<PAGE>
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 March 31, 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 May 5, 1997, the number of shares outstanding of the registrant's class
of common stock were 57,991,823 shares.
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
TABLE OF CONTENTS PAGE
----------------- ----
PART I FINANCIAL INFORMATION
- ----------------------------
<S> <C>
Item 1 - Financial Statements
Consolidated Statements of Financial Condition at
March 31, 1997 and December 31, 1996 1
Consolidated Statements of Income for the three months
ended March 31, 1997 and 1996 2
Consolidated Statements of Shareholders' Equity for the three months
ended March 31, 1997 and 1996 3
Consolidated Statements of Cash Flows for the three months
ended March 31, 1997 and 1996 4
Notes to Consolidated Financial Statements 5-16
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 17
PART II - OTHER INFORMATION
- ---------------------------
Item 5 - Other Information 24
Item 6 - Exhibits and Reports on Form 8-K 24
</TABLE>
<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
------
March 31, December 31,
1997 1996
-------------- --------------
<S> <C> <C>
Cash and cash equivalents (including $178,681 and
$170,079 in 1997 and 1996 which are restricted) $256,633 $321,703
Receivables, net of allowance for credit losses of
$22,053 and $19,895 in 1997 and 1996 1,438,787 1,385,934
Interest-only strip receivables, net of allowance for
credit losses of $247,398 and $220,085 in 1997 and 1996 633,363 586,300
Property and equipment, net 82,951 73,458
Other 27,792 24,545
---------- ----------
$2,439,526 $2,391,940
========== ==========
Liabilities and Shareholders' Equity
------------------------------------
Liabilities:
Notes payable $1,316,962 $1,319,197
Accounts payable and other liabilties 349,239 333,283
Income taxes, principally deferred 157,035 147,197
Unearned insurance commissions 7,939 7,754
---------- ----------
1,831,175 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 57,983,105 shares in
1997 and 57,791,436 in 1996 189,397 188,276
Retained earnings 283,591 260,870
---------- ----------
606,351 582,509
---------- ----------
$2,439,526 $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
March 31,
1997 1996
------------ ------------
<S> <C> <C>
Revenues:
Gain on sale of receivables $111,215 $81,505
Net unrealized gain on valuation of interest-only strips 9,966 -
Finance income, fees earned and other 69,287 52,557
------- -------
190,468 134,062
------- -------
Expenses:
Salaries and employee benefits 51,012 35,272
Other operating expenses 57,326 42,493
Interest 30,585 27,734
Provision for credit losses on loans not sold 5,506 4,829
------- -------
144,429 110,328
------- -------
Income before income taxes 46,039 23,734
Income taxes 19,340 9,530
------- -------
Net income $26,699 $14,204
======= =======
Net income per common share:
Primary $0.41 $0.27
======= =====
Fully diluted $0.41 $0.27
======= =====
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
(Dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
1997 1996
---------------------------- ---------------------------
Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Preferred stock:
Balance, beginning of period 5,215,000 $133,363 - $ -
--------- -------- ---------- --------
Balance, end of period 5,215,000 133,363 - -
========== -------- ========== --------
Common stock:
Balance, beginning of period 57,791,436 188,276 51,339,896 59,603
Issuance of common stock - - 5,937,500 122,075
Proceeds and related tax benefits
from exercise of stock options 191,669 1,121 121,523 1,729
---------- --------- ---------- --------
Balance, end of period 57,983,105 189,397 57,398,919 183,407
========== -------- ========== --------
Retained earnings:
Balance, beginning of period 260,870 181,523
Net income 26,699 14,204
Preferred dividends, $0.43 per share (2,242) -
Common dividends, $0.03 per share in 1997 and
$ 0.02 per share in 1996 (1,736) (1,078)
-------- --------
Balance, end of period 283,591 194,649
-------- --------
Total shareholders' equity $606,351 $378,056
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
1997 1996
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income $26,699 $14,204
Adjustments to reconcile net income to net
cash used in operations:
Provision for deferred income taxes 12,101 5,546
Depreciation and amortization 4,611 2,586
Provision for credit losses on loans not sold 5,506 4,829
Net unrealized gain on valuation of interest-only strip (9,966) -
Net changes in operating assets and liabilities:
Proceeds from loans sold 1,618,485 1,146,325
Loans originated and purchased (1,636,819) (1,216,931)
Loans repurchased (1,666) (5,134)
Increase in other receivables (38,359) (119,299)
Interest-only strip receivables, net (37,097) (33,090)
Net (decrease) increase in accounts payable and other liabilities (11,470) 1,610
Other, net (5,952) (2,224)
------- --------
Net cash used in operating activities (73,927) (201,578)
------- --------
Cash flows from investing activities:
Purchase of property and equipment (13,477) (6,013)
------- --------
Cash flows from financing activities:
Net (decrease) increase in credit facilities (2,215) 272,045
Principal payments on unsecured senior notes (20) (20,000)
Principal payments on subordinated debt - (11,000)
Net increase in collections payable 27,426 35,867
Net proceeds from issuance of common stock - 122,075
Proceeds from exercise of stock options 1,121 1,729
Dividends paid (3,978) (1,078)
-------- --------
Net cash provided by financing activities 22,334 399,638
-------- --------
Net (decrease) increase in cash and cash equivalents (65,070) 192,047
Cash and equivalents at beginning of period 321,703 178,781
-------- --------
Cash and cash equivalents at end of period $256,633 $370,828
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<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 (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.
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.
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.
5
<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 (CONTINUED)
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
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 loan (including premiums paid on
loans purchased) between the portion sold and any retained interests (interest-
only strip receivable), based on their relative fair values at the date of
transfer. 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.
Unrealized gains or losses include the recognition of an unrealized gain
which represents the initial difference between the allocated carrying amount
and the fair market value of the interest-only strip at the date of sale.
The fair value of the interest-only strip receivable is determined by
computing 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 adequate servicing compensation after giving
effect to prepayment assumptions ("Spread") and an allowance for potential
credit losses on loans sold. The interest-only strip receivable, which is
classified as a trading security, is carried at fair market value and is
analyzed quarterly by the Company. Adjustments to the fair market value are
recognized as unrealized gains or losses.
6
<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 Spread and the actual cash collected and
(iii) interest income on loans retained by the Company.
RECLASSIFICATION
Certain financial statement captions reported in the audited Statement of
Financial Condition as of December 31, 1996, the Statement of Income and the
Statement of Cash Flow for the three months ended March 31, 1996, as well as the
1996 Subsidiary Guarantors' financial statements presented in Note 3 have been
reclassified to conform to the presentation of the 1997 financial statements
which reflects adoption of FAS 125.
NET INCOME PER SHARE
Net income per share of common stock is computed using the weighted average
number of common shares outstanding during each period, after giving effect to
common stock equivalents arising from the assumed conversion of the outstanding
$1.72 mandatory convertible preferred stock to the extent it is dilutive and the
assumed exercise of stock options. The primary and fully diluted weighted
average number of common shares including common stock equivalents is 59,289,322
for the three months ended March 31, 1997 and 52,738,400 for the three months
ended March 31, 1996.
RECENT ACCOUNTING DEVELOPMENTS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 128 ("FAS 128"), Earnings Per
Share and Statement of Financial Accounting Standard No. 129 ("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
earnings per share 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.
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. The adoption of these statements is not
expected to have a material effect on the Company's financial statements.
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 late 1997. The
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. Total expenditures to date are
$32,800,000. The 400,000 square foot building will help to centralize
operations and support additional staff from 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 between prime
plus 2.00% and 2.50% and are collateralized by the loans. Upon sale of the
loans, the advances are repaid. At March 31, 1997, the Company has made
available to originators, lines of credit of approximately $142,000,000. At
March 31, 1997 and December 31, 1996, advances outstanding are $9,949,000 and
$8,291,000, respectively, and are included in receivables. The weighted average
amounts outstanding under these credit agreements are $8,338,000 and $11,192,000
for the three months ended March 31, 1997 and the year ended December 31, 1996,
respectively.
In certain securitization transactions, the Company subordinates a portion
of its interest in excess cash flows to investors. The investors' protection
from losses is provided by the subordination of the Company's cash flows
including various combinations of cash deposits provided by the Company,
subordination accounts and credit enhancements provided by third parties. At
March 31, 1997, $178,681,000 of cash deposits held in interest-bearing accounts
are restricted, and $250,197,000 is advanced in connection with subordination
accounts. 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 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 March
31, 1997, under the terms of such agreements the Company had the right to
deliver $229,129,000 of Home Equity Loans, $2,192,000 of Commercial loans,
$24,743,000 of Student Loans, and $26,095,000 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 $6,381,000 and ($864,000) for the three months ended March 31, 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 $51,006,000 of Home Equity Loans
at March 31, 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 disbursed. At March 31,
1997, loans to borrowers in the State of California accounted for approximately
20% 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 Subsidiary Guarantees 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 consolidating condensed 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>
(3) SUBSIDIARY GUARANTORS (CONTINUED)
Consolidating Statements of Financial Condition
March 31, 1997
(Dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Combined Combined
Parent Guarantor Non-Guarantor
Assets Company Subsidiaries Subsidiaries Eliminations Consolidated
------ --------------- --------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $180,623 ($82,169) $158,179 $ - $256,633
Receivables, net 385 1,116,056 322,346 - 1,438,787
Interest-only strip receivable, net - - 633,363 - 633,363
Investment in subsidiaries 393,949 3,326 - (397,275) -
Property and equipment, net - 81,262 1,689 - 82,951
Other 4,656 18,632 4,504 - 27,792
---------- ---------- ---------- -------- ----------
$579,613 $1,137,107 $1,120,081 ($397,275) $2,439,526
========= ========== ========== ========= ==========
Liabilities and Shareholders' Equity
------------------------------------
Liabilities:
Notes payable $1,313,333 $3,629 $ - $ - $1,316,962
Accounts payable and other
liabilities 9,087 326,245 13,907 - 349,239
Income taxes, principally deferred (31,480) 161,519 26,996 - 157,035
Unearned insurance commissions - 7,939 - - 7,939
Due to (from) parent and affiliates (1,319,678) 333,074 986,676 (72) -
----------- ----------- ------------ ---------- -----------
(28,738) 832,406 1,027,579 (72) 1,831,175
----------- ----------- ----------- ---------- -----------
Subordinated debt 2,000 - - - 2,000
----------- ----------- ----------- ---------- -----------
Shareholders' equity:
Preferred stock 133,363 - - - 133,363
Common stock 189,397 20,413 3,190 (23,603) 189,397
Additional paid-in capital - 9,103 47,897 (57,000) -
Retained earnings 283,591 275,185 41,415 (316,600) 283,591
----------- ----------- ----------- ---------- -----------
606,351 304,701 92,502 (397,203) 606,351
----------- ----------- ----------- ---------- -----------
$579,613 $1,137,107 $1,120,081 ($397,275) $2,439,526
=========== =========== =========== ========== ===========
</TABLE>
10
<PAGE>
(3) SUBSIDIARY GUARANTORS (CONTINUED)
Consolidating Statements of Financial Condition
31-Dec-96
(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 receivable, 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>
(3) SUBSIDIARY GUARANTORS (CONTINUED)
Consolidating Statements of Income
Three Months ended March 31, 1997
(Dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Combined Combined
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues:
Gain on sale of receivables $ - $95,645 $15,570 $ - $111,215
Net unrealized gain on valuation of
interest-only strip - 9,730 236 - 9,966
Finance income, fees earned and other 1,358 57,452 10,477 - 69,287
------- -------- ------ -------- ---------
1,358 162,827 26,283 - 190,468
------- -------- ------ -------- ---------
Expenses:
Operating expenses 895 106,498 6,451 113,844
Interest 467 26,118 4,000 - 30,585
------- -------- ------ -------- ---------
1,362 132,616 10,451 - 144,429
------- -------- ------ -------- ---------
Income (loss) before income taxes and
undistributed income of subsidiaries (4) 30,211 15,832 - 46,039
Income taxes - 12,725 6,615 - 19,340
Equity in undistributed income of subsidiaries 26,703 642 - (27,345) -
------- -------- ------ -------- --------
Net income (loss) $26,699 $18,128 $9,217 ($27,345) $26,699
======= ======== ====== ======== ========
</TABLE>
12
<PAGE>
(3) SUBSIDIARY GUARANTORS (CONTINUED)
Consolidating Statements of Income
Three Months ended March 31, 1996
(Dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Combined Combined
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues:
Gain on sale of receivables $294 $69,809 $11,402 $ - $ 81,505
Finance income, fees earned and other 927 45,563 6,067 - 52,557
------- ------- ------ -------- -------
1,221 115,372 17,469 - 134,062
------- ------- ------ -------- -------
Expenses:
Operating expenses 1,261 75,799 5,534 - 82,594
Interest - 24,509 3,225 - 27,734
------- ------- ------ -------- -------
1,261 100,308 8,759 - 110,328
------- ------- ------ -------- -------
Income (loss) before income taxes and
undistributed income of subsidiaries (40) 15,064 8,710 - 23,734
Income taxes (credit) (11) 6,007 3,534 - 9,530
Equity in undistributed income of subsidiaries 14,233 276 - (14,509) -
------- ------- ------ -------- -------
Net income (loss) $14,204 $9,333 $5,176 $(14,509) $14,204
======= ======= ====== ======== =======
</TABLE>
13
<PAGE>
(3) SUBSIDIARY GUARANTORS (CONTINUED)
Consolidating Statements of Cash Flows
For the Three Months ended March 31, 1997
(Dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Combined Combined
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
---------- --------------- ------------ ------------ ---------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $26,699 $18,128 $9,217 ($27,345) $26,699
Adjustments to reconcile net income to net
cash used in operations:
Equity in undistributed income of
subsidiaries (26,703) (642) - 27,345 -
Provision for deferred income taxes 8,069 4,032 - 12,101
Depreciation and amortization 548 3,867 196 - 4,611
Provision for credit losses - 5,506 - - 5,506
Net unrealized gain on valuation of
interest-only strip - - (9,966) - (9,966)
Net changes in operating assets
and liabilities:
Proceeds from loans sold - 1,328,457 290,028 - 1,618,485
Loans originated and purchased - (1,461,279) (175,540) - (1,636,819)
Loans repurchased - (1,666) - - (1,666)
Increase (decrease) in other
receivables (385) (17,309) (20,665) - (38,359)
Interest-only strip - - (37,097) - (37,097)
Net increase (decrease) in accounts
payable and other liabilities (12,839) 3,373 (2,004) - (11,470)
Other, net (10,912) 5,974 (1,014) - (5,952)
-------- --------- --------- -------- ---------
Net cash used in operating activites (23,592) (107,522) 57,187 - (73,927)
-------- --------- --------- -------- ---------
Cash flows from investing activities:
Purchase of property and equipment - (13,493) 16 - (13,477)
Investment in and advances to subsidiaries 14,775 60,149 (74,924) - -
-------- --------- --------- -------- ---------
Net cash used in investing activites 14,775 46,656 (74,908) - (13,477)
-------- --------- --------- -------- ---------
Cash flows from financing activities:
Net decrease in credit facilities (2,215) - - - (2,215)
Principal payments on unsecured senior note (20) - - - (20)
Net increase in collections payable - 19,665 7,761 - 27,426
Proceeds from exercise of stock options 1,121 - - - 1,121
Dividends paid (3,978) - - - (3,978)
-------- --------- --------- -------- ---------
Net cash provided by financing activities (5,092) 19,665 7,761 - 22,334
-------- --------- --------- -------- ---------
Net increase (decrease) in cash and cash
equivalents (13,909) (41,201) (9,960) - (65,070)
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 $180,623 ($82,169) $158,179 $ - $256,633
======== ========= ========= ======== =========
</TABLE>
14
<PAGE>
**********
(3) SUBSIDIARY GUARANTORS (CONTINUED)
Consolidating Statements of Cash Flows
For the Three Months ended March 31, 1996
(Dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Combined Combined
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
------------ --------------- ------------ ------------ ---------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $14,204 $9,333 $5,176 ($14,509) $14,204
Adjustments to reconcile net income to net
cash used in operations:
Equity in undistributed income of
subsidiaries (40,263) (276) 26,030 14,509 -
Provision for deferred income taxes (6) 3,498 2,054 - 5,546
Depreciation and amortization 465 1,941 180 - 2,586
Provision for credit losses - 4,829 - - 4,829
Net change in operating assets
and liabilities:
Proceeds from loans sold - 938,696 207,629 - 1,146,325
Loans originated and purchased - (1,096,477) (120,454) - (1,216,931)
Loans repurchased - (5,134) - - (5,134)
Increase in other
receivables (369) (71,564) (47,366) - (119,299)
Interest-only strip - - (33,090) - (33,090)
Net increase (decrease) in accounts
payable and other liabilities 2,717 (4,530) 3,423 - 1,610
Other, net (4,675) 209 2,242 - (2,224)
-------- --------- -------- -------- ---------
Net cash used in operating activites (27,927) (219,475) 45,824 - (201,578)
-------- --------- -------- -------- ---------
Cash flows from investing activities:
Purchase of property and equipment - (5,880) (133) - (6,013)
Investment in and advances to subsidiaries (139,729) 180,813 (41,084) - -
-------- --------- -------- -------- ---------
Net cash used in investing activites (139,729) 174,933 (41,217) - (6,013)
-------- --------- -------- -------- ---------
Cash flows from financing activities:
Increase in credit facilities 272,045 - - - 272,045
Principal payments on unsecured senior notes (20,000) - - - (20,000)
Principal payments on subordinated debt (11,000) - - - (11,000)
Increase (decrease) in collections payable - 40,579 (4,712) - 35,867
Net proceeds from issuance of common stock 122,075 - - - 122,075
Proceeds from exercise of stock options 1,729 - - - 1,729
Dividends paid (1,078) - - - (1,078)
-------- --------- -------- -------- ---------
Net cash provided by financing activities 363,771 40,579 (4,712) - 399,638
-------- --------- -------- -------- ---------
Net increase (decrease) in cash and cash
equivalents 196,115 (3,963) (105) - 192,047
Cash and cash equivalents at the beginning of period 168,367 (61,390) 71,804 - 178,781
-------- --------- -------- -------- ---------
Cash and cash equivalents at the end of period $364,482 ($65,353) $71,699 $ - $370,828
======== ========= ======== ======== =========
</TABLE>
15
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4) SUBSEQUENT EVENTS
On May 14, 1997 the Company acquired 100% of the stock of Platform Home
Loans Ltd., a United Kingdom ("U.K.") based servicer of mortgage loans. The
acquisition is a cash transaction of approximately $3,000,000 and will be
accounted for as a purchase. The acquisition will facilitate the Company's entry
into the U.K. as an originator of home equity loans.
16
<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
significantly 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 receivable). The calculation of the fair value of the interest-only strip
receivable 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.
17
<PAGE>
CERTAIN ACCOUNTING CONSIDERATIONS (CONTINUED)
The following chart presents certain estimates used in the calculation of
the interest-only strip receivable:
Three months ended
March 31,
1997 1996
---- ----
Discount rates:
Home Equity Loans 11.5% 11.1%
Commercial Loans 10.4% 10.7%
Student Loans 8.3% 8.2%
Auto Loans (4) 12.0% -
Prepayment rates:
Home Equity Loans (1) 25.8% 24.5%
Commercial Loans (1) 8.6% 9.0%
Student Loans (1) (3) 3.6% 3.0%
Auto Loans (2) (4) 1.9% -
Adequate servicing compensation:
Home Equity Loans 0.35% 0.35%
Commercial Loans 0.40% 0.40%
Student Loans (3) 0.90% 0.88%
Auto Loans (4) 2.50% -
Spreads:
Home Equity Loans 3.91 3.57
Commercial Loans 2.45 2.64
Student Loans 1.81 1.32
Auto Loans (4) 10.04 -
(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 Auto Loan division for the
three months ended March 31, 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.
18
<PAGE>
FINANCIAL CONDITION
MARCH 31, 1997
Cash and cash equivalents decreased $65.1 million, to $256.6 million at
March 31, 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 net cash used in investing activities for the purchase
of property and equipment.
Receivables, net of allowance for credit losses, increased $52.9 million to
$1.4 billion at March 31, 1997. This increase was due primarily to the fact that
loans originated and purchased exceeded loan sales by $18.3 million, accrued
interest receivable increased $3.3 million and other receivables increased $33.5
million. The allowance for credit losses also increased $2.2 million in 1997.
Originations increased 35% for the three months ended March 31, 1997, compared
to the three months ended March 31, 1996 (to $1.6 billion in 1997 from $1.2
billion in 1996), primarily as a result of the Company providing a greater
variety of products, complemented by geographic expansion of the originations
network, maturation of the Auto Loan origination offices 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
attributable to advances made in connection with certain securitizations,
principally designed to protect investors from losses. These advances increased
by $22.2 million, to $250.2 million at March 31, 1997, from $228.0 million at
December 31, 1996. Also included in other receivables are repurchased loans. The
balance of the repurchased loan portfolio was $17.9 million at March 31, 1997
compared to $24.4 million at December 31, 1996. Prior to 1993, 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 which do not contain repurchase
obligations and has been able to negotiate whole loan sales without such a
contingent repurchase obligation.
The interest-only strip receivable increased by $47.1 million to $633.4
million at March 31, 1997 from $586.3 million at December 31, 1996. This
increase was due to the following: (i) the initial recognition of fair value of
the retained asset of $146.9 million offset by amortization of $82.5 million;
(ii) the initial recognition of unrealized gain on loans sold during the three
months ended March 31, 1997 of $10.0 million; and (iii) the increase in the
allowance for possible credit losses on loans sold of $42.0 million, reduced by
net charge-offs on loans sold of $14.7 million.
Total net charge-offs increased 86% to $17.9 million for the three months
ended March 31, 1997 from $9.6 million for the three months ended March 31,
1996, due to the increase in the Company's serviced loan portfolio. Home Equity
Loan net charge-offs for the three months ended March 31, 1997, were $12.6
million or 57 basis points of Home Equity Loans serviced. For the three months
ended March 31, 1996, Home Equity Loan net charge-offs were $7.7 million, or 48
basis points of Home Equity Loans serviced. Commercial Loan net charge-offs for
the three months ended March 31, 1997 were $0.7 million, or 40 basis points of
the unguaranteed portion of the Commercial Loans serviced. Commercial loan net
charge-offs for the three months ended March 31, 1996 were $0.7 million or 55
basis points of the unguaranteed portion of commercial loans serviced. Auto Loan
net charge-offs for the three months ended March 31, 1997 were $4.7 million or
314 basis points of Auto Loans Serviced. Auto Loan net charge-offs for the three
months ended March 31, 1996 were $1.2 million or 266 basis points of Auto Loans
serviced. Although the dollar amount of charge-offs has increased for the three
months ended March 31, 1997 compared to the same period last year, the rate of
charge-offs to loans serviced has remained relatively constant over the recent
quarters. In addition, the Company has continued to increase its ratio of
allowances for credit losses to the at-risk portfolio.
19
<PAGE>
FINANCIAL CONDITION (CONTINUED)
Property, plant and equipment, net, increased by $9.5 million to $83.0
million at March 31, 1997 from $73.5 million at December 31, 1996. This increase
was primarily a result of the development costs for the three months ended March
31, 1997, in the amount of $9.5 million for the construction of an office
building in West Sacramento, California. The building is expected to be
completed in late 1997, with an anticipated total cost of approximately $85.0
million. In addition, the Company purchased $4.0 million in computer equipment
to enhance the branch offices' automation to support new product lines, provide
system improvements and equipment supporting electronic document generation,
storage and retrieval. These increases were offset by depreciation and
amortization expense of $4.0 million.
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 March 31, 1997, the Company has notes payable of
$1.3 billion, a decrease of $2.2 million from December 31, 1996. This decrease
is a result of net decreases of $2.2 million in credit facilities.
Accounts payable and other liabilities increased $15.9 million to $349.2
million at March 31, 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 $27.4 million, which is a
result of the increase in the serviced loan portfolio, offset by a net decrease
of $11.9 million in accrued interest expense representing the semi-annual
payment of interest on senior debt.
Income taxes, principally deferred, increased $9.8 million, to $157.0
million at March 31, 1997 from $147.2 million at December 31, 1996. The primary
reason for the increase in deferred income taxes result from 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 are the gain on sale of receivables and the provision for
credit losses.
Total shareholders' equity at March 31, 1997 was $606.4 million, which
compares with $582.5 million at December 31, 1996, an increase of $23.9 million.
The increase in shareholders' equity primarily resulted from net income of $26.7
million. In addition, the Company received proceeds from exercised stock options
of $1.1 million. Shareholders' equity decreased $3.9 million as a result of
payment of cash dividends.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1996
Net income was $26.7 million for the three months ended March 31, 1997,
compared to $14.2 million for the three months March 31, 1996, an increase of
88%. Primary and fully diluted net income per common share increased to $0.41
for the same period in 1997, from $0.27 for the same period in 1996. The primary
and fully diluted weighted average number of shares of common stock including
common stock equivalents was 59,289,322 for 1997 and 52,738,400 for 1996. The
increase in net income is primarily attributable to income derived from gain on
sale of receivables, the recording of the net unrealized gain on valuation of
interest-only strip receivable and finance income and fees earned due to the
growth in the Company's serviced loan portfolio.
20
<PAGE>
RESULTS OF OPERATIONS (CONTINUED)
Gain on sale of receivables totaled $111.2 million for the three months
ended March 31, 1997, an increase of 36% compared to $81.5 million for the
three months ended March 31, 1996. Loans sold in the first quarter of 1997
totaled $1.6 billion compared to $1.1 billion in the first quarter of 1996. The
percentage gain on sale of receivables on Home Equity Loans was 10.60%
for the three months ended March 31, 1997 compared to 8.12% for the three months
ended March 31, 1996; Student Loans was 5.48% for the three months ended March
31, 1997 compared to 5.49% for the three months ended March 31, 1996; Commercial
Loans including the unguaranteed portions of SBA Loans was 12.94% for the three
months ended March 31, 1997 compared to 15.85% for the three months ended March
31, 1996. The percentage gain on sale of receivables on Auto Loans was 11.41%
for the three months ended March 31, 1997. There were no sales of loans by the
Auto Loan division for the three months ended March 31, 1996.
The provision for credit losses on loans sold increased 103% to $42.0
million for the three months ended March 31, 1997 from $20.7 million for the
three months ended March 31, 1996. This increase reflects an increase in loans
sold and an increase in the estimated loss rate which is based upon the current
risk characteristics of the servicing assets and is calculated using the present
value of projected future losses estimated on a static pool basis. In addition,
the provision for the three months ended March 31, 1997 includes a provision for
Auto Loans sold. There were no Auto Loans sold for the three months ended March
31, 1996, accordingly, no provision was required.
Home Equity Loans delinquent 90 days-and-over increased to 3.93% at March
31, 1997 from 2.57% at March 31, 1996. Commercial Loans delinquent 90 days-and-
over increased to 4.50% at March 31, 1997 from 4.13% at March 31, 1996. Auto
Loans delinquent 90 days-and-over increased to 0.33% at March 31, 1997, from
0.28% at March 31, 1996.
The net unrealized gain on valuation of interest-only strip was recognized
during the first quarter of 1997 as part of implementation of FAS 125. The
amount recorded of $10.0 million represents the difference between the allocated
carrying amount and fair market value of the interest-only strip receivable for
loans sold during the first quarter of 1997.
Finance income, fees earned and other increased 32% to $69.3 million for
the three months ended March 31, 1997, compared to $52.6 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 40% to $13.2 billion at March 31,
1997, as compared to $9.5 billion at March 31, 1996.
Salaries and employee benefits increased 45% to $51.0 million for the
three months ended March 31, 1997, compared to $35.3 million for the three
months ended March 31, 1996. This increase was primarily a result of additional
staff needed for the growth in the Home Equity Loan division and the Auto Loan
division.
Other operating expenses including provision for credit losses on loans not
sold increased 33% to $62.8 million for the three months ended March 31, 1997,
compared to $47.3 million for the three months ended March 31, 1996. The net
increase was primarily attributable to the following: (i) increase in occupancy
costs and related office expenses of $8.7 million associated with the opening of
additional branch offices; (ii) increase in advertising expenses of $4.1 million
to help stimulate loan originations; (iii) decrease in professional fees
(including computer programming consulting) of $0.9 million; (iv) increase in
loan expenses of $1.6 million related to growth in loan originations; and (v)
increase in depreciation and amortization of $2.0 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.
21
<PAGE>
RESULTS OF OPERATIONS (CONTINUED)
Interest expense increased 10% to $30.6 million for the three months ended
March 31, 1997 from $27.7 million for the three months ended March 31, 1996.
The increase is attributable to an increase of $208.7 million in the Company's
average debt outstanding for the first three months of 1997.
Income taxes increased 103% to $19.3 million for the three months ended
March 31, 1997 from $9.5 million for the three months ended March 31, 1996 due
to an increase in pretax income. The effective tax rate increased from 40.2%
for the three months ended March 31, 1996 to 42.0% for the three months ended
March 31, 1997, due to an increase in the effective state tax rate from 5.2% for
the three months ended March 31, 1996, to 7.0% for the three months ended March
31, 1997.
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, 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.
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 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 March 31, 1997, the Company has made
available to originators, lines of credit of approximately $142.0 million, of
which $9.9 million were outstanding and are included in other receivables.
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 $256.6 million at March 31, 1997, a decrease
of $65.1 million from December 31, 1996. At March 31, 1997, $178.7 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. This
decrease primarily resulted from cash used in operating activities of $73.9
million primarily attributable to the increase in the interest-only strip
receivable of $119.6 million, offset by amortization of the interest-only strip
receivable of $82.5 million. In addition, the decrease resulted from cash used
in investing activities of $13.5 million, offset by cash provided by financing
activities of $22.3 million.
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 receivable thereby reducing cash flows
received in the future.
22
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
The Company began development of an 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 $85.0 million and will be funded out of the
general working capital of the Company. Total expenditures to date are $32.8
million. The 400,000 square foot building will help to centralize operations
and support additional staff from the anticipated growth of the business.
At March 31, 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 March 31, 1997. At March 31, 1997, the
Company had $366.2 million outstanding with a weighted average interest rate of
7.15%.
The Company has a $400 million unsecured revolving credit facility, (the
"Credit Facility"), expiring August 16, 1999. At March 31, 1997, outstanding
advances under the Credit Facility were $290.0 million with a weighted average
interest rate of 6.08%. Other unsecured notes at March 31, 1997 totaled $20.1
million, with a weighted average interest rate of 5.75%.
In addition, at March 31, 1997, the Company had outstanding $637.0 million
of unsecured senior debt and $2.0 million of subordinated debt which require
principal payments by the Company of $114.0 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 debt and subordinated debt bear
interest at rates ranging from 7.63% to 9.16%, with a weighted average interest
rate of 8.58% at March 31, 1997.
On April 15, 1997, the Company completed a public offering of $175.0
million of 8.05% senior notes due 2002 and $125.0 million of 8.375% senior notes
due 2004. The senior notes constitute unsecured and unsubordinated senior
indebtedness of the Company. The net proceeds of this offering were used to
repay a portion of the indebtedness outstanding under certain credit facilities.
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 certain distributions including dividends. At
March 31, 1997, the Company had available $331.6 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.
In December 1996, the Company received an investment grade rating of BBB
from Standard & Poor's. It is anticipated that this rating will help make
available new sources of capital, in addition to lowering the Company's cost of
funds.
Due to the impact of high demand for SBA Loans on the SBA's budget, the SBA
imposed a maximum loan size for Section 7(a) Loans of $500,000 effective May 5,
1997. It is unknown for what length of time this limitation will be in effect.
The Company is reviewing alternatives to address this change including making
its own companion loans, which would not be guaranteed by the SBA, when borrower
needs exceed $500,000. Currently, the Company is unable to predict what effect
this limitation will have on its SBA Loan volume or profitability.
23
<PAGE>
PART II OTHER INFORMATION
Item 5. Other Information
On May 14, 1997 the Company acquired 100% of the stock of Platform Home
Loans Ltd., a United Kingdom ("U.K.") based servicer of mortgage loans. The
acquisition is a cash transaction of approximately $3,000,000 and will be
accounted for as a purchase. The acquisition will facilitate the Company's
entry into the U.K. as an originator of home equity loans.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhibits are filed herewith:
EXHIBIT PAGE
NO. NO.
- --- ---
11.0 Computation of Earnings per Common Share 26
(b) There have been no reports filed on
Form 8-K for the quarter ended
March 31, 1997.
24
<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: May 15, 1997
25
<PAGE>
Exhibit 11
THE MONEY STORE INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE (1)
(UNAUDITED)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Three months ended March 31,
---------------------------
(Dollars in thousands, except earnings per share) 1997 (2) 1996 (3)
- ---------------------------------------------------------------------------------------------------
PRIMARY and FULLY DILUTED EARNINGS PER COMMON SHARE:
<S> <C> <C>
Net income $26,699 $14,204
Less preferred dividends 2,242 -
---------- ----------
Net income for calculating primary
earnings per common share $24,457 $14,204
========== ==========
Average common shares outstanding 57,867,152 51,137,700
Add the effect of common stock
equivalents arising from the
assumed exercise of stock options 1,422,170 1,600,700
---------- ----------
Average common shares outstanding as adjusted 59,289,322 52,738,400
========== ==========
Primary and fully diluted earnings per common share $0.41 $0.27
========== ==========
</TABLE>
(1) This presentation is submitted in accordance with Item 601 (b) (11) of
Regulation S-K.
(2) The conversion of preferred stock proved to be antidilutive for the quarter
and, therefore, was not included in the computation of fully diluted
earnings per share.
(3) The 3% materiality test on fully diluted earnings per share was not met,
therefore, dual presentation was not required.
26
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MARCH 31,
1997 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 256,633
<SECURITIES> 0
<RECEIVABLES> 1,460,840
<ALLOWANCES> 22,053
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 82,951
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,439,526
<CURRENT-LIABILITIES> 0
<BONDS> 2,000
133,363
0
<COMMON> 189,397
<OTHER-SE> 283,591
<TOTAL-LIABILITY-AND-EQUITY> 2,439,526
<SALES> 0
<TOTAL-REVENUES> 190,468
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 108,338
<LOSS-PROVISION> 5,506
<INTEREST-EXPENSE> 30,585
<INCOME-PRETAX> 46,039
<INCOME-TAX> 19,340
<INCOME-CONTINUING> 26,699
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 26,699
<EPS-PRIMARY> 0.41
<EPS-DILUTED> 0.41
</TABLE>
