<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
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
1-10785
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THE MONEY STORE INC.
(Exact name of registrant as specified in its charter)
New Jersey 22-2293022
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(State of other jurisdiction of (I.R.S.employer
incorporation or organization) Identification No.)
2840 Morris Avenue, Union, New Jersey 07083
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(Address of principal executive office) (Zip Code)
(908) 686-2000
--------------
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether 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 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.
(X) Yes ( ) No
APPLICABLE ONLY TO CORPORATE ISSUERS;
Number of shares outstanding of issuer's Common Stock, as of November 11,
1996: 57,705,600 shares.
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1996
TABLE OF CONTENTS PAGE
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PART I FINANCIAL INFORMATION
- ----------------------------
Item 1 - Financial Statements
Consolidated Statements of Financial Condition at
September 30, 1996 and December 31, 1995 2
Consolidated Statements of Income for the three and nine months
ended September 30, 1996 and 1995 3
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1996 and 1995 4
Notes to Consolidated Financial Statements 5
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 7 - 13
PART II - OTHER INFORMATION
- ---------------------------
Item 6 - Exhibits and Reports on Form 8-K 14
1
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
THE MONEY STORE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------ ------------
(UNAUDITED)
<S> <C> <C>
Cash and cash equivalents (including $143,432 and
$136,159 in 1996 and 1995 which is restricted) $ 240,558 $ 178,781
Receivables, net of allowance for credit losses
of $19,902 and $15,591 in 1996 and 1995 1,339,394 1,029,853
Excess servicing asset 706,557 524,359
Property and equipment, net 62,508 33,762
Other 26,777 25,493
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$2,375,794 $1,792,248
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Notes payable $1,378,016 $1,075,892
Accounts payable and other liabilities 257,389 226,443
Income taxes, principally deferred 117,864 94,928
Unearned insurance commissions 6,787 4,704
Allowance for credit losses on loans sold 184,330 125,155
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1,944,386 1,527,122
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Subordinated debt 13,000 24,000
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Commitments and contingencies
SHAREHOLDERS' EQUITY:
Preferred stock, no par;
authorized 10,000,000 shares; none
issued and outstanding
Common stock, no par; authorized
250,000,000 shares; issued and
outstanding 57,562,598 shares in
1996 and 51,339,896 in 1995 182,995 59,603
Paid in capital 2,023 0
Retained earnings 233,390 181,523
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418,408 241,126
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$2,375,794 $1,792,248
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
2
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THE MONEY STORE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Gain on sale of receivables $ 143,701 $ 103,675 $ 359,513 $ 242,993
Finance income, fees earned and other 58,483 41,586 175,791 106,691
----------- ----------- ----------- -----------
202,184 145,261 535,304 349,684
----------- ----------- ----------- -----------
EXPENSES:
Salaries and employee benefits 42,892 32,338 117,001 86,031
Other operating expenses 52,372 29,997 138,528 82,871
Provision for credit losses 35,870 33,800 94,891 61,752
Interest 32,993 26,612 91,426 65,990
----------- ----------- ----------- -----------
164,127 122,747 441,846 296,644
----------- ----------- ----------- -----------
Income before income taxes 38,057 22,514 93,458 53,040
----------- ----------- ----------- -----------
Income taxes (credits):
Current (5,756) 11,950 (5,297) 7,194
Deferred 21,093 (2,669) 42,934 14,603
----------- ----------- ----------- -----------
15,337 9,281 37,637 21,797
----------- ----------- ----------- -----------
Net income $ 22,720 $ 13,233 $ 55,821 $ 31,243
=========== =========== =========== ===========
Net income per share $0.38 $0.26 $0.95 $0.61
=========== =========== =========== ===========
Weighted average number
of common shares outstanding 59,090,793 51,096,575 58,629,987 50,934,678
=========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
3
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THE MONEY STORE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1996 1995
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 55,821 $ 31,243
Adjustments to reconcile net income to net
cash used in operations:
Depreciation and amortization 8,787 5,799
Provision for deferred income taxes 42,934 14,603
Provision for credit losses 94,891 61,752
Net changes in operating assets and liabilities:
Proceeds from loans sold 3,856,057 2,405,588
Loans originated and purchased (4,039,226) (2,626,513)
Loans repurchased (5,500) (7,057)
Increase in receivables (166,671) (83,681)
Excess Servicing Spread (350,666) (234,267)
Amortization of excess servicing asset 168,468 98,473
Net increase (decrease) in accounts payable and
other liabilities (10,369) 11,073
Other, net (9,790) (1,799)
----------- -----------
Net cash used in operating activities (355,264) (324,786)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (35,446) (12,628)
----------- -----------
Cash flows from financing activities:
Net increase (decrease) in credit facilities 52,124 (39,386)
Proceeds from other notes payable 333,000 300,000
Principal payments on other notes payable (83,000) 0
Principal payments on subordinated debt (11,000) 0
Debt issuance costs (1,413) (1,421)
Net increase in collections payable 41,315 41,226
Net proceeds from issuance of common stock 122,075 0
Proceeds from exercised stock options 1,317 1,329
Tax benefit from exercise of stock options 2,023 0
Dividends paid (3,954) (2,411)
----------- -----------
Net cash provided by financing activities 452,487 299,337
----------- -----------
Net increase (decrease) in cash and cash equivalents 61,777 (38,077)
Cash and equivalents at beginning of period 178,781 161,292
----------- -----------
Cash and cash equivalents at end of period $ 240,558 $ 123,215
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements include the accounts of The Money
Store Inc. and its subsidiaries (the "Company"), all of which are wholly-
owned. All significant intercompany accounts and transactions have been
eliminated.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. It is suggested
that these condensed financial statements be read in conjunction with the
Company's December 31, 1995 audited consolidated financial statements and
notes thereto.
In the opinion of management all adjustments (which included only normal
recurring adjustments) necessary for a fair presentation of the financial
position and results of operations for these periods have been made.
However, results for such interim periods are subject to year-end
adjustments and are not necessarily indicative of results for a full year.
(2) NET INCOME PER SHARE
Net income per share of common stock is computed using the weighted average
number of shares of common stock outstanding during each period, after
giving effect to common stock equivalents arising from the issuance of
stock options. All share and per share amounts have been restated to
reflect the five-for-two stock split on December 1, 1995.
(3) COMMITMENTS AND CONTINGENCIES
The Company generally sells its home equity loans with servicing retained
in mortgage pass-through transactions and in whole loan transactions. In
certain whole loan transactions, the Company is subject to off-balance
sheet credit risk in the normal course of business due to commitments and
obligations to service and repurchase loan receivables which are not
included in the accompanying consolidated financial statements. These
commitments and obligations do not necessarily represent future cash flow
obligations. The obligations to repurchase home equity loans are subject
to various terms and conditions including limitations on the amount of
loans that may be required to be repurchased in any given year. Based upon
the terms of whole loan transactions and management's estimates of the
lives of the underlying portfolios, management believes that there are
$63,911,000 of home equity loans at September 30, 1996, which the Company
may be required to repurchase in the future should such loans become more
than 90 days past due.
In an attempt to minimize the risk of interest rate fluctuations, one of
the strategies employed by the Company is to enter into agreements that
allow the Company to sell loans to certain trusts in the future at an
agreed upon price. At September 30, 1996, under the terms of such
agreements the Company had the right to sell $119,593,000 of home equity
loans.
5
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(4) SUBSEQUENT EVENTS
On November 5, 1996, the Company completed an underwritten public offering
of 4.6 million shares of $1.72 Mandatory Convertible Preferred Stock at
$26.50 per share, resulting in net proceeds of $117.9 million, which were
used to pay down outstanding warehouse loans and other credit facilities.
Each share of Preferred Stock will pay an annual dividend of $1.72 per
share, will be convertible at the option of the holder into 0.833 shares of
Common Stock and will automatically convert on December 1, 1999 into Common
Stock. The mandatory conversion rate, based on a formula, will range from
0.8333 to 1.000 shares of Common Stock per share of Preferred Stock
depending on the market price of the Common Stock for the 20 trading days
preceding the mandatory conversion date.
On November 11, 1996, the Underwriters informed the Company of their intent
to exercise an over-allotment option they had been granted for an
additional 615,000 shares of Mandatory Convertible Preferred Stock which
should result in an additional $15.8 million in net proceeds to the
Company. The proceeds from the exercise of the over-allotment option, which
is expected to close on November 14, 1996, will be used to pay down
additional outstanding warehouse loans and other credit facilities.
6
<PAGE>
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CERTAIN ACCOUNTING CONSIDERATIONS
As a fundamental part of its business and financing strategy, the Company
sells the majority of its loans with the servicing retained. The majority
of the Company's revenue is recognized as gain on sale of loans, which
represents the present value of the difference between the interest rate
charged by the Company to a borrower and the interest rate received by the
investor who purchased the loan, in excess of normal loan servicing fees
(the "Excess Servicing Spread") and non-refundable fees and premiums on
loans sold. The Company recognizes such gain on sale of loans in the year
that such loans are sold, although cash (representing the Excess Servicing
Spread and servicing fees) is received by the Company over the lives of the
loans. Concurrently with recognizing such gain on sale, the Company
records a corresponding asset on its consolidated statement of financial
condition in an initial amount equal to the Excess Servicing Spread (the
"Excess Servicing Asset"). The Excess Servicing Asset is computed, in
part, based upon, and amortized over, the estimated lives of the loans.
The timing of sales of the Company's loans may impact the Company's
earnings from quarter to quarter.
The Excess Servicing Asset is calculated utilizing certain estimates made
by management at the time loans are sold. The rate of prepayment of loans
may be affected by a variety of economic and other factors, including
prevailing interest rates and the availability of alternative financing to
borrowers. The effect of those factors on loan prepayment rates may vary
depending on the type of loan. Estimates of prepayment rates are made
based on management's expectations of future prepayment rates, which are
based, in part, on the historical rate of repayment of the Company's loans
and other considerations. There can be no assurance of the accuracy of
management's prepayment estimates. If actual prepayments with respect to
sold loans occur more quickly than was projected at the time such loans
were sold, the carrying value of the Excess Servicing Asset may have to be
written down through a charge to earnings in the period of adjustment. If
actual prepayments with respect to sold loans occur more slowly than
estimated, the carrying value of the Excess Servicing Asset on the
Company's consolidated statement of financial condition would not increase,
although total income would exceed previously estimated amounts.
The Company has several strategies which it employs in an attempt to
minimize the risk of interest rate fluctuations during the period between
the time it originates loans and the time such loans are sold; i) the
Company attempts to package and sell loans on a regular basis, thereby
minimizing the period during which loans are held, ii) the Company usually
does not fix the interest rate applicable to fixed rate home equity loans
it originates until shortly prior to the closing of the loan, iii) the
Company from time to time purchases options to sell government securities
at agreed upon prices or sells securities not yet purchased, and iv) in
certain securitizations the Company enters into an agreement that allows it
to sell loans in the future at an agreed upon price. The Company has basis
risk on certain variable rate loans it sells where the customer and
investor rates are based upon different indices and adjust at varying
intervals.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
SEPTEMBER 30, 1996
Receivables, net, increased $309.5 million to $1.3 billion at September 30,
1996 from $1.0 billion at December 31, 1995. This increase was primarily
due to a net increase in loans held for sale of $182.2 million, accrued
interest receivable of $21.5 million, other receivables of $101.5 million
and allowance for credit losses of $4.3 million in 1996. The increase in
loans held for sale was due primarily to the fact that loans originated and
purchased exceeded loan sales by $183.2 million, offset by reductions of
$1.0 million. Originations increased 54% for the nine months ended
September 30, 1996, compared to the nine months ended September 30, 1995,
primarily as a result of the Company providing greater variety of products,
complemented by geographic expansion of the originations network and
diversification in the methods of loan origination.
The increase in accrued interest receivable is primarily due to the growth
in the serviced loan portfolio. The increase in other receivables is
principally attributable to advances, designed to protect investors from
losses, made in connection with certain securitizations. Also included in
other receivables are repurchased loans. The balance of the repurchased
loan portfolio was $25.7 million at September 30, 1996 compared to $29.2
million at December 31, 1995. In the past, when the Company sold home
equity loans as whole loans, it generally committed to repurchase loans
that became more than 90 days past due, up to a predetermined limit. The
Company has increased its use of securitizations and has been able to
negotiate whole loan sales without such a contingent repurchase obligation.
The Excess Servicing Asset increased by $182.2 million to $706.6 million at
September 30, 1996 from $524.4 million at December 31, 1995. This increase
was due to Excess Servicing Spread on loans sold with servicing retained of
$350.7 million offset by amortization of $168.5 million.
Property, plant and equipment, net increased by $28.7 million to $62.5
million at September 30, 1996 from $33.8 million at December 31, 1995.
This increase was largely a result of the purchase of land and related
development costs to date in the amount of $15.2 million for the
construction of the Company's new building in West Sacramento, California.
The building is expected to be completed in late 1997, with an anticipated
total cost of approximately $75.0 million. In addition, the Company
purchased $11.5 million in computer equipment to enhance the branch
office's automation to support new product lines, provide system
improvements and equipment supporting electronic document generation,
storage and retrieval. Furniture and office equipment and leasehold
improvements increased $8.7 million primarily attributable to employment
growth in the home equity loan division and the auto loan division. These
increases were offset by depreciation expense of $6.7 million.
The primary source of funding the Company's receivables comes from
borrowings issued under various credit arrangements. At September 30, 1996,
the Company had notes payable of $1.4 billion, which compares with $1.1
billion at December 31, 1995, an increase of $302.1 million. This increase
is primarily a result of net increases of $52.1 million in secured credit
facilities, in addition to borrowings of $333.0 million in connection with
a three-year revolving credit facility (the "Credit Facility") offset by
principal payments on unsecured notes of $83.0 million.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION (CONT.)
Accounts payable and other liabilities increased $31.0 million to $257.4
million at September 30, 1996, from $226.4 million at December 31, 1995.
The increase resulted primarily from an increase in funds collected on
loans sold and serviced for others ("collections payable") of $41.3 million
offset by a decrease in other miscellaneous accounts payable and accrued
expenses.
Income taxes, principally deferred, increased $23.0 million, from $94.9
million at December 31, 1995 to $117.9 million at September 30, 1996.
This increase resulted from the net income for the nine months ended
September 30, 1996.
The allowance for credit losses on loans sold increased $59.1 million from
$125.2 million at December 31, 1995 to $184.3 million at September 30,
1996, due to an increase in the amount of loans sold.
Total shareholders' equity at September 30, 1996 was $418.4 million which
compares with $241.1 million at December 31, 1995, an increase of $177.3
million. During March 1996, the Company completed a common stock offering,
the net proceeds of which amounted to $122.1 million. In addition, the
Company had net income of $55.8 million, received proceeds from exercised
stock options of $1.3 million and recorded $2.0 million in paid in capital
representing the tax benefit from the exercise by employees of nonqualified
stock options and disqualified incentive stock options. Shareholders'
equity decreased $3.9 million as a result of payment of cash dividends.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1995
Net income for the nine months ended September 30, 1996 was $55.8 million
($0.95 per share) on 58,629,987 weighted average number of shares
outstanding compared to net income of $31.2 million ($0.61 per share) on
50,934,678 weighted average number of shares outstanding for the nine
months ended September 30, 1995, an increase of 79%. The increase in net
income is primarily attributable to income derived from gain on sale of
receivables, as well as finance income and fees earned due to the growth in
the Company's serviced loan portfolio.
Gain on sale of receivables totaled $359.5 million for the nine months
ended September 30, 1996, an increase of 48%, compared to $243.0 million
for the nine months ended September 30, 1995. Loans sold for the nine
months ended September 30, 1996 totaled $3.9 billion, compared to $2.4
billion for the nine months ended September 30, 1995, offset by a decrease
in the percentages of Excess Servicing Spread as follows: (i) on home
equity loans sold to 3.42% for the nine months ended September 30, 1996
from 3.47% for the nine months ended September 30, 1995, (ii) on SBA loans
sold including the sale of unguaranteed portions of SBA loans to 1.93% for
the nine months ended September 30, 1996 from 2.16% for the nine months
ended September 30, 1995, (iii) student loans sold to 1.41% for the nine
months ended September 30, 1996 from 1.72% for the nine months ended
September 30, 1995, and (iv) on auto loans to 9.86% for the nine months
ended September 30, 1996 from 10.33% for the nine months ended September
30, 1995.
Finance income, fees earned and other totaled $175.8 million for the nine
months ended September 30, 1996, an increase of 65%, compared to $106.7
million for the nine months ended September 30, 1995. The primary factor
attributable to the growth in finance income and fees is the increase in
the Company's serviced loan portfolio of 43% to $11.2 billion at September
30, 1996 as compared to $7.8 billion at September 30, 1995.
Salaries and employee benefits increased 36% to $117.0 million for the
nine months ended September 30, 1996, compared to $86.0 million for the
nine months ended September 30, 1995. This increase was largely a result
of additional staff needed for the growth in the home equity loan division
and the auto loan division.
Other operating expenses increased 67% to $138.5 million for the nine
months ended September 30, 1996, compared to $82.9 million for the nine
months ended September 30, 1995. The increase was primarily attributable
to occupancy costs and related office expenses associated with the opening
of additional branch offices totaling $15.3 million. In addition,
advertising expense increased $15.2 million, professional fees (including
computer programming consulting fees) increased $7.0 million primarily to
support enhancing the branch offices' computer system and loan expenses
increased $5.4 million as a result of the Company's growth in loan
originations.
The provision for credit losses increased $33.1 million to $94.9 million
for the nine months ended September 30, 1996 from $61.8 million for the
nine months ended September 30, 1995. The provision increased to maintain
the allowance for credit losses and the allowance for credit losses on
loans sold at a level considered adequate to cover risk characteristics of
the serviced loan portfolio and increased loan originations and sales.
Home equity loans delinquent 90 days-and-over increased to 3.33% at
September 30, 1996 from 2.09% at September 30, 1995. SBA Loans delinquent
90 days-and-over increased to 4.03% at September 30, 1996 from 3.71% at
September 30, 1995. Auto Loans delinquent 90 days-and-over increased to
0.34% at September 30, 1996, from .02% at September 30, 1995, the initial
year of operations for the division.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (CONT.)
Charge-offs, net of recoveries increased 80% to $32.4 million for the nine
months ended September 30, 1996 from $18.0 million for the nine months
ended September 30, 1995, due to the increase in the Company's serviced
loan portfolio.
Interest expense increased 39% to $91.4 million for the nine months ended
September 30, 1996, from $66.0 million for the nine months ended September
30, 1995. The increase is attributable to the increase in the Company's
average debt outstanding during the nine months ended September 30, 1996.
Income taxes increased 73% to $37.6 million for the nine months ended
September 30, 1996 over the prior year due to an increase in pretax income.
The effective tax rate decreased to 40% for the nine months ended September
30, 1996, compared to 41% for the nine months ended September 30, 1995, as
a result of a decrease in state taxes.
THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1995
Net income for the third quarter 1996 was $22.7 million ($0.38 per share)
on 59,090,793 weighted average shares outstanding compared to net income of
$13.2 million ($0.26 per share) on 51,096,575 weighted average shares
outstanding for the third quarter of 1995, an increase of 72%. The
increase in net income is primarily attributable to income derived from the
gain on sale of receivables, as well as finance income and fees earned
caused by the growth in the Company's serviced loan portfolio.
Gain on sale of receivables totaled $143.7 million for the third quarter of
1996, an increase of 39% compared to $103.7 million for the third quarter
of 1995. The increase is primarily attributable to an increase of 44% in
loans sold from $975.9 million in the third quarter of 1995 to $1.4 billion
in the third quarter of 1996. Offsetting this increase is a decrease in
the Excess Servicing Spread (i) on home equity loans sold to 3.73% for the
third quarter of 1996 from 3.92% for the third quarter of 1995, (ii) on SBA
loans sold to 1.23% for the third quarter of 1996 from 1.68% (which
includes the sale of unguaranteed portion of SBA loans) for the third
quarter of 1995 and (iii) on auto loans sold to 10.05% for the third
quarter of 1996 from 10.33% for the third quarter of 1995. There were no
sales of loans by the student loan division for the three months ended
September 30, 1996, compared to Excess Servicing Spread of 1.72% for the
third quarter of 1995.
Finance income, fees earned and other totaled $58.5 million for the third
quarter of 1996 an increase of 41% compared to $41.6 million for the third
quarter of 1995. The primary factor attributable to the growth in finance
income and fees is the increase in the Company's serviced loan portfolio of
43% to $11.2 billion at September 30, 1996, compared to $7.8 billion at
September 30, 1995.
Salaries and employee benefits increased 33% to $42.9 million for the
third quarter of 1996 from $32.3 million for the third quarter of 1995.
This increase was largely the result of additional staff needs for growth
in the home equity loan division, as well as new offices for the auto loan
division.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (CONT.)
Other operating expenses increased 75% to $52.4 million for the third
quarter of 1996, compared to $30.0 million for the third quarter of 1995.
The increase is primarily attributable to an increase in occupancy costs
and related office expenses totaling $3.4 million associated with the
opening of additional branch and administrative offices, advertising
expense of $7.9 million, professional fees of $2.6 million, primarily to
support enhancing the branch offices' computer system, and loan expenses of
$3.3 million as a result of the Company's growth in loan originations.
The provision for credit losses increased by 6% to $35.9 million for the
third quarter 1996 from $33.8 million for the third quarter of 1995.
Charge-offs, net of recoveries, increased 79% to $12.9 million for the
third quarter of 1996 compared to $7.2 million for the third quarter of
1995, due to the increase in the Company's serviced loan portfolio.
Interest expense increased 24% to $33.0 million for the third quarter of
1996, from $26.6 million for the third quarter of 1995. This increase
resulted from increases in notes payable used in part to fund the increase
in receivables.
Income taxes increased 65% to $15.3 million for the third quarter of 1996,
from $9.3 million for the third quarter of 1995, due to an increase in
pretax income.
LIQUIDITY AND CAPITAL RESOURCES
The Company's business requires continual access to short- and long-term
sources of debt financing and equity capital. The Company's cash
requirements arise from loan originations and purchases, advances and
reserve account deposits in securitizations, loan repurchases, repayment of
debt upon maturity, payment of operating and interest expenses and capital
expenditures. The Company's primary sources of liquidity are sales into
secondary markets of the loans it originates, long-term borrowing (senior
notes and subordinated debt), unsecured credit facilities, borrowing under
term loans and credit facilities secured by pledges of its loans, in most
cases until such loans are sold and the lenders can be repaid, and finance
income and fees generated by the serviced loan portfolio.
In order to continue to originate loans, the Company will need to maintain
and renew its various credit facilities at least at current levels, or
obtain new credit facilities to replace existing facilities and its long
term borrowing as they become due.
Cash and cash equivalents were $240.6 million at September 30, 1996, an
increase of $61.8 million from December 31, 1995. At September 30, 1996,
$143.4 million of cash and cash equivalents were restricted. These
restrictions are reduced as loans are liquidated. This increase resulted
from cash provided by financing activities of $452.5 million primarily
attributable to net proceeds from the issuance of 5.9 million shares of
the Company's common stock, the net proceeds of which were $122.1 million,
and the net increase in notes payables of $302.1 million offset by cash
used in operating activities and investing activities of $355.3 million and
$35.5 million, respectively.
The Company from time to time sells certain of its receivables, primarily
SBA loans and student loans, at a premium. This strategy does not
significantly effect reported earnings in the period of sales but allows
the Company to generate a higher level of cash flow from current
operations. Such a strategy also reduces the average Excess Servicing
Spread, thereby reducing cash flows received in the future.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (CONT.)
The Company began development of its new West Coast headquarters office
building located in West Sacramento, California in May 1996, with
completion expected in late 1997. The project, which includes the purchase
of land and building construction, is estimated to cost approximately $75.0
million, and will be funded out of the general working capital of the
Company. The 400,000 square foot building will help to centralize
operations and support additional staff from the anticipated growth of the
business.
At September 30, 1996, the Company had $2.4 billion of credit facilities
for warehousing loans which are subject to periodic renewal and are used to
finance loans after origination and prior to sale. Of the amount available
under these facilities $2.0 billion was unused at September 30, 1996. At
December 31, 1995, the Company had $1.6 billion of availability of credit
facilities for warehousing loans, of which $1.2 billion was unused. At
September 30, 1996, the Company had $407.3 million of warehouse notes
payable at a weighted average interest rate of 6.34%.
On August 16, 1996, the Company entered into a $400 million unsecured
Credit Facility. At September 30, 1996, outstanding advances under the
Credit Facility were $333.0 million with a weighted average interest rate
of 6.80%. In addition, at September 30, 1996, the Company had outstanding
$637.2 million of unsecured debt and $13.0 million of subordinated debt
which requires the Company to pay $13.0 million in the fourth quarter of
1996, $112.0 million in 1997, $40.0 million in 1998, $190.0 million in
1999, $110.0 million in 2000, $35.0 million in 2001 and $150.0 million in
2002. The unsecured senior notes and subordinated debt bear interest at
rates ranging from 7.63% to 12.00%, with a weighted average interest rate
of 8.64% at September 30, 1996.
The Company is required to comply with various operating and financial
covenants defined in the above agreements including covenants which may
restrict the Company's ability to pay dividends. At September 30, 1996,
under the most restrictive of these dividend covenants, the Company had
available $145.5 million for the payment of dividends.
On November 5, 1996, the Company completed an underwritten public offering
for 4.6 million shares of $1.72 Mandatory Convertible Preferred Stock. The
net proceeds of $117.9 million were used to pay down a portion of the
outstanding warehouse loans and the Credit Facility. On November 11, 1996,
the Underwriters informed the Company of their intent to exercise an over-
allotment option they had been granted for an additional 615,000 shares
which should result in an additional $15.8 million in net proceeds to the
Company. These proceeds will also be used to pay down additional
outstanding warehouse loans and the Credit Facility.
While the Company believes that it will be able to refinance or otherwise
repay its short term and unsecured debt in the normal course of its
business, there can be no assurance that the Company's existing lenders
will agree to refinance such debt, that other lenders will be willing to
extend lines of credit to the Company or that funds otherwise generated
from operations will be sufficient to satisfy such obligations. Future
financing may involve the issuance of additional common stock or other
securities, including securities convertible into or exercisable for common
stock.
13
<PAGE>
PART II OTHER INFORMATION
Item 2. Changes in Securities
(b) The right of the holders of the Company's common stock to
receive dividends has been limited by the Amendment to the
Restated Certificate of Incorporation of the Company
relating to the issuance of its $1.72 Mandatory
Convertible Preferred Stock (the "Amendment'). Generally,
the Amendment prohibits the payment of dividends on the
Company's common stock unless, among other things, full
dividends on all outstanding shares of Preferred Stock
have been paid or declared and set aside for payment.
Item 6. Exhibits and Reports on Form 8-K
(a) (1) The Amendment. Incorporated herein by reference to Exhibit
4.1 of the Company Form 8-K as filed with Securities and
Exchange Commission on October 31, 1996.
(2) The $400,000 Credit Agreement dated as of August 16, 1996
among the Company, as borrower, the various financial
institutions named therein, as lenders, First Union
National Bank of North Carolina, as documentation agent,
and The First National Bank of Chicago, as administrative
agent, as amended by Amendment No. 1 thereto, incorporated
hereby by reference to Exhibit 10.1 of the Company's Form
8-K as filed with the Securities and Exchange Commission
on October 31, 1996.
(b) The Company filed the following reports on Form 8-K during
the third quarter of 1996 and through the date hereof:
(1) On October 23, 1996, under Item 5, containing (i) the
Press Release that announced the Company's financial
results for the quarter ended September 30, 1996 and (ii)
the Press Release that announced the execution of an
agreement pursuant to which HFS Incorporated ("HFS")
selected The Money Store Inc. to be its preferred vendor
to provide qualified franchisees of HFS' hotel brands with
SBA and conventional loans.
(2) On October 30, 1996, under Item 5, containing (i) the
Amendment, (ii) the opinion of Eric R. Elwin, Esq.,
Corporate Counsel to Company, regarding legality of the
Preferred Stock, (iii) the opinion of Stroock & Stroock &
Lavan regarding tax matters and (iv) the Credit Agreement.
(3) On October 30, 1996, under Item 5, containing (i) the
Underwriting Agreement dated October 30, 1996 among the
Company, Prudential Securities Incorporated, Bear Stearns
& Co., Inc., Montgomery Securities and Oppenheimer & Co.,
Inc., as representatives of the several underwriters named
therein and (ii) the Pricing Agreement dated October 30,
1996 among the Company, Prudential Securities
Incorporated, Bear Stearns & Co., Inc., Montgomery
Securities and Oppenheimer & Co., Inc., as representatives
of the several underwriters named in the Underwriting
Agreement.
14
<PAGE>
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.
The Money Store Inc.
--------------------
(Registrant)
By: /s/ James K. Ransom
-------------------------------
James K. Ransom
Vice President and
Principal Accounting Officer
Dated: November 13, 1996
15
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