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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