-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JPX/SUMlaDkJpG/RjJkMEYCdpsJ2oElzshRbDDiTqBXxYgYbYNALBCRFv4UGzGwy tzc6LNRBAKqvQTIw/Zs0cw== 0000950168-99-001882.txt : 19990630 0000950168-99-001882.hdr.sgml : 19990630 ACCESSION NUMBER: 0000950168-99-001882 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990629 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WORLD ACCEPTANCE CORP CENTRAL INDEX KEY: 0000108385 STANDARD INDUSTRIAL CLASSIFICATION: PERSONAL CREDIT INSTITUTIONS [6141] IRS NUMBER: 570425114 STATE OF INCORPORATION: SC FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-19599 FILM NUMBER: 99655439 BUSINESS ADDRESS: STREET 1: 108 FREDRICK STREET CITY: GREENVILLE STATE: SC ZIP: 29607 BUSINESS PHONE: 8642989800 MAIL ADDRESS: STREET 1: P O BOX 6429 CITY: GREENVILLE STATE: SC ZIP: 29606 10-K 1 WORLD ACCEPTANCE CORPORATION 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------------- FORM 10-K ----------------- (Mark One) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended March 31, 1999 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to _____________ Commission file number 0-19599 WORLD ACCEPTANCE CORPORATION (Exact name of registrant as specified in its charter) South Carolina 570425114 ------------------------------ --------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 108 Frederick Street Greenville, South Carolina 29607 ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) (864) 298-9800 ----------------------------------------------------- (Registrant's telephone number, including area code) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock, no par value (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of voting stock held by nonaffiliates of the registrant as of June 18, 1999, computed by reference to the closing sale price on such date, was $97,459,937. As of the same date, 19,016,573 shares of Common Stock, no par value, were outstanding. DOCUMENTS INCORPORATED BY REFERENCE The Registrant's 1999 Annual Report ("the Annual Report") furnished to the Commission pursuant to Rule 14a-3(b) and the Notice of Annual Meeting of Shareholders and definitive Proxy Statement pertaining to the 1999 Annual Meeting of Shareholders ("the Proxy Statement") and filed pursuant to Regulation 14A are incorporated herein by reference into Parts II and IV, and Part III, respectively. WORLD ACCEPTANCE CORPORATION FORM 10-K REPORT TABLE OF CONTENTS ------------------
Item No. Page - ------- ---- PART I 1. Description of Business............................................................................. 1 2. Properties.......................................................................................... 8 3. Legal Proceedings................................................................................... 8 4. Submission of Matters to a Vote of Security Holders................................................. 10 PART II 5. Market for Registrant's Common Equity and Related Stockholder Matters............................... 10 6. Selected Financial Data............................................................................. 10 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............... 10 7a. Quantitative and Qualitative Disclosures About Market Risk............................................ 10 8. Financial Statements and Supplementary Data........................................................... 10 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................ 11 PART III 10. Directors and Executive Officers of the Registrant................................................. 11 11. Executive Compensation............................................................................. 11 12. Security Ownership of Certain Beneficial Owners and Management..................................... 11 13. Certain Relationships and Related Transactions..................................................... 11 PART IV 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.................................... 11
INTRODUCTION World Acceptance Corporation, a South Carolina corporation, operates a small-loan consumer finance business in nine states. As used herein, the "Company" includes World Acceptance Corporation and each of its subsidiaries, except that when used with reference to the Common Stock or other securities described herein and in describing the positions held by management or agreements of the Company, it includes only World Acceptance Corporation. All references in this report to "fiscal 1999" are to the Company's fiscal year ended March 31, 1999. PART I. ITEM 1. DESCRIPTION OF BUSINESS GENERAL. The Company is engaged in the small-loan consumer finance business, offering short-term loans, related credit insurance and ancillary products and services to individuals. The Company generally offers standardized installment loans of between $130 to $2,500 through 385 offices in South Carolina, Georgia, Texas, Oklahoma, Louisiana, Tennessee, Illinois, Missouri, and New Mexico as of June 18, 1999. The Company generally serves individuals with limited access to other sources of consumer credit from banks, savings and loans, other consumer finance businesses and credit cards. Small-loan consumer finance companies operate in a highly structured regulatory environment. Consumer loan offices are individually licensed under state laws, which establish allowable interest rates, fees and other charges on small loans made to consumers and, in many states, the maximum principal amounts and maturities of these loans. The Company believes that virtually all participants in the small-loan consumer finance industry charge the maximum rates permitted under applicable state laws. The small-loan consumer finance industry is a highly fragmented segment of the consumer lending industry. Small-loan consumer finance companies generally make loans to individuals of up to $1,000 with maturities of one year or less. These companies approve loans on the basis of the personal creditworthiness of their customers and maintain close contact with borrowers to encourage the repayment or refinancing of loans. By contrast, commercial banks, savings and loans and other consumer finance businesses typically make loans of more than $1,000 with maturities of more than one year. Those financial institutions generally approve consumer loans on the security of qualifying personal property pledged as collateral or impose more stringent credit requirements than those of small-loan consumer finance companies. As a result of their higher credit standards and specific collateral requirements, commercial banks, savings and loans and other consumer finance businesses typically charge lower interest rates and fees and experience lower delinquency and charge-off rates than do small-loan consumer finance companies. Small-loan consumer finance companies generally charge higher interest rates and fees to compensate for the greater credit risk of delinquencies and charge-offs and increased loan administration and collection costs. The lending activities of small-loan consumer finance companies also differ from those of pawnshops. Pawnshops generally make smaller loans with shorter original maturities than small-loan consumer finance companies. Pawnshops also extend loans based exclusively on the assessed value of the personal property that is pledged to secure their loans rather than on the personal creditworthiness of the borrower. Pawnshops experience default or forfeiture rates on their loans that are significantly greater than those experienced by small-loan consumer finance companies and, as a result, derive a large portion of their revenues from the sale of forfeited collateral in the ordinary course of their operations. EXPANSION. During fiscal 1999, the Company opened 26 new offices. Three other offices were purchased and 10 offices were closed, merged into other existing offices, or sold due to their inability to grow to profitable levels. The Company plans to open or acquire at least 25 new offices in each of the next two fiscal years by increasing the number of offices in its existing market areas and in new states where it believes demographic profiles and state regulations are attractive. The Company's ability to expand operations into new states is dependent upon its ability to obtain necessary regulatory approvals and licenses, and there can be no assurance that the Company will be able to obtain any such approvals or consents. 1 The Company's expansion is also dependent upon its ability to identify attractive locations for new offices and hire suitable personnel to staff, manage and supervise new offices. In evaluating a particular community, the Company examines several factors, including the demographic profile of the community, the existence of an established small-loan consumer finance market and the availability of suitable personnel to staff, manage and supervise the new offices. The Company generally locates new offices in communities already served by at least one small-loan consumer finance company. The small-loan consumer finance industry is highly fragmented in the nine states in which the Company currently operates. The Company believes that its competitors in these markets are principally independent operators with fewer than 20 offices. The Company also believes that attractive opportunities to acquire offices from competitors in its existing markets and to acquire offices in communities not currently served by the Company will become available as conditions in the local economies and the financial circumstances of the owners change. The following table sets forth the number of offices of the Company at the dates indicated:
At March 31, --------------------------------------------------------------------------------------- At June 18, STATE 1992 1993 1994 1995 1996 1997 1998 1999 1999 - ----- ---- ---- ---- ---- ---- ---- ---- ---- ---- South Carolina........ 52 53 56 59 62 68 64 63 63 Georgia............... 34 35 35 38 39 45 49 49 49 Texas................. 62 66 81 93 104 131 128 131 132 Oklahoma.............. 23 27 31 33 39 40 41 40 41 Louisiana (1)......... 5 10 12 15 20 18 21 20 20 Tennessee (2)......... - - 2 6 18 24 28 30 33 Illinois (3).......... - - - - - 3 11 20 20 Missouri (4).......... - - - - - 1 9 16 16 New Mexico (5)........ - - - - - 6 9 10 11 ---- ---- ----- ----- ----- ----- ---- ---- ---- Total............ 176 191 217 244 282 336 360 379 385 ==== ==== ===== ===== ===== ===== ==== ==== ====
(1) The Company commenced operations in Louisiana in May 1991. (2) The Company commenced operations in Tennessee in April 1993. (3) The Company commenced operations in Illinois in September 1996. (4) The Company commenced operations in Missouri in August 1996. (5) The Company commenced operations in New Mexico in December 1996. LOAN AND OTHER PRODUCTS. In each state in which it operates, the Company offers loans that are standardized by amount and maturity in an effort to reduce documentation and related processing costs. Substantially all of the Company's loans are payable in monthly installments with terms of four to fifteen months, and all loans are prepayable at any time without penalty. In fiscal 1999, the Company's average originated loan size and term were approximately $518 and nine months, respectively. State laws regulate lending terms, including the maximum loan amounts and interest rates and the types and maximum amounts of fees, insurance premiums and other costs that may be charged. As of March 31, 1999, the annual percentage rates on loans offered by the Company, which include interest, fees and other charges as calculated for the purposes of federal consumer loan disclosure requirements, ranged from 27% to 205% depending on the loan size, maturity and the state in which the loan is made. In addition, in certain states, the Company sells credit insurance in connection with its loans as agent for an unaffiliated insurance company, which may increase its yields on loans originated in those states. Specific allowable charges vary by state and, consistent with industry practice, the Company generally charges the maximum rates allowable under applicable state law. Statutes in Texas, Oklahoma and South Carolina allow for indexing the maximum loan amounts to the Consumer Price Index. Fees charged by the Company include origination and account maintenance fees, monthly handling charges and, in South Carolina, Georgia, 2 Louisiana and Tennessee, non-file fees, which are collected by the Company and paid as premiums to an unaffiliated insurance company for non-recording insurance. The Company, as an agent for an unaffiliated insurance company, markets and sells credit life, credit accident and health, credit property, and unemployment insurance in connection with its loans in states where the sale of such insurance is permitted by law. Credit life insurance provides for the payment in full of the borrower's credit obligation to the lender in the event of death. Credit accident and health insurance provides for repayment of loan installments to the lender that come due during the insured's period of income interruption resulting from disability from illness or injury. Credit property insurance insures payment of the borrower's credit obligation to the lender in the event that the personal property pledged as security by the borrower is damaged or destroyed. Unemployment insurance provides for repayment of loan installments to the lender that come due during the insured's period of involuntary unemployment. The Company requires each customer to obtain credit insurance in the amount of the loan for all loans originated in South Carolina, and Georgia, and encourages customers to obtain credit insurance for loans originated in Tennessee and Louisiana. Customers in those states typically obtain such credit insurance through the Company. Charges for such credit insurance are made at maximum authorized rates and are stated separately in the Company's disclosure to customers, as required by the Truth-in-Lending Act. In the sale of insurance policies, the Company as agent writes policies only within limitations established by its agency contracts with the insurer. The Company does not sell credit insurance to non-borrowers. The Company also markets automobile club memberships to its borrowers in Georgia, Tennessee and Louisiana as an agent for an unaffiliated automobile club. Club memberships entitle members to automobile breakdown and towing insurance and related services. The Company is paid a commission on each membership sold, but has no responsibility for administering the club, paying insurance benefits or providing services to club members. The Company generally does not market automobile club memberships to non-borrowers. In fiscal 1995 the Company implemented its World Class Buying Club, and began marketing certain electronic products and appliances to its Texas borrowers. Since implementation, the Company has expanded this program to Georgia, Tennessee, South Carolina, Louisiana, Oklahoma and New Mexico and plans to introduce the program in Illinois and Missouri in the summer of 1999. Borrowers participating in this program can purchase a product from a catalog available at a branch office and finance the purchase with a retail installment sales loan provided by the Company. Products sold through this program are shipped directly by the suppliers to the Company's customers and, accordingly, the Company is not required to maintain any inventory to support the program. LOAN ACTIVITY AND SEASONALITY. The following table sets forth the composition of the Company's gross loans receivable by state at March 31 of each year from 1992 through 1999:
At March 31, ------------------------------------------------------------------------- State 1992 1993 1994 1995 1996 1997 1998 1999 ----- ---- ---- ---- ---- ---- ---- ---- ---- South Carolina........... 38% 37% 37% 35% 33% 26% 23% 22% Georgia.................. 13 14 14 13 13 13 14 16 Texas.................... 39 38 38 38 35 39 35 31 Oklahoma................. 8 8 7 7 8 7 7 7 Louisiana (1)............ 2 3 3 4 5 3 4 4 Tennessee (2)............ - - 1 3 6 10 11 12 Illinois (3)............. - - - - - - 2 3 Missouri (4)............. - - - - - - 1 2 New Mexico (5)........... - - - - - 2 3 3 ---- ----- ----- ----- ----- ---- ---- ---- Total................ 100% 100% 100% 100% 100% 100% 100% 100% ==== ===== ===== ===== ===== ==== ==== ====
_______________________________ (1) The Company commenced operations in Louisiana in May 1991. (2) The Company commenced operations in Tennessee in April 1993. (3) The Company commenced operations in Illinois in September 1996. (4) The Company commenced operations in Missouri in August 1996. (5) The Company commenced operations in New Mexico in December 1996. 3 The following table sets forth the total number of loans and the average loan balance by state at March 31, 1999:
Total Number Average Gross Loan of Loans Balance -------- ------- South Carolina..................... 69,940 472 Georgia............................ 36,550 663 Texas.............................. 131,473 358 Oklahoma........................... 24,223 418 Louisiana.......................... 12,965 402 Tennessee.......................... 28,768 645 Illinois........................... 9,716 437 Missouri........................... 6,607 449 New Mexico......................... 9,133 459 -------- Total.......................... 329,375 --------
The Company's highest loan demand occurs generally from October through December, its third fiscal quarter. Loan demand is generally lowest and loan repayment highest from January to March, its fourth fiscal quarter. Consequently, the Company experiences significant seasonal fluctuations in its operating results and cash needs. Operating results from the Company's third fiscal quarter are generally significantly lower than in other quarters and operating results for its fourth fiscal quarter are generally higher than in other quarters. LENDING AND COLLECTION OPERATIONS. The Company seeks to provide short-term loans to the segment of the population that has limited access to other sources of credit. In evaluating the creditworthiness of potential customers, the Company primarily examines the individual's discretionary income, length of current employment, duration of residence and prior credit experience. Loans are made to individuals on the basis of the customer's discretionary income and other factors and are limited to amounts that the customer can reasonably be expected to repay from that income. All of the Company's new customers are required to complete standardized credit applications in person or by telephone at local Company offices. Each of the Company's local offices is equipped to perform immediate background, employment and credit checks and approve loan applications promptly, often while the customer waits. The Company's employees verify the applicant's employment and credit histories through telephone checks with employers, other employment references and a variety of credit services. Substantially all new customers are required to submit a listing of personal property that will be pledged as collateral to secure the loan, but the Company does not rely on the value of such collateral in the loan approval process and generally does not perfect its security interest in that collateral. Accordingly, if the customer were to default in the repayment of the loan, the Company may not be able to recover the outstanding loan balance by resorting to the sale of collateral. The Company generally approves less than 50% of applications for loans to new customers. The Company believes that the development and continual reinforcement of personal relationships with customers improve the Company's ability to monitor their creditworthiness, reduce credit risk and generate repeat loans. It is not unusual for the Company to have made a number of loans to the same customer over the course of several years, many of which were refinanced with a new loan after two or three payments. In determining whether to refinance existing loans, the Company typically requires loans to be current on a recency basis, and repeat customers are generally required to complete a new credit application if they have not completed one within the prior two years. In fiscal 1999, approximately 88% of the Company's loans were generated through refinancings of outstanding loans and the origination of new loans to previous customers. A refinancing represents a new loan transaction with a present customer in which a portion of the new loan is used to repay the balance of an existing loan and the remaining portion is advanced to the customer. The Company actively markets the opportunity to refinance existing loans prior to maturity, thereby increasing the amount borrowed and increasing the fees and other income realized. For fiscal 1997, 1998, and 1999, the percentages of the Company's loan originations that were refinancings of existing loans were 81.8%, 79.1%, and 78.5% respectively. 4 The Company allows refinancing of delinquent loans on a case-by-case basis for those customers who otherwise satisfy the Company's credit standards. Each such refinancing is carefully examined before approval to avoid increasing credit risk. A delinquent loan may generally be refinanced only if the customer has made payments which, together with any credits of insurance premiums or other charges to which the customer is entitled in connection with the refinancing, reduce the balance due on the loan to an amount equal to or less than the original cash advance made in connection with the loan. The Company does not allow the amount of the new loan to exceed the original amount of the existing loan. The Company believes that refinancing delinquent loans for certain customers who have made periodic payments allows the Company to increase its average loans outstanding and its interest, fee and other income without experiencing a material increase in loan losses. These refinancings also provide a resolution to temporary financial setbacks for these borrowers and sustains their credit rating. To reduce late payment risk, local office staff encourage customers to inform the Company in advance of expected payment problems. Local office staff also promptly contact delinquent customers following any payment due date and thereafter remain in close contact with such customers through phone calls, letters or personal visits to the customer's residence or place of employment until payment is received or some other resolution is reached. When representatives of the Company make personal visits to delinquent customers, the Company's policy is to encourage the customers to return to the Company's office to make payment. Company employees are instructed not to accept payment outside of the Company's offices except in unusual circumstances. In Georgia and Oklahoma, the Company is permitted under state laws to garnish customers' wages for repayment of loans, but the Company does not otherwise generally resort to litigation for collection purposes, and rarely attempts to foreclose on collateral. INSURANCE-RELATED OPERATIONS. In Georgia, Louisiana, South Carolina, Tennessee, and on a limited basis, New Mexico, the Company sells credit insurance to customers in connection with its loans as an agent for an unaffiliated insurance company. These insurance policies provide for the payment of the outstanding balance of the Company's loan upon the occurrence of an insured event. The Company earns a commission on the sale of such credit insurance, which is based in part on the claims experience of the insurance company on policies sold on its behalf by the Company. The Company has a wholly owned captive insurance subsidiary, which reinsures a portion of the credit insurance sold in connection with loans made by the Company. Certain coverages currently sold by the Company on behalf of the unaffiliated insurance carrier are ceded by the carrier to the captive insurance subsidiary, providing the Company with an additional source of income derived from the earned reinsurance premiums. In fiscal 1999, the captive insurance subsidiary reinsured less than 9.7% of the credit insurance sold by the Company and contributed approximately $1,093,000 to the Company's total revenues. The Company typically does not perfect its security interest in collateral securing its loans by filing Uniform Commercial Code financing statements. Statutes in Georgia, Louisiana, South Carolina and Tennessee permit the Company to charge a non-file or non-recording insurance fee in connection with loans originated in these states. These fees are equal in aggregate amount to the premiums paid by the Company to purchase non-file insurance coverage from an unaffiliated insurance company. Under its non-file insurance coverage, the Company is reimbursed for losses on loans resulting from its policy not to perfect its security interest in collateral pledged to secure the loans. MONITORING AND SUPERVISION. The Company's loan operations are organized into Eastern and Western Divisions, with the Eastern Division consisting of South Carolina, Georgia, Tennessee and Illinois and the Western Division consisting of Louisiana, Texas, Oklahoma, Missouri and New Mexico. Several levels of management monitor and supervise the operations of each of the Company's offices. Branch managers are directly responsible for the performance of their respective offices and must approve all credit applications. District supervisors are responsible for the performance of eight to ten offices in their districts, typically communicate with the branch managers of each of their offices at least weekly and visit the offices monthly. Each of the state Vice Presidents of Operations monitor the performance of all offices within their states (or partial state in the case of Texas), primarily through communication with district supervisors. These Vice Presidents of Operations typically communicate with the district supervisors of each of their districts weekly and visit each office in their states quarterly. 5 Senior management receives daily delinquency loan volume, charge-off, and other statistical reports consolidated by state and has access to these daily reports for each branch office. At least monthly, district supervisors audit the operations of each office in their geographic area and submit standardized reports detailing their findings to the Company's senior management. At least once every nine months, each office undergoes an audit by the Company's internal auditors. These audits include an examination of cash balances and compliance with Company loan approval, review and collection procedures and federal and state laws and regulations. In fiscal 1994 the Company converted all of its loan offices to a new computer system following its acquisition of Paradata Financial Systems, Inc., a small software company located near St. Louis, Missouri. This system uses a proprietary data processing software package developed by Paradata, and has enabled the Company to fully automate all loan account processing and collection reporting. The system also provides significantly enhanced management information and control capabilities. The Company also markets the system to other finance companies, but there can be no assurance that revenues from sales of the system to third parties will be material. STAFF AND TRAINING. Local offices are generally staffed with three employees. The branch manager supervises operations of the office and is responsible for approving all loan applications. Each office generally has one assistant manager, who contacts delinquent customers, reviews loan applications and prepares operational reports and one customer service representative, who takes and processes loan applications and payments and assists in the preparation of operational reports and collection and marketing activities. Large offices may employ additional assistant managers and service representatives. New employees are required to review a detailed training manual that outlines the Company's operating policies and procedures. The Company tests each employee on the training manual during the first year of employment. In addition, each branch provides in-office training sessions once every week and training sessions outside the office for one full day every two months. COMPENSATION. The Company administers a performance-based compensation program for all of its district supervisors and branch managers. The Company annually reviews the performance of branch managers and adjusts their base salaries based upon a number of factors, including office loan growth, delinquencies and profitability. Branch managers also receive incentive compensation based upon office profitability and delinquencies. In addition, branch managers are paid a cash bonus for training personnel who are promoted to branch manager positions. Assistant managers and service representatives are paid a base salary and incentive compensation based primarily upon their office's loan volume and delinquency ratio. ADVERTISING. The Company actively advertises through direct mail, targeting both its present and former customers and potential customers who have used other sources of consumer credit. The Company creates mailing lists from public records of collateral filings by other consumer credit sources, such as furniture retailers and other consumer finance companies and obtains or acquires mailing lists from other sources. In addition to the general promotion of its loans for vacations, back-to-school needs and other uses, the Company advertises extensively during the October through December holiday season and in connection with new office openings. The Company believes its advertising contributes significantly to its ability to compete effectively with other providers of small-loan consumer credit. In fiscal 1999, advertising expenses were approximately 4.4% of total revenues. COMPETITION. The small-loan consumer finance industry is highly fragmented, with numerous competitors. The majority of the Company's competitors are independent operators with fewer than 20 offices. Pawnshops also provide competition in most of the communities served by the Company. Competition from nationwide consumer finance businesses is limited because these companies typically do not make loans of less than $1,000. The Company believes that competition between small-loan consumer finance companies occurs primarily on the basis of the strength of customer relationships, customer service and reputation in the local community, rather than pricing, as participants in this industry generally charge comparable interest rates and fees. The Company believes that its relatively larger size affords it a competitive advantage over smaller companies by increasing its access to, and reducing its cost of, capital. Most of the states in which the Company currently operates limit the size of loans made by small-loan consumer finance companies and prohibit the extension of more than one loan to a customer by any one company. As a result, many customers borrow from more than one finance company, enabling the Company to obtain information on the 6 credit history of specific customers from other consumer finance companies. The Company generally seeks to open new offices in communities already served by at least one other small-loan consumer finance company. GOVERNMENT REGULATION. Small-loan consumer finance companies are subject to extensive regulation, supervision and licensing under various federal and state statutes, ordinances and regulations. In general, these statutes establish maximum loan amounts and interest rates and the types and maximum amounts of fees, insurance premiums and other costs that may be charged. In addition, state laws regulate collection procedures, the keeping of books and records and other aspects of the operation of small-loan consumer finance companies. Generally, state regulations also establish minimum capital requirements for each local office. State agency approval is required to open new branch offices. Accordingly, the ability of the Company to expand by acquiring existing offices and opening new offices will depend in part on obtaining the necessary regulatory approvals. A Texas regulation requires the approval of the Texas Consumer Credit Commissioner for the acquisition, directly or indirectly, of more than 10% of the voting or common stock of a consumer finance company. A Louisiana statute prohibits any person from acquiring control of 50% or more of the shares of stock of a licensed consumer lender, such as the Company, without first obtaining a license as a consumer lender. The overall effect of these laws, and similar laws in other states, is to make it more difficult to acquire a consumer finance company than it might be to acquire control of a nonregulated corporation. Each of the Company's branch offices is separately licensed under the laws of the state in which the office is located. Licenses granted by the regulatory agencies in these states are subject to renewal every year and may be revoked for failure to comply with applicable state and federal laws and regulations. In the states in which the Company currently operates, licenses may be revoked only after an administrative hearing. The Company and its operations are regulated by several state agencies, including the Industrial Loan Division of the Office of the Georgia Insurance Commissioner, the Consumer Finance Division of the South Carolina Board of Financial Institutions, the South Carolina Department of Consumer Affairs, the Texas Office of the Consumer Credit Commission, the Oklahoma Department of Consumer Credit, the Louisiana Office of Financial Institutions the Tennessee Department of Financial Institutions, the Missouri Division of Finance, the Illinois Consumer Credit Division, Department of Financial Institutions, and the Consumer Credit Bureau of the New Mexico Financial Institutions Division. These state regulatory agencies audit the Company's local offices from time to time and each state agency performs an annual compliance audit of the Company's operations in that state. The Company is also subject to state regulations governing insurance agents in the states in which it sells credit insurance. State insurance regulations require that insurance agents be licensed, govern the commissions that may be paid to agents in connection with the sale of credit insurance and limit the premium amount charged for such insurance. The Company's captive insurance subsidiary is regulated by the insurance authorities of the Turks and Caicos Islands of the British West Indies, where the subsidiary is organized and domiciled. The Company is subject to extensive federal regulation as well, including the Truth-in-Lending Act, the Equal Credit Opportunity Act and the Fair Credit Reporting Act and the regulations thereunder and the Federal Trade Commission's Credit Practices Rule. These laws require the Company to provide complete disclosure of the principal terms of each loan to every prospective borrower, prohibit misleading advertising, protect against discriminatory lending practices and proscribe unfair credit practices. Among the principal disclosure items under the Truth-in-Lending Act are the terms of repayment, the final maturity, the total finance charge and the annual percentage rate charged on each loan. The Equal Credit Opportunity Act prohibits creditors from discriminating against loan applicants on the basis of race, color, sex, age or marital status. Pursuant to Regulation B promulgated under the Equal Credit Opportunity Act, creditors are required to make certain disclosures regarding consumer rights and advise consumers whose credit applications are not approved of the reasons for the rejection. The Fair Credit Reporting Act requires the Company to provide certain information to consumers whose credit applications are not approved on the basis of a report obtained from a consumer reporting agency. The Credit Practices Rule limits the types of property a creditor may accept as collateral to secure a consumer loan. Violations of the statutes and regulations described above may result in actions for damages, claims for refund of payments made, certain fines and penalties, injunctions against certain practices and the potential forfeiture of rights to repayment of loans. Consumer finance companies are affected by changes in state and federal statutes and regulations. The Company actively participates in trade associations and in lobbying efforts in the states in which it operates. Although the Company is not aware of any pending or proposed legislation that would have a material adverse effect 7 on the Company's business, there can be no assurance that future regulatory changes will not adversely affect the Company's lending practices, operations, profitability or prospects. EMPLOYEES. As of March 31, 1999, the Company had approximately 1,299 employees, none of whom were represented by labor unions. The Company considers its relations with its personnel to be good. The Company seeks to hire people who will become long-term employees. The Company experiences a high level of turnover among its entry-level personnel, which the Company believes is typical of the small-loan consumer finance industry. EXECUTIVE OFFICERS. The names and ages, positions, terms of office and periods of service of each of the Company's executive officers (and other business experience for executive officers who have served as such for less than five years) are set forth below. The term of office for each executive officer expires upon the earlier of the appointment and qualification of a successor or such officers' death, resignation, retirement or removal.
Period of Service as Executive Officer and Pre-executive Officer Experience (if an Name and Age Position Executive Officer for Less Than Five Years) - ------------ --------- ------------------------------------------- Charles D. Walters (60) Chairman and Chief Chairman since July 1991; President Executive Officer; since July 1986; CEO since July 1991; Director Director since April 1989 A. Alexander McLean, III (48) Executive Vice President; Executive Vice President since August 1996; Chief Financial Officer; Senior Vice President since July 1992; Director CFO and Director since June 1989 Mark C. Roland (43) Senior Vice President, Since January 1996; Senior Vice President - Eastern Division Operations Support, Fleet Finance, in Atlanta, Georgia, from January 1993 to January 1996 Casey K. Johnson (38) Senior Vice President, Since April 1998; Vice President, Operations - Western Division West Texas since June 1994; Supervisor of North Oklahoma since August 1989
ITEM 2. PROPERTIES The Company owns its headquarters facility of approximately 14,000 square feet in Greenville, South Carolina, and all of the furniture, fixtures and computer terminals located in each branch office. As of June 18, 1999, the Company had 385 branch offices, most of which are leased pursuant to short-term operating leases. During the fiscal year ended March 31, 1999, total lease expense was approximately $3.2 million, or an average of approximately $8,526 per office. The Company's leases generally provide for an initial three- to five-year term with renewal options. The Company's branch offices are typically located in shopping centers, malls and the first floors of downtown buildings. Branch offices generally have a uniform physical layout and range in size from 800 to 1,200 square feet. ITEM 3. LEGAL PROCEEDINGS Since April 1995, the Company and several of its subsidiaries have been parties to litigation challenging the Company's non-filing insurance practices. Non-filing insurance is an insurance product that lenders like the Company can purchase in lieu of filing a UCC financing statement covering the collateral of their borrowers. The litigation against the Company has been consolidated with other litigation against other finance companies, jewelry and furniture retailers, and insurance companies in a purported nationwide class action in the U.S. District Court in Alabama under the caption In re: Consolidated "Non-filing Insurance" Fee Litigation (Multidistrict Litigation Docket No. 1130), U.S. District Court, Middle District of Alabama, Northern Division). 8 On November 11, 1998, the Company and its subsidiaries named in the action entered into a settlement agreement. Pursuant to the settlement agreement, which is subject to the court's approval, the Company has agreed to settle all claims alleged in the litigation involving it and its subsidiaries for an aggregate cash payment of $5 million. In addition, the terms of the settlement will curtail certain non-filing practices by the Company and its subsidiaries and will allow the court to approve criteria defining those circumstances in which the Company's subsidiaries can make non-filing insurance claims going forward. As a result of the settlement, non-filing insurance fees charged to borrowers will be reduced by 25%. The settlement agreement, which includes the settlement by several other defendants in the litigation, including the Company's insurer, is subject to the court's approval because the settlement concerns a class action. The Company has recorded an accrual for settlement costs, including the expected expenses to comply with the terms of the settlement, of $5.4 million in the fiscal year ended March 31, 1999. Of this total accrual, $5.1 million has been paid to an escrow account, pending distribution to class participants. Going forward, the Company expects that the settlement will limit and reduce the coverage for the types of losses with respect to which its subsidiaries will submit claims. The Company cannot predict the amount of this reduction, but believes that the settlement will negatively impact the Company in the near term, but should not have a material adverse effect of the Company's results of operations over time. The Company has been named as a defendant in an action, Turner v. World Acceptance Corp., pending in district court for the Fourteenth Judicial District, Tulsa County, Oklahoma (No. CJ-97-1921). The action commenced against the Company on May 20, 1997, names numerous other consumer finance companies as defendants, and seeks certification as a statewide class action. The action alleges that the Company and other consumer finance defendants collected excess finance charges in connection with refinancing certain consumer finance loans in Oklahoma and seeks money damages and an injunction against further collection of such charges. The Company has filed an answer in the action denying liability, and discovery is proceeding. The plaintiff's claim is based on a recent opinion of the Oklahoma Attorney General interpreting a provision of the Oklahoma Consumer Credit Code with respect to the permitted amount of certain loan refinance charges in a manner contrary to prior regulatory practice in existence in Oklahoma since 1969. The Company and numerous other consumer finance companies have brought suit to enjoin enforcement by the Oklahoma Attorney General of its recent interpretation of this provision of the Oklahoma Consumer Credit Code. In May 1999, the Oklahoma Supreme Court upheld the Attorney General's interpretation on a prospective basis. The Company and the other consumer finance companies party to the proceeding against the Attorney General have petitioned the Oklahoma Supreme Court for a rehearing on this matter. In addition, the State of Oklahoma has recently enacted legislation to clarify the interpretation of the disputed provision of the Oklahoma Consumer Credit Code consistent with the prior regulatory practice followed by the Company. Because of this recent legislation, the Company expects that the purported class-action lawsuit, even if decided adversely to the Company, would not materially affect the Company's refinancing practices in Oklahoma going forward, although such an adverse decision could possibly involve a material monetary award. The Company intends to defend this action vigorously. This report on Form 10-K, including "Management's Discussion and Analysis of Financial Condition and Results of Operations" ("MD&A") and other information incorporated herein by reference, may contain various "forward-looking statements," within the meaning of Section 21E of the Securities Exchange Act of 1934, that are based on management's belief and assumptions, as well as information currently available to management. Specifically, management's statements of expectations with respect to the litigation and pending settlement (the "Settlement") and the other litigation in Oklahoma (the "Oklahoma Litigation") described above and in MD&A and the matters discussed in "Year 2000" in MD&A may be deemed forward-looking statements. When used in this document, the words "anticipate," "estimate," "expect," and similar expressions may identify forward-looking statements. Although the Company believes that the expectations reflected in any such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct. Any such statements are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, the Company's actual financial results, performance or financial condition may vary materially from those anticipated, estimated or expected. Among the key factors that could cause the Company's actual financial results, performance or condition to differ from the expectations expressed or implied in such forward-looking statements are the following: changes in interest rates; risks inherent in making loans, including repayment risks and value of collateral; recently-enacted or 9 proposed legislation; whether, and the terms upon which, court approval of the Settlement is obtained; the occurrence of non-filing claims at historical levels in circumstances validated by the Settlement; the timing and amount of revenues that may be recognized by the Company; the outcome of the Oklahoma Litigation; changes in current revenue and expense trends (including trends affecting charge-offs); changes in the Company's markets and general changes in the economy (particularly in the markets served by the Company); the ability of the Company and third parties with whom the Company deals to achieve year 2000 compliance; the unpredictable nature of litigation; and other matters discusses in this Report and the Company's other filings with the Securities and Exchange Commission. From time to time the Company is involved in other routine litigation relating to claims arising out of its operations in the normal course of business in which damages in various amounts are claimed. Although the Company believes that it is not presently a party to any such other pending legal proceedings that would have a material adverse effect on its financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to the Company's security holders during the fourth fiscal quarter ended March 31, 1999. PART II. ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Since November 26, 1991, the Company's Common Stock has traded on the NASDAQ National Market System ("NASDAQ") under the symbol WRLD. As of June 18, 1999, there were 162 holders of record of Common Stock. Since April 1989, the Company has not declared or paid any cash dividends on its Common Stock. Its policy has been to retain earnings for use in its business. In the future, the Company's Board of Directors will determine whether to pay cash dividends based on conditions then existing, including the Company's earnings, financial condition, capital requirements and other relevant factors. In addition, the Company's credit agreements with its lenders impose restrictions on the amount of cash dividends that may be paid on its capital stock. Information contained under the caption "Corporate Information--Common Stock" in the Annual Report is incorporated herein by reference in further response to this Item 5. ITEM 6. SELECTED FINANCIAL DATA Information contained under the caption "Selected Consolidated Financial and Other Data" in the Annual Report is incorporated herein by reference in response to this Item 6. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Information contained under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Annual Report is incorporated herein by reference in response to this Item 7. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's outstanding debt under the Revolving Credit Facility was $57.2 million at March 31, 1999. Interest on borrowings under this facility is based, at the Company's option, on the prime rate or LIBOR plus 1.60%. Based on the outstanding balance at March 31, 1999, a change of 1% in the interest rate would cause a change in interest expense of approximately $572,000 on an annual basis. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Consolidated Financial Statements for the Company and the Independent Auditors' Report thereon are contained in the Annual Report and are incorporated by reference in response to this Item 8. 10 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE The Company had no disagreements on accounting or financial disclosure matters with its independent certified public accountants to report under this Item 9. PART III. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information contained under the caption "Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy Statement is incorporated herein by reference in response to this Item 10. The information in response to this Item 10 regarding the executive officers of the Company is contained in Item 1, Part I hereof under the caption "Executive Officers." ITEM 11. EXECUTIVE COMPENSATION Information contained under the caption "Executive Compensation" in the Proxy Statement, except for the information therein under the subcaption "Joint Report of the Compensation Committee and the Stock Option Committee," is incorporated herein by reference in response to this Item 11. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information contained under the captions "Ownership of Shares by Certain Beneficial Owners as of June 18, 1999" and "Ownership of Common Stock of Management as of June 18, 1999" in the Proxy Statement is incorporated by reference herein in response to this Item 12. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information contained under the heading "Compensation Committee Interlocks and Insider Participation" in the Proxy Statement is incorporated herein by reference in response to this Item 13. PART IV. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (1) The following consolidated financial statements of the Company and Independent Auditors' Report are contained in the Annual Report and are incorporated herein by reference. CONSOLIDATED FINANCIAL STATEMENTS: Consolidated Balance Sheets at March 31, 1999 and 1998 Consolidated Statements of Operations for the years ended March 31, 1999, 1998 and 1997 Consolidated Statements of Shareholders' Equity for the years ended March 31, 1999, 1998 and 1997 Consolidated Statements of Cash Flows for the years ended March 31, 1999, 1998 and 1997 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS INDEPENDENT AUDITORS' REPORT (2) Financial Statement Schedules All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions, are inapplicable, or the required information is included elsewhere in the consolidated financial statements. 11 (3) Exhibits The following exhibits are filed as part of this report or, where so indicated, have been previously filed and are incorporated herein by reference.
Filed Herewith (*), Non-Applicable (NA), or or Incorporated by Company Exhibit Reference Previous Registration Number Description Exhibit Number No. or Report ----------------------------------------------------------------------------------------------------------------- 3.1 Second Amended and Restated Articles of Incorporation of the 3.1 1992 10-K Company 3.2 First Amendment to Second Amended and Restated Articles of 3.2 1995 10-K Incorporation 3.3 Amended Bylaws of the Company 3.4 33-42879 4.1 Specimen Share Certificate 4.1 33-42879 4.2 Articles 3, 4 and 5 of the Form of Company's Second Amended 3.1, 3.2 1995 10-K and Restated Articles of Incorporation (as amended) 4.3 Article II, Section 9 of the Company's Second Amended and 3.2 1995 10-K Restated Bylaws 4.4 Amended and Restated Revolving Credit Agreement, dated as of 4.4 9-30-97 June 30, 1997, between Harris Trust and Savings Bank, the 10-Q Banks signatory thereto from time to time and the Company 4.5 Amended and Restated Note Agreement, dated as of June 30, 4.5 9-30-97 1997, between Jefferson-Pilot Life Insurance Company and the 10-Q Company 4.6# Amended and Restated Note Agreement, dated as of June 30, 4.6 9-30-97 1997, between Principal Mutual Life Insurance Company and the 10-Q Company 4.7 Note Agreement, dated as of June 30, 1997, between Principal 4.7 9-30-97 Mutual Life Insurance Company and the Company re: 10% Senior 10-Q Subordinated Secured Notes 4.8 Amended and Restated Security Agreement, Pledge and Indenture 4.8 9-30-97 of Trust, dated as of June 30, 1997, between the Company and 10-Q 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 Settlement Agreement dated as of April 1, 1999, between the * N/A Company and R. Harold Owens 10.4 Securityholders' Agreement dated as of September 19, 1991, 10.5 33-42879 between the Company and certain of its securityholders
12
Filed Herewith (*), Non-Applicable (NA), or or Incorporated by Company Exhibit Reference Previous Registration Number Description Exhibit Number No. or Report ----------------------------------------------------------------------------------------------------------------- 10.5+ 1992 Stock Option Plan of the Company 4 33-52166 10.6+ 1994 Stock Option Plan of the Company, as amended 10.6 1995 10-K 10.7+ The Company's Executive Incentive Plan 10.6 1994 10-K 10.8+ The Company's Executive Strategic Incentive Plan 10.8 1995 10-K 10.9+ Amendment No. 1, dated as of April 1, 1996, to the Executive 10.9 1996 10-K Strategic Incentive Plan 13 Excerpts from 1999 Annual Report of the Company, with respect * NA to those portions incorporated by reference into this report 21 Schedule of Company's subsidiaries * NA 23 Consent of KPMG Peat Marwick LLP in connection with the Company's Registration Statements on Form S-8 * NA 27 Financial Data Schedule * NA
+ Management Contract or other compensatory plan required to be filed under Item 14(c) of this report and Item 601 of Regulation S-K of the Securities and Exchange Commission. # Omitted from filing - substantially identical to immediately preceding exhibit, except for the parties thereto and the principal amount involved. (4) Reports on Form 8-K During the most recent fiscal quarter, there were no reports filed on Form 8-K. 13 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. WORLD ACCEPTANCE CORPORATION By: /s/ A. Alexander McLean, III ---------------------------------- A. Alexander McLean, III Executive Vice President and CFO Date: June 28, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature --------- /s/ Charles D. Walters - ------------------------------------------------------- Charles D. Walters, Chairman and Chief Executive Officer (principal executive officer); Director Date: June 28, 1999 /s/ A. Alexander McLean, III - ------------------------------------------------------------ A. Alexander McLean, III, Executive Vice President and Chief Financial Officer (principal financial officer and principal accounting officer); Director Date: June 28, 1999 /s/ Ken R. Bramlett, Jr. - ---------------------------------------------------------- Ken R. Bramlett, Jr., Director Date: June 28, 1999 /s/ William S. Hummers, III - --------------------------------------------------------- William S. Hummers, III, Director Date: June 28, 1999 14 EX-10 2 EXHIBIT 10_3 SETTLEMENT AGREEMENT AND MUTUAL RELEASE OF CLAIMS This SETTLEMENT AGREEMENT AND MUTUAL RELEASE OF CLAIMS is made and entered into as of the 1st day of April 1999, by and between WORLD ACCEPTANCE CORPORATION, a South Carolina corporation with its principal place of business in Greenville, South Carolina, ("the Company"), and R. HAROLD OWENS ("Employee"). STATEMENT OF PURPOSE Employee has served as an officer, director and employee of the Company. Effective April 1, 1999, Employee has ended his employment with the Company. In order to resolve any and all claims between the parties hereto, and for the good and valuable consideration otherwise set forth herein, the parties have entered into this Agreement. AGREEMENT NOW THEREFORE, in consideration of the mutual covenants and agreements contained herein and other good and valuable consideration, the Company and Employee hereby agree as follows: 1. Date of Termination. Employee's employment with the Company and/or the Company's subsidiaries is hereby ended as of April 1, 1999. Employee hereby tenders Employee's resignation from any and all positions, including as a director, now held with the Company and/or its subsidiaries, all such resignations to be effective as of April 1, 1999. 2. Separation Payments and Other Benefits. (a) SALARY CONTINUATION. Subject to Employee's full compliance with the terms of this Agreement, including the conditions set forth below, the Company shall continue to pay the current base salary of Employee ($189,414 per year) from the date of termination set forth in paragraph 1 above through April 30, 2000. All separation payments set forth herein shall be payable at a time and in accord with the regular payroll practices of the Company with respect to its executive officers. All such amounts shall be subject to and reduced by any applicable federal and state withholding taxes. (b) COMPANY CAR. Subject to Employee not then being in material breach of any provision set forth in this Agreement, the Company - no later than ten (10) business days following the complete execution of this Agreement -- shall assign to Employee the title to the Company automobile that he is currently driving (1997 Lincoln Continental), free and clear of any liens or encumbrances. (c) STOCK OPTIONS. Subject to Employee not then being in material breach of any provision set forth in this Agreement, the Company shall take all necessary steps to grant to Employee options to purchase 50,000 shares of the Company's common stock pursuant to the Company's 1994 Stock Option Plan. The exercise price for each option shall be the fair market value of a share on the date of grant. Such options shall be granted to Employee within 10 (ten) business days following complete execution hereof. All stock options which have been granted to Employee prior to April 1, 1999, together with the options to be granted to Employee pursuant to this subparagraph, shall be deemed fully vested and exercisable as of April 1, 1999. Employee shall be entitled to exercise all such options, according to the terms thereof, at any time prior to June 26, 2001. (d) ANNUAL INCENTIVE AWARD. Subject to Employee not then being in material breach of any provision set forth in this Agreement, Employee shall be entitled to the full amount of the award payable to him pursuant to the terms of the Executive Incentive Plan of the Company for the fiscal year ended March 31, 1999. This amount (estimated by Employee to be $205,000) will be paid to Employee simultaneous with payments made under the Executive Incentive Plan to other executives of the Company, and shall be reduced by any applicable withholding taxes. 3. Benefit Plans and Fringe Benefits. From and after the employment termination date set forth in paragraph 1 above, and through and including April 30, 2000, Employee shall be entitled to receive medical, dental, disability and life insurance benefits on the same terms as provided to other executive officers of the Company. Provided, however, that the provision of dental, disability and life insurance benefits to Employee shall be subject to underwriter approval of the insurers associated with such plans, and the Company shall exercise its best efforts to obtain underwriter approval on Employee's behalf. Employee agrees to cooperate in any reasonable underwriting requirements, including providing any documentation requested by the insurer as a part of such underwriting process. If such underwriter approval is not forthcoming with respect to any such plan participation, the Company shall either, at its option, (i) provide for comparable coverage at the Company's expense or (ii) pay to Employee a sum, less any applicable withholding taxes, which is equivalent to the amount the Company would have otherwise had to pay with respect to Employee's participation in such group plan from the date of termination set forth in paragraph 1 above through April 30, 2000. Any dispute concerning such payment or provision of benefits hereunder shall be settled by final, conclusive and binding arbitration before and according to the rules then prevailing of the American Arbitration Association in Greenville County, South Carolina. Provided further, that all benefits hereunder shall cease and Employee shall be furnished notice of continuation coverage under COBRA as of April 30, 2000. Except for the foregoing, and after April 30, 2000, Employee shall not have the right to participate in or receive any benefit under any employee benefit plan of the Company, any fringe benefit plan of the Company, or any other plan, policy or arrangement of the Company providing benefits or perquisites to employees of the Company generally or individually. Provided, however, that Employee shall be entitled to elect the payment of benefits to which Employee is entitled under any employee pension benefit plan of the Company as provided under the terms of any such plan. 4. Vacation Pay. Upon the first regularly scheduled payday following the execution hereof, the Company shall pay to Employee four (4) days of vacation pay, which Employee and the Company agree constitutes all such accrued and unused vacation pay. 5. Return of Company Property. All records, files, lists, including computer-generated lists, drawings, notes, notebooks, letters, handbooks, blueprints, manuals, sketches, specifications, formulas, financial documents, sales and business plans, customer lists, lists of customer contacts, pricing information, computers, software, cellular phones, credit cards, keys, equipment and similar items relating to the Company's business, together with any other property of the -2- Company or property which the Employee received in the course of Employee's employment with the Company, shall be returned to the Company immediately. Employee further represents that Employee will not copy or cause to be copied, print out or cause to be printed out any software, documents or other materials originating with or belonging to the Company. 6. Confidentiality and Nondisparagement. (a) Employee agrees not to make any statement, written or oral (including but not limited to any media source or to any other party) regarding any of the following subjects: (i) the investigation by the special committee of the Board of Directors of the Company into allegations concerning Employee, including without limitation the subject matter thereof; (ii) any of the circumstances leading up to or surrounding Employee's departure from the Company; (iii) any allegations made by Employee or others concerning alleged improprieties or conduct of other employees, officers or directors of the Company or (iv) the terms of this Agreement. The Company agrees to instruct and take all reasonable and necessary steps to prevent any officer or director of the Company from making any statement, written or oral (including but not limited to any media source or to any third party) regarding any of the following subjects: (a) the investigation by the special committee of the Board of Directors of the Company into allegations concerning Employee, including without limitation the subject matter thereof; (b) any of the circumstances leading up to or surrounding Employee's departure from the Company; (c) any allegations concerning any alleged improprieties of Employee or (d) the terms of this Agreement. Provided, however, it shall not constitute a breach of this subparagraph for Employee to disclose the terms of this Agreement to Employee's spouse, legal counsel, tax accountant, medical provider or licensed counselor, provided Employee obtains the agreement of such person to keep the terms hereof confidential. Provided further that neither party hereto shall violate this subparagraph if otherwise required to disclose the terms of this Agreement by law, including without limitation by any provision of or regulation under the Securities Exchange Act of 1934. (b) Furthermore, Employee, for the good and valuable consideration furnished herein, agrees not to disparage, bring into disrepute or make any negative statement concerning the Company or any of its employees, officers or directors or make any other statement that would disrupt, impair or affect adversely the reputation, business interests, or profitability of the Company, or its employees, officers or directors, or place the Company or such individuals in any negative light. The Company, for the good and valuable consideration furnished by Employee herein, agrees to instruct and take all reasonable and necessary steps to prevent any officer or director of the Company or any employee of the Company with material involvement or knowledge concerning the investigation by the Special Committee of the Board of Directors from disparaging, bringing into disrepute or making any negative statement concerning Employee to or in the presence or hearing of any third party or from making any other statement in the presence or hearing of any third party that would disrupt, impair or affect adversely the reputation of Employee, or place Employee in any negative light. Any breach of this paragraph by the parties shall constitute a material breach of this Agreement, and shall entitle such nonbreaching party to any and all remedies provided by law for the material breach of contract, including such remedies, if otherwise available by law, which permit such party to suspend any performance hereunder otherwise owed to the other party hereto. Provided, however, that notwithstanding the provisions hereof, it shall not constitute a breach of this Agreement for either party hereto to testify truthfully about any subject when compelled to do so by properly issued legal process. The parties hereto agree that the Company shall issue a press release concerning Employee's departure -3- in the form attached hereto as Exhibit A and further agree that it shall not constitute a breach or violation of this Agreement for any party to state that Employee's departure from the Company was due to philosophical or personality differences, or words substantially to that effect. 7. Admissions. Employee acknowledges that the payment by the Company of the benefits described herein shall never for any purpose be considered an admission of liability on the part of the Company, by whom liability is expressly denied, and no past or present wrongdoing on the part of the Company shall be implied by such payment. Similarly, no admission of past or present wrongdoing on the part of Employee shall be implied by virtue of his resignation from the Company. 8. Release. (a) As consideration for the payments to be made by the Company to Employee pursuant to paragraph 2 hereof, Employee agrees for Employee and for Employee's heirs, executors, administrators and assigns, to release and forever discharge the Company and all of its parent and subsidiary corporations, together with each of their respective agents, officers, employees, directors and attorneys, from and to waive any and all rights with respect to all manner of claims, actions, causes of action, suits, judgments, rights, demands, debts, damages, or accountings of whatever nature, legal, equitable or administrative, whether the same are now known or unknown, which Employee ever had, now has or may claim to have, upon or by reason of the occurrence of any matter, cause or thing whatsoever up to the date of this Settlement Agreement and Mutual Release of Claims, including without limitation: (i) any claim whatsoever (whether under federal or state statutory or common law) arising from or relating to Employee's employment or changes in Employee's employment relationship with the Company, including Employee's separation, termination or resignation therefrom; (ii) all claims and rights for additional compensation or benefits of whatever nature; (iii) any claim for breach of contract, implied or express, impairment of economic opportunity, intentional or negligent infliction of emotional distress, wage or benefit claim, prima facie tort, defamation, libel, slander, negligent termination, wrongful discharge, or any other tort, whether intentional or negligent; (iv) all claims and rights under Title VII of the Civil Rights Act of 1964, the Civil Rights Acts of 1866, 1871, or 1991, the Age Discrimination in Employment Act, the Employee Retirement Income Security Act, the Americans With Disabilities Act of 1993, the Family and Medical Leave Act, all as amended, or any other federal, state, county or municipal statute or ordinance relating to any condition of employment or employment discrimination; and (v) all claims under Employee's Employment Agreement with the Company. Provided, however, this Release shall not (i) include any claims relating to the obligations of the Company, its officers, directors, employees or agents under this Agreement, (ii) operate to release Employee's ownership of any common stock of the Company, or (iii) affect Employee's vested and accrued rights as a participant in the Company's 401(k) plan. Provided, however, that in the event any legal action is commenced hereafter against Employee by any individual released by Employee herein, and provided that such legal action arises out of facts or circumstances prior to the date hereof, the release by Employee in favor of such individual (and only such individual) shall be null and void. (b) As consideration for the releases and other obligations of Employee set forth herein, the Company, for itself and all of its parent and subsidiary corporations, and for all of their respective officers, directors and employees in their official or representative capacities, agrees to release and forever discharge from and waive any and all rights with respect to all manner of claims, actions, causes of action, suits, judgments, rights, demands, debts, damages, or accountings of -4- whatever nature, legal, equitable or administrative, whether the same are now known or unknown, which the Company, or any of its parent or subsidiary corporations ever had, now has or may claim to have, upon or by reason of the occurrence of any matter, cause or thing whatsoever up to the date of this Settlement Agreement and Mutual Release of Claims, including without limitation: (i) any claim whatsoever (whether under federal or state statutory or common law) arising from or relating to Employee's employment or changes in Employee's employment relationship with the Company, including Employee's separation, termination or resignation therefrom, (ii) all claims and rights for additional compensation or benefits of whatever nature; (iii) any claim for breach of contract, implied or express, impairment of economic opportunity, intentional or negligent infliction of emotional distress, assault, battery, sexual, racial or other unlawful harassment, wage or benefit claim, prima facie tort, defamation, libel, slander, or any other tort, whether intentional or negligent; (iv) all claims and rights under any federal, state, county or municipal statute or ordinance relating to any condition of employment or employment discrimination; and (v) all claims under Employee's Employment Agreement with the Company. Provided, however, this Release shall not include any claims relating to the obligations of Employee under this Agreement or release Employee in the event of Employee's theft or defalcation of any Company funds or property. 9. Disclosure of Confidential Information. For a period of two (2) years from the date of this Agreement, Employee shall not disclose to anyone any confidential or proprietary information of the Company. For purposes of this paragraph, "confidential and proprietary information" shall mean information not generally known to the public that was created by, disclosed or made available to Employee in the course of Employee's employment by the Company, and shall include, but not be limited to all nonpublic information concerning the affairs, business, clients, customers and other relationships of the Company, as well as all confidential and proprietary financial and marketing information of the Company, including without limitation sales methods, information concerning principals or customers, advertising methods, financial affairs or methods of procurement, marketing and business plans, strategies, projections, business opportunities, client lists, sales and cost information and financial results and performance. 10. Governing Law and Forum Selection. Employee and the Company agree that any claim against the Employee or Company or any of its affiliates or their employees, officers or directors ("the Company Parties") arising out of or relating in any way to this Agreement or to Employee's employment with the Company shall be brought exclusively in the Circuit Court of Greenville County, South Carolina, or the United States District Court for the District of South Carolina, and in no other forum. Employee and the Company hereby irrevocably consent to the personal and subject matter jurisdiction of these courts for the purpose of adjudicating any claims subject to this forum selection clause. Employee and the Company also agree that any dispute of any kind arising out of or relating to this Agreement or to Employee's employment (including without limitation any claim released herein by Employee) shall at either the Employee's or the Company Parties' sole election or demand be submitted to final, conclusive and binding arbitration before and according to the rules then prevailing of the American Arbitration Association in Greenville County, South Carolina, which election or demand may be made at any time prior to the last day to answer and/or respond to a summons and/or complaint or counterclaim made by Employee or the Company. The results of any such arbitration proceeding shall be final and binding both upon the Company Parties and upon Employee, and shall be subject to judicial confirmation as provided by the Federal Arbitration Act, which is incorporated herein -5- by reference. Provided, however, that nothing in this paragraph 10 shall preclude either party, if otherwise entitled by law, from obtaining preliminary or emergency injunctive relief in the Circuit Court of Greenville County or the United States District Court for the District of South Carolina to restrain any violation of the provisions of paragraphs 6, 9 or 14 hereof. 11. Entire Agreement. This Agreement contains the entire agreement between the Company and Employee and supersedes all prior agreements relating to the subject matter hereof, and may be changed only by a writing signed by the parties hereto. Any and all prior representations, statements and discussions regarding the subject matter of this Agreement have been merged into and/or replaced by the terms of this Agreement. 12. Return of Employee's Property. Employee's property presently in the possession of the Company, whether at Employee's office or otherwise, shall be promptly returned to him and facilitated by Employee's secretary. 13. Severability. If any of the provisions set forth in this Agreement be held invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement, but this Agreement shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein. Provided, however, that this provision shall not affect in any way the obligations of Employee set forth in paragraph 12 above, or affect Employee's ability to ratify any provision of this Agreement. 14. Noncompetition. From the date hereof, through and including April 30, 2000 (such period not to include any period(s) of violation of period(s) of time required for litigation to enforce the covenants of this paragraph), Employee shall not: (a) Become employed by (as an officer, director, employee, consultant, principal or otherwise), or otherwise become commercially interested in or affiliated with (whether through direct, indirect, actual or beneficial ownership or through a financial interest), a COMPETITOR, unless Employee accepts employment with a COMPETITOR in an area of the COMPETITOR'S business which does not compete in any significant way with the Company. For purposes of this Agreement, a COMPETITOR shall be defined as any person or entity operating in the small-loan consumer finance industry (I.E., lenders who generally make loans of less than $1,000 with maturities of fifteen months or less). (b) Solicit or attempt to solicit, for competitive purposes, the business of any of the Company's clients or customers, or solicit or attempt to solicit, for competitive purposes, the business of any of the Company's prospective customers or clients, or otherwise induce such customers or clients or prospective customers or clients to reduce, terminate, or restrict or alter their business relationships with the Company in any fashion. (c) In recognition of the broad geographic scope of the Company's business and of the ease of competing with the Company's business in any part of the -6- United States, the restrictions on competition set forth in items (a) and (b) above are intended to cover the following geographic areas: (i) each and every county and each and every state in which the Company or any of its affiliates has an office or place of business; (ii) each and every county and each and every state in which the Company or any of its affiliates has any customers; (iii) each and every county and each and every state in which the Company or any of its affiliates participates in or is licensed to engage in any small loan consumer finance business; (iv) the states of South Carolina, Georgia, Texas, Oklahoma, Louisiana, Tennessee, Illinois, Missouri and New Mexico. (d) In addition, from the date hereof until March 31, 2001, Employee shall not induce or attempt to induce any employee of the Company to leave the Company for the purpose of engaging in any business operation, including without limitation any business operation that is substantially competitive with the Company's current business. 15. Voluntary Agreement. Employee hereby represents that Employee has carefully read and completely understands the provisions of this Agreement and that Employee has entered into this Agreement voluntarily and without any coercion whatsoever, and in order to receive benefits the Company contends are not otherwise owed to Employee by the Company. Employee represents that he has been advised of his right to secure counsel to assist in his reviewing this Agreement, that he has had sufficient time to review carefully each of the provisions hereto with his counsel, and that his execution hereof is the product of his own free will and volition. The Company hereby represents that it has entered into this Agreement voluntarily and that due corporate authority has been obtained for entry into this Agreement. 16. Assistance and Cooperation. Employee agrees to cooperate with and provide assistance to the Company and its legal counsel in connection with any litigation (including arbitration or administrative hearings) or investigation affecting the Company, in which, in the reasonable judgment of the Company's counsel, Employee's assistance or cooperation is needed. Employee shall, when requested by the Company, provide testimony or other assistance and shall travel at the Company's request in order to fulfill this obligation. Provided, however, that, in connection with such litigation or investigation, the Company shall attempt to accommodate Employee's schedule, shall provide him with reasonable notice in advance of the times in which his cooperation or assistance is needed, and shall reimburse Employee for any reasonable expenses and loss of income incurred in connection with such matters. In addition, during the time he is receiving the payments set forth in paragraph 2 herein, Employee agrees to cooperate fully with the Company on all matters relating to his employment and the conduct of the Company's business. This obligation to cooperate, however, shall not be considered to prohibit or restrict other employment by the Employee, except as is set forth in paragraph 14 herein. 17. Waiver, Dependent Conditions and Fees. Any waiver or consent from the Company or Employee with respect to any term or provision of this Agreement or any other aspect of Employee's or the Company's conduct shall be effective only in the specific instance and for the specific purpose for which given and shall not be deemed, regardless of frequency given, to be a further or continuing waiver or consent. The failure or delay of the Company or Employee at any time or times to require performance of, or to exercise any of its powers, rights -7- or remedies with respect to, any term or provision of this Agreement or any other aspect of Employee's or the Company's conduct shall not affect the Company's or Employee's right at a later time to enforce any such term or provision. In addition thereto, the failure of Employee or the Company to perform or satisfy any material obligation set forth herein shall give the Company or Employee, if otherwise allowed by law, the right to suspend any obligation otherwise owed to the other party hereto. In the event the Company or Employee prevails in any legal action to enforce its or his rights hereunder, the Company or Employees, as the case may be, shall be entitled to recover its or his reasonable attorney's fees and expenses from the other, nonprevailing party. 18. Indemnification. The Company agrees to indemnify Employee for acts and omissions preceding the date hereof to the full extent permitted under the Articles of Incorporation and Bylaws of the Company. The Company further agrees to obtain for Employee, with respect to acts and omissions preceding the date hereof, directors' and officers' liability insurance with the same limits as pertain to the Company's other officers and directors. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement, or caused this Agreement to be duly executed by their authorized representatives as of the day and year first above written. WORLD ACCEPTANCE CORPORATION By: /s/ Ken R. Bramlett, Jr. ------------------------ Position: Director ----------------- /s/ R. Harold Owens ------------------------ R. Harold Owens WITNESS: /s/ Patricia K. Owens - ---------------------- -8- EXHIBIT A FOR IMMEDIATE RELEASE Contact: A. Alexander McLean, III Executive Vice President and Chief Financial Officer (864) 298-9800 WORLD ACCEPTANCE CORPORATION ANNOUNCES RESIGNATION OF CHIEF OPERATING OFFICER GREENVILLE, S.C., April 4, 1999 -- World Acceptance Corporation (Nasdaq:WRLD) announced today that R. Harold Owens, World's President and Chief Operating Officer, has resigned from the Company to pursue other business interests. Charles D. Walters, Chairman and CEO, commented on Mr. Owens departure. "We thank Harold for his years of service to the company," said Walters. "He made many positive contributions to our company, and we all wish him well in his new endeavors." World Acceptance Corporation is one of the largest small-loan consumer finance companies, operating 383 offices in nine states. It is also the parent company of ParaData Financial Systems, a provider of computer software solutions for the consumer finance industry. -9- EX-13 3 EXHIBIT 13 SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA - --------------------------------------------------------------------------------
(In thousands, except per share amounts) Years Ended March 31, 1999 1998 1997 1996 1995 --------- --------- --------- --------- -------- STATEMENT OF OPERATIONS DATA: Interest and fee income................................. $ 80,677 $ 71,873 $ 64,820 $ 58,326 $ 51,257 Insurance commissions and other income................. 11,085 8,754 7,863 9,608 5,871 ------ --------- --------- --------- --------- Total revenues....................................... 91,762 80,627 72,683 67,934 57,128 ------ --------- --------- --------- --------- Provision for loan losses............................... 11,707 9,609 9,480 7,255 4,699 Legal expense........................................... 5,845 441 645 477 160 Other general and administrative expenses............... 57,788 53,029 46,201 40,546 35,142 Interest expense........................................ 5,534 5,541 4,322 3,498 3,598 -------- --------- --------- --------- --------- Total expenses....................................... 80,874 68,620 60,648 51,776 43,599 -------- --------- --------- --------- --------- Income before income taxes.............................. 10,888 12,007 12,035 16,158 13,529 Income taxes............................................ 3,568 3,909 3,952 5,602 4,910 -------- --------- --------- --------- --------- Net income (1).......................................... $ 7,320 $ 8,098 $ 8,083 $ 10,556 $ 8,619 ======== ========= ========= ========= ========= Net income per common share (diluted) (1)............... $ .38 $ .42 $ .41 $ .49 $ .41 ======== ========= ========= ========= ========= Diluted weighted average common equivalent shares.................................... 19,213 19,172 19,833 21,653 20,787 ======== ========= ========= ========= ========= BALANCE SHEET DATA (END OF PERIOD): Loans receivable........................................ $ 117,339 $ 103,385 $ 89,539 $ 79,624 $ 71,527 Allowance for loan losses............................... (8,769) (8,444) (6,283) (5,007) (4,364) ------- --------- -------- --------- -------- Loans receivable, net............................ 108,570 94,941 83,256 74,617 67,163 Total assets............................................ 133,470 118,382 104,486 90,572 83,558 Total debt.............................................. 71,632 64,182 58,682 38,232 37,882 Shareholders' equity.................................... 54,692 47,301 38,963 44,880 35,758 OTHER OPERATING DATA: As a percentage of average loans receivable: Provision for loan losses............................ 10.4% 9.9% 11.1% 9.4% 7.2% Net charge-offs...................................... 9.7% 9.4% 10.6% 8.6% 5.8% Number of offices open at year-end...................... 379 360 336 282 244
(1) The Company recorded a legal settlement of $5.4 million in fiscal 1999. Excluding this settlement, net of the income tax benefit, net income and net income per diluted common share would have been $10.8 million and $.56, respectively. - -------------------------------------------------------------------------------- WORLD ACCEPTANCE CORPORATION 5 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- GENERAL The Company's financial performance continues to be dependent in large part upon the growth in its outstanding loan receivables, the ongoing introduction of new products and services for marketing to the customer base, the maintenance of loan quality and acceptable levels of operating expenses. Since March 31, 1994, gross loans receivable have increased at a 15.6% annual compounded rate from $72.4 million to $149.6 million at March 31, 1999. The increase reflects both the higher volume of loans generated through the Company's existing offices and the contribution of loans generated from new offices opened or acquired over the period. During this same five-year period, the Company has grown from 217 offices to 379 offices as of March 31, 1999. The Company plans to open or acquire at least 25 new offices in each of the next two fiscal years. The Company continues to identify new products and services for marketing to its customer base. In addition to new insurance related products which have been introduced in selected states over the last several years, the Company began to sell and finance electronic items and appliances to its existing customer base. This program, the "World Class Buying Club," began in Texas in February 1995 and has since been expanded into seven states, with further expansion into the remaining two states expected within the next several months. During fiscal 1999, loan volume from this program increased to $4.4 million, a 39.2% increase over fiscal 1998 volume. As of the end of the fiscal year, the sales finance portfolio amounted to $4.0 million, or 2.7% of the total loans outstanding. The Company plans to continue to aggressively market these products, which have provided positive contributions in prior years and are expected to continue to enhance revenues in fiscal 2000 and beyond. The Company's ParaData Financial Systems subsidiary provides data processing systems to 111 separate finance companies, including World, and currently supports approximately 988 individual branch offices in 43 states. During fiscal 1999, ParaData increased net revenues on system sales and support to approximately $2.4 million, a 63.4% increase over fiscal 1998 net revenues. This increase resulted in a pretax contribution to the Company of $792,000. Additionally, and more important, ParaData continued to provide state-of-the-art data processing support for the Company's in-house integrated computer system. Beginning in fiscal 1997, the Company expanded its product line on a limited basis to include larger balance, lower risk and lower yielding, individual consumer loans. Since that time, the Company has acquired five larger loan offices and several bulk purchases of larger loans receivable. Additionally, the Company has converted five of its traditional small-loan offices into those offering the larger loan products. As of March 31, 1999, the larger class of loans amounted to approximately $8.4 million, a 30.5% increase over the balance outstanding at the end of the prior fiscal year. Even with this growth, the $8.4 million in larger balances represented only 5.6% of the total loan portfolio at the end of the fiscal year. Management believes that these offices can support much larger asset balances with lower expense and loss ratios, thus providing positive contributions. While the Company does not intend to change its primary lending focus from its small-loan business, it does intend to continue expanding the larger loan product line into additional offices during the current fiscal year. - -------------------------------------------------------------------------------- 6 WORLD ACCEPTANCE CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS - -------------------------------------------------------------------------------- The following table sets forth certain information derived from the Company's consolidated statements of operations and balance sheets, as well as operating data and ratios, for the periods indicated.
Years Ended March 31, 1999 1998 1997 ---------- ----------- ----------- (Dollars in thousands) Average gross loans receivable (1).................................... $ 144,203 $ 125,094 $ 109,206 Average loans receivable (2).......................................... 112,273 97,285 85,445 Expenses as a percentage of total revenue: Provision for loan losses......................................... 12.8% 11.9% 13.0% General and administrative(3)..................................... 63.5% 66.3% 64.5% Total interest expense............................................ 6.0% 6.9% 5.9% Operating margin (4).................................................. 23.8% 21.8% 22.5% Return on average assets (5).......................................... 8.4% 7.2% 8.2% Offices opened and acquired, net...................................... 19 24 54 Total offices (at period end)......................................... 379 360 336
- -------------------- (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) Excludes $5.4 million expense for pending legal settlement for the year ended March 31, 1999. Including this one time charge, the ratio would have been 69.3% for the annual period. (4) Operating margin is computed as total revenues less provision for loan losses and general and administrative expenses (excluding the legal settlement change), as a percentage of total revenues. Including the $5.4 million charge for the pending legal settlement, the operating margin for the year ended March 31, 1999 would have been 17.9%. (5) Excludes $5.4 legal settlement, net of tax benefit, for the year ended March 31, 1999. Including this one time change, the ratio would have been 5.7% for the annual period. COMPARISON OF FISCAL 1999 VERSUS FISCAL 1998 Net income for the fiscal year ended March 31, 1999 was $7.3 million. The results for the year were greatly affected by legal expenses resulting from a pending settlement of certain litigation (See Pending Legal Settlement). The total costs of this settlement is expected to be $5.4 million including the expense of complying with the terms of the settlement. Excluding the settlement related expenses, as well as the related income tax benefit, net income amounted to $10.8 million, an increase of $2.7 million, or 33.0%, over fiscal 1998. This increase resulted from an increase in operating income (revenues less the provision for loan losses and general and administrative expenses) of $4.3 million, or 24.4%. This increase was offset by an increase in income taxes. Total revenues amounted to $91.8 million during fiscal 1999, an increase of $11.1 million, or 13.8%, over fiscal 1998. Revenues from the 311 offices that were open throughout both fiscal years increased by 8.9%. At March 31, 1999, the Company had 379 offices in operation, a net increase of 19 offices during the fiscal year. - -------------------------------------------------------------------------------- WORLD ACCEPTANCE CORPORATION 7 MANAGEMENT'S DISCUSSION AND ANALYSIS - -------------------------------------------------------------------------------- During fiscal 1999, interest and fee income increased by $8.8 million, or 12.4%, over the previous fiscal year. This increase resulted primarily from an increase in average loans receivable of $15.0 million, or 15.4%, over the two fiscal years. The Company continued to see a decline in the overall yield on the loan portfolio as the volume of larger loans and sales finance loans increased over prior year levels. Insurance commissions and other income increased by $2.3 million, or 26.6%, over the two fiscal years. Insurance commissions increased by $533,000, or 10.1%, as a result of increased loans outstanding in the four states where credit insurance is sold in conjunction with the Company's loan products. Other income increased by $1.8 million, or 51.9%, primarily as a result of increased volume by the Company's sales finance program and greatly increased revenue by the Company's computer subsidiary, ParaData Financial Systems. The gross profit from the sales finance program, referred to as the "World Class Buying Club" increased by $339,000, or 21.7%, over the two fiscal years, as the program was expanded into two additional states during the year. As of the end of the fiscal year, this program was offered to the Company's customers in seven of the nine states where the Company currently operates. ParaData's gross profits increased by $925,000, or 63.4%, during fiscal 1999, primarily as a result of several new systems that were installed for new customers during the year. At the end of the fiscal year, ParaData had 111 customers and supported 988 branch offices, including the Company's 379 offices. Additionally, increased sales of other ancillary products, such as Motor Club Memberships and Accidental Death & Disability Insurance, further enhanced other income during the current fiscal year. The provision for loan losses increased by $2.1 million, or 21.8%, when comparing the past two fiscal years. This increase resulted from an increase in the allowance for losses of $325,000, or 3.8%, combined with an increase in net charge-offs of $1.7 million, or 18.6%. As a percentage of average loans receivable, net charge-offs increased slightly from 9.4% during fiscal 1998 to 9.7% during fiscal 1999. General and administrative expenses, excluding the pending legal settlement, increased by $4.8 million, or 8.9%, during the current year when compared to fiscal 1998. As a percentage of total revenues, these expenses decreased from 66.3% in fiscal 1998 to 63.5% in the most recent year. The Company's expense ratios have benefited from the sale or combination of 10 unprofitable offices during the year, as well as a reduction in the number of new offices that were opened during this period. Excluding the expenses related to the legal settlement and those associated with ParaData, overall general and administrative expenses, when divided by average open offices increased by 3.3%. Interest expense remained level over the two fiscal years. While the Company's average level of debt outstanding increased by approximately 7.3% over the past two fiscal years, the Company benefited from a reduction in interest rates during this period as prime dropped from 8.5% at the beginning of the fiscal year to 7.75% at March 31, 1999. The Company's effective income tax rate increased slightly to 32.8% in fiscal 1999 from 32.6% in fiscal 1998 as a result of reduced benefits from the Company's captive insurance subsidiary. COMPARISON OF FISCAL 1998 VERSUS FISCAL 1997 Net income was $8.1 million in fiscal 1998, approximately the same as the amount earned during fiscal 1997. Operating income was $17.5 million in fiscal 1998, an increase of $1.2 million, or 7.3%, over the $16.3 million in fiscal 1997. This increase was primarily offset by an increase in interest expense. Interest and fee income during fiscal 1998 increased by $7.4 million, or 11.0%, over fiscal 1997. This increase resulted primarily from an increase of $11.8 million, or 13.9%, in average loans receivable between the two years. The increase in interest and fee income resulting from the larger loan base was partially offset by a decrease in the loan yields over the two fiscal years. Both the larger loan portfolio and the sales finance portfolio carry substantially reduced interest rates from the small-loan portfolio, resulting in the reduced overall yield during the fiscal year. - -------------------------------------------------------------------------------- 8 WORLD ACCEPTANCE CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS - -------------------------------------------------------------------------------- Insurance commissions and other income increased by $891,000, or 11.3%, over the two fiscal years. Insurance commissions increased by $445,000, or 9.2%, as a result of the corresponding increase in loan volume in states where credit insurance can be sold. Other income increased by $446,000, or 14.8%, primarily as a result of increased sales and profits from the Company's "World Class Buying Club" program, which was expanded to five states during fiscal 1998. Total revenues were $83.6 million during fiscal 1998, an $8.3 million increase, or 11.0%, over the $75.3 million reported during fiscal 1997. Revenues from the 269 offices that were open throughout both fiscal years decreased by approximately 2.5%. The provision for loan losses during fiscal 1998 increased by $487,000, or 4%, from the previous year. This increase resulted from an increase in the general allowance for loan losses, offset by a reduction in loan losses. As a percentage of average loans receivable, net charge-offs decreased to 9.4% during fiscal 1998 from 10.6% during fiscal 1997. This decrease represents the first decline in the charge-off ratios in several years. As a percentage of loans receivable outstanding, the allowance for loan losses increased to 8.2% at March 31, 1998, compared to 7.0% at March 31, 1997. This increase resulted primarily from reserves on acquired loans that were purchased at significant discounts during the fiscal year. General and administrative expenses during fiscal 1998 increased by $6.6 million, or 14.1%, over the previous fiscal year. This increase was due to the cost associated with the 78 net new offices that have been opened or acquired over the two year period beginning March 31, 1996. This increase was partially offset by a decline of $1.6 million of intangible amortization, due to certain intangible assets becoming fully amortized during the fiscal year. Total general and administrative expenses, when divided by average open offices, increased by only .2% when comparing the two fiscal years and as a percentage of total revenues, increased from 62.2% in fiscal 1997 to 63.9% during the most recent fiscal year. Interest expense increased by $1.2 million during fiscal 1998 as a result of a 20% increase in average borrowings outstanding over the two fiscal years as well as the increased interest rate on the $10.0 million in subordinated debt that was issued during the year. The Company's effective income tax rate decreased slightly to 32.6% during fiscal 1998 from 32.8% the prior fiscal year. The Company continues to benefit from reduced state taxes resulting from a reorganization in fiscal 1996, as well as certain tax benefits from a reinsurance subsidiary. CREDIT LOSS EXPERIENCE Delinquency is computed on the basis of the date of the last full contractual payment on a loan (known as the recency method) and on the basis of the amount past due in accordance with original payment terms of a loan (known as the contractual method). Management closely monitors portfolio delinquency using both methods to measure the quality of the Company's loan portfolio and the potential for credit losses. - -------------------------------------------------------------------------------- WORLD ACCEPTANCE CORPORATION 9 MANAGEMENT'S DISCUSSION AND ANALYSIS - -------------------------------------------------------------------------------- The Company maintains an allowance for loan losses in an amount that, in management's opinion, is adequate to cover losses inherent in the existing loan portfolio. The Company charges against current earnings, as a provision for loan losses, amounts added to the allowance to maintain it at levels expected to cover future losses of principal. The Company's policy is to charge off loans on which a full contractual installment has not been received during the prior 180 days, or sooner if the loan is deemed uncollectible. Collection efforts on charged-off loans continue until the obligation is satisfied or until it is determined such obligation is not collectible or the cost of continued collection efforts will exceed the potential recovery. Recoveries of previously charged-off loans are credited to the allowance for loan losses. The following table sets forth the Company's allowance for loan losses at the end of the fiscal years ended March 31, 1999, 1998, and 1997 and the credit loss experience over the indicated periods:
At or for the Years Ended March 31, ------------------------------------- 1999 1998 1997 --------- --------- --------- (Dollars in thousands) Allowance for loan losses........................................... $ 8,769 $ 8,444 $ 6,283 Percentage of loans receivable...................................... 7.5% 8.2% 7.0% Provision for loan losses........................................... $ 11,707 $ 9,609 $ 9,480 Net charge-offs..................................................... $ 10,863 $ 9,158 $ 9,077 Net charge-offs as a percentage of average loans receivable (1)..... 9.7% 9.4% 10.6% (1) Average loans receivable have been determined by averaging month-end gross loans receivable less unearned interest and deferred fees over the indicated period. The following table classifies the gross loans receivable of the Company that were delinquent on a recency and contractual basis for at least 60 days at March 31, 1999, 1998, and 1997: At March 31, ------------------------------------ 1999 1998 1997 --------- --------- --------- (Dollars in thousands) Recency basis: 60 - 89 days past due............................................. $ 2,163 $ 1,901 $ 1,812 90 - 179 days past due............................................ 1,047 712 640 ------- ------- ------ Total........................................................... $ 3,210 $ 2,613 $ 2,452 ======= ======= ====== Percentage of period end gross loans receivable..................... 2.1% 2.0% 2.2% Contractual basis: 60 - 89 days past due............................................. $ 2,766 $ 2,360 $ 2,227 90 - 179 days past due............................................ 2,609 1,952 1,912 ------- ------- ------ Total........................................................... $ 5,375 $ 4,312 $ 4,139 ======= ======= ====== Percentage of period end gross loans receivable..................... 3.6% 3.3% 3.6%
- -------------------------------------------------------------------------------- 10 WORLD ACCEPTANCE CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS - -------------------------------------------------------------------------------- QUARTERLY INFORMATION AND SEASONALITY The Company's loan volume and corresponding loans receivable follow seasonal trends. The Company's highest loan demand typically occurs from October through December, its third fiscal quarter. Loan demand has generally been the lowest and loan repayment highest from January to March, its fourth fiscal quarter. Loan volume and average balances typically remain relatively level during the remainder of the year. This seasonal trend affects quarterly operating performance through corresponding fluctuations in interest and fee income and insurance commissions earned and the provision for loan losses recorded, as well as fluctuations in the Company's cash needs. Consequently, operating results for the Company's third fiscal quarter generally are significantly lower than in other quarters and operating results for its fourth fiscal quarter significantly higher than in other quarters. The following table sets forth certain items included in the Company's unaudited consolidated financial statements and the offices open during fiscal years 1998 and 1999.
AT OR FOR THE THREE MONTHS ENDED --------------------------------------------------------------------------------------------- June 30, Sept. 30, Dec. 31, March 31, June 30, Sept. 30, Dec. 31, March 31, 1997 1997 1997 1998 1998 1998 1998 1999 --------- ---------- --------- --------- -------- --------- -------- -------- (Dollars in thousands) Total revenues....... $ 18,386 $ 19,302 $ 20,720 $ 22,218 $ 20,734 $ 21,682 $ 23,836 $ 25,510 Provision for loan losses....... 2,098 2,867 3,562 1,082 2,360 3,112 4,262 19,734 General and administrative expenses.......... 12,624 12,843 14,317 13,685 13,925 19,696 15,012 15,000 Net income (loss).... 1,651 1,469 893 4,086 2,133 (1,670) 2,054 4,803 Gross loans receivable........ $ 115,916 $ 125,930 $ 143,315 $ 130,559 $ 136,061 $ 141,133 $ 166,479 $ 149,571 Number of offices open...... 350 359 360 360 366 374 383 379
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS AND REGULATORY POLICIES In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The Statement is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. The Company does not anticipate that adoption of SFAS 133 will have a material effect on its financial statements. - -------------------------------------------------------------------------------- WORLD ACCEPTANCE CORPORATION 11 MANAGEMENT'S DISCUSSION AND ANALYSIS - -------------------------------------------------------------------------------- LIQUIDITY AND CAPITAL RESOURCES The Company has financed its operations, acquisitions and office expansion through a combination of cash flow from operations and borrowings from its institutional lenders. The Company has generally applied its cash flow from operations to fund its increasing loan volume, to fund acquisitions, to repay long-term indebtedness, to repurchase its common stock and, during this past fiscal year, to fund the pending legal settlement. As the Company's gross loans receivable increased from $99.4 million at March 31, 1996, to $149.6 million at March 31, 1999, net cash provided by operating activities for fiscal years 1997, 1998, and 1999 was $20.6 million, $19.0 million, and $20.7 million, respectively. 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. 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, but believes stock repurchases to be a viable component of the Company's long-term financial strategy and an excellent use of excess cash when the opportunity arises. In addition, the Company plans to open or acquire at least 25 new offices in each of the next two fiscal years. Expenditures by the Company to open and furnish new offices generally averaged approximately $15,000 per office during fiscal 1999. 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 three offices and a number of loan portfolios from competitors in eight states in 21 separate transactions during fiscal 1999. Gross loans receivable purchased in these transactions were approximately $5.9 million in the aggregate at the dates of purchase. The Company believes that attractive opportunities to acquire new offices or receivables from its competitors or to acquire offices in communities not currently served by the Company will continue to become available as conditions in local economies and the financial circumstances of owners change. On December 1, 1998, the Company paid the fourth installment on its 8.5% Senior Term Notes of $4.0 million. The Company financed the acquisitions and the Term Note repayment with borrowings under its revolving credit facility. The Company has $4.0 million remaining principal balance of 8.5% senior secured notes due December 1, 1999 (the "Term Notes"). The Term Notes provide for interest payments to be made semi-annually with the final principal payment to be made on December 1, 1999. The Company has a $65.0 million revolving credit facility with a syndicate of banks. The credit facility will expire on September 30, 2000. The maximum amount that could be borrowed under this credit facility was raised to $77.0 million during the period December 1, 1998 to March 15, 1999. Funds borrowed under the revolving credit facility bear interest, at the Company's option, at either the agent bank's prime rate per annum or the LIBOR rate plus 1.60% per annum. At March 31, 1999, the interest rate on borrowings under the revolving credit facility was 6.63%. 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 March 31, 1999, $57.1 million was outstanding under this facility, and there was $7.9 million of unused borrowing availability under the borrowing base limitations. - -------------------------------------------------------------------------------- 12 WORLD ACCEPTANCE CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS - -------------------------------------------------------------------------------- On June 30, 1997, the Company issued $10.0 million of Senior Subordinated Secured Notes. These notes mature in five annual installments of $2.0 million beginning June 30, 2000, and ending June 30, 2004, and bear interest at 10.0%, payable quarterly. The notes were issued at a discounted price equal to 99.6936% and may be prepaid subject to certain prepayment penalties. Borrowings under the revolving credit facility, the Term Notes, and the subordinated notes are secured by a lien on substantially all the tangible and intangible assets of the Company and its subsidiaries pursuant to various security agreements. The Company's credit agreements contain a number of financial covenants, including minimum net worth and fixed charge coverage requirements. The credit agreements also contain certain other covenants, including covenants that impose limitations on the Company with respect to (i) declaring or paying dividends or making distributions on or acquiring common or preferred stock or warrants or options, (ii) redeeming or purchasing or prepaying principal or interest on subordinated debt, (iii) incurring additional indebtedness and (iv) entering into a merger, consolidation or sale of substantial assets or subsidiaries. The Term Notes and Senior Subordinated Notes are also subject to prepayment penalties. The Company believes that it is in compliance with these agreements and does not believe that these agreements will materially limit its business and expansion strategy. The Company believes that cash flow from operations and borrowings under its revolving credit facility will be adequate to fund the expected cost of opening or acquiring new offices, including funding initial operating losses of new offices and funding loans receivable originated by those offices and the Company's other offices and the scheduled repayment of the Term Notes. The Company needs to increase the borrowing limits under its revolving credit facility from time to time and does not anticipate this to be a problem, however, there can be no assurance that this additional funding will be available 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 operates allow indexing of maximum loan amounts to the Consumer Price Index. These provisions will allow the Company to make larger loans at existing interest rates in those states, which could offset the potential increase in operating costs due to inflation. PENDING LEGAL SETTLEMENT Since April 1995, the Company and several of its subsidiaries have been parties to litigation challenging the Company's non-filing insurance practices. Non-filing insurance is an insurance product that lenders like the Company can purchase in lieu of filing a UCC financing statement covering the collateral of their borrowers. The litigation against the Company has been consolidated with other litigation against other finance companies, jewelry and furniture retailers, and insurance companies in a purported nationwide class action in the U.S. District Court in Alabama under the caption In re: Consolidated "Non-filing Insurance" Fee Litigation (Multidistrict Litigation Docket No. 1130), U.S. District Court, Middle District of Alabama, Northern Division). On November 11, 1998, the Company and its subsidiaries named in the action entered into a settlement agreement. Pursuant to the settlement agreement, which is subject to the court's approval, the Company has agreed to settle all claims alleged in the litigation involving it and its subsidiaries for an aggregate cash payment of $5 million. In addition, the terms of the settlement will curtail certain non-filing practices by the Company and its subsidiaries and will allow the court to approve criteria defining those circumstances in which the Company's subsidiaries can make non-filing insurance claims going forward. As a result of the settlement, non-filing insurance fees charged to borrowers will be reduced by 25%. The settlement agreement, which includes the settlement by several other defendants in the litigation, including the Company's insurer, is subject to the court's approval because the settlement concerns a class action. - -------------------------------------------------------------------------------- WORLD ACCEPTANCE CORPORATION 13 MANAGEMENT'S DISCUSSION AND ANALYSIS - -------------------------------------------------------------------------------- The Company has recorded an accrual for settlement costs, including the expected expenses to comply with the terms of the settlement, of $5.4 million in the fiscal year ended March 31, 1999. Of this total accrual, $5.1 million has been paid to an escrow account, pending distribution to class participants. Going forward, the Company expects that the settlement will limit and reduce the coverage for the types of losses with respect to which its subsidiaries will submit claims. The Company cannot predict the amount of this reduction, but believes that the settlement will negatively impact the Company in the near term, but should not have a material adverse effect of the Company's results of operations over time. YEAR 2000 The Company recognizes that there is a business risk in computerized systems and products as the calendar rolls over into the next century. Failure of these systems and products to correctly process the date could cause miscalculations, unpredictable or inconsistent results, or complete system failures. This problem is commonly called the "year 2000 problem." In particular, in the Company's line of business, the year 2000 problem could cause results such as miscalculations of interest on loans or other significant problems. The Company has determined that its primary software package, the "Loan Manager System" developed and maintained by its wholly owned subsidiary, ParaData Financial Systems, is year 2000 compliant. The Company is also dependent upon several outside vendors for processing information such as payroll, general ledger, benefits administration, etc. Inquiries have been made of and assurances received from each of these providers that these systems are also prepared for the year 2000. Nevertheless, the Company intends to conduct tests of all primary and secondary systems during 1999 to ensure the accuracy of information to the extent possible. The Company believes that its total costs of addressing the year 2000 problem has been, and will continue to be, immaterial. The Company believes the most reasonably likely worst case year 2000 scenario would be the failure of key suppliers (e.g. utility providers, phone and data communication vendors, banks, etc.) to achieve year 2000 compliance, resulting in lost revenues due to forced office closings or loss of communications for extended periods of time. Currently, based on responses obtained from third parties to date, the Company is not aware of any material third parties that do not expect to be year 2000 compliant. However, due to the uncertainty surrounding the readiness of third parties, the Company is unable to determine whether the consequences of year 2000 failures will materially affect the Company's financial condition or results of operations. The Company maintains a contingency plan that allows individual offices to operate in a manual environment for short periods of time; however, these alternatives would not be sufficient should year 2000 failures cause blackouts for extended periods. The year 2000 disclosure set forth above should be read in connection with "Forward-Looking Information," which follows. OTHER MATTERS The Company has been named as a defendant in an action, Turner v. World Acceptance Corp., pending in district court for the Fourteenth Judicial District, Tulsa County, Oklahoma (No. CJ-97-1921). The action commenced against the Company on May 20, 1997, names numerous other consumer finance companies as defendants, and seeks certification as a statewide class action. The action alleges that the Company and other consumer finance defendants collected excess finance charges in connection with refinancing certain consumer finance loans in Oklahoma and seeks money damages and an injunction against further collection of such charges. The Company has filed an answer in the action denying liability, and discovery is proceeding. The plaintiff's claim is based on a recent opinion of the Oklahoma Attorney General interpreting a provision of the - -------------------------------------------------------------------------------- 14 WORLD ACCEPTANCE CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS - -------------------------------------------------------------------------------- Oklahoma Consumer Credit Code with respect to the permitted amount of certain loan refinance charges in a manner contrary to prior regulatory practice in existence in Oklahoma since 1969. The Company and numerous other consumer finance companies have brought suit to enjoin enforcement by the Oklahoma Attorney General of its recent interpretation of this provision of the Oklahoma Consumer Credit Code. In May 1999, the Oklahoma Supreme Court upheld the Attorney General's interpretation on a prospective basis. The Company and the other consumer finance companies party to the proceeding against the Attorney General have petitioned the Oklahoma Supreme Court for a rehearing on this matter. In addition, the State of Oklahoma has recently enacted legislation to clarify the interpretation of the disputed provision of the Oklahoma Consumer Credit Code consistent with the prior regulatory practice followed by the Company. Because of this recent legislation, the Company expects that the purported class-action lawsuit, even if decided adversely to the Company, would not materially affect the Company's refinancing practices in Oklahoma going forward, although such an adverse decision could possibly involve a material monetary award. The Company intends to defend this action vigorously. Management's statement of expectation with respect to the litigation described herein may be deemed a forward-looking statement, within the meaning of Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"), and no assurance can be given that management's expectation will prove correct, as such expectation is subject to certain risks, uncertainties and assumptions based on the preliminary nature of the case and the vagaries of litigation generally. Should one or more of these risks materialize or should underlying assumptions prove incorrect, the actual outcome of this litigation could differ materially from management's expectation. FORWARD-LOOKING STATEMENTS This report on Form 10-K, including "Management's Discussion and Analysis of Financial Condition and Results of Operations," may contain various "forward-looking statements," within the meaning of Section 21E of the Securities Exchange Act of 1934, that are based on management's belief and assumptions, as well as information currently available to management. Specifically, management's statements of expectations with respect to the litigation and pending settlement (the "Settlement") described above in "Pending Legal Settlement", the litigation described above in "Other Matters," and the matters discussed above in "Year 2000," may be deemed forward-looking statements. When used in this document, the words "anticipate," "estimate," "expect," and similar expressions may identify forward-looking statements. Although the Company believes that the expectations reflected in any such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct. Any such statements are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, the Company's actual financial results, performance or financial condition may vary materially from those anticipated, estimated or expected. Among the key factors that could cause the Company's actual financial results, performance or condition to differ from the expectations expressed or implied in such forward-looking statements are the following: changes in interest rates; risks inherent in making loans, including repayment risks and value of collateral; recently-enacted or proposed legislation; whether, and the terms upon which, court approval of the Settlement is obtained; the occurrence of non-filing claims at historical levels in circumstances validated by the Settlement; the timing and amount of revenues that may be recognized by the Company; changes in current revenue and expense trends (including trends affecting charge-offs); changes in the Company's markets and general changes in the economy (particularly in the markets served by the Company); the ability of the Company and third parties with whom the Company deals to achieve year 2000 compliance; the unpredictable nature of litigation; and other matters discusses in this Report and the Company's other filings with the Securities and Exchange Commission. - -------------------------------------------------------------------------------- WORLD ACCEPTANCE CORPORATION 15 CONSOLIDATED BALANCE SHEETS - --------------------------------------------------------------------------------
March 31, ------------------------------------- 1999 1998 --------------- -------------- ASSETS Cash............................................................................ $ 1,236,207 1,212,611 Gross loans receivable.......................................................... 149,570,861 130,559,256 Less: Unearned interest and deferred fees........................................ (32,231,831) (27,173,845) Allowance for loan losses.................................................. (8,769,367) (8,444,563) ------------- ------------- Loans receivable, net.................................................. 108,569,663 94,940,848 Property and equipment, net..................................................... 6,299,662 6,424,757 Other assets, net............................................................... 7,536,987 6,193,300 Intangible assets, net.......................................................... 9,827,885 9,610,394 ------------- ------------- $ 133,470,404 118,381,910 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Senior notes payable....................................................... 61,150,000 53,700,000 Subordinated notes payable................................................. 10,000,000 10,000,000 Other note payable......................................................... 482,000 482,000 Income taxes payable....................................................... 1,940,091 2,795,119 Accounts payable and accrued expenses...................................... 5,206,483 4,103,511 ------------- ------------- Total liabilities...................................................... 78,778,574 71,080,630 ------------- ------------- Shareholders' equity: Preferred stock, no par value Authorized 5,000,000 shares............................................ - - Common stock, no par value Authorized 95,000,000 shares; issued and outstanding 19,016,573 and 18,998,573 shares at March 31, 1999, and 1998, respectively ............................. - - Additional paid-in capital................................................. 935,921 864,968 Retained earnings.......................................................... 53,755,909 46,436,312 -------------- ------------- Total shareholders' equity............................................. 54,691,830 47,301,280 ------------- ------------- Commitments and contingencies $ 133,470,404 118,381,910 ============= =============
See accompanying notes to consolidated financial statements. - -------------------------------------------------------------------------------- 16 WORLD ACCEPTANCE CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS - --------------------------------------------------------------------------------
Years Ended March 31, --------------------------------------------------- 1999 1998 1997 --------------- ------------- ------------- Revenues: Interest and fee income.................................... $ 80,676,687 71,872,739 64,820,096 Insurance commissions and other income..................... 11,085,548 8,753,768 7,863,196 ------------- ------------- ------------- Total revenues.................................... 91,762,235 80,626,507 72,683,292 ------------- ------------- ------------- Expenses: Provision for loan losses.................................. 11,707,392 9,608,495 9,479,894 ------------- ------------- ------------- General and administrative expenses: Personnel.............................................. 37,055,930 32,922,691 28,161,923 Occupancy and equipment................................ 6,358,974 6,099,711 5,037,019 Data processing........................................ 1,437,421 1,309,845 1,027,590 Advertising ......................................... 4,063,755 4,179,616 2,897,659 Legal.................................................. 5,844,864 441,246 645,486 Amortization of intangible assets...................... 1,309,632 1,432,076 3,020,259 Other.................................................. 7,562,355 7,084,384 6,055,772 ------------- ------------- ------------- 63,632,931 53,469,569 46,845,708 ------------- ------------- ------------- Interest expense........................................... 5,534,315 5,541,002 4,322,351 ------------- ------------- ------------- Total expenses.................................... 80,874,638 68,619,066 60,647,953 ------------- ------------- ------------- Income before income taxes...................................... 10,887,597 12,007,441 12,035,339 ------------- ------------- ------------- Income taxes.................................................... 3,568,000 3,909,000 3,952,000 ------------- ------------- ------------- Net income...................................................... $ 7,319,597 8,098,441 8,083,339 ============= ============= ============= Net income per common share Basic...................................................... $ .39 .43 .41 ============= ============= ============= Diluted.................................................... $ .38 .42 .41 ============= ============= ============= Weighted average common equivalent shares outstanding Basic...................................................... 19,010,789 18,959,348 19,492,086 ============= ============= ============= Diluted.................................................... 19,212,813 19,172,456 19,832,525 ============= ============= =============
See accompanying notes to consolidated financial statements. - -------------------------------------------------------------------------------- WORLD ACCEPTANCE CORPORATION 17 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - --------------------------------------------------------------------------------
Additional Paid-in Retained Capital Earnings Total ----------- ------------ ------------ Balances at March 31, 1996........................................ $ 14,625,136 30,254,532 44,879,668 Proceeds from exercise of stock options (60,000 shares), including tax benefits of $66,469.............................. 259,294 - 259,294 Common stock repurchases (1,810,000 shares)....................... (14,258,838) - (14,258,838) Net income........................................................ - 8,083,339 8,083,339 ----------- ------------ ------------ Balances at March 31, 1997........................................ 625,592 38,337,871 38,963,463 Proceeds from exercise of stock options (62,000 shares), including tax benefits of $58,543.............................. 239,376 - 239,376 Net income........................................................ - 8,098,441 8,098,441 ----------- ------------ ------------ Balances at March 31, 1998........................................ 864,968 46,436,312 47,301,280 Proceeds from exercise of stock options (18,000 shares), including tax benefits of $18,453.............................. 70,953 - 70,953 Net income........................................................ - 7,319,597 7,319,597 ----------- ------------ ------------ Balances at March 31, 1999........................................ $ 935,921 53,755,909 54,691,830 =========== ============ ============
See accompanying notes to consolidated financial statements. - -------------------------------------------------------------------------------- 18 WORLD ACCEPTANCE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS - --------------------------------------------------------------------------------
Years Ended March 31, 1999 1998 1997 ------------ ------------ ------------ Cash flows from operating activities: Net income ...................................................... $7,319,597 8,098,441 8,083,339 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of intangible assets .............................. 1,309,632 1,432,076 3,020,259 Amortization of loan costs and discounts........................ 119,741 73,636 80,841 Provision for loan losses....................................... 11,707,392 9,608,495 9,479,894 Depreciation .................................................. 1,428,619 1,456,052 1,319,667 Change in accounts: Other assets, net............................................. (1,463,428) (1,742,179) (847,269) Income taxes payable.......................................... (836,575) (322,645) (217,680) Accounts payable and accrued expenses......................... 1,102,972 438,919 (334,850) ------------ ------------ ------------ Net cash provided by operating activities................... 20,687,950 19,042,795 20,584,201 ------------ ------------ ------------ Cash flows from investing activities: Increase in loans receivable, net................................. (21,064,511) (13,857,947) (5,511,878) Net assets acquired from office acquisitions, primarily loans..... (4,311,115) (7,450,022) (12,688,099) Increase in intangible assets from acquisitions................... (1,527,123) (1,925,437) (7,277,485) Purchases of property and equipment, net.......................... (1,264,105) (1,763,684) (1,698,400) ------------ ------------ ------------ Net cash used by investing activities....................... (28,166,854) (24,997,090) (27,175,862) ------------ ------------ ----------- Cash flows from financing activities: Proceeds (repayments) of senior revolving notes payable, net................................................... 11,450,000 (500,000) 24,450,000 Repayment of senior term notes payable............................ (4,000,000) (4,000,000) (4,000,000) Proceeds from senior subordinated notes........................... - 10,000,000 - Proceeds from exercise of stock options........................... 52,500 180,833 192,825 Repurchase of common stock........................................ - - (14,258,838) ------------ ------------ ----------- Net cash provided by financing activities.................. 7,502,500 5,680,833 6,383,987 ------------ ------------ ------------ Increase (decrease) in cash.......................................... 23,596 (273,462) (207,674) Cash at beginning of year............................................ 1,212,611 1,486,073 1,693,747 ------------ ------------ ------------ Cash at end of year.................................................. $ 1,236,207 1,212,611 1,486,073 ============ ============ ============
See accompanying notes to consolidated financial statements. - -------------------------------------------------------------------------------- WORLD ACCEPTANCE CORPORATION 19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Company's accounting and reporting policies are in accordance with generally accepted accounting principles and conform to general practices within the finance company industry. The following is a description of the more significant of these policies used in preparing the consolidated financial statements. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of World Acceptance Corporation and its wholly owned subsidiaries (the Company). Subsidiaries consist of operating entities in various states, ParaData Financial Systems, a software company acquired during fiscal 1994, and WAC Holdings Ltd., a captive reinsurance company established in fiscal 1994. All significant intercompany balances and transactions have been eliminated in consolidation. LOANS AND INTEREST INCOME The Company is licensed to originate direct cash consumer loans in the states of Georgia, South Carolina, Texas, Oklahoma, Louisiana, Tennessee, Missouri, Illinois and New Mexico. During fiscal 1999 and 1998, the Company originated loans generally ranging up to $1,500, with terms of 15 months or less. Experience indicates that a majority of the direct cash consumer loans are renewed. Fees received and direct costs incurred for the origination of loans are deferred and amortized to interest income over the contractual lives of the loans. Unamortized amounts are recognized in income at the time that loans are renewed or paid in full. Loans are carried at the gross amount outstanding reduced by unearned interest and insurance income, net deferred origination fees and direct costs, and an allowance for loan losses. Unearned interest is deferred at the time the loans are made and accreted to income on a collection method, which approximates the level yield method. Charges for late payments are credited to income when collected. The Company generally offers its loans at the prevailing statutory rates for terms not to exceed 15 months. Management believes that the carrying value approximates the fair value of its loan portfolio. ALLOWANCE FOR LOAN LOSSES Additions to the allowance for loan losses are based on management's evaluation of the loan portfolio under current economic conditions, the volume of the loan portfolio, overall portfolio quality, review of specific loans, charge-off experience, and such other factors which, in management's judgment, deserve recognition in estimating loan losses. Loans are charged off at the earlier of when such loans are deemed to be uncollectible or when six months have elapsed since the date of the last payment. The net balance of loans deemed to be uncollectible is charged against the loan loss allowance. Recoveries of previously charged-off loans are credited to the allowance for loan losses. While management uses the best information available to make evaluations, future adjustments to the allowance may be necessary if conditions differ substantially from the assumptions used in making the calculations. - -------------------------------------------------------------------------------- 20 WORLD ACCEPTANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- At March 31, 1999 and 1998, there were no concentrations of loans in any local economy, type of property, or to any one borrower. PROPERTY AND EQUIPMENT Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is recorded using the straight-line method over the estimated useful life of the related asset as follows: building, 40 years; furniture and fixtures, 5 to 10 years; equipment, 3 to 7 years; and vehicles, 3 years. Amortization of leasehold improvements is recorded using the straight-line method over the lesser of the estimated useful life of the asset or the term of the lease. Additions to premises and equipment and major replacements or betterments are added at cost. Maintenance, repairs, and minor replacements are charged to operating expense as incurred. When assets are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in income. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principals requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. OTHER ASSETS Other assets include costs incurred in connection with originating long-term debt. Such remaining unamortized costs aggregated $232,930 and $352,671 at March 31, 1999 and 1998, respectively, and are amortized as interest expense over the life of the respective indebtedness. INTANGIBLE ASSETS Intangible assets include the cost of acquiring existing customers, the value assigned to noncompete agreements, costs incurred in connection with the acquisition of loan offices, and goodwill (the excess cost over the fair value of the net assets acquired). These assets are being amortized on a straight-line basis over the estimated useful lives of the respective assets as follows: 8 to 10 years for customer lists, 5 to 10 years for noncompete agreements and acquisition costs, and 10 years for goodwill. Management periodically evaluates the recoverability of the unamortized balances of these assets and adjusts them as necessary. FAIR VALUE OF FINANCIAL INSTRUMENTS The Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 107, "Disclosures about the Fair Value of Financial Instruments" (SFAS 107) in December 1991. SFAS 107 requires disclosures about the fair value of all financial instruments whether or not recognized in the balance sheet, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. The carrying amount of financial instruments included in the financial statements are deemed reasonable estimates of their fair value because of the short-term nature of these instruments. - -------------------------------------------------------------------------------- WORLD ACCEPTANCE CORPORATION 21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- INSURANCE PREMIUMS Insurance premiums for credit life, accident and health, property and unemployment insurance written in connection with certain loans, net of refunds and applicable advance insurance commissions retained by the Company, are remitted monthly to an insurance company. All commissions are credited to unearned insurance commissions and recognized as income over the life of the related insurance contracts, using a method similar to that used for the recognition of interest income. NON-FILE INSURANCE Non-file premiums are charged on certain loans at inception and renewal in lieu of recording and perfecting the Company's security interest in the assets pledged on certain loans and are remitted to a third party insurance company for non-file insurance coverage. Such insurance and the related insurance premiums, claims, and recoveries are not reflected in the accompanying consolidated financial statements (see note 6). Certain losses related to such loans, which are not recoverable through life, accident and health, property, or unemployment insurance claims are reimbursed through non-file insurance claims subject to policy limitations. Any remaining losses are charged to the allowance for loan losses. INCOME TAXES The Company uses the asset and liability method of accounting for income taxes required by SFAS No. 109, ACCOUNTING FOR INCOME TAXES. Under the asset and liability method of Statement 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under Statement 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. SUPPLEMENTAL CASH FLOW INFORMATION For the years ended March 31, 1999, 1998, and 1997, the Company paid interest of $5,784,930, $5,391,147, and $4,302,473, respectively. For the years ended March 31, 1999, 1998, and 1997, the Company paid income taxes of $5,661,575, $5,406,645, and $5,343,680, respectively. - -------------------------------------------------------------------------------- 22 WORLD ACCEPTANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Supplemental non-cash financing activities for the years ended March 31, 1999, 1998, and 1997, consist of:
1999 1998 1997 ---------- ----------- ----------- Tax benefits from exercise of stock options.................. $ 18,453 58,543 66,469
EARNINGS PER SHARE Earnings per share are computed in accordance with SFAS No. 128, "Earnings per Share". SFAS No. 128 replaces Accounting Principles Board (APB) Opinion 15, "Earnings Per Share," and simplifies the computation of earnings per share (EPS) by replacing the presentations of primary EPS with a presentation of basic EPS. Basic EPS includes no dilution and is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution of securities that could share in the earnings of the Company. Common stock equivalents included in the diluted EPS computation consist of stock options which are computed using the treasury stock method. STOCK BASED COMPENSATION SFAS 123, "Accounting for Stock-Based Compensation," issued in October 1995, allows a company to either adopt the fair value method of valuation or continue using the intrinsic valuation method presented under Accounting Principles Board (APB) Opinion 25 to account for stock-based compensation. The fair value method recommended in SFAS 123 requires a company to recognize compensation expense based on the fair value of the option on the grant date. The intrinsic value method measures compensation expense as the difference between the quoted market price of the stock and the exercise price of the option on the date of grant. The Company has elected to continue using APB Opinion 25 and has disclosed in the footnotes pro forma net income and earnings per share information as if the fair value method had been applied. RECLASSIFICATION Certain reclassification entries have been made for fiscal 1998 and 1997 to conform with fiscal 1999 presentation. There was no impact on shareholders' equity or net income previously reported as a result of these reclassifications. - -------------------------------------------------------------------------------- WORLD ACCEPTANCE CORPORATION 23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- (2) ALLOWANCE FOR LOAN LOSSES The following is a summary of the changes in the allowance for loan losses for the years ended March 31, 1999, 1998, and 1997:
March 31, ----------------------------------------------- 1999 1998 1997 ------------ ----------- ----------- Balance at the beginning of the year....................... $ 8,444,563 6,283,459 5,006,703 Provision for loan losses.................................. 11,707,392 9,608,495 9,479,894 Loan losses................................................ (12,256,626) (10,436,240) (10,025,203) Recoveries................................................. 1,393,437 1,278,616 947,999 Allowance on acquired loans, net of specific charge-offs... (519,399) 1,710,233 874,066 ------------ ----------- ------------ Balance at the end of the year............................. $ 8,769,367 8,444,563 6,283,459 ============ =========== ============
The allowance on accrued loans represents specific reserves established on bulk loan purchases and is shown in the above roll-forward net of subsequent charge-offs related to the same purchased loans. (3) PROPERTY AND EQUIPMENT Summaries of property and equipment follow:
March 31, ------------------------------ 1999 1998 ------------ ------------ Land.................................................................$ 250,443 325,443 Buildings and leasehold improvements................................. 2,550,763 2,788,518 Furniture and equipment.............................................. 9,600,998 8,296,239 ------------ ------------ 12,402,204 11,410,200 Less accumulated depreciation and amortization....................... 6,102,542 4,985,443 ------------ ------------ Total........................................................... $ 6,299,662 6,424,757 ============ ============ (4) INTANGIBLE ASSETS Intangible assets, net of accumulated amortization, consist of: March 31, ------------------------------ 1999 1998 ------------ ------------ Cost of acquiring existing customers................................. $ 1,994,782 1,150,626 Value assigned to noncompete agreements.............................. 6,228,480 6,564,982 Goodwill............................................................. 1,271,633 1,437,499 Other................................................................ 332,990 457,287 ------------ ------------ Total........................................................... $ 9,827,885 9,610,394 ============ ============
- -------------------------------------------------------------------------------- 24 WORLD ACCEPTANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- (5) NOTES PAYABLE Summaries of the Company's notes payable follow: SENIOR CREDIT FACILITIES $4,000,000 Senior Secured Term Notes -- These notes mature December 1, 1999, and bear interest at 8.5%, payable semi-annually. The notes may be prepaid subject to certain prepayment penalties. $65,000,000 Revolving Credit Facility - This facility provides for borrowings of up to $65.0 million, with $57.2 million outstanding at March 31, 1999, subject to a borrowing base formula. The maximum borrowings were temporarily increased to $77.0 million for the period December 15, 1998, to March 15, 1999. The Company may borrow, at its option, at the rate of prime or LIBOR plus 1.60%. At March 31, 1999, the Company's interest rate was 6.63% and the unused amount available under the revolver was $7,850,000. The revolving credit facility has a commitment fee of 3/8 of 1% on the unused portion of the commitment. Borrowings under the revolving credit facility mature on September 30, 2000. $10,000,000 Senior Subordinated Secured Notes - These notes mature in five annual installments of $2.0 million beginning June 30, 2000 and ending June 30, 2004, and bear interest at 10.0%, payable quarterly. The notes were issued at a discounted price equal to 99.6936% and may be prepaid subject to certain prepayment penalties. Substantially all of the Company's assets are pledged as collateral for borrowings under the senior credit agreements. The Company's assets are also pledged as collateral for the senior subordinated notes on a subordinated basis. OTHER NOTE PAYABLE The Company also has a $482,000 note payable to an unaffiliated insurance company, bearing interest at 10%, payable annually, which matures in September 2001. The various debt agreements contain restrictions on the amounts of permitted indebtedness, investments, working capital, repurchases of common stock and cash dividends. At March 31, 1999, approximately $2,863,945 was available under these covenants for the payment of cash dividends, or the repurchase of the Company's common stock. In addition, the agreements restrict liens on assets and the sale or transfer of subsidiaries. The Company was in compliance with the various debt covenants for all periods presented. The aggregate annual maturities of the notes payable for each of the fiscal years subsequent to March 31, 1999, are as follows: 2000, $4,000,000; 2001, $59,150,000; 2002, $2,482,000; 2003, $2,000,000; 2004, $2,000,000; thereafter, $2,000,000. - -------------------------------------------------------------------------------- WORLD ACCEPTANCE CORPORATION 25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- (6) NON-FILE INSURANCE The Company maintains non-file insurance coverage with an unaffiliated insurance company. Premiums, claims paid, and recoveries under this coverage are not included in the accompanying financial statements. The following is a summary of the non-file insurance activity for the years ended March 31, 1999, 1998, and 1997:
1999 1998 1997 ------------- ----------- ----------- Insurance premiums written................ $ 3,162,825 3,257,517 3,566,960 Recoveries on claims paid................. $ 367,756 334,812 315,112 Claims paid............................... $ (3,200,486) (3,267,005) (3,971,106)
(7) LEASES The Company conducts most of its operations from leased facilities, except for its owned corporate office building. It is expected that in the normal course of business, expiring leases will be renewed at the Company's option or replaced by other leases or acquisitions of other properties. The future minimum lease payments under noncancelable operating leases as of March 31, 1999, are as follows:
2000..................................................................... $ 2,817,962 2001..................................................................... 1,686,646 2002..................................................................... 786,966 2003 .................................................................... 459,749 2004 .................................................................... 191,597 Thereafter............................................................... 77,250 ------------ Total future minimum lease payments............................. $ 6,020,171 ============ Rental expense for cancelable and noncancelable operating leases for the years ended March 31, 1999, 1998, and 1997 was $3,180,150, $2,929,002, and $2,345,068, respectively. (8) INCOME TAXES Income tax expense for the years ended March 31, 1999, 1998, and 1997, consists of: 1999 1998 1997 ---------- ----------- ----------- Current: Federal.......................................................$ 4,538,000 4,845,000 4,834,000 State......................................................... 287,000 209,000 292,000 ---------- ----------- ----------- Total..................................................... 4,825,000 5,054,000 5,126,000 --------- ----------- ----------- Deferred: Federal....................................................... (1,179,000) (1,073,000) (1,107,000) State......................................................... (78,000) (72,000) (67,000) ---------- ----------- ----------- Total..................................................... (1,257,000) (1,145,000) (1,174,000) ---------- ----------- ----------- $ 3,568,000 3,909,000 3,952,000 ========== =========== ===========
- -------------------------------------------------------------------------------- 26 WORLD ACCEPTANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- The income tax expense for the years ended March 31, 1999, 1998, and 1997 differs from the amount computed by applying the U.S. Federal income tax rate of 35% as a result of the following:
1999 1998 1997 ---------- ----------- ----------- Computed "expected" income tax expense............................ $ 3,811,000 4,202,000 4,212,000 Increase resulting from: State income tax, net of Federal benefit..................... 136,000 89,000 146,000 Amortization of goodwill..................................... 58,000 58,000 19,000 Insurance income exclusion................................... (162,000) (278,000) (235,000) Other, net................................................... (275,000) (162,000) (190,000) ---------- ----------- ----------- Total income tax expense.......................................... $ 3,568,000 3,909,000 3,952,000 ========== =========== =========== Temporary differences between the financial statement carrying amounts and tax basis of assets and liabilities that give rise to significant portions of the deferred tax asset (liability) at March 31, 1999 and 1998, relate to the following: 1999 1998 ----------- ----------- Deferred tax assets: Allowance for doubtful accounts.............................. $ 3,200,000 3,082,000 Unearned insurance commissions............................... 1,176,000 617,000 Accounts payable and accrued expenses primarily related to employee benefits............................. 370,000 189,000 Intangible assets............................................ 246,000 189,000 Tax over book accrued interest receivable.................... 536,000 537,000 Other........................................................ 211,000 94,000 ------------- ------------ Gross deferred tax assets......................................... 5,739,000 4,708,000 Less valuation allowance.......................................... (211,000) (94,000) ------------- ------------ Net deferred tax assets........................................... 5,528,000 4,614,000 ------------- ------------ Deferred tax liabilities: Discount on purchased loans.................................. (151,000) (526,000) Deferred net loan origination fees........................... (408,000) (379,000) Other........................................................ (244,000) (241,000) ------------- ------------ Gross deferred tax liabilities.................................... (803,000) (1,146,000) ------------- ------------ Net deferred tax assets........................................... $ 4,725,000 3,468,000 ============= ============
A valuation allowance is established for any portion of the gross deferred tax asset that is not more likely than not to be realized. The realization of net deferred tax assets is based on utilization of loss carrybacks to prior taxable periods, anticipation of future taxable income and the utilization of tax planning strategies. Management has determined that it is more likely than not that the net deferred tax asset can be realized based upon these criteria. The Internal Revenue Service has examined the Company's federal income tax returns for the fiscal years 1994 through 1996. Tax returns for fiscal 1997 and subsequent years are subject to examination by the taxing authorities. - -------------------------------------------------------------------------------- WORLD ACCEPTANCE CORPORATION 27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- (9) EARNINGS PER SHARE The following is a reconciliation of the numerators and denominators of the basic and diluted EPS calculations.
For the year ended March 31, 1999 ---------------------------------------------------- Income Shares Per Share (Numerator) (Denominator) Amount BASIC EPS ------------- ------------- --------- Income available to common shareholders.................. $ 7,319,597 19,010,789 $ .39 ====== EFFECT OF DILUTIVE SECURITIES Options.................................................. $ - 202,024 ---------- ----------- DILUTED EPS Income available to common shareholders plus assumed conversions............................... $ 7,319,597 19,212,813 $ .38 ---------- ---------- ====== For the year ended March 31, 1998 ---------------------------------------------------- Income Shares Per Share (Numerator) (Denominator) Amount BASIC EPS ------------- ------------- --------- Income available to common shareholders.................. $ 8,098,441 18,959,348 $ .43 ====== EFFECT OF DILUTIVE SECURITIES Options.................................................. $ - 213,108 ---------- ----------- DILUTED EPS Income available to common shareholders plus assumed conversions............................... $ 8,098,441 19,172,456 $ .42 ---------- ----------- ====== For the year ended March 31, 1997 ---------------------------------------------------- Income Shares Per Share (Numerator) (Denominator) Amount BASIC EPS ----------- ------------ --------- Income available to common shareholders.................. $ 8,083,339 19,492,086 $ .41 ====== EFFECT OF DILUTIVE SECURITIES Options.................................................. $ - 340,439 ----------- ----------- DILUTED EPS Income available to common shareholders plus assumed conversions............................... $ 8,083,339 19,832,525 $ .41 ============ =========== ======
Options to purchase 1,979,878, 1,938,669, and 1,672,669 shares of common stock at various prices were outstanding during years ended March 31, 1999, 1998 and 1997, respectively, but were not included in the computation of diluted EPS because the option exercise price was greater than the average market price of the common shares. The options, which expire on various dates, were still outstanding as of March 31, 1999. - -------------------------------------------------------------------------------- 28 WORLD ACCEPTANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- (10) BENEFIT PLANS RETIREMENT PLAN The Company provides a defined contribution employee benefit plan (401(k) plan) covering full-time employees, whereby employees can invest up to 15% of their gross pay. The Company makes a matching contribution equal to 50% of the employees' contributions for the first 6% of gross pay. The Company's expense under this plan was $306,697, $284,925, and $268,214 for the years ended March 31, 1999, 1998, and 1997, respectively. STOCK OPTION PLANS The Company has a 1992 Stock Option Plan and a 1994 Stock Option Plan for the benefit of certain directors, officers, and key employees. Under these plans, 3,750,000 shares of authorized common stock have been reserved for issuance pursuant to grants approved by the Stock Option Committee. The options have a maximum duration of 10 years, may be subject to certain vesting requirements, and are priced at the market value of the Company's common stock on the date of grant of the option. The Company applies APB Opinion 25 in accounting for the stock option plans which are described in the preceding paragraph. Accordingly, no compensation expense has been recognized for the stock-based option plans. Had compensation cost been recognized for the stock option plans applying the fair-value-based method as prescribed by SFAS 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
($ in thousands except per share amounts) 1999 1998 1997 ----------- ----------- ----------- Net Income As reported................................................. $ 7,320 8,098 8,083 Pro forma................................................... $ 6,666 7,553 7,639 Basic earnings per share As reported................................................. $ .39 .43 .41 ====== ====== ====== Pro forma................................................... $ .35 .40 .39 ====== ====== ====== Diluted earnings per share As reported................................................. $ .38 .42 .41 ====== ====== ====== Pro forma................................................... $ .35 .39 .39 ====== ====== ======
The effects of applying SFAS 123 may not be representative of the effects on reported net income in future years. The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for grants in 1999, 1998, and 1997, respectively: dividend yield of zero; expected volatility of 51%, 43%, and 44%; risk-free interest rate of 5.00%, 5.82%, and 6.63%; and expected lives of 10 years for all plans in all three years. - -------------------------------------------------------------------------------- WORLD ACCEPTANCE CORPORATION 29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - --------------------------------------------------------------------------------
At March 31, 1999, the Company had the following options outstanding: SHARES SHARES SHARES PRICE GRANT DATE GRANTED EXERCISABLE EXERCISED PER SHARE EXPIRATION DATE ---------- ------- ----------- --------- --------- --------------- April 22, 1992 150,000 150,000 - $ 2.98 April 22, 2002 April 30, 1992 24,000 24,000 6,000 $ 3.04 April 30, 2002 October 20, 1992 358,500 358,500 218,500 $ 2.92 October 20, 2002 January 20, 1993 30,000 30,000 - $ 5.04 January 20, 2003 April 7, 1993 90,000 90,000 4,000 $ 6.33 April 7, 2003 April 30, 1993 18,000 18,000 - $ 5.54 April 30, 2003 October 19, 1993 336,000 336,000 13,500 $ 6.88 October 19, 2003 April 30, 1994 24,000 24,000 - $ 5.75 April 30, 2004 October 13, 1994 504,000 407,400 6,000 $ 7.48 October 13, 2004 April 1,1995 211,692 211,692 - $ 8.63 April 1, 2005 April 30, 1995 24,000 24,000 - $ 9.50 April 30, 2005 June 26, 1995 75,000 45,000 - $ 11.33 June 26, 2005 October 31, 1995 113,500 69,300 - $ 13.00 October 31, 2005 January 23, 1996 15,000 9,000 - $ 10.25 January 23, 2006 April 1, 1996 196,177 196,179 - $ 10.75 April 1, 2006 April 1, 1996 36,900 36,900 - $ 10.75 April 1, 2006 April 30, 1996 24,000 24,000 - $ 10.06 April 30, 2006 July 18, 1996 14,600 14,600 - $ 6.75 July 18, 2006 October 25, 1996 187,000 74,800 - $ 6.69 October 25, 2006 January 27, 1997 36,000 14,400 - $ 5.94 January 27, 2007 March 31, 1997 31,100 20,733 - $ 5.41 March 31, 2007 April 1, 1997 78,662 52,443 - $ 5.41 April 1, 2007 April 29, 1997 24,000 24,000 - $ 5.18 April 29, 2007 April 30, 1997 24,000 24,000 - $ 5.16 April 30, 2007 October 28, 1997 227,500 45,500 - $ 5.19 October 28, 2007 April 1, 1998 73,309 24,436 - $ 6.69 April 1, 2008 April 1, 1998 42,200 14,067 - $ 6.69 April 1, 2008 April 30, 1998 24,000 24,000 - $ 6.50 April 30, 2008 November 23, 1998 275,000 - - $ 5.25 November 23, 2008 ----------- ----------- --------- Total 3,268,140 2,386,950 248,000 ========= ========= =========
Subsequent to March 31, 1999, the Company granted options for additional shares under the plans: April 1, 1999, 150,000 shares to certain executives; April 1, 1999, 46,900 shares to certain branch managers; April 30, 1999, 24,000 shares to non-management directors; and May 11, 1999, 15,000 shares to a certain executive. After giving affect of the above grants, there remain 245,960 shares of common stock available for future grants. No expense has been recorded relative to stock options granted to date. 30 WORLD ACCEPTANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- (11) ACQUISITIONS During fiscal 1999, the Company purchased the net assets of 21 consumer loan offices for a total consideration of $5,909,134. Total net loans receivable acquired amounted to $4,271,696, and the Company paid $1,527,123 for non-compete agreements with predecessor owners and other intangible assets. Eighteen of the 21 offices acquired were merged into existing offices. During fiscal 1998, the Company purchased the net assets of 27 consumer loan offices for a total consideration of $9,338,522. Total net loans receivable acquired amounted to $7,450,022, and the Company paid $1,925,437 for non-compete agreements with predecessor owners and other intangible assets. Eighteen of the 27 offices acquired were merged into existing offices. During fiscal 1997, the Company purchased the net assets of 46 consumer loan offices for a total consideration of $17,282,138. Total net loans receivable acquired amounted to $10,051,841, and the Company paid $7,292,652 for non-compete agreements with predecessor owners and other intangible assets. Nine of the 46 offices acquired were merged into existing offices. The impact of these purchases does not have a material effect on the results of operations as reported. (12) QUARTERLY INFORMATION (UNAUDITED) The following sets forth selected quarterly operating data:
1999 1998 --------------------------------- --------------------------------- First Second Third Fourth First Second Third Fourth ----- ------ ----- ------ ----- ------ ----- ------ (in thousands, except earnings per share date) Total revenues............................. $ 20,734 21,682 23,836 25,510 18,386 19,302 20,720 22,218 Provision for loan losses.................. 2,360 3,112 4,262 1,973 2,098 2,867 3,562 1,082 General and administrative expenses........ 13,925 19,696 15,012 15,000 12,624 12,843 14,317 13,685 Interest expense........................... 1,216 1,411 1,456 1,451 1,181 1,383 1,453 1,523 Income tax expense ........................ 1,100 (867) 1,052 2,283 832 740 495 1,842 -------- -------- ------- ------ ------- ------- ------- ------ Net income............................ $ 2,133 (1,670) 2,054 4,803 1,651 1,469 893 4,086 ======== ======= ======= ====== ======= ======= ======= ====== Earnings per share: Basic................................. $ .11 (.09) .11 .26 .09 .08 .05 .22 ======== ======= ======= ====== ======== ======== ======= ====== Diluted............................... $ .11 (.09) .11 .25 .09 .08 .05 .21 ======== ======= ======= ====== ======= ======= ======= ======
- ---------------------------------------------------------------------------- WORLD ACCEPTANCE CORPORATION 31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ---------------------------------------------------------------------------- (13) LITIGATION Since April 1995, the Company and several of its subsidiaries have been parties to litigation challenging the Company's non-filing insurance practices. Non-filing insurance is an insurance product that lenders like the Company can purchase in lieu of filing a UCC financing statement covering the collateral of their borrowers. The litigation against the Company has been consolidated with other litigation against other finance companies, jewelry and furniture retailers, and insurance companies in a purported nationwide class action in the U.S. District Court in Alabama under the caption In re: Consolidated "Non-filing Insurance" Fee Litigation (Multidistrict Litigation Docket No. 1130), U.S. District Court, Middle District of Alabama, Northern Division). On November 11, 1998, the Company and its subsidiaries named in the action entered into a settlement agreement. Pursuant to the settlement agreement, which is subject to the court's approval, the Company has agreed to settle all claims alleged in the litigation involving it and its subsidiaries for an aggregate cash payment of $5 million. In addition, the terms of the settlement will curtail certain non-filing practices by the Company and its subsidiaries and will allow the court to approve criteria defining those circumstances in which the Company's subsidiaries can make non-filing insurance claims going forward. As a result of the settlement, non-filing insurance fees charged to borrowers will be reduced by 25%. The settlement agreement, which includes the settlement by several other defendants in the litigation, including the Company's insurer, is subject to the court's approval because the settlement concerns a class action. The Company has been named as a defendant in an action, Turner v. World Acceptance Corp. pending in district court for the Fourteenth Judicial District, Tulsa County, Oklahoma (No. CJ-97-1921). The action commenced against the Company on May 20, 1997, names numerous other consumer finance companies as defendants, and seeks certification as a statewide class action. The action alleges that the Company and other consumer finance defendants collected excess finance charges in connection with refinancing certain consumer finance loans in Oklahoma and seeks money damages and an injunction against further collection of such charges. The Company has filed an answer in the action denying liability, and discovery is proceeding. The plaintiff's claim is based on a recent opinion of the Oklahoma Attorney General interpreting a provision of the Oklahoma Consumer Credit Code with respect to the permitted amount of certain loan refinance charges in a manner contrary to prior regulatory practice in existence in Oklahoma since 1969. The Company and numerous other consumer finance companies have brought suit to enjoin enforcement by the Oklahoma Attorney General of its recent interpretation of this provision of the Oklahoma Consumer Credit Code. In May 1999, the Oklahoma Supreme Court upheld the Attorney General's interpretation on a prospective basis. The Company and the other consumer finance companies party to the proceeding against the Attorney General have petitioned the Oklahoma Supreme Court for a rehearing on this matter. In addition, the State of Oklahoma has recently enacted legislation to clarify the interpretation of the disputed provision of the Oklahoma Consumer Credit Code consistent with the prior regulatory practice followed by the Company. Because of this recent legislation, the Company expects that the purported class-action lawsuit, even if decided adversely to the Company, would not materially affect the Company's refinancing practices in Oklahoma going forward, although such an adverse decision could possibly involve a material monetary award. The Company intends to defend this action vigorously. Management's statement of expectation with respect to this litigation may be deemed a forward-looking statement, within the meaning of Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"), and no assurance can be given that management's expectation will prove correct, as such - ---------------------------------------------------------------------------- 32 WORLD ACCEPTANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ---------------------------------------------------------------------------- expectation is subject to certain risks, uncertainties and assumptions based on the preliminary nature of the case and the vagaries of litigation generally. Should one or more of these risks materialize or should underlying assumptions prove incorrect, the actual outcome of this litigation could differ materially from management's expectation. At March 31, 1999, the Company and certain of its subsidiaries have been named as defendants in various other legal actions arising from their normal business activities in which damages in various amounts are claimed. Although the amount of any ultimate liability with respect to such other matters cannot be determined, in the opinion of management, and based upon the advice of counsel, any such liability will not have a material adverse effect on the Company's consolidated financial statements taken as a whole. (14) COMMITMENTS The Company has entered into employment agreements with certain key executive employees. The employment agreements have terms of three years and call for aggregate minimum annual base salaries of $386,046, adjusted annually as determined by the Company's Compensation Committee. The agreements also provide for annual incentive bonuses, which are based on the achievement of certain predetermined operational goals. - ---------------------------------------------------------------------------- WORLD ACCEPTANCE CORPORATION 33 INDEPENDENT AUDITORS' REPORT - ---------------------------------------------------------------------------- The Board of Directors World Acceptance Corporation Greenville, South Carolina We have audited the accompanying consolidated balance sheets of World Acceptance Corporation and subsidiaries as of March 31, 1999 and 1998, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the years in the three-year period ended March 31, 1999. The consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of World Acceptance Corporation and subsidiaries as of March 31, 1999 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended March 31, 1999, in conformity with generally accepted accounting principles. Greenville, South Carolina April 22, 1999 - ---------------------------------------------------------------------------- 34 WORLD ACCEPTANCE CORPORATION CORPORATE INFORMATION - ---------------------------------------------------------------------------- COMMON STOCK World Acceptance Corporation's common stock trades on The Nasdaq Stock Market under the symbol: WRLD. As of June 18, 1999, there were approximately 169 shareholders of record and approximately 2,500 persons or entities who hold their stock in nominee or "street" names through various brokerage firms. On this date there were 19,016,573 shares of common stock outstanding. The table below reflects the stock prices published by Nasdaq by quarter for the last three fiscal years. The last reported sale price on June 18, 1999, was $5.50. MARKET PRICE OF COMMON STOCK Fiscal 1998 ---------------------------------------- Quarter High Low ------- ---- --- First $ 7.00 $ 5.13 Second 7.00 5.75 Third 6.50 4.78 Fourth 7.81 4.94 Fiscal 1999 ---------------------------------------- Quarter High Low ------- ---- --- First $ 7.94 $ 5.63 Second 6.94 4.75 Third 6.50 4.56 Fourth 6.75 5.19 - ---------------------------------------------------------------------------- WORLD ACCEPTANCE CORPORATION EX-21 4 EXHIBIT 21 Exhibit 21 SUBSIDIARIES of WORLD ACCEPTANCE CORPORATION Jurisdiction of Incorporation Corporate Name or Organization - -------------- --------------- World Acceptance Corporation South Carolina World Finance Corporation of South Carolina, Inc. South Carolina World Finance Corporation of Georgia Georgia World Finance Corporation of Texas Texas World Acceptance Corporation of Oklahoma, Inc. Oklahoma World Finance Corporation of Louisiana Louisiana World Acceptance Corporation of Missouri Missouri World Finance Corporation of Tennessee Tennessee World Acceptance Corporation of Alabama Alabama WAC Insurance Company, Ltd. Turks & Caicos Islands WFC Limited Partnership Texas, but not Inc. WFC of South Carolina, Inc. South Carolina World Finance Corporation of Illinois Illinois World Finance Corporation of New Mexico New Mexico EX-23 5 EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT The Board of Directors World Acceptance Corporation We consent to incorporation by reference in registration statements (Nos. 33-52166 and 33-98938) on Form S-8 of World Acceptance Corporation of our report dated April 22, 1999, relating to the consolidated balance sheets of World Acceptance Corporation and subsidiaries as of March 31, 1999 and 1998, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the years in the three-year period ended March 31, 1999, which report appears in the March 31, 1999 annual report on Form 10-K of World Acceptance Corporation. Greenville, South Carolina KPMG LLP June 29, 1999 EX-27 6 EXHIBIT 27
5 1,000 3-MOS 6-MOS 9-MOS 12-MOS MAR-31-1999 MAR-31-1999 MAR-31-1999 MAR-31-1999 APR-01-1999 APR-01-1999 APR-01-1999 APR-01-1999 JUN-30-1998 SEP-30-1998 DEC-31-1998 MAR-31-1999 770 1,294 1,506 1,236 0 0 0 0 107,061 110,595 129,105 117,339 8,799 8,908 10,075 8,769 0 0 0 0 99,032 102,981 120,536 109,806 6,395 6,721 6,710 6,300 0 0 0 0 121,171 125,279 143,250 133,471 5,928 8,712 9,729 7,147 65,782 68,732 83,632 71,632 0 0 0 0 0 0 0 0 49,461 47,835 49,889 54,692 0 0 0 0 121,171 125,279 143,250 133,471 0 0 0 0 20,734 42,416 66,252 91,762 0 0 0 0 0 0 0 0 13,925 33,621 48,633 63,633 2,360 5,472 9,733 11,707 1,216 2,627 4,084 5,534 3,233 696 3,802 10,888 1,100 233 1,285 3,568 2,133 463 2,517 7,320 0 0 0 0 0 0 0 0 0 0 0 0 2,133 463 2,517 7,320 0.11 0.02 0.13 0.39 0.11 0.02 0.13 0.38
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