UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
For the quarterly period ended September 30, 2003
or
For the transition period from to
Commission File Number: 0-19599
WORLD ACCEPTANCE CORPORATION
(Exact name of registrant as specified in its charter.)
108 Frederick Street
Greenville, South Carolina 29607
(Address of principal executive offices)
(Zip Code)
(864) 298-9800
(registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for shorter period than the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
x Yes ¨ No
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Indicate the number of shares outstanding of each of issuer’s classes of common stock, as of the latest practicable date, November 14, 2003.
AND SUBSIDIARIES
TABLE OF CONTENTS
PART I—FINANCIAL INFORMATION
2
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
Cash
Gross loans receivable
Less:
Unearned interest and fees
Allowance for loan losses
Loans receivable, net
Property and equipment, net
Other assets, net
Intangible assets, net
Total assets
LIABILITIES & SHAREHOLDERS’ EQUITY
Liabilities:
Senior notes payable
Subordinated notes payable
Other notes payable
Accounts payable and accrued expenses
Total liabilities
Shareholders’ equity:
Common stock, no par value
Authorized 95,000,000 shares; issued and outstanding 18,230,045 and 17,663,189 shares at September 30, 2003 and March 31, 2003, respectively
Additional paid-in capital
Retained earnings
Total shareholders’ equity
See accompanying notes to consolidated financial statements.
3
CONSOLIDATED STATEMENTS OF OPERATIONS
Revenues:
Interest and fee income
Insurance and other income
Total revenues
Expenses:
Provision for loan losses
General and administrative expenses:
Personnel
Occupancy and equipment
Data processing
Advertising
Amortization of intangible assets
Other
Interest expense
Total expenses
Income before income taxes
Income taxes
Net income
Net income per common share:
Basic
Diluted
Weighted average common shares outstanding:
4
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Balances at March 31, 2002
Proceeds from exercise of stock options (416,734 shares), including tax benefit of $392,945
Common stock repurchases (1,623,549 shares)
Balances at March 31, 2003
Proceeds from exercise of stock options (552,983 shares), including tax benefit of $1,352,508
Balances at September 30, 2003
5
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of loan costs and discounts
Depreciation
Change in accounts:
Net cash provided by operating activities
Cash flows from investing activities:
Increase in loans, net
Net assets acquired from office acquisitions, primarily loans
Purchase of premises and equipment
Purchases of intangible assets
Net cash used in investing activities
Cash flows from financing activities:
Proceeds (repayment) of senior notes payable, net
Repayment of senior subordinated notes
Proceeds from senior subordinated notes
Proceeds from exercise of stock options
Common stock repurchases
Net cash (used in) provided by financing activities
Increase (decrease) in cash
Cash, beginning of period
Cash, end of period
Supplemental disclosure of cash flow information:
Cash paid for interest expense
Cash paid for income taxes
Supplemental schedule of noncash financing activities:
Tax benefits from exercise of stock options
6
WORLD ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
NOTE 1—BASIS OF PRESENTATION
The consolidated financial statements of the Company at September 30, 2003, and for the three and six month periods then ended were prepared in accordance with the instructions for Form 10-Q and are unaudited; however, in the opinion of management, all adjustments (consisting only of items of a normal recurring nature) necessary for a fair presentation of the financial position at September 30, 2003, and the results of operations and cash flows for the three and six months periods then ended, have been included. The results for the period ended September 30, 2003 are not necessarily indicative of the results that may be expected for the full year or any other interim period.
Certain reclassification entries have been made for fiscal 2003 to conform with fiscal 2004 presentation. These reclassifications had no impact on shareholders’ equity or net income.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
These consolidated financial statements do not include all disclosures required by accounting principles generally accepted in the United States and should be read in conjunction with the Company’s audited financial statements and related notes for the year ended March 31, 2003, included in the Company’s 2003 Annual Report to Shareholders.
NOTE 2—COMPREHENSIVE INCOME
The Company applies the provision of Financial Accounting Standards Board’s (FASB) Statement of Financial Accounting Standards (SFAS) No. 130 “Reporting Comprehensive Income.” The Company has no items of other comprehensive income; therefore, net income equals comprehensive income.
NOTE 3—ALLOWANCE FOR LOAN LOSSES
The following is a summary of the changes in the allowance for loan losses for the periods indicated (unaudited):
Three months ended
September 30,
Six months ended
Balance at beginning of period
Loan losses
Recoveries
Allowance on acquired loans, net of specific charge-offs
Balance at end of period
For the three months ended September 30, 2003 and 2002, the Company recorded adjustments of approximately $43,000, and $132,000, respectively, to the allowance for loan losses in connection with its acquisitions in accordance generally accepted accounting principles. These adjustments were $183,000 and $1,050,000 for the six months ended September 30, 2003 and 2002, respectively.
The Company records acquired loans at fair value based on current interest rates, less allowances for uncollectibility and collection costs. The Company normally records all acquired loans on its books; however, the acquired loan portfolios generally include some loans that the Company deems uncollectible but which do not have
7
an allowance assigned to them. An allowance for loan losses is then estimated based on a review of the loan portfolio, considering delinquency levels, charge-offs, loan mix and other current economic factors. The Company then records the acquired loans at their gross value and records the related allowance for loan losses as an adjustment to their allowance for loan losses. This is reflected as purchase accounting acquisitions. Subsequent charge-offs related to acquired loans are reflected in the purchase accounting acquisition adjustment in the year of acquisition.
NOTE 4—AVERAGE SHARE INFORMATION
The following is a summary of the basic and diluted average common shares outstanding:
Basic:
Average common shares outstanding (denominator)
Diluted:
Average common shares outstanding
Dilutive potential common shares
Average diluted shares outstanding (denominator)
The following options were outstanding at the period end presented but were excluded from the calculation of diluted earnings per share because of the exercise price was greater than the average market price of the common shares:
For the six months ended
September 30, 2002
NOTE 5—STOCK-BASED COMPENSATION
SFAS No. 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 No. 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. Accordingly, no compensation expense has been recorded. 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:
(Dollars in thousands, except per share amounts)
Net income, as reported
Deduct:
Total stock-based employee compensation expense determined under fair value based method for all option awards, net of related income tax effect
Pro forma net income
Basic earnings per share
As reported
Pro forma
Diluted earnings per share
8
NOTE 6—ACQUISITIONS
The following table sets forth the acquisition activity of the Company for the six months ended September 30, 2003 and 2002:
Number of offices purchased
Merged into existing offices
Purchase Price
Tangible assets:
Net loans
Furniture, fixtures & equipment
Total tangible assets
Customer lists
Non-compete agreements
Goodwill
Total intangible assets
The Company evaluates each acquisition to determine if the acquired enterprise meets the definition of a business. Those that meet the definition of a business are accounted for under SFAS No. 141 and those that do not meet the definition of a business combination are accounted for as asset purchases. The results of all acquisitions have been included in the Company’s consolidated financial statements since the respective acquisition dates. The pro forma impact of these purchases as though they had been acquired at the beginning of the periods presented would not have a material effect on the results of operations as reported.
9
PART I. FINANCIAL INFORMATION
Results of Operations
The following table sets forth certain information derived from the Company’s consolidated statements of operations and balance sheets, as well as operating data and ratios, for the periods indicated (unaudited):
Average gross loans receivable (1)
Average loans receivable (2)
Expenses as a % of total revenue:
General and administrative
Total interest expense
Operating margin (3)
Return on average assets (annualized)
Offices opened or acquired, net
Total offices (at period end)
Comparison of Three Months Ended September 30, 2003, Versus
Three Months Ended September 30, 2002
Interest and fee income for the quarter ended September 30, 2003, increased by $4.2 million, or 13.0%, over the same period of the prior year. This increase resulted from a $22.6 million increase, or 11.9%, in average loans receivable over the two corresponding periods. The increase in interest and fee income was greater than the increase in average net loans receivable due to a small change in mix in the loan portfolio. During the 12 months ending on September 30, 2003, small loans (those less than $1,000 in original balance) grew by 15.0% and the larger loans grew by 1.8%. Smaller loans generally carry higher interest rates (and will have higher losses) than the larger loans.
Insurance commissions and other income increased by $1.3 million, or 34.7%, when comparing the two quarterly periods. Insurance commissions increased by $706,000, or 31.4%, due to the increased loan volume in those states where credit insurance may be sold. Additionally, the Company does not recognize insurance income on purchased loans; however insurance commissions are recognized on these loans as they are renewed. Due to the large purchases of loans in the first quarter of fiscal 2003, the insurance revenue from these loans was substantially higher during the second quarter of fiscal 2004 when compared to fiscal 2003. Other income increased by $616,000, or 39.6%. This increase over the prior period is partially due to an accrual of $305,000 in the second quarter of fiscal
10
MANAGEMENTS’ DISCUSSION AND ANALYSIS, CONTINUED
Comparison of Three Months Ended September 30, 2002, Versus
Three Months Ended September 30, 2001, continued
2003 for a required payment to an outside consultants for early termination of a contract during the second quarter of fiscal 2003. This consultant provided services in our income tax preparation business, under a fee splitting basis; therefore, the accrual was reflected as a reduction in our tax preparation fees. Additionally, other sources of revenues, including returned check charges, sale of motor club memberships, and the gross profit from the sale of electronics and appliances under our World Class Buying Club were also higher during the most recent quarter due to the overall increase in the customer base.
Total revenues rose to $41.7 million during the quarter ended September 30, 2003, a 15.3% increase over the $36.1 million for the corresponding quarter of the previous year. Revenues from the 435 offices open throughout both quarters increased by approximately 11.1%, primarily due to increased balances of loans receivable in those offices. At September 30, 2003, the Company had 486 offices in operation, an increase of 16 offices from March 31, 2003.
The provisions for loan losses during the quarter ended September 30, 2003, increased by $1.7 million, or 22.7% from the same quarter last year. This increase resulted from a combination of increases in both the general allowance for loan losses due to loan growth and the amount of loans charged off. Net charge-offs for the current quarter amounted to $8.6 million, a 22.2% increase over the $7.0 million charged off during the same quarter of fiscal 2003. As a percentage of average loans receivable, net charge-offs increased to 16.0% on an annualized basis for three months ended September 30, 2003, from 14.7% annualized for the prior year quarter. The increase in the charge-off percentages is also partially due to the change in the mix of the loan portfolio as previously mentioned. Higher yielding small loans generally have higher loss ratios. Management does not currently believe that loan losses will continue to rise significantly above the most recent quarterly levels; however, the Company can give no assurance that loan losses will not continue to increase, and such further increases would negatively affect the Company’s financial performance.
General and administrative expenses for the quarter ended September 30, 2003, increased by $1.8 million, or 8.7% over the same quarter of fiscal 2003. This increase is due primarily to an increase in personnel cost over the two quarterly periods as a result of the 25 net new offices open or acquired between September 30, 2002 and September 30, 2003. Overall, general and administrative expenses as a percent of total revenues decreased from 55.9% during the quarter ended September 30, 2002 to 52.7% during the most recent quarter.
Interest expense decreased by $241,000, or 20.6%, as a result of the continued reduction in interest rates during the last year as well as due to a 7.1% decrease in average debt outstanding when comparing the two quarterly periods.
The Company’s effective income tax rate remained unchanged at 35.5% when comparing the two quarters.
Net income rose to $6.1 million during the three months ended September 30, 2003, a 32.0% increase over the $4.6 million earned during the corresponding three-month period of the previous year. Diluted earnings per share rose by only 23.1% when comparing the two quarterly periods. This lower percentage increase in diluted earnings per share is due to the increased shares outstanding resulting from the exercise of stock options as well as an increase in the dilutive effect of the remaining outstanding options based on the higher trading price of the Company’s common stock during the period.
Comparison of Six Months Ended September 30, 2003,
Versus Six Months Ended September 30, 2002
For the six-month period ended September 30, 2003, net income amounted to $11.7 million. This represents a $2.4 million, or 26.1%, increase when comparing the two six-month periods. Operating income (revenues less the provision for loan losses and general and administrative expenses) increased by $3.5 million, or 20.9%, over the two periods. This increase was in addition to a decrease in interest expense, offset by an increase in income taxes.
Total revenues amounted to $81.9 million during the current six-month period, an increase of $11.0 million, or 15.5%, over the prior-year period. This increase resulted from increases in interest and fee income of 13.8%, insurance commissions of 22.3% and other income of 34.0%. The increase in interest and fee income resulted from the increase in average loans receivable of 13.8% when comparing the two six-month periods. Revenues from the 435 offices open throughout both six-month periods increased approximately 11.1%.
11
The provision for loan losses increased by $3.3 million, or 23.6%, during the current six-month period when compared to the same period of fiscal 2003. This increase resulted primarily from an increase in loan losses over these two periods. Net charge-offs increased to $15.5 million during the six-months ended September 30, 2002, a $2.5 million, or 19.3%, increase over the $13.0 million charged-off during the September 30, 2002 period. As a percentage of average loans receivable, annualized net charge-offs rose to 14.7% during the current period from 14.1% during the same period of fiscal 2003.
General and administrative expenses increased by $4.2 million, or 10.4%, over the two six-month periods. This increase resulted from the 25 net new offices added during the 12 month period ending September 30, 2003. As a percent of total revenues, general and administrative expenses decreased from 56.9% during the six month of fiscal 2003 to 54.4% during the most recent period. Additionally, excluding the expenses associated with ParaData, overall general and administrative expenses, when divided by the average open offices, increased by 5.2% when comparing the two-six month periods.
Interest expense decreased by $282,000 when comparing the two six-month periods, a decrease of 12.8%. This reflects the decrease in interest rates during the past year.
The effective income tax rate remained unchanged at 35.5% during the two six-month periods.
Liquidity and Capital Resources
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 has financed these requirements through a combination of cash flow from operations and borrowings from its institutional lenders. The Company believes that cash flow from operations and borrowings under its revolving credit facility will be adequate to fund its currently expected cost of opening or acquiring new office, including funding initial operating losses of new offices and funding loans receivable originated by those offices and the Company’s other offices and the scheduled repayment of the senior subordinated notes. Management is not currently aware of any trends, demands, commitments, events or uncertainties that it believes will result in, or are reasonably likely to result in the Company’s liquidity increasing or decreasing in any material way. From time to time, the Company has needed and obtained, and expects that it will continue to need on a periodic basis, an increase in the borrowing limits under its revolving credit facility. The Company has successfully obtained such increases in the past and anticipates that it will be able to do so in the future as the need arises; however, there can be no assurance that this additional funding will be available (or available on reasonable terms) if and when needed.
As the Company’s gross loans receivable increased from $173.6 million at March 31, 2000 to $266.8 million at March 31, 2003, net cash provided by operating activities for fiscal years 2001, 2002 and 2003 was $31.9 million, $48.3 million and $55.1 million, respectively.
The Company repurchased 1,623,549 shares in fiscal 2003 for an aggregate purchase price of $12,000,000. The Company believes stick 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.
The Company acquired five offices and a number of loan portfolios from competitors in four states in 13 separate transactions during the first six months of fiscal 2004. Gross loans receivable purchased in these transactions were approximately $4.0 million in the aggregate at the dates of purchase. The Company believes that attractive opportunities to acquire new offices or receivables from its competitors or to acquire offices in communities not currently served by the Company will continue to become available as conditions in local economies and the financial circumstances of owners change. The Company 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 $20,000 per office during fiscal 2003. New offices have also required from $100,000 or $400,000 to fund outstanding loans receivable originated during their first 12 months of operation.
The Company has a $152.0 million base credit facility with a syndicate of banks. In addition to the base revolving credit commitment, there is a $15 million seasonal revolving credit commitment available November 15 of each year through March 31 of the immediately succeeding year to cover the increase in loan demand during this period. The credit facility will expire on September 30, 2005. 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 2.0% per annum. At September 30, 2003, the interest rate on borrowings under the revolving credit facility was 3.16%. 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
12
receivable. On September 30, 2003, $93.8 million was outstanding under this facility, and there was $58.2 million of unused borrowing availability under the borrowing base limitations.
The Company has a $1.2 million installment note payable with a bank, bearing interest at LIBOR plus 2.00%, payable monthly, due in six $200,000 annual installment beginning on May 1, 2004. Certain fixed assets are pledged as collateral on this note.
The Company has $2.0 million of senior subordinated secured notes payable to an insurance company. These notes mature on 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 and the senior subordinated notes are secured by a lien on substantially all the tangible and intangible assets of the Company and its subsidiaries pursuant to various security agreements.
The Company also has a $482,000 note payable to an unaffiliated insurance company, bearing interest at 10.0%, payable annually, which matures in September 2004.
The Company’s credit agreements contain a number of financial covenants, including minimum net worth and fixed charge coverage requirements. The credit agreements also contain certain other covenants, including covenants that impose limitations on the Company with respect to (i) declaring or paying dividends or making distributions on or acquiring common or preferred stock or warrants or options; (ii) redeeming or purchasing or prepaying principal or interest on subordinated debt; (iii) incurring additional indebtedness; and (iv) entering into a merger, consolidation or sale of substantial assets or subsidiaries. The senior subordinated notes are also subject to prepayment penalties. The Company was in compliance with these agreements as of September 30, 2003 and does not believe that these agreements will materially limit its business and expansion strategy.
Inflation
The Company does not believe that inflation has a material adverse effect on its financial condition or results of operations. The primary impact of inflation on the operations of the Company is reflected in increased operating costs. While increases in operating costs would adversely affect the Company’s operations, the consumer lending laws of three of the nine states in which the Company currently operates allow indexing of maximum loan amounts to the Consumer Price Index. These provisions will allow the Company to make larger loans at existing interest rates, which could partially offset the effect of inflationary increases in operating costs.
Quarterly Information and Seasonality
The Company’s loan volume and corresponding loans receivable follow seasonal trends. The Company’s highest loan demand occurs each year from October through December, its third fiscal quarter. Loan demand is generally the lowest and loan repayment is highest from January to March, its fourth fiscal quarter. Loan volume and average balances remain relatively level during the remainder of the year. This seasonal trend causes fluctuations in the Company’s cash needs and quarterly operating performance through corresponding fluctuations in interest and fee income and insurance commissions earned, since unearned interest and insurance income are accreted to income on a collection method. Consequently, operating results for the Company’s third fiscal quarter are significantly lower than in other quarters and operating results for its fourth fiscal quarter are generally higher than in other quarters.
13
Recently Adopted Accounting Pronouncements
Accounting for Exit or Disposal Activities
In June 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”), which addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task force Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” SFAS 146 applies to costs associated with an exit activity that do not involve an entity newly acquired in a business combination or with a disposal activity covered by SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Those costs include, but are not limited to, the following: a) termination benefits provided to current employees that are involuntarily terminated under the terms of a benefit arrangement that, in substance, is not an ongoing benefit arrangement or an individual deferred compensation contract (hereinafter referred to as one-time termination benefits); b) costs to terminate a contract that is not a capital lease; and c) costs to consolidate facilities or relocate employees. This Statement does not apply to costs associated with the retirement of a long-lived asset covered by SFAS No. 143, “Accounting for Asset Retirement Obligations.” A liability for a cost associated with an exit or disposal activity shall be recognized and measured initially at its fair value in the period in which the liability is incurred. A liability for a cost associated with an exit or disposal activity is incurred when the definition of a liability is met in accordance with FASB Concepts Statements No. 6, “Elements of Financial Statements.” The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002. The initial adoption of this standard did not have an impact on the financial condition or results of operations of the Company.
Accounting for Guarantees
In November 2002, the FASB issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”). FIN 45 elaborates on the disclosure to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. FIN 45 clarifies that a guarantor is required to disclose (a) the nature of the guarantee; (b) the maximum potential amount of future payments under the guarantee; (c) the carrying amount of the liability; and (d) the nature and extent of any recourse provisions or available collateral that would enable the guarantor to recover the amounts paid under the guarantee. FIN 45 also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the obligation it has undertaken in issuing the guarantee at its inception.
The initial recognition and initial measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements in FIN 45 are effective for financial statements ending after December 15, 2002. The initial adoption of this standard did not have an impact on the financial condition or results of operations of the Company.
Accounting for Variable Interest Entities
In January 2003, the FASB issued FASB Interpretation No. 46, (“FIN 46”), “Consolidation of Variable Interest Entities,” which addresses consolidation by business enterprises of variable interest entities. Under FIN 46, an enterprise that holds significant variable interest in a variable interest entity but is not the primary beneficiary is required to disclose the nature, purpose, size, and activities of the variable interest entity, its exposure to loss as a result of the variable interest holder’s involvement with the entity, and the nature of its involvement with the entity and date when the involvement began. The primary beneficiary of a variable interest entity is required to disclose the nature, purpose, size, and activities of the variable interest entity, the carrying amount and classification of consolidated assets that are collateral for the variable interest entity’s obligations, and any lack of recourse by creditors (or beneficial interest holders) of a consolidated variable interest entity to the general creditors (or beneficial interest holders) of a consolidated variable entity to the general creditor of the primary beneficiary. The Company had no impact upon adoption since it had no interests in entities, which it considers to be included within the scope of FIN 46.
14
Recently Issued Accounting Pronouncements
Accounting for Loans or Certain Debt Securities Acquired in a Transfer
The AcSEC expects to issue, Statement of Position (“the SOP”) “Accounting for Loans or Certain Debt Securities Acquired in a Transfer”, which addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an investor’s initial investment in loans or debt securities (“loans”) acquired in purchase business combinations and applies to all nongovernmental entities. The SOP limits the yield that may be accreted to the excess of the investor’s estimate of undiscounted expected principal, interest, and other cash flows over the investor’s initial investment in the loan. The SOP will require that the excess of contractual cash flows over cash flows expected to be collected not be recognized as an adjustment of yield, loss accrual, or valuation allowance. The SOP will prohibit investors from displaying the accretable yield and non-accretable difference in the balance sheet. Subsequent increases in cash flows expected to be collected generally would be recognized prospectively through adjustment of the loan’s yield over its remaining life. Deceases in cash flows expected to be collected would be recognized as an impairment.
For loans acquired in a transfer, which have evidence of deterioration of credit quality since origination, the SOP prohibits “carry over” or creation of a valuation allowances in the initial accounting. The SOP does not prohibit recognition of an allowance for loan loss at acquisition for loans acquired in business combinations that do not have evidence of deterioration of credit quality since origination.
The prohibition of the valuation allowance carryover applies to the purchase of an individual loan, a pool of loans, a group of loans, and loans acquired in a purchase business combination. The SOP will be effective for transfers of loans acquired in fiscal years beginning after December 15, 2004.
Accounting for Derivative Instruments and Hedging Activities
Effective July 1, 2003, the Company adopted SFAS No. 149, (“SFAS 149”), “Amendment of Statement 133 on Derivative Instruments and Hedging Activities,” which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS 149 clarifies under what circumstances a contract with an initial net investment meets the characteristics of a derivative, clarifies when a derivative contains a financing component, amends the definition of an underlying to conform it to language used in FIN 45, and amends certain other existing pronouncements. Those changes will result in more consistent reporting of contracts as either derivatives or hybrid instruments. Management does not believe the provisions of this standard will have a material impact on results of future operations.
Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity
Effective July 1, 2003, the Company adopted SFAS No. 150, (“SFAS 150”), “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity,” which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS 150 requires an issuer to classify certain financial instruments that include certain obligations, such as mandatory redemption, repurchase of the issuer’s equity, or settlement by issuing equity, as liabilities or assets in some circumstances. Forward contracts to repurchase an issuer’s equity shares that require physical settlement in exchange for cash are initially measured at the fair value of the shares at inception, adjusted for any consideration or unstated rights or privileges, which is the same as the amount that would be paid under the conditions specified in the contract if settlement occurred immediately. Those contracts and mandatorily redeemable financial instruments are subsequently measured at the present value of the amount to be paid at settlement, if both the amount of cash and the settlement date are fixed, or, otherwise, at the amount that would be paid under the conditions specified in the contract if settlement occurred at the reporting date. Other financial instruments are initially and subsequently measured at fair value, unless required by SFAS 150 or other generally accepted accounting principles to be measured differently. The Company had no impact upon adoption since it had no financial instruments, which it considers to be included within the scope of SFAS 150.
15
Forward-Looking Information
This report on Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” may contain various “forward-looking statements,” within the meaning of Section 21E of the Securities Exchange Act of 1934, that are based on management’s belief and assumptions, as well as information currently available to management. When used in this document, the words “anticipate,” “estimate,” “expect,” “believe,” “plan,” “may,” “will,” “should” and similar expressions may identify forward-looking statements. Although the Company believes that the expectations reflected in any such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct. Any such statements are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, the Company’s actual financial results, performance or financial condition may vary materially from those anticipated, estimated or expected. Among the key factors that could cause the Company’s actual financial results, performance or condition to differ from the expectations expressed or implied in such forward-looking statements are the following: changes in interest rates, risks inherent in making loans, including repayment risks and value of collateral; recently-enacted or proposed legislation; the timing and amount of revenues that may be recognized by the Company; changes in current revenue and expense trends (including trends affecting charge-offs); changes in the Company’s markets and general changes in the economy (particularly in the markets served by the Company); and other matters discussed in this Report and the Company’s other filings with the Securities and Exchange Commission.
The Company’s financial instruments consist of the following: cash, loans receivable, senior notes payable and subordinated notes payable. Fair market approximates carrying value for all of these instruments. Loans receivable are originated at prevailing market rates and have an average life of approximately four months. Given the short-term nature of these loans, they are continually repriced at current market rates. The revolving credit facility and the other $1.2 million note payable have variable rates based on a margin over LIBOR and reprice with any changes in LIBOR. The interest rate of the subordinated notes is 10%, which is considered to be a market rate for this type of instrument. The Company’s outstanding debt under its floating rate notes was $95.0 million at September 30, 2003. Interest on borrowings under the revolving credit facility is based at the Company’s option, on the prime rate or LIBOR plus 2.00% and on the other note payable, LIBOR plus 2.00%. Based on the outstanding balance at September 30, 2003, a change of 1% in the interest rate would cause a change in interest expense of approximately $950,000 on an annual basis.
An evaluation was carried out under the supervision and with the participation of the Company’s management, including the its chief executive officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the Company’s disclosure controls and procedures as of September 30, 2003. Based on that evaluation, the Company’s management, including the CEO and CFO, has concluded that the Company’s disclosure controls and procedures are effective. During the second quarter of fiscal 2004, there was no change in the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
16
PART II. OTHER INFORMATION
From time to time the Company is involved in routine litigation relating to claims arising out of its operations in the normal course of business. The Company believes that it is not currently a party to any such pending legal proceedings that would have a material adverse effect on its financial condition.
The Company’s credit agreements contain certain restrictions on the payment of cash dividends on its capital stock. See Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources,” the contents of which are incorporated by reference in repose to this item.
Ken R. Bramlett, Jr.
James R. Gilreath
William S. Hummers III
Douglas R. Jones
A. Alexander McLean III
Charles D. Walters
Charles D. Way
VOTES IN FAVOR
VOTES AGAINST
ABSTENTIONS*
*There were no broker non-votes on these routine items.
17
PART II. OTHER INFORMATION, CONTINUED
Description
Previous
Exhibit
Number
Company
Registration
No. or Report
18
The Company furnished one report on Form 8-K during the quarter ended September 30, 2003. The report, furnished August 14, 2003, attached the terms of the Company’s earnings press release the quarter ended June 30, 2003.
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
November 14, 2003
D. R. Jones, President and Chief Executive Officer
A. A. McLean III, Executive Vice President
and Chief Financial Officer
20