-----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, CNKAhmptRSLOiIfI+xovW36YkQ9Lh1XIhSckOtqSloG8FZ9JikPkoa2HsQ6NfLot K8yPHh4kENpG0Ub6aHga5g== 0000950168-02-002437.txt : 20020814 0000950168-02-002437.hdr.sgml : 20020814 20020814155554 ACCESSION NUMBER: 0000950168-02-002437 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020814 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: 1934 Act SEC FILE NUMBER: 000-19599 FILM NUMBER: 02736350 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 FORMER COMPANY: FORMER CONFORMED NAME: WORLD FINANCE CORP DATE OF NAME CHANGE: 19700210 10-Q 1 d10q.txt FORM 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 EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2002 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 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, August 13, 2002. Common Stock, no par value 17,642,102 ----------------------------------- ------------------------ (Class) (Outstanding) 1 WORLD ACCEPTANCE CORPORATION AND SUBSIDIARIES TABLE OF CONTENTS
PAGE PART I - FINANCIAL INFORMATION Item 1. Consolidated Financial Statements (unaudited): Consolidated Balance Sheets as of June 30, 2002 and March 31, 2002 3 Consolidated Statements of Operations for the three months ended June 30, 2002 and June 30, 2001 4 Consolidated Statements of Shareholders' Equity for the year ended March 31, 2002 and the three months ended June 30, 2002 5 Consolidated Statements of Cash Flows for the three months ended June 30, 2002 and June 30, 2001 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial 9 Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk 14 PART II - OTHER INFORMATION Item 1. Legal Proceedings 14 Item 2. Changes in Securities 14 Item 6. Exhibits and Reports on Form 8-K 15 Signatures 17
2 WORLD ACCEPTANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED)
June 30, March 31, 2002 2002 --------------- ----------- ASSETS Cash $ 4,723,271 3,222,266 Gross loans receivable 247,202,566 226,306,409 Less: Unearned interest and fees (59,802,765) (53,669,912) Allowance for loan losses (14,224,955) (12,925,644) --------------- ----------- Loans receivable, net 173,174,846 159,710,853 Property and equipment, net 7,511,354 6,920,824 Other assets, net 11,886,301 11,425,691 Intangible assets, net 14,762,090 13,967,315 --------------- ----------- Total assets $ 212,057,862 192,246,949 =============== =========== LIABILITIES & SHAREHOLDERS' EQUITY Liabilities: Senior notes payable 98,650,000 76,900,000 Subordinated notes payable 6,000,000 6,000,000 Other note payable 482,000 482,000 Income taxes payable 2,480,820 2,615,536 Accounts payable and accrued expenses 6,665,645 6,816,033 --------------- ----------- Total liabilities 114,278,465 92,813,569 --------------- ----------- Shareholders' equity: Common stock, no par value - - Authorized 95,000,000 shares; issued and outstanding 17,632,402 and 18,879,218 shares at June 30, 2002 and March 31, 2002, respectively Additional paid-in capital - 681,354 Retained earnings 97,779,397 101,752,026 --------------- ----------- Total shareholders' equity 97,779,397 102,433,380 --------------- ----------- $ 212,057,862 195,246,949 =============== ===========
See accompanying notes to consolidated financial statements. 3 WORLD ACCEPTANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three months ended June 30, --------------------------------- 2002 2001 ---- ---- Revenues: Interest and fee income $ 29,996,379 26,651,367 Insurance and other income 4,822,648 3,742,650 ---------------- ---------- Total revenues 34,819,027 30,394,017 ---------------- ---------- Expenses: Provision for loan losses 6,363,304 5,203,514 General and administrative expenses: Personnel 13,643,018 11,900,892 Occupancy and equipment 2,100,330 1,912,711 Data processing 430,033 413,794 Advertising 993,706 939,858 Amortization of intangible assets 549,599 426,958 Other 2,468,606 2,363,825 ---------------- ---------- 20,185,292 17,958,038 Interest expense 1,032,066 1,595,010 ---------------- ---------- Total expenses 27,580,662 24,756,562 ---------------- ---------- Income before income taxes 7,238,365 5,637,455 Income taxes 2,570,000 1,982,000 ---------------- ---------- Net income $ 4,668,365 3,655,455 ================ ========== Net income per common share: Basic $ 0.25 .20 ================ ========== Diluted $ 0.25 .19 ================ ========== Weighted average common equivalent shares outstanding: Basic 18,382,511 18,741,736 ================ ========== Diluted 18,907,646 19,308,304 ================ ==========
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, 2001 $ 313,655 82,412,879 82,726,534 Proceeds from exercise of stock options (442,136 shares), including tax benefit of $526,469 2,546,634 - 2,546,634 Common stock repurchases (251,891 shares) (2,178,935) - (2,178,935) Net income - 19,339,147 19,339,147 ----------- ----------- ----------- Balances at March 31, 2002 $ 681,354 101,752,026 102,433,380 Proceeds from exercise of stock options (100,733 shares), including tax benefit of $101,586 677,645 - 677,645 Common stock repurchases (1,347,549 shares) (1,358,999) (8,640,994) (9,999,993) Net income - 4,668,365 4,668,365 ----------- ----------- ----------- Balances at June 30, 2002 $ - 97,779,397 97,779,397 =========== =========== ===========
See accompanying notes to consolidated financial statements. 5 WORLD ACCEPTANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three months ended June 30, ----------------------------- 2002 2001 ---- ---- Cash flows from operating activities: Net income $ 4,668,365 3,655,455 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 6,363,304 5,203,514 Amortization of intangible assets 549,599 426,958 Amortization of loan costs and discounts 15,544 34,964 Depreciation 410,042 382,468 Change in accounts: Other assets, net (476,154) (537,724) Accounts payable and accrued expenses (150,388) (1,527,109) Income taxes payable (33,130) (643,906) -------------- ------------ Net cash provided by operating activities 11,347,182 6,994,620 -------------- ------------ Cash flows from investing activities: Increase in loans, net (12,128,774) (8,592,987) Net assets acquired from office acquisitions, primarily loans (7,839,523) (3,243,431) Purchases of premises and equipment (859,572) (609,708) Purchases of intangible assets (1,344,374) (450,500) -------------- ------------ Net cash used by investing activities (22,172,243) (12,896,626) -------------- ------------ Cash flows from financing activities: Proceeds from senior notes payable, net 21,750,000 4,850,000 Repurchase of common stock (9,999,993) (193,608) Proceeds from exercise of stock options 576,059 934,916 -------------- ------------ Net cash provided by financing activities 12,326,066 5,591,308 -------------- ------------ Increase (decrease) in cash 1,501,005 (310,698) Cash, beginning of period 3,222,266 3,292,504 -------------- ------------ Cash, end of period $ 4,723,271 2,981,806 ============== ============ Supplemental disclosure of cash flow information: Cash paid for interest expense $ 939,102 1,412,835 Cash paid for income taxes 2,603,130 1,876,827 Supplemental schedule of noncash financing activities: Tax benefits from exercise of stock options 101,586 185,837
See accompanying notes to consolidated financial statements. 6 WORLD ACCEPTANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002 NOTE 1 - BASIS OF PRESENTATION The consolidated financial statements of the Company at June 30, 2002, and for the three months 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 June 30, 2002, and the results of operations and cash flows for the period then ended, have been included. The results for the period ended June 30, 2002 are not necessarily indicative of the results that may be expected for the full year or any other interim period. Certain reclassification entries have been made for fiscal 2002 to conform with fiscal 2003 presentation. These reclassifications had no impact on shareholders' equity or net income. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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. These consolidated financial statements do not include all disclosures required by accounting principles generally accepted in the United States and should be read in conjunction with the Company's audited financial statements and related notes for the year ended March 31, 2002, included in the Company's 2002 Annual Report to Shareholders. NOTE 2 - COMPREHENSIVE INCOME The Company applies the provision of Financial Accounting Standards Board's (FASB) Statement of Financial Accounting Standards (SFAS) No. 130 "Reporting Comprehensive Income." The Company has no items of other comprehensive income; therefore, net income equals comprehensive income. NOTE 3 - 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 ended June 30, ----------------------------- 2002 2001 -------------- ----------- Balance at beginning of period $ 12,925,644 12,031,622 Provision for loan losses 6,363,304 5,203,514 Loan losses (6,525,006) (5,360,270) Recoveries 564,529 442,879 Allowance on acquired loans, net of specific charge-offs 896,484 339,652 -------------- ----------- Balance at end of period $ 14,224,955 12,657,397 ============== =========== NOTE 4 - CURRENT ACCOUNTING ISSUES Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 requires that intangible assets with estimated useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." A related statement, SFAS No. 141, "Business Combinations," requires that upon adoption of SFAS No. 141, the Company must evaluate its existing intangible assets and goodwill that were acquired in prior purchase business combinations and make any necessary reclassifications in order to conform with the new criteria in SFAS No. 7 141 for recognition apart from goodwill. Upon adoption of SFAS 142, the Company must reassess the useful lives and residual values of all intangible assets acquired, and make any necessary amortization period adjustments by the end of the first interim period after adoption. In addition, to the extent an intangible asset is identified as having an indefinite useful life, the Company must test the intangible asset for impairment in accordance with the provisions of SFAS 142 within the first interim period. Any impairment loss will be measured as of the date of adoption and recognized as the cumulative effect of a change in accounting principles in the first interim period. In connection with SFAS No. 142's transitional goodwill impairment evaluation, the statement requires the Company to perform an assessment of whether there is an indication that goodwill is impaired as of the date of adoption. To accomplish this, the Company must identify its reporting units and determine the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of the date of adoption. The Company will then have six months from the date of adoption to determine the fair value of each reporting unit and compare it to the reporting unit's carrying amount. To the extent a reporting unit's carrying amount exceeds its fair value, an indication exists that the reporting unit's goodwill may be impaired and the Company must perform the second step of the transitional impairment test. In the second step, the Company must compare the implied fair value of the reporting unit's goodwill, determined by allocating the reporting unit's fair value to all of its assets and liabilities in a manner similar to a purchase price allocation in accordance with SFAS No. 141, to its carrying amount, both of which would be measured as of the date of adoption. This second step is required to be completed as soon as possible, but no later than the end of the year of adoption. Any transitional impairment loss will be recognized as the cumulative effect of a change in accounting principle in the Company's statement of operations. The Company adopted SFAS No. 142 effective April 1, 2002. The adoption of SFAS 142 did not have a material effect on results of operations during the first quarter. As of the date of adoption, the Company's carrying amount for goodwill associated with its previous acquisitions of certain consumer finance operations totaled $774,038. During the previous year, the amortization of goodwill approximated $166 thousand (pre-tax) and in the comparable quarter ended June 30, 2001, totaled $41.5 thousand (pre-tax). The amortization of goodwill ceased effective April 1, 2002. The Company also had previously recorded intangibles associated with non-compete agreements acquired in those same acquisitions of consumer finance operations with a carrying value of approximately $13.2 million. During the previous year, the amortization of intangibles approximated $1.8 million (pre-tax) and in the comparable quarter ended June 30, 2001, totaled $385 thousand (pre-tax). During the quarter ended June 30, 2002, amortization of intangibles approximated $550 thousand (pre-tax). The Company expects to record amortization expense related to intangibles of $2.2 million during fiscal 2003. The Company will complete its analysis of the fair value of its goodwill by September 30, 2002, and provide for any transitional impairment losses as the cumulative effect of a change in accounting principles. The amortization expense and net income of the Company for the quarters ended June 30, 2002, and June 30, 2001, follow: For the Quarter Ended June 30, 2002 2001 -------- -------- (thousands) Net income $ 4,668 $ 3,655 Goodwill amortization, net of tax - 29 -------- -------- Adjusted net income 4,668 3,684 ======== ======== Basic earnings per share $ 0.25 $ 0.20 Goodwill amortization, net of tax - - -------- -------- Adjusted net income 0.25 0.20 ======== ======== Basic earnings per share $ 0.25 $ 0.19 Goodwill amortization, net of tax - - -------- -------- Adjusted net income 0.25 0.19 ======== ======== 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 ended June 30, --------------------- 2002 2001 ---------- ------- (Dollars in thousands) Average gross loans receivable /(1)/ $ 234,905 215,540 Average loans receivable /(2)/ 176,992 164,025 Expenses as a % of total revenue: Provision for loan losses 18.3% 17.1% General and administrative 58.0% 59.1% Total interest expense 3.0% 5.2% Operating margin /(3)/ 23.8% 23.8% Return on average assets (annualized) 9.2% 7.8% Offices opened or acquired, net 13 4 Total offices (at period end) 454 424 - ---------- /(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)/ Operating margin is computed as total revenues less provision for loan losses and general and administrative expenses, as a percentage of total revenue. Comparison of Three Months Ended June 30, 2002, Versus Three Months Ended June 30, 2001 Net income rose to $4.7 million for the three months ended June 30, 2002, a 27.7% increase over the $3.7 million earned during the corresponding three-month period of the previous year. This increase resulted from an increase in operating income (revenues less provision for loan losses and general and administrative expenses) of approximately $1,038,000, or 14.4%, and a decrease in interest expense, offset partially by an increase in income taxes. Interest and fee income for the quarter ended June 30, 2002, increased by $3.3 million, or 12.6%, over the same period of the prior year. This increase resulted from a $13.0 million increase, or 7.9%, in average loans receivable over the two corresponding periods combined with an increase in yields on the loan portfolio due to changes in certain state laws. Insurance commissions and other income increased by $1.1 million, or 28.9%, over the two quarterly periods. Insurance commissions increased by $654,000, or 32.4%, during the most recent quarter when compared to the prior year quarter due to the increase in loans in those states where credit insurance may be sold in conjunction with the loan. Other income increased by $426,000, or 24.7%, over the two corresponding quarters primarily due to the 9 WORLD ACCEPTANCE CORPORATION MANAGEMENTS' DISCUSSION AND ANALYSIS, CONTINUED Comparison of Three Months Ended June 30, 2002, Versus Three Months Ended June 30, 2001, continued introduction of certain ancillary products (motor club and accidental death and dismemberment insurance) in the state of Kentucky. Fees generated from tax return preparations also increased during the quarter, but this was offset by a reduction in revenue generated by ParaData, the Company's computer subsidiary. Most fees from the tax preparation business are recognized in the fourth fiscal quarter each year, and ParaData's revenue is dependent upon attracting new customers, which results in fluctuations in revenue and earnings. Total revenues rose to $34.8 million during the quarter ended June 30, 2002, a 14.6% increase over the $30.4 million for the corresponding quarter of the previous year. Revenues from the 419 offices open throughout both quarterly periods increased by approximately 9.7%. At June 30, 2002, the Company had 454 offices in operation, an increase of 13 offices from March 31, 2002. The provision for loan losses during the quarter ended June 30, 2002, increased by $1,160,000, or 22.3%, from the same quarter last year. This increase resulted from a combination of increases in both the general allowance for loan losses due to loan growth and the amount of loans charged off. Net charge-offs for the current quarter amounted to $6.0 million, a 21.2% increase over the $4.9 million charged off during the same quarter of fiscal 2002. As a percentage of average loans receivable, net charge-offs increased from 12.0% on an annualized basis from three months ended June 30, 2001 to 13.5% annualized for the most recent quarter. The Company expects this trend in charge-offs to continue at least through the third quarter. General and administrative expenses for the quarter ended June 30, 2002, increased by $2.2 million, or 12.4% over the same quarter of fiscal 2002. Overall, general and administrative expenses, when divided by average open offices, increased by approximately 5.2% when comparing the two periods; and, as a percentage of total revenue, decreased from 59.1% during the prior year quarter to 58.0% during the most recent quarter. Interest expense decreased by $563,000, or 35.3%, over the two corresponding quarterly periods even though average debt outstanding increased by approximately 2.9% over these two periods. This decrease was due to the significant interest rate reductions that took place during fiscal 2002. The weighted average interest rate for borrowings under the revolving credit facility fell from 5.71% at June 30, 2001 to 3.63% at June 30, 2002. The Company's effective income tax rate increased slightly from 35.2% during the first quarter of fiscal 2002 to 35.5% during the most recent quarter due to a decreased impact of certain favorable permanent differences over a larger expected earnings base. 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's primary ongoing cash requirements relate to the funding of new offices and acquisitions, the overall growth of loans outstanding, the repayment of long-term indebtedness and the repurchase of its common stock. As the Company's gross loans receivable increased from $149.6 million at March 31, 1999 to $226.3 million at March 31, 2002, net cash provided by operating activities for fiscal years 2000, 2001, and 2002 increased from $31.9 million, to $39.1 million to $48.3 million, respectively. The Company repurchased 1,986,000 shares of its common stock under its repurchase program, for an aggregate purchase price of approximately $16.0 million, between February 1996 and October 1996. Because of certain loan agreement restrictions, the Company suspended its stock repurchases in October 1996. The stock repurchase program was reinstated in January 2000, and 144,000 shares were repurchased in fiscal 2000, 275,000 shares in fiscal 2001 and 252,000 shares in fiscal 2002 for aggregate purchase prices of $724,000, $1,434,000, and $2,179,000 respectively. During the first quarter of fiscal 2003, the Company repurchased 1,347,549 shares for $9,997,993. The Company 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. 10 In addition, the Company plans to open or acquire at least 20 new offices in each of the next two fiscal years. Expenditures by the Company to open and furnish new offices generally averaged approximately $20,000 per office during fiscal 2002. 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 11 offices and a number of loan portfolios from competitors in seven states in 16 separate transactions during the first quarter of fiscal 2003. Gross loans receivable purchased in these transactions were approximately $10.7 million in the aggregate at the dates of purchase. The Company believes that attractive opportunities to acquire new offices or receivables from its competitors or to acquire offices in communities not currently served by the Company will continue to become available as conditions in local economies and the financial circumstances of owners change. The Company has a $125.0 million base credit facility with a syndicate of banks. In addition to the base revolving credit commitment, there is a $15 million seasonal revolving credit commitment available November 15 of each year through March 31 of the immediately succeeding year to cover the increase in loan demand during this period. The credit facility will expire on September 30, 2004. 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 1.85% per annum. At June 30, 2002, the interest rate on borrowings under the revolving credit facility was 3.63%. 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 June 30, 2002, $98.7 million was outstanding under this facility, and there was $26.3 million of unused borrowing availability under the borrowing base limitations. The Company has $6.0 million of senior subordinated secured notes with an insurance company. These notes mature in annual installments of $2.0 million on each June 30, from 2002 through 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 and the senior 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 senior subordinated notes are also subject to prepayment penalties. The Company believes that it is in 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 senior subordinated notes. From time to time, the Company has needed and obtained, and expects that it will continue to need on a periodic basis, an increase in the borrowing limits under its revolving credit facility. The Company has successfully obtained such increases in the past and anticipates that it will be able to do so in the future as the need arises; however, there can be no assurance that this additional funding will be available (or available on reasonable terms) if and when needed. 11 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 nine 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. Impact of Recently Issued Accounting Standards Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 requires that intangible assets with estimated useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." A related statement, SFAS No. 141, "Business Combinations," requires that upon adoption of SFAS No. 141, the Company must evaluate its existing intangible assets and goodwill that were acquired in prior purchase business combinations and make any necessary reclassifications in order to conform with the new criteria in SFAS No. 141 for recognition apart from goodwill. Upon adoption of SFAS No. 142, the Company must reassess the useful lives and residual values of all intangible assets acquired, and make any necessary amortization period adjustments by the end of the first interim period after adoption. In addition, to the extent an intangible asset is identified as having an indefinite useful life, the Company must test the intangible asset for impairment in accordance with the provisions of SFAS No. 142 within the first interim period. Any impairment loss will be measured as of the date of adoption and recognized as the cumulative effect of a change in accounting principles in the first interim period. In connection with SFAS No. 142's transitional goodwill impairment evaluation, the statement requires the Company to perform an assessment of whether there is an indication that goodwill is impaired as of the date of adoption. To accomplish this, the Company must identify its reporting units and determine the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of the date of adoption. The Company will then have six months from the date of adoption to determine the fair value of each reporting unit and compare it to the reporting unit's carrying amount. To the extent a reporting unit's carrying amount exceeds its fair value, an indication exists that the reporting unit's 12 goodwill may be impaired and the Company must perform the second step of the transitional impairment test. In the second step, the Company must compare the implied fair value of the reporting unit's goodwill, determined by allocating the reporting unit's fair value to all of its assets and liabilities in a manner similar to a purchase price allocation in accordance with SFAS No. 141, to its carrying amount, both of which would be measured as of the date of adoption. This second step is required to be completed as soon as possible, but no later than the end of the year of adoption. Any transitional impairment loss will be recognized as the cumulative effect of a change in accounting principle in the Company's statement of operations. The Company adopted SFAS No. 142 effective April 1, 2002. The adoption of SFAS No. 142 did not have a material effect on results of operations during the first quarter. As of the date of adoption, the Company's carrying amount for goodwill associated with its previous acquisitions of certain consumer finance operations totaled $774,038. During the previous year, the amortization of goodwill approximated $166 thousand (pre-tax) and in the comparable quarter ended June 30, 2001, totaled $41.5 thousand (pre-tax). The amortization of goodwill ceased effective April 1, 2002. The Company also had previously recorded intangibles associated with non-compete agreements acquired in those same acquisitions of consumer finance operations with a carrying value of approximately $13.2 million. During the previous year, the amortization of intangibles approximated $1.8 million (pre-tax) and in the comparable quarter ended June 30, 2001, totaled $385 thousand (pre-tax). During the quarter ended June 30, 2002, amortization of intangibles approximated $550 thousand (pre-tax). The Company expects to record amortization expense related to intangibles of 2.2 million during fiscal 2003. The Company will complete its analysis of the fair value of its goodwill by September 30, 2002, and provide for any transitional impairment losses as the cumulative effect of a change in accounting principles. The amortization expense and net income of the Company for the quarters ended June 30, 2002, and June 30, 2001, follow: For the Quarter Ended June 30, 2002 2001 -------- -------- (thousands) Net income $ 4,668 $ 3,655 Goodwill amortization, net of tax - 29 -------- -------- Adjusted net income 4,668 3,684 ======== ======== Basic earnings per share $ 0.25 $ 0.20 Goodwill amortization, net of tax - - -------- -------- Adjusted net income 0.25 0.20 ======== ======== Basic earnings per share $ 0.25 $ 0.19 Goodwill amortization, net of tax - - -------- -------- Adjusted net income 0.25 0.19 ======== ======== In August 2001, SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" was issued which addresses the financial accounting and reporting for the impairment or disposal of long-lived assets. While SFAS 144 supercedes SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of", it retains many of the fundamental provisions of SFAS 121. The provisions of SFAS 144 are effective for financial statements issued for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years. The Company adopted SFAS 144 on April 1, 2002, with no material effect on the Company. In April 2002, the FASB issued SFAS 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections". SFAS 145 rescinds SFAS 4, "Reporting Gains and Losses from Extinguishments of Debt", and an amendment of SFAS 4, SFAS 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." SFAS 145 requires that gains and losses from extinguishments of debt should be classified as an extraordinary item only if they meet the criteria of FASB Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" ("FASB Opinion 30"). Applying the provisions of FASB Opinion 30 will distinguish transactions that are part of an entity's recurring operations from those that are unusual or infrequent or that meet the criteria for classification as an extraordinary item. The provisions of SFAS 145 are effective for financial statements issued for fiscal years beginning after May 15, 2002, and interim periods within those fiscal years and early adoption is encouraged. Any gain or loss on 13 extinguishment of debt that was classified as an extraordinary item in prior periods presented that does not meet the criteria in FASB Opinion 30 for classification as an extraordinary item will be reclassified. The adoption of SFAS 145 is not expected to have a material impact on the Company. In June 2002, the FASB issued SFAS 146, "Accounting for Cost Associated with Exit or Disposal Activities." SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. The statement also establishes that fair value is the objective for initial measurement of the liability. Adoption of SFAS 146 is effective for exit or disposal activities that are initiated after December 31, 2002. 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. 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; 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); and other matters discussed in this Report and the Company's other filings with the Securities and Exchange Commission. Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company's outstanding debt under the Revolving Credit Facility was $98.7 million at June 30, 2002. Interest on borrowings under this facility is based, at the Company's option, on the prime rate or LIBOR plus 1.85%. Based on the outstanding balance at June 30, 2002, a change of 1% in the interest rate would cause a change in interest expense of approximately $987,000 on an annual basis. PART II. OTHER INFORMATION Item 1. Legal Proceedings From time to time the Company is involved in 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 pending legal proceedings that would have a material adverse effect on its financial condition. Item 2. Changes in Securities The Company's credit agreements contain certain restrictions on the payment of cash dividends on its capital stock. See "Management's Discussion of Liquidity and Capital Resources." 14 WORLD ACCEPTANCE CORPORATION AND SUBSIDIARIES PART II. OTHER INFORMATION, CONTINUED Item 6. Exhibits and Reports on Form 8-K (a) Exhibits:
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 Agreements, 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 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 4.6 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 Douglas R. Jones, effective 10.3 12-31-99 10-Q August 16, 1999 10.4+ Securityholders' Agreement, dated as of September 19, 1991, 10.5 33-42879 between the Company and certain of its securityholders
15 10.5+ World Acceptance Corporation Supplemental 10.7 2000 10-K Income Plan 10.6+ Board of Directors Deferred Compensation Plan 10.6 2000 10-K 10.7+ 1992 Stock Option Plan of the Company 4 33-52166 10.8+ 1994 Stock Option Plan of the Company, as amended 10.6 1995 10-K 10.9+ The Company's Executive Incentive Plan 10.6 1994 10-K 10.10+ World Acceptance Corporation Retirement Savings Plan 4.1 333-14399 10.11+ Executive Deferral Plan 10.12 2001 10-K 99.1 Certification of Chief Executive Officer * 99.2 Certification of Chief Financial Officer *
+ Management Contract or other compensatory plan required to be filed under Item 14(c) of this report and Item 601 of Regulation 5-K of the Securities and Exchange Commission. * Filed herewith. (b) Reports on Form 8-K. There were no reports filed on Form 8-K during the quarter ended June 30, 2002. 16 WORLD ACCEPTANCE CORPORATION AND SUBSIDIARIES SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. WORLD ACCEPTANCE CORPORATION Dated: August 13, 2002 /s/ C. D. Walters ----------------------------------- C. D. Walters, Chairman, and Chief Executive Officer Dated: August 13, 2002 /s/ A. A. McLean III ------------------------------------------ A. A. McLean III, Executive Vice President and Chief Financial Officer 17 EX-99.1 3 dex991.txt CERTIFICATION OF CEO EXHIBIT # 99.1 CERTIFICATION OF PERIODIC REPORT I, C. D. Walters, of World Acceptance Corporation, certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that (to my knowledge): (1) the Quarterly Report on form 10-Q of the Company for the quarter ended June 30, 2002, (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: August 13, 2002 /s/ C. D. Walters ------------------------------- C. D. Walters Chairman and CEO 18 EX-99.2 4 dex992.txt CERTIFICATION OF CFO EXHIBIT # 99.2 CERTIFICATION OF PERIODIC REPORT I, A.A. McLean III, of World Acceptance Corporation, certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that (to my knowledge): (3) the Quarterly Report on form 10-Q of the Company for the quarter ended June 30, 2002, (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (4) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: August 13, 2002 /s/ A. A. McLean III ------------------------------- A.A. McLean III Executive Vice President and CFO 19 -----END PRIVACY-ENHANCED MESSAGE-----