UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
For the quarterly period ended June 30, 2005
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 is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
x Yes ¨ No
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.
Indicate the number of shares outstanding of each of issuer’s classes of common stock, as of the latest practicable date, August 9, 2005.
Common Stock, no par value
18,632,854
(Class)
AND SUBSIDIARIES
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1.
Item 2.
Item 3.
Item 4.
PART II - OTHER INFORMATION
Item 6.
Signatures
2
CONSOLIDATED BALANCE SHEETS
(Unaudited)
Cash
Gross loans receivable
Less:
Unearned interest and fees
Allowance for loan losses
Loans receivable, net
Property and equipment, net
Deferred tax benefit
Other assets, net
Intangible assets, net
Total assets
Liabilities:
Senior notes payable
Other notes payable
Income taxes payable
Accounts payable and accrued expenses
Total liabilities
Shareholders’ equity:
Common stock, no par value
Authorized 95,000,000 shares; issued and outstanding 18,735,557 and 18,948,907 shares at June 30, 2005 and March 31, 2005, 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 equivalent shares outstanding:
4
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Retained
Earnings
Balances at March 31, 2004
Proceeds from exercise of stock options (577,710 shares), including tax benefit of $3,181,612
Common stock repurchases (486,000 shares)
Balances at March 31, 2005
Proceeds from exercise of stock options (52,650 shares), including tax benefit of $365,503
Common stock repurchases (266,000 shares)
Balances at June 30, 2005
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
Purchases of premises and equipment
Purchases of intangible assets
Net cash used by investing activities
Cash flows from financing activities:
Proceeds from senior notes payable, net
Repayment of senior subordinated notes
Repayment of other notes payable, net
Repurchase of common stock
Proceeds from exercise of stock options
Net cash 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
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
June 30, 2005
NOTE 1 - BASIS OF PRESENTATION
The consolidated financial statements of the Company at June 30, 2005, and for the three months then ended were prepared in accordance with the instructions for Form 10-Q and are unaudited; however, in the opinion of management, all adjustments (consisting only of items of a normal recurring nature) necessary for a fair presentation of the financial position at June 30, 2005, and the results of operations and cash flows for the period then ended, have been included. The results for the period ended June 30, 2005 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 2005 to conform with fiscal 2006 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, 2005, included in the Company’s 2005 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):
Balance at beginning of period
Loan losses
Recoveries
Purchase accounting acquisitions
Balance at end of period
For the quarters ended June 30, 2005 and 2004, the Company recorded adjustments of approximately $37,000 and $440,000, respectively, to the allowance for loan losses in connection with its acquisitions in accordance with generally accepted accounting principles. These adjustments represent the allowance for loan losses on acquired loans (see Note 7 for recently adopted accounting pronouncement relating to acquired loans).
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 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.
7
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 the exercise price was greater than the average market price of the common shares:
For the three months ended
June 30, 2004
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 quarters ended June 30, 2005 and 2004:
Number of offices purchased
Merged into existing offices
Purchase Price
Tangible assets:
Net loans
Furniture, fixtures & equipment
Excess of purchase prices over carrying value of net intangible 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 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 had a material effect on the results of operations as reported.
NOTE 7 - RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
Accounting for Certain Loans or Debt Securities Acquired in a Transfer
Effective April 1, 2005, the Company adopted Statement of Position No. 03-3 (SOP 03-3), “Accounting for Certain Loans or Debt Securities Acquired in a Transfer,” which prohibits carryover or creation of valuation allowances in the initial accounting of all loans acquired in a transfer that are within the scope of this SOP. The prohibition of the valuation allowance carryover applies to the purchase of loans (including loans acquired in a business combination) with evidence of determination of credit quality since origination, for which it’s probable, at acquisition, that the investor will be unable to collect all contractually required payments. The initial adoption of this standard did not have a material impact on the financial condition or results of operations of the Company.
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 June 30, 2005, Versus
Three Months Ended June 30, 2004
Net income amounted to $7.3 million for the three months ended June 30, 2005, approximately the same that was earned during the corresponding three-month period of fiscal 2005. Operating income (revenues less provision for loan losses and general and administrative expenses) increased approximately $555,000, or 4.5%, which was offset by an increase in interest expense and an increase in income taxes.
Interest and fee income for the quarter ended June 30, 2005, increased by $4.0 million, or 9.8%, over the same period of the prior year. This increase resulted from a $26.4 million increase, or 10.7%, in average loans receivable over the two corresponding periods.
Insurance commissions and other income increased by $291,000, or 4.2%, between the two quarterly periods. Insurance commissions increased by $441,000, or 10.5%, during the most recent quarter when compared to the prior year quarter due to the increase in loans in those states where credit insurance may be sold in conjunction with the loan. Other income decreased by $150,000, or 5.6%, over the two corresponding quarters primarily due to a reduction in tax preparation fees recognized during the current quarter when compared to the prior year quarter.
10
MANAGEMENTS’ DISCUSSION AND ANALYSIS, CONTINUED
Three Months Ended June 30, 2004, continued
Total revenues rose to $51.8 million during the quarter ended June 30, 2005, a 9.0% increase over the $47.5 million for the corresponding quarter of the previous year. Revenues from the 520 offices open throughout both quarterly periods increased by approximately 3.0%. At June 30, 2005, the Company had 583 offices in operation, an increase of 4 offices from March 31, 2005.
The provision for loan losses during the quarter ended June 30, 2005 increased by $913,000, or 10.6%, 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 $9.5 million, a 23.5% increase over the $7.7 million charged off during the same quarter of fiscal 2005. As a percentage of average loans receivable, net charge-offs increased to 13.9% on an annualized basis for the current quarter from 12.5% for the quarter ended June 30, 2004. While this represents a significant increase from the prior year first quarter, the current quarter charge-off percentage to date appears to be more in line with the percentages experienced during the quarter ended June 30, 2003 and 2002, which were 13.41% and 13.47%, respectively. Although the Company does not anticipate experiencing any near term material change in its ongoing expected loss ratios it cannot give assurance that such changes will not occur or would not materially and adversely affect the Company’s results of operations and financial condition.
General and administrative expenses for the quarter ended June 30, 2005 increased by $2.8 million, or 10.7% over the same quarter of fiscal 2005. Overall, general and administrative expenses, when divided by average open offices, increased by approximately 2.2% when comparing the two periods; and, as a percentage of total revenue, increased from 55.6% during the prior year quarter to 56.5% during the most recent quarter. This increase resulted from a higher growth rate in expenses than in revenue. While the growth in expenses is in line with the growth in the number of offices, the growth in revenue is less than the Company’s historical rate, due to the reduced growth rate in the balances in loans outstanding. The Company expects these ratios to become more in line with historical measures as the fiscal year progresses.
Interest expense increased by $317,000 when comparing the two corresponding quarterly periods as a result of the recent rise in interest rates.
The Company’s effective income tax rate increased to 37.4% for the quarter ended June 30, 2005 from 36.5% for the prior year quarter due to an increase in state income taxes.
Critical Accounting Policies
The Company’s accounting and reporting policies are in accordance with accounting principles generally accepted in the United States of America and conform to general practices within the finance company industry. Certain critical accounting policies involve significant judgment by the Company’s management, including the use of estimates and assumptions which affect the reported amounts of assets, liabilities, revenues, and expenses. As a result, changes in these estimates and assumptions could significantly affect the Company’s financial position and results of operations. The Company considers its policies regarding the allowance for loan losses to be its most critical accounting policy due to the significant degree of management judgment. The Company has developed policies and procedures for assessing the adequacy of the allowance for loan losses which takes into consideration various assumptions and estimates with respect to the loan portfolio. The Company’s assumptions and estimates may be affected in the future by changes in economic conditions, among other factors.
Liquidity and Capital Resources
The Company has financed its operations, acquisitions and office expansion through a combination of cash flow from operations and borrowings from its institutional lenders. The Company’s primary ongoing cash requirements relate to the funding of new offices and acquisitions, the overall growth of loans outstanding, the repayment of indebtedness and the repurchase of its common stock. As the Company’s gross loans receivable increased from $226.3 million at March 31, 2002 to $351.5 million at March 31, 2005, net cash provided by operating activities for fiscal years 2003, 2004 and 2005 was $55.1 million, $70.4 million and $88.1 million, respectively.
11
The Company repurchased 1,986,000 shares of its common stock under its repurchase program, for an aggregate purchase price of approximately $16.0 million, between February 1996 and October 1996. Because of certain loan agreement restrictions, the Company suspended its stock repurchases in October 1996. The stock repurchase program was reinstated in January 2000, and 144,000 shares were repurchased in fiscal 2000, 275,000 shares in fiscal 2001, 252,000 shares in fiscal 2002, 1,623,549 shares in fiscal 2003 and 486,000 in fiscal 2005 for respective aggregate purchase prices of $724,000, $1,434,000, $2,179,000, $12,000,000 and $8,751,000. During the first quarter of fiscal 2006, the Company repurchased 266,000 shares for an aggregate purchase price of $6,885,384. See the table entitled “Issuer Purchases of Equity Securities” in Part II, Item 2 below for further information regarding the Company’s recent repurchase activity and remaining repurchase authorization. The Company believes stock repurchases to be a viable component of the Company’s long-term financial strategy and an excellent use of excess cash when the opportunity arises. In addition, the Company plans to open or acquire at least 25 new offices in each of the next two fiscal years. Expenditures by the Company to open and furnish new offices generally averaged approximately $25,000 per office during fiscal 2005. 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 one office and a number of loan portfolios from competitors in three states in six separate transactions during the first quarter of fiscal 2006. Gross loans receivable purchased in these transactions were approximately $944,000 in the aggregate at the dates of purchase. The Company believes that attractive opportunities to acquire new offices or receivables from its competitors or to acquire offices in communities not currently served by the Company will continue to become available as conditions in local economies and the financial circumstances of owners change.
The Company has a $167.0 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, 2007. 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 1.90% per annum. At June 30, 2005, the interest rate on borrowings under the revolving credit facility was 5.28%. The Company pays a commitment fee equal to 0.375% of the daily unused portion of the revolving credit facility. Amounts outstanding under the revolving credit facility may not exceed specified percentages of eligible loans receivable. On June 30, 2005, $99.45 million was outstanding under this facility, and there was $67.55 million of unused borrowing availability under the borrowing base limitations.
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 Company believes that it was in compliance with these agreements as of June 30, 2005, 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 other notes payable (for the next 12 months and for the foreseeable future beyond that). 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.
12
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 eleven 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.
Recently Adopted Accounting Pronouncements
Effective April 1, 2005, the Company adopted Statement of Position No. 03-3 (SOP 03-3), “ Accounting for Certain Loans or Debt Securities Acquired in a Transfer,” which prohibits carryover or creation of valuation allowances in the initial accounting of all loans acquired in a transfer that are within the scope of this SOP. The prohibition of the valuation allowance carryover applies to the purchase of loans (including loans acquired in a business combination) with evidence of determination of credit quality since origination, for which it’s probable, at acquisition, that the investor will be unable to collect all contractually required payments. The initial adoption of this standard did not have a material impact on the financial condition or results of operations of the Company.
Recently Issued Accounting Pronouncements
Accounting for Stock Based Compensation
In December 2004, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 123 (Revised) (SFAS 123-R), “Share-Based Payment”. This standard requires expensing of stock options and other share-based payments and supersedes SFAS No. 123 which had allowed companies to choose between expensing stock options or showing pro forma disclosure only. On April 14, 2005, the SEC announced the adoption of a rule that delays the effective date of SFAS 123-R. This standard will be effective as of the beginning of the Company’s 2006 fiscal year and will apply to previously issued and unvested awards, as well as all awards granted, modified, cancelled or repurchased after the effective date. The Company is currently evaluating the expected impact that the adoption of SFAS 123-R will have on its financial condition or results of operations. Pro forma information regarding net income and earnings per share as if we had accounted for our employee stock options granted under the fair value method of SFAS 123 is presented in Note 5 to our Condensed Consolidated Financial Statements.
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,” “plan,” “expect,” “believe,” “may,” “will,” and “should” any variation of the foregoing and similar expressions may identify
13
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 does not undertake any obligation to update any forward-looking statements it makes.
The Company’s financial instruments consist of the following: cash, loans receivable, and senior 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 $0.8 million note payable have variable rates based on a margin over LIBOR and reprice with any changes in LIBOR. The Company’s outstanding debt under its floating rate notes was $100.3 million at June 30, 2005. Interest on borrowings under the revolving credit facility is based at the Company’s option, on the prime rate or LIBOR plus 1.90% and on the other note payable, LIBOR plus 2.00%. Based on the outstanding balance at June 30, 2005, a change of 1% in the interest rate would cause a change in interest expense of approximately $1.0 million on an annual basis.
An evaluation was carried out under the supervision and with the participation of the Company’s management, including its Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the Company’s disclosure controls and procedures as of June 30, 2005. 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 first quarter of fiscal 2006, 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.
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 presently a party to any such pending legal proceedings that would have a material adverse effect on its financial condition.
14
The Company’s credit agreements contain certain restrictions on the payment of cash dividends on its capital stock. See “Management’s Discussion of Liquidity and Capital Resources.”
Issuer Purchases of Equity Securities
April 1 through April 30, 2005
May 1 through May 31, 2005
June 1 through June 30, 2005
Total for the Quarter
15
PART II. OTHER INFORMATION, CONTINUED
Description
16
17
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.
Date:
August 9, 2005
18