<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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, 1997
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
001-10785
---------
THE MONEY STORE INC.
(Exact name of registrant as specified in its charter)
New Jersey 22-2293022
---------- ----------
(State of other jurisdiction of (I.R.S.employer
incorporation or organization) Identification No.)
2840 Morris Avenue, Union, New Jersey 07083
------------------------------------- -----
(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 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 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:
As of November 6, 1997, the number of shares outstanding of the registrant's
class of common stock were 58,292,335 shares.
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<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1997
Table of Contents PAGE
- ----------------- ----
PART I FINANCIAL INFORMATION
- ----------------------------
Item 1 - Financial Statements
Consolidated Statements of Financial Condition at
September 30, 1997 and December 31, 1996 1
Consolidated Statements of Income for the three and nine months
ended September 30, 1997 and 1996 2
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1997 and 1996 3
Notes to Consolidated Financial Statements 4-17
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 18-27
PART II - OTHER INFORMATION
- ---------------------------
Item 5 - Other Information 28
Item 6 - Exhibits and Reports on Form 8-K 28
<PAGE>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
THE MONEY STORE INC. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
(Dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Assets
------ September 30, December 31,
1997 1996
-------------- --------------
<S> <C> <C>
Cash and cash equivalents (including $203,840 and
$170,079 in 1997 and 1996 which are restricted) $ 328,598 $ 321,703
Receivables, net of allowance for credit losses of
$20,842 and $19,895 in 1997 and 1996 1,601,138 1,385,934
Interest-only strip receivables, net of allowance for
credit losses of $334,363 and $220,085 in 1997 and 1996 826,329 586,300
Property and equipment, net 122,041 73,458
Other 26,015 24,545
-------------- --------------
$2,904,121 $ 2,391,940
============== ==============
Liabilities and Shareholders' Equity
-----------------------------------
Liabilities:
Notes payable $1,614,298 $ 1,319,197
Accounts payable and other liabilities 443,539 333,283
Income taxes, principally deferred 166,940 147,197
Unearned insurance commissions 8,449 7,754
-------------- --------------
2,233,226 1,807,431
-------------- --------------
Subordinated debt 2,000 2,000
-------------- --------------
Commitments and contingencies (Note 2)
Shareholders' equity:
Preferred stock, no par; authorized
10,000,000 shares; issued and outstanding
5,215,000 of $1.72 mandatory convertible shares in
1997 and 1996 (aggregate liquidation preference of $138,198) 133,363 133,363
Common stock, no par; authorized 250,000,000 shares;
issued and outstanding 58,278,091
shares in 1997 and 57,791,436 in 1996 195,215 188,276
Foreign currency translation adjustments 2 -
Retained earnings 340,315 260,870
-------------- --------------
668,895 582,509
-------------- --------------
$2,904,121 $ 2,391,940
============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE>
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,
1997 1996 1997 1996
-------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues:
Gain on sale of receivables, including net
unrealized gain on valuation of interest-only strips $ 174,545 $ 112,424 $ 422,431 $ 276,933
Finance income, fees earned and other 72,623 58,483 214,479 175,791
-------------- --------------- -------------- --------------
247,168 170,907 636,910 452,724
-------------- --------------- -------------- --------------
Expenses:
Salaries and employee benefits 64,800 42,892 172,088 117,001
Other operating expenses 76,251 52,372 190,767 138,527
Interest 39,584 32,993 105,253 91,426
Provision for credit losses on loans not sold 7,679 4,593 14,044 12,312
-------------- --------------- -------------- --------------
188,314 132,850 482,152 359,266
-------------- --------------- -------------- --------------
Income before income taxes 58,854 38,057 154,758 93,458
Income taxes 23,800 15,337 62,781 37,637
-------------- --------------- -------------- --------------
Net income $ 35,054 $ 22,720 $ 91,977 $ 55,821
============== =============== ============== ==============
Net income per common share:
Primary $ 0.55 $ 0.38 $ 1.44 $ 0.95
============== =============== ============== ==============
Fully diluted $ 0.54 $ 0.38 $ 1.42 $ 0.95
============== =============== ============== ==============
Weighted average number of shares outstanding:
Primary 60,018,900 59,090,793 59,369,690 58,629,987
============== =============== ============== ==============
Fully diluted 65,233,900 59,346,543 64,771,520 58,889,385
============== =============== ============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30,
1997 1996
--------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 91,977 $ 55,821
Adjustments to reconcile net income to net
cash used in operations:
Provision for deferred income taxes 35,509 42,934
Depreciation and amortization 15,183 8,787
Provision for credit losses on loans not sold 14,044 12,312
Net unrealized gain on valuation of interest-only strips (49,631) -
Net changes in operating assets and liabilities:
Proceeds from loans sold 5,257,022 3,856,057
Loans originated and purchased (5,453,372) (4,039,226)
Loans repurchased (3,290) (5,500)
Other increases in receivables (29,607) (133,184)
Net increase in interest-only strip receivables, net (190,398) (123,023)
Net increase (decrease) in accounts payable and other
liabilities 25,529 (10,369)
Other, net (7,663) (17,850)
--------------- --------------
Net cash used in operating activities (294,697) (353,241)
--------------- --------------
Cash flows from investing activities:
Purchase of property and equipment (61,479) (35,446)
Payment for purchase of servicing company, net of cash
acquired (2,422) -
Payment for purchase of assets of mortgage company (2,200) -
--------------- --------------
Net cash used in investing activities (66,101) (35,446)
--------------- --------------
Cash flows from financing activities:
Net increase in secured and unsecured credit facilities 127,121 302,124
Principal payments on unsecured notes (132,020) -
Proceeds from unsecured notes 300,000 -
Debt issuance costs (2,953) (1,413)
Principal payments on subordinated debt - (11,000)
Net increase in collections payable 84,727 41,315
Net proceeds from issuance of common stock - 122,075
Proceeds from exercise of stock options 3,350 1,317
Dividends paid (12,532) (3,954)
--------------- --------------
Net cash provided by financing activities 367,693 450,464
--------------- --------------
Net increase in cash and cash equivalents 6,895 61,777
Cash and cash equivalents at beginning of period 321,703 178,781
--------------- --------------
Cash and cash equivalents at end of period $ 328,598 $ 240,558
=============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
The Money Store Inc. together with its subsidiaries (the "Company") is a
financial services company engaged in the business of originating (including
purchasing), selling and servicing consumer and commercial loans of specified
types and offering related services. Loans originated by the Company primarily
consist of: (i) fixed and adjustable rate loans secured by mortgages on
residential real estate and loans which allow consumers to borrow up to 125% of
the value of their homes ("125 LTV Loans"), (collectively "Home Equity Loans");
which include FHA Title I home improvement loans ("FHA Title I Loans") insured
by the Federal Housing Authority (the "FHA") of the United States Department of
Housing and Urban Development ("HUD") and other home improvement loans not
insured by FHA ("Conventional Home Improvement Loans" and; collectively with FHA
Title I Loans, "Home Improvement Loans"); (ii) loans guaranteed in part ("SBA
Loans") by the United States Small Business Administration (the "SBA") and
commercial loans generally secured by first mortgages ("Small Business Loans"
and, together with SBA Loans, "Commercial Loans"); (iii) government-guaranteed
student loans ("Student Loans"); and (iv) motor vehicle retail installment sale
contracts purchased from automobile dealers ("Auto Loans").
BASIS OF FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements include the accounts of The Money
Store Inc. and its subsidiaries, all of which are wholly-owned. All significant
intercompany accounts and transactions have been eliminated in consolidation.
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, 1996
audited consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996.
In the opinion of management all adjustments (which include 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 the full year.
4
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Adoption of New Accounting Policies
On January 1, 1997, the Company adopted Statement of Financial Accounting
Standard ("FAS") No. 125 ("FAS 125"), ACCOUNTING FOR TRANSFERS AND SERVICING OF
FINANCIAL ASSETS AND EXTINGUISHMENT OF LIABILITIES. This statement provides
guidance for distinguishing transfers of financial assets that are sales from
transfers that are secured borrowings. FAS 125 supersedes FAS 76, 77 and 122,
while amending both FAS 65 and 115. The statement is to be applied
prospectively and earlier implementation was not permitted.
Pursuant to FAS 125 a transfer of financial assets in which control is
surrendered is accounted for as a sale to the extent that consideration other
than beneficial interests in the transferred assets is received in the exchange.
Liabilities and derivatives incurred or obtained by the transfer of financial
assets are required to be measured at fair value, if practicable. Also,
servicing assets and other retained interests in the transferred assets must be
measured by allocating the previous carrying value between the asset sold and
the interest retained, if any, based on their relative fair values at the date
of transfer. For each servicing contract in existence before January 1, 1997,
previously recognized servicing rights and excess servicing receivables that do
not exceed contractually specified servicing fees are required to be combined,
net of any previously recognized servicing obligations under that contract, as a
servicing asset or liability. Previously recognized servicing receivables that
exceed contractually specified servicing fees are required to be reclassified as
interest-only strip receivables and the allowance for credit losses on loans
sold will be reclassified as a reduction of these receivables.
FAS 125 also requires an assessment of interest-only strips, loans, other
receivables and retained interests in securitizations. If these assets can be
contractually prepaid or otherwise settled such that the holder would not
recover substantially all of its recorded investment, the assets will be
measured like available-for-sale securities or trading securities under FAS
115. This assessment is required for financial assets held on or acquired after
January 1, 1997.
REVENUE RECOGNITION
(a) GAIN ON SALE OF RECEIVABLES, INCLUDING NET UNREALIZED GAIN ON VALUATION OF
INTEREST-ONLY STRIPS
Gain on sale of receivables represents the difference between the proceeds
(including premiums) from the sale, net of related transaction costs, and the
allocated carrying amount of the loans sold. The allocated carrying amount is
determined by allocating the original amount of loans (including premiums paid
on loans purchased) between the portion sold and any retained interests
(interest-only strip receivables) based on their relative fair values at the
date of sale. The net unrealized gains on valuation of interest-only strips
include the recognition of unrealized gains which represents the initial
difference between the allocated carrying amount of loans sold and their fair
market value. In addition, gain on sale includes non-refundable fees on loans
sold and gains or losses on certain transactions structured as an economic
hedge. The Company recognizes such gain on sale of loans on the settlement
date.
5
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(UNAUDITED)
REVENUE RECOGNITION (CONTINUED)
(b) FINANCE INCOME
Finance income includes (i) servicing compensation; (ii) the difference
between the present value of the interest-only strip and the actual cash
collected; (iii) interest income on loans retained by the Company and (iv)
miscellaneous fee income.
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 assumed conversion of the
Company's outstanding $1.72 mandatory convertible preferred stock to the extent
it is dilutive, and the assumed exercise of stock options.
Reclassification
Certain financial statement captions reported in the audited Consolidated
Statement of Financial Condition as of December 31, 1996, the Consolidated
Statements of Income for the three and nine months ended September 30, 1996 and
the Consolidated Statement of Cash Flow for the nine months ended September 30,
1996, as well as the 1996 Subsidiary Guarantors' condensed consolidating
financial data presented in Note 3 have been reclassified to conform to the
presentation of the 1997 consolidated financial statements, which reflects
adoption of FAS 125.
Acquisitions
On May 14, 1997, the Company acquired 100% of the stock of
Platform Home Loans Ltd., a United Kingdom ("U.K.") servicer of mortgage loans
which was accounted for as a purchase transaction. This acquisition resulted in
the recognition of $2,000,000 of goodwill which is being amortized using the
straight-line method over five years and is included in other assets.
On August 14, 1997, the Company acquired substantially all of the assets of
Integrated Capital Group, an originator and seller of mortgage loans which
was accounted for as a purchase transaction. The amount of $1,450,000 paid in
excess of the assets purchased represents a covenant not to compete which is
being amortized using the straight-line method over three years and is included
in other assets.
FOREIGN CURRENCY TRANSLATION
All assets and liabilities of the U.K. subsidiaries are translated into
U.S. dollars at the rate in effect as of the date of the financial statements.
Income and expense items are translated at the weighted average exchange rate
for the period. The resulting translation adjustments are recorded as a
component of shareholders' equity.
6
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
RECENT ACCOUNTING DEVELOPMENTS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
FAS 128, EARNINGS PER SHARE, and FAS 129, DISCLOSURE OF INFORMATION ABOUT
CAPITAL STRUCTURE.
FAS 128 establishes standards for computing and presenting earnings per
share ("EPS"), and applies to entities with publicly held common stock or
potential common stock. This statement simplifies the standards for computing
EPS previously found in Accounting Principles Board Opinion No.
15, EARNINGS PER SHARE, and makes them comparable to international EPS
standards. It replaces the presentation of primary EPS with a presentation of
basic EPS. It also requires dual presentation of basic and diluted EPS on the
face of the income statement for all entities with complex capital structures,
and requires a reconciliation of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS computation.
The adoption of this statement is not expected to have a material effect on the
Company's financial statements.
FAS 129 lists required disclosures about capital structure that had been
included in a number of previously existing, separate, statements and opinions.
Both of these statements are effective for financial statements issued for
periods ending after December 15, 1997.
In June 1997, the FASB issued FAS 130, REPORTING COMPREHENSIVE INCOME, and
FAS 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION.
FAS 130 establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains, and losses) in a full set
of general-purpose financial statements. It does not, however, specify when to
recognize or how to measure items that make up comprehensive income. FAS 130 was
issued to address the concerns over the practice of reporting elements of
comprehensive income directly in equity.
FAS 131 establishes standards for the way public business enterprises are
to report information about operating segments in annual financial statements,
and requires those enterprises to report selected information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers.
FAS 130 is effective for financial statements issued for periods beginning
after December 15, 1997. FAS 131 is effective for financial statements issued
for years beginning after December 15, 1997.
7
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(UNAUDITED)
(2) COMMITMENTS, CONTINGENCIES AND CONCENTRATION OF CREDIT RISK
The Company began development of an office building located in West
Sacramento, California in May 1996, with completion expected in 1998. This
project, which includes the purchase of land and building construction, is
estimated to cost approximately $85,000,000, and will be funded out of the
general working capital of the Company. In addition, capitalized expenditures
to complete the building for occupancy are anticipated to be approximately
$10,000,000. Total expenditures to date are $54,232,000. The 400,000 square
foot building will help to centralize operations and support additional staff
for the anticipated growth of the business.
The Company has provided revolving credit facilities to various originators
of home equity loans. These facilities provide the originators with warehouse
financing prior to the sale of loans, usually to the Company. These agreements,
which are subject to renewal periodically, bear interest at rates primarily
between prime plus 2.00% and 2.50% and are collateralized by the loans. Upon
sale of the loans, the advances are repaid. At September 30, 1997, the Company
has made available to originators, lines of credit of approximately
$103,600,000. At September 30, 1997 and December 31, 1996, advances outstanding
are $17,748,000 and $8,291,000, respectively, and are included in Receivables,
net.
In certain securitization transactions, the Company subordinates a portion
of its interest in excess cash flows to the interest of investors. The
investors' protection from losses is provided by the subordination of the
Company's cash flows including among other methods, various combinations of cash
deposits provided by the Company, subordination accounts and credit enhancement
provided by third parties. At September 30, 1997, $203,840,000 of cash deposits
held in interest-bearing accounts are restricted, and $322,465,000 is advanced
in connection with subordination accounts and is included in Receivables, net.
In senior subordinated structures, the senior certificate holders are protected
from losses by outstanding subordinated certificates and credit enhancements
provided by third parties, and in some cases the limited guarantee of the
Company.
In certain securitizations, limited guarantees are provided by the Company
as credit enhancement. During the second quarter of 1997, the Company completed
two asset-backed securitizations, one collateralized by Commercial Loans, and
the other by Home Equity Loans which employed a senior/subordinate structure
with the subordinate bonds enhanced by a limited guarantee by the Company. At
September 30, 1997, these limited guarantees amounted to approximately
$14,000,000.
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 it
to sell loans to certain trusts in the future at an agreed upon price. At
September 30, 1997, under the terms of such agreements the Company had the right
to deliver $271,345,000 of Home Equity Loans, $15,925,000 of Commercial Loans
and $14,409,000 of Auto Loans, within approximately 90 days of such date.
In addition, the Company from time to time purchases and sells government
securities at agreed upon prices as an economic hedge. Gains and losses on
these transactions, which are included in the Gain on sale of receivables
amounted to ($16,190,000) and $3,960,000 for the nine months ended September 30,
1997 and 1996, respectively.
8
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(UNAUDITED)
(2) COMMITMENTS, CONTINGENCIES AND CONCENTRATION OF CREDIT RISK (CONTINUED)
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 $44,280,000 of Home Equity Loans
at September 30, 1997 which the Company may be required to repurchase in the
future should such loans become more than 90 days past due.
The Company's serviced loan portfolio is widely dispersed. At September
30, 1997, loans to borrowers in the State of California accounted for
approximately 19% of total serviced loan portfolio, while no other state
accounted for more than 7%.
In the normal course of business, the Company is subject to various legal
proceedings and claims, the resolution of which will not in management's
opinion, have a material adverse effect on the consolidated financial position
or results of operations of the Company.
(3) SUBSIDIARY GUARANTORS
On April 15, 1997, The Company completed a public offering of $175,000,000
of 8.05% senior notes due 2002 and $125,000,000 of 8.375% senior notes due 2004
(collectively the "Senior Notes"). The Senior Notes constitute unsecured and
unsubordinated senior indebtedness of the Company. The Senior Notes are fully
and unconditionally guaranteed (the "Subsidiary Guarantees") on a senior
unsecured, joint and several, basis by certain of the Company's wholly-owned
subsidiaries (the "Guarantors"), although the Subsidiary Guarantees may
terminate prior to maturity of the Senior Notes upon the occurrence of certain
circumstances. The Senior Notes rank equally in right of payment, on a pari
passu basis, with all existing and future unsecured and unsubordinated
indebtedness and guarantees of the Guarantors. The ability of the Company's
subsidiaries to pay dividends or make payments on intercompany indebtedness will
be subject to applicable state laws. The net proceeds of this offering were
used to repay a portion of the indebtedness outstanding under certain credit
facilities.
The following condensed consolidating financial data illustrate the
composition of the combined Guarantors. The Company believes that providing the
condensed consolidating information is of material interest to potential
investors in the Senior Notes and has not presented separate financial
statements for each of the Guarantors because it was deemed that such financial
statements would not provide potential investors with any material additional
information.
Investments in subsidiaries are accounted for by the parent and Subsidiary
Guarantors on the equity method for the purposes of the consolidating financial
data. Earnings of subsidiaries are therefore reflected in the parent's and
Subsidiary Guarantor's investment accounts and earnings. The principal
elimination entries eliminate investments in subsidiaries and intercompany
balances and transactions.
9
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
(3) SUBSIDIARY GUARANTORS (CONTINUED)
<TABLE>
<CAPTION>
Consolidating Statements of Financial Condition
September 30, 1997
(Dollars in thousands)
Combined Combined
Parent Guarantor Non-Guarantor
Assets Company Subsidiaries Subsidiaries Eliminations Consolidated
------------ -------------- -------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 231,296 $ (68,792) $ 166,094 $ - $ 328,598
Receivables, net 575 981,827 618,736 - 1,601,138
Interest-only strip receivables, net - - 826,329 - 826,329
Investment in subsidiaries 465,977 3,616 - (469,593) -
Property and equipment, net - 120,240 1,801 - 122,041
Other 6,386 18,825 804 - 26,015
------------ -------------- -------------- -------------- ------------
$ 704,234 $ 1,055,716 $ 1,613,764 $ (469,593) $ 2,904,121
============ ============== ============== ============== ============
Liabilities and Shareholders' Equity
------------------------------------
Liabilities:
Notes payable $ 1,607,450 $ 6,848 $ - $ - $ 1,614,298
Accounts payable and other liabilities 21,567 404,985 16,987 - 443,539
Income taxes, principally deferred (61,934) 203,766 25,108 - 166,940
Unearned insurance commissions - 8,449 - - 8,449
Due to (from) parent and affiliates (1,533,742) 53,376 1,480,442 (76) -
------------ -------------- -------------- -------------- ------------
33,341 677,424 1,522,537 (76) 2,233,226
------------ -------------- -------------- -------------- ------------
Subordinated debt 2,000 - - - 2,000
------------ -------------- -------------- -------------- ------------
Shareholders' equity:
Preferred stock 133,363 - - - 133,363
Common stock 195,215 23,713 3,190 (26,903) 195,215
Additional paid-in capital - 12,553 47,897 (60,450) -
Foreign currency translation -
adjustments - 2 - - 2
Retained earnings 340,315 342,024 40,140 (382,164) 340,315
------------ -------------- -------------- -------------- -----------
668,893 378,292 91,227 (469,517) 668,895
------------ -------------- -------------- -------------- -----------
$ 704,234 $ 1,055,716 $ 1,613,764 $ (469,593) $ 2,904,121
============ ============== ============== ============== ===========
</TABLE>
10
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
(3) SUBSIDIARY GUARANTORS (CONTINUED)
Consolidating Statements of Financial Condition
December 31, 1996
(Dollars in thousands)
<TABLE>
<CAPTION>
Combined Combined
Parent Guarantor Non-Guarantor
Assets Company Subsidiaries Subsidiaries Eliminations Consolidated
----------- --------------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 194,532 $ (40,968) $ 168,139 $ - $ 321,703
Receivables, net - 964,259 421,675 - 1,385,934
Interest-only strip receivables, net - - 586,300 - 586,300
Investment in subsidiaries 367,246 2,684 - (369,930) -
Property and equipment, net - 71,636 1,822 - 73,458
Other 5,204 18,516 825 - 24,545
----------- --------------- ------------- ------------ -------------
$ 566,982 $ 1,016,127 $ 1,178,761 $ (369,930) $ 2,391,940
=========== ===========================================================
Liabilities and Shareholders' Equity
------------------------------------
Liabilities:
Notes payable $ 1,315,394 $ 3,803 $ - $ - $ 1,319,197
Accounts payable and other liabilities 21,926 303,207 8,150 - 333,283
Income taxes, principally deferred (20,568) 147,545 20,220 - 147,197
Unearned insurance commissions - 7,754 - - 7,754
Due to (from) parent and affiliates (1,334,279) 267,245 1,067,106 (72) -
----------- --------------- ------------- ------------ -------------
(17,527) 729,554 1,095,476 (72) 1,807,431
----------- -----------------------------------------------------------
Subordinated debt 2,000 - - - 2,000
----------- --------------- ------------- ------------ -------------
Shareholders' equity:
Preferred stock 133,363 - - - 133,363
Common stock 188,276 20,413 3,190 (23,603) 188,276
Additional paid-in capital - 9,103 47,897 (57,000) -
Retained earnings 260,870 257,057 32,198 (289,255) 260,870
----------- --------------- ------------- ------------ -------------
582,509 286,573 83,285 (369,858) 582,509
----------- --------------- ------------- ------------- -------------
$ 566,982 $ 1,016,127 $ 1,178,761 $ (369,930) $ 2,391,940
=========== =============== ============ ============= =============
</TABLE>
11
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(3) SUBSIDIARY GUARANTORS (CONTINUED)
<TABLE>
<CAPTION>
Consolidating Statements of Income
Three Months ended September 30, 1997
(Dollars in thousands)
Combined Combined
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
------------- ---------------- --------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Revenues:
Gain on sale of receivables, including
net unrealized gain on valuation of
interest-only strips $ - $ 174,389 $ 156 $ - $ 174,545
Finance income, fees earned and other 1,845 61,623 9,155 - 72,623
------------- ---------------- --------------- ------------- -----------
1,845 236,012 - 9,311 - - - 247,168
------------- ---------------- --------------- ------------- -----------
Expenses:
Operating expenses 1,063 139,980 7,687 - 148,730
Interest 782 35,305 3,497 - 39,584
------------- ---------------- --------------- ------------- -----------
1,845 175,285 - 11,184 - - - 188,314
------------- ---------------- --------------- ------------- -----------
Income (loss) before income taxes and
undistributed income of subsidiaries - 60,727 (1,873) - 58,854
Income taxes (credit) - 24,664 (864) - 23,800
Equity in undistributed income (loss)
of subsidiaries 35,054 (172) - (34,882) -
------------- ---------------- --------------- ------------- -----------
Net income (loss) $ 35,054 $ 35,891 $ (1,009) $ (34,882) $ 35,054
============= ================ =============== ============= ===========
</TABLE>
12
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
(3) SUBSIDIARY GUARANTORS (CONTINUED)
<TABLE>
<CAPTION>
Consolidating Statements of Income
Three Months ended September 30, 1996
(Dollars in thousands)
Combined Combined
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
------------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Revenues:
Gain on sale of receivables $ - $ 112,725 $ (301) $ - $ 112,424
Finance income, fees earned and other 2,326 48,858 7,299 - 58,483
------------- ----------- ----------- ------------ -----------
2,326 161,583 6,998 - 170,907
------------- ----------- ----------- ------------ -----------
Expenses:
Operating expenses 1,167 93,295 5,395 - 99,857
Interest 1,159 29,784 2,050 - 32,993
------------- ----------- ----------- ------------ -----------
2,326 123,079 7,445 - 132,850
------------- ----------- ----------- ------------ -----------
Income (loss) before income taxes and
undistributed income of subsidiaries - 38,504 (447) - 38,057
Income taxes (credit) - 15,437 (100) - 15,337
Equity in undistributed income of
subsidiaries 22,720 390 - (23,110) -
------------- ----------- ----------- ------------ -----------
Net income (loss) $ 22,720 $ 23,457 $ (347) $ (23,110) $ 22,720
============= =========== =========== ============ ===========
</TABLE>
13
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(3) SUBSIDIARY GUARANTORS (CONTINUED)
<TABLE>
<CAPTION>
Consolidating Statements of Income
Nine Months ended September 30, 1997
(Dollars in thousands)
Combined Combined
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
----------- ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Revenues:
Gain on sale of receivables, including
net unrealized gain on valuation of
interest-only strips $ - $ 405,353 $ 17,078 $ - $ 422,431
Finance income, fees earned and other 4,920 183,086 26,473 - 214,479
----------- ----------- ------------ ------------ -----------
4,920 588,439 43,551 - 636,910
----------- ----------- ------------ ------------ -----------
Expenses:
Operating expenses 3,671 352,767 20,461 - 376,899
Interest 1,249 94,013 9,991 - 105,253
----------- ----------- ------------ ------------ -----------
4,920 446,780 30,452 - 482,152
----------- ----------- ------------ ------------ -----------
Income before income taxes and
undistributed income of subsidiaries - 141,659 13,099 - 154,758
Income taxes - 57,624 5,157 - 62,781
Equity in undistributed income of subsidiaries 91,977 932 - (92,909) -
----------- ----------- ------------ ------------ -----------
Net income $ 91,977 $ 84,967 $ 7,942 $ (92,909) $ 91,977
=========== =========== ============ ============ ===========
</TABLE>
14
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(3) SUBSIDIARY GUARANTORS (CONTINUED)
<TABLE>
<CAPTION>
Consolidating Statements of Income
Nine Months ended September 30, 1996
(Dollars in thousands)
Combined Combined
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
----------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues:
Gain on sale of receivables $ 294 $ 262,171 $ 14,468 $ - $ 276,933
Finance income, fees earned and other 4,533 151,874 19,384 - 175,791
----------- ----------- ------------ ----------- -----------
4,827 414,045 33,852 - 452,724
----------- ----------- ------------ ----------- -----------
Expenses:
Operating expenses 3,276 250,066 14,498 - 267,840
Interest 1,551 83,152 6,723 - 91,426
----------- ----------- ------------ ----------- -----------
4,827 333,218 21,221 - 359,266
----------- ----------- ------------ ----------- -----------
Income before income taxes and
undistributed income of subsidiaries - 80,827 12,631 - 93,458
Income taxes - 32,482 5,155 - 37,637
Equity in undistributed income of
subsidiaries 55,821 873 - (56,694) -
----------- ----------- ------------ ----------- -----------
Net income $ 55,821 $ 49,218 $ 7,476 $ (56,694) $ 55,821
=========== =========== ============ =========== ===========
</TABLE>
15
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(3) SUBSIDIARY GUARANTORS (CONTINUED)
<TABLE>
<CAPTION>
Consolidating Statements of Cash Flows
Nine Months ended September 30, 1997
(Dollars in thousands)
Combined Combined
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
---------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $ 91,977 $ 84,967 $ 7,942 $ (92,909) $ 91,977
Adjustments to reconcile net income to net
cash used in operations:
Equity in undistributed income of
subsidiaries (91,977) (932) - 92,909 -
Provision for deferred income taxes - 32,790 2,719 - 35,509
Depreciation and amortization 1,817 12,905 461 - 15,183
Provision for credit losses on loans not
sold - 13,720 324 - 14,044
Net unrealized gain on valuation of
interest-only strips - - (49,631) - (49,631)
Net changes in operating assets
and liabilities:
Proceeds from loans sold - 4,942,310 314,712 - 5,257,022
Loans originated and purchased - (5,031,951) (421,421) - (5,453,372)
Loans repurchased - (3,290) - - (3,290)
Other (increases) decreases in
receivables (575) 61,885 (90,917) - (29,607)
Net increase in interest-only strip
receivables, net - - (190,398) - (190,398)
Net (increase) decrease in accounts
payable and other liabilities (359) 23,250 2,638 - 25,529
Other, net (37,823) 27,729 2,431 - (7,663)
---------- ----------- ---------- ---------- -----------
Net cash used in operating activites (36,940) 163,383 (421,140) - (294,697)
---------- ----------- ---------- ---------- -----------
Cash flows from investing activities:
Purchase of property and equipment - (61,039) (440) - (61,479)
Payment for purchase of servicing
company, net of cash acquired - (2,422) - - (2,422)
Payment for purchase of assets of
mortgage company - (2,200) - - (2,200)
Investment in and advances to subsidiaries (206,217) (207,119) 413,336 - -
---------- ----------- ---------- ---------- -----------
Net cash used in investing activites (206,217) (272,780) 412,896 - (66,101)
---------- ----------- ---------- ---------- -----------
Cash flows from financing activities:
Net increase in secured and
unsecured credit facilities 124,076 3,045 - - 127,121
Principal payments on unsecured notes (132,020) - - - (132,020)
Proceeds from unsecured notes 300,000 - - - 300,000
Debt issuance costs (2,953) - - - (2,953)
Net increase in collections payable - 78,528 6,199 - 84,727
Proceeds from exercise of stock options 3,350 - - - 3,350
Dividends paid (12,532) - - - (12,532)
---------- ----------- ---------- ---------- -----------
Net cash provided by financing activities 279,921 81,573 6,199 - 367,693
---------- ----------- ---------- ---------- -----------
Net increase (decrease) in cash and cash
equivalents 36,764 (27,824) (2,045) - 6,895
Cash and cash equivalents at the beginning of period 194,532 (40,968) 168,139 - 321,703
---------- ----------- ---------- ---------- -----------
Cash and cash equivalents at the end of period $ 231,296 $ (68,792) $ 166,094 $ - $ 328,598
========== =========== ========== ========== ===========
</TABLE>
16
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(3) Subsidiary Guarantors(continued)
<TABLE>
<CAPTION>
Consolidating Statements of Cash Flows
Nine Months ended September 30, 1996
(Dollars in thousands)
Combined Combined
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
---------- ------------ ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $ 55,821 $ 49,218 $ 7,476 $ (56,694) $ 55,821
Adjustments to reconcile net income to net
cash used in operations:
Equity in undistributed income of
subsidiaries (55,821) (873) - 56,694 -
Provision for deferred income taxes - 37,182 5,752 - 42,934
Depreciation and amortization 1,844 6,604 339 - 8,787
Provision for credit losses on loans
not sold - 12,341 (29) - 12,312
Net change in operating assets
and liabilities:
Proceeds from loans sold - 3,541,746 314,311 - 3,856,057
Loans originated and purchased - (3,728,773) (310,453) - (4,039,226)
Loans repurchased - (5,500) - - (5,500)
Other increases in
receivables (2,550) (96,012) (34,622) - (133,184)
Net increase in interest-only
strip receivables, net - - (123,023) - (123,023)
Net increase (decrease) in
accounts payable and other
liabilities (10,988) 739 (120) - (10,369)
Other, net (8,925) (18,388) 9,463 - (17,850)
---------- ------------ ---------- ---------- ------------
Net cash used in operating activites (20,619) (201,716) (130,906) - (353,241)
---------- ------------ ---------- ---------- ------------
Cash flows from investing activities:
Purchase of property and equipment - (35,248) (198) - (35,446)
Investment in and advances to subsidiaries (374,419) 189,977 184,442 - -
---------- ------------ ---------- ---------- ------------
Net cash used in investing activites (374,419) 154,729 184,244 - (35,446)
---------- ------------ ---------- ---------- ------------
Cash flows from financing activities:
Net increase (decrease) in secured and
unsecured credit facilities 302,185 (61) - - 302,124
Debt issuance costs (1,413) - - - (1,413)
Principal payments on subordinated debt (11,000) - - - (11,000)
Increase (decrease) in collections payable - 41,646 (331) - 41,315
Net proceeds from issuance of common stock 122,075 - - - - 122,075
Proceeds from exercise of stock options 1,317 - - - - - 1,317
Dividends paid (3,954) - - - (3,954)
---------- ------------ ---------- ---------- ------------
Net cash provided by financing activities 409,210 41,585 (331) - 450,464
---------- ------------ ---------- ---------- ------------
Net increase (decrease) in cash and cash
equivalents 14,172 (5,402) 53,007 - 61,777
Cash and cash equivalents at the beginning of period 168,367 (61,393) 71,807 - 178,781
---------- ------------ ---------- ---------- ------------
Cash and cash equivalents at the end of period $ 182,539 $ (66,795) $ 124,814 $ - $ 240,558
========== ============ ========== ========== ============
</TABLE>
17
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements under this caption constitute "forward-looking
statements" under the Private Securities Litigation Reform Act of 1995 which
involve risks and uncertainties. The Company's actual results may differ
materially from the results discussed in such forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
economic conditions, competition in the geographic and business areas in which
the Company conducts its operations, fluctuations in interest rates, credit
quality and government regulation.
ADOPTION OF NEW ACCOUNTING POLICIES
See Note 1 to consolidated financial statements for the adoption of new
accounting policies.
RECENT ACCOUNTING DEVELOPMENTS
See Note 1 to consolidated financial statements for recent accounting
developments.
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 receivables. The
calculation of the gain on sale is determined in part by the allocation of fair
market value between the loans sold and the retained interest (interest-only
strip receivables). The calculation of the fair value of the interest-only
strip receivables utilizes certain estimates made by management at the time
loans are sold. These estimates include the following: (i) discount rate used
to calculate present value; (ii) rate of prepayment; (iii) adequate servicing
compensation; and (iv) the provision for credit losses on loans 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 estimates. The timing of sales of the Company's
loans may impact the Company's earnings from quarter to quarter.
18
<PAGE>
CERTAIN ACCOUNTING CONSIDERATIONS (CONTINUED)
The following chart presents certain weighted average estimates used in the
calculation of the interest-only strip receivables:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Discount rates:
Home Equity Loans 12.0% 11.5% 11.7% 11.2%
Commercial Loans 10.6% 10.4% 10.5% 10.5%
Student Loans (4) 8.0% - 8.3% 8.2%
Auto Loans 12.0% 12.0% 12.0% 12.0%
Prepayment rates:
Home Equity Loans (1) 25% 25% 25% 25%
Commercial Loans (1) 9% 9% 9% 9%
Student Loans (1) (3) (4) 4% - 4% 3%
Auto Loans (2) 1.9% 1.7% 1.9% 1.7%
Adequate servicing compensation:
Home Equity Loans 0.39% 0.35% 0.37% 0.35%
Commercial Loans 0.40% 0.40% 0.40% 0.40%
Student Loans (3) (4) 0.81% - 0.86% 0.82%
Auto Loans 2.50% 2.50% 2.50% 2.50%
Spreads:
Home Equity Loans 4.86% 3.73% 4.46% 3.42%
Commercial Loans 2.48% 1.23% 2.25% 1.93%
Student Loans (4) 2.16% - 1.83% 1.41%
Auto Loans 10.23% 10.05% 10.19% 9.86%
</TABLE>
(1) Represents an annual prepayment rate (CPR).
(2) Represents a monthly rate based on original principal balance
(ABS).
(3) Represents an average of in-school and repayment periods.
(4) There were no sales of loans by the Student Loan division for
the three months ended September 30, 1996.
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 loans; (iii) the Company from time to time
purchases and sells government securities at agreed upon prices as an economic
hedge; 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.
19
<PAGE>
FINANCIAL CONDITION
September 30, 1997
Cash and cash equivalents increased $6.9 million, to $328.6 million at
September 30, 1997 from $321.7 million at December 31, 1996. This is a result
of net cash provided by financing activities offset in part by net cash used in
operating activities and investing activities.
Receivables, net increased $215.2 million to $1.6 billion at September 30,
1997 from $1.4 billion at December 31, 1996. The increase is primarily due to
increases in loans held for sale, accrued interest receivable, advances made in
connection with certain securitizations and advances on revolving credit
facilities to various originators of home equity loans as follows: (i) loans
held for sale increased by $95.1 million to $1.1 billion at September 30, 1997
from $1.0 billion at December 31, 1996; (ii) accrued interest receivable
increased by $22.6 million to $91.5 million at September 30, 1997 from $68.9
million at December 31, 1996 as a result of the growth in the serviced loan
portfolio; (iii) advances made in connection with certain securitizations
increased by $99.9 million to $343.9 million at September 30, 1997 from $244.0
million at December 31, 1996 due primarily to increases in the amount of loans
securitized; and (vi) an increase in advances on revolving credit facilities to
various originators of home equity loans of $9.5 million. These increases are
offset in part by an increase in the allowance for credit losses on loans not
sold of $0.9 million for the nine months ended September 30, 1997 and a decrease
in the repurchased loan portfolio of $7.9 million from $24.4 million at December
31, 1996 to $16.5 million at September 30, 1997. This decrease in the
repurchased loan portfolio is a result of the Company's increased use of
securitization and whole loan sales which do not contain repurchase obligations.
The interest-only strip receivables increased by $240.0 million to $826.3
million at September 30, 1997 from $586.3 million at December 31, 1996. This
increase was due to the initial recognition of fair value of the retained asset
of $564.0 million and the initial recognition of unrealized gain on loans sold
during the nine months ended September 30, 1997 of $66.1 million. Offsetting
these increases was amortization of $276.3 million, an increase in the allowance
for possible credit losses on loans sold of $150.9 million, net of charge-offs
on loans sold of $53.5 million, and $16.5 million representing an increase in
the estimated credit loss rate based upon the current risk characteristics of
the servicing asset.
Property, plant and equipment, net, increased by $48.5 million to $122.0
million at September 30, 1997 from $73.5 million at December 31, 1996. This
increase was primarily a result of the development costs for the nine months
ended September 30, 1997, in the amount of $30.9 million for the construction of
an office building in West Sacramento, California. The building is expected to
be completed in 1998, with an anticipated total construction cost of
approximately $85.0 million and capitalized expenditures to complete the
building for occupancy of approximately $10.0 million. In addition, the Company
purchased $25.6 million in computer equipment to enhance the branch offices'
automation to support new product lines, provide system improvements and
electronic document generation, storage and retrieval. Leasehold improvements
and office equipment supporting employee growth increased by $4.9 million.
These increases were offset by depreciation and amortization expense of $12.9
million.
20
<PAGE>
FINANCIAL CONDITION (CONTINUED)
The Company's operating activities require continual access to financing
sources because of the net cash used in operating activities. The primary source
of funding for the Company's operations comes from borrowings incurred under
various credit arrangements. At September 30, 1997, the Company has notes
payable of $1.6 billion, an increase of $295.1 million from $1.3 billion at
December 31, 1996. This increase is a result of net increases of $127.1 million
in secured and unsecured credit facilities, principal payments of $132.0 million
on unsecured notes, and the issuance of $300.0 million in unsecured senior debt.
Accounts payable and other liabilities increased $110.2 million to $443.5
million at September 30, 1997, from $333.3 million at December 31, 1996. The
increase resulted primarily from an increase in funds collected on loans sold
and serviced for others ("collections payable") of $84.7 million which is a
result of the increase in the loans sold with servicing retained included in the
serviced loan portfolio, and from a net increase of $25.5 million in other
miscellaneous liabilities and accrued expenses.
Income taxes, principally deferred, increased $19.7 million, to $166.9
million at September 30, 1997 from $147.2 million at December 31, 1996,
resulting from a deferred tax provision of $35.5 million for the nine months
ended September 30, 1997, offset by a net decrease in current taxes payable of
$15.8 million for the nine months ended September 30, 1997. The primary reason
for the increase in deferred income taxes is the tax effect of the temporary
differences between tax reporting and generally accepted accounting principles
which give rise to deferred tax assets and deferred tax liabilities. The most
significant of these differences are the gain on sale of receivables and the
provision for credit losses.
Total shareholders' equity at September 30, 1997 was $668.9 million, which
compares with $582.5 million at December 31, 1996, an increase of $86.4 million.
The increase in shareholders' equity primarily resulted from net income of $92.0
million. In addition, the Company received proceeds and related tax benefits
from exercised stock options of $6.9 million. Shareholders' equity decreased
$12.5 million as a result of payment of cash dividends.
21
<PAGE>
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1996
Net income was $92.0 million for the nine months ended September 30, 1997,
compared to $55.8 million for the nine months ended September 30, 1996, an
increase of 65%. Primary net income per common share increased to $1.44 for the
same period in 1997, from $0.95 for the same period in 1996. Fully diluted net
income per common share increased to $1.42 for the same period in 1997, from
$0.95 for the same period in 1996. The increase in net income is primarily
attributable to income derived from gain on sale of receivables including the
net unrealized gain on valuation of interest-only strip receivables and finance
income and fees earned due to the growth in the Company's serviced loan
portfolio.
Gain on sale of receivables, including net unrealized gain on valuation of
interest-only strips totaled $422.4 million for the nine months ended September
30, 1997, an increase of 53% compared to $276.9 million for the nine months
ended September 30, 1996. The net unrealized gain on valuation of interest-
only strips recognized as part of the implementation of FAS 125 (beginning in
1997) was $49.6 million. This amount is comprised of $66.1 million which
represents the difference between the allocated carrying amount and fair market
value of the interest-only strip receivables for loans sold during the nine
months ended September 30, 1997, offset by $16.5 million representing an
increase in the estimated credit loss rate based upon the current risk
characteristics of the servicing assets and is calculated using the present
value of the projected future losses estimated on a static pool basis.
Loans sold with servicing retained for the nine months ended
September 30, 1997 totaled $5.2 billion compared to $3.8 billion for the nine
months ended September 30, 1996. In addition, loans sold with servicing
released in the nine months ended September 30, 1997 totaled $90.5 million
compared to $19.7 million for the nine months ended September 30, 1996. The
percentage gain on sale of receivables on Home Equity Loans was 11.08% for the
nine months ended September 30, 1997 compared to 8.98% for the nine months ended
September 30, 1996. Student Loans was 5.60% for the nine months ended September
30, 1997 compared to 6.05% for the nine months ended September 30, 1996;
Commercial Loans including the unguaranteed portions of SBA Loans was 14.44% for
the nine months ended September 30, 1997 compared to 12.51% for the nine months
ended September 30, 1996; Auto Loans was 12.05% for the nine months ended
September 30, 1997 compared to 12.22% for the nine months ended September 30,
1996. See Certain Accounting Considerations (page 19) for estimates affecting
the percentages of gain on sale.
The provision for credit losses on loans sold, which is recorded as a
reduction from gain on sale, increased 83% to $150.9 million for the nine months
ended September 30, 1997 from $82.6 million for the nine months ended September
30, 1996. This increase is a result of the increase in the amount of loans
sold during the nine months ended September 30, 1997, as well as increases in
the credit loss rates. Credit loss rates increased due to increases in the risk
characteristics of Auto Loans sold and the 125 LTV Loans sold during the third
quarter.
22
<PAGE>
RESULTS OF OPERATIONS (CONTINUED)
Home Equity Loans delinquent 90 days-and-over increased to 4.23% at
September 30, 1997 from 3.33% at September 30, 1996. Commercial Loans
delinquent 90 days-and-over increased to 4.79% at September 30, 1997 from 4.03%
at September 30, 1996. Auto Loans delinquent 90 days-and-over increased to
0.71% at September 30, 1997, from 0.34% at September 30, 1996.
Total net charge-offs increased 109% to $67.8 million for the nine months
ended September 30, 1997 from $32.4 million for the nine months ended September
30, 1996. This increase is primarily a result of (i) an increase in the Home
Equity Loan net charge-offs due in part to the increase in its serviced loan
portfolio, (ii) an increase in the amount of Auto Loan net charge-offs which is
expected to continue as the Auto Loan serviced loan portfolio matures. In
addition, the Company has continued to increase its rate of allowance for credit
losses to the at-risk serviced loan portfolio. Home Equity Loan net charge-offs
for the nine months ended September 30, 1997, were $41.0 million or 53 basis
points (annualized) of Home Equity Loans serviced. For the nine months ended
September 30, 1996, Home Equity Loan net charge-offs were $26.4 million, or 46
basis points (annualized) of Home Equity Loans serviced. Commercial Loan net
charge-offs for the nine months ended September 30, 1997 were $1.9 million, or
34 basis points (annualized) of the unguaranteed portion of the Commercial Loans
serviced. Commercial Loan net charge-offs for the nine months ended September
30, 1996 were $2.0 million or 48 basis points (annualized) of the unguaranteed
portion of Commercial Loans serviced. Auto Loan net charge-offs for the nine
months ended September 30, 1997 were $24.9 million or 428 basis points
(annualized) of Auto Loans serviced. Auto Loan net charge-offs for the nine
months ended September 30, 1996 were $4.0 million or 146 basis points
(annualized) of Auto Loans serviced.
The Company has experienced higher than anticipated Auto Loan delinquencies
and net charge-offs. As a result, the Company has taken steps to improve the
quality of its Auto Loan originations, as well as the quality of the overall
Auto Loan serviced portfolio. These steps include the slowing down of Auto Loan
originations, strengthening the management team, centralizing more processing
functions and reviewing the branch structure.
Finance income, fees earned and other increased 22% to $214.5 million for
the nine months ended September 30, 1997 compared to $175.8 million for the same
period last year. The primary factor contributing to this growth is the
increase in the Company's serviced loan portfolio of 36% to $15.3 billion at
September 30, 1997, as compared to $11.2 billion at September 30, 1996.
Salaries and employee benefits increased 47% to $172.1 million for the nine
months ended September 30, 1997, compared to $117.0 million for the nine months
ended September 30, 1996. This increase was primarily a result of additional
staff needed in the Home Equity Loan division to support the increased
marketing efforts, loan origination activities and the diversification of the
product line.
Other operating expenses increased 36% to $204.8 million for the nine
months ended September 30, 1997, compared to $150.8 million for the nine months
ended September 30, 1996. The net increase was primarily attributable to the
following: (i) an increase in occupancy costs and related office expenses of
$29.9 million associated with the opening of additional branch offices; (ii) an
increase in advertising expenses of $4.9 million to help stimulate loan
originations; (iii) an increase in collection expense of $3.4 million due to
increased collection activity; (iv) an increase in loan expenses of $7.4 million
related to growth in loan originations; (v) an increase in depreciation and
amortization of $6.4 million, resulting primarily from purchases of computer
equipment and other office equipment to support the growth in both new product
lines and the Company's employment base; and (vi) an increase in the provision
for credit losses on loans not sold of $1.7 million.
23
<PAGE>
RESULTS OF OPERATIONS (CONTINUED)
Interest expense increased 15% to $105.3 million for the nine months ended
September 30, 1997 from $91.4 million for the nine months ended September 30,
1996. The increase is attributable to an increase of $232.9 million in the
Company's average debt outstanding for the nine months ended September 30, 1997.
Income taxes increased 67% to $62.8 million for the nine months ended
September 30, 1997 from $37.6 million for the nine months ended September 30,
1996 due to an increase in pretax income. The effective tax rate increased to
40.6% for the nine months ended September 30, 1997 from 40.3% for the nine
months ended September 30, 1996.
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1996
Net income was $35.1 million for the three months ended September 30, 1997,
compared to $22.7 million for the three months September 30, 1996, an increase
of 54%. Primary net income per common share increased to $0.55 for the same
period in 1997, from $0.38 for the same period in 1996. Fully diluted net
income per common share increased to $0.54 for the same period in 1997, from
$0.38 for the same period in 1996. The increase in net income is primarily
attributable to income derived from gain on sale of receivables, including the
net unrealized gain on valuation of interest-only strip receivables and finance
income and fees earned due to the growth in the Company's serviced loan
portfolio.
Gain on sale of receivables including net unrealized gain on valuation of
interest-only strips totaled $174.5 million for the three months ended September
30, 1997, an increase of 55% compared to $112.4 million for the three months
ended September 30, 1996. The net unrealized gain on valuation of interest-
only strips, recognized as part of the implementation of FAS 125 (beginning in
1997) was $19.8 million. This amount is comprised of $31.3 million which
represents the difference between the allocated carrying amount and fair market
value of the interest-only strip receivables for loans sold during the three
months ended September 30, 1997, offset by $11.5 million representing an
increase in the estimated credit loss rate based upon the current risk
characteristics of the servicing asset and is calculated using the present value
of the projected future losses estimated on a static pool basis.
Loans sold with servicing retained in the third quarter of 1997
totaled $2.0 billion compared to $1.4 billion in the third quarter of 1996. The
percentage gain on sale of receivables on Home Equity Loans was 11.94% for the
three months ended September 30, 1997 compared to 10.26% for the three months
ended September 30, 1996; Student Loans was 5.13% for the three months ended
September 30, 1997; no Student Loans were sold in the third quarter of 1996;
Commercial Loans which included the sale of unguaranteed portions of SBA Loans
for the three months ended September 30, 1997 was 17.85% compared to 8.84% for
the three months ended September 30, 1996; Auto Loans was 12.41% for the three
months ended September 30, 1997 compared to 12.43% for the three months ended
September 30, 1996. In addition, loans sold with servicing released in the
third quarter of 1997 totaled $37.1 million, with no loans sold with servicing
released in the third quarter of 1996. See Certain Accounting Considerations
(page 19), for estimates affecting the percentages of gain on sale.
The provision for credit losses on loans sold which is recorded as a
reduction from gain on sale, increased 114% to $67.1 million for the three
months ended September 30, 1997 from $31.3 million for the three months ended
September 30, 1996. This increase is a result of the increase in the amount of
loans sold during the three months ended September 30, 1997, as well as
increases in the credit loss rates. Credit loss rates increased due to
increases in the risk characteristics of the Auto Loans sold and the 125 LTV
Loans sold during the third quarter.
24
<PAGE>
RESULTS OF OPERATIONS (CONTINUED)
Total net charge-offs increased to $28.8 million for the three months ended
September 30, 1997 from $12.9 million for the three months ended September 30,
1996. This increase is primarily a result of (i) an increase in the Home Equity
Loan net charge-offs due in part to the increase in its serviced loan portfolio,
(ii) an increase in the amount of Auto Loan net charge-offs which is expected to
continue as the Auto Loan serviced loan portfolio matures. In addition, the
Company has continued to increase its rate of allowance for credit losses to the
at-risk serviced loan portfolio. The net charge-offs as a percentage of the at-
risk portfolio for the three months ended September 30, 1997 were comparable to
the percentages for the nine months with the exception of Auto Loans. Auto Loan
net charge-offs for the three months ended September 30, 1997 were $13.4 million
or 687 basis points (annualized) of Auto Loans serviced. Auto Loan net charge-
offs for the three months ended September 30, 1996 were $1.8 million or 196
basis points (annualized) of Auto Loans serviced.
Finance income, fees earned and other increased 24% to $72.6 million for
the three months ended September 30, 1997 compared to $58.5 million for the same
period last year. The primary factor contributing to this growth is the
increase in the Company's serviced loan portfolio of 36% to $15.3 billion at
September 30, 1997, as compared to $11.2 billion at September 30, 1996.
Salaries and employee benefits increased 51% to $64.8 million for the three
months ended September 30, 1997, compared to $42.9 million for the three months
ended September 30, 1996. This increase was primarily a result of additional
staff needed for the growth in the Home Equity Loan division to support the
increased marketing efforts, loan origination activities and the diversification
of the product line.
Other operating expenses increased 47% to $83.9 million for the three
months ended September 30, 1997, compared to $57.0 million for the three months
ended September 30, 1996. The net increase was primarily attributable to the
following: (i) an increase in occupancy costs and related office expenses of
$16.7 million associated with the opening of additional branch offices; (ii) an
increase in collection expense of $1.0 million due to increased collection
activity; (iii) an increase in professional fees of $1.9 million; (iv) an
increase in loan expenses of $3.9 million related to growth in loan
originations; (v) an increase in depreciation and amortization of $2.1 million,
resulting primarily from purchases of computer equipment and other office
equipment to support the growth in both new product lines and the Company's
employment base; and (vi) an increase in provision for credit losses on loans
not sold of $3.1 million.
Interest expense increased 20% to $39.6 million for the three months ended
September 30, 1997 from $33.0 million for the three months ended September 30,
1996. The increase is attributable to an increase of $379.0 million in the
Company's average debt outstanding for the third quarter of 1997.
Income taxes increased 55% to $23.8 million for the three months ended
September 30, 1997 from $15.3 million for the three months ended September 30,
1996 due to an increase in pretax income. The effective tax rate increased from
40.3% for the three months ended September 30, 1996 to 40.4% for the three
months ended September 30, 1997.
25
<PAGE>
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, tax payments due on the Company's
taxable income and capital expenditures. The Company's primary sources of
liquidity are sales into secondary markets of the loans it originates, long-term
borrowing, unsecured credit facilities 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 certain securitizations, limited guarantees are provided by the Company
as credit enhancement. During the second quarter of 1997, the Company completed
two asset-backed securitizations, one collateralized by Commercial Loans, and
the other by Home Equity Loans which employed senior/subordinate structures with
the subordinate bonds enhanced by a limited guarantee by the Company. At
September 30, 1997, these limited guarantees amounted to approximately $14.0
million.
The Company has provided revolving credit facilities to various originators
of home equity loans. These facilities provide the originators with warehouse
financing prior to the sale of loans, usually to the Company. These agreements,
which are subject to renewal periodically, bear interest at rates primarily
between prime plus 2.00% and 2.50% and are collateralized by the loans. Upon
the sale of the loans, the advances are repaid. At September 30, 1997, the
Company has made available to originators, lines of credit of approximately
$103.6 million, of which $17.7 million were outstanding and are included in
other receivables.
Cash and cash equivalents were $328.6 million at September 30, 1997, an
increase of $6.9 million from December 31, 1996. This increase primarily
resulted from cash provided by financing activities of $367.7 million, primarily
attributable to the proceeds of $300.0 million from the public offering of
senior notes in April 1997. This increase was offset by cash used in operating
and investing activities of $360.8 million. At September 30, 1997, $203.8
million of cash and cash equivalents were restricted. These restrictions
primarily relate to cash deposits held in interest-bearing accounts for the
protection of investors from losses in various securitization transactions.
These restrictions are reduced as the underlying loans sold are liquidated.
The Company from time to time sells certain of its loans, primarily SBA
Loans and Student Loans, at a premium. This strategy does not significantly
affect 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 interest-only strip receivables thereby reducing cash flows
received in the future.
The Company began development of an office building located in West
Sacramento, California in May 1996, with completion expected in 1998. The
project, which includes the purchase of land and building construction, is
estimated to cost approximately $85.0 million and will be funded out of the
general working capital of the Company. In addition, capitalized expenditures
to complete the building for occupancy are anticipated to be approximately $10.0
million. Total expenditures to date through September 30, 1997 are $54.2
million. The 400,000 square foot building will help to centralize operations and
support additional staff from the anticipated growth of the business.
26
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
On October 21, 1997, the Company entered into a non-binding Letter of
Understanding ("Letter") for the purchase of approximately 125 acres of land for
the future development of an employee office complex. If purchased, after
satisfaction of various contingencies, the cost of acquiring the land will be
approximately $14.5 million and will be funded out of general working capital of
the Company.
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.
At September 30, 1997, the Company had $2.3 billion of secured credit
facilities, 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, $1.9 billion was unused at September 30, 1997. At September 30,
1997, the Company had $353.0 million outstanding with a weighted average
interest rate of 6.35%.
The Company has a $800.0 million unsecured revolving credit facility,
expiring June 30, 2000. At September 30, 1997, outstanding advances under this
credit facility were $429.3 million with a weighted average interest rate of
6.46%. This credit facility replaced the $400.0 million unsecured revolving
credit facility that would have expired on August 16, 1999.
At September 30, 1997, the Company had outstanding $825.0 million of
unsecured senior debt and $2.0 million of subordinated debt which require
principal payments by the Company of $2.0 million in the fourth quarter of 1997,
$40.0 million in 1998, $190.0 million in 1999, $110.0 million in 2000, $35.0
million in 2001, $325.0 million in 2002, and $125.0 million thereafter. The
unsecured senior debt and subordinated debt bear interest at rates ranging from
7.63% to 9.00%, with a weighted average interest rate of 8.37% at September 30,
1997.
The Company is required to comply with various operating and financial
covenants set forth in the above agreements including covenants which may
restrict the Company's ability to pay certain distributions including dividends.
At September 30, 1997, the Company has available $361.5 million for the payment
of such distributions under the most restrictive of such covenants.
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.
The Company has received an investment grade rating of BBB from Standard &
Poor's and Duff & Phelps and a Ba1 rating from Moody's Investor Service. These
ratings provide the Company access to the public debt market and more efficient
securitization structures. In addition, it is anticipated that these ratings
will help make available new sources of capital.
27
<PAGE>
PART II OTHER INFORMATION
- -------------------------
ITEM 5. OTHER INFORMATION
On November 13, 1997, the Company announced that it had applied to list
its outstanding common stock and convertible preferred stock on the New York
Stock Exchange ("NYSE"). Pending NYSE approval, the Company anticipates that
its shares will begin trading on the NYSE on or about December 10, 1997 under
the symbol "MON". The Company currently trades on the Nasdaq National Market
System under the Symbol "MONE".
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed herewith:
EXHIBIT PAGE
No. NO.
- --- ---
11.0 Computation of Earnings per Common Share 30
(b) There have been no reports filed on Form 8-K for the quarter ended
September 30, 1997.
28
<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 14, 1997
29
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT 11
THE MONEY STORE INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE (1)
- -------------------------------------------------------------------------------------------------------------------
Three months ended September 30, Nine months ended September 30,
------------------------------- ----------------------------
(Dollars in thousands, except earnings per common share) 1997 1996 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PRIMARY EARNINGS PER COMMON SHARE:
Net income $ 35,054 $ 22,720 $ 91,977 $ 55,821
Less preferred dividends 2,242 - 6,726 -
----------- ----------- ------------ -----------
Net income for calculating primary
earnings per common share $ 32,812 $ 22,720 $ 85,251 $ 55,821
=========== =========== =========== ===========
Average common shares outstanding 58,194,489 57,540,705 58,020,606 57,083,547
Add exercise of options reduced by the
number of shares that could have
been purchased with the proceeds
from such exercise 1,824,411 1,550,088 1,349,084 1,546,440
----------- ----------- ------------ -----------
Average common shares outstanding as adjusted 60,018,900 59,090,793 59,369,690 58,629,987
Primary earnings per common share $ 0.55 $ 0.38 $ 1.44 $ 0.95
=========== =========== =========== ===========
FULLY DILUTED EARNINGS PER COMMON SHARE:
Net income $ 35,054 $ 22,720 $ 91,977 $ 55,821
=========== =========== =========== ===========
Average common shares outstanding 58,194,489 57,540,705 58,020,606 57,083,547
Add preferred stock converted to common 5,215,000 5,215,000
Add exercise of options reduced by the
number of shares that could have
been purchased with the proceeds
from such exercise 1,824,411 1,805,838 1,535,914 1,805,838
----------- ----------- ------------ -----------
Average common shares outstanding as adjusted 65,233,900 59,346,543 64,771,520 58,889,385
=========== =========== =========== ===========
Fully diluted earnings per common share $ 0.54 $ 0.38 $ 1.42 $ 0.95
=========== =========== =========== ===========
</TABLE>
(1) This presentation is submitted in accordance with Item 601 (b) (11) of
Regulation S-K.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SEPTEMBER
30, 1997 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 328,598
<SECURITIES> 0
<RECEIVABLES> 1,621,980
<ALLOWANCES> 20,842
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 122,041
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,904,121
<CURRENT-LIABILITIES> 0
<BONDS> 2,000
133,363
0
<COMMON> 195,215
<OTHER-SE> 340,317
<TOTAL-LIABILITY-AND-EQUITY> 2,904,121
<SALES> 0
<TOTAL-REVENUES> 636,910
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 362,855
<LOSS-PROVISION> 14,044
<INTEREST-EXPENSE> 105,253
<INCOME-PRETAX> 154,758
<INCOME-TAX> 62,781
<INCOME-CONTINUING> 91,977
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 91,977
<EPS-PRIMARY> 1.44
<EPS-DILUTED> 1.42
</TABLE>
