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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 September 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
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WORLD ACCEPTANCE CORPORATION
------------------------------------
(Exact name of registrant as specified in its charter.)
South Carolina 57-0425114
-------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
108 Frederick Street
Greenville, South Carolina 29607
--------------------------------------------
(Address of principal executive offices)
(Zip Code)
(864) 298-9800
-------------------
(registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for shorter period than the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
X Yes No
--------- ----------
Indicate the number of shares outstanding of each of issuer's classes of common
stock, as of the latest practicable date, November 14, 2002.
Common Stock, no par value 17,518,178
------------------------------- --------------------------------
(Class) (Outstanding)
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,
2002 and March 31, 2002 3
Consolidated Statements of Operations for the three month periods and
six month periods ended September 30, 2002 and September 30, 2001 4
Consolidated Statements of Shareholders' Equity for the
year ended March 31, 2002 and the six months ended
September 30, 2002 5
Consolidated Statements of Cash Flows for the three month periods and
six month periods ended September 30, 2002 and September 30, 2001 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
Item 4. Controls and Procedures 14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 18
2
WORLD ACCEPTANCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, March 31,
2002 2002
------------- --------------
ASSETS
Cash $ 4,154,717 3,222,266
Gross loans receivable 255,186,565 226,306,409
Less:
Unearned interest and fees (62,689,770) (53,669,912)
Allowance for loan losses (14,595,411) (12,925,644)
------------- -------------
Loans receivable, net 177,901,384 159,710,853
Property and equipment, net 7,649,169 6,920,824
Other assets, net 12,333,824 11,425,691
Intangible assets, net 15,342,654 13,967,315
------------- -------------
Total assets $ 217,381,748 195,246,949
============= =============
LIABILITIES & SHAREHOLDERS' EQUITY
Liabilities:
Senior notes payable 105,100,000 76,900,000
Subordinated notes payable 4,000,000 6,000,000
Other note payable 482,000 482,000
Accounts payable and accrued expenses 5,091,017 9,431,569
------------- -------------
Total liabilities 114,673,017 92,813,569
------------- -------------
Shareholders' equity:
Common stock, no par value - -
Authorized 95,000,000 shares; issued and outstanding
17,686,302 and 18,879,218 shares at September 30, 2002
and March 31, 2002, respectively
Additional paid-in capital 305,931 681,354
Retained earnings 102,402,800 101,752,026
------------- -------------
Total shareholders' equity 102,708,731 102,433,380
------------- -------------
$ 217,381,748 195,246,949
============= =============
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,
------------------------------- -------------------------------
2002 2001 2002 2001
---- ---- ---- ----
Revenues:
Interest and fee income $ 32,340,709 27,852,989 62,337,088 54,504,356
Insurance and other income 3,804,927 3,471,251 8,627,575 7,213,901
------------ ------------- ------------ -------------
Total revenues 36,145,636 31,324,240 70,964,663 61,718,257
------------ ------------- ------------ -------------
Expenses:
Provision for loan losses 7,604,577 6,902,167 13,967,881 12,105,681
------------ ------------- ------------ -------------
General and administrative expenses:
Personnel 13,067,707 11,110,932 26,710,725 23,011,824
Occupancy and equipment 2,251,524 2,027,227 4,351,854 3,939,938
Data processing 438,448 420,126 868,481 833,920
Advertising 1,020,991 809,371 2,014,697 1,749,229
Amortization of intangible assets 536,882 486,211 1,086,481 913,169
Other 2,890,257 2,419,936 5,358,863 4,783,761
------------ ------------- ------------ -------------
20,205,809 17,273,803 40,391,101 35,231,841
------------ ------------- ------------ -------------
Interest expense 1,168,847 1,525,012 2,200,913 3,120,022
------------ ------------- ------------ -------------
Total expenses 28,979,233 25,700,982 56,559,895 50,457,544
------------ ------------- ------------ -------------
Income before income taxes 7,166,403 5,623,258 14,404,768 11,260,713
Income taxes 2,543,000 1,950,000 5,113,000 3,932,000
------------ ------------- ------------ -------------
Net income $ 4,623,403 3,673,258 9,291,768 7,328,713
============ ============= ============ =============
Net income per common share:
Basic $ .26 .20 .52 .39
============ ============= ============ =============
Diluted $ .26 .19 .50 .38
============ ============= ============ =============
Weighted average common shares outstanding:
Basic 17,647,270 18,828,202 18,014,891 18,784,969
============ ============= ============ =============
Diluted 18,070,289 19,589,543 18,488,968 19,448,923
============ ============= ============ =============
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 (162,933 shares),
including tax benefit of $170,970 983,576 - 983,576
Common stock repurchases (1,347,549 shares) (1,358,999) (8,640,994) (9,999,993)
Net income - 9,291,768 9,291,768
----------- ------------ -----------
Balances at September 30, 2002 $ 305,931 102,402,800 102,708,731
=========== ============ ===========
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,
-------------------------- ---------------------------
2002 2001 2002 2001
---- ---- ---- ----
Cash flows from operating activities:
Net income $ 4,623,403 3,673,258 9,291,768 7,328,713
Adjustments to reconcile net income
to net cash provided by operating activities:
Provision for loan losses 7,604,577 6,902,167 13,967,881 12,105,681
Amortization of intangible assets 536,882 486,211 1,086,481 913,169
Amortization of loan costs and discounts 34,759 47,549 50,303 82,513
Depreciation 412,481 393,369 822,523 775,837
Change in accounts:
Other assets, net (482,282) 462,971 (958,436) (74,753)
Accounts payable and accrued expenses (3,986,064) (575,342) (4,169,582) (2,746,357)
----------- ----------- ----------- -----------
Net cash provided by operating activities 8,743,756 11,390,183 20,090,938 18,384,803
----------- ----------- ----------- -----------
Cash flows from investing activities:
Increase in loans, net (10,466,382) (5,670,166) (22,595,156) (14,263,153)
Net assets acquired from office acquisitions,
primarily loans (1,879,733) (4,970,585) (9,719,256) (8,214,019)
Purchases of intangible assets (1,117,446) (1,456,648) (2,461,820) (1,907,148)
Purchase of premises and equipment (535,296) (509,089) (1,394,868) (1,118,797)
----------- ----------- ----------- -----------
Net cash used by investing activities (13,998,857) (12,606,491) (36,171,100) (25,503,117)
----------- ----------- ----------- -----------
Cash flows from financing activities:
Proceeds of senior notes payable, net 6,450,000 4,950,000 28,200,000 9,800,000
Repayment of senior subordinated notes (2,000,000) (2,000,000) (2,000,000) (2,000,000)
Proceeds from exercise of stock options 236,547 565,955 812,606 1,500,871
Common stock repurchases - (1,851,141) (9,999,993) (2,044,749)
----------- ------------ ----------- -----------
Net cash provided by financing activities 4,686,547 1,664,814 17,012,613 7,256,122
----------- ----------- ----------- -----------
Increase (decrease) in cash (568,554) 448,506 932,451 137,808
Cash, beginning of period 4,723,271 2,981,806 3,222,266 3,292,504
----------- ----------- ----------- -----------
Cash, end of period $ 4,154,717 3,430,312 4,154,717 3,430,312
=========== =========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest expense $ 1,267,375 1,482,946 2,206,477 2,895,781
Cash paid for income taxes 6,731,426 3,329,280 9,334,556 5,206,107
Supplemental schedule of noncash financing activities:
Tax benefits from exercise of stock options 69,384 155,053 170,970 340,890
See accompanying notes to consolidated financial statements.
6
WORLD ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
NOTE 1 - BASIS OF PRESENTATION
The consolidated financial statements of the Company at September 30, 2002,
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, 2002, and the
results of operations and cash flows for the periods then ended, have been
included. The results for the periods ended September 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 Six months
ended September 30, ended September 30,
--------------------------- --------------------------
2002 2001 2002 2001
---- ---- ---- ----
Balance at beginning of period $14,224,955 12,657,397 12,925,644 12,031,622
Provision for loan losses 7,604,577 6,902,167 13,967,881 12,105,681
Loan losses (7,581,982) (6,634,965) (14,106,988) (11,995,235)
Recoveries 574,500 442,791 1,139,029 885,670
Allowance on acquired loans, net
of specific charge-offs (226,639) 503,827 669,845 843,479
----------- ----------- ------------ ------------
Balance at end of period $14,595,411 13,871,217 14,595,411 13,871,217
=========== =========== ============ ============
NOTE 4 - CURRENT ACCOUNTING ISSUES
Effective January 1, 2002, the Company adopted the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"). It 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 142. SFAS
142 also requires that intangible assets with definite useful lives be amortized
over their respective estimated useful lives to their estimated residual values
and reviewed for impairment in accordance with SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." ("SFAS 144").
7
In connection with the transitional goodwill, SFAS 142 requires the Company
to perform an assessment of whether there is an indication that goodwill is
impaired as of April 1, 2002. To accomplish this, the Company had to 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 had until September 30, 2002, 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 second step
of the transitional impairment test must be performed. In the second step, the
implied fair value of the reporting unit's goodwill, determined by allocating
the reporting unit's fair value to all of it assets (recognized and
unrecognized) and liabilities in a manner similar to a purchase price allocation
in accordance with SFAS 141, "Business Combinations," is compared to its
carrying amount, both of which would be measured as of April 1, 2002.
The Company has completed its analysis of the fair value of its intangible
assets. The Company is currently completing the second step of its impairment
analysis and does not expect to record a transitional impairment loss. Any
transitional impairment loss would be recognized as the cumulative effect of a
change in accounting principle in the consolidated statements of income for the
nine months ended December 31, 2002 (although it will not be reflected in the
third quarter of fiscal 2003 results since the impairment is reflected as of
April 1, 2002). There was no change in the carrying amount of goodwill at
September 30, 2002 compared to March 31, 2002.
As of the April 2002 adoption of SFAS 142, the Company had unamortized
goodwill in the amount of $774,000 unamortized identifiable intangible assets in
the amount of $13.0 million and unamortized unidentifiable intangible assets in
the amount of $178,000 related to branch purchases. Under SFAS 142, the
amortization of goodwill ceased effective April 1, 2002. The amortization of
goodwill approximated $166,000 (pre-tax) during fiscal 2002 and $95,000
(pre-tax) during the six months ended September 30, 2001. The Company will
continue to amortize the identifiable intangible assets, which relate to the
cost of acquiring existing customers and the value assigned to non-compete
agreements and unidentifiable intangible assets from branch purchases.
The amortization expense and net income of the Company for the three month
and six month periods ended September 30, 2002 and 2001 follow:
Three months Six months
ended September 30, ended September 30,
------------------- -------------------
2002 2001 2002 2001
---- ---- ---- ----
(thousands)
Net income $4,623 3,673 9,292 7,329
Goodwill amortization, net of tax -- 33 -- 62
------ ------ ------ ------
Adjusted net income $4,623 3,706 9,292 7,391
====== ====== ====== ======
Basic earnings per share $ .26 .20 .52 .39
Goodwill amortization, net of tax -- -- -- --
------ ------ ------ ------
Adjusted net income $ .26 .20 .52 .39
====== ====== ====== ======
Diluted earnings per share $ .26 .19 .50 .38
Goodwill amortization, net of tax -- -- -- --
------ ------ ------ ------
Adjusted net income $ .26 .19 .50 .38
====== ====== ====== ======
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,
------------------- -------------------
2002 2001 2002 2001
---- ---- ---- ----
(Dollars in thousands)
Average gross loans receivable /(1)/ $ 252,379 225,054 243,133 220,094
Average loans receivable /(2)/ 189,552 170,435 182,892 167,079
Expenses as a % of total revenue:
Provision for loan losses 21.0% 22.0% 19.7% 19.6%
General and administrative 55.9% 55.1% 56.9% 57.1%
Total interest expense 3.2% 4.9% 3.1% 5.1%
Operating margin /(3)/ 23.1% 22.8% 23.4% 23.3%
Return on average assets (annualized) 8.6% 7.6% 8.9% 7.7%
Offices opened or acquired, net 7 10 20 14
Total offices (at period end) 461 434 461 434
_____________
/(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 September 30, 2002, Versus
Three Months Ended September 30, 2001
Interest and fee income for the quarter ended September 30, 2002,
increased by $4.5 million, or 16.1%, over the same period of the prior year.
This increase resulted from a $19.1 million increase, or 11.2%, in average loans
receivable over the two corresponding periods. The large increase in average
loans receivable over the two corresponding quarters was due primarily to
several acquisitions during the first six months of the fiscal year. The company
has acquired approximately 14,400 accounts, or approximately $13.6 million in
gross loans, in 25 separate transactions during the current fiscal year.
Insurance commissions and other income increased by $334,000, or 9.6%,
when comparing the two quarterly periods. Insurance commissions increased by
$226,000, or 11.2%, due to the increased loan volume in those states where
credit insurance may be sold. Other income increased by $108,000, or 7.4%. While
the sale of certain ancillary products such as Motor Club and Accidental Death
and Dismemberment policies grew by approximately $326,000, or 69.5%, due to the
introduction of these products in Kentucky, this was partially offset by an
additional accrual of $305,000 for a required payment to an outside consultant
for early termination of a contract. This
9
WORLD ACCEPTANCE CORPORATION
MANAGEMENTS' DISCUSSION AND ANALYSIS, CONTINUED
Comparison of Three Months Ended September 30, 2002, Versus
Three Months Ended September 30, 2001, continued
consultant provided services in our income tax preparation business, under a fee
splitting basis; therefore the accrual was reflected as a reduction of our tax
preparation fees. Income from ParaData, our computer subsidiary, increased by
$72,000, or 12.2%.
Total revenues rose to $36.1 million during the quarter ended September 30,
2002, a 15.4% increase over the $31.3 million for the corresponding quarter of
the previous year. Revenues from the 414 offices open throughout both quarters
increased by approximately 8.8%, primarily due to increased balances of loans
receivable in those offices. At September 30, 2002, the Company had 461 offices
in operation, an increase of 20 offices from March 31, 2002.
The provisions for loan losses during the quarter ended September 30, 2002,
increased by $702,000, or 10.2% 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 $7.0 million, a 13.2% increase over the $6.2
million charged off during the same quarter of fiscal 2002. As a percentage of
average loans receivable, net charge-offs increased to 14.8% on an annualized
basis for three months ended September 30, 2002, from 14.5% annualized for the
prior year quarter. Management does not currently believe that loan losses will
continue to rise significantly above the most recent quarterly levels; however,
the Company can give no assurance that loan losses will not continue to
increase, and such further increases would negatively affect the Company's
financial performance.
General and administrative expenses for the quarter ended September 30,
2002, increased by $2.9 million, or 17.0% over the same quarter of fiscal 2002.
This increase is due primarily to an increase in personnel cost over the two
quarterly periods as a result of the 27 net new offices open or acquired between
September 30, 2001 and September 30, 2002. Overall, general and administrative
expenses as a percent of total revenues increased slightly from 55.1% during the
quarter ended September 30, 2001 to 55.9% during the most recent quarter.
Management expects this expense ratio to improve over the remainder of the
fiscal year as personnel growth should level off and revenues from the new
offices will increase as we enter our busiest quarter for loan demand, as well
as our tax preparation season.
Interest expense decreased by $356,000, or 23.4%, primarily as a result of
the reduction of interest rates during the past year, even though average debt
increased by 9.5% when comparing the two quarterly periods.
The Company's effective income tax rate increased slightly to 35.5% from
34.7% when comparing the two quarters due to an expected increase in state
income taxes.
Net income rose to $4.6 million during the three months ended September 30,
2002, a 25.9% increase over the $3.7 million earned during the corresponding
three-month period of the previous year.
Comparison of Six Months Ended September 30, 2002,
Versus Six Months Ended September 30, 2001
For the six-month period ended September 30, 2002, net income amounted to
$9.3 million. This represents a $2.0 million, or 26.8%, increase when comparing
the two six-month periods. Operating income (revenues less the provision for
loan losses and general and administrative expenses) increased by $2.2 million,
or 15.5%, over the two periods. This increase was in addition to a decrease in
interest expense, offset by an increase in income taxes.
Total revenues amounted to $71.0 million during the current six-month
period, an increase of $9.2 million, or 15.0%, over the prior-year period. This
increase resulted from increases in interest and fee income of 14.4%, insurance
commissions of 21.8% and other income of 16.8%. The increase in interest and fee
income resulted from the increase in average loans receivable of 9.5% when
comparing the two six-month periods. Revenues from the 414 offices open
throughout both six-month periods increased approximately 9.2%.
The provision for loan losses increased by $1.9 million, or 15.4%, during
the current six-month period when compared to the same period of fiscal 2002.
This increase resulted primarily from an increase in loan losses over these two
periods. Net charge-offs increased to $13.0 million during the six-months ended
September 30, 2002, a $1.9 million, or 16.7%, increase over the $11.1 million
charged-off during the September 30, 2001 period. As a percentage of average
loans receivable, annualized net charge-offs rose to 14.2% during the current
period from 13.3% during the same period of fiscal 2002.
10
General and administrative expenses increased by $5.2 million, or 14.6%, over
the two six-month periods. This increase resulted from the 27 net new offices
added during the 12 month period ending September 30, 2002. As a percent of
total revenues, general and administrative expenses decreased from 57.1% during
the six month of fiscal 2002 to 56.9% during the most recent period.
Additionally, excluding the expenses associated with ParaData, overall general
and administrative expenses, when divided by the average open offices, increased
by 7.6% when comparing the two-six month periods.
Interest expense decreased by $919,000 when comparing the two six-month
periods, a decrease of 29.5%. This reflects the decrease in interest rates
during the past year.
The effective income tax rate increased slightly to 35.5% during the six
months ended September 30, 2002, from 34.9% during the same period ended
September 30, 2001 due to higher expected state income taxes.
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 144,000 shares of its common stock 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
$9,999,993. 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.
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 12 offices and a number of loan portfolios from
competitors in seven states in 25 separate transactions during the first six
months of fiscal 2003. Gross loans receivable purchased in these transactions
were approximately $13.6 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 September 30, 2002, the interest rate on
borrowings under the revolving credit facility was 3.72%. The Company pays a
commitment fee equal to 0.375% per annum 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
September 30, 2002, $105.1 million was outstanding under this facility, and
there was $19.9 million of unused borrowing availability under the borrowing
base limitations.
The Company has $4.0 million of senior subordinated secured notes with an
insurance company. These notes mature in annual installments of $2.0 million on
each June 30, 2003 and 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.
11
WORLD ACCEPTANCE CORPORATION
MANAGEMENTS' DISCUSSION AND ANALYSIS, CONTINUED
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.
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
Effective January 1, 2002, the Company adopted the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"). It 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 142. SFAS
142 also requires that intangible assets with definite useful lives be amortized
over their respective estimated useful lives to their estimated residual values
and reviewed for impairment in accordance with SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." ("SFAS 144").
In connection with the transitional goodwill, SFAS 142 requires the Company
to perform an assessment of whether there is an indication that goodwill is
impaired as of April 1, 2002. To accomplish this, the Company had to 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 had until September 30, 2002, to determine the fair value of each
reporting unit and compare it to the
12
WORLD ACCEPTANCE CORPORATION
MANAGEMENTS' DISCUSSION AND ANALYSIS, CONTINUED
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 second step of the transitional impairment
test must be performed. In the second step, the implied fair value of the
reporting unit's goodwill, determined by allocating the reporting unit's fair
value to all of it assets (recognized and unrecognized) and liabilities in a
manner similar to a purchase price allocation in accordance with SFAS 141,
"Business Combinations," is compared to its carrying amount, both of which would
be measured as of April 1, 2002.
The Company has completed its analysis of the fair value of its intangible
assets. The Company is currently completing the second step of its impairment
analysis and does not expect to record a transitional impairment loss. Any
transitional impairment loss would be recognized as the cumulative effect of a
change in accounting principle in the consolidated statements of income for the
nine months ended December 31, 2002 (although it will not be reflected in the
third quarter of fiscal 2003 results since the impairment is reflected as of
April 1, 2002). There was no change in the carrying amount of goodwill at
September 30, 2002 compared to March 31, 2002.
As of the April 2002 adoption of SFAS 142, the Company had unamortized
goodwill in the amount of $774,000 unamortized identifiable intangible assets in
the amount of $13.0 million and unamortized unidentifiable intangible assets in
the amount of $178,000 related to branch purchases. Under SFAS 142, the
amortization of goodwill ceased effective April 1, 2002. The amortization of
goodwill approximated $166,000 (pre-tax) during fiscal 2002 and $95,000
(pre-tax) during the six months ended September 30, 2001. The Company will
continue to amortize the identifiable intangible assets, which relate to the
cost of acquiring existing customers and the value assigned to non-compete
agreements and unidentifiable intangible assets from branch purchases.
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
1,2 002, 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
extinguishments 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 items will be reclassified. The adoption of
SFAS 145 is not expected to have a material impact on the Company.
In June 2002, the FASB issues SFAS 146, "Accounting for Cost Associated
with Exit or Disposal Activities." SFAS 146 requires that a liability of 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.
13
WORLD ACCEPTANCE CORPORATION
MANAGEMENTS' DISCUSSION AND ANALYSIS, CONTINUED
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," "believe,"
"plan," 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
$105.1 million at September 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 September 30, 2002, a change of 1% in the interest
rate would cause a change in interest expense of approximately $1.1 million on
an annual basis.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Control and Procedures
World Acceptance Corporation's Chief Executive Officer and Chief
Financial Officer have evaluated the company's disclosure controls
and procedures as of November 11, 2002, and they concluded that
these controls and procedures are effective.
(b) Changes in Internal Controls
There are no significant changes in internal controls or in other
factors that could significantly affect those controls subsequent
to November 11, 2002.
14
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.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The 2002 Annual Meeting of Shareholders was held on August 7,
2002.
(b) Pursuant to Instruction 3 to Item 4, this paragraph need not be
answered.
(c) At the 2002 Annual Meeting of Shareholders, the following three
matters were voted upon and passed. The tabulation of votes was:
(1) The election of seven Directors to serve until the 2003
Annual Meeting of Shareholders:
VOTES IN FAVOR VOTES WITHHELD*
-------------- ---------------
Ken R. Bramlett, Jr. 15,450,358 791,469
--------------- ----------------
James R. Gilreath 15,449,158 792,669
--------------- ----------------
William S. Hummers III 15,450,358 791,469
--------------- ----------------
Douglas R. Jones 14,786,817 1,455,010
--------------- ----------------
A. Alexander McLean III 14,783,848 1,457,979
--------------- ----------------
Charles D. Walters 14,785,100 1,456,727
--------------- ----------------
Charles D. Way 15,450,358 791,469
--------------- ----------------
(2) The approval of the 2002 Stock Option Plan.
VOTES IN FAVOR VOTES AGAINST ABSTENTIONS*
---------------- ---------------- ----------------
15,022,609 1,214,671 4,547
---------------- ---------------- ----------------
(3) The ratification of the selection of KPMG LLP as Independent
Auditors:
VOTES IN FAVOR VOTES AGAINST ABSTENTIONS*
---------------- ---------------- ----------------
16,207,150 32,977 1,700
---------------- ---------------- ----------------
*There were no broker non-votes on these routine items.
15
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
16
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+ 2002 Stock Option Plan of the Company Appendix A Definitive Proxy
Statement on
Schedule 14A
for 2002 Annual
Meeting
10.10+ The Company's Executive Incentive Plan 10.6 1994 10-K
10.11+ World Acceptance Corporation Retirement Savings Plan 4.1 333-14399
10.12+ 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 S-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 September
30, 2002.
17
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 14, 2002 /s/ C. D. Walters
------------------------------------------
C. D. Walters, Chairman, and
Chief Executive Officer
Dated: November 14, 2002 /s/ A. A. McLean III
------------------------------------------
A. A. McLean III, Executive Vice President
and Chief Financial Officer
CERTIFICATIONS
I, Charles D. Walters, certify that:
1. I have reviewed this quarterly report on Form 10-Q of World Acceptance
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a - 14 and 15d - 14) for the registrant
and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls, and;
18
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Dated: November 14, 2002 /s/ C.D. Walters
-----------------------------------
C. D. Walters
Chairman and CEO
I, A.A. McLean III, certify that:
1. I have reviewed this quarterly report on Form 10-Q of World Acceptance
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a - 14 and 15d - 14) for the registrant
and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls, and;
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Dated: November 14, 2002 /s/ A.A. McLean III
-----------------------------------
A.A. McLean III
Executive Vice President and CFO
19