<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996 Commission File No.: 001-10785
THE MONEY STORE INC.
(Exact name of registrant as specified in its charter)
New Jersey 22-2293022
(State or other jurisdiction of (I.R.S. Employer
incorporated or organization) Identification No.)
2840 Morris Avenue, New Jersey 07083
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (908) 686-2000.
----------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
(Title of Each Class) (Name of Each Exchange on which Registered)
--------------------- -------------------------------------------
Common Stock, no par value Nasdaq National Market System
Preferred Stock, no par value Nasdaq National Market System
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 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
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
form 10-K. [ ]
As of February 3, 1997 the aggregate market value of voting stock held by
nonaffiliates of registrant was approximately $917,129,599.
As of March 25, 1997 the shares outstanding of the issuer's class of common
stock were 57,976,380.
DOCUMENTS INCORPORATED BY REFERENCE:
Part III, items 10, 11, 12, and 13, is incorporated by reference to The
Money Store Inc.'s definitive proxy statement to shareholders which will be
filed with the Commission no later than 120 days after December 31, 1996.
<PAGE>
PART I
Item 1. 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").
The business strategy of the Company has been to identify and pursue niche
lending opportunities which management believes have had widespread unsatisfied
demand. For the year ended December 31, 1996, the Company originated
approximately $5.7 billion of loans. Of these loans, approximately 73% by
principal amount were Home Equity Loans, approximately 11% by principal amount
were Commercial Loans, approximately 8% by principal amount were Student Loans
and approximately 8% by principal amount were Auto Loans. Management believes
that during 1996 the Company was among the largest originators, by principal
amount, of Home Equity Loans and Student Loans in the United States. Based upon
statistics compiled by the SBA, management believes that during each of the last
14 SBA fiscal years the Company originated a greater principal amount of SBA
Loans than any other originator of such loans in the United States.
The majority of Home Equity Loans are made to borrowers owning one-to
four-family homes, for the purpose of refinancing existing mortgage loans, debt
consolidation, home improvements, education and a variety of other purposes.
Management believes that American homeowners have substantial home equity
available as security for additional borrowings and that the use of home equity
loans should continue to increase.
The focus of the Company's commercial lending activities to date has been
to originate business loans for the purchase or refinance of owner/user
commercial real estate or small businesses under SBA guidelines. The majority of
the Commercial Loans originated by the Company are loans to purchase or
refinance owner/user commercial real estate, with the balance primarily
consisting of loans for which the use of loan proceeds may not be limited to the
purchase or refinance of commercial real estate.
The Company originates Student Loans to tens of thousands of students
annually. The Company primarily targets students attending accredited four-year
colleges and universities. In October 1995, the Company began to originate
privately insured student loans.
The Company began originating Auto Loans in January 1995. Retail
installment sale contracts for new and used automobiles, minivans, vans, and
light trucks are purchased from automobile dealers. These contracts provide
financing to individuals purchasing the vehicles.
1
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Substantially all of the loans originated by the Company are sold to
institutional investors or pledged to the Company's warehouse lenders until the
loans can be sold and these lenders repaid. Revenue is recognized as gain on
sale of receivables, which represents the present value of the difference
between the interest rate charged by the Company to a borrower and the interest
rate received by the investor who purchased the loan, in excess of normal loan
servicing fees (the "Excess Servicing Spread") and non-refundable fees and
premiums on loans sold. The Company recognizes such gain on sale of receivables
in the year that such loans are sold, although cash (representing the Excess
Servicing Spread and servicing fees) is received by the Company over the lives
of the loans. The Company's practice of selling its loans is designed to
increase the Company's liquidity, reduce its need to access markets for capital
and reduce certain risks associated with interest rate fluctuations. For loans
sold during 1996, the Excess Servicing Spread averaged approximately 3.68% on
Home Equity Loans, 2.09% on Commercial Loans, 1.90% on Student Loans and 10.09%
on Auto Loans.
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 as an economic hedge, iii) the Company
from time to time purchases or sells government securities at agreed upon
prices, 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.
At December 31, 1996 the Company operated out of 217 branch offices and was
doing business in 50 states, the District of Columbia and the Commonwealth of
Puerto Rico.
The following table shows the Company's originations and portfolio
balances for the three years ended December 31, 1996:
<TABLE>
Originations and Serviced Loan Portfolio
(Dollars in thousands)
As of and for the years ended December 31,
-----------------------------------------
<CAPTION>
1996 1995 1994
---------------------------------- --------------------------------- ---------------------------------
Originations Originations Originations
--------------------- -------------------- ---------------------
Serviced Serviced Serviced
Number Loan Number Loan Number Loan
Amount of Loans Portfolio Amount of Loans Portfolio Amount of Loans Portfolio
---------- -------- ----------- ---------- -------- ---------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Home Equity
Loans $4,150,992 104,519 $ 8,230,776 $2,885,044 67,828 $5,751,677 $2,013,027 38,644 $3,725,918
% of Total 72.9% 67.5% 75.5% 66.7% 72.4% 63.2%
Commercial Loans 635,498 1,769 2,282,384 440,728 1,461 1,907,050 420,416 1,143 1,605,645
% of Total 11.2% 18.7% 11.5% 22.1% 15.1% 27.2%
Student Loans 458,459 168,837 1,203,739 369,129 139,946 845,501 345,965 136,354 566,906
% of Total 8.0% 9.9% 9.7% 9.8% 12.5% 9.6%
Auto Loans 448,105 45,124 475,533 128,070 13,141 117,239
% of Total 7.9% -- 3.9% 3.3% -- 1.4% -- -- --
---------- ------- ----------- ---------- ------- ---------- ---------- ------- ----------
Totals $5,693,054 320,249 $12,192,432 $3,822,971 222,376 $8,621,467 $2,779,408 176,141 $5,898,469
========== ======= =========== ========== ======= ========== ========== ======= ==========
</TABLE>
2
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Home Equity Loans
Overview
The Company's mortgage lending activities consist of originating, selling
and servicing Home Equity Loans. These loans are primarily secured by one-to
four-family residential properties, including low-rise condominiums,
single-family detached homes, single-family attached homes, properties in
planned unit developments and mixed use properties. The Company generally does
not make Home Equity Loans secured by high-rise condominiums, cooperative
residences or other categories of properties that management believes have high
levels of risk. Home Equity Loans are made to borrowers for the purpose of
refinancing existing mortgage loans, debt consolidation, home improvements,
education and a variety of other purposes. In 1996, the Company began test
marketing a home equity line of credit ("HELOC").
As of December 31, 1996 Home Equity Loans secured by property located in
California, New York, New Jersey, Pennsylvania and Washington accounted for
13.8%, 9.2%, 6.9%, 6.1% and 5.7%, respectively, of the principal amount of Home
Equity Loans in the serviced loan portfolio. At such date, Home Equity Loans
secured by property located in each other jurisdiction represented less than
5.6% of the principal amount of Home Equity Loans in the serviced loan
portfolio.
Home Equity Loan Origination
The Company's 92 Home Equity Loan origination offices do business in 41
states and the District of Columbia. The Company intends to enter most remaining
major geographic markets in the United States gradually as conditions warrant.
The Company's Home Equity Loan division is centrally organized with its
administrative, underwriting and servicing operations based in Sacramento,
California, with local offices generally located in major metropolitan areas.
Applications for Home Equity Loans typically are received by telephone direct
from the public or through independent mortgage brokers. The Company also
originates Home Equity Loans by purchasing them from other originators or
holders ("Wholesale Loans").
The entire application and approval process for Home Equity Loans other
than Wholesale Loans is generally conducted by telephone. The Company attempts
to grant approvals of loans quickly to borrowers meeting the Company's lending
guidelines. A loan officer is responsible for completing, evaluating and
processing the loan application of a prospective borrower based on information
obtained from the borrower or mortgage broker and verified with third parties.
Although some applications are approved in branch offices, substantially all
loan applications are approved by an underwriter in Sacramento. Loan officers
are trained to structure loans that meet the applicant's needs, while satisfying
the Company's lending guidelines. If an applicant does not meet the guidelines
for the loan applied for, a different loan that better suits the applicant's
needs may be suggested to the applicant.
3
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The Company originates Home Equity Loans to borrowers with credit histories
and income deemed satisfactory by management who indicate the ability to repay
their loan. Management supports two main origination policies. The primary and
initial origination policy is to analyze the applicant's creditworthiness (i.e.,
a determination of the applicant's ability to repay the loan). Creditworthiness
is assessed by examination of a number of factors, including calculating a
debt-to-income ratio, which is the sum of the borrower's normal monthly expenses
divided by the applicant's monthly income before taxes and other payroll
deductions (the "Gross Debt Ratio"), examining the applicant's credit history
through standard credit reporting bureaus, and by checking the applicant's
payment history with respect to existing mortgages, if any, on the property.
The second origination policy for Home Equity Loans other than Home
Improvement Loans and certain HELOC's is a determination of the ratio (the
"Combined Loan-to-Value Ratio") that all mortgages existing on the property
(including the loan applied for, less any premiums for credit life or disability
insurance which are financed) bear to the appraised value of the property
securing such loan at the time of origination. Combined Loan-to-Value Ratio
guidelines are established depending on the type of loan and creditworthiness of
the borrower. For Home Equity Loans of more than $15,000, the Company generally
confirms the value of the property to be mortgaged by appraisals (which in
certain cases may be drive-by appraisals) performed by independent appraisers or
by acceptable alternative valuation techniques.
The Company has several procedures which it uses to verify information
obtained from an applicant. The applicant's outstanding balance and payment
history on any senior mortgage may be verified by calling the senior mortgage
lender. If the senior mortgage lender, if any, can not be reached by telephone
or will not verify this information, the Company attempts to verify the
information using other methods. In order to verify an applicant's employment
status, the Company will obtain from the applicant either recent tax returns and
other tax forms (e.g., W-2 Forms) and current pay stubs and the Company may
telephone the applicant's employer or obtain written verification from the
employer. Further, the Company will not close a Home Equity Loan prior to
receiving evidence that the property securing the loan, if any, is insured. For
loans over $15,000, a title search is ordered to verify the vesting of title to
the mortgaged property, along with the existence of any mortgages, tax or other
liens that have been levied on the property, to assure that the lien priority
will be as represented by the borrower.
Most Home Equity Loans originated by the Company are scheduled to amortize
over their terms. The Company may also collect nonrefundable points, late
charges and various fees in certain states in connection with its Home Equity
Loans. Other fees charged, where allowable, include those related to credit
reports, lien searches, title insurance and recordings, prepayment fees and
appraisal fees. Home Equity Loans have original terms up to 30 years. Because of
prepayments, it is expected that Home Equity Loans will have shorter lives than
their original terms to maturity.
Although the Company has no maximum dollar amount for Home Equity Loans
other than Home Improvement Loans, the actual maximum amount that the Company
will lend is determined by a number of factors, including the applicant's
ability to repay the loan, the value of the borrower's equity in the real estate
and the ratio of such equity to the home's value.
4
<PAGE>
The Company began making FHA Title I Loans in 1990 and Conventional Home
Improvement Loans in 1995. It began making both FHA insured and non-FHA insured
loans originated through and purchased from home improvement contractors
("Dealer/Contractor Loans") in 1994. Under current FHA regulations, the maximum
amount of an FHA Title I Loan on a single family home is $25,000. Borrowers must
use the proceeds of such FHA Title I Loans to improve the property securing the
FHA Title I Loan. The underwriting process with respect to Home Improvement
Loans other than Dealer/Contractor Loans is substantially similar to the process
for Home Equity Loans, except that for loans of $15,000 or less, Combined
Loan-to-Value Ratios generally are not computed and appraisals are not obtained.
If a contractor desires to utilize the Company's financing programs it must make
application to the Company for approval. All purchased Dealer/Contractor Loan
contracts are on forms provided or approved by the Company and each contract
purchased is approved in accordance with the Company's guidelines. Where
required, property values are generally determined by drive-by "as-is"
appraisals. Title insurance is required on some of these loans in first lien
position.
Where state laws permit, the Company has, in some instances, entered into
arrangements with insurance carriers pursuant to which the Company offers, as
agent for such insurers, credit life and accident and health coverage to its
Home Equity Loan borrowers. If an insurance policy is purchased, the cost to the
borrower of the policy is generally financed as part of the loan. The Company
receives a commission based on the insurance policy's premium and remits the
premium net of commissions to the sponsoring insurance carrier. The Company
occasionally receives a premium for reinsuring a portion of the credit life and
accident and health insurance offered to its borrowers. The purchase of
insurance is not a prerequisite to loan approval. Premiums and commissions on
credit life and accident and health insurance coverage vary from state to state.
For financial statement purposes, insurance commissions received are deferred
and recognized over the life of the insurance policy.
Home Equity Loan Servicing and Sales
The Company currently sells Home Equity Loans primarily through the
issuance of asset-backed securities ("Asset-Backed Securities") to financial
institutions and retains the right to service the loans it originates. Servicing
includes collecting payments from borrowers, remitting payments to investors who
have purchased the loans, accounting for principal and interest, contacting
delinquent borrowers, supervising foreclosures and bankruptcies in the event of
unremedied defaults and managing real estate owned.
Through December 31, 1996 the Company has completed offerings of Home
Equity Loan Asset-Backed Securities aggregating $10.7 billion. In 1996, $3.8
billion of Home Equity Loans were sold in Home Equity Loan Asset-Backed
Securities, and $169.0 million of Home Equity Loans were sold in whole loan
sales. The Home Equity Loan Asset-Backed Securities represent undivided
beneficial ownership interests in pools consisting of loans originated by the
Company which have been sold by the Company to an independent trust. The
principal and part of the interest payments on such loans are remitted by the
Company, as the servicer of the loan pool, to the trust and then passed from the
trust to investors in the Asset-Backed Securities. As a result of the credit
enhancements described below, the primary risk to investors in Asset-Backed
Securities is the risk that loans underlying the Asset-Backed Securities will be
prepaid at a rate other than as expected, thereby changing the rate at which an
investor's principal is repaid.
5
<PAGE>
Each issue of credit enhanced Home Equity Loan Asset-Backed Securities sold
to investors has received a rating of Aaa from Moody's Investors Service Inc.
("Moody's") and AAA from Standard & Poor's Ratings Services ("S&P").
Asset-Backed Securities provide an additional source of liquidity for the
Company, and the Company intends to continue to sell Home Equity Loans through
sales of Asset-Backed Securities.
The investors' protection from losses is generally provided by various
structuring mechanisms and combinations of cash deposits, bank letters of
credit, subordination accounts and credit enhancement provided by third parties.
In some structures, the senior certificate holders are protected from losses by
outstanding subordinated certificates and credit enhancement provided by third
parties. At December 31, 1996 and 1995, the Company had $112.3 million and $49.1
million, respectively, of cash deposits held in interest bearing accounts and
$170.2 million and $81.4 million in subordination accounts, respectively,
supporting these transactions. (See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources.")
Delinquencies and Collections
Unless circumstances dictate otherwise, collection efforts begin when an
account is over 15 days past due, at which time the Company attempts to contact
the borrower to determine the reason for the delinquency and to attempt to cause
the account to become current. If the status of the account continues to
deteriorate, an analysis is undertaken by the Company to determine appropriate
action. When a borrower is experiencing difficulty in making timely payments,
the Company may temporarily adjust the borrower's payment schedule. The
determination of how to work out a delinquent loan is based upon a number of
factors, including the borrower's payment history and the reason for the current
inability to make timely payments. Under certain circumstances, the Company will
treat as current an account which is in arrears but has an established record of
timely, uniform and consistent payments. This policy does not forgive interest
or effect the future application of payments.
When a loan is 90 days (four payments) past due in accordance with its
original terms, the facts surrounding the delinquency are reviewed, the
underlying property may be reappraised and the results evaluated by the Company
to determine a course of action.
Regulations and practices regarding the liquidation of properties (e.g.,
foreclosure) and the rights of the mortgagor in default vary greatly from state
to state. Only if a delinquency cannot otherwise be cured will the Company
decide that liquidation is the appropriate course of action. If, after
determining that purchasing a property securing a Home Equity Loan will minimize
the loss associated with such defaulted loan, the Company may bid at the
foreclosure sale for such property or accept a deed in lieu of foreclosure.
At December 31, 1996, the Home Equity Loan real estate owned portfolio,
which is carried at the lower of carrying value or fair value less estimated
cost to sell, was $6.5 million. In addition, at December 31, 1996, the Company
serviced $31.1 million of real estate owned by trusts in connection with
Asset-Backed Securities. These amounts may include any senior mortgage balance,
delinquent senior mortgage payments and other advances made on the property.
6
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The following table illustrates the Company's delinquency and charge-off
experience with respect to Home Equity Loans:
Home Equity Loan Delinquencies and Charge-offs
<TABLE>
<CAPTION>
As of and for the years
ended December 31,
-----------------------------------------
(Dollars in thousands)
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
30-59 days past due 1.31% 1.76% 1.77%
60-89 days past due 0.81% 0.68% 0.42%
90+ days past due 3.83% 2.42% 1.86%
Loans charged-off, net $ 37,039 $ 24,205 $ 19,942
Loans charged-off, net, as
a percentage of the
Home Equity Loans in the
serviced loan portfolio 0.45% 0.42% 0.54%
</TABLE>
Repurchase Obligations
For certain whole loan sales prior to 1993, the Company is committed to
repurchase from investors any such loans that become 90 days (four payments)
past due or more. This obligation is subject to various terms and conditions,
including, in some instances, a limitation on the amount of loans that may be
required to be repurchased in any given year. Based on the Company's repurchase
obligations contained in certain of these loan sale contracts and management's
estimates of the lives of the underlying portfolios, management believes that
there are $57.6 million of Home Equity Loans at December 31, 1996, which the
Company may be required to repurchase in the future should such loans become 90
days past due.
The amount of Home Equity Loans repurchased during the years ended December
31, 1996, 1995, and 1994, were $7.0 million, $9.1 million, and $14.3 million,
respectively. At December 31, 1996, and 1995, the Company owned $24.4 million
and $29.2 million, respectively, of Home Equity Loans which had been repurchased
from investing institutions because such loans had become at least 90 days (four
payments) past due. (See "Management's Discussion and Analysis of Financial
Condition and Results of Operations").
Commercial Loans
Overview
In 1979, the Company received authorization from the SBA to make SBA Loans.
Based upon SBA-compiled statistics, during each of the last 14 SBA fiscal years
the Company has originated a greater principal amount of SBA Loans than any of
the approximately 12,000 banks, savings and loan associations and non-bank
lenders that have participated in the SBA program.
7
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Commercial Loans
Overview (continued)
Commercial Loans originated by the Company may be used for owner/user real
estate acquisition, construction, renovation, expansion, land and site
improvements, acquisition and installation of machinery and equipment and the
interest on interim financing. Although the Company intends to increase the
number of Small Business Loans it originates, currently, most of the Commercial
Loans in the Company's serviced loan portfolio are comprised of SBA Loans.
As of December 31, 1996, Commercial Loans originated in California,
Arizona, Colorado, New Jersey and New York accounted for 34.2%, 7.3%, 6.6%,
6.0%, and 5.4% respectively, of the principal amount of Commercial Loans in the
serviced loan portfolio. At such date, Commercial Loans originated in each other
jurisdiction represented less than 5.3% of the principal amount of the
Commercial Loans in the serviced loan portfolio.
Commercial Loan Origination
The Company's 64 Commercial Loan origination offices do business in 49
states and the District of Columbia.
The Company maintains its national Commercial Loan administrative office in
Sacramento, California. Sales offices are organized into seven regions reporting
to regional and national management offices. Activities at the local and
regional level include business development and loan closing. Activities at the
national level include marketing, credit approval, quality control, document
preparation, loan servicing and secondary market sales.
The majority of the Company's Commercial Loan originations in 1996 were SBA
Loans consisting of first mortgages for the purchase or finance of commercial
real estate, general business loans for business acquisitions, equipment
purchases, working capital or debt refinancing.
All Commercial Loans originated by the Company are evidenced by
floating rate notes which adjust quarterly, require payment monthly and are
scheduled to amortize fully over their stated term. SBA Loans originated by the
Company have terms ranging from seven to 25 years depending upon the use of
proceeds, with an average term of approximately 22 years. Generally, seven-year
loans are made for working capital, ten-year loans for equipment and 25-year
loans for real estate. Terms for the Company's Small Business Loans range from a
minimum of 20 years to a maximum of 30 years.
Loan officers in the Company's national offices in Sacramento evaluate the
applicant's financial statements, credit reports, business reports and plans and
other data to determine if the credit and collateral satisfy the Company's
standards as to historic debt service coverage, reasonableness of projections,
strength of management and sufficiency of secondary repayment and, if
applicable, the SBA's eligibility rules. Recommended applications are then
forwarded to a credit manager or senior credit officer for approval. Loans made
pursuant to the Preferred Lender Program (described below) do not require
further SBA approval. All other applications for SBA Loans are submitted to the
appropriate district SBA office for approval. Prior to funding any real property
to be taken as primary collateral is appraised by independent appraisers.
8
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SBA Program
The SBA administers three levels of lender participation in its general
business loan program, pursuant to Section 7(a) of the Small Business Act of
1953, as amended, and the rules and regulations promulgated thereunder (the
"Small Business Act"). Under the first level of "Section 7(a)" lender
participation, commonly known as the Guaranteed Participant Program, the lender
gathers and processes data from applicants and forwards it, along with its
request for the SBA's guaranty, to the local SBA office. The SBA then completes
an independent analysis, and makes its decision on the loan application. SBA
turnaround time on such applications can vary greatly, depending on its backlog
of loan applications.
Under the second level of lender participation, known as the Certified
Lender Program, the "Certified Lender" gathers and processes the application and
makes its request to the SBA, as in the Guaranteed Participant Program
procedure. The SBA then performs a review of the lender's credit analysis on an
expedited basis, which review is generally completed within three working days.
The SBA generally requires that lenders originate loans meeting certain
portfolio quality and volume criteria before authorizing lenders to participate
as Certified Lenders. Authorization is granted on an SBA district by district
basis.
Under the third level of lender participation, known as the Preferred
Lender Program, the lender has the authority to approve a loan and to obligate
the SBA to guarantee the loan without submitting an application to the SBA for
credit review. The lender is required to notify the SBA of the approved loan,
along with the submission of pertinent SBA documents. The standards established
for participants in the Preferred Lender Program, the SBA's highest designation,
are more stringent than those for participants in the Certified Lender Program.
The Company has been named a Preferred Lender by the SBA in virtually all of the
major SBA loan markets in which it competes. Most of the Company's SBA Loans are
currently originated under the Preferred Lender Program.
SBA Guarantees
Until October 12, 1995, under the Guaranteed Participant and the Certified
Lender Programs, the SBA guaranteed loans of $155,000 or less up to 90%, and
loans in excess of $155,000 with terms of less than 10 years up to 85%. For
loans in excess of $155,000 with terms greater than 10 years, the maximum
guaranty was 75%. Under the Preferred Lender Program, the maximum guaranty was
70%.
After October 12, 1995, under the Guaranteed Participant and the Certified
Lender Programs, the SBA guarantees loans of $100,000 or less up to 80%; all
other loans have a maximum guaranty of 75%. The SBA's maximum guaranty per
borrower under all three programs is $750,000, with certain exceptions. In the
event of a default by the borrower, any losses resulting therefrom are shared
pari passu between the Company and the SBA. If the SBA establishes that any
resulting loss is attributable to substantial deficiencies in the manner in
which the loan was originated, documented or funded by the Company, the SBA may
seek recovery of funds from the Company. Due to federal budgetary constraints in
1995, the SBA had imposed a maximum loan size for SBA Loans of $500,000 from
January 1 through October 12, 1995. The Company reviewed alternatives to address
the effects of that change and, as a result, made some companion commercial
loans, not guaranteed by the SBA, when borrower needs exceeded $500,000.
9
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Commercial Loan Servicing and Sales
The Company sells and services substantially all the Commercial Loans it
originates. Servicing includes collecting payments from borrowers and remitting
payments to investors including, with respect to the guaranteed interests, to
the FTA (defined below), accounting for principal and interest, contacting
delinquent borrowers and supervising loan liquidations. The Company's quality
control staffs review loan files to confirm that the loans are originated and
maintained in accordance with its requirements and applicable SBA regulations.
The Company typically conducts field visits to the borrower's place of business
at least once during the year the loan is made and within 24 months thereafter.
The Company sells the guaranteed portion of its SBA Loans either
individually or, through its wholly-owned broker-dealer subsidiary, in pools and
sells the unguaranteed portion of the SBA Loans in the form of Asset-Backed
Securities. The Company generally sells its individual guaranteed portions and
guaranteed portion pools to financial institutions or broker-dealers for their
investment or resale. Investors in the guaranteed and unguaranteed portions of
SBA Loans and the Company (with respect to the unguaranteed portion retained)
share ratably in all principal collected from the borrowers with respect to the
loans.
SBA Loans are written at a variable rate of interest which generally is
limited to a maximum of 275 basis points over the lowest prime lending rate
published in The Wall Street Journal adjusted on the first day of each calendar
quarter. The guaranteed portions of SBA Loans are converted by the SBA to
registered government guaranteed certificates and the certificates are sold to
investors to yield a variable rate that adjusts relative to the prime rate. SBA
lenders are required to pay a fee to the SBA of 40 basis points per annum on the
outstanding balance of the guaranteed portion of all loans sold in the secondary
market between September 1, 1993 and October 12, 1995. For SBA Loans approved on
or after October 12, 1995 a fee equal to 50 basis points per annum, on all SBA
Loans is payable.
The SBA has contracted with Colson Services Corp. to serve as the exclusive
Fiscal and Transfer Agent (the "FTA") for the guaranteed portion of SBA Loans
sold in the secondary market. The Company collects payments from borrowers and
remits to the FTA amounts due to investors. The FTA then remits such amounts to
the investors and administers the transfer of SBA guaranteed interests of SBA
Loans from one investor to another.
Through December 31, 1996 the Company had sold $590.7 million of the
unguaranteed portions of SBA Loans in the form of SBA Loan Asset-Backed
Securities comprised of Class A and Class B Certificates. The SBA Loan
Asset-Backed Securities represent beneficial ownership interests in a trust
consisting primarily of the right to receive payments and other recoveries
attributable to a pool of unguaranteed portions of SBA Loans. The principal and
interest payments attributable to these certificates are remitted by the
Company, as the servicer of the loan pool, to the trust and then passed from the
trust to the investors in the SBA Loan Asset-Backed Securities.
In the Company's credit enhanced SBA Loan Asset-Backed Securities, the
Class A SBA Loans Asset-Backed Securities have all received a rating of Aaa from
Moody's and AAA from Duff & Phelps Credit Rating Co. ("D&P"). The Class B SBA
Loan Asset-Backed Securities received a rating of A2 and A from Moody's and D&P,
respectively. SBA Loan Asset-Backed Securities provide an additional source of
liquidity for the Company, and the Company intends to continue to offer SBA Loan
Asset-Backed Securities. As of December 31, 1996, the Company had not sold any
Small Business Loans. At December 31, 1996, there were $120.5 million of Small
Business Loans held for sale.
10
<PAGE>
Commercial Loan Servicing and Sales (continued)
The investors' protection from losses is generally provided by structuring
mechanisms and cash deposits. At December 31, 1996 and 1995 the Company had
$25.4 million and $18.2 million, respectively of cash deposits held in interest
bearing accounts to protect investors from losses in SBA Asset-Backed
Securities. (See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" - "Liquidity and Capital Resources.")
Delinquency and Collections
As a general matter, when an SBA Loan becomes 75 days past due, the Company
initiates procedures that may result in the SBA purchasing the guaranteed
portion from the holder of the defaulted loan. The SBA will pay the guaranteed
portion of the principal balance, together with accrued interest covering a
period generally not to exceed 120 days. The Company's collection officers
contact delinquent borrowers and continue to maintain contact until the loan is
brought current or is liquidated. Generally, after a loan becomes 90 days
delinquent, the Company delivers a demand notice and begins the process of
workout, foreclosure and liquidation.
The following table shows the Company's delinquency and charge-off
experience with respect to Commercial Loans:
Commercial Loan Delinquencies and Charge-offs
<TABLE>
<CAPTION>
As of and for the years
ended December 31,
------------------------------------
(Dollars in thousands)
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
30-59 days past due 1.08% 1.01% 0.89%
60-89 days past due 0.60% 0.35% 0.41%
90+ days past due 4.21% 3.97% 3.67%
Unguaranteed portion of Commercial Loans in
the serviced loan portfolio $ 627,563 $ 437,829 $ 353,037
Loans charged-off, net $ 2,553 $ 1,732 $ 1,293
Loans charged-off, net, as a percentage
of the unguaranteed portion of the
Commercial Loans in the serviced loan portfolio 0.41% 0.40% 0.37%
</TABLE>
Student Loans
Overview
The Company was authorized in 1984 by the United States Department of
Education (the "DOE") to make Student Loans.
As of December 31, 1996, Student Loans originated in California, Florida,
New Jersey, Texas and New York accounted for 35.6%, 21.1%, 11.9%, 10.9%, and
5.3% respectively, of the principal amount of the Student Loans in the serviced
loan portfolio. At such date, Student Loans originated in each other
jurisdiction represented less than 2.1% of the principal amount of Student Loans
in the serviced loan portfolio.
11
<PAGE>
Student Loan Program Participation
The Company primarily originates subsidized and unsubsidized Stafford Loans
(formerly known as Guaranteed Student Loans), Consolidation Loans and parental
loans for dependent students ("PLUS Loans"), all of which are or were part of
the federal government's Federal Family Education Loan Program. The federal
government eliminated Supplemental Loans for Students ("SLS Loans") in favor of
the Unsubsidized Stafford Loan Program in 1994.
The borrower's interest rate for both subsidized and unsubsidized Stafford
Loans made on or after July 1, 1995 is a variable rate of 250 basis points over
the 91-day T-bill rate during deferral periods, rising to 310 basis points over
the 91-day T-bill rate during the loan repayment phase, with a maximum rate to
the borrower of 8.25% per annum. For both subsidized and unsubsidized Stafford
Loans made on or after July 1, 1995 the lender's yield is 250 basis points over
the 91-day T-bill rate during deferral periods, but rises to 310 basis points
over the 91-day T-bill rate during the loan repayment phase.
Most Stafford loans made prior to July 1, 1995 bear a slightly higher
lender yield and borrower rate of interest and are subject to different and
slightly higher interest rate caps. If the lender's guaranteed yield exceeds the
borrower's maximum interest rate, the DOE, in most cases, pays the difference to
the lender or holder. Students must commence repaying Stafford Loans six months
after graduation or otherwise leaving school.
Stafford Loans are available to eligible dependent or independent students
who can demonstrate financial need and thus qualify for the federal subsidy of
interest which characterizes this loan type. Unsubsidized Stafford Loans are
available to students who can not demonstrate sufficient financial need to
qualify for the in-school interest subsidy paid by the DOE on subsidized
Stafford Loans ("Unsubsidized Stafford Loans"). The DOE pays the interest on a
subsidized Stafford Loan to the lender or other holder of the loan until the
student is obligated to make principal payments. In all other respects,
subsidized and Unsubsidized Stafford Loans are the same. Interest accruing on
Unsubsidized Stafford Loans when the borrower is in school (or during certain
grace and deferral periods) is either periodically paid by the borrower or
deferred and added (capitalized) to the principal balance of the loan.
SLS Loans were available to eligible independent students who did not meet
the financial need tests for Stafford Loans, until July 1, 1994. The interest
rate for both the borrower and the lender is 310 basis points over the 52-week
Treasury bill, adjusted annually, effective July 1 of each year. In no event is
the borrower required to pay more than 11% per annum. If the lender's guaranteed
interest rate exceeds the borrower's maximum interest rate, the DOE pays the
difference to the lender subject to certain adjustments. Students are obligated
to begin repaying SLS Loans upon disbursement unless an in-school deferment is
requested. Almost all students requested and received such a deferment. If the
borrower requested and was granted a deferment of the repayment obligation,
interest on an SLS Loan accrues during the deferment period and is capitalized
as a part of the principal of the loan until the student is obligated to begin
monthly amortization. Deferred interest is capitalized by the Company and
included in the insured principal amount by the guarantee agencies.
12
<PAGE>
Student Loan Program Participation (continued)
PLUS Loans are available to parents of eligible dependent undergraduate
students. The interest rate characteristics of PLUS Loans are the same as those
of SLS Loans, except the interest rate cap was 10% for PLUS Loans made prior to
July 1, 1993 and is 9% thereafter. Parents of the students are obligated to
begin repaying PLUS Loans upon disbursement. If the borrower requests and is
eligible for a deferment of the repayment obligation, the interest on a PLUS
Loan accrues during the deferment period and is capitalized as part of the loan
until the parent is obligated to begin monthly amortization. Deferred interest
is included in the insured principal amount by the guarantee agencies.
Consolidation Loans are available to eligible borrowers of Stafford Loans,
SLS Loans and PLUS Loans and other federally guaranteed loans (each an
"Underlying Federal Loan"). Subject to the satisfaction of certain conditions
set forth in the Higher Education Act, each holder of a Consolidation Loan will
be entitled to the same guaranteed and federal reinsurance arrangements as are
available on Stafford Loans, SLS Loans and PLUS Loans. Consolidation Loans bear
interest at a rate per annum equal to the weighted average of the interest rates
on the Underlying Federal Loans (rounded up to the nearest whole percent). In
general, a borrower must repay each Consolidation Loan in scheduled monthly
installments over a period from 10 to 30 years, depending on the original
principal amount of such Consolidation Loan. Repayment of a Consolidation Loan
must commence within 60 days after disbursement of the proceeds to the holders
of Underlying Federal Loans, thereby discharging the liability of the borrower
thereon.
Student Loan Guarantees
The payment of principal and interest on all Stafford Loans, Consolidation
Loans, SLS Loans, and PLUS Loans is guaranteed by agencies approved by the DOE.
With respect to loans originated prior to October 1, 1993, the loans are fully
guaranteed against losses due to default, death, disability, and bankruptcy;
with respect to loans originated on or after October 1, 1993, only 98% of the
principal amount and interest of each loan is guaranteed. Such guarantee
agencies are, in turn, reinsured for loss by the federal government. The federal
guarantee of Student Loans is contingent upon compliance with a variety of due
diligence regulations concerning the origination and servicing of Student Loans.
Student Loan Origination
At December 31, 1996 the Company was marketing Student Loans in 40 states
and Puerto Rico through 8 offices. With the exception of the Company's Student
Loan operations center in Sacramento, California these offices are origination
offices out of which marketing personnel operate. The Company intends to enter
additional geographic markets as conditions warrant.
Maximum loan amounts, interest rates, terms and conditions and eligibility
all are determined by the DOE and are the same for all lenders. Prior to
funding, each application is guaranteed by the appropriate guarantee agency. All
loan applications are reviewed for compliance with Federally mandated
eligibility criteria and completeness.
13
<PAGE>
Student Loan Servicing and Sales
The Company originates Student Loans up to the maximum amount allowed under
each particular program, depending upon borrower eligibility. The loans may be
used for educational expenses only; generally, the checks are made payable
jointly to the student (or, in the case of PLUS Loans, to the parent) and the
school. The Company primarily targets student attending four-year colleges and
universities.
The Company currently sells Student Loans through the issuance of
Asset-Backed Securities to financial institutions and retains the right to
service the loans it originates. Servicing, often through sub-servicers,
includes collecting payments from borrowers, remitting payments to investors,
accounting for principal and interest, contacting delinquent borrowers and
arranging for repayment.
The Company generally services the loans on behalf of the Trusts during the
initial payment deferral period and has contracted with the Pennsylvania Higher
Education Assistance Agency and AFSA Data Corporation to service the loans
during their repayment phase. Prior to selling Student Loans, the Company
warehouses them pursuant to a financing arrangement. See "Loan Funding and
Borrowing Arrangements" below.
Through December 31, 1996 the Company has sold $1.2 billion of Student
Loans in the form of Asset-Backed Securities. The Student Loan Asset-Backed
Securities represent notes issued by and beneficial ownership interests in
trusts consisting primarily of the right to receive payments and other
recoveries attributable to a pool of Student Loans. The principal and interest
payments attributable to these securities are remitted by the Company, as the
servicer of the loan pool, to the trusts and then passed from the trusts to
investors.
Each issue of credit enhanced Student Loan Asset-Backed Securities sold to
investors has received a rating of Aaa from Moody's Investors Service Inc.
("Moody's") and AAA from Standard & Poor's Ratings Services ("S&P").
Asset-Backed Securities provide an additional source of liquidity for the
Company, and the Company intends to continue to sell Student Loans through sales
of Asset-Backed Securities.
Auto Loans
Overview
In 1995, the Company began originating loans to provide financing to
non-prime borrowers for the purpose of purchasing new and used cars, minivans,
vans and light trucks.
As of December 31, 1996, Auto Loans originated in California, Georgia,
Texas, Illinois, and Florida accounted for 25.4%, 7.6%, 7.3%, 5.9% and 5.8%
respectively, of the principal amount of Auto Loans in the serviced loan
portfolio. At such date, Auto Loans originated in each other jurisdiction
represented less than 4.0% of the principal amount of the Auto Loans in the
serviced loan portfolio.
14
<PAGE>
Auto Loans (continued)
Dealer Solicitation
The Company solicits business, through its marketing representatives, from
franchised new car dealers and independent used car dealers ("Dealers"). Once
selected, if a Dealer is interested in the Company's financing program, it
enters into a non-exclusive written Dealer agreement (a "Dealer Agreement"). The
Company's Dealer Agreements generally provide that contracts are sold by the
Dealer to the Company "without recourse" to the Dealer, except in limited
circumstances including, among others, that (i) the financed vehicle is not
properly registered showing the Company as lienholder; (ii) unless otherwise
specified in the related motor vehicle retail installment sale contract, the
full down payment specified in the contract was not received by the Dealer in
cash; (iii) certain representations and warranties by the Dealer regarding the
contract, the financed vehicle, the contract process and manner of sale are
breached or untrue; and (iv) the Dealer has failed to comply with applicable
law.
Auto Loan Origination
The Company's 53 Auto Loan origination offices do business in 39 states.
The Company intends to enter additional major geographic markets as conditions
warrant.
In the event that an individual elects to finance the purchase of a motor
vehicle through a Dealer, the Dealer will submit a customer's credit application
and the motor vehicle retail installment sale contract to the Company for review
of the customer's credit worthiness and proposed transaction terms. Upon
submission by a Dealer of a motor vehicle retail installment sale contract and
related documentation, the Company completes a series of processes and
procedures which are designed to (i) substantiate the accuracy of information
critical to its original credit decision, (ii) verify that the contract
submitted by the Dealer complies with both the conditions under which the credit
approval was granted and the Company's transaction structure criteria, and (iii)
confirm that the documentation complies with the Company's loss management
requirements. These processes and procedures include the verification of
employment, income, collateral and insurance prior to the contract being
released for purchase. If a transaction meets the Company's requirements, the
Dealer is notified that the Company will purchase the contract.
Auto Loan Servicing and Sales
The Company sells Auto Loans through the issuance of Asset Backed
Securities. The Company retains the right to service loans it originates.
Once a contract is purchased from a Dealer, the Company services and
administers the contract. Servicing and administrative activities have been
tailored to non-prime credits. The Company (i) collects payments; (ii) remits
payments to investors; (iii) accounts for and posts all payments received; (iv)
responds to borrower inquiries; (v) takes all necessary action to maintain the
security interest granted in the financed vehicle; (vi) investigates
delinquencies and communicates with the borrower to obtain timely payments;
(vii) reports interest information to the borrower; (viii) monitors the contract
and its related collateral; and (ix) when necessary, repossesses and disposes of
the financed vehicle. The Company utilizes a monthly billing statement system
(rather than payment coupon books) to remind borrowers of their monthly payment
obligations.
15
<PAGE>
Auto Loan Servicing and Sales (continued)
Through December 31 1996, the Company has sold $514.2 million of Auto Loans
in the form of Asset-Backed Securities. The Auto Loan Asset-Backed Securities
represent individual beneficial ownership interests in a pool consisting of Auto
Loans originated by the Company which have been sold to a trust. The principal
and interest payments attributable to these certificates are remitted by the
Company, as the servicer of the loan pool, to the trust and then passed from the
trust to the investor.
The Auto Loan Asset-Backed Securities all received a rating of Aaa from
Moody's and AAA from S&P. Auto Loan Asset-Backed Securities provide an
additional source of liquidity for the Company, and the Company intends to
continue to offer Auto Loan Asset-Backed Securities. The investors' protection
from losses is generally provided by structuring mechanisms and combinations of
cash deposits and credit enhancement provided by third parties. At December 31,
1996 the Company had $22.1 million of cash deposits held in interest bearing
accounts to protect investors from losses in Auto Loan Asset-Backed Securities.
(See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources.")
Delinquency Control and Collections
The Company contacts borrowers for first payment delinquencies commencing
five days after the borrower's due date and ten days after the due date for
subsequent payments. Contacts continue until payment has been received. Under
certain circumstances, the Company will treat as current an account which is in
arrears but meets certain criteria. This policy does not forgive interest but
could extend the maturity of the loan.
The Company's collection personnel generally review any account that
reaches fifteen (15) days delinquent to assess collection efforts to date and to
refine, if necessary, collection strategy. Together with senior management,
collection personnel generally design a collection strategy that includes a
specific deadline within which the obligation must be collected. Accounts that
have not been collected during such period are again reviewed, and, unless there
are specific circumstances which warrant further collection efforts, the account
is assigned to outside agencies for repossession of the financed vehicle.
Repossessed vehicles are generally resold through wholesale auctions, which are
attended principally by Dealers. Regardless of the actions taken or
circumstances surrounding a specific delinquent account, any account which
reaches 150 days of delinquency is charged-off and the borrower is pursued,
subject to legal limitations, for both the collateral and the deficiency.
16
<PAGE>
The following table illustrates the Company's delinquency and charge-off
experience with respect to Auto Loans:
Auto Loan Delinquencies and Charge-offs
<TABLE>
<CAPTION>
As of and for the years
ended December 31
---------------------------
(Dollars in thousands)
1996 1995
---------- -----------
<S> <C> <C>
30-59 days past due 2.15% 1.60%
60-89 days past due 0.47% 0.15%
90+ days past due 0.41% 0.04%
Loans charged-off, net $ 7,474 $ 290
Loans charged-off, net, as a percentage
of the Auto Loans in the serviced
loan portfolio 1.57% 0.25%
</TABLE>
The Company began originating Auto Loans in 1995. Therefore, the above
results may not be indicative of the portfolio's future performance.
Loan Funding and Borrowing Arrangements
The Company pledges loans to secure available warehouse lines of credit.
Warehouse lines are paid down when the Company receives the proceeds from the
sale of the loans or when cash is otherwise available.
At December 31, 1996, the Company had credit facilities for warehousing
loans totaling $2.6 billion. Outstanding borrowings under these credit lines
were approximately $408.2 million at a weighted average interest rate of 7.50%
at December 31, 1996. The Company is not required to maintain compensating
balances or forward sales commitments under these facilities which generally
mature on a periodic basis with renewals at the lender's discretion.
In addition, at December 31, 1996 the Company had outstanding $637.0
million of senior unsecured notes and $2.0 million of subordinated unsecured
notes, (collectively, the "Unsecured Notes") 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 Notes bear interest at rates ranging from 7.63 % to 9.16%, with a
weighted average interest rate of 8.58% at December 31, 1996. The Company also
had unsecured notes consisting of bank loans due within one year of
approximately $20.1 million at December 31, 1996, with a weighted average
interest rate of 5.71%.
The Company also has a $400.0 million unsecured, revolving credit facility,
(the "Credit Facility") which expires August 16, 1999. At December 31, 1996,
outstanding advances under the Credit Facility were $250.0 million with a
weighted average interest rate of 5.98%.
17
<PAGE>
Loan Funding and Borrowing Arrangements (continued)
Certain of the Company's loan agreements, including the Credit Facility and
the agreements pursuant to which the Unsecured Notes were issued (the" Note
Agreements"), prohibit Marc Turtletaub and Alan Turtletaub from beneficially
owning in the aggregate less than a specified percentage of the outstanding
voting stock of the Company, prohibit third parties from beneficially owning
more than a specified percentage of the outstanding voting stock of the Company
and/or prohibit certain changes in management of the Company. In the case of the
Note Agreements, violation of such provisions could require the Company to offer
to prepay such Unsecured Notes or could permit the holders of 50% of the
outstanding principal amount of any issue of Unsecured Notes to declare all the
outstanding Unsecured Notes of such issue immediately due and payable. A default
in any of such provisions could also cause defaults under the Credit Facility
and other loan agreements. While a majority of the executive officers relevant
to such covenants have entered into employment agreements with the Company,
there can be no assurance that any or all of such persons will remain employed
with the Company. There can be no assurance that Marc Turtletaub and Alan
Turtletaub will retain the required percentages of the voting control of the
Company necessary to avoid violating such changes in control provisions.
Advertising and Marketing
Management believes that the Company's Home Equity Loan advertising
campaigns have been responsible for generating the majority of the Company's
applications for Home Equity Loans. Most of the advertising relating to Home
Equity Loans is in television and print media. The Company monitors the source
of its applications to determine the most advantageous methods and manner of
advertising to determine the allocation of its funds for this purpose.
Hall of Fame baseball player Jim Palmer has been the corporate spokesperson
for the Company since 1993. The Company believes that Mr. Palmer is an effective
spokesperson.
Advertising relating to Home Equity Loans features the Company's 24-hour
toll-free telephone number 1-800-LOAN-YES. Potential customers in geographic
regions served by the Company who call this number are automatically transferred
to the office nearest the caller's location or to the Company's headquarters.
The Company also utilizes a network of account executives responsible for
originating Home Equity Loans through home improvement contractors and mortgage
brokers and bankers. Management believes that this service, along with expedited
processing of applications and closings, are key factors in the Company's
success.
The Company's Commercial Loan division utilizes a national network of
Business Development Officers ("BDOs"), who are responsible for calling on
businesses in their respective local markets and marketing Commercial Loans for
the Company. BDOs work closely with their local commercial real estate brokerage
community, including major real estate brokerage firms, for referrals. The
Company also works directly with large national franchisers and professional
associations to market Commercial Loans.
The Company's primary advertising for Commercial Loans is in local business
print media and commercial real estate business publications. Advertising for
Commercial Loans supports the activities of the BDOs, who are the primary direct
source of the Company's Commercial Loan business.
18
<PAGE>
Advertising and Marketing (continued)
The Company's Student Loan division utilizes a network of Regional Account
Executives ("RAE's") to work closely with colleges and universities.
Additionally, the RAE's provide borrowers with a variety of written promotional
materials through high school and college admissions personnel. The Company also
works directly with student and parent borrowers via its toll free telephone
number, 1-800 EDUCAID, and its home page on the internet.
The Company solicits Auto Loan business from Dealers through its marketing
representatives. The Company's marketing representatives identify and target
both franchised new car dealers and independent used car dealers.
Allowances for Credit Losses
The Company employs the allowance method for the purpose of providing for
credit losses. Provision for credit losses is charged to income in amounts
sufficient to maintain the allowance at a level considered adequate to cover
anticipated losses resulting from liquidation of outstanding loans. The
allowance for credit losses is based upon periodic analysis of the portfolio,
economic conditions and trends, historical credit loss experience, borrowers'
ability to repay, and collateral values. The Company's charge-off policy is
based on a review of each individual receivable. The allowance for credit losses
on loans sold represents the Company's best estimate of future credit losses
likely to be incurred over the life of the loans sold. See "Home Equity Loans
- -- Delinquencies and Collections", "Commercial Loans -- Delinquencies and
Collections", and "Auto Loans -- Delinquency and Collections", above.
The following table summarizes the Company's allowances for credit losses:
<TABLE>
<CAPTION>
As of and for the
years ended December 31,
---------------------------------
1996 1995 1994
--------- --------- -------
(Dollars in thousands)
<S> <C> <C> <C>
Balance, beginning of year $ 140,746 $ 77,863 $ 45,542
Provision for credit losses 145,652 90,723 52,600
Loans charged-off and reclassification
to collateral owned (51,265) (30,118) (20,925)
Recoveries 4,847 2,278 646
--------- --------- --------
Balance, end of year $ 239,980 $ 140,746 $ 77,863
========= ========= ========
Allowance for credit losses $ 19,895 $ 15,591 $ 14,014
Allowance for credit losses on loans sold 220,085 125,155 63,849
--------- --------- --------
$ 239,980 $ 140,746 $ 77,863
========= ========= ========
</TABLE>
19
<PAGE>
Regulation
Generally
The Company's operations are subject to extensive local, state and federal
regulations including, but not limited to, the following federal statutes and
regulations promulgated thereunder: the Small Business Act, the Small Business
Investment Act of 1958, as amended, (the "SBA"), Title 1 of the Consumer Credit
Protection Act of 1968, as amended (including certain provisions thereof
commonly known as the "Truth-in-Lending Act" or "TILA"), the Equal Credit
Opportunity Act of 1974, as amended (the "ECOA"), the Fair Credit Reporting Act
of 1970, as amended (the "FCRA"), Title IV of the Higher Education Act of 1965,
as amended (the "HEA"), the Fair Debt Collection Practices Act, as amended, and
the Real Estate Settlement Procedures Act (the "RESPA"). In addition, the
Company is subject to state laws and regulations with respect to the amount of
interest and other charges which lenders can collect on loans (e.g., usury
laws).
In the judgment of management, existing statutes and regulations have not
had a materially adverse effect on the business done by the Company. However, it
is not possible to forecast the nature of future legislation, regulations,
judicial decisions, orders or interpretations, nor their impact upon the future
business, financial condition or prospects of the Company.
Home Equity Loans
Mortgage lending laws generally require licensing of the lender,
limitations on the amount, duration and charges for various categories of loans,
adequate disclosure of certain contract terms and limitations on certain
collection practices and creditor remedies. Most states have usury laws which
limit interest rates, although the limits generally are considerably higher than
current interest rates that the Company charges. State regulatory authorities
may conduct audits of the books, records and practices of the Company's
operations. The Company is licensed to do business in each state in which it
does business and in which such licensing is required and believes it is in
compliance in all material respects with these regulations.
The Company's Home Equity Loan, origination activities are subject to
TILA and Regulation Z promulgated thereunder. TILA contains disclosure
requirements designed to provide consumers with uniform, understandable
information with respect to the terms and conditions of loans and credit
transactions in order to give them the ability to compare credit terms. TILA
also guarantees consumers a three-day right to cancel certain credit
transactions, including any refinanced mortgage or junior mortgage loan on a
consumer's primary residence. The Company believes that it is in compliance in
all material respects with TILA.
The Company is also required to comply with the ECOA which, in part,
prohibits creditors from discriminating against applicants on the basis of race,
color, sex, age or marital status. Regulation B promulgated under ECOA restricts
creditors from obtaining certain types of information from loan applicants. It
also requires certain disclosures by the lender regarding consumer rights and
requires lenders to advise applicants who are turned down for credit of the
reasons therefor. In instances where a loan applicant is denied credit or the
rate or charge for a loan is increased as a result of information obtained from
a consumer credit agency, another statute, the FCRA, requires the lender to
supply the applicant with the name and address of the reporting agency. Under
RESPA and Regulation X thereunder, disclosures to certain borrowers are required
to be made within prescribed time frames. Good faith estimates of applicable
closing costs are provided where required.
20
<PAGE>
Home Equity Loans (continued)
The Company's involvement in FHA Title I guaranteed lending activities
requires compliance with the regulatory and reporting requirements of the FHA.
The FHA only guarantees loans that comply with certain rigorous standards.
Commercial Loans
SBA Loans are governed by federal statutes (the Small Business Act and SBA)
and may be subject to regulation by certain states. These federal statutes and
regulations specify the types of loans and loan amounts which are eligible for
the SBA's guaranty as well as the servicing requirements imposed on the lender
to maintain SBA guarantees.
Although most states do not regulate commercial loans, certain states do
require licensing of lenders, have limitations on interest rates and certain
charges, require adequate disclosure of certain contract terms and place
limitations on certain collection practices and creditor remedies. Authorities
in those states that regulate the Company's Commercial Loan activities may
conduct audits of the books, records and practices of the Company.
The Company is also required to comply with certain portions of the ECOA
which are applicable to its Commercial Loans. The Company must comply with
ECOA's prohibition against discrimination on the basis of race, color, sex, age
or marital status and with the portion of Regulation B under the ECOA that
requires lenders to advise loan applicants of the reasons their credit request
was declined or subject to other adverse action.
Student Loans
Virtually every aspect of federally guaranteed student lending is highly
regulated pursuant to the HEA, including such matters as eligibility criteria
for borrowing, loan size limitations, interest rates, disclosure, repayment
terms and conditions, and loan origination and servicing requirements. Although
the Company believes it is in compliance in all material respects with all
applicable federal laws and regulations relating to Student Loans, there can be
no assurance that more restrictive laws and regulations will not be adopted
which could adversely impact the Company's Student Loan business.
Under the Omnibus Budget Reconciliation Act of 1993, Congress made a number
of changes that may affect the financial condition of the entities which
guarantee Student Loans. In addition, that legislation greatly expanded the
Federal Direct Student Loan Program volume to a target of 60% of Student Loan
demand in academic year 1998-1999, which could result in decreasing volumes of
Student Loans originated by the Company. For the past two years, the DOE has
failed to meet its statutorely prescribed targets for market share. There can be
no assurance that such changes will not have an adverse effect on the Company's
volume of Student Loan originations or on its ability to securitize the Student
Loans it originates due to the potential adverse impact on the Student Loan
guarantors. In addition, the DOE is implementing a direct consolidation loan
program, which may further reduce the volume of Student Loans originated.
Finally, federal legislation considered from time to time could modify many of
the provisions of existing federal laws relating to Student Loans. Until final
legislation is adopted, any impact on the Company, if any, is impossible to
determine.
21
<PAGE>
Auto Loans
Auto Loans are governed by federal law, including TILA and ECOA, and a wide
variety of state laws governing retail installment contracts.
The Company is licensed to do business in each state in which it does
business and in which such licensing is required and believes it is in
compliance in all material respects with such regulations.
Competition
The businesses in which the Company engages are competitive, with
competition occurring primarily on the basis of the type of loan, interest rates
and service. Competitors in the financial services business include specialty
finance companies, commercial banks, credit unions, thrift institutions,
industrial banks, credit card issuers, commercial finance companies, leasing
companies and investment banks, many of which have considerably greater
financial, technical and marketing resources than the Company. Substantial
national financial services networks have been formed by major brokerage firms,
insurance companies, retailers and bank holding companies. The Company believes
that it competes on the basis of providing competitive rates, prompt, efficient
and complete service and organizational efficiency. Other national competitors
include Beneficial Corp., Household Finance Corporation, and Avco Financial
Services, Inc. Competition for the Home Equity Loans varies a great deal across
geographic regions. On a local level, banks and smaller independent mortgage
companies are a competitive force.
The Company's major competitors for Commercial Loans vary from region to
region and market to market. Its primary competitors are regional banks and
non-bank lenders such as AT&T Capital Corp. and Heller First Capital. In
addition, state chartered business and industrial development companies offer
competition in certain states.
The origination portion of the student loan industry is becoming
increasingly concentrated. Many national and local banks make Student Loans, but
few have a focus on Student Loans. The Company's principal national competitors
are Citibank, N.A., BankAmerica Corp., Chase Manhattan Bank, Key Corp., Bank One
and Norwest Bank. In addition to competition from other lenders, the Company
faces competition from the Federal government. In 1993, Congress authorized a
"direct loan program" to be phased in through the 1998-1999 academic year. The
Company believes that yet-to-be recognized costs to the federal government may
eventually prevent full implementation of the direct loan program. Full
implementation of the direct loan program as presently constituted could result
in an adverse impact on this part of the Company's business.
The Company's major competitors for Auto Loans vary from region to region
and market to market. Its primary competitors are small independent banks and
auto finance companies such Olympic Financial Ltd., AmeriCredit Corp., WFS
Financial Inc. and First Merchants Acceptance Corp. Additionally, local finance
companies offer competition in most states.
22
<PAGE>
Environmental Policies
In the course of its business, the Company has acquired, and may in the
future acquire, through foreclosure, properties securing loans it has originated
or purchased which are in default. In the event that hazardous substances or
wastes, contaminants, pollutants, or sources thereof were to be discovered on
such properties after acquisition by the Company, the Company might be required
to remove such substances from the affected properties at its sole cost and
expense.
The Company has instituted a policy with respect to Commercial Loans and
certain of its Home Equity Loans secured by multifamily properties that is
designed to protect the Company from environmental risks and liabilities. In the
loan origination process for Commercial Loans, the Company's standard commitment
letter to be signed by the applicant includes representations that the property
is free of contamination from hazardous materials and complies with various
other environmental requirements. A questionnaire designed to elicit possible
environmental risks associated with a particular Commercial Loan must be
completed by every applicant. Company personnel or designated agents are
required to visit, and prepare an analysis of, the site prior to submitting the
loan for approval. The site is then compared to published lists of federal and
state "superfund" sites, and any property located on or adjacent to any such
site must receive a satisfactory assessment from an independent, professional
environmental engineering firm in order to be approved as Commercial Loan
collateral. Additionally, if a business operated on or adjacent to the
collateral is a "frequently polluting industry" as identified by the SBA, then a
satisfactory environmental assessment must be received before the collateral is
accepted. Applicants are also required to indemnify the Company and provide a
certificate that the property is free of hazardous waste and will remain so
during the term of the loans. Additional factors may be evaluated, and
requirements imposed, depending upon the findings derived from the
above-described procedures and the particular circumstances of the loan or the
location of the collateral. All appropriate licenses and permits must be
procured by the applicant prior to funding.
In the liquidation process with respect to Commercial Loans, in addition to
the environmental policy described above, before foreclosure is commenced on
real property collateral, a determination is made as to whether the collateral
is on or adjacent to a federal or state "superfund" list and/or whether the
business operated thereon or adjacent thereto is a "frequently polluting
industry" per SBA guidelines. If either situation is present, then a
satisfactory environmental site assessment must be obtained prior to
foreclosure. Decisions to foreclose upon real property securing SBA Loans and
certain Small Business Loans are made in conjunction with the SBA.
The Company does not have an explicit environmental policy applicable with
respect to loans other than Commercial Loans and Home Equity Loans secured by
multifamily properties.
Employees
As of December 31, 1996, the Company had approximately 3,460 employees
(full-time and part-time) approximately 1,960, 415, 165 and 490 of whom were
employed in connection with the Company's Home Equity Loan, Commercial Loan,
Student Loan, and Auto Loan activities, respectively. The remaining 430
employees work in Corporate/Administration. The Company is not subject to any
collective bargaining arrangements. The Company believes that its employee
relations are good.
23
<PAGE>
Item 2. Properties
The Company's headquarters are located on the East Coast in Union, New
Jersey and on the West Coast in Sacramento, California. The Company occupies
approximately 50,000 square feet in Union under a lease expiring in 2000. The
Company occupies approximately 468,000 square feet in Sacramento, primarily in
six office buildings, under several leases expiring at various times through
2001.
In May 1996, the Company began development of an office building located in
West Sacramento, California. It is anticipated that the project will be
completed in late 1997 with an estimated cost of approximately $85.0 million.
The 400,000 square foot building will help centralize operations and support
additional staff from the anticipated growth of the business.
Of the Company's 217 branch offices at December 31, 1996, two in New Jersey
are owned by the Company. All other offices of the Company are leased pursuant
to leases expiring at various dates through 2002. Management believes that its
facilities are suitable for its business as presently conducted.
Item 3. Legal Proceedings
Because the nature of the business of the Company involves the collection
of numerous accounts, the validity of liens and compliance with state and
federal lending laws, the Company is subject to numerous claims and legal
actions in the ordinary course of its business. While it is impossible to
estimate with certainty the ultimate legal and financial liability with respect
to such claims and actions, the Company believes that the aggregate amount of
such liabilities will not result in monetary damage which in the aggregate would
have a material adverse effect on the financial condition or results of
operations of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
None
24
<PAGE>
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's common stock is traded on the Nasdaq National Market System,
under the symbol "MONE". The following table sets forth for the periods
indicated the range of the high and low sale prices for the Company's common
stock as quoted on the Nasdaq National Market System from January 1, 1995 to
December 31, 1996. Such Nasdaq quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commission and may not necessarily represent actual
transactions. These amounts have been adjusted for stock splits effected by the
Company.
<TABLE>
<CAPTION>
1996 High Low 1995 High Low
---- ---- --- ---- ----- ----
<S> <C> <C> <C> <C> <C>
First Quarter $27.87 $13.25 First Quarter $ 6.93 $ 4.73
Second Quarter 28.25 21.00 Second Quarter 9.73 5.87
Third Quarter 26.50 18.50 Third Quarter 19.70 9.47
Fourth Quarter 31.63 25.75 Fourth Quarter 22.10 14.20
</TABLE>
On March 17, 1997, the Company had approximately 203 common stockholders of
record. The Company believes its common stock is beneficially held by in excess
of 11,212 shareholders.
In 1996 and 1995, the Company paid quarterly dividends aggregating $5.7
million and $3.5 million, respectively, on its common stock. The Company
anticipates continuing its quarterly dividend program, and employing additional
earnings for use in the origination and purchase of loans, and the expansion of
the Company's business.
The $1.72 mandatory convertible preferred stock of the Company ranks prior
to the common stock as to the payment of dividends and distribution of assets
upon liquidation. The liquidation preference of each share of preferred stock is
an amount equal to the sum of $27.63 and all accrued and unpaid dividends
thereon.
The agreements pursuant to which the Unsecured Notes were issued restrict
the ability of the Company and certain of its subsidiaries to pay dividends or
to make other distributions and investments. In addition, the Credit Facility
and certain of the Company's warehouse lines and term notes incorporate the
restrictions contained in the Unsecured Note agreements or otherwise contain
similar restrictions.
At December 31, 1996, the Company has available $296.7 million for the
payment of certain distributions, including dividends, under the most
restrictive of the operating and financial covenants contained in these
agreements. All dividends paid by the Company have been in compliance with the
above stated restrictions.
25
<PAGE>
Item 6. Selected Financial Data
Selected Consolidated Financial Data:
<TABLE>
<CAPTION>
As of and for the years ended December 31,
----------------------------------------------------------------
1996 1995 1994 1993(2) 1992(2)
---- ---- ---- ---- ----
(Dollars in thousands, except share and per share data)
<S> <C> <C> <C> <C> <C>
Selected Consolidated Statement of Financial Condition Data:
Receivables, net $ 1,385,934 $ 1,029,853 $ 637,017 $ 570,856 $ 348,769
Excess servicing asset 806,385 524,359 319,605 224,892 158,229
Total assets 2,612,025 1,792,248 1,165,130 910,335 611,541
Notes payable (excluding senior notes) 682,197 420,892 321,420 296,636 160,864
Unsecured senior notes 637,000 655,000 355,000 205,000 125,000
Subordinated debt 2,000 24,000 24,000 41,000 53,000
Shareholders' equity 582,509 241,126 194,263 165,313 126,155
Selected Consolidated Statement of Income Data:
Gain on sale of receivables $ 544,451 $ 353,995 $ 259,913 $ 159,576 $ 94,515
Finance income, fees earned and other 234,211 156,563 70,557 60,233 62,791
Operating expenses 364,394 242,817 181,784 107,306 74,352
Provision for credit losses 145,652 90,723 52,600 42,746 25,850
Interest expense 124,076 93,985 43,059 29,184 31,504
Net income 85,655 48,715 31,321 21,771 15,226
Net income per common share (1):
Primary $ 1.44 $ 0.95 $ 0.62 $ 0.48 $ 0.34
Fully diluted 1.41 0.95 0.62 0.48 0.34
Weighted average number of common shares outstanding (1):
Primary 59,085,322 51,023,609 50,804,963 45,347,486 45,168,750
Fully diluted 60,821,321 51,023,609 50,804,963 45,347,486 45,168,750
Cash dividends per common share $ .10 $ .07 $ .05 $ .04 $ .01
Selected Other Financial Data:
Volume of loans originated or purchased $ 5,693,054 $ 3,822,971 $ 2,779,408 $ 1,699,010 $ 1,007,465
Outstanding serviced loan portfolio 12,192,432 8,621,467 5,898,469 3,872,708 2,963,930
Average shareholders' equity to average total assets 18.70% 14.72% 17.33% 19.15% 19.48%
</TABLE>
(1) Net income per share of common stock is computed using the weighted average
number of shares of common stock outstanding during each period, after
giving effect to common stock equivalents arising from the issuance and the
assumed conversion of the preferred stock and the assumed exercise of stock
options. In addition, all share and per share amounts have been restated to
reflect stock splits effected by the Company.
(2) Certain items have been reclassified to conform to 1995 presentation.
26
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Certain Accounting Considerations
As a fundamental part of its business and financing strategy, The Money
Store Inc. and Subsidiaries (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, which represents the present value of the
difference between the interest rate charged by the Company to a borrower and
the interest rate received by the investor who purchased the loan, in excess of
normal loan servicing fees after giving effect to prepayment assumptions (the
"Excess Servicing Spread"). Included in gain on sale of receivables in addition
to the Excess Servicing Spread are the following: (i) non-refundable fees and
premiums on loans sold; (ii) costs related to the sale of loans; and (iii) gains
or losses on certain transactions structured as an economic hedge that are
designed to minimize risk of interest rate fluctuations. The Company recognizes
such gains in the year that such loans are sold, although cash (representing the
Excess Servicing Spread and servicing fees) is received by the Company over the
lives of the loans. Concurrently with recognizing such gain on sale, the Company
records a corresponding asset on its consolidated statement of financial
condition in an initial amount equal to the Excess Servicing Spread (the "Excess
Servicing Asset"). The Excess Servicing Asset is computed, in part, based upon,
and amortized over the estimated lives of the loans sold. The timing of sales of
the Company's loans may impact the Company's earnings from quarter to quarter.
The Excess Servicing Spread is calculated utilizing certain estimates made
by management at the time loans are sold. These estimates include the following:
(i) discount rate; (ii) rate of prepayment; and (iii) normal servicing fees,
(see following chart). The rate of prepayment of loans may be affected by a
variety of economic and other factors, including prevailing interest rates and
the availability of alternative financing to borrowers. The effect of those
factors on loan prepayment rates may vary depending on the type of loan.
Estimates of prepayment rates are made based on management's expectations of
future prepayment rates, which are based, in part, on the historical rate of
repayment of the Company's loans and other considerations. There can be no
assurance of the accuracy of management's prepayment estimates. If actual
prepayments with respect to sold loans occur more quickly than was projected at
the time such loans were sold, the carrying value of the Excess Servicing Asset
may have to be adjusted through a charge to earnings in the period of
adjustment. If actual prepayments with respect to sold loans occur more slowly
than estimated, the carrying value of the Excess Servicing Asset on the
Company's consolidated statement of financial condition would not increase,
although total income would exceed previously estimated amounts.
27
<PAGE>
The following chart presents the estimates used in the calculation of
the Excess Servicing Spread:
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Discount rates:
Home Equity Loans 11.3% 11.6% 9.7%
Commercial Loans 10.5% 11.2% 9.4%
Student Loans 8.2% 8.7% 7.7%
Auto Loans 12.0% 12.0% --
Prepayment rates:
Home Equity Loans (1) 25.0% 22.0% 21.0%
Commercial Loans (1) 9.0% 8.5% 8.0%
Student Loans (1) (3) 4.0% 2.5% 2.5%
Auto Loans (2) 1.8% 1.5% --
Normal servicing fees:
Home Equity Loans .35% .35% .35%
Commercial Loans .40% .40% .40%
Student Loans (3) .85% .85% .85%
Auto Loans 2.50% 2.50% --
</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.
The Company records an allowance for credit losses on loans sold as a
liability on the consolidated statement of financial condition. The allowance
represents the present value of projected future losses estimated on a static
pool basis. The present value is calculated using a risk-free interest rate of
6.8%, 6.3% and 7.2% for the years ended December 31, 1996, 1995 and 1994,
respectively.
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.
28
<PAGE>
Financial Condition
December 31, 1996
Cash and cash equivalents increased $142.9 million, to $321.7 million at
December 31, 1996, from $178.8 million at December 31, 1995. This increase is
due to an increase in net cash provided by financing activities compared to 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 $356.1 million
to $1.4 billion at December 31, 1996 from $1.0 billion at December 31, 1995.
This increase was primarily due to a net increase in loans held for sale of
$231.4 million, accrued interest receivable of $25.0 million and other
receivables of $104.0 million. The allowance for credit losses increased $4.3
million in 1996. The increase in loans held for sale was due primarily to the
fact that loans originated and purchased exceeded loan sales by $243.8 million.
Originations increased 49% for the year, (to $5.7 billion in 1996 from $3.8
billion in 1995), primarily as a result of the Company providing 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 $106.5 million, to $228.0 million at December 31, 1996, from $121.5 million
at December 31, 1995. Also included in other receivables are repurchased loans.
The balance of the repurchased loan portfolio was $24.4 million at December 31,
1996 compared to $29.2 million at December 31, 1995. 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 Excess Servicing Asset increased by $282.0 million to $806.4 million at
December 31, 1996 from $524.4 million at December 31, 1995. This increase was
due to Excess Servicing Spread on loans sold with servicing retained of $534.5
million offset by amortization of $252.5 million.
Property, plant and equipment, net, increased by $39.7 million to $73.5
million at December 31, 1996 from $33.8 million at December 31, 1995. This
increase was primarily a result of the purchase of land and related development
costs to date in the amount of $23.3 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 $13.9 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. Furniture and office equipment and leasehold improvements
increased $15.3 million primarily attributable to employment growth in the Home
Equity Loan division and the Auto Loan division. These increases were offset by
depreciation and amortization expense of $12.8 million.
29
<PAGE>
Financial Condition (Cont.)
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 December 31, 1996, the Company has notes payable
of $1.3 billion, which compares with $1.1 billion at December 31, 1995, an
increase of $243.3 million. This increase is primarily a result of net increases
of $306.3 million in secured notes payable, including net borrowings of $250.0
million in connection with a three-year $400 million unsecured revolving credit
facility (the "Credit Facility") offset by principal payments on unsecured notes
of $83.0 million.
Accounts payable and other liabilities increased $106.8 million to $333.3
million at December 31, 1996, from $226.4 million at December 31, 1995. The
increase resulted primarily from an increase in funds collected on loans sold
and serviced for others ("collections payable") of $82.8 million, which is a
result of the increase in the serviced loan portfolio, and from a net increase
of $24.0 million in other miscellaneous accounts payable and accrued expenses.
Income taxes, principally deferred, increased $52.3 million, to $147.2
million at December 31, 1996, from $94.9 million at December 31, 1995. The
primary reason for the increase in deferred income taxes results 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.
The allowance for credit losses on loans sold increased $94.9 million to
$220.1 million at December 31, 1996, from $125.2 million at December 31, 1995.
The allowance for credit losses on loans sold represents the present value of
projected future losses. The increase in the allowance relates primarily to the
volume of loans sold in 1996.
Total shareholders' equity at December 31, 1996 was $582.5 million, which
compares to $241.1 million at December 31, 1995, an increase of $341.4 million.
The increase in shareholders' equity resulted from the completion of a common
stock offering in March 1996, the net proceeds of which amounted to $122.1
million, and the completion of an offering of a $1.72 mandatory convertible
preferred stock, the net proceeds of which amounted to $133.4 million. In
addition, the Company had net income of $85.7 million and received proceeds and
the related tax benefit from exercised stock options of $6.5 million.
Shareholders' equity decreased $6.3 million as a result of the payment of cash
dividends.
30
<PAGE>
Results of Operations
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Net income was $85.7 million for the year ended December 31, 1996, compared
to $48.7 million for the year ended December 31, 1995, an increase of 76%.
Primary net income per common share increased to $1.44 in 1996, from $0.95 in
1995. The primary weighted average number of shares of common stock including
common stock equivalents is 59,085,322 for 1996 and 51,023,609 for 1995. Fully
diluted net income per common share increased to $1.41 in 1996, from $0.95 in
1995. The fully diluted weighted average number of shares of common stock
including common stock equivalents is 60,821,321 for 1996 and 51,023,609 for
1995. The increase in net income is primarily attributable to income derived
from gain on sale of receivables, as well as finance income and fees earned due
to the growth in the Company's serviced loan portfolio.
Gain on sale of receivables totaled $544.5 million for 1996, an
increase of 54%, compared to $354.0 million for 1995. Loans sold in 1996 totaled
$5.4 billion, compared to $3.5 billion for 1995. The increase also reflects
increases in the percentage of Excess Servicing Spread as follows: (i) on Home
Equity Loans sold to 3.68% for 1996 from 3.65% for 1995; (ii) on Commercial
Loans sold, including the sale of unguaranteed portions of SBA Loans, to 2.09%
in 1996 from 2.04% for 1995; and (iii) on Student Loans sold to 1.90% for 1996
from 1.63% for 1995. The Excess Servicing Spread for Auto Loans decreased to
10.09% for 1996 from 10.60% for 1995.
Finance income, fees earned and other increased 50% to $234.2 million for
1996, compared to $156.6 million for 1995. The primary factor attributable to
this growth is the increase in the Company's serviced loan portfolio of 41% to
$12.2 billion at December 31, 1996, as compared to $8.6 billion at December 31,
1995.
Salaries and employee benefits increased 43% to $170.3 million for 1996,
compared to $119.4 million for 1995. 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 increased 57% to $194.1 million for 1996, compared
to $123.4 million for 1995. The increase was primarily attributable to the
following increases: (i) occupancy costs and related office expenses of $32.8
million associated with the opening of additional branch offices; (ii)
advertising expenses of $13.9 million to help stimulate loan originations; (iii)
professional fees (including computer programming consulting) of $9.9 million to
support enhancing the branch offices' computer systems; (iv) loan expenses of
$6.9 million related to growth in loan originations; and (v) depreciation and
amortization of $7.2 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.
The provision for credit losses increased 61% to $145.7 million for 1996
from $90.7 million for 1995. The provision increased to maintain the allowance
for credit losses and the allowance for credit losses on loans sold at a level
considered adequate to cover risk characteristics and growth of the serviced
loan portfolio. Home Equity Loans delinquent 90 days-and-over increased to 3.83%
at December 31, 1996 from 2.42% at December 31, 1995. Commercial Loans
delinquent 90 days-and-over increased to 4.21% at December 31, 1996 from 3.97%
at December 31, 1995. Auto Loans delinquent 90 days-and-over increased to 0.41%
at December 31, 1996 from 0.04% at December 31, 1995, the initial year of
operations for the division.
31
<PAGE>
Results of Operations (Cont.)
Charge-offs, net of recoveries increased 79% to $47.1 million for 1996 from
$26.2 million for 1995, due to the increase in the Company's serviced loan
portfolio. Home Equity Loan net charge-offs for the year were $37.0 million or
45 basis points of Home Equity Loans serviced. For 1995, Home Equity Loan net
charge-offs were $24.2 million, or 42 basis points of Home Equity Loans
serviced. Commercial Loan net charge-offs for the year were $2.6 million, or 41
basis points of the unguaranteed portion of the Commercial Loans serviced.
Commercial Loan net charge-offs were $1.7 million, or 40 basis points of the
unguaranteed portion of the Commercial Loans serviced for 1995. Auto Loan net
charge-offs for the year were $7.5 million or 157 basis points of Auto Loans
serviced. Auto Loan net charge-offs for 1995 were $290,000 or 25 basis points of
Auto Loans serviced.
Interest expense increased 32% to $124.1 million for 1996 from $94.0
million for 1995. The increase is attributable to the increase in the Company's
average debt outstanding during 1996 of $511.9 million, offset in part by a
decrease in interest rates to 7.1% in 1996 from 7.7% in 1995 on the Company's
warehouse facilities and to 8.2% in 1996 from 8.7% in 1995 on the unsecured
notes payable.
Income taxes increased 72% to $58.9 million for 1996 from $34.3 million for
1995 due to an increase in pretax income. The effective tax rate remained at 41%
for 1996 and 1995.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Net income for 1995 increased 55.5% from $31.3 million ($0.62 per share) on
50,804,963 weighted average number of shares outstanding in 1994 to $48.7
million ($0.95 per share) on 51,023,609 weighted average number of shares
outstanding in 1995. Per share and weighted average share amounts have been
adjusted to reflect stock splits effected by the Company. The increase in net
income is primarily attributable to income derived from gain on sale of loans,
as well as finance income and fees earned caused by the growth in the Company's
serviced loan portfolio.
Gain on sale of receivables totaled $354.0 million for 1995, an increase of
36.2% compared to $259.9 million for 1994. The increase is primarily
attributable to an increase of 24.6% in loans sold from $2.8 billion in 1994 to
$3.5 billion in 1995. The increase also reflects increases in the Excess
Servicing Spread (i) on Home Equity Loans sold to 3.65% for 1995 from 2.51% for
1994, and (ii) on Commercial Loans sold, including the sale of unguaranteed
portions of SBA Loans, to 2.04% for 1995 from 1.93% for 1994. The Excess
Servicing Spread on Student Loans was 1.63% for 1995, which represents a
decrease from 1.72% for 1994. In 1995, the Company completed its first two Auto
Loan securitizations resulting in an Excess Servicing Spread of 10.60% for 1995.
Finance income, fees earned and other income increased 122% from $70.6
million in 1994 to $156.6 million in 1995. This was a result of the increase in
the serviced loan portfolio of 45.8% from $5.9 billion at December 31, 1994 to
$8.6 billion at December 31, 1995.
Salaries and employee benefits increased 39.5% from $85.6 million in 1994
to $119.4 million in 1995. This increase was due primarily to staffing the new
Auto Loan division, as well as an expansion of the Company's wholesale and home
improvement lending operations. The Company also incurred approximately $5.0
million in non-recurring costs associated with the consolidation and
centralization of operations in the Home Equity and Commercial Loan divisions.
32
<PAGE>
Results of Operations (Cont.)
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Other operating expenses increased 28.3% from $96.2 million in 1994 to
$123.4 million in 1995. The increase was primarily attributed to increased
occupancy costs and related office expenses associated with the opening of
additional branch offices and an increase in loan expenses as a result of the
Company's increase in loan originations.
The provision for credit losses increased by $38.1 million from $52.6
million in 1994 to $90.7 million in 1995. The provision was increased to
maintain the allowance for credit losses and the allowance for credit losses on
loans sold at a level considered adequate to cover risk characteristics of the
serviced loan portfolio and increased loan originations and sales.
Net charge-offs increased 23.5% to $26.2 million for 1995 from $21.2
million for 1994. The percentages of net charge-offs to the Company's serviced
loan portfolio decreased from 0.54% to 0.42% for Home Equity Loans offset in
part by an increase from 0.37% to 0.40% for Commercial Loans.
Home Equity Loans delinquent 90 days-and-over increased from 1.86% in 1994
to 2.42% in 1995, while Commercial Loans delinquent 90 days-and-over increased
from 3.67% in 1994 to 3.97% in 1995. Auto Loans delinquent 90 days-and-over were
0.04% in 1995.
Interest expense increased 118.3% from $43.1 million in 1994 to $94.0
million in 1995. This increase resulted from increases in notes payable used in
part to fund the increase in receivables while the average cost of funds was
8.25% for 1995 and 8.80% for 1994.
The effective tax rate increased from 40.9% in 1994 to 41.3% in 1995 as a
result of an increase in state income taxes.
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 expense 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 December 31, 1996, the Company has made
available to originators, lines of credit of approximately $141,000,000. At
December 31, 1996 and 1995 advances outstanding were $8,291,000 and $6,447,000,
respectively, and are included in other receivables. The weighted average
amounts outstanding under these credit agreements were $11,192,000 and
$2,370,000 for the years ended December 31, 1996 and 1995, respectively.
33
<PAGE>
Liquidity and Capital Resources (Cont.)
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 $321.7 million at December 31, 1996, an
increase of $142.9 million from December 31, 1995. At December 31, 1996, $170.1
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
increase primarily resulted from cash provided by financing activities of $550.9
million primarily attributable to net proceeds of $122.1 million from the March
1996 underwritten public offering of 5.9 million shares of common stock, the net
proceeds of $133.4 million from the November 1996 underwritten public offering
of 5.2 million shares of $1.72 mandatory convertible preferred stock, and the
net increase in notes payable of $243.3 million. The increase in cash was offset
by cash used in operating activities and investing activities of $359.4 million
and $48.6 million, respectively.
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 average Excess Servicing Spread, 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 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 $23.3
million. The 400,000 square foot building will help to centralize operations and
support additional staff from the anticipated growth of the business.
At December 31, 1996, the Company had $2.6 billion of 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,
$2.2 billion was unused at December 31, 1996. At December 31, 1996, the Company
had $408.2 million of warehouse notes payable at a weighted average interest
rate of 7.50%.
On August 16, 1996, the Company entered into a three-year $400 million
unsecured revolving credit facility, (the "Credit Facility"). At December 31,
1996, outstanding advances under the Credit Facility were $250.0 million with a
weighted average interest rate of 5.98%.
In addition, at December 31, 1996, 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 December 31, 1996. Other unsecured notes at December
31, 1996 totaled $20.1 million, with a weighted average interest rate of 5.71%.
34
<PAGE>
Liquidity and Capital Resources (Cont.)
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
December 31, 1996, the Company had available $296.7 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.
35
<PAGE>
Item 8. Financial statements and supplementary data
The Money Store Inc. and Subsidiaries
Consolidated Financial Statements
December 31, 1996 and 1995
(With Independent Auditors' Report Thereon)
36
<PAGE>
Independent Auditors' Report
The Board of Directors and Shareholders
The Money Store Inc.:
We have audited the accompanying consolidated statements of financial
condition of The Money Store Inc. and subsidiaries as of December 31, 1996 and
1995, and the related consolidated statements of income, shareholders' equity
and cash flows for each of the years in the three-year period ended December 31,
1996. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The Money
Store Inc. and subsidiaries as of December 31, 1996 and 1995, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996, in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Sacramento, CA
February 12, 1997
37
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
(Dollars in thousands)
<TABLE>
<CAPTION>
Assets
------ December 31,
-----------------------
1996 1995
---------- ----------
<S> <C> <C>
Cash and cash equivalents (including $170,079 and
$136,159 in 1996 and 1995 which are restricted) $ 321,703 $ 178,781
Receivables, net of allowance for credit losses of
$19,895 and $15,591 in 1996 and 1995 1,385,934 1,029,853
Excess servicing asset 806,385 524,359
Property and equipment, net 73,458 33,762
Other 24,545 25,493
---------- ----------
$2,612,025 $1,792,248
========== ==========
Liabilities and Shareholders' Equity
------------------------------------
Liabilities:
Notes payable $1,319,197 $1,075,892
Accounts payable and other liabilities 333,283 226,443
Income taxes, principally deferred 147,197 94,928
Unearned insurance commissions 7,754 4,704
Allowance for credit losses on loans sold 220,085 125,155
---------- ----------
2,027,516 1,527,122
---------- ----------
Subordinated debt 2,000 24,000
---------- ----------
Commitments and contingencies (Note 10)
Shareholders' equity:
Preferred stock, no par; authorized
10,000,000 shares; issued and
outstanding 5,215,000 of $1.72
mandatory convertible shares in 1996
(aggregate liquidation value of $144,064) 133,363 --
Common stock, no par; authorized 250,000,000
shares; issued and outstanding 57,791,436 shares
in 1996 and 51,339,896 shares in 1995 188,276 59,603
Retained earnings 260,870 181,523
---------- ----------
582,509 241,126
---------- ----------
$2,612,025 $1,792,248
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
38
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
Consolidated Statements of Income
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Gain on sale of receivables $544,451 $353,995 $259,913
Finance income, fees earned and other 234,211 156,563 70,557
-------- -------- --------
778,662 510,558 330,470
-------- -------- --------
Expenses:
Salaries and employee benefits 170,296 119,423 85,596
Other operating expenses 194,098 123,394 96,188
Provision for credit losses 145,652 90,723 52,600
Interest 124,076 93,985 43,059
-------- -------- --------
634,122 427,525 277,443
-------- -------- --------
Income before income taxes 144,540 83,033 53,027
Income taxes 58,885 34,318 21,706
-------- -------- --------
Net income $ 85,655 $ 48,715 $ 31,321
======== ======== ========
Net income per common share:
Primary $ 1.44 $ 0.95 $ 0.62
======== ======== ========
Fully diluted $ 1.41 $ 0.95 $ 0.62
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
39
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
(Dollars in thousands)
<TABLE>
<CAPTION>
Total
Preferred Stock Common Stock Retained Shareholders'
Shares Amount Shares Amount Earnings Equity
---------- --------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 -- $ -- 50,805,000 $ 57,963 $107,350 $165,313
Net income 31,321 31,321
Purchase of fractional shares (37)
Common dividends (2,371) (2,371)
---------- --------- ---------- -------- -------- --------
Balance, December 31, 1994 -- -- 50,804,963 57,963 136,300 194,263
Net income 48,715 48,715
Proceeds from exercise
of stock options 534,933 1,640 1,640
Common dividends (3,492) (3,492)
---------- --------- ---------- -------- -------- --------
Balance, December 31, 1995 -- -- 51,339,896 59,603 181,523 241,126
Net income 85,655 85,655
Issuance of preferred stock 5,215,000 133,363 133,363
Issuance of common stock 5,937,500 122,128 122,128
Proceeds and related tax benefits
from exercise of stock options 514,040 6,545 6,545
Preferred dividends (621) (621)
Common dividends (5,687) (5,687)
---------- --------- ---------- -------- -------- --------
Balance, December 31, 1996 5,215,000 $ 133,363 57,791,436 $188,276 $260,870 $582,509
========== ========= ========== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
40
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in thousands)
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 85,655 $ 48,715 $ 31,321
Adjustments to reconcile net income to net
cash used in operations:
Depreciation and amortization 15,630 8,446 5,475
Provision for deferred income taxes 47,887 13,430 16,437
Provision for credit losses 145,652 90,723 52,600
Net changes in operating assets
and liabilities:
Proceeds from loans sold 5,449,240 3,508,824 2,816,411
Loans originated and purchased (5,693,054) (3,822,971) (2,779,408)
Loans repurchased (6,971) (9,059) (14,314)
Increase in other receivables (156,693) (97,445) (110,116)
Excess Servicing Spread (534,550) (342,256) (208,156)
Amortization of Excess Servicing Asset 252,524 137,502 113,443
Increase in accounts payable and
other liabilities 24,001 18,469 10,186
Other, net 11,236 7,242 (936)
----------- ----------- -----------
Net cash used in operating
activities (359,443) (438,380) (67,057)
----------- ----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (48,612) (17,466) (15,487)
Payment for purchase of home improvement loan
company, net of cash acquired -- -- (2,748)
----------- ----------- -----------
Net cash used in investing activities (48,612) (17,466) (18,235)
----------- ----------- -----------
Cash flows from financing activities:
Net increase in credit facilities 302,415 99,472 24,784
Proceeds from unsecured senior notes 20,000 300,000 150,000
Principal payments on unsecured senior notes (83,000) -- --
Principal payments on subordinated debt (22,000) -- (17,000)
Debt issuance costs (1,413) (2,902) (2,169)
Net increase in collections payable 82,839 78,617 6,662
Net proceeds from issuance of preferred stock 133,363 -- --
Net proceeds from issuance of common stock 122,128 -- --
Proceeds from exercise of stock options 2,953 1,640 --
Dividends paid (6,308) (3,492) (2,371)
----------- ----------- -----------
Net cash provided by financing
activities 550,977 473,335 159,906
----------- ----------- -----------
Net increase in cash and cash equivalents 142,922 17,489 74,614
Cash and cash equivalents at beginning of year 178,781 161,292 86,678
----------- ----------- -----------
Cash and cash equivalents at end of year $ 321,703 $ 178,781 $ 161,292
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
41
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(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. The consolidated
financial statements are prepared in accordance with generally accepted
accounting principles. All significant intercompany accounts and transactions
have been eliminated in consolidation. In preparing the consolidated financial
statements, management is required to make estimates and assumptions which
affect the reported amounts of assets and liabilities as of the date of the
consolidated statements of financial condition and revenues and expenses for the
period. Actual results could differ from those estimates. These estimates
include, among other things, estimated prepayments and discount rates on loans
sold with servicing retained, valuation of collateral owned, and determination
of the allowance for credit losses.
Revenue Recognition
Gain on sale of receivables represents the present value of the difference
between the interest rate charged by the Company to a borrower and the interest
rate received by the investor who purchased the loan in excess of normal loan
servicing fees after giving effect to prepayment assumptions (the "Excess
Servicing Spread"). Included in gain on sale of receivables in addition to the
Excess Servicing Spread are the following: (i) non-refundable fees and premiums
on loans sold; (ii) costs related to the sale of the loans; and (iii) gains or
losses on certain transactions structured as an economic hedge that are designed
to minimize risk of interest rate fluctuations. The Company recognizes such gain
on sale of loans on the settlement date. Gains on the sale of a portion of a
loan are based on the relative fair market value of the loan portion sold and
retained. Concurrently with recognizing such gain on sale, the Company records a
corresponding asset (the "Excess Servicing Asset") on its consolidated statement
of financial condition in an initial amount equal to the Excess Servicing
Spread.
42
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies (continued)
Revenue Recognition (continued)
The Excess Servicing Asset is amortized, as a charge to finance income, in
proportion to the income received from the differential retained over the
estimated lives of the underlying loans. Income from the differential retained
is recorded in finance income as received. In addition, finance income includes
servicing fees and interest income on loans retained by the Company. The Excess
Servicing Asset is carried at the lower of amortized cost or net realizable
value.
The carrying value of the Excess Servicing Asset is analyzed quarterly by
the Company on a disaggregated basis to determine whether prepayment experience
has had an impact on this carrying value. Expected cash flows of the underlying
loans sold are reviewed based upon current economic conditions and the type of
loans originated and are revised as necessary using the original discount rate
used in calculating the gain on sale. Adjustments arising from adverse
prepayment experience are recognized as a charge to earnings while favorable
experience is not recognized until realized.
The Company ceases to accrue finance income on loans receivable which
become 90 days delinquent. Finance income previously accrued and unpaid on loans
receivable which become 90 days delinquent is reversed.
Loans Receivable
Loans receivable held for sale are carried at the lower of aggregate cost
or market value. Market value is determined by outstanding commitments from
investors or current investor yield requirements. There was no allowance for
market losses on loans receivable held for sale at December 31, 1996 and 1995.
Credit Losses
Provision for credit losses is charged to income in amounts sufficient to
maintain the allowance at a level considered adequate to cover anticipated
losses resulting from liquidation of outstanding loans. The allowance for credit
losses is based upon periodic analysis of the portfolio, economic conditions and
trends, historical credit loss experience, borrowers' ability to repay and
collateral values. The allowance for credit losses on loans sold represents the
Company's best estimate of future credit losses likely to be incurred over the
life of the loans sold. The Company's charge-off policy is based on a review of
each individual receivable and the loan is charged-off when deemed
uncollectable.
43
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies (continued)
Property and Equipment, net
Property and equipment is stated at cost less accumulated depreciation and
amortization. Capital leases are included in property and equipment, at the
capitalized amount. Depreciation and amortization are computed primarily using
the straight-line method. Estimated useful lives range from three to seven years
for furniture and equipment, the lesser of ten years or the lease term for
leasehold improvements, and three to five years for capital leases.
Also included in property and equipment is the capitalization of costs
relating to the construction of an office building. Costs include expenditures
for the purchase of land, construction of the building along with related costs
and the amount of interest associated with the construction. Capitalized
interest is recorded as part of the asset cost and will be depreciated over its
useful life when it becomes operational.
Collateral Owned
Collateral owned consists of property acquired by foreclosure or in
settlement of loans receivable or repossession, and is carried at the lower of
carrying value or fair value less estimated costs to sell. Collateral owned is
$7,199,000 and $10,211,000 at December 31, 1996 and 1995, respectively, and is
included in other assets.
Income Taxes
The Company recognizes deferred tax assets and liabilities for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply in the year in which those temporary differences are expected
to be recovered or settled. The effect on deferred tax assets and liabilities of
a change in tax rates is recognized in income in the period that includes the
enactment date.
Unearned Insurance Commissions
The Company receives a commission from third party providers based upon the
insurance coverage sold to Home Equity Loan customers. For financial reporting,
this income is deferred and recognized over the expected life of the insurance
policy.
44
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies (continued)
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 and the assumed exercise of stock
options. The primary weighted average number of common shares including common
stock equivalents is 59,085,322 for 1996, 51,023,609 for 1995 and 50,804,963 for
1994. The fully diluted weighted average number of common shares including
common stock equivalents is 60,821,321 for 1996, 51,023,609 for 1995 and
50,804,963 for 1994. All share and per share amounts have been restated to
reflect stock splits effected by the Company.
Statements of Cash Flows
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
Supplemental disclosure of cash flow information is as follows:
Cash paid for interest expense is $122,531,000, $84,335,000 and $38,779,000
for the years ended December 31, 1996, 1995 and 1994, respectively. Cash paid
for income taxes is $9,253,000, $12,940,000 and $2,035,000 for the years ended
December 31, 1996, 1995 and 1994, respectively.
Supplemental disclosure of noncash investing and financing activities is as
follows:
Noncash investing and financing activities consist of capital lease
obligations of $3,890,000 for the year ended December 31, 1996, in connection
with leases for equipment.
Recent Accounting Developments
In June 1996, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard 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 effective January 1, 1997 and is to be applied prospectively. Earlier
implementation is not permitted.
45
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Recent Accounting Developments (Cont.)
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 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 asset 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.
It is expected that, upon implementation, FAS 125 will require the Company
to record an unrealized gain of approximately $15,000,000.
In May 1995, the FASB issued FAS 122, "Accounting for Mortgage Servicing
Rights" which became effective for years beginning after December 15, 1995. The
adoption of FAS 122 has no material impact on the financial condition or results
of operations of the Company.
46
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(2) Receivables, net
<TABLE>
<CAPTION>
December 31,
---------------------------
1996 1995
---------- ----------
(Dollars in thousands)
<S> <C> <C>
Loans held for sale:
Home Equity Loans $ 548,181 $ 460,310
Commercial Loans 264,655 235,157
Student Loans 187,498 106,413
Auto Loans 38,779 5,842
---------- ----------
1,039,113 807,722
Other 297,832 193,799
Accrued interest 68,884 43,923
---------- ----------
1,405,829 1,045,444
Less allowance for credit losses 19,895 15,591
---------- ----------
$1,385,934 $1,029,853
========== ==========
</TABLE>
Loans Held for Sale
Home Equity Loans
Home Equity Loans held for sale have contractual maturities of up to 30
years. Real property of the borrower is usually pledged as collateral. Home
Equity Loans are generally sold in securitization transactions with servicing
retained.
Commercial Loans
SBA Loans have contractual maturities of up to 25 years. SBA Loans are made
under the Small Business Act and are guaranteed in part by the Federal
government. The guaranteed and unguaranteed portions of SBA Loans are sold in
separate transactions while the Company retains the servicing rights. At
December 31, 1996 and 1995, the unguaranteed portion of SBA Loans held for sale
is $44,829,000 and $85,932,000, respectively.
Small Business Loans have maturities up to 30 years. At December 31, 1996
and 1995, Small Business Loans held for sale are $120,450,000 and $72,577,000,
respectively.
47
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(2) Receivables, net (continued)
Student Loans
Student Loans have varying maturities. Loans are made through the
Guaranteed Student Loan Program and are at least insured 98% by agencies
approved by the United States Department of Education. Student Loans are
generally sold in securitization transactions with servicing retained.
Auto Loans
Auto Loans have contractual maturities up to seven years. The vehicle
purchased by the borrower is pledged as collateral. Auto Loans are generally
sold in securitization transactions with servicing retained.
Other Receivables
Other receivables consist primarily of cash advances made by the Company in
connection with certain securitization transactions designed to protect
investors from losses and repurchased loans.
Allowance for Credit Losses
The activity in the allowance for credit losses is summarized as follows:
<TABLE>
<CAPTION>
As of and for the
years ended December 31,
----------------------------------
1996 1995 1994
--------- --------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Balance, beginning of year $ 140,746 $ 77,863 $ 45,542
Provision for credit losses 145,652 90,723 52,600
Loans charged-off and reclassification to collateral
owned (51,265) (30,118) (20,925)
Recoveries 4,847 2,278 646
--------- --------- --------
Balance, end of year $ 239,980 $ 140,746 $ 77,863
========= ========= ========
Allowance for credit losses $ 19,895 $ 15,591 $ 14,014
Allowance for credit losses on loans sold 220,085 125,155 63,849
--------- --------- --------
$ 239,980 $ 140,746 $ 77,863
========= ========= ========
</TABLE>
48
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(2) Receivables, net (continued)
At December 31, 1996 and 1995, the gross allowance for credit losses on
loans sold was $292,055,000 and $158,424,000, respectively, which was discounted
using risk-free interest rates of 6.80% and 6.34% in 1996 and 1995,
respectively.
As of December 31, 1996 and 1995, loans retained by the Company totaling
$31,602,000 and $35,637,000, respectively, were on non-accrual status.
Serviced Loan Portfolio
The serviced loan portfolio, which consists of loans sold to investors and
loans retained by the Company, is as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------
1996 1995
----------- ----------
(Dollars in thousands)
<S> <C> <C>
Home Equity Loans $ 8,230,776 $5,751,677
Commercial Loans 2,282,384 1,907,050
Student Loans 1,203,739 845,501
Auto Loans 475,533 117,239
----------- ----------
$12,192,432 $8,621,467
=========== ==========
</TABLE>
(3) Excess Servicing Asset
The activity in the Excess Servicing Asset is summarized as follows:
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------------
1996 1995 1994
--------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C>
Balance, beginning of year $ 524,359 $ 319,605 $ 224,892
Excess Servicing Spread 534,550 342,256 208,156
Amortization (252,524) (137,502) (113,443)
--------- --------- ---------
Balance, end of year $ 806,385 $ 524,359 $ 319,605
========= ========= =========
</TABLE>
49
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(3) Excess Servicing Asset (continued)
The Company discounts the cash flows on the underlying loans sold at a rate
it believes a purchaser would require as a rate of return. The weighted average
rates used to discount the cash flows are as follows:
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Home Equity Loans 11.3% 11.6% 9.7%
Commercial Loans 10.5% 11.2% 9.4%
Student Loans 8.2% 8.7% 7.7%
Auto Loans 12.0% 12.0% --
</TABLE>
The carrying value of the Excess Servicing Asset is analyzed quarterly by
the Company on a disaggregated basis to determine whether prepayment experience
has had any impact on this carrying value.
The weighted average discount rate used in determining the carrying value
of the Excess Servicing Asset is 11.5%, 11.0% and 10.0% as of December 31, 1996,
1995 and 1994, respectively.
Included in gain on sale of receivables in addition to the Excess
Servicing Spread, is the following: (i) non-refundable fees and premiums on
loans sold; (ii) costs related to the sale of loans; and (iii) gains or losses
on certain transactions structured as an economic hedge that are designed to
minimize risk of interest rate fluctuations. The net amounts of these additions
to gain on sale are $9,901,000, $11,739,000 and $51,757,000 for the years ended
December 31, 1996, 1995 and 1994, respectively.
50
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(4) Property and Equipment, net
<TABLE>
<CAPTION>
December 31,
------------------------
1996 1995
-------- -------
(Dollars in thousands)
<S> <C> <C>
Land $ 7,296 $ 183
Buildings and improvements 6,182 4,398
Furniture and fixtures 75,085 47,662
Construction in progress (a) 16,182 --
-------- -------
104,745 52,243
Less accumulated depreciation
and amortization 31,287 18,481
-------- -------
$ 73,458 $33,762
======== =======
</TABLE>
(a) Capitalized interest is $803,000 for the year ended December 31, 1996.
(5) Notes Payable
<TABLE>
<CAPTION>
December 31,
------------------------------
1996 1995
---------- ----------
(Dollars in thousands)
<S> <C> <C>
Secured:
Warehouse notes $ 408,244 $ 355,114
Other notes 3,803 628
---------- ----------
412,047 355,742
Unsecured 907,150 720,150
---------- ----------
$1,319,197 $1,075,892
========== ==========
</TABLE>
Secured Notes
The Company has available lines of credit, which are subject to renewal
periodically, for warehousing of loans of $2,600,000,000 at December 31, 1996.
Outstanding borrowings under these credit facilities are collateralized by loans
of $411,682,000 and restricted cash in the amount of $6,083,000 at December 31,
1996. Upon the sale of loans, the notes are repaid.
51
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(5) Notes Payable (continued)
In addition, other secured notes represent capital lease obligations of
$3,803,000 at December 31, 1996. The future minimum lease payments are as
follows: $1,602,000 in 1997, $1,528,000 in 1998, $637,000 in 1999, $464,000 in
2000 and $35,000 in 2001. Included in the above amounts is $463,000 representing
interest.
The following table presents data on warehouse notes payable:
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------------
1996 1995 1994
----------- ----------- ------------
(Dollars in thousands)
<S> <C> <C> <C>
Weighted average interest rate for
the year 7.1% 7.7% 5.6%
Weighted average interest rate at
end of year 7.5% 6.6% 6.4%
Average amount outstanding for
the year $ 799,282 $ 548,733 $ 255,789
Maximum amount outstanding
at any month end $ 1,281,698 $ 916,426 $ 411,577
</TABLE>
Unsecured Notes
Unsecured notes at December 31, 1996 and 1995 included senior notes of
$637,000,000 and $655,000,000, respectively. The Company is required to pay
principal of $112,000,000 in 1997, $40,000,000 in 1998, $190,000,000 in 1999,
$110,000,000 in 2000, $35,000,000 in 2001 and $150,000,000 in 2002.
On August 16, 1996, the Company entered into a $400,000,000 unsecured
revolving credit facility (the "Credit Facility") which expires August 16, 1999.
At December 31, 1996 outstanding advances under the Credit Facility were
$250,000,000.
In addition, unsecured notes payable include bank loans due within one year
of $20,150,000 and $65,150,000 at December 31, 1996 and 1995, respectively.
The Company is required to comply with various operating and financial
covenants defined in the agreements governing the issuance of the senior notes.
In addition, the Credit Facility and certain of the Company's warehouse notes
incorporate the restriction contained in the senior notes or otherwise contain
similar restrictions. The covenants restrict the payment of certain
distributions including dividends. At December 31, 1996, the Company had
available $296,704,000 for the payment of such distributions under the most
restrictive of such covenants.
52
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(5) Notes Payable (continued)
Costs incurred in connection with the issuance of the unsecured notes have
been deferred and are being amortized over the terms of the respective notes
using the straight line method. At December 31, 1996 and 1995, the unamortized
debt issuance cost is $4,875,000 and $5,473,000, respectively.
The following table presents data on unsecured notes payable:
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------------
1996 1995 1994
----------- ----------- -------------
(Dollars in thousands)
<S> <C> <C> <C>
Weighted average interest rate for
the year 8.2% 8.7% 8.3%
Weighted average interest rate at
end of year 7.8% 8.6% 8.7%
Average amount outstanding for
the year $ 822,833 $ 561,483 $ 279,562
Maximum amount outstanding
at any month end $ 1,010,150 $ 720,150 $ 405,150
</TABLE>
(6) Subordinated Debt
<TABLE>
<CAPTION>
December 31,
-----------------------
1996 1995
------- -------
(Dollars in thousands)
<S> <C> <C>
12% due December 31, 1996 (a) $ -- $22,000
7.8% due September 2, 1997 2,000 2,000
------- -------
$ 2,000 $24,000
======= =======
</TABLE>
(a) The notes provide for semi-annual interest payments and annual principal
payments of $11,000,000. The Company had an $11,000,000 payment due on
December 31, 1995 (not a business day) which was paid on January 2, 1996.
53
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(6) Subordinated Debt (continued)
In connection with the above notes, the Company is required to comply with
various operating and financial covenants as defined in the respective
agreements governing the issuance of the notes.
Costs incurred in connection with the issuance of the notes are deferred
and amortized over the terms of the respective notes using the straight line
method. The subordinated debt issuance cost is fully amortized at December 31,
1996 and at December 31, 1995, the unamortized subordinated debt issuance cost
is $434,000.
(7) Accounts Payable and Other Liabilities
Accounts payable and other liabilities includes $246,018,000 and
$163,179,000 at December 31, 1996 and 1995, respectively, of funds collected on
loans sold and serviced for others. The Company is responsible for the
collection of principal and interest which is remitted primarily in the month
following collection.
(8) Employee Benefit Plans
Defined Contribution Plan
The Company has a defined contribution plan (401(k)) for all eligible
employees. Contributions to the plan are in the form of employee salary
deferrals which may be subject to employer matching contributions up to a
specified limit. In addition, the Company may make an annual profit sharing
contribution on behalf of its employees. The Company's cost for the plan, net of
reallocated forfeitures, amounted to $4,851,000, $3,479,000 and $3,176,000 for
the years ended December 31, 1996, 1995 and 1994, respectively.
Profit Sharing Plan
The Company has a non-qualified profit sharing plan for certain employees.
Contributions to this plan are based on a percentage of pretax profits. The
Company's cost of the plan amounted to $8,771,000, $4,391,000 and $3,337,000 for
the years ended December 31, 1996, 1995 and 1994, respectively.
Pension Plan
The Company has a non-qualified, unfunded pension benefit plan. The purpose
of the plan is to supplement the existing employee benefit plans for certain key
executives. The benefits are based upon years of service and the employee's
highest average compensation as defined.
54
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(8) Employee Benefit Plans (continued)
The following table sets forth the plan's status and amounts recognized in
the Company's consolidated financial statements:
<TABLE>
<CAPTION>
December 31,
--------------------
1996 1995
------- -------
(Dollars in thousands)
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested $ 1,350 $ 1,262
Non-vested 1,979 1,758
------- -------
Accumulated benefit obligation 3,329 3,020
Effect of projected future compensation levels 94 146
------- -------
Projected benefit obligation 3,423 3,166
Unrecognized prior service cost (1,859) (2,069)
Unrecognized net gain (loss) 53 (16)
Additional minimum liability 1,712 1,939
------- -------
Total pension liability $ 3,329 $ 3,020
======= =======
</TABLE>
In determining the projected benefit obligation for the year ended December
31, 1996, the discount rate was 7.5% pre-retirement and 7.0% post-retirement.
For the year ended December 31, 1995, the discount rate was 7.0% for
pre-retirement and post-retirement. The rate of increase in the future
compensation levels was 4.0% in 1996 and 1995.
55
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(8) Employee Benefit Plans (continued)
Net periodic pension cost includes the following components:
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------
1996 1995 1994
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Service cost $105 $144 $136
Interest cost on projected benefit obligation 222 206 174
Net amortization and deferral 210 210 211
---- ---- ----
Net periodic pension cost $537 $560 $521
==== ==== ====
</TABLE>
In determining the net periodic pension cost for the year ended December
31, 1996, the discount rate was 7.0% pre-retirement and post-retirement. For the
year ended December 31, 1995, the discount rate was 7.5% pre-retirement and 7.0%
post-retirement. The rate of increase in the future compensation levels was 4.0%
in 1996 and 1995. For the year ended December 31, 1994, the discount rate was
7.0% and the rate of increase in the future compensation levels was 4.0%.
Stock Option Plans
The Company's 1991 Stock Option Plan, as amended on April 15, 1993, and the
1995 Stock Incentive Plan dated August 15, 1995 (collectively the "Plans")
provide for a total of 5,484,375 shares for issuance.
Options granted under the Plans may be incentive stock options or
non-qualified stock options. The exercise price of both types of options will be
equal to 100% of the fair market value of the shares on the date of the grant.
56
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(8) Employee Benefit Plans (continued)
Twenty percent of the options initially granted under the Plans are
exercisable by the holder one year after the date of grant, with an additional
20% of the options exercisable on the anniversary date of the grant for the next
four years. No options shall be granted under the 1991 Stock Option Plan or the
1995 Stock Incentive Plan after September 15, 2001 and August 15, 2005,
respectively. Changes in options outstanding are as follows:
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------------------------------------------------------------------
1996 1995 1994
----------------------------- ----------------------------- ----------------------------
Number of Weighted-Average Number of Weighted-Average Number of Weighted-Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------ -------------- ------ -------------- ------ --------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at
beginning of year 3,168,090 $ 9.54 2,261,732 $ 4.27 794,996 $ 2.84
Options granted 983,091 24.01 1,697,909 14.16 1,466,736 5.05
Options canceled (276,605) 15.34 (241,376) 6.23 -- --
Options exercised (523,350) 6.13 (550,175) 3.57 -- --
--------- --------- ---------
Options outstanding at
end of year 3,351,226 13.95 3,168,090 9.54 2,261,732 4.27
========= ========= =========
Options exercisable 521,750 7.62 530,000 3.77 477,000 2.84
========= ========= =========
</TABLE>
57
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(8) Employee Benefit Plans (continued)
<TABLE>
<CAPTION>
Weighted-
Weighted- Average
Average Remaining
Number of Exercise Contracted
Shares Price Life (in years)
------------- -------------- --------------
<S> <C> <C> <C>
Exercise prices:
$2.84
Options outstanding 195,249 $ 2.84 --
Options exercisable 195,249 2.84
$4.83 - $7.07
Options outstanding 1,133,940 5.47 3.2
Options exercisable 167,936 5.44
$9.57
Options outstanding 22,500 9.57 4.0
Options exercisable 4,500 9.57
$15.90 - $22.25
Options outstanding 1,508,287 17.76 4.3
Options exercisable 154,065 15.99
$25.00 - $26.69
Options outstanding 491,250 25.63 5.0
Options exercisable -- --
</TABLE>
In October 1995, the Financial Accounting Standards Board issued Statement
No. 123, Accounting for Stock-Based Compensation ("FAS 123"). This Statement
establishes a new fair value based accounting method for stock-based
compensation plans and encourages (but does not require) employers to adopt the
new method in place of the provisions of Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees ("APB 25"). Companies may continue
to apply the accounting provisions of APB 25 in determining net income; however,
they must apply the disclosure requirements of FAS 123 for all grants issued
after 1994. The Company elected to continue to apply the provisions of APB 25 in
accounting for the employee stock plans described above. Accordingly, no
compensation cost has been recognized.
58
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(8) Employee Benefit Plans (continued)
Had compensation cost for these employee stock plans been determined
based on the new fair value method under FAS 123, the Company's net income and
net income per share would have been reduced based on the month of grant to the
pro forma amounts indicated as follows:
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------
1996 1995
---- ----
(Dollars in thousands, except per share data)
<S> <C> <C>
Net income:
As reported $ 85,655 $ 48,715
Pro forma (1) 83,677 48,058
Net income per common share:
Primary:
As reported $ 1.44 $ 0.95
Pro forma (1) 1.41 0.94
Fully diluted:
As reported 1.41 0.95
Pro forma (1) 1.38 0.94
</TABLE>
(1) The pro forma amounts noted above only reflect the effects of stock-based
compensation grants made after 1994. Because stock options are granted each
year and generally vest over five years, these pro forma amounts may not
reflect the full effect of applying the (optional) fair value method
established by FAS 123 that would be expected if all outstanding stock
option grants were accounted for under this method.
The fair value of each option grant is estimated based on the date of
grant. In determining the fair value, the Company used a modified Black-Scholes
option-pricing model. For the fixed stock option plans, the following
weighted-average assumptions are used for 1996 and 1995, respectively: expected
dividend yield of 0.35% and 0.45%; expected volatility of 46.34% and 45.45%;
risk-free interest rates of 6.41% and 5.96%; and expected lives of five for both
years. The weighted-average grant-date fair value of options granted are $11.44
and $6.56 for the years ended December 31, 1996 and 1995, respectively.
59
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(9) Income Taxes
The provision for income taxes is as follows:
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------------
1996 1995 1994
------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C>
Current $10,998 $20,888 $ 5,269
Deferred 47,887 13,430 16,437
------- ------- -------
$58,885 $34,318 $21,706
======= ======= =======
</TABLE>
A reconciliation between the expected Federal income tax expense and the
actual income tax expense is as follows:
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------
1996 1995 1994
-------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C>
Income before income taxes $144,540 $83,033 $53,027
Statutory Federal income tax rate 35% 35% 35%
-------- ------- -------
Computed expected income tax expense 50,589 29,062 18,559
State income taxes net of Federal income
tax benefit 8,296 5,256 3,147
-------- ------- -------
$ 58,885 $34,318 $21,706
======== ======= =======
</TABLE>
At December 31, 1996, the Company has state net operating loss
carryforwards available of $13,150,000, expiring on various dates through 2011.
60
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(9) Income Taxes (continued)
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities is as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------
1996 1995
-------- --------
(Dollars in thousands)
<S> <C> <C>
Deferred tax assets:
Provision for credit losses $ 98,993 $ 59,270
Interest on non-performing loans 12,307 6,864
Other 8,806 4,542
-------- --------
120,106 70,676
-------- --------
Deferred tax liabilities:
Gain on sale of receivables 253,587 159,153
Depreciation and amortization 2,883 --
-------- --------
256,470 159,153
-------- --------
Net deferred tax liability $136,364 $ 88,477
======== ========
</TABLE>
Management believes it is more likely than not that the Company will
realize the benefit of deferred tax assets and that such assets will reverse
during periods in which the Company generates net taxable income and reversal of
deferred tax liabilities.
61
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(10) Commitments, Contingencies and Concentrations of Credit Risk
The Company is obligated under noncancellable operating leases for property
and equipment expiring at various dates through 2001. Minimum annual rental
payments at December 31, 1996, are as follows (dollars in thousands):
1997 $ 13,611
1998 11,535
1999 8,052
2000 3,827
2001 926
--------
$ 37,951
========
Rent expense amounted to $14,470,000, $10,113,000 and $7,201,000 for
the years ended December 31, 1996, 1995 and 1994, respectively.
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. The capitalized expenditures
including interest through December 31, 1996 are $23,295,000. 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 December 31, 1996, the Company has made
available to originators, lines of credit of approximately $141,000,000. At
December 31, 1996 and 1995 advances outstanding were $8,291,000 and $6,447,000,
respectively, and are included in other receivables. The weighted average
amounts outstanding under these credit agreements were $11,192,000 and
$2,370,000 for the years ended December 31, 1996 and 1995, 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
December 31, 1996, $163,996,000 of cash deposits held in interest-bearing
accounts are restricted, and $228,046,000 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.
62
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(10) Commitments, Contingencies and Concentrations of Credit Risk (continued)
In an attempt to minimize the risk of interest rate fluctuations, one of
the strategies employed by the Company is to enter into pre-funding arrangements
in connection with securitization transactions that allow it to sell loans in
the future at an agreed upon price. At December 31, 1996, under the terms of the
agreements the Company had the right to deliver $176,716,000 of Home Equity
Loans, $31,679,000 of SBA Loans, $30,071,000 of Student Loans, and $49,913,000
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. Losses on these
transactions, which are included in gain on sale of receivables, amounted to
$1,435,000 and $5,110,000 for the years ended December 31, 1996 and 1995,
respectively. There were no purchases or sales during 1994.
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 loans receivable which are not included in
the accompanying consolidated financial statements. 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 $57,562,000 of Home Equity Loans at December 31, 1996,
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 December 31,
1996, loans to borrowers in the State of California accounted for approximately
20% of the total serviced loan portfolio, while no other state accounted for
more than 9%.
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.
(11) Related Party Transactions
The Company leases corporate administrative offices in New Jersey from a
joint venture which includes a general partnership, whose partners are
shareholders and executive officers of the Company. The annual rent under this
lease, which expires in 2000, is subject to certain adjustments, and was
approximately $1,184,000 for the year ended December 31, 1996 and $1,200,000 for
the years ended December 31, 1995 and 1994.
63
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(12) Other Operating Expenses
Other operating expenses include the following:
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------
1996 1995 1994
-------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C>
Advertising $ 52,227 $ 38,290 $40,318
Depreciation and amortization 15,630 8,446 5,475
Loan expenses 18,383 11,457 8,126
Office, stationery and supplies 41,471 27,172 15,353
Professional fees 16,417 6,529 4,382
Occupancy costs 14,470 10,113 7,201
Other expenses 35,500 21,387 15,333
-------- -------- -------
$194,098 $123,394 $96,188
======== ======== =======
</TABLE>
(13) Shareholders' Equity
In May 1996, the shareholders of the Company approved the increase in
authorized shares of the Company from 100,000,000 shares to 250,000,000 shares
of common stock.
In March 1996, the Company sold 5,937,500 shares of common stock for $21.50
per share, the net proceeds of which amounted to $122,128,000.
In November 1996, the Company sold 5,215,000 shares of $1.72 mandatory
convertible preferred stock for $26.50 per share, the net proceeds of which
amounted to $133,363,000. Each share will pay an annual dividend of $1.72 per
share, will be convertible at the option of the holder into 0.833 shares of
common stock and will automatically convert on December 1, 1999 into common
stock. The mandatory conversion rate, based on a formula, will range from 0.833
to 1.000 shares of common stock per share.
64
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(14) Fair Values of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments" ("FAS 107"), requires disclosure of fair
value information about financial instruments, whether or not recognized in the
statement of financial condition. Fair values are based on estimates using
present value or other valuation techniques in cases where quoted market prices
are not available. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instrument. FAS 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Company.
Estimated fair values, carrying values and various methods and assumptions
used in valuing the Company's financial instruments are set forth below:
<TABLE>
<CAPTION>
December 31,
------------
1996 1995
--------------------------- ---------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
------------ ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Financial Assets:
Cash and cash equivalents (a) $ 321,703 $ 321,703 $ 178,781 $ 178,781
Receivables (b) 1,405,829 1,479,000 1,045,444 1,100,000
Excess Servicing Asset (c) 806,385 822,000 524,359 603,000
Financial Liabilities:
Notes payable (excluding senior notes) (d) 682,197 682,197 420,892 420,892
Unsecured - senior notes (d) 637,000 648,000 655,000 693,000
Subordinated debt (e) 2,000 2,000 24,000 25,000
</TABLE>
(a) The carrying value of cash and cash equivalents is considered to be a
reasonable estimate of fair value.
(b) Since it is the Company's business to sell loans it originates, the fair
values were estimated using current investor yields or outstanding
commitments from investors. The fair value for non-performing loans was
based upon recent appraisals of collateral securing such loans. Included in
the carrying value and estimated fair value of receivables is the
mark-to-market effect of any open economic hedge transactions, which were
insignificant at December 31, 1996 and 1995.
(c) The fair value was estimated by discounting future cash flows using rates
available for instruments with similar terms and remaining maturities. In
determining the fair value, assumed prepayments utilized by the Company
were not significantly different from the Company's actual prepayment
experience.
(d) Warehouse and unsecured notes (excluding the senior notes) generally have
original maturities of less than 90 days; and therefore, the carrying value
is a reasonable estimate of fair value. Term notes are generally adjustable
rate and indexed to the prime rate, therefore, carrying value is a
reasonable estimate of fair value. The fair value of the senior notes was
estimated based on rates currently available for debt with similar terms
and remaining maturities.
(e) Fair value was estimated based on rates currently available for debt with
similar terms and remaining maturities.
65
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(14) Fair Values of Financial Instruments (continued)
The fair value estimates made at December 31, 1996 and 1995, were based
upon pertinent market data and relevant information about the financial
instruments at that time. These estimates do not reflect any premium or discount
that could result from offering for sale at one time the entire portion of the
financial instrument. Because no market exists for a portion of the financial
instruments, fair value estimates may be based on judgments regarding future
expected loss experience, current economic conditions, risk characteristics of
various financial instruments and other factors. These estimates are subjective
in nature and involve uncertainties and matters of significant judgment and
therefore cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
Fair value estimates are based on existing on-and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. For instance, the Company has certain fee-generating
business lines (e.g., its loan servicing operations) that were not considered in
these estimates since these activities are not financial instruments. In
addition, the tax implications related to the realization of the unrealized
gains and losses can have a significant effect on fair value estimates and have
not been considered in any of the estimates.
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<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(15) Selected Quarterly Data (unaudited)
The following represents selected quarterly financial data of the Company,
which, in the opinion of management, reflects adjustments (comprising only
normal recurring adjustments) necessary for fair presentation.
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------------------------
March 31, June 30, September 30, December 31,
----------- ----------- ------------ -----------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
1996
- ----
Revenues $ 154,748 $ 178,372 $ 202,184 $ 243,358
Income before income taxes 23,734 31,667 38,057 51,082
Net income 14,204 18,897 22,720 29,834
Net income per common share - primary $ 0.27 $ 0.32 $ 0.38 $ 0.49
Weighted average number of common shares
outstanding - primary 52,738,400 59,399,392 59,090,793 59,385,914
Net income per common share - fully diluted $ 0.27 $ 0.32 $ 0.38 $ 0.48
Weighted average number of common shares
outstanding - fully diluted 52,738,400 59,399,392 59,346,543 62,235,498
1995
- ----
Revenues $ 91,758 $ 112,665 $ 145,261 $ 160,874
Income before income taxes 12,344 18,182 22,514 29,993
Net income 7,244 10,766 13,233 17,472
Net income per common share $ 0.14 $ 0.21 $ 0.26 $ 0.34
Weighted average number of common shares outstanding 50,805,206 50,899,050 51,096,575 51,287,503
</TABLE>
67
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Item 9. Change in and disagreements with accountants on accounting and financial
disclosure
None
68
<PAGE>
PART III
Items 10 - 13. Registrant incorporates by reference herein information in
its proxy statement which complies with the information
called for by Items 10 - 13 of the Form 10-K. The proxy will
be filed at a later date with the Commission.
69
<PAGE>
PART IV
Item 14. Exhibits, financial statement schedules and reports on Form 8-K
<TABLE>
(a)(1) Financial statements Page(s)
<S> <C> <C>
The following consolidated financial statements
of The Money Store Inc. and subsidiaries are
included in Part II, Item 8 of this report
Independent Auditors' Report 37
Consolidated Statements of Financial Condition -
December 31, 1996 and 1995 38
Consolidated Statements of Income -
Years ended December 31, 1996, 1995 and 1994 39
Consolidated Statements of Shareholders' Equity -
Years ended December 31, 1996, 1995 and 1994 40
Consolidated Statements of Cash Flows -
Years Ended December 31, 1996, 1995 and 1994 41
Notes to Consolidated Financial Statements 42-67
(2) Financial statement schedules
None required
(3) Exhibits 77
</TABLE>
70
<PAGE>
Exhibit
No.
---------
3.1 Restated Certificate of Incorporation of the Registrant.
3.2 By-Laws of Registrant. (Incorporated by reference to Company's
Registration Statement on Form S-1; File No. 33-41172).
3.3 Certificate of Amendment to the Restated Certificate of
Incorporation of the Registrant, dated October 12, 1995.
3.4 Certificate of Amendment to the Restated Certificate of
Incorporation of the Registrant, dated May 15, 1996.
3.5 Certificate of Amendment to the Restated Certificate of
Incorporation of the Registrant dated October 30, 1996.
4.1 Specimen Common Stock Certificate of the Registrant.
(Incorporated by reference to Company's Registrant Statement of
Form S-1; File No. 33-41172).
4.2 Note Agreement, Dated as of September 9, 1992, as amended,
relating to the Registrant's Series A and Series B Senior Notes
due in September 1996 and September 1997, respectively, including
the form of Series A and Series B Senior Notes. (Incorporated by
reference to the Company's 1992 Annual Report on Form 10-K; File
No. 1-10785).
4.3 Note Agreement, dated as of April 15, 1993, as amended, relating
to the Registrant's Senior Notes due April 15, 1998, including
the form of 7.63% Senior Note. (Incorporated by reference to the
Company's 1993 Annual Report on Form 10-K; File No. 1-10785).
4.4 Note Agreement, dated as of September 30, 1993, as amended,
relating to the Registrant's Series A and Series B Senior Notes
both due in September 2000, including the form of Series A and
Series B Senior Notes. (Incorporated by reference to the
Company's 1993 Annual Report on Form 10-K; File No. 1-10785).
4.5 Note Agreement, dated as of September 20, 1994, as amended,
relating to the Registrant's Series A due September 30, 1999 and
Series B due September 30, 2000, including the form of Series A
and Series B Senior Notes. (Incorporated by reference to the
Company's 1994 Annual Report on Form 10-K; File No. 1-10785).
4.6 Note Agreement dated as of April 6, 1995, as amended, relating to
the Registrant's Senior Notes due March 31, 2002, including the
form of 9.0% Senior Note. (Incorporated by reference to the
Company's 1995 Annual Report on Form 10K; File No.1-10785).
4.7 Note Agreement dated as of September 13, 1995, as amended,
relating to the Registrant's Series A Notes due September 15,
1999, Series B Notes due September 15, 2000, and Series C Notes
due September 15, 2001, including the form of Series A, Series B,
and Series C Senior Notes. (Incorporated by reference to the
Company's 1995 Annual Report on Form 10K; File No. 1-10785).
71
<PAGE>
10.1 Form of 1991 Stock Option Plan. (Incorporated by reference to
Company's Registration Statement on Form S-1; File No. 33-41172).
10.2 Amended and Restated Deferred Bonus Plan, effective January 1,
1982. (Incorporated by reference to Company's Registration
Statement on Form S-1; File No. 33-41172).
10.3 Amended Bonus Plan, effective January 1, 1982, relating
amendments as of December 31, 1990. (Incorporated by reference to
Company's 1992 Annual Report on Form 10-K; File No. 1-10785).
10.4 Form of Indemnification Agreement between the Registrant and
certain of its directors and officers. (Incorporated by reference
to Company's Registration Statement Registration Statement on
Form S-1; File No. 33-41172).
10.5 Form of Amended and Restated Employment Agreement between the
Registrant and Morton Dear dated September 16, 1991.
(Incorporated by reference to Company's 1992 Annual Report on
Form 10-K; File No. 1-10785).
10.6 Form of Employment Agreement between the Registrant and Marc
Turtletaub dated September 16, 1991. (Incorporated by reference
to Company's Registration Statement on Form S-1; File No.
33-41172).
10.7 Form of Amended and Restated Employment Agreement between the
Registrant and Anthony R. Medici dated September 16, 1991.
(Incorporated by reference to Company's Registration Statement on
Form S-1; File No.33-41172).
10.8 Amended and Restated Employment Agreement between the Registrant
and Harry Puglisi dated September 16, 1991. (Incorporated by
reference to Company's Registration Statement on Form S-1; File
No.33-41172).
10.9 Amended and Restated Employment Agreement between the Registrant
and William S. Templeton dated September 16, 1991. (Incorporated
by reference to Company's Registration Statement on Form S-1;
File No. 33-41172).
10.10 Amended and Restated Employment Agreement between the Registrant
and Alan Turtletaub dated September 16, 1991. (Incorporated by
reference to Company's Registration Statement on Form S-1; File
No. 33-41172).
10.11 Agreement, dated August 13, 1980, by and between The Money Store
Investment Corporation, a subsidiary of the Registrant, and the
Small Business Administration. (Incorporated by reference to
Company's Registration Statement on Form S-1; File No. 33-41172).
10.12 Lease Agreement from Shav Associates, Barlis, Inc. and M.S.
Associates, as landlord, to the Registrant, as lessee, dated
September 28, 1983. (Incorporated by reference to Company's
Registration Statement on Form S-1; File No.33-41172).
72
<PAGE>
10.13 Amended and Restated Indenture, dated as of July 1, 1994, among
the Registrant as Issuer, Trans-World Insurance Company ("TWIC")
as Pledgor and Master Servicer and Bankers Trust Company, not in
its individual capacity, but solely as Indenture Trustee.
(Incorporated by reference to the Company's 1994 Annual Report on
Form 10-K; File No. 1-10785).
10.14 Second Terms Supplement to the Amended and Restated Indenture of
July 1, 1994, dated as of August 23, 1994, among the Registrant
as Issuer, TWIC as Pledgor and Master Servicer and Bankers Trust
Company as Indenture Trustee. (Incorporated by reference to the
Company's 1994 Annual Report on Form 10-K; File No. 1-10785).
10.15 Loan Purchase Agreement dated as of May 2, 1994, between TWIC and
the Dauphin Deposit Bank and Trust Company as Trustee for the
Educaid Student Loan Trust 1994-1. (Incorporated by reference to
the Company's 1994 Annual Report on Form 10-K; File No. 1-10785).
10.16 The Money Store Inc. Supplemental Executive Retirement Plan
("SERP"), dated as of December 28, 1993, effective January 1,
1994. (Incorporated by reference to the Company's 1994 Annual
Report on Form 10-K; File No. 1-10785).
10.17 Third Terms Supplement to the Amended and Restated Indenture of
July 1, 1994, dated as of October 12, 1995, among the Registrant
as Issuer, TWIC as Pledgor and Master servicer and Bankers Trust
Company as Indenture Trustee. (Incorporated by reference to
the Company's 1995 Annual Report on Form 10K; File No. 1-10785).
10.18 Form of 1995 Stock Incentive Plan. (Incorporated by reference to
the Company's 1995 Annual Report on Form 10-K; File No. 1-10785).
10.19 Credit Agreement, date as of August 16, 1996 among the Registrant
as Borrower, Various Financial Institutions, as Lenders, and
First Union National Bank of North Carolina, as Documentation
Agent, and The First National Bank of Chicago, as Administrative
Agent, and Amendment No. 1 thereto (incorporated hereby by
reference to Exhibit 10.1 to the Registrant's Form 8-K as filed
with the Commission on October 31, 1996; File No. 001-10785).
10.20 Amendment No. 2 to the Credit Agreement, dated as of August 16,
1996 among the Registrant as Borrower, Various Financial
Institutions as Lenders, and First Union National Bank of North
Carolina, as Documentation Agent, and the First National Bank of
Chicago, as Administrative Agent.
11.0 Computation of Earnings per Common Share.
21.1 Subsidiaries of Registrant.
23.1 Independent Auditors' Consent.
73
<PAGE>
(b) Reports on Form 8-K
The Company filed the following reports on Form 8-K during the
fourth quarter of 1996:
(1) On October 23, 1996, under Item 5, containing (i) the Press Release
that announced the Company's financial results for the quarter
ended September 30, 1996 and (ii) the Press Release that announced
the execution of an agreement pursuant to which HFS Incorporated
("HFS") selected The Money Store Inc. To be its preferred vendor to
provide qualified franchises of HFS' hotel brands with SBA and
conventional loans.
(2) On October 30, 1996, under Item 5, containing (i) the Amendment to
the Restated Certificate of Incorporation of the Company relating
to the issuance of its $1.72 mandatory convertible preferred stock,
(ii) the opinion of Eric R. Elwin, Esq., Corporate Counsel to
Company, regarding legality of the Preferred Stock, (iii) the
opinion of Stroock & Stroock & Lavan regarding tax matters and (iv)
the Credit Agreement.
(3) On October 30, 1996, under Item 5, containing (i) the Underwriting
Agreement dated October 30, 1996 among the Company, Prudential
Securities Incorporated, Bear Stearns & Co., Inc,, Montgomery
Securities and Oppenheimer & Co., Inc., as representatives of the
several underwriters name therein and (ii) the Pricing Agreement
dated October 30, 1996 among the Company, Prudential Securities
Incorporated, Bear Stearns & Co., Inc., Montgomery Securities and
Oppenheimer & Co., Inc., as representatives of the several
underwriters named in the Underwriting Agreement.
74
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereto duly authorized.
By: /s/ Marc Turtletaub By: /s/ Morton Dear
------------------------- -------------------
Marc Turtletaub Morton Dear
President and Executive Vice President
Chief Executive Officer Chief Financial Officer
(Principal Financial Officer)
Dated: March 20, 1997 By: /s/ James K. Ransom
-------------------
James K. Ransom
Vice President
(Principal Accounting Officer)
75
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
By: /s/ Alan Turtletaub March 20, 1997
------------------------------------------
Alan Turtletaub
Chairman of the Board
Director
By: /s/ Marc Turtletaub March 20, 1997
------------------------------------------
Marc Turtletaub
President and
Chief Executive Officer
Director
By: /s/ Morton Dear March 20, 1997
------------------------------------------
Morton Dear
Executive Vice President
Chief Financial Officer
(Principal Financial Officer)
Director
By: /s/ Harry Puglisi March 20, 1997
------------------------------------------
Harry Puglisi
Treasurer
Director
By: /s/ William S. Templeton March 20, 1997
------------------------------------------
William S. Templeton
Senior Vice President
Director
76
<PAGE>
EXHIBIT 3.1
RESTATED CERTIFICATE OF INCORPORATION
OF
THE MONEY STORE INC.
Pursuant to the provisions of Section 14A:9-5, Corporations, General, of
the New Jersey Statutes, the undersigned corporation hereby adopts the following
Restated Certificate of Incorporation:
FIRST: The name of the corporation is
THE MONEY STORE INC.
SECOND: The purpose for which the corporation is organized to engage in is
any activity within the purposes for which corporations may be organized under
the New Jersey Business Corporation Act.
THIRD: A. The total number of shares which the corporation is authorized to
issue is twenty-five million (25,000,000), of which twenty-four million
(24,000,000) shares shall be Common Stock, no par value, and one million
(1,000,000) shares shall be Preferred Stock with no par value.
B. The Board of Directors of the corporation is authorized at any time and
from time to time, to issue the Preferred Stock in one or more series, and, in
connection with the creation of each such series, to fix by the
77
<PAGE>
resolution or resolutions providing for the issue of shares thereof the number
of shares to be included in such series, and the designation, powers,
preferences and rights of the shares of each such series and the qualifications,
limitations or restrictions thereof, to the fullest extent now or hereafter
permitted by the laws of the State of New Jersey. The authority of the Board of
Directors with respect to each series of Preferred Stock shall include, but not
be limited to, determination of the following:
(i) The number of shares constituting that series and the distinctive
designation of that series;
(ii) The dividend rate on the shares of that series, whether dividends
shall be cumulative, and, if so, the date or dates, and the relative rights
of priority, if any, of payment of dividends on shares of that series;
(iii) Whether that series shall have voting rights, in addition to the
voting rights provided by law, and, if so, the terms of such voting rights;
(iv) Whether that series shall have conversion privileges, and, if so,
the terms and conditions of such conversion, including provision for
adjustment of the conversion rate in such events as the Board of Directors
shall determine;
78
<PAGE>
(v) Whether or not the shares of that series shall be redeemable, and,
if so, the terms and conditions of such redemption, including the date or
date upon or after which they shall be redeemable, and the amount per share
payable in case of redemption which amount may vary under different
conditions and at different redemption dates;
(vi) Whether that series shall have a sinking fund for the redemption
or purchase of shares of that series, and, if so, the terms and amount of
such sinking fund;
(vii) The rights of the shares of that series in the event of
voluntary or involuntary liquidation, dissolution or winding up of the
corporation, and the relative rights of priority, if any, of payment of
shares of that series; and
(viii) Any other relative rights, preferences and limitations of that
series.
Dividends on outstanding shares of Preferred Stock shall be paid or
declared and set apart for payment before any dividends shall be paid or
declared and set apart for payment on the Common Stock with respect to the same
dividend period.
If upon any voluntary or involuntary liquidation, dissolution or winding up
of the corporation, the assets available for distribution to holders of shares
of Preferred
79
<PAGE>
Stock of all series shall be insufficient to pay such holders the full
preferential amount to which they are entitled, then such assets shall be
distributed ratably among the shares of all series of Preferred Stock in
accordance with the respective preferential amounts (including unpaid cumulative
dividends, if any) payable with respect thereto.
C. Except for and subject to those rights expressly granted to the holders
of Preferred Stock, or any series thereof, pursuant hereto or pursuant to the
authority hereby vested in the Board of Directors or except as may be provided
by the laws of the State of New Jersey, the holders of Common Stock shall have
exclusively all rights of shareholders including but not limited to the entire
voting power, all dividends declared by the corporation and all assets of the
corporation in the event of any liquidation, dissolution or winding up of the
corporation. Subject to paragraph D of this Section Third covering elections of
directors, each holder of Common Stock shall be entitled to one vote in person
or by proxy for each share.
D. At each election for directors each shareholder who is entitled to vote
at such election shall have the right to vote, in person or by proxy, the number
of shares
80
<PAGE>
owned by him for as many persons as there are directors to be elected
and for whose election he has a right to vote, or to cumulate his votes by
giving one candidate as many votes as the number of his shares shall equal, or
to distribute such votes on the same principle among any number of such
candidates.
FOURTH: A. The number of directors constituting the entire Board of
Directors shall be determined in the By-Laws as provided therein; provided,
however, that the number of directors shall not be reduced so as to shorten the
term of any director at the time in office; and provided further, that the
number of directors constituting the entire Board of Directors shall be seven
unless otherwise fixed by a majority of the entire Board of Directors.
B. The Board of Directors shall be divided into three classes to be
equal, or as nearly equal as possible, in number: Class A, Class B and Class C;
the term of office of those of the Class A to expire at the annual meeting of
shareholders next ensuing after the date of this Restated Certificate of
Incorporation; of the Class B one year thereafter; of the Class C two years
thereafter; and at each annual election held after such classification and
election, directors of each
81
<PAGE>
class shall be chosen for three year terms to succeed those whose terms expire.
C. The power to fill vacancies on the Board of Directors (whether by reason
of resignation, removal with or without cause, creation of new directorships or
otherwise) shall be vested solely in the Board of Directors, except as provided
below, and vacancies may be filled by a majority of the directors then in
office, although less than a quorum, unless all directorships are vacant, in
which case the shareholders shall fill the then existing vacancies. Any director
chosen by the Board of Directors to fill a vacancy shall hold office only until
the next election of directors by shareholders and until that director's
successor shall be elected and shall have qualified. In the case of removal of a
director by the affirmative vote of the shareholders pursuant to Paragraph E of
this Section Fourth, the vacancy created by such removal shall be filled by the
affirmative vote of the holders of record of a majority of the outstanding
shares of stock entitled to vote thereon; provided that should the shareholders
entitled to vote thereon fail to elect a director to fill a vacancy caused by
the removal of a director by the affirmative vote of the shareholders pursuant
to
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<PAGE>
Paragraph E of this Section Fourth, such vacancy shall be filled by the Board of
Directors as provided herein.
D. Special meetings of the shareholders of the corporation for any purpose
may be called at any time by the Board of Directors, or by a committee of the
Board of Directors which has been duly designated by the Board of Directors and
whose power and authority, as provided in a resolution of the Board of Directors
or in the By-Laws of the corporation, include the power to call such meetings.
Special meetings may also be called upon request, in writing, of the holders of
record of 66 2/3% of the outstanding shares of stock entitled to vote at such a
meeting.
E. Notwithstanding any other provisions of this Restated Certificate of
Incorporation or the By-Laws of the corporation (and notwithstanding the fact
that some lesser percentage may be specified by this Restated Certificate of
Incorporation or the By-Laws of the corporation), any director or the entire
Board of Directors of the corporation may be removed at any time, but only by
the affirmative vote of the holders of record of 66-2/3% of the outstanding
shares of capital stock of the corporation entitled to vote generally in the
election of directors (considered for this purpose as one class) cast at a
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<PAGE>
meeting of the shareholders called for that purpose, and the vacancy caused by
such removal shall be filled as provided herein; provided that whenever the
holders of any one or more series of Preferred Stock shall have the right,
voting separately as a class, to elect one or more directors of the corporation,
the provisions of this paragraph E of this Section Fourth shall not apply with
respect to the director or directors elected by such holders of Preferred Stock
and the provisions in the Certificate of Designation of such class or series of
Preferred Stock shall apply, in respect of removal, with or without cause, of a
director or directors so elected.
FIFTH: The corporation shall, to the fullest extent permitted by Section
14A:3-5, Corporations, General, of the New Jersey Statutes, as it exists on the
date hereof or as it may hereafter be amended, or by any successor thereto,
indemnify any and all persons whom it shall have power to indemnify under said
section from and against any and all of the expenses, liabilities or other
matters referred to in or covered by said section. The corporation shall advance
expenses to the fullest extent permitted by said section. Such right to
indemnification and advancement of expenses shall continue as to a person who
has ceased to be a director, officer, employee or agent and shall
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<PAGE>
inure to the benefit of the heirs, executors and administrators of such a
person. The indemnification and advancement of expenses provided for herein
shall not be deemed exclusive of any other rights to which those seeking
indemnification or advancement of expenses may be entitled under any By-Law,
agreement, vote of shareholders or disinterested directors or otherwise.
SIXTH: A director or officer shall not be personally liable to the
corporation or its shareholders for damages for breach of any duty owed to the
corporation or its shareholders, except that a director or officer shall not be
relieved from liability for any breach of duty based upon an act or omission (a)
in breach of the duty of loyalty to the corporation or its shareholders, (b) not
in good faith or involving a knowing violation of law, or (c) resulting in
receipt by such person of an improper personal benefit.
SEVENTH: A. In addition to any affirmative vote required by the New Jersey
Shareholders Protection Act, Section 14A:10A, Corporations General, of the New
Jersey Statutes, as it exists on the date hereof or as it may hereafter be
amended, or by any successor thereto, or this Restated Certificate of
Incorporation, and except as otherwise expressly provided in
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paragraph B of this Section Seventh, no Business Combination (as hereinafter
defined) shall be consummated unless such Business Combination shall have been
approved by the affirmative vote of the holders of record of outstanding shares
representing at least 66-2/3% of the voting power of the then outstanding Voting
Shares (as hereinafter defined), voting together as a single class. Such
affirmative vote shall be required notwithstanding the fact that no vote may be
required by law or that a lesser percentage may be specified in this Restated
Certificate of Incorporation or in any agreement with any national securities
exchange or otherwise.
B. The provisions of paragraph A of this Section Seventh shall not be
applicable to any particular Business Combination and such Business Combination
shall require only such affirmative vote as is required by law and any other
provision of this Restated Certificate of Incorporation, if the Business
Combination shall have been approved by a majority of the Continuing Directors
(as hereinafter defined) or all of the following conditions shall have been met:
(i) The transaction constituting the Business Combination shall
provide for consideration to be received by all holders of Common Stock in
exchange for all their shares of
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Common Stock, and the aggregate amount of the cash and the Fair Market
Value (as hereinafter defined) as of the date of the consummation of the
Business Combination of consideration other than cash to be received per
share by holders of Common Stock in such Business Combination shall be at
least equal to the higher of the following:
(a) if applicable, the highest per-share price (including any
brokerage commissions, transfer taxes and soliciting dealers' fees)
paid in order to acquire any shares of Common Stock beneficially owned
by an Interested Person (1) within the two-year period immediately
prior to the Announcement Date (as hereinafter defined), (2) within
the two-year period immediately prior to the Determination Date (as
hereinafter defined) or (3) in the transaction in which it became an
Interested Person, whichever is highest; or
(b) the Fair Market Value per share of Common Stock on the
Announcement Date or on the Determination Date, whichever is higher;
(ii) If the transaction constituting the Business Combination shall
provide for a consideration to be received by holders of any class or
series of outstanding Voting Shares other than Common Stock the aggregate
amount of the cash
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and the Fair Market Value as of the date of the consummation of the
Business Combination of consideration other than cash to be received per
share shall be at least equal to the highest of the following (it being
intended that the requirements of this subparagraph (ii) shall be required
to be met with respect to every class and series of outstanding Voting
Shares, whether or not an Interested Person has previously acquired any
shares of a particular class of Voting Shares):
(a) if applicable, the highest per-share price (including any
brokerage commissions, transfer taxes and soliciting dealers fees)
paid in order to acquire any shares of Common Stock beneficially owned
by an Interested Person (1) within the two-year period immediately
prior to the Announcement Date, (2) within the two-year period
immediately prior to the Determination Date or (3) in the transaction
in which it became an Interested person, whichever is highest; or
(b) the Fair Market Value per share of such class or series of
Voting Shares on the Announcement Date or the Determination Date,
whichever is higher; or
(c) if applicable, the highest preferential amount per share to
which the holders of shares of such class or series of Voting Shares
are entitled in the event
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of any voluntary or involuntary liquidation, dissolution or winding up
of the corporation;
(iii) The price determined in accordance with subparagraphs (i) and
(ii) of this paragraph B shall be subject to appropriate adjustment in the
event of any recapitalization, stock dividend, stock split, combination of
shares or similar event;
(iv) The consideration to be received by holders of a particular class
or series of outstanding Voting Shares (including Common Stock) shall be in
cash or in the same form as was previously paid in order to acquire shares
of such class or series of Voting Shares which are beneficially owned by an
Interested Person and, if an Interested Person beneficially owns shares of
any class or series of Voting Shares which were acquired with varying forms
of consideration, the form of consideration for such class or series of
Voting Shares which were acquired with varing forms of consideration, the
form of consideration for such class or series of Voting Shares shall be
either cash or the form used to acquire the largest number of shares of
such class or series of Voting Shares beneficially owned by it;
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(v) After such Interested Person has become an Interested Person and
prior to the consummation of such Business Combination, such Interested
Person shall not have become the beneficial owner of any additional shares
of Voting Shares except as part of the transaction in which it became an
Interested Person;
(vi) After such Interested Person has become an Interested Person,
such Interested Person shall not have received the benefit, directly or
indirectly (except proportionately as a stockholder), of any loans,
advances, guarantees, pledges or other financial assistance or any tax
credits or other tax advantages provided by the corporation, whether in
anticipation of or in connection with such Business Combination or
otherwise; and
(vii) A proxy or information statement describing the proposed
Business Combination and complying with the requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and
regulations thereunder (or any subsequent provisions replacing the Exchange
Act or such rules or regulations) shall be mailed to the stockholders of
the corporation, no later than the earlier of (a) thirty (30) days prior to
any vote on the proposed Business
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Combination or (b) if no vote on such Business Combination is required,
sixty (60) days prior to the consummation of such Business Combination
(whether or not such proxy or information statement is required to be
mailed pursuant to the Exchange Act or subsequent provisions). Such proxy
statement shall contain at the front thereof, in a prominent place, any
recommendations as to the advisability (or inadvisability) of the Business
Combination which the Continuing Directors, or any of them, may have
furnished in writing and, if deemed advisable by a majority of the
Continuing Directors, an opinion of a reputable investment banking firm as
to the fairness (or lack of fairness) of the terms of such Business
Combination, from the point of view of the holders of Voting Shares other
than an Interested Person (such investment banking firm to be selected by a
majority of the Continuing Directors to be furnished with all information
it reasonably requests and to be paid a reasonable fee for its services
upon receipt by the corporation of such opinion).
C. For the purposes of this section:
(i) "Affiliate" of another Person shall mean (a) any Person directly
or indirectly owning, controlling, or holding with power to vote, 5% or
more of the outstanding voting securities of such other Person; (b) any
Person 5% or more of
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whose outstanding voting securities are directly or indirectly owned,
controlled, or held with power to vote, by such other Person; (c) any
Person directly or indirectly controlling, controlled by, or under common
control with, such other Person; (d) any officer, director, partner,
co-partner, or employee of such other Person; (e) if such other Person is
an investment company, any investment adviser thereof or any member of an
advisory board thereof; and (f) if such other Person is an unincorporated
investment company not having a board of directors, the depositor thereof.
(ii) "Announcement Date" shall mean the date of the first public
announcement of the proposed Business Combination.
(iii)"Business Combination" shall mean;
(a) any merger or consolidation of the corporation or any direct
or indirect subsidiary of the corporation with (i) an Interested
Person (as hereinafter defined) or (ii) any other Person (as
hereinafter defined) whether or not itself an Interested Person which
is, or after such merger or consolidation would be, an Affiliate (as
hereinafter defined) of an Interested Person, or
(b) any sale, lease, exchange, mortgage, pledge, grant of a
security interest, transfer or other
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disposition (in one transaction or a series of transactions) to or
with (i) an Interested Person or (ii) any other Person (whether or not
itself an Interested Person) which is, or after such sale, lease,
exchange, mortgage, pledge, grant of a security interest, transfer or
other disposition would be, an Affiliate of an Interested Person,
directly or indirectly, of assets of the corporation (including,
without limitation, any voting securities of any direct or indirect
subsidiary of the corporation) or any direct or indirect subsidiary of
the corporation, or both, having an aggregate Fair Market Value of
$10,000,000 or more, or
(c) the issuance or transfer by the corporation or any direct or
indirect subsidiary of the corporation (in one transaction or in a
series of transactions) of any securities of the corporation or any
direct or indirect subsidiary of the corporation, or both, to (i) an
Interested Person or (ii) any other Person (whether or not itself an
Interested Person) which is, or after such issuance or transfer would
be, an Affiliate of an Interested Person in exchange for cash,
securities or other property (or a combination thereof) having an
aggregate Fair Market Value of $10,000,000 or more, other than the
issuance of securities upon the conversion of convertible securities
of the corporation or any direct or
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indirect subsidiary of the corporation which were not acquired by such
Interested Person (or such other Person) from the corporation or a
direct or indirect subsidiary of the corporation, or
(d) the adoption of any plan or proposal for the liquidation,
dissolution or winding up of the corporation proposed by or on behalf
of (i) an Interested Person or (ii) any other Person (whether or not
itself an Interested Person) which is or after such liquidation,
dissolution or winding up would be, an Affiliate of an Interested
Person, or
(e) any reclassification of securities (including any reverse
stock split), or recapitalization of the corporation, or any merger or
consolidation of the corporation with any of its direct or indirect
subsidiaries or any other transaction (whether or not with or into or
otherwise involving an Interested Person) which has the effect,
directly or indirectly, of increasing the proportionate share of the
outstanding shares of any class of equity or convertible securities of
the corporation or any direct or indirect subsidiary of the
corporation directly or indirectly beneficially owned by (i) an
Interested Person or (ii) any other Person (whether or not itself an
Interested Person) which is, or after such reclassification,
recapitalization, merger or
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consolidation or other transaction would be, an Affiliate of an
Interested Person.
(iv) "Continuing Director" shall mean (i) any member of the Board of
Directors of the corporation, while such Person is a member of the Board,
who is not an Interested Person, or an Affiliate of an Interested Person,
or a representative or nominee of an Interested Person or of any such
Affiliate, and who was a member of the Board prior to the date of this
Restated Certificate of Incorporation, or (ii) any Person who subsequently
becomes a member of the Board, while such Person is a member of the Board,
who is not an Interested Person, or an Affiliate of an Interested Person,
or a representative or nominee of an Interested Person or of any such
Affiliate, if such Person's nomination for election or election to the
Board is recommended or approved by a majority of the Continuing Directors.
(v) "Determination Date" shall mean the date on which an Interested
Person became an Interested Person.
(vi) "Fair Market Value" on a specified date shall mean (i) with
respect to shares of Common Stock or shares of any other class or series of
Voting Shares, of the average of the bid and asked closing prices at which
one such share is traded on the over-the-counter market, as reported on the
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National Association of Security Dealers Automated Quotation System, or on
the stock exchange, if any, on which such shares are primarily traded, but
if no such shares were traded on such date, then on the last previous date
on which a share was so traded, or, if none of the above are applicable,
the value of a share as established by the Continuing Directors for such
date using any reasonable method of valuation, and (ii) with respect to all
other property, real or personal, other than cash, the fair market value of
that property on the date in question as determined by the Board of
Directors in good faith.
(vii) "Interested Person" shall mean any Person other than the
corporation that:
(1) is the beneficial owner, directly or indirectly, of 10% or
more of the voting power of the outstanding Voting Shares of the
corporation; or
(2) is an Affiliate of that Person and at any time within the
five-year period immediately prior to the date in question was the
beneficial owner, directly or indirectly, of 10% or more of the voting
power of the then outstanding stock of the corporation.
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(viii) "Person" shall mean an individual, corporation, a partnership,
an association, a joint-stock company, a trust or any unincorporated
organization.
(ix) "Voting Shares" shall mean stock of all classes and series of the
corporation entitled to vote generally in the election of directors.
D. A majority of the Continuing Directors shall have the power and duty to
determine for the purposes of this Section Seventh, on the basis of information
known to them after reasonable inquiry, all facts necessary to determine
compliance with this Section Seventh including, without limitation, (i)whether a
Person is an Interested Person, (ii) the number of shares of Voting Shares
beneficially owned by any Person, (iii) whether a Person is an Affiliate of
another, (iv) whether the assets which are the subject of any Business
Combination have, or the consideration to be received for the issuance or
transfer of securities by the corporation or any subsidiary in any Business
Combination has, an aggregate Fair Market Value of $10,000,000 or more, (v)
whether the requirements of this Section Seventh have been met and (vi) such
other matters with respect to which a determination is required under this
Section Seventh. The good faith determination of a majority of
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the Continuing Directors on such matters shall be conclusive and binding for all
purposes of this Section Seventh.
E. Nothing contained in this section shall be construed to relieve the
members of the Board of Directors or an Interested Person from any fiduciary
obligation imposed by law.
F. The fact that any Business Combination complies with the provisions of
this Section Seventh shall not be construed to impose any fiduciary duty,
obligation or responsibility on the Board of Directors, or any member thereof,
to approve such Business Combination or recommend its adoption or approval to
the shareholders of the corporation, nor shall such compliance limit, prohibit
or otherwise restrict in any manner the Board of Directors, or any member
thereof, with respect to evaluations of or actions and responses taken with
respect to such Business Combination.
EIGHT: The corporation reserves the right to amend, alter, change or repeal
any provision contained in this Restated Certificate of Incorporation, in the
manner now or hereafter prescribed by statute, and all rights conferred on
shareholders herein are granted subject to this reservation. Notwithstanding the
preceding sentence, the provisions of this
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Restated Certificate of Incorporation relating to (i) cumulative voting (Section
Third, Paragraph D), (ii) any matter with respect to the Board of Directors (all
of Section Fourth), (iii) the merger or consolidation of the corporation
(Section Seventh), and (iv) the amendment, alteration, change or repeal of this
Restated Certificate of Incorporation (Section Eighth) may not be amended
without the affirmative vote of the holders of 66-2/3% of the shares entitled to
vote in the election of directors.
NINTH: In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is expressly authorized to amend, alter, change
and repeal the By-Laws of the corporation.
TENTH: The address of the corporation's current registered office is 2840
Morris Avenue, Union, New Jersey 07083 and the name of the corporation's current
registered agent is Eric R. Elwin.
ELEVENTH: The number of directors constituting the current Board of
Directors is five. The name and addresses of the directors constituting the
current Board of Directors are:
Name Address
---- -------
Alan Turtletaub 65 Dorison Drive
Short Hills, NJ 07078
Marc Turtletaub 4434 Mapel Lane
Carmichael, CA 95608
Morton Dear 22 Fordham Road
Livingston, NJ 07039
Anthony R. Medici 37 Remington Drive
Edison, NJ 08817
Harry Puglisi 46 Wisteria Street
Edison, NJ 08817
DATED, this 17th day of June, 1991.
THE MONEY STORE INC.
By:
---------------------
Morton Dear
Executive Vice President
and Secretary
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CERTIFICATE REQUIRED TO BE FILED WITH THE
RESTATED CERTIFICATE OF INCORPORATION
OF
THE MONEY STORE INC.
Pursuant to the provisions of Section 14A:9-5(5), Corporations, General, of
the New Jersey Statutes, the undersigned corporation hereby executes the
following certificate:
FIRST: The name of the corporation is The Money Store Inc.
SECOND: The Restated Certificate of Incorporation was adopted on the 17th
day of June, 1991.
THIRD: At the time of the adoption of the Restated Certificate of
Incorporation, the number of shares outstanding was 92.9. The total of such
shares entitled to vote thereon, and the vote of such shares was:
Total Number of Shares Number of Shares Voted
Entitled to Vote For Against
---------------- --- -------
92.9 92.9 0
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At the time of the adoption of the Restated Certificate of Incorporation,
the number of outstanding shares of each class or series entitled to vote
thereon as a class and the vote of such shares, was:
Total Number of Shares Number of Shares Voted
Class or Series Entitled to Vote For Against
--------------- ---------------- --- -------
Common Stock 92.9 92.9 0
FOURTH: Not applicable.
FIFTH: This Restated Certificate of Incorporation restates and integrates
and further amends the Certificate of Incorporation of this corporation by
amending and restating the provisions of the Certificate of Incorporation in
their entirety.
SIXTH: The effective date of this amendment shall be June 17, 1991.
DATED this 17th day of June, 1991.
THE MONEY STORE INC.
By:____________________
Morton Dear
Executive Vice President
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EXHIBIT 3.3
CERTIFICATE OF AMENDMENT
TO THE
RESTATED CERTIFICATE OF INCORPORATION
OF
THE MONEY STORE INC.
Pursuant to the provisions of Section 14A:9-2(4) of the New Jersey Business
Corporation Act, the undersigned corporation executes the following Certificate
of Amendment to its Restated Certificate of Incorporation:
1. The name of the corporation is The Money Store Inc. (the "Corporation").
2. Paragraph A of Article THIRD of the Corporation's Restated Certificate
of Incorporation shall be amended to read as follows:
"The total number of shares which the corporation is
authorized to issue is One Hundred Ten Million (110,000,000),
of which One Hundred Million (100,000,000) shares shall be
Common Stock, with no par value, and Ten Million (10,000,000)
shares shall be Preferred Stock, with no par value."
3. The amendment was adopted by the shareholders of the Corporation on
October 12, 1995.
4. The total number of shares entitled to vote on the amendment was
13,637,900.
5. The number of shares voting for and against the amendment was as
follows:
Number of Shares Number of Shares
Voting For Voting Against
Amendment Amendment
--------- ---------
8,008,887 3,826,559
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Dated: October 12, 1995
THE MONEY STORE INC.
By: /s/ Morton Dear
--------------------------
Name: Morton Dear
Title: Executive Vice President
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EXHIBIT 3.4
CERTIFICATE OF AMENDMENT
TO THE
RESTATED CERTIFICATE OF INCORPORATION
OF
THE MONEY STORE INC.
Pursuant to the provisions of Section 14A:9-2(4) of the New Jersey Business
Corporation Act, the undersigned corporation executes the following Certificate
of Amendment to its Restated Certificate of Incorporation:
1. The name of the corporation is The Money Store Inc. (the "Corporation").
2. Paragraph A of Article THIRD of the Corporation's Restated Certificate
of Incorporation shall be amended to read as follows:
"The total number of shares which the corporation is
authorized to issue is Two Hundred Sixty Million
(260,000,000), of which Two Hundred Fifty Million
(250,000,000) shares shall be Common Stock, with no par value,
and Ten Million (10,000,000) shares shall be Preferred Stock,
with no par value."
3. The amendment was adopted by the shareholders of the Corporation on May
15, 1996.
4. The total number of shares entitled to vote on the amendment was
57,394,794.
5. The number of shares voting for and against the amendment was as
follows:
Number of Shares Number of Shares
Voting For Voting Against
Amendment Amendment
35,657,613 15,159,408
Dated: May 15, 1996
THE MONEY STORE INC.
By: /s/ Morton Dear
-----------------------
Name: Morton Dear
Title: Executive Vice President
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EXHIBIT 3.5
AMENDMENT TO THE RESTATED
CERTIFICATE OF INCORPORATION
OF THE MONEY STORE INC.
On October 30, 1996, pursuant to the authority granted to and vested in the
Board of Directors (hereinafter called the "Board of Directors" or the "Board")
of The Money Store Inc., a corporation organized and existing under the laws of
the State of New Jersey (hereinafter called the "Corporation"), and in
accordance with the provisions of Section 14A:7-2 of the New Jersey Business
Corporation Law and Article Third of the Corporation's Restated Certificate of
Incorporation (the "Certificate of Incorporation"), the Board of Directors voted
in favor of amending Article Third of the Certificate of Incorporation to add a
new Section E thereto in order to create a new series of preferred stock, no par
value, of the Corporation and to state the designation and number of shares, and
to fix the preferences, limitations and relative rights thereof, all as
hereinafter set forth.
"SECTION E -- $1.72 MANDATORY CONVERTIBLE PREFERRED STOCK, NO PAR VALUE PER
SHARE.
PARAGRAPH 1. DESIGNATION AND AMOUNT.
The shares of such series shall be designated as "Mandatory Convertible
Preferred Stock, no par value per share" (the "Preferred Shares"). The
authorized number of shares constituting such series of Preferred Shares shall
be 5,290,000.
PARAGRAPH 2. DIVIDENDS.
(a) The holders of outstanding Preferred Shares shall be entitled to
receive, when, as and if declared by the Board of Directors out of funds legally
available therefor, cumulative preferential cash dividends from November 5, 1996
(the "Issue Date"), at the rate per share of $1.72 per annum, and no more,
payable quarterly in arrears on the 1st day of each March, June, September and
December, respectively (each such date being hereinafter referred to as a
"Dividend Payment Date"), or, if any Dividend Payment Date is not a business
day, then the Dividend Payment Date shall be the next succeeding business day.
Each dividend on the Preferred Shares shall be payable to holders of record as
they appear on the stock register of the Corporation on the record date
therefor, which shall be a date fixed by the Board of Directors not less than 10
nor more than 60 days preceding the related Dividend Payment Date. The first
dividend payment shall be for the period from the Issue Date up to but excluding
December 1, 1996 and the first dividend will be payable on December 2, 1996.
Dividends (or amounts equal to accrued and unpaid dividends) payable on the
Preferred Shares for any period less than a full quarterly dividend period will
be computed on the basis of a 360-day year of twelve 30-day months and the
actual number of days elapsed in any period less than one month.
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Dividends on the Preferred Shares will accrue whether or not there are
funds legally available for the payment of such dividends and whether or not
such dividends are declared on a daily basis from the previous Dividend Payment
Date. Accrued but unpaid dividends on the Preferred Shares shall cumulate as of
the Dividend Payment Date on which they first become payable, but no interest
shall accrue on accumulated but unpaid dividends on the Preferred Shares.
Dividends will cease to accrue in respect of the Preferred Shares on the
Mandatory Conversion Date (as hereinafter defined) or on the date of their
earlier conversion.
The Preferred Shares will rank on a parity, both as to payment of dividends
and distribution of assets upon liquidation, with any future preferred stock
issued by the Corporation (the "Preferred Stock") that by its terms ranks pari
passu with the Preferred Shares.
(b) As long as any Preferred Shares are outstanding, no dividends for any
dividend period or other distributions will be paid in cash or otherwise (other
than dividends or other distributions payable in shares of, or warrants, rights
or options exercisable for or convertible into shares of, Common Stock (as
hereinafter defined) or any other capital stock of the Corporation ranking
junior to the Preferred Shares as to the payment of dividends (for the purposes
of this Paragraph 2, such shares of Common Stock and other capital stock ranking
junior to the Preferred Shares as to payment of dividends are hereinafter
referred to collectively as "Junior Stock") and cash in lieu of fractional
shares of such Junior Stock in connection with any such dividend) on any Junior
Stock unless: (i) full dividends on all outstanding shares of each series of
Preferred Stock that does not constitute Junior Stock (for the purposes of this
Paragraph 2, each such series, including the Preferred Shares, is hereinafter
referred to as "Parity Preferred Stock") have been paid, or declared and set
aside for payment, for all dividend periods terminating on or prior to the date
of such Junior Stock dividend or distribution payment to the extent such
dividends are cumulative; (ii) dividends in full, in the case of a dividend
payment with respect to Junior Stock, for any Parity Preferred Stock dividend
period commencing on or prior to the date of such Junior Stock dividend payment
or, in the case of any other distribution with respect to Junior Stock, for the
current quarterly dividend period, have been paid, or declared and set aside for
payment, on all outstanding shares of Parity Preferred Stock to the extent such
dividends are cumulative; (iii) the Corporation has paid or set aside all
amounts, if any, then or theretofore required to be paid or set aside for all
purchase, retirement and sinking funds, if any, for all outstanding shares of
Parity Preferred Stock; and (iv) the Corporation is not in default on any of its
obligations to redeem any outstanding shares of Parity Preferred Stock.
In addition, as long as any Preferred Shares are outstanding, no shares of
any Junior Stock may be purchased, redeemed or otherwise acquired by the
Corporation or any of its subsidiaries (except in connection with a
reclassification or exchange of any Junior Stock through the issuance of other
Junior Stock (and cash in lieu of fractional shares of such Junior Stock in
connection therewith) or the purchase, redemption or other acquisition of any
Junior Stock with any Junior Stock (and cash in lieu of fractional shares of
such Junior Stock in connection therewith)) nor may any funds be set aside or
made available for any sinking fund for the purchase or redemption of any Junior
Stock unless: (i) full dividends on all outstanding
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shares of Parity Preferred Stock have been paid, or declared and set aside for
payment, for all dividend periods terminating on or prior to the date of such
Junior Stock purchase, redemption or other acquisition to the extent such
dividends are cumulative; (ii) the Corporation has paid or set aside all
amounts, if any, then or theretofore required to be paid or set aside for all
purchase, retirement and sinking funds, if any, for any outstanding shares of
Parity Preferred Stock; and (iii) the Corporation is not in default on any of
its obligations to redeem any outstanding shares of Parity Preferred Stock.
Subject to the provisions described above, such dividends or other
distributions (payable in cash, property, or Junior Stock) as may be determined
by the Board of Directors may be declared and paid on the shares of any Junior
Stock from time to time and Junior Stock may be purchased, redeemed or otherwise
acquired by the Corporation or any of its subsidiaries from time to time. In the
event of the declaration and payment of any such dividends or other
distributions, the holders of such Junior Stock will be entitled, to the
exclusion of holders of any outstanding Parity Preferred Stock, to share therein
according to their respective interests.
As long as any Preferred Shares are outstanding, no dividends for any
dividend period or other distributions will be paid in cash or otherwise (other
than dividends or other distributions payable in shares of, or warrants, rights
or options exercisable for or convertible into, Junior Stock and cash in lieu of
fractional shares of such Junior Stock in connection therewith) on any shares of
Parity Preferred Stock (other than the Preferred Shares), unless either: (a)(i)
full dividends on all outstanding shares of Parity Preferred Stock have been
paid, or declared and set aside for payment, for all dividend periods
terminating on or prior to the date of such Parity Preferred Stock dividend or
distribution payment to the extent such dividends are cumulative; (ii) dividends
in full, in the case of a dividend payment, for any Parity Preferred Stock
dividend period commencing on or prior to the date of such dividend payment or,
in the case of any other distribution, for the current quarterly dividend
period, have been paid, or declared and set aside for payment, on all
outstanding shares of Parity Preferred Stock to the extent such dividends are
cumulative; (iii) the Corporation has paid or set aside all amounts, if any,
then or theretofore required to be paid or set aside for all purchase,
retirement and sinking funds, if any, for all outstanding shares of Parity
Preferred Stock; and (iv) the Corporation is not in default on any of its
obligations to redeem any outstanding shares of Parity Preferred Stock; or (b)
any such dividends are declared and paid pro rata so that the amounts of any
dividends declared and paid per outstanding Preferred Share and each other share
of such Parity Preferred Stock will in all cases bear to each other the same
ratio that accrued and unpaid dividends (including any accumulation with respect
to unpaid dividends for prior dividend periods, if such dividends are
cumulative) per outstanding Preferred Share and such other outstanding shares of
Parity Preferred Stock bear to each other.
In addition, as long as any Preferred Shares are outstanding, no shares of
any Parity Preferred Stock may be purchased, redeemed or otherwise acquired by
the Corporation or any of its subsidiaries (except with any Junior Stock and
cash in lieu of fractional shares of such Junior Stock in connection therewith)
nor may any funds be set aside or made available for any sinking fund for the
purchase or redemption of any Parity Preferred Stock unless: (i)
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full dividends on all outstanding shares of Parity Preferred Stock have been
paid, or declared and set aside for payment, for all dividend periods
terminating on or prior to the date of such Parity Preferred Stock purchase,
redemption or other acquisition to the extent such dividends are cumulative;
(ii) the Corporation has paid or set aside all amounts, if any, then or
theretofore required to be paid or set aside for all purchase, retirement, and
sinking funds, if any, for any outstanding shares of Parity Preferred Stock; and
(iii) the Corporation is not in default on any of its obligations to redeem any
outstanding shares of Parity Preferred Stock.
(c) Any dividend payment made on the Preferred Shares shall first be
credited against the earliest accrued but unpaid dividend due with respect to
the Preferred Shares.
(d) All dividends paid with respect to the Preferred Shares shall be paid
pro rata to the holders entitled thereto.
(e) Holders of the Preferred Shares shall be entitled to receive dividends
in preference to and in priority over any dividends upon any shares of the
Corporation ranking junior to the Preferred Shares as to dividends, but subject
to the rights of holders of shares of the Corporation having a preference and a
priority over the payment of dividends on the Preferred Shares.
PARAGRAPH 3. CONVERSION.
(a) Mandatory Conversion. On December 1, 1999 (the "Mandatory Conversion
Date"), unless previously converted at the option of the holder in accordance
with the provisions of Paragraph 3(b) below, each outstanding Preferred Share
shall convert automatically (the "Mandatory Conversion") into (i) a number of
shares of Common Stock equal to the Conversion Rate (as defined below) in effect
on the Mandatory Conversion Date and (ii) the right to receive an amount in cash
equal to all accrued and unpaid dividends on such Preferred Share (other than
previously declared dividends payable to a holder of record on a prior date) to
the Mandatory Conversion Date, whether or not declared, out of funds legally
available for the payment of dividends. The "Conversion Rate" is equal to (a) if
the Current Market Price (as hereinafter defined) of the Common Stock is greater
than or equal to $31.80 per share (the "Conversion Price"), 0.833 of a share of
Common Stock per Preferred Share, (b) if the Current Market Price is less than
the Conversion Price but greater than $26.50 (the "Initial Price"), a fractional
share of Common Stock per Preferred Share having a value (determined at the
Current Market Price) equal to the Initial Price, and (c) if the Current Market
Price is less than or equal to the Initial Price, one share of Common Stock per
Preferred Share, subject in each case to adjustment as provided in Paragraph
3(c) below. Dividends on the Preferred Shares shall cease to accrue, and the
Preferred Shares shall cease to be outstanding, on the Mandatory Conversion
Date. The Corporation shall make such arrangements as it deems appropriate for
the issuance of certificates representing shares of Common Stock and for the
payment of cash in respect of such accrued and unpaid dividends, if any, or cash
in lieu of fractional shares, if any, in exchange for and contingent upon
surrender of certificates representing the Preferred Shares, and the Corporation
may defer the
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payment of dividends on such shares of Common Stock and the voting thereof
until, and make such payment and voting contingent upon, the surrender of such
certificates representing the Preferred Shares, provided that the Corporation
shall give the holders of the Preferred Shares such notice of any such actions
as the Corporation deems appropriate and upon such surrender such holders shall
be entitled to receive such dividends declared and paid on such shares of Common
Stock subsequent to the Mandatory Conversion Date. Amounts payable in cash in
respect of the Preferred Shares or in respect of such shares of Common Stock
shall not bear interest.
(b) Conversion at Option of Holder. The Preferred Shares are convertible,
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in whole or in part, at the option of the holders thereof, at any time prior to
the Mandatory Conversion Date, into shares of Common Stock at a rate of 0.833 of
a share of Common Stock for each Preferred Share (the "Optional Conversion
Rate"), subject to adjustment as set forth in Paragraph 3(c) below.
Conversion of Preferred Shares at the option of the holder may be effected
by delivering certificates evidencing such Preferred Shares, together with
written notice of conversion and a proper assignment of such certificates to the
Corporation or in blank (and, if applicable, cash payment of an amount equal to
the dividend attributable to the current quarterly dividend accrued on such
shares), to the office of any transfer agent for the Preferred Shares or to any
other office or agency maintained by the Corporation for that purpose and
otherwise in accordance with conversion procedures established by the
Corporation. Each optional conversion shall be deemed to have been effected
immediately prior to the close of business on the date on which the foregoing
requirements shall have been satisfied. The conversion shall be at the Optional
Conversion Rate in effect at such time and on such date.
Holders of Preferred Shares at the close of business on a record date for
any payment of declared dividends shall be entitled to receive the dividend
payable on such Preferred Shares on the corresponding Dividend Payment Date
notwithstanding the optional conversion of such Preferred Shares following such
record date and prior to the corresponding Dividend Payment Date. However,
Preferred Shares surrendered for conversion after the close of business on a
record date for any payment of declared dividends and before the opening of
business on the next succeeding Dividend Payment Date must be accompanied by
payment in cash of an amount equal to the dividend thereon which is to be paid
on such Dividend Payment Date. Except as otherwise provided above, upon any
optional conversion of Preferred Shares, the Corporation shall make no payment
of or allowance for unpaid dividends, whether or not in arrears, on converted
Preferred Shares or for previously declared dividends or distributions on the
shares of Common Stock issued upon such conversion.
(c) Conversion Rate and Optional Conversion Rate Adjustments. The
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Conversion Rate and the Optional Conversion Rate shall each be subject to
adjustment from time to time as provided below in this Paragraph 3(c).
(i) If the Corporation shall, after the Issue Date:
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(A) pay a stock dividend or make a distribution with respect to its
Common Stock in shares of such Common Stock,
(B) subdivide or split its outstanding Common Stock into a greater
number of shares,
(C) combine its outstanding shares of Common Stock into a smaller
number of shares, or
(D) issue by reclassification of its shares of Common Stock any
shares of common stock of the Corporation,
then, in any such event, the Conversion Rate and the Optional
Conversion Rate in effect immediately prior to such event shall each
be adjusted so that the holder of any Preferred Shares shall
thereafter be entitled to receive, upon Mandatory Conversion or upon
conversion at the option of the holder, the number of shares of Common
Stock of the Corporation which such holder would have owned or been
entitled to receive immediately following any event described above
had such Preferred Shares been converted immediately prior to such
event or any record date with respect thereto. Such adjustment shall
become effective at the opening of business on the business day next
following the record date for determination of stockholders entitled
to receive such dividend or distribution, in the case of a dividend or
distribution, and shall become effective immediately after the
effective date, in the case of a subdivision split, combination or
reclassification. Such adjustment shall be made successively.
(ii) If the Corporation shall, after the Issue Date, issue rights or
warrants to all holders of its Common Stock entitling them (for a
period not exceeding 45 days from the date of such issuance) to
subscribe for or purchase shares of Common Stock at a price per share
less than the Current Market Price of the Common Stock, then, in any
such event unless such rights or warrants are issued to holders of
Preferred Shares on a pro rata basis with the shares of Common Stock
based on the Conversion Rate on the date immediately preceding such
issuance, the Conversion Rate and Optional Conversion Rate shall each
be adjusted by multiplying the Conversion Rate and the Optional
Conversion Rate, in effect immediately prior to the date of issuance
of such rights or warrants, by a fraction, of which the numerator
shall be the number of shares of Common Stock outstanding on the date
of issuance of such rights or warrants, immediately prior to such
issuance, plus the number of additional shares of Common Stock offered
for subscription or purchase pursuant to such rights or warrants, and
of which the denominator shall be the number of shares of Common Stock
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outstanding on the date of issuance of such rights or warrants,
immediately prior to such issuance, plus the number of additional
shares of Common Stock which the aggregate offering price of the total
number of shares of Common Stock so offered for subscription or
purchase pursuant to such rights or warrants would purchase at such
Current Market Price (determined by multiplying such total number of
shares by the exercise price of such rights or warrants and dividing
the product so obtained by such Current Market Price). Such adjustment
shall become effective at the opening of business on the business day
next following the record date for the determination of stockholders
entitled to receive such rights or warrants. To the extent that shares
of Common Stock are not delivered after the expiration of such rights
or warrants, the Conversion Rate and the Optional Conversion Rate
shall each be readjusted to the Conversion Rate and the Optional
Conversion Rate which would then be in effect had the adjustments been
made upon the issuance of such rights or warrants upon the basis of
delivery of only the number of shares of Common Stock actually
delivered. Such adjustment shall be made successively.
(iii) If the Corporation shall, after the Issue Date, pay a dividend or
make a distribution to all holders of its Common Stock of evidences of
its indebtedness, cash or other assets (including capital stock of the
Corporation but excluding any cash dividends or distributions, other
than Extraordinary Cash Distributions (as hereinafter defined) and
dividends or distributions referred to in subparagraph (i) above),
then unless such dividend is paid or distribution is made to each
holder of Preferred Shares on a pro rata basis with the shares of
Common Stock based on the Conversion Rate on the date immediately
preceding such payment or distribution, in any such event, the
Conversion Rate and the Optional Conversion Rate shall each be
adjusted by multiplying the Conversion Rate and the Optional
Conversion Rate in effect on the record date mentioned below, by a
fraction of which the numerator shall be the Current Market Price per
share of the Common Stock on the record date for the determination of
stockholders entitled to receive such dividend or distribution, and of
which the denominator shall be such Current Market Price per share of
Common Stock less the fair market value (as determined in good faith
by the Board of Directors, whose determination shall be conclusive,
and described in a resolution adopted with respect thereto) as of such
record date of the portion of the assets or evidences of indebtedness
so distributed or of such subscription rights or warrants applicable
to one share of Common Stock. Such adjustment shall become effective
on the opening of business on the business day next following the
record date for the determination of stockholders entitled to receive
such dividend or distribution. Such adjustment shall be made
successively.
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(iv) Any shares of Common Stock issuable in payment of a dividend shall be
deemed to have been issued immediately prior to the close of business
on the record date for such dividend for purposes of calculating the
number of outstanding shares of Common Stock under subparagraph (ii)
above.
(v) The Corporation shall also be entitled to make upward adjustments in
the Conversion Rate and the Optional Conversion Rate, as it in its
sole discretion shall determine to be advisable, in order that any
stock dividends, subdivisions of shares, distribution of rights to
purchase stock or securities, or distribution of securities
convertible into or exchangeable for stock (or any transaction that
could be treated as any of the foregoing transactions pursuant to
Section 305 of the Internal Revenue Code of 1986, as amended) made by
the Corporation to its stockholders after the Issue Date shall not be
taxable.
(vi) In any case in which Paragraph 3(c) shall require that an adjustment
as a result of any event become effective at the opening of business
on the business day next following a record date and the date fixed
for conversion pursuant to Paragraph 3(a) occurs after such record
date, but before the occurrence of such event, the Corporation may, in
its sole discretion, elect to defer the following until after the
occurrence of such event: (A) issuing to the holder of any converted
Preferred Shares the additional shares of Common Stock issuable upon
such conversion over the shares of Common Stock issuable before giving
effect to such adjustments and (B) paying to such holder any amount in
cash in lieu of a fractional share of Common Stock pursuant to
Paragraph 3(h).
(vii) All adjustments to the Conversion Rate and the Optional Conversion
Rate shall be calculated to the nearest 1/100th of a share of Common
Stock. No adjustment in the Conversion Rate or the Optional Conversion
Rate shall be required unless such adjustment would require an
increase or decrease of at least one percent therein; provided,
however, that any adjustment that by reason of this subparagraph (vii)
is not required to be made shall be carried forward and taken into
account in any subsequent adjustment. If an adjustment is made to the
Conversion Rate pursuant to this Paragraph 3(c), then an appropriate
adjustment shall also be made to the Current Market Price solely to
determine whether clause (a), (b) or (c) of the definition of
"Conversion Rate" in Paragraph 3(a) shall apply on the Mandatory
Conversion Date. All adjustments in the Conversion Rate and the
Optional Conversion Rate shall be made successively.
(d) Adjustment for Consolidation or Merger. In case of any consolidation or
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merger to which the Corporation is a party (other than a merger or consolidation
in which the Corporation is the surviving or continuing corporation and in which
the Common Stock
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outstanding immediately prior to the merger or consolidation remains unchanged),
or in case of any sale or transfer to another corporation of the property of the
Corporation as an entirety or substantially as an entirety, or in case of any
statutory exchange of securities with another corporation (other than in
connection with a merger or acquisition), proper provision shall be made so that
each Preferred Share shall, after consummation of such transaction, be subject
to (i) conversion at the option of the holder into the kind and amount of
securities, cash or other property receivable upon consummation of such
transaction by a holder of the number of shares of Common Stock into which such
Preferred Share might have been converted immediately prior to consummation of
such transaction, and (ii) conversion on the Mandatory Conversion Date into the
kind and amount of securities, cash or other property receivable upon
consummation of such transaction by a holder of the number of shares of Common
Stock into which such Preferred Share would have converted if the conversion on
the Mandatory Conversion Date had occurred immediately prior to the date of
consummation of such transaction, plus the right to receive cash in an amount
equal to all accrued and unpaid dividends on such Preferred Share (other than
previously declared dividends payable to a holder of record as of a prior date),
and assuming in each case that such holder of shares of Common Stock failed to
exercise rights of election, if any, as to the kind or amount of securities,
cash or other property receivable upon consummation of such transaction
(provided that if the kind or amount of securities, cash or other property
receivable upon consummation of such transaction is not the same for each
non-electing share, then the kind and amount of securities, cash or other
property receivable upon consummation of such transaction for each non-electing
share shall be deemed to be the kind and amount so receivable per share by a
plurality of the non-electing shares). The kind and amount of securities into or
for which the Preferred Shares shall be convertible after consummation of such
transaction shall be subject to adjustment as described in Paragraph 3(c) above
following the date of consummation of such transaction. The Corporation may not
become a party to any such transaction unless the terms thereof are consistent
with the foregoing or consistent with clause (iii) of Paragraph 7(b).
For purposes of the immediately preceding paragraph and Paragraph
3(f)(iii), any sale or transfer to another corporation of property of the
Corporation which did not account for at least 50% of the consolidated net
income of the Corporation for its most recent fiscal year ending prior to the
consummation of such transaction shall not in any event be deemed to be a sale
or transfer of the property of the Corporation as an entirety or substantially
as an entirety.
(e) Announcement of Adjustments. Whenever the Conversion Rate and Optional
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Conversion Rate are adjusted as herein provided, the Corporation shall:
(i) forthwith compute the adjusted Conversion Rate and Optional Conversion
Rate in accordance herewith and prepare a certificate signed by an
officer of the Corporation setting forth the adjusted Conversion Rate
and Optional Conversion Rate, the method of calculation thereof in
reasonable detail and the facts requiring such adjustment and upon
which such adjustment is based, which certificate shall be conclusive,
final and
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binding evidence of the correctness of the adjustment, and file such
certificate with the transfer agent for the Preferred Shares and the
Common Stock; and
(ii) make a prompt public announcement and mail a notice to the holders of
record of the outstanding Preferred Shares stating that the Conversion
Rate and the Optional Conversion Rate have been adjusted, the facts
requiring such adjustment and upon which such adjustment is based and
setting forth the adjusted Conversion Rate and Optional Conversion
Rate, such notice to be mailed at or prior to the time the Corporation
mails an interim statement to its stockholders covering the fiscal
quarter during which the facts requiring such adjustment occurred, but
in any event within 45 days of the end of such fiscal quarter.
(f) Notices. In case, at any time while any of the Preferred Shares are
outstanding,
(i) the Corporation shall declare a dividend (or any other distribution)
on its Common Stock, excluding any cash dividends; or
(ii) the Corporation shall authorize the issuance to all holders of its
Common Stock of rights or warrants to subscribe for or purchase shares
of its Common Stock or of any other subscription rights or warrants;
or
(iii) the Corporation shall authorize any reclassification of its Common
Stock (other than a subdivision or combination thereof) or of any
consolidation or merger to which the Corporation is a party and for
which approval of any stockholders of the Corporation is required
(except for a merger of the Corporation into one of its subsidiaries
solely for the purpose of changing the corporate domicile of the
Corporation to another state of the United States and in connection
with which there is no substantive change in the rights or privileges
of any securities of the Corporation other than changes resulting from
differences in the corporate statutes of the then existing and the new
state of domicile), or of the sale or transfer to another corporation
of the property of the Corporation as an entirety or substantially as
an entirety; or
(iv) the Corporation shall authorize the voluntary or involuntary
dissolution, liquidation or winding up of the Corporation;
then the Corporation shall cause to be filed at each office or agency maintained
for the purpose of conversion of the Preferred Shares, and shall cause to be
mailed to the holders of Preferred Shares at their last addresses as they shall
appear on the stock register, at least 10 days before the date hereinafter
specified (or the earlier of the dates hereinafter specified, in the event that
more than one date is specified), a notice stating (A) the date on which a
record is to be taken for the purpose of such dividend, distribution, rights or
warrants, or, if a record is not to be
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taken, the date as of which the holders of Common Stock of record to be entitled
to such dividend, distribution, rights or warrants are to be determined, or (B)
the date on which any such reclassification, consolidation, merger, sale,
transfer, dissolution, liquidation or winding up is expected to become
effective, and the date as of which it is expected that holders of Common Stock
of record shall be entitled to exchange their Common Stock for securities or
other property (including cash), if any, deliverable upon such reclassification,
consolidation, merger, sale, transfer, dissolution, liquidation or winding up.
The failure to give or receive the notice required by this subparagraph (f) or
any defect therein shall not affect the legality or validity of any such
dividend, distribution, right or warrant or other action.
(g) Effect of Conversions. The person or persons in whose name or names any
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certificate or certificates for shares of Common Stock shall be issuable upon
any conversion shall be deemed to have become on the date of any such conversion
the holder or holders of record of the shares represented thereby; provided,
however, that any such surrender on any date when the stock transfer books of
the Corporation shall be closed shall constitute the person or persons in whose
name or names the certificate or certificates for such shares are to be issued
as the record holder or holders thereof for all purposes at the opening of
business on the next succeeding day on which such stock transfer books are open.
(h) No Fractional Shares. No fractional shares of Common Stock shall be
--------------------
issued upon the conversion of any Preferred Shares. In lieu of any fractional
share otherwise issuable in respect of the aggregate number of Preferred Shares
of any holder which are converted upon Mandatory Conversion or any optional
conversion, such holder shall be entitled to receive an amount in cash (computed
to the nearest cent) equal to the same fraction of the Closing Price of the
Common Stock determined (A) as of the fifth Trading Day immediately preceding
the Mandatory Conversion Date, in the case of Mandatory Conversion, or (B) as of
the second Trading Day immediately preceding the effective date of conversion,
in the case of an optional conversion by a holder. If more than one Preferred
Share shall be surrendered for conversion at one time by or for the same holder,
the number of full shares of Common Stock issuable upon conversion thereof shall
be computed on the basis of the aggregate number of Preferred Shares so
surrendered or redeemed.
(i) Reissuance. Preferred Shares that have been issued and reacquired in
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any manner, including shares purchased, exchanged or converted, shall not be
reissued as part of the Preferred Shares and shall (upon compliance with any
applicable provisions of the laws of the State of New Jersey) have the status of
authorized and unissued shares of the Preferred Stock undesignated as to series
and may be redesignated and reissued as part of any series of Preferred Stock.
(j) Payment of Taxes. The Corporation shall pay any and all documentary,
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stamp or similar issue or transfer taxes payable in respect of the issue or
delivery of shares of Common Stock on the conversion of Preferred Shares
pursuant to this Paragraph 3; provided, however, that the Corporation shall not
be required to pay any tax which may be payable in respect of any registration
of transfer involved in the issue or delivery of shares of Common Stock in a
name other than that of the registered holder of Preferred Shares converted or
to be
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converted, and no such issue or delivery shall be made unless and until the
person requesting such issue has paid to the Corporation the amount of any such
tax or has established, to the satisfaction of the Corporation, that such tax
has been paid.
(k) Reservation of Common Stock. The Corporation shall at all times reserve
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and keep available, free from preemptive rights, out of the aggregate of its
authorized but unissued Common Stock and/or its issued Common Stock held in its
treasury, for the purpose of effecting any Mandatory Conversion of the Preferred
Shares or any conversion of the Preferred Shares at the option of the holder,
the full number of shares of Common Stock then deliverable upon any such
conversion of all outstanding Preferred Shares.
PARAGRAPH 4. LIQUIDATION RIGHTS.
(a) In the event of the liquidation, dissolution, or winding up of the
business of the Corporation, whether voluntary or involuntary, the holders of
Preferred Shares then outstanding, after payment or provision for payment of the
debts and other liabilities of the Corporation and the payment or provision for
payment of any distribution on any shares of the Corporation having a preference
and a priority over the Preferred Shares on liquidation, and before any
distribution to the holders of shares of Common Stock or other shares of cpital
stock ranking junior to the Preferred Shares as to the distribution of assets
upon liquidation, shall be entitled to be paid out of the assets of the
Corporation available for distribution to its stockholders an amount per
Preferred Share in cash equal to the sum of (i) $1.72 plus (ii) all accrued and
unpaid dividends thereon. In the event the assets of the Corporation available
for distribution to the holders of the Preferred Shares upon any dissolution,
liquidation or winding up of the Corporation shall be insufficient to pay in
full the liquidation payments payable to the holders of outstanding Preferred
Shares and of all other series of Preferred Stock ranking on a parity with the
Preferred Shares as to payments upon liquidation, the holders of Preferred
Shares and of all other series of Preferred Stock ranking on a parity with the
Preferred Shares as to payments upon liquidation shall share ratably in such
distribution of assets in proportion to the amount which would be payable on
such distribution if the amounts to which the holders of outstanding Preferred
Shares and the holders of outstanding shares of such Preferred Stock ranking on
a parity with the Preferred Shares as to payments upon liquidation were paid in
full. Except as provided in this Paragraph 4, holders of Preferred Shares shall
not be entitled to any distribution in the event of liquidation, dissolution or
winding up of the affairs of the Corporation.
(b) For the purposes of this Paragraph 4, none of the following shall be
deemed to be a voluntary or involuntary liquidation, dissolution or winding up
of the Corporation:
(i) the sale, lease, transfer or exchange of all or substantially all of
the assets of the Corporation;
(ii) the consolidation or merger of the Corporation with one or more other
corporations (whether or not the Corporation is the corporation
surviving such consolidation or merger); or
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(iii) a statutory exchange of securities with another corporation.
PARAGRAPH 5. DEFINITIONS.
As used in this Section E:
(i) The term "business day" shall mean any day other than a Saturday,
Sunday, or a day on which banking institutions in the State of New
Jersey are authorized or obligated by law or executive order to close
or are closed because of a banking moratorium or otherwise.
(ii) The term "Closing Price" with respect to a share of Common Stock shall
mean, on any date of determination, the reported last sale price of a
share of Common Stock on the Nasdaq Stock Market's National Market
(the "Nasdaq National Market") on such date or, if the Common Stock is
not listed for trading on the Nasdaq National Market for trading on
any such date, the last sale price of a share of Common Stock as
reported in the composite transactions for the principal United States
securities exchange on which the Common Stock is then listed for
trading, or if the Common Stock is not so listed on any national
securities exchange, the last quoted bid price for the Common Stock in
the over-the-counter market as reported by the National Quotation
Bureau Incorporated or similar organization, or if such bid price is
not available, the market value of a share of Common Stock on such
date as determined by a nationally recognized independent investment
banking firm retained for this purpose by the Corporation.
(iii) The term "Common Stock" shall mean any stock of any class of the
Corporation which has no preference in respect of dividends or of
amounts payable in the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Corporation and which is
not subject to redemption by the Corporation. However, shares of
Common Stock issuable upon conversion of Preferred Shares shall
include only shares of the class designated as Common Stock at the
Issue Date, or shares of the Corporation of any class or classes
resulting from any reclassification or reclassifications thereof and
which have no preference in respect of dividends or of amounts payable
in the event of any voluntary or involuntary liquidation, dissolution
or winding up of the Corporation and which are not subject to
redemption by the Corporation; provided, however, that, if at any time
there shall be more than one such resulting class, the shares of each
such class then so issuable shall be substantially in the proportion
which the total number of shares of such class resulting from such
reclassification bears to the total number of shares of all classes
resulting from all such reclassifications.
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(iv) Except as otherwise stated below, the term "Current Market Price"
shall mean the average Closing Price per share of Common Stock on the
20 Trading Days immediately prior to, but not including, the Mandatory
Conversion Date. Solely for purposes of determining the "Conversion
Rate" referred to in clause (ii) of Paragraph 3(c), the term "Current
Market Price" shall mean the average Closing Price per share of the
Common Stock on the 20 Trading Days immediately prior to, but not
including, the date on which the rights or warrants referred to in
such clause (ii) are issued. Solely for purposes of determining the
"Conversion Rate" referred to in clause (iii) of Paragraph 3(c), the
term "Current Market Price" shall mean the average Closing Price per
share of the Common Stock on the 20 Trading Days immediately prior to,
but not including, the date on which the dividends or distributions
referred to in such clause (iii) are paid or made. Solely for purposes
of determining the "Conversion Rate" referred to in subclause (B) of
Paragraph 7(b)(iii), the term "Current Market Price" shall mean the
average Closing Price per share of the Common Stock on the 20 Trading
Days immediately prior to, but not including, the date on which the
announcement of the merger or consolidation referred to in such
subclause (B) is made.
(v) The term "Extraordinary Cash Distributions" shall mean, with respect
to any cash dividend or distribution paid on any date, the amount, if
any, by which all cash dividends and cash distributions on the Common
Stock paid during the consecutive 12-month period ending on and
including such date (other than cash dividends and cash distributions
for which an adjustment to the Conversion Rate and the Optional
Conversion Rate was previously made) exceeds, on a per share of Common
Stock basis, 10% of the average of the daily Closing Prices of the
Common Stock over such consecutive 12-month period.
(vi) The term "Trading Day" shall mean a day on which the Common Stock (a)
is not suspended from trading on any national securities exchange or
association or over-the-counter market at the close of business of
such day and (b) has traded at least once on the national securities
exchange or association or over-the-counter market that is the primary
market for the trading of such security.
PARAGRAPH 6. NO PREEMPTIVE RIGHTS.
The holders of Preferred Shares shall have no preemptive rights, including
preemptive rights with respect to any shares of capital stock or other
securities of the Corporation convertible into or carrying rights or options to
purchase any such shares.
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PARAGRAPH 7. VOTING RIGHTS.
(a) Except as indicated below and as provided by New Jersey law, the
holders of Preferred Shares have no voting rights. On matters subject to vote by
holders of Preferred Shares, the holders are entitled to one vote per share. If
at any time dividends payable on the Preferred Shares are in arrears and unpaid
in an aggregate amount equal to or exceeding the aggregate amount of dividends
payable thereon for six quarterly dividend periods, the holders of the Preferred
Shares, voting separately as a class with the holders of all other series of
Preferred Stock upon which like voting rights have been conferred and are
exercisable, shall have the right to vote for the election of two Directors of
the Corporation ("Preferred Stock Directors"), such Preferred Stock Directors to
be in addition to the number of Directors constituting the Board of Directors
immediately prior to the accrual of such right. Such right of the holders of
Preferred Shares to elect two Preferred Stock Directors, when vested, shall
continue until all dividends in arrears on the Preferred Shares shall have been
paid in full or declared and set apart for payment, and, when so paid or
declared and set apart for payment, such right of the holders of Preferred
Shares to elect two Preferred Stock Directors separately as a class shall cease,
subject always to the same provisions for the vesting of such right of the
holders of the Preferred Shares to elect two Preferred Stock Directors in the
case of future dividend defaults.
The term of office of each Director elected pursuant to the preceding
paragraph shall terminate on the earlier of (i) the next annual meeting of
stockholders at which a successor shall have been elected and qualified or (ii)
the termination of the right of holders of Preferred Shares and such other
series of Preferred Stock to vote for Preferred Stock Directors pursuant to the
preceding paragraph. Vacancies on the Board of Directors resulting from the
death, resignation or other cause of any such Preferred Stock Director shall be
filled exclusively by no less than two-thirds of the remaining Directors and the
new Director so elected shall hold office until a successor is elected and
qualified.
(b) For as long as any Preferred Shares remain outstanding, the Corporation
will not, without the affirmative vote or consent of the holders of at least 66
2/3 thereof actually voting (voting separately as a class): (i) amend, alter or
repeal any of the provisions of the Certificate of Incorporation that would
affect adversely the powers, preferences or rights of the holders of the
Preferred Shares then outstanding or reduce the minimum time required for any
notice to which only the holders of Preferred Shares then outstanding may be
entitled; provided, however, that any such amendment, alteration or repeal that
would authorize or create, or increase the authorized amount of, any additional
shares of Common Stock or any other shares of capital stock ranking junior to or
on a parity with the Preferred Shares as to payment of dividends or the
distribution of assets upon liquidation, dissolution or winding up of the
Corporation (whether or not already authorized) shall not be deemed to affect
adversely such powers, preferences or rights and shall not be subject to
approval by the holders of the Preferred Shares; (ii) authorize or create, or
increase the authorized amount of, any capital stock, or any security
convertible into capital stock, of any class ranking senior to the Preferred
Shares as to payment of dividends or the distribution of assets upon
liquidation, dissolution or winding up of the Corporation; or (iii) merge or
consolidate with or into any
120
<PAGE>
other corporation, unless each holder of the Preferred Shares immediately
preceding such merger or consolidation shall have the right either to (A)
receive or continue to hold in the resulting corporation the same number of
shares, with substantially the same rights and preferences, as correspond to the
Preferred Shares so held or (B) convert into shares of Common Stock at the
Conversion Rate in effect on the date immediately preceding the announcement of
any such merger or consolidation (such date, solely for purposes of determining
the appropriate Conversion Rate then in effect with respect to this clause (B),
being deemed the "Mandatory Conversion Date").
There is no limitation on the issuance by the Corporation of any class of
stock ranking junior to or on a parity with the Preferred Shares as to the
payment of dividends or the distribution of assets upon liquidation, dissolution
or winding up of the Corporation.
Notwithstanding the provisions summarized in the preceding two paragraphs,
however, no such approval described therein of the holders of the Preferred
Shares shall be required to authorize an increase in the number of authorized
shares of Preferred Stock or Common Stock.
121
<PAGE>
IN WITNESS WHEREOF, The Money Store Inc. has caused this Amendment to its
Restated Certificate of Incorporation to be duly executed by the undersigned
officer this __ day of October, 1996.
THE MONEY STORE INC.
By: ___________________________
Name:
Title:
122
<PAGE>
EXHIBIT 10.20
SECOND AMENDMENT
TO CREDIT AGREEMENT
THIS SECOND AMENDMENT, dated as of December 13, 1996 (this "Amendment") is
---------
among The Money Store Inc. (the "Borrower"), the Lenders, First Union National
--------
Bank of North Carolina, as Documentation Agent, and The First National Bank of
Chicago, as Administrative Agent.
BACKGROUND
1. The Borrower, the Lenders, the Documentation Agent and the
Administrative Agent entered into a Credit Agreement, dated as of August 16,
1996 (as amended by the First Amendment to Credit Agreement dated as of
September 20, 1996, the "Credit Agreement").
----------------
2. The parties desire to amend the Credit Agreement in certain respects as
set forth herein.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto hereby agree as
follows:
SECTION 3. Definitions. Capitalized terms used in this Amendment and not
-----------
otherwise defined herein shall have the meanings assigned thereto in the Credit
Agreement.
SECTION 4. Amendments to Credit Agreement. Each of the parties hereto
------------------------------
agrees that, effective as of the date hereof (or as of August 16, 1996 in the
case of the amendments provided in clauses (a), (b) and (d) below, or as of
----------- --- ---
January 1, 1997 in the case of the amendments provided in clauses (c), (e) and
----------- ---
(f) below), the Credit Agreement is hereby amended as follows:
- ---
a) The definition of "Contingent Obligation" is hereby amended and
------------------------------------------------------------------
restated in its entirety to read as follows:
--------------------------------------------
"Contingent Obligation of a Person means any agreement, undertaking
---------------------
or arrangement by which such Person assumes, guarantees, endorses,
contingently agrees to purchase or provide funds for the payment of,
or otherwise becomes or is
123
<PAGE>
contingently liable upon, the obligation or liability of any other
Person, or agrees to maintain the net worth or working capital or
other financial condition of any other Person, or otherwise assures
any creditor of such other Person against loss, including, without
limitation, any comfort letter, operating agreement, take-or-pay
contract or discount with recourse, but excluding (i) endorsements of
negotiable instruments for deposit or collection in the ordinary
course of business of the Borrower and its Subsidiaries and (ii) any
recourse obligation of the Borrower or any of its Subsidiaries with
respect to loans or other receivables sold with recourse to the
Borrower or such Subsidiary or any of the property of either, if such
loans or other receivables are sold to trusts or other special purpose
entities in securitization transactions entered into in the ordinary
course of business of the Borrower and its Subsidiaries, but only to
the extent such recourse obligation (w) is incurred by a Subsidiary of
the Borrower that is a bankruptcy-remote, special purpose entity
formed for the sole purpose of securitizing, or facilitating the
securitizing of, consumer loans and other receivables of the Borrower
and its other Subsidiaries (which Subsidiary does not itself originate
consumer loans, receivables or other financial assets, and, if it
acquires such assets, it acquires such assets from the Borrower and
its other Subsidiaries) and arises out of such Subsidiary being deemed
a general partner of a trust or other special purpose entity which
issues securities in connection with the Borrower's securitization
transactions, so long as such obligation is not in respect of any
payments on such securities, (x) is in respect of a breach of
representation, warranty, covenant or undertaking (other than any
covenant or undertaking to pay the principal or comparable portion of
any loans or receivables transferred, or of any securities or other
obligations issued, in connection with such securitization
transactions), made by the Borrower or any of its Subsidiaries
relating to such sale
124
<PAGE>
of receivables, (y) is or will be funded from Consolidated Restricted
Cash, or (z) constitutes the repurchase obligations reported in the
Borrower's consolidated financial statements as of December 31, 1995.
Contingent Obligations of a Person shall include without limitation,
the stated amount of each letter of credit, surety bond and other
similar instrument issued by such Person. The amount of any Contingent
Obligation of a Person shall be deemed to be the maximum amount for
which such Person may be liable, whether upon the occurrence of any
contingency or otherwise, under or by virtue of such Contingent
Obligation."
b) The definition of "Indebtedness" is hereby amended by (i) deleting
---------------------------------------------------------------------
the word "and" at the end of clause (viii) therein and (ii) inserting the
-------------------------------------------------------------------------
following text immediately prior to the period at the end of such
-----------------------------------------------------------------
definition:
-----------
"and (x) without duplication, any liabilities of such Person in
connection with obligations excluded from the definition of
Contingent Obligation pursuant to clause (ii) of such
-----------
definition".
c) The definition of "Payment Date" is hereby amended and restated in
---------------------------------------------------------------------
its entirety to read as follows:
--------------------------------
" Payment Date means the first Business Day of each calendar
------------
month."
d) The definition of "Securitization SPV" is hereby amended and
---------------------------------------------------------------
restated in its entirety to read as follows:
--------------------------------------------
" Securitization SPV means a Subsidiary of the Borrower which is
------------------
a bankruptcy remote special purpose entity formed for the sole
purpose of securitizing, or facilitating the securitizing of,
consumer loans and other receivables of the Borrower and its
other Subsidiaries, so long as (i) such entity does not itself
originate consumer loans, receivables or other financial assets,
and, if it acquires such assets, it acquires such
125
<PAGE>
assets from the Borrower and its other Subsidiaries and (ii) such
entity does not make or suffer to exist any Contingent
Obligation."
e) The definition of "Quarterly Payment Date" is hereby deleted from
--------------------------------------------------------------------
Article I in its entirety.
--------------------------
f) Section 2.5(a) is hereby amended by substituting the term "Payment
---------------------------------------------------------------------
Date" for the term "Quarterly Payment Date" therein.
----------------------------------------------------
g) Section 2.8 is hereby amended by (i) substituting the time "noon
-------------------------------------------------------------------
(Chicago time)" for the time "10:00 a.m. (Chicago time)" each of the two
------------------------------------------------------------------------
times such time appears in the second sentence of such section and (ii)
-----------------------------------------------------------------------
amending and restating the third sentence of such section in its entirety
-------------------------------------------------------------------------
to read as follows:
-------------------
"Not later than (x) noon (Chicago time), in the case of a
Eurodollar Advance or (y) 3:00 p.m. (Chicago time), in the case
of any Advance not described in the immediately preceding clause
------
(x), on each Borrowing Date, each Lender (or in the case of a
---
Facility B Advance, each Facility B Lender) shall make available
its Loan or Loans, in funds immediately available in Chicago to
the Agent at its address specified pursuant to Article XIII."
------------
h) Section 2.9 is hereby amended by substituting the time "noon
---------------------------------------------------------------
(Chicago time)" for the time "10:00 a.m. (Chicago time)" therein.
-----------------------------------------------------------------
SECTION 1. Conditions to Effectiveness. This Amendment shall become
---------------------------
effective as of the dates set forth in Section 2 above, once the Agent shall
---------
have received counterparts of this Amendment executed by the Borrower and the
Required Lenders.
SECTION 2. Representations and Warranties. The Borrower hereby
------------------------------
represents and warrants that no Default or Unmatured Default has occurred which
is continuing and the representations and warranties set forth in Article V of
---------
the Credit Agreement are true and correct as of the date hereof, in each case
after giving effect to the amendments made hereby.
126
<PAGE>
SECTION 3. Fees and Expenses. The Borrower hereby agrees, in accordance
-----------------
with Section 9.7 of the Credit Agreement, to pay, or reimburse the Agent and the
Documentation Agent, on demand, for any and all legal fees and expenses incurred
by the Agent or the Documentation Agent, as applicable, in connection with this
Amendment.
SECTION 4. Miscellaneous. The Credit Agreement, as amended hereby,
-------------
remains in full force and effect. Any reference to the Credit Agreement from and
after the date of this Amendment shall be deemed to refer to the Credit
Agreement as amended hereby. This Amendment may be executed in any number of
counterparts, and by the parties on separate counterparts, all of which shall
constitute but one and the same agreement. This Amendment shall be governed by
the internal laws of the State of Illinois, but giving effect to Federal laws
applicable to national banks.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed and delivered as of the date and year first above written.
THE MONEY STORE INC.
By:_______________________________
Name Printed:_____________________
Title:____________________________
THE FIRST NATIONAL BANK OF CHICAGO,
individually and as Administrative Agent
By:_______________________________
Name Printed:______________________
Title:_____________________________
FIRST UNION NATIONAL BANK
OF NORTH CAROLINA
By:_______________________________
Name Printed:______________________
Title:_____________________________
BANCO POPULAR de PUERTO RICO
By:_______________________________
Name Printed:______________________
Title:_____________________________
BANK HAPOALIM B.M.
By:_______________________________
Name Printed:______________________
Title:_____________________________
THE BANK OF NEW YORK
By:_______________________________
Name Printed:______________________
Title:_____________________________
THE BANK OF NOVA SCOTIA
By:_______________________________
Name Printed:______________________
Title:_____________________________
127
<PAGE>
THE CHASE MANHATTAN BANK
By:_______________________________
Name Printed:______________________
Title:_____________________________
CIBC INC.
By:_______________________________
Name Printed:______________________
Title:_____________________________
COMERICA BANK
By:_______________________________
Name Printed:______________________
Title:_____________________________
CREDIT LYONNAIS NEW YORK BRANCH
By:_______________________________
Name Printed:______________________
Title:_____________________________
FIRST BANK NATIONAL ASSOCIATION
By:_______________________________
Name Printed:______________________
Title:_____________________________
THE SUMITOMO BANK OF CALIFORNIA
By:_______________________________
Name Printed:______________________
Title:_____________________________
By:_______________________________
Name Printed:______________________
Title:_____________________________
THE SUMITOMO BANK, LIMITED
By:_______________________________
Name Printed:______________________
Title:_____________________________
By:_______________________________
Name Printed:______________________
Title:_____________________________
UNION BANK OF CALIFORNIA, N.A.
By:_______________________________
Name Printed:______________________
Title:_____________________________
128
<PAGE>
UNITED STATES NATIONAL BANK
OF OREGON
By:_______________________________
Name Printed:______________________
Title:_____________________________
WELLS FARGO BANK, N.A.
By:_______________________________
Name Printed:______________________
Title:_____________________________
Each of the undersigned hereby consents
to the foregoing Amendment as of the
date and year first above written:
TMS Mortgage Inc., The Money Store/Kentucky Inc., The Money Store Home Equity
Corp., The Money Store/D.C., Inc., The Money Store/Minnesota Inc., The Money
Store Auto Finance Inc., The Money Store Commercial Mortgage Inc., Equity
Insurance Agency, Inc., Major Brokerage Co., Inc., Princeton Escrow, Dyna-Mark,
Inc., The Money Store Investment Corporation, The Money Store of New York, Inc.,
The Commerce Group, The Money Store/Service Corp., ClassNotes Inc., The Money
Store Realty, Inc., TMS Venture Holdings Inc.
By:________________________________________
Name Printed:_______________________________
Title:______________________________________
129
<PAGE>
Exhibit 11
THE MONEY STORE INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE (1)
<TABLE>
<CAPTION>
========================================================================================================
Year ended December 31,
---------------------------
(Dollars in thousands, except earnings per share) 1996 1995
========================================================================================================
<S> <C> <C>
PRIMARY EARNINGS PER COMMON SHARE
Net income $ 85,655 $ 48,715
Less preferred dividends 621 --
----------- -----------
Net income for calculating primary
earnings per common share $ 85,034 $ 48,715
=========== ===========
Average common shares outstanding 57,649,424 51,023,609
Add the effect of common stock equivalents
arising from the assumed exercise
of stock options 1,435,898 --
----------- -----------
Average common shares outstanding as adjusted 59,085,322 51,023,609
=========== ===========
Primary earnings per common share $ 1.44 $ 0.95
=========== ===========
FULLY DILUTED EARNINGS PER COMMON SHARE
Net income $ 85,655 $ 48,715
=========== ===========
Average common shares outstanding 57,649,424 51,023,609
Add the effect of common stock equivalents
arising from the assumed conversion
of the $1.72 mandatory convertible
preferred stock and the assumed exercise
of stock options 3,171,898 --
----------- -----------
Average common shares outstanding as adjusted 60,821,321 51,023,609
=========== ===========
Fully diluted earnings per common share $ 1.41 $ 0.95
=========== ===========
</TABLE>
(1) This presentation is submitted in accordance with item 601 (b) (11) of
Regulation S-K.
132
<PAGE>
EXHIBIT 21.1
Subsidiaries of The Money Store Inc. ("TMS")
<TABLE>
<CAPTION>
Percentage of
Voting Stock
Owned by
TMS and
Jurisdiction of each other
Name of Subsidiary Incorporation Subsidiary(1)
- ------------------ ------------- -------------
<S> <C> <C>
THE MONEY STORE/D.C. INC. VIRGINIA TMS Mortgage Inc.
THE MONEY STORE/KENTUCKY INC. KENTUCKY TMS Mortgage Inc.
THE MONEY STORE/MINNESOTA INC. MINNESOTA TMS Mortgage Inc.
EQUITY INSURANCE AGENCY, INC. NEW JERSEY TMS Mortgage Inc.
MAJOR BROKERAGE CO., INC. NEW JERSEY TMS Mortgage Inc.
PRINCETON ESCROW CALIFORNIA TMS Mortgage Inc.
THE MONEY STORE HOME EQUITY CORP. KENTUCKY TMS Mortgage Inc.
DYNA-MARK INC. NEW JERSEY TMS Mortgage Inc.
THE MONEY STORE INVESTMENT NEW JERSEY 100%
CORPORATION
THE MONEY STORE OF NEW YORK INC. NEW YORK The Money Store
Investment
Corporation
FIRST MONEY STORE SECURITIES INC. NEW JERSEY 100%
THE COMMERCE GROUP CALIFORNIA 100%
THE MONEY STORE COMMERCIAL
MORTGAGE INC. NEW JERSEY 100%
(f/k/a Commercial Capital Co. Inc.)
THE MONEY STORE SERVICE CORP. NEW JERSEY 100%
TMS MORTGAGE INC. NEW JERSEY 100%
TRANS-WORLD INSURANCE COMPANY ARIZONA 100%
TMS SPECIAL HOLDINGS, INC. DELAWARE 100%
TMS HOME HOLDINGS, INC. DELAWARE TMS Mortgage Inc.
TMS SBA HOLDINGS INC. DELAWARE The Money Store
Investment
Corporation
TMS STUDENT HOLDINGS INC. DELAWARE 100%
EDUCAID STUDENT HOLDINGS INC. DELAWARE 100%
TMS AUTO HOLDINGS INC. DELAWARE 100%
CLASSNOTES INC. DELAWARE 100%
THE MONEY STORE AUTO FINANCE INC. DELAWARE 100%
THE MONEY STORE REALTY INC. CALIFORNIA 100%
TMS VENTURE HOLDING COMPANY INC. DELAWARE 100%
TMS HELOC HOLDINGS, INC. DELAWARE TMS Mortgage Inc.
</TABLE>
- ----------
(1) Unless otherwise noted, stock of affiliates is owned by The Money Store Inc.
133
<PAGE>
EXHIBIT 23.1
Independent Auditors' Consent
-----------------------------
The Board of Directors and Shareholders
The Money Store Inc.:
We consent to incorporation by reference in the Registration Statements (No.
333-20817, 33-98972, 333-18877, and 333-14075) on Forms S-3 and the Registration
Statements (Nos. 33-66332 and 33-96830) on Forms S-8 of our report dated
February 12, 1997, relating to the consolidated statements of financial
condition of The Money Store Inc. and subsidiaries as of December 31, 1996 and
1995, and the related consolidated statements of income, shareholders' equity,
and cash flows for each of the years in the three-year period ended December 31,
1996, which report appears in the December 31, 1996 Annual Report on Form 10-K
of The Money Store Inc., and to the reference to our firm under the heading
"Experts" in the Prospectus dated March 7, 1997.
/s/ KPMG Peat Marwick LLP
Sacramento, California
March 26, 1997
134
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DECEMBER 31,
1996 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 321,703
<SECURITIES> 0
<RECEIVABLES> 1,405,829
<ALLOWANCES> 19,895
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 73,458
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,612,025
<CURRENT-LIABILITIES> 0
<BONDS> 2,000
133,363
0
<COMMON> 188,276
<OTHER-SE> 260,870
<TOTAL-LIABILITY-AND-EQUITY> 2,612,025
<SALES> 0
<TOTAL-REVENUES> 778,662
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 364,394
<LOSS-PROVISION> 145,652
<INTEREST-EXPENSE> 124,076
<INCOME-PRETAX> 144,540
<INCOME-TAX> 58,655
<INCOME-CONTINUING> 85,655
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 85,655
<EPS-PRIMARY> 1.41
<EPS-DILUTED> 1.41
</TABLE>
