<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (date of earliest event reported) March 4, 1998
THE MONEY STORE INC.
(Exact name of registrant as specified in its charter)
New Jersey 001-10785 22-2293022
(State or other jurisdiction (Commission File Number) (IRS Employer
of incorporation) Identification No.)
2840 Morris Avenue, Union, New Jersey 07083
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (908) 686-2000
N/A
(Former name or former address, if changed since last report)
<PAGE>
1
ITEM 5. OTHER EVENTS
Attached hereto as Exhibit 99.1 are the audited consolidated financial
statements of The Money Store Inc. and subsidiaries as of December 31, 1997 and
1996 and for each of the years in the three-year period ending December 31,
1997.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND
EXHIBITS
(c) The following exhibits are filed herewith:
Exhibit No.
- ----------
99.1 Audited consolidated financial statements of The Money Store Inc. and
subsidiaries as of December 31, 1997 and 1996 and for each of the
years in the three year-period ended December 31, 1997.
<PAGE>
2
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE MONEY STORE INC.
By: /s/ Michael Benoff
--------------------------
Name: Michael Benoff
Title: Executive Vice President
and Chief Financial Officer
Dated: March 4, 1998
<PAGE>
3
EXHIBIT INDEX
Exhibit Description of Exhibit
- ------- ----------------------
99.1 Audited consolidated financial statements of The Money Store Inc. and
subsidiaries as of December 31, 1997 and 1996 and for each of the
years in the three-year period ended December 31, 1997.
<PAGE>
4
EXHIBIT 99.1
The Money Store Inc. and Subsidiaries
Consolidated Financial Statements
December 31, 1997 and 1996
(With Independent Auditors' Report Thereon)
<PAGE>
5
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, 1997 and
1996, 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,
1997. 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, 1997 and 1996, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the consolidated financial statements, the
Company adopted the provisions of Statement of Financial Accounting Standards
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities" in 1997.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Sacramento, CA
February 11, 1998
except as to Note 19, which
is as of March 4, 1998
<PAGE>
6
THE MONEY STORE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands)
<TABLE>
<CAPTION>
Assets
------
December 31,
-----------------------------------
1997 1996
---------- ----------
<S> <C> <C>
Cash and cash equivalents $ 301,669 $ 162,945
Short-term cash investments (Note 10) 195,580 161,703
Receivables, net (Note 3) 1,287,484 1,157,889
Interest-only strip receivables (Note 4) 1,170,254 811,400
Property and equipment, net (Note 5) 153,074 73,458
Other 28,640 24,545
---------- ----------
$3,136,701 $2,391,940
========== ==========
Liabilities and Shareholders' Equity
------------------------------------
Liabilities:
Notes payable (Note 6) $1,516,081 $1,319,197
Accounts payable and other liabilities (Note 8) 542,211 333,283
Income taxes, principally deferred (Note 9) 152,877 147,197
Unearned insurance commissions 9,466 7,754
---------- ----------
2,220,635 1,807,431
---------- ----------
Subordinated debt (Note 7) 250,000 2,000
---------- ----------
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 1997 and 1996
(aggregate liquidation value of $138,198) (Note 12) 133,363 133,363
Common stock, no par; authorized 250,000,000
shares; issued and outstanding 58,336,635 shares
in 1997 and 57,791,436 shares in 1996 (Note 12) 196,748 188,276
Foreign currency translation adjustment (Note 12) 104 -
Retained earnings 335,851 260,870
---------- ----------
666,066 582,509
---------- ----------
$3,136,701 $2,391,940
========== ==========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
7
THE MONEY STORE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Gain on sale of receivables, including net
unrealized gain on valuation of
interest-only strips $574,553 $395,120 $273,967
Finance income, fees earned and other 256,248 209,919 152,048
-------- -------- --------
830,801 605,039 426,015
-------- -------- --------
Expenses:
Salaries and employee benefits (Note 13) 225,061 157,869 118,892
Other operating expenses (Note 14) 226,550 175,076 115,440
Interest 142,218 118,651 92,830
Provision for credit losses on loans not sold (Note 3) 9,223 14,828 20,222
-------- -------- --------
603,052 466,424 347,384
-------- -------- --------
Income from continuing operations before income taxes 227,749 138,615 78,631
Income taxes (Note 9) 95,120 57,808 32,559
-------- -------- --------
Income from continuing operations 132,629 80,807 46,072
Discontinued operations (Note 2):
Income (loss) from operations of
auto finance division, less applicable
income taxes (benefit) (33,419) 4,848 2,643
Loss on disposal of auto finance division,
including provision of $3,000 for operating
losses during phase-out period, less
applicable income tax benefit (7,122) - -
-------- -------- --------
Net income $ 92,088 $ 85,655 $ 48,715
======== ========== ==========
Net earnings (loss) per common share:
Continuing operations (Note 15) $ 2.13 $ 1.42 $ 0.90
Discontinued operations (0.70) 0.09 0.05
-------- -------- --------
Net income $ 1.43 $ 1.51 $ 0.95
======== ========== ==========
Net earnings (loss) per common
share- assuming dilution:
Continuing operations (Note 15) $ 2.06 $ $1.38 $ 0.89
Discontinued operations (0.63) 0.08 0.05
-------- -------- --------
Net income $ 1.43 $ 1.46 $ 0.94
======== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
8
<TABLE>
<CAPTION>
THE MONEY STORE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in thousands, except per share data)
Foreign
Currency Total
Preferred Stock Common Stock Translation Retained Shareholders'
Shares Amount Shares Amount Adjustment Earnings Equity
------------ -------- ---------- ----------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
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 (Note 12) 5,215,000 133,363 133,363
Issuance of common
stock (Note 12) 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
Net income 92,088 92,088
Proceeds and related tax
benefits from exercise of stock
options (Note 13) 545,199 8,472 8,472
Foreign currency translation
adjustment (Note 12) 104 104
Preferred dividends (8,970) (8,970)
Common dividends (8,137) (8,137)
------------ -------- ---------- ---------- ------------ ---------- ------------
Balance, December 31, 1997 5,215,000 $ 133,363 58,336,635 $ 196,748 $ 104 $ 335,851 $ 666,066
============ ========= ========== ========== ============ ========== ============
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
9
THE MONEY STORE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
---------------- ---------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 92,088 $ 85,655 $ 48,715
Adjustments to reconcile net income to net cash
used in operations:
Discontinued operations 40,541 (4,848) (2,643)
Depreciation and amortization 21,107 15,116 8,362
Provision for deferred income taxes 27,347 47,007 12,033
Provision for credit losses on loans not sold 9,223 14,828 20,222
Net unrealized gain on valuation of interest-only strip receivables (77,866) - -
Net change in operating assets and liabilities:
Increase in short-term cash investments (33,877) (83,449) (24,443)
Proceeds from loans sold 7,703,309 5,449,240 3,508,824
Loans originated and purchased (7,801,014) (5,693,054) (3,822,971)
Loans repurchased (4,196) (6,971) (9,059)
Sale of certain interest-only strip receivables 109,000 - -
Increase in other receivables (39,927) (16,042) (30,412)
Increase in interest-only strip receivables (420,033) (274,645) (196,070)
Increase in accounts payable and other liabilities 21,756 28,382 26,249
Other, net (2,383) (3,574) (6,225)
----------- ----------- -----------
Net cash used in operating activities (354,925) (442,355) (467,418)
----------- ----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (55,278) (32,430) (17,466)
Construction in progress (43,507) (16,182) -
Payment for purchase of servicing company, net of cash
acquired (2,422) - -
Payment for purchase of assets of mortgage company (2,200) - -
----------- ----------- -----------
Net cash used in investing activities (103,407) (48,612) (17,466)
----------- ----------- -----------
Cash flows from financing activities:
Net increase (decrease) in secured credit facilities (8,896) 52,415 84,472
Net increase in unsecured credit facilities 37,800 250,000 5,000
Principal payments on unsecured notes (132,020) (83,000) (245,000)
Proceeds from unsecured notes 300,000 20,000 555,000
Principal payments in subordinated debt (2,000) (22,000) -
Proceeds from subordinated debt 250,000 - -
Debt issuance costs (4,958) (1,413) (2,902)
Net increase in collections payable 169,347 82,839 78,617
Net proceeds from issuance of preferred stock - 133,363 -
Net proceeds from issuance of common stock - 122,128 -
Proceeds from exercise of stock options 4,786 2,953 1,640
Dividends paid (17,107) (6,308) (3,492)
----------- ----------- -----------
Net cash provided by financing activities 596,952 550,977 473,335
Effect of exchange rate changes on cash and cash equivalents 104 - -
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 138,724 60,010 (11,549)
Cash and cash equivalents at beginning of period 162,945 102,935 114,484
----------- ----------- -----------
Cash and cash equivalents at the end of period $301,669 $162,945 $102,935
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
10
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 and loans which allow consumers to borrow up to 125%
of the value of their homes ("125 LTV Loans"), (collectively "Home Equity
Loans"), which include FHA Title I home improvement loans ("FHA Title I
Loans") insured by the Federal Housing Authority (the "FHA") of the United
States Department of Housing and Urban Development ("HUD") and other home
improvement loans not insured by FHA ("Conventional Home Improvement Loans"
and, collectively with FHA Title I Loans, "Home Improvement Loans"); (ii)
loans guaranteed in part ("SBA Loans") by the United States Small Business
Administration (the "SBA") and commercial loans generally secured by first
mortgages ("Small Business Loans" and, together with SBA Loans, "Commercial
Loans"); and (iii) government-guaranteed student loans ("Student Loans").
The Company commenced operations in the United Kingdom ("U.K.") in May
1997, with the purchase of Platform Home Loans Ltd. ("Platform"), a U.K. based
servicer of mortgage loans, and the organization of The Money Store Limited
U.K. engaged in the business of originating and purchasing mortgage loans.
Since 1995, the Company has originated motor vehicle retail installment
sale contracts purchased from automobile dealers ("Auto Loans"). On January
21, 1998, the Company decided to close its auto finance division as part of
its overall strategy to focus on more profitable areas of lending. As a result
of this action, the auto finance division is treated as a discontinued
operation for financial reporting.
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.
INVESTMENT IN JOINT VENTURE
The Company has a 50% equity interest in a limited liability company
which is engaged in the business of originating, selling and servicing
mortgage loans. As of December 31, 1997, the joint venture had not commenced
operations.
<PAGE>
11
THE MONEY STORE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ADOPTION OF NEW ACCOUNTING POLICIES
On January 1, 1997, the company adopted Statement of Financial
Accounting Standards ("FAS") No. 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 No. 125 supersedes FAS Nos. 76, 77
and 122, while amending both FAS Nos. 65 and 115. The statement is to be applied
prospectively and earlier implementation was not permitted.
For each servicing contract in existence before January 1, 1997,
previously recognized servicing rights and excess servicing receivables that do
not exceed contractually specified servicing fees are required to be combined,
net of any previously recognized servicing obligations under that contract, as a
servicing asset or liability. Previously recognized servicing receivables that
exceed contractually specified servicing fees are required to be reclassified as
interest-only strip receivables and the allowance for credit losses on loans
sold will be reclassified as a reduction of these receivables.
On December 31, 1997, the Company adopted FAS No. 128, Earnings Per
Share, and FAS No. 129, Disclosure of Information about Capital Structure.
FAS No. 128 requires that the Company report basic and diluted earnings
per share ("EPS") which replaces primary and fully diluted earnings per share
previously reported by the Company. The key difference is that basic EPS does
not adjust for common stock equivalents. It also requires dual presentation of
basic and diluted EPS on the face of the income statement for all entities with
a complex capital structure and requires a reconciliation of the numerator and
denominator of the basic EPS computations to the numerator and denominator of
the diluted EPS computation. All prior year EPS amounts have been restated to
reflect the adoption of FAS No. 128. The adoption of this statement has not had
a material effect on the Company's financial statements.
FAS No. 129 lists required disclosures about capital structure that had
been included in a number of previously existing, separate statements and
opinions. Adoption of this statement has had no effect on the Company's
financial statements.
REVENUE RECOGNITION
(A) GAIN ON SALE OF RECEIVABLES AND VALUATION OF INTEREST-
ONLY STRIP RECEIVABLES
Gain on sale of receivables represents the difference between the
proceeds (including premiums) from the sale, net of related transaction costs,
and the allocated carrying amount of the loans sold. The allocated carrying
amount is determined by allocating the original amount of loans (including
premiums paid on loans purchased) between the portion sold and any retained
interests (interest-only strip receivables and servicing assets and liabilities)
based on their relative fair values at the date of sale. The net unrealized
gains on valuation of interest-only strip receivables include the recognition of
unrealized gains which represents the initial difference between the allocated
carrying amount of loans sold and their fair market value. In addition, gain on
sale includes non-refundable fees on loans sold and gains or losses on certain
transactions structured as an economic hedge. The Company recognizes such gain
on sale of loans on the settlement date.
<PAGE>
12
THE MONEY STORE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION (CONTINUED)
(A) GAIN ON SALE OF RECEIVABLES AND VALUATION OF INTEREST-
ONLY STRIP RECEIVABLES (CONTINUED)
The fair value of the interest-only strip receivables is based upon the
present value of future expected cash flows. The cash flows are calculated using
a discount rate commensurate with the risk involved and include estimates of
future revenues and expenses including assumptions about defaults and
prepayments. In connection with securitization transactions, the value of the
future expected cash flows are calculated based upon the release of the
respective cash flows from the securitization.
Subsequent to the initial recognition of the interest-only strip
receivables, on-going assessments are made to determine the fair value of the
expected future cash flows based upon current market conditions. The asset is
measured like available-for-sale securities or trading securities under FAS No.
115 and, accordingly, adjustments to the fair value are recorded based upon
those classifications. At December 31, 1997, the interest-only strip receivables
are classified as trading securities.
The Company recognizes a servicing asset, which is included in interest-
only strip receivables, and a servicing liability, which is included in accounts
payable and other liabilities, both of which are initially measured based upon
fair value. Subsequently, the asset and liability are measured by amortizing the
amounts over the servicing period.
Impairment of the servicing asset is measured based upon a
stratification of risk characteristics. Adjustments are made through a valuation
allowance if the carrying value exceeds fair value. Adjustments are not made if
the fair value exceeds the carrying value.
(B) FINANCE INCOME
Finance income includes: (i) servicing compensation; (ii) earnings on
the interest-only strip receivables; (iii) interest income on receivables held
for sale by the Company; and (iv) miscellaneous fee income.
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, 1997 and 1996.
<PAGE>
13
THE MONEY STORE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOANS RECEIVABLE (CONTINUED)
Provision for credit losses on loans not sold 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 on loans not sold is based upon periodic analysis of
the portfolio, economic conditions and trends, historical credit loss
experience, borrowers' ability to repay, and collateral values.
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 the
useful life of the asset 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
$3,068,000 and $7,199,000 at December 31, 1997 and 1996, 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.
<PAGE>
14
THE MONEY STORE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET EARNINGS PER SHARE
The basic weighted average number of common shares is 58,095,111 for
1997, 56,375,277 for 1996 and 51,028,609 for 1995. The diluted weighted average
number of common shares including common stock equivalents is 64,389,816 for
1997, 58,399,322 for 1996 and 51,803,127 for 1995. The Company's common stock
equivalents, included in the assumed conversion of the Company's outstanding
$1.72 Mandatory Convertible Preferred Stock and the assumed exercise of stock
options to the extent they are dilutive. 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 $142,672,000, $122,531,000 and
$84,335,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
Cash paid for income taxes is $53,475,000, $9,253,000 and $12,940,000 for the
years ended December 31, 1997, 1996 and 1995, respectively.
Supplemental disclosure of non-cash investing and financing activities
is as follows:
Non-cash investing and financing activities consist of capital lease
obligations of $9,531,000 and $3,890,000 for the years ended December 31, 1997
and 1996, respectively, in connection with leases for equipment. There were no
non-cash investing or financing activities for the year ended December 31, 1995.
RECLASSIFICATION
Certain financial statement captions reported in the Consolidated
Statement of Financial Condition as of December 31, 1996, the Consolidated
Statements of Income and the Consolidated Statements of Cash Flows for the years
ended December 31, 1996 and 1995, as well as the 1996 Subsidiary Guarantors'
condensed consolidating financial data presented in Note 18 have been
reclassified to conform to the presentation of the 1997 consolidated financial
statements.
<PAGE>
15
THE MONEY STORE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACQUISITIONS
On May 14, 1997, the Company acquired 100% of the stock of Platform Home
Loans Ltd., a United Kingdom ("U.K.") based servicer of mortgage loans which was
accounted for as a purchase transaction. This acquisition resulted in the
recognition of $2,000,000 of goodwill which is being amortized using the
straight-line method over five years and is included in other assets.
On August 14, 1997, the Company acquired substantially all of the assets
of Integrated Capital Group Inc., an originator and seller of mortgage loans
which was accounted for as a purchase transaction. The amount of $1,450,000 paid
in excess of the assets purchased represents a covenant not to compete which is
being amortized using the straight-line method over three years and is included
in other assets.
FOREIGN CURRENCY TRANSLATION
All assets and liabilities of the U.K. subsidiaries are translated into
U.S. dollars at the rate in effect as of the date of the financial statements.
Income and expense items are translated at the weighted average exchange rate
for the period. The resulting translation adjustments are recorded as a
component of shareholders' equity.
RECENT ACCOUNTING DEVELOPMENTS
In June 1997, the FASB issued FAS No. 130, Reporting Comprehensive
Income, and FAS No. 131, Disclosures about Segments of an Enterprise and Related
Information.
FAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains, and losses)
in a full set of general-purpose financial statements. It does not, however,
specify when to recognize or how to measure items that make up comprehensive
income. FAS No. 130 was issued to address the concerns over the practice of
reporting elements of comprehensive income directly in equity. FAS No. 130 is
effective for financial statements issued for periods beginning after December
15, 1997.
FAS No. 131 establishes standards for the way public business
enterprises are to report information about operating segments in annual
financial statements, and requires those enterprises to report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. FAS No. 131 is
effective for financial statements issued for years beginning after December 15,
1997.
<PAGE>
16
THE MONEY STORE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2) DISCONTINUED OPERATIONS
On January 29, 1998, the Company announced that it has ceased
originating loans in its auto finance division as part of an overall corporate
strategy to focus on more profitable areas of lending. This division operated on
a nationwide basis and originated loans for the purpose of purchasing
new and used cars, minivans, vans and light trucks. The Company sold these loans
in securitization transactions with servicing retained. In connection with this,
all related operating activity is reclassified and reported as discontinued
operations in the 1997 and the preceding years' Consolidated Financial
Statements. Also included in the Company's Consolidated Statements of Financial
Condition are the assets of the auto finance division of $40,662,000 and
$91,512,000 at December 31, 1997 and 1996, respectively, consisting of short-
term cash investments, receivables, interest-only strip receivables and
equipment. In addition, the Company has liabilities of $80,092,000 and
$81,597,000 at December 31, 1997 and 1996, respectively, consisting of accounts
payable and intercompany liabilities.
The results of discontinued operations are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1997 1996 1995
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Revenues $ 6,848 $ 45,210 $ 19,594
Expenses 67,653 39,285 15,192
-------- -------- --------
Operating income (loss) before
taxes and loss on disposal (60,805) 5,925 4,402
Income taxes (benefit) (27,386) 1,077 1,759
-------- -------- --------
Income (loss) before loss
on disposal (33,419) 4,848 2,643
Loss on disposal, net of tax benefit (7,122) - -
-------- -------- --------
Income (loss) from discontinued
operations $(40,541) $ 4,848 $ 2,643
======== ======== ========
</TABLE>
The loss on disposal provides for lease terminations, employment
severance and benefits, write-off of fixed assets and leasehold improvements and
an accrual for estimated future operating losses, and is included in accounts
payable and other liabilities.
<PAGE>
17
THE MONEY STORE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) RECEIVABLES, NET
December 31,
-----------------------------------
1997 1996
---------------- -----------------
(Dollars in thousands)
Loans held for sale:
Home Equity Loans $ 727,840 $ 548,181
Commercial Loans 188,077 264,655
Student Loans 202,658 187,498
Auto Loans 2,228 38,779
---------------- -----------------
1,120,803 1,039,113
Other receivables 186,699 138,671
---------------- -----------------
1,307,502 1,177,784
Less allowance for credit losses
on loans not sold 20,018 19,895
---------------- -----------------
$ 1,287,484 $ 1,157,889
================ =================
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, 1997 and 1996, the unguaranteed portion of SBA Loans held for sale
is $58,568,000 and $44,829,000, respectively.
Small Business Loans have maturities up to 30 years. At December 31,
1997 and 1996, Small Business Loans held for sale are $21,618,000 and
$120,450,000, respectively.
STUDENT LOANS
Student Loans have varying maturities. Substantially all 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.
<PAGE>
18
THE MONEY STORE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) RECEIVABLES, NET (CONTINUED)
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 accrued interest, repurchased
loans and advances in connection with revolving credit facilities to various
originators of home equity loans.
ALLOWANCE FOR CREDIT LOSSES ON LOANS NOT SOLD
The activity in the allowance for credit losses on loans not sold is
summarized as follows:
<TABLE>
<CAPTION>
AS OF AND FOR THE
YEARS ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
------------ ----------- ------------
(Dollars in thousands)
<S> <C> <C> <C>
Balance, beginning of year $ 19,895 $ 15,591 $ 14,014
Provision for credit losses on loans not sold:
Continuing operations 9,223 14,828 20,222
Discontinued operations 3,010 2,412 420
Net loans charged off and
reclassification to collateral owned (12,110) (12,936) (19,065)
--------- --------- ---------
Balance, end of year $ 20,018 $ 19,895 $ 15,591
========= ========= =========
</TABLE>
As of December 31, 1997 and 1996, loans retained by the Company totaling
$73,787,000 and $31,602,000, respectively, were on non-accrual status.
<PAGE>
19
THE MONEY STORE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) RECEIVABLES, NET (CONTINUED)
SERVICED LOAN PORTFOLIO
The serviced loan portfolio, which consists of loans sold to investors
and loans retained by the Company, is as follows:
DECEMBER 31,
-----------------------------
1997 1996
------------- --------------
(Dollars in thousands)
Home Equity Loans $ 11,430,392 $ 8,230,776
Commercial Loans 2,694,640 2,282,384
Student Loans 1,590,791 1,203,739
Auto Loans 778,121 475,533
------------ ------------
$ 16,493,944 $ 12,192,432
============ ============
(4) INTEREST-ONLY STRIP RECEIVABLES
The activity in the interest-only strip receivables is summarized as
follows:
As of and for the
years ended December 31,
-------------------------------------
1997 1996 1995
------------- ----------- -----------
(Dollars in thousands)
Balance, beginning of year $ 811,400 $518,347 $310,627
Initial recognition of the fair value 589,464 406,138 272,175
Unrealized gain on valuation 27,282
Net amortization (148,892) (113,085) (64,455)
Sale of certain
interest-only strip receivables (109,000) - -
---------- -------- --------
Balance, end of year $1,170,254 $811,400 $518,347
========== ======== ========
As of December 31, 1997 and 1996, servicing assets included in the
interest-only strip receivables are $39,809,000 and $25,970,000, respectively.
<PAGE>
20
THE MONEY STORE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(4) INTEREST-ONLY STRIP RECEIVABLES (CONTINUED)
The following chart presents certain weighted average estimates used in
the valuation of the interest-only strip receivables:
Years ended December 31,
---------------------------
1997 1996 1995
-------- -------- ---------
Discount rates:
Home Equity Loans 11.70% 11.30% 11.60%
Commercial Loans 10.50% 10.50% 11.20%
Student Loans 8.30% 8.20% 8.70%
Auto Loans 12.00% 12.00% 12.00%
Prepayment rates:
Home Equity Loans (1) 26.00% 25.00% 22.00%
Commercial Loans (1) 9.00% 9.00% 8.50%
Student Loans (1) (3) 3.00% 4.00% 2.50%
Auto Loans (2) 1.90% 1.80% 1.50%
Adequate servicing compensations:
Home Equity Loans 0.38% 0.35% 0.35%
Commercial Loans 0.40% 0.40% 0.40%
Student Loans (3) 0.85% 0.85% 0.85%
Auto Loans 1.50% 1.50% 1.50%
Annual loss assumptions:
Home Equity Loans 0.75% 0.65% 0.65%
Commercial Loans 0.20% 0.20% 0.25%
Student Loans - - -
Auto Loans 12.50% 4.30% 2.90%
(1) Represents an annual prepayment rate (HEP/CPR).
(2) Represents a monthly rate based on original principal balance (ABS).
(3) Represents an average of in-school and repayment periods.
<PAGE>
21
THE MONEY STORE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) PROPERTY AND EQUIPMENT, NET
December 31,
---------------------------------
1997 1996
------------- ------------
(Dollars in thousands)
Land $ 7,316 $ 7,296
Buildings and improvements 8,411 6,182
Furniture and equipment 128,274 75,085
Construction in progress (a) 59,689 16,182
-------- -------
203,690 104,745
Less accumulated depreciation
and amortization 50,616 31,287
-------- -------
$153,074 $73,458
======== =======
(a) Includes capitalized interest of $4,047,000 and $803,000 at
December 31, 1997 and 1996, respectively.
(6) NOTES PAYABLE
DECEMBER 31,
--------------------------------
1997 1996
-------------- ---------------
(Dollars in thousands)
Secured:
Warehouse notes $ 391,561 $ 408,244
Obligations under
capital leases 11,590 3,803
----------- -----------
403,151 412,047
Unsecured:
Revolving credit
facility 287,800 250,000
Senior notes 825,000 637,000
Other unsecured notes 130 20,150
----------- -----------
1,112,930 907,150
----------- -----------
$ 1,516,081 $ 1,319,197
=========== ===========
<PAGE>
22
THE MONEY STORE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) NOTES PAYABLE (CONTINUED)
SECURED NOTES
The Company has available lines of credit, which are subject to renewal
periodically, for warehousing of loans of $2,500,000,000 at December 31, 1997.
Outstanding borrowings under these credit facilities are collateralized by loans
of $395,081,000 at December 31, 1997. Upon the sale of loans, the notes are
repaid.
At December 31, 1997, the future minimum lease payments under capital
lease obligations are as follows (dollars in thousands):
1998 $ 4,685
1999 3,518
2000 3,183
2001 1,466
2002 512
Thereafter 15
-------------
Total $13,379
=============
Included in the above amounts is $1,789,000 representing interest.
The following table presents data on warehouse notes payable:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------
1997 1996 1995
---------------- ---------------- ----------------
(Dollars in thousands)
<S> <C> <C> <C>
Weighted average interest rate
for the year 6.2 % 7.1 % 7.7 %
Weighted average interest rate at
end of year 6.6 % 7.5 % 6.6 %
Average amount outstanding for
the year $ 904,717 $ 799,282 $548,733
Maximum amount outstanding
at any month end $1,143,994 $1,281,698 $916,426
</TABLE>
<PAGE>
23
THE MONEY STORE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) NOTES PAYABLE (CONTINUED)
UNSECURED NOTES
The Company has an $800,000,000 unsecured revolving credit facility (the
"Credit Facility") which expires June 30, 2000. At December 31, 1997,
outstanding advances under the Credit Facility were $287,800,000.
The aggregate amount of senior notes maturities for each of the five
years following 1997 are as follows (dollars in thousands):
1998 $ 40,000
1999 190,000
2000 110,000
2001 35,000
2002 325,000
Thereafter 125,000
-------------
$825,000
=============
The Company is required to comply with various operating and financial
covenants defined in the agreements governing the issuance of the senior notes
and the Credit Facility. In addition, certain of the Company's warehouse notes
incorporate the restrictions contained in the senior notes or otherwise contain
similar restrictions. The covenants restrict the payment of certain
distributions including dividends. At December 31, 1997, the Company has
available $358,468,000 for the payment of such distributions under the most
restrictive of these covenants.
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 a method that approximates level-yield. At December 31, 1997 and
1996, the unamortized debt issuance costs are $5,668,000 and $4,875,000,
respectively.
<PAGE>
24
THE MONEY STORE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) NOTES PAYABLE (CONTINUED)
The following table presents data on unsecured notes payable:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------
1997 1996 1995
---------------- ---------------- ----------------
(Dollars in thousands)
<S> <C> <C> <C>
Weighted average interest rate for
the year 7.6 % 8.2 % 8.7 %
Weighted average interest rate at
end of year 7.9 % 7.8 % 8.6 %
Average amount outstanding for
the year $1,207,848 $ 822,833 $561,483
Maximum amount outstanding
at any month end $1,497,230 $1,010,150 $720,150
</TABLE>
(7) SUBORDINATED DEBT
DECEMBER 31,
---------------------------
1997 1996
----------- -----------
(Dollars in thousands)
7.3% due December 1, 2002 (a) $ 150,000 $ -
8.0% due December 1, 2007 (a) 100,000 -
7.8% due September 2, 1997 - 2,000
----------- -----------
$ 250,000 $ 2,000
=========== ===========
(a) Interest on the notes is payable semiannually on June 1 and December
1, commencing June 1, 1998. The notes are unsecured, subordinated to
all existing and future senior indebtedness, and effectively
subordinated to all indebtedness and other obligations of the
Company's subsidiaries.
<PAGE>
25
THE MONEY STORE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(7) SUBORDINATED DEBT (CONTINUED)
As of December 31, 1997, the unamortized subordinated debt issuance
costs are $1,796,000. These costs are related to the $250,000,000 of
subordinated debt issued in 1997. The subordinated debt issuance costs
associated with the subordinated debt outstanding as of December 31, 1996 had
been substantially amortized.
(8) ACCOUNTS PAYABLE AND OTHER LIABILITIES
Accounts payable and other liabilities includes $415,365,000 and
$246,018,000 at December 31, 1997 and 1996, 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. Also included in accounts payable and other liabilities at
December 31, 1997 is an accrual for the loss on disposal of the auto finance
division of $12,000,000 and the recognition of a servicing liability for the
auto finance division of $8,700,000.
(9) INCOME TAXES
The provision for income taxes from continuing operations is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------
1997 1996 1995
--------------- --------------- ---------------
(Dollars in thousands)
<S> <C> <C> <C>
Current $52,019 $14,359 $22,920
Deferred 43,101 43,449 9,639
--------------- --------------- ---------------
$95,120 $57,808 $32,559
=============== =============== ===============
</TABLE>
Deferred tax expense relating to discontinued operations is $19,596,000
for the year ending December 31, 1997. Deferred tax expense from discontinued
operations for the years ending December 31, 1996 and 1995 was not material.
A reconciliation between the expected Federal income tax expense and the
actual income tax expense is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------
1997 1996 1995
-------------- -------------- --------------
(Dollars in thousands)
<S> <C> <C> <C>
Income from continuing operations
before income taxes $227,749 $138,615 $78,631
Statutory Federal income tax rate 35% 35% 35%
-------------- -------------- --------------
Computed expected income tax expense 79,712 48,515 27,521
State income taxes net of Federal income
tax benefit 15,408 9,293 5,038
-------------- -------------- --------------
$ 95,120 $ 57,808 $32,559
============== ============== ==============
</TABLE>
<PAGE>
26
THE MONEY STORE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9) INCOME TAXES (CONTINUED)
At December 31, 1997, the Company has state net operating loss
carryforwards available of $24,924,000, expiring on various dates through 2017.
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities is as follows:
DECEMBER 31,
---------------------------------
1997 1996
--------------- ---------------
(Dollars in thousands)
Deferred tax assets:
Provision for credit losses
on loans not sold $ 8,007 $ 7,958
Interest on non-accrual loans 18,679 12,307
Unearned insurance 3,935 3,213
Deferred bonuses 5,318 4,880
Auto division expense accruals 4,988 -
Other 3,266 713
--------------- ---------------
44,193 29,071
--------------- ---------------
Deferred tax liabilities:
Interest-only strip receivables 200,019 162,552
Depreciation and amortization 4,042 2,883
--------------- ---------------
204,061 165,435
--------------- ---------------
Net deferred tax liability $159,868 $136,364
=============== ===============
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.
<PAGE>
27
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 2003. Minimum annual
rental payments at December 31, 1997 are as follows (dollars in thousands):
1998 $ 15,135
1999 12,619
2000 8,219
2001 5,221
2002 2,671
Thereafter 5
------------
$ 43,870
============
Rent expense amounted to $14,462,000, $12,458,000 and $9,730,000 for the
years ended December 31, 1997, 1996 and 1995, respectively.
The Company began development of an office building located in West
Sacramento, California in May 1996, with completion expected in 1998. This
project, which includes the purchase of land and building construction, is
estimated to cost $87,000,000, and will be funded out of the general working
capital of the Company. In addition, capitalized expenditures to complete the
building for occupancy are anticipated to be approximately $10,000,000. Total
expenditures including capitalized interest to date are $66,802,000. The 400,000
square foot building will help to centralize operations and support additional
staff for the anticipated growth of the business.
The Company has provided revolving credit facilities to various
originators of home equity loans. These facilities provide the originators with
warehouse financing prior to the sale of loans, usually to the Company. These
agreements, which are subject to renewal periodically, bear interest at rates
primarily between prime plus 2.00% and 2.50% and are collateralized by the
loans. Upon sale of the loans, the advances are repaid. At December 31, 1997,
the Company has made available to originators, lines of credit of approximately
$88,000,000. Advances outstanding at December 31, 1997 and 1996, are $17,389,000
and $8,291,000, respectively, and are included in Receivables, net.
In certain securitization transactions, the Company subordinates a
portion of its interest in excess cash flows to the interest of investors. The
investors' protection from losses is provided by the subordination of the
Company's cash flows including among other methods, various combinations of cash
deposits provided by the Company, subordination accounts and credit enhancement
provided by third parties. At December 31, 1997 and 1996, short-term cash
investments represent restricted cash deposits held in interest-bearing accounts
for the protection of investors from losses. In addition, advances in connection
with subordination accounts of $379,500,000 and $225,100,000 are included in
interest-only strip receivables. In senior subordinated structures, the senior
certificate holders are protected from losses by outstanding subordinated
certificates and credit enhancements provided by third parties, and in some
cases the limited guarantee of the Company.
<PAGE>
28
THE MONEY STORE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(10) COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS OF CREDIT RISK (CONTINUED)
In certain securitizations, limited guarantees are provided by the
Company as credit enhancement. During the second quarter of 1997, the Company
completed two asset-backed securitizations, one collateralized by Commercial
Loans, and the other by Home Equity Loans which employed a senior/subordinate
structure with the subordinate bonds enhanced by a limited guarantee by the
Company. At December 31, 1997, these limited guarantees amounted to
approximately $13,000,000.
In an attempt to minimize the risk of interest rate fluctuations, one of
the strategies employed by the Company is to enter into agreements that allow it
to sell loans to certain trusts in the future at an agreed upon price. At
December 31, 1997, under the terms of such agreements the Company had the right
to deliver $207,710,000 of Home Equity Loans, $1,666,000 of Commercial Loans,
$12,634,000 of Student Loans and $21,486,000 of Auto Loans, within approximately
90 days of such date.
In addition, the Company occasionally purchases and sells government
securities at agreed upon prices as an economic hedge. Losses on these
transactions, which are included in the gain on sale of receivables amounted to
$20,599,000, $1,139,000 and $5,110,000 for the years ended December 31, 1997,
1996 and 1995, respectively.
The Company generally sells its Home Equity Loans with servicing
retained in mortgage pass-through transactions and in whole loan transactions.
In certain whole loan transactions, the Company is subject to off-balance sheet
credit risk in the normal course of business due to commitments and obligations
to service and repurchase loan receivables which are not included in the
accompanying consolidated financial statements. These commitments and
obligations do not necessarily represent future cash flow obligations. The
obligations to repurchase Home Equity Loans are subject to various terms and
conditions including limitations on the amount of loans that may be required to
be repurchased in any given year. Based upon the terms of whole loan
transactions and management's estimates of the lives of the underlying
portfolios, management believes that there are $40,224,000 of Home Equity Loans
at December 31, 1997 which the Company may be required to repurchase in the
future should such loans become more than 90 days past due.
The Company's serviced loan portfolio is widely dispersed. At December
31, 1997, loans to borrowers in the State of California accounted for
approximately 18% of total serviced loan portfolio, while no other state
accounted for more than 7%.
In the normal course of business, the Company is subject to various
legal proceedings and claims, the resolution of which will not in management's
opinion, have a material adverse effect on the consolidated financial position
or results of operations of the Company.
<PAGE>
29
THE MONEY STORE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 $1,171,000, $1,184,000 and $1,200,000 for the years ended December
31, 1997, 1996 and 1995, respectively.
In addition, the Company leases offices in California from a
partnership, whose general partner is a corporation in which an executive
officer is a majority shareholder. The annual rent under this lease which
expires in March 1998 was $110,000, $203,000 and $203,000 for the years ended
December 31, 1997, 1996 and 1995, respectively.
(12) SHAREHOLDERS' EQUITY
Foreign currency translation adjustment resulted in a gain of $104,000
in 1997. This gain represents the cumulative effect of translating assets and
liabilities of the Company's U.K. subsidiaries.
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.
(13) 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 $8,282,000, $4,851,000 and $3,479,000 for
the years ended December 31, 1997, 1996 and 1995, 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 $9,342,000, $8,771,000 and
$4,391,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
<PAGE>
30
THE MONEY STORE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(13) EMPLOYEE BENEFIT PLANS (CONTINUED)
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.
The following table sets forth the plan's status and amounts recognized
in the Company's consolidated financial statements:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------
1997 1996
--------------------- -------------------
(Dollars in thousands)
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested $ - $ 1,350
Non-vested 2,402 1,979
--------------------- -------------------
Accumulated benefit obligation 2,402 3,329
Effect of projected future compensation levels 3 94
--------------------- -------------------
Projected benefit obligation 2,405 3,423
Unrecognized prior service cost (1,648) (1,859)
Unrecognized net gain (loss) (15) 53
Additional minimum liability 1,660 1,712
--------------------- -------------------
Total pension liability $ 2,402 $ 3,329
===================== ===================
</TABLE>
In determining the projected benefit obligation for the year ended
December 31, 1997, the discount rate is 7.0% pre-retirement and 7.0%
post-retirement. For the year ended December 31, 1996, 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 1997 and 1996.
<PAGE>
31
THE MONEY STORE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(13) EMPLOYEE BENEFIT PLANS (CONTINUED)
Net periodic pension cost includes the following components:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------
1997 1996 1995
------------ -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Service cost $ 108 $ 105 $ 144
Interest cost on projected benefit obligation 156 222 206
Net amortization and deferral 210 210 210
------------ -------- --------
Net periodic pension cost $ 474 $ 537 $ 560
============ ======== ========
</TABLE>
In determining the net periodic pension cost for the year ended December
31, 1997, the discount rate is 7.5% pre-retirement and 7.0% post-retirement. 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 1997, 1996 and 1995.
STOCK OPTION PLANS
The Company's 1991 Stock Option Plan, as amended, the 1995 Stock
Incentive Plan and the 1997 Stock Incentive Plan (collectively the "Plans")
provide for a total of 8,284,375 shares to be reserved 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 is
equal to 100% of the fair market value of the shares on the date of the grant.
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, the
1995 Stock Incentive Plan, or the 1997 Stock Incentive Plan after September 15,
2001, August 15, 2005, and August 13, 2007, respectively. Changes in options
outstanding are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------------------------
1997 1996 1995
------------------------------------- --------------------------------- -----------------------------
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 3,351,226 $ 13.95 3,168,090 $ 9.54 2,261,732 $ 4.27
Options granted 1,791,000 24.15 983,091 24.01 1,697,909 14.16
Options canceled (468,027) 18.02 (276,605) 15.34 (241,376) 6.23
Options exercised (545,199) 8.78 (523,350) 6.13 (550,175) 3.57
----------------- ------------- ---------
Options outstanding at
end of year 4,129,000 18.50 3,351,226 13.95 3,168,090 9.54
================= ============= =========
Options exercisable 643,869 12.43 521,750 7.62 530,000 3.77
================= ============= =========
</TABLE>
<PAGE>
32
THE MONEY STORE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(13) 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 93,875 $ 2.84 -
Options exercisable 93,875 2.84
$4.83 - $7.07
Options outstanding 777,187 5.53 2.2
Options exercisable 190,489 5.41
$9.57
Options outstanding 22,500 9.57 3.0
Options exercisable 9,000 9.57
$15.90 - $22.25
Options outstanding 2,085,713 19.55 4.1
Options exercisable 281,480 17.18
$24.06 - $28.63
Options outstanding 1,149,725 26.81 4.7
Options exercisable 69,025 25.82
</TABLE>
FAS No. 123 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
No. 25"). Companies may continue to apply the accounting provisions of APB No.
25 in determining net income; however, they must apply the disclosure
requirements of FAS No. 123 for all grants issued after 1994. The Company
elected to continue to apply the provisions of APB No. 25 in accounting for the
employee stock plans described above. Accordingly, no compensation cost has been
recognized.
<PAGE>
33
THE MONEY STORE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(13) EMPLOYEE BENEFIT PLANS (CONTINUED)
Had compensation cost for these employee stock plans been determined
based on the new fair value method under FAS No. 123, the Company's net income
and net earnings per share would have been reduced based on the month of grant
to the pro forma amounts indicated as follows:
YEARS ENDED DECEMBER 31,
------------------------------------
1997 1996 1995
---------- ---------- ----------
(Dollars in thousands, except per share data)
Net income:
As reported $ 92,088 $ 85,655 $ 48,715
========= ========= =========
Pro forma (1) $ 88,232 $ 83,677 $ 48,058
========= ========= =========
Net earnings per common share:
As reported $ 1.43 $ 1.51 $ 0.95
========= ========= =========
Pro forma (1) $ 1.37 $ 1.47 $ 0.94
========= ========= =========
Net earnings per common share-
assuming dilution:
As reported $ 1.43 $ 1.46 $ 0.94
========= ========= =========
Pro forma (1) $ 1.37 $ 1.43 $ 0.93
========= ========= =========
(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 No. 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 1997, 1996 and 1995 respectively: expected
dividend yield of 0.47%, 0.35% and 0.45%; expected volatility of 54.47%, 46.34%
and 45.45%; risk-free interest rates of 6.53%, 6.41% and 5.96%; and expected
lives of five for all three years. The weighted-average grant-date fair value of
options granted are $11.49, $11.44 and $6.56 for the years ended December 31,
1997, 1996 and 1995, respectively. Compensation expense resulting from the
granting of stock options relating to discontinued operations was not material.
<PAGE>
34
THE MONEY STORE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(14) OTHER OPERATING EXPENSES
Other operating expenses include the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------
1997 1996 1995
-------------- -------------- --------------
(Dollars in thousands)
<S> <C> <C> <C>
Advertising $60,692 $51,848 $38,005
Depreciation and amortization 21,107 15,116 8,362
Loan expenses 25,037 16,217 10,921
Office, stationery and supplies 45,094 33,046 22,036
Professional fees 15,293 16,102 6,360
Occupancy costs 14,462 12,458 9,730
Other expenses 44,865 30,289 20,026
--------- ---------- ----------
$226,550 $175,076 $115,440
========= ========== ==========
</TABLE>
<PAGE>
35
THE MONEY STORE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(15) RECONCILIATION OF BASIC AND DILUTED NET EARNINGS PER COMMON SHARE FROM
CONTINUING OPERATIONS
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------
1997
------------------------------------------------
(Dollars in thousands, except per share amounts)
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Income from continuing operations $132,629
Less: Preferred stock dividends (8,970)
---------
Basic EPS
Income available to
common stockholders 123,659 58,095,111 $ 2.13
======
Effect of Dilutive Securities
Stock options 1,079,705
Convertible preferred stock 8,970 5,215,000
--------- ----------
Diluted EPS
Income available to common
stockholders + assumed conversions $132,629 64,389,816 $ 2.06
========= ========== ======
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------
1996
------------------------------------------------
(Dollars in thousands, except per share amounts)
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Income from continuing operations $ 80,807
Less: Preferred stock dividends (621)
---------
Basic EPS
Income available to
common stockholders 80,186 56,375,277 $ 1.42
======
Effect of Dilutive Securities
Stock options 1,164,154
Convertible preferred stock 621 859,891
--------- ----------
Diluted EPS
Income available to common
stockholders + assumed conversions $ 80,807 58,399,322 $ 1.38
========= ========== ======
</TABLE>
<PAGE>
36
THE MONEY STORE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(15) RECONCILIATION OF BASIC AND DILUTED NET EARNINGS PER COMMON SHARE FROM
CONTINUING OPERATIONS (CONTINUED)
<TABLE>
Year ended December 31,
-----------------------------------------------
1995
-----------------------------------------------
<CAPTION> (Dollars in thousands, except per share amounts)
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Income from continuing operations $ 46,072
Basic EPS
Income available to
Common stockholders 46,072 51,023,609 $ 0.90
========
Effect of Dilutive Securities
Stock options 767,178
--------- -------------
Diluted EPS
Income available to common
stockholders + assumed conversions $ 46,072 51,790,787 $ 0.89
========= ============= ========
</TABLE>
Options on 535,500, 491,250 and 1,352,909 shares of common stock were not
included in computing diluted earnings per share for the years ended December
31, 1997, 1996 and 1995, respectively, as they were antidilutive.
(16) FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments" ("FAS No. 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 No. 107 excludes certain
financial instruments and all non-financial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Company.
<PAGE>
37
THE MONEY STORE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(16) FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
Estimated fair values, carrying values and various methods and
assumptions used in valuing the Company's financial instruments are set forth
below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------
1997 1996
------------------------------------- -----------------------------
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) $ 301,669 $ 301,669 $ 162,945 $ 162,945
Short-term cash investments (a) 195,580 195,580 161,703 161,703
Receivables (b) 1,287,484 1,376,000 1,157,889 1,250,000
Interest-only strip receivables (c) 1,170,254 1,170,254 811,400 811,400
Financial Liabilities:
Notes payable (excluding senior notes) (d) 691,081 691,081 682,197 682,197
Unsecured - senior notes (d) 825,000 836,000 637,000 648,000
Subordinated debt (e) 250,000 242,000 2,000 2,000
</TABLE>
(a) The carrying value of cash, cash equivalents and short-term cash
investments 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, 1997 and 1996.
(c) The interest-only strip receivables are carried at fair value
(see Note 4)
(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.
The fair value estimates made at December 31, 1997 and 1996, 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. Changes
in assumptions could significantly affect the estimates.
<PAGE>
38
THE MONEY STORE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(16) FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
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.
<PAGE>
39
THE MONEY STORE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(17) 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
-----------------------------------------------------------------
(Dollars in thousands, except per share amounts) March 31 June 30 Sept. 30 Dec. 31
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1997
Revenues $ 171,817 $ 177,877 $ 243,000 $ 238,107
Net income before income taxes 43,698 43,706 74,378 65,967
Net income from continuing operations 24,558 25,756 43,163 39,152
Net income (loss) from discontinued operations 2,141 4,468 (8,109) (39,041)
Net income 26,699 30,224 35,054 111
NET EARNINGS (LOSS) PER COMMON SHARE:
Continuing operations $ 0.39 $ 0.41 $ 0.70 $ 0.63
Discontinued operations 0.04 0.08 (0.14) (0.67)
----------- ----------- ----------- -----------
Net income $ 0.43 $ 0.49 $ 0.56 $ (0.04)
=========== =========== =========== ===========
Weighted average number of shares
outstanding - basic 57,867,152 57,996,580 58,194,429 58,316,257
=========== =========== =========== ===========
NET EARNINGS (LOSS) PER COMMON SHARE - ASSUMING DILUTION:
Continuing operations $ 0.38 $ 0.40 $ 0.66 $ 0.61
Discontinued operations 0.03 0.07 (0.12) (0.60)
----------- ----------- ----------- -----------
Net income $ 0.41 $ 0.47 $ 0.54 $ 0.01
=========== =========== =========== ===========
Weighted average number of shares
outstanding - diluted 64,198,653 64,265,320 64,921,108 64,543,020
=========== =========== =========== ===========
1996
Revenues $ 130,428 $ 131,711 $ 161,673 $ 181,227
Net income before income taxes 28,151 21,631 42,106 46,727
Net income from continuing operations 16,560 12,585 24,852 26,810
Net income (loss) from discontinued operations (2,356) 6,312 (2,132) 3,024
Net income 14,204 18,897 22,720 29,834
NET EARNINGS (LOSS) PER COMMON SHARE:
Continuing operations $ 0.31 $ 0.22 $ 0.43 $ 0.45
Discontinued operations (0.04) 0.11 (0.04) 0.05
----------- ----------- ----------- -----------
Net income $ 0.27 $ 0.33 $ 0.39 $ 0.50
=========== =========== =========== ===========
Weighted average number of shares
outstanding - basic 52,742,197 57,487,314 57,540,705 57,703,490
=========== =========== =========== ===========
NET EARNINGS (LOSS) PER COMMON SHARE - ASSUMING DILUTION:
Continuing operations $ 0.31 $ 0.21 $ 0.42 $ 0.43
Discontinued operations (0.04) 0.11 (0.04) 0.05
------------ ----------- ----------- -----------
Net income $ 0.27 $ 0.32 $ 0.38 $ 0.48
============ =========== =========== ===========
Weighted average number of shares
outstanding - diluted 53,978,406 58,931,031 58,819,160 62,494,392
============ =========== =========== ===========
</TABLE>
<PAGE>
40
THE MONEY STORE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(17) SELECTED QUARTERLY DATA (UNAUDITED) (CONTINUED)
Amounts presented for the first, second and third quarters of 1997 and
all quarters of 1996 have been restated from previously reported amounts in
order to reflect the discontinued operations relating to the auto finance
division (see Note 2). Additionally, net earnings per common share amounts have
been restated to reflect the adoption of Statement of Financial Accounting
Standards No. 128 (see Notes 1 and 15).
(18) SUBSIDIARY GUARANTORS
On April 15, 1997, the Company completed a public offering of
$175,000,000 of 8.05% senior notes due 2002 and $125,000,000 of 8.375% senior
notes due 2004 (collectively the "Senior Notes"). The Senior Notes constitute
unsecured and unsubordinated senior indebtedness of the Company. The
unsecured, joint and several, basis by certain of the company's wholly-owned
subsidiaries (the "Guarantors"), although the Subsidiary Guarantees may
terminate prior to maturity of the Senior Notes upon the occurrence of certain
circumstances. The Senior Notes rank equally in right of payment, on a pair
passu basis, with all existing and future unsecured and unsubordinated
indebtedness and guarantees of the Guarantors. The ability of the Company's
subsidiaries to pay dividends or make payments on intercompany indebtedness will
be subject to applicable state laws. The net proceeds of this offering were
used to repay a portion of the indebtedness outstanding under certain credit
facilities.
The following condensed consolidating financial data illustrate the
composition of the combined Guarantors. The Company believes that providing the
condensed consolidating information is of material interest to potential
investors in the Senior Notes and has not presented separate financial
statements for each of the Guarantors because it was deemed that such financial
statements would not provide potential investors with any material additional
information.
Investments in subsidiaries are accounted for by the parent and
Subsidiary Guarantors on the equity method for the purposes of the consolidating
financial data. Earnings of subsidiaries are therefore reflected in the
parent's and Subsidiary Guarantor's investment accounts and earnings. The
principal elimination entries eliminate investments in subsidiaries and
intercompany balances and transactions.
<PAGE>
41
THE MONEY STORE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(18) SUBSIDIARY GUARANTORS
CONSOLIDATING STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
COMBINED COMBINED
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
------
Cash and cash equivalents $ 284,495 $ 21,539 $ (4,365) $ - $ 301,669
Short-term-cash investments - - 195,580 - 195,580
Receivables, net 743 1,082,547 204,194 - 1,287,484
Interest-only strip receivables - - 1,170,254 - 1,170,254
Investment in subsidiaries 469,766 4,142 - (473,908) -
Property and equipment, net - 150,010 3,064 - 153,074
Other 9,181 18,574 885 - 28,640
----------- ---------- ---------- ---------- ----------
$ 764,185 $1,276,812 $1,569,612 $(473,908) $3,136,701
=========== ========== ========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Liabilities:
Notes payable $ 1,504,490 $ 11,591 $ - $ - $1,516,081
Accounts payable and other liabilities 26,804 498,383 17,024 - 542,211
Income taxes, principally deferred (64,273) 184,552 32,598 - 152,877
Unearned insurance commissions - 9,466 - - 9,466
Due to (from) parent and affiliates (1,618,798) 207,667 1,411,207 (76) -
----------- ---------- ---------- ---------- ----------
(151,777) 911,659 1,460,829 (76) 2,220,635
----------- ---------- ---------- ---------- ----------
Subordinated debt 250,000 - - - 250,000
----------- ---------- ---------- ---------- ----------
Shareholders' equity:
Preferred stock 133,363 - - - 133,363
Common stock 196,748 27,366 3,190 (30,556) 196,748
Paid-in capital - 12,553 47,897 (60,450) -
Foreign currency translation adjustment - 104 - - 104
Retained earnings 335,851 325,130 57,696 (382,826) 335,851
----------- ---------- ---------- ---------- ----------
665,962 365,153 108,783 (473,832) 666,066
----------- ---------- ---------- ---------- ----------
$ 764,185 $1,276,812 $1,569,612 $(473,908) $3,136,701
=========== ========== ========== ========== ==========
</TABLE>
<PAGE>
42
THE MONEY STORE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(18) SUBSIDIARY GUARANTORS (CONTINUED)
CONSOLIDATING STATEMENTS OF FINANCIAL CONDITION
December 31, 1996
(Dollars in thousands)
<TABLE>
<CAPTION>
COMBINED COMBINED
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
------
Cash and cash equivalents $ 194,532 $ (40,968) $ 9,381 $ - $ 162,945
Short-term cash investments - - 161,703 - 161,703
Receivables, net - 964,259 193,630 - 1,157,889
Interest-only strip receivables - - 811,400 - 811,400
Investment in subsidiaries 367,246 2,684 - (369,930) -
Property and equipment, net - 71,636 1,822 - 73,458
Other 5,204 18,516 825 - 24,545
-------------------------------------------------------------------------------
$ 566,982 $1,016,127 $1,178,761 $(369,930) $2,391,940
===============================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Liabilities:
Notes payable $ 1,315,394 $ 3,803 $ - $ - $1,319,197
Accounts payable and other liabilities 21,926 303,207 8,150 - 333,283
Income taxes, principally deferred (20,568) 147,545 20,220 - 147,197
Unearned insurance commissions - 7,754 - - 7,754
Due to (from) parent and affiliates (1,334,279) 270,844 1,063,507 (72) -
-------------------------------------------------------------------------------
(17,527) 733,153 1,091,877 (72) 1,807,431
-------------------------------------------------------------------------------
Subordinated debt 2,000 - - - 2,000
-------------------------------------------------------------------------------
Shareholders' equity:
Preferred stock 133,363 - - - 133,363
Common stock 188,276 20,413 3,190 (23,603) 188,276
Paid-in capital - 9,103 47,897 (57,000) -
Retained earnings 260,870 253,458 35,797 (289,255) 260,870
-------------------------------------------------------------------------------
582,509 282,974 86,884 (369,858) 582,509
-------------------------------------------------------------------------------
$ 566,982 $1,016,127 $1,178,761 $(369,930) $2,391,940
===============================================================================
</TABLE>
<PAGE>
43
THE MONEY STORE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(18) SUBSIDIARY GUARANTORS (CONTINUED)
CONSOLIDATING STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, 1997
(Dollars in Thousands)
<TABLE>
<CAPTION>
COMBINED COMBINED
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Gain on sale of receivables $ - $ 543,567 $ 30,986 $ - $ 574,553
Finance income, fees earned
and other 7,161 211,585 37,502 - 256,248
------- ----------- ----------- --------- -----------
7,161 755,152 68,488 - 830,801
------- ----------- ----------- --------- -----------
Expenses:
Operating expenses 4,789 436,395 19,650 - 460,834
Interest 2,405 123,684 16,129 - 142,218
------- ----------- ----------- --------- -----------
7,194 560,079 35,779 - 603,052
------- ----------- ----------- --------- -----------
Income (loss) before income
taxes and undistributed income
of subsidiaries (33) 195,073 32,709 - 227,749
Income tax (benefit) (6) 83,129 11,997 - 95,120
------- ----------- ----------- --------- -----------
Net income from continuing
operations (27) 111,944 20,712 - 132,629
Income (loss) from operations
of auto finance division less
applicable income taxes (benefit) - (34,606) 1,187 - (33,419)
Loss on disposal of auto
finance division, including
provision of $3,000 for
operating losses during
phase-out period, less
applicable income taxes (benefit) - (7,122) - - (7,122)
Equity in undistributed
income of subsidiaries 92,115 1,458 - (93,573) -
------- ----------- ----------- --------- -----------
Net income $ 92,088 $ 71,674 $ 21,899 $ (93,573) $ 92,088
======= =========== =========== ========= ===========
</TABLE>
<PAGE>
44
THE MONEY STORE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(18) SUBSIDIARY GUARANTORS (CONTINUED)
CONSOLIDATING STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, 1996
(Dollars in thousands)
<TABLE>
<CAPTION>
COMBINED COMBINED
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- -------------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Revenues:
Gain on sale of receivables $ 296 $ 371,585 $ 23,239 $ - $ 395,120
Finance income, fees earned
and other 5,841 175,207 28,871 - 209,919
---------- -------------- --------------- -------------- --------------
6,137 546,792 52,110 - 605,039
---------- -------------- --------------- -------------- --------------
Expenses:
Operating expenses 4,814 324,681 18,278 - 347,773
Interest 1,323 106,668 10,660 - 118,651
---------- -------------- --------------- -------------- --------------
6,137 431,349 28,938 - 466,424
---------- -------------- --------------- -------------- --------------
Income before income
taxes and undistributed
income of subsidiaries - 115,443 23,172 - 138,615
Income taxes - 49,809 7,999 - 57,808
---------- -------------- --------------- -------------- --------------
Net income from continuing
operations - 65,634 15,173 - 80,807
Income from operations of
Auto Finance Division
less applicable income - 4,528 320 - 4,848
taxes
Equity in undistributed
income of subsidiaries 85,655 1,094 - (86,749) -
---------- -------------- --------------- -------------- --------------
Net income $ 85,655 $ 71,256 $ 15,493 $ (86,749) $ 85,655
========== ============== =============== ============== ==============
</TABLE>
<PAGE>
45
THE MONEY STORE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(18) SUBSIDIARY GUARANTORS (CONTINUED)
CONSOLIDATING STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, 1995
(Dollars in Thousands)
<TABLE>
<CAPTION>
COMBINED COMBINED
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Gain on sale of receivables $ - $ 251,229 $ 22,738 $ - $ 273,967
Finance income, fees earned
and other 6,363 128,915 16,770 - 152,048
-------- ---------- ---------- ------- ----------
6,363 380,144 39,508 - 426,015
-------- ---------- ---------- ------- ----------
Expenses:
Operating expenses 6,365 231,169 17,020 - 254,554
Interest (2) 81,288 11,544 - 92,830
-------- ---------- ---------- ------- __________
6,363 312,457 28,564 - 347,384
-------- ---------- ---------- ------- ----------
Income loss before income
taxes and undistributed
income of subsidiaries - 67,687 10,944 - 78,631
Income taxes (benefit) (4) 28,615 3,948 - 32,559
-------- ---------- ---------- ------- ----------
Net income from continuing
operations 4 39,072 6,996 - 46,072
Income from operations of Auto
Finance Division less
applicable income taxes - 2,643 - - 2,643
Equity in undistributed
income of subsidiaries 48,711 873 - (49,584) -
-------- ---------- ---------- ------- ----------
Net income $ 48,715 $ 42,588 $ 6,996 $ (49,584) $ 48,715
======== ========== ========== ========= ==========
</TABLE>
<PAGE>
46
THE MONEY STORE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(18) SUBSIDIARY GUARANTORS (CONTINUED)
Consolidating Statements of Cash Flows
For the Year ended December 31, 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
Combined Combined
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $ 92,088 $ 71,674 $ 21,899 $ (93,573) $ 92,088
Adjustments to reconcile net income to net
cash provided by (used in) operations:
Equity in undistributed income of
subsidiaries (92,088) (1,485) - 93,573 -
Discontinued Operations - 39,354 1,187 - 40,541
Depreciation and amortization 2,369 18,123 615 - 21,107
Provision for deferred income taxes - 24,119 3,228 - 27,347
Provision for credit losses on loans not sold - 9,223 - - 9,223
Net unrealized gain on valuation of
interest-only strip receivables - - (77,866) - (77,866)
Net changes in operating assets
and liabilities:
Increase in short-term cash investments - - (33,877) - (33,877)
Proceeds from loans sold - 7,136,711 566,598 - 7,703,309
Loans originated and purchased - (7,218,720) (582,294) - (7,801,014)
Loans repurchased - (4,196) - - (4,196)
Sale of certain interest-only strip
receivables - - 109,000 - 109,000
Decrease (increase) in other receivables (743) (44,316) 5,132 - (39,927)
Increase in interest-only strip receivables - - (420,033) - (420,033)
Increase (decrease) in accounts
payable and other liabilities 4,878 (1,146) 18,024 - 21,756
Other, net (41,407) 10,226 28,798 - (2,383)
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in) operating activities (34,903) 39,567 (359,589) - (354,925)
------------ ------------ ------------ ------------ ------------
Cash flows from investing activities:
Purchase of property and equipment - (53,421) (1,857) - (55,278)
Construction in progress - (43,507) - - (43,507)
Payment for purchase of servicing company, net of
cash acquired - (2,422) - - (2,422)
Payment for purchase of assets of mortgage company - (2,200) - - (2,200)
Investment in and advances to subsidiaries (294,951) (52,749) 347,700 - -
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in) investing activities (294,951) (154,299) 345,843 - (103,407)
Cash flows from financing activities:
Net increase (decrease) in secured credit facilities (16,684) 7,788 - - (8,896)
Net increase in unsecured credit facilities 37,800 - - - 37,800
Principal payments on unsecured senior note (132,020) - - - (132,020)
Proceeds from unsecured notes 300,000 - - - 300,000
Principal payments on subordinated debt (2,000) - - - (2,000)
Proceeds from subordinated debt 250,000 - - - 250,000
Debt issuance costs (4,958) - - - (4,958)
Net increase in collections payable - 169,347 - - 169,347
Proceeds from exercise of stock options 4,786 - - - 4,786
Dividends paid (17,107) - - - (17,107)
------------ ------------ ------------ ------------ ------------
Net cash provided by financing activities 419,817 177,135 - - 596,952
Effect of exchange rate changes on cash and cash
equivalents - 104 - - 104
------------ ------------ ------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents 89,963 62,507 (13,746) - 138,724
Cash and cash equivalents at the beginning of period 194,532 (40,968) 9,381 - 162,945
------------ ------------ ------------ ------------ ------------
Cash and cash equivalents at the end of period $ 284,495 $ 21,539 $ (4,365) $ - $ 301,669
============ ============ ============ ============ ============
</TABLE>
<PAGE>
47
THE MONEY STORE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(18) SUBSIDIARY GUARANTORS (CONTINUED)
Consolidating Statements of Cash Flows
For the Year ended December 31, 1996
(Dollars in thousands)
<TABLE>
<CAPTION>
Combined Combined
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $ 85,655 $ 71,256 $ 15,493 $ (86,749) $ 85,655
Adjustments to reconcile net income to net
cash provided by (used in) operations:
Equity in undistributed income of
subsidiaries (85,655) (1,094) - 86,749 -
Discontinued Operations (5,168) 320 - (4,848)
Depreciation and amortization 2,499 12,188 429 - 15,116
Provision for deferred income taxes - 41,032 5,975 - 47,007
Provision for credit losses on loans not sold - 14,828 - - 14,828
Net unrealized gain on valuation of
interest-only strip receivables - - - - -
Net changes in operating assets
and liabilities:
Increase in short-term cash investments - - (83,449) - (83,449)
Proceeds from loans sold - 5,061,776 387,464 - 5,449,240
Loans originated and purchased - (5,234,595) (458,459) - (5,693,054)
Loans repurchased - (6,971) - - (6,971)
Sale of certain interest-only strip
receivables - - - - -
Decrease (increase) in other receivables 274 (2,413) (13,903) - (16,042)
Increase in interest-only strip receivables - - (274,645) - (274,645)
Increase in accounts payable and other
liabilities 775 25,214 2,393 - 28,382
Other, net (490) 15,271 (18,355) - (3,574)
------------ ------------ ----------- ------------ ------------
Net cash provided by (used in) operating activities 3,058 (8,676) (436,737) - (442,355)
------------ ------------ ----------- ------------ ------------
Cash flows from investing activities:
Purchase of property and equipment - (31,733) (697) - (32,430)
Construction in progress - (16,182) - - (16,182)
Payment for purchase of servicing company, net of cash
acquired - - - - -
Payment for purchase of assets of mortgage company - - - - -
Investment in and advances to subsidiaries (445,746) (5,108) 450,854 - -
------------ ------------ ----------- ------------ ------------
Net cash provided by (used in) investing activities (445,746) (53,023) 450,157 - (48,612)
Cash flows from financing activities:
Net increase (decrease) in secured credit facilities 53,130 (715) - - 52,415
Net increase in unsecured credit facilities 250,000 - - - 250,000
Principal payments on unsecured senior note (83,000) - - - (83,000)
Proceeds from unsecured notes 20,000 - - - 20,000
Principal payments on subordinated debt (22,000) - - - (22,000)
Proceeds from subordinated debt - - - - -
Debt issuance costs (1,413) - - - (1,413)
Net increase in collections payable - 82,839 - - 82,839
Net proceeds from issuance of preferred stock 133,363 - - - 133,363
Net proceeds from issuance of common stock 122,128 - - - 122,128
Proceeds from exercise of stock options 2,953 - - - 2,953
Dividends paid (6,308) - - - (6,308)
------------ ------------ ----------- ------------ ------------
Net cash provided by financing activities 468,853 82,124 - - 550,977
Effect of exchange rate changes on cash and
cash equivalents - - - - -
------------ ------------ ----------- ------------ ------------
Net increase in cash and cash
equivalents 26,165 20,425 13,420 - 60,010
Cash and cash equivalents at the beginning of period 168,367 (61,393) (4,039) - 102,935
------------ ------------ ----------- ------------ ------------
Cash and cash equivalents at the end of period $ 194,532 $ (40,968) $ 9,381 $ - $ 162,945
============ ============ =========== ============ ============
</TABLE>
<PAGE>
48
THE MONEY STORE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(18) SUBSIDIARY GUARANTORS (CONTINUED)
Consolidating Statements of Cash Flows
For the Year ended December 31, 1995
(Dollars in thousands)
<TABLE>
<CAPTION>
Combined Combined
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $ 48,715 $ 42,588 $ 6,996 $ (49,584) $ 48,715
Adjustments to reconcile net income to net
cash provided by (used in) operations:
Equity in undistributed income of
subsidiaries (48,715) (869) - 49,584 -
Discontinued Operations (2,643) - - (2,643)
Depreciation and amortization 1,888 6,150 324 - 8,362
Provision for deferred income taxes - 8,401 3,632 - 12,033
Provision for credit losses on loans not sold - 19,794 428 - 20,222
Net unrealized gain on valuation of
interest-only strip receivables - - - - -
Net changes in operating assets
and liabilities:
Increase in short-term cash investments - - (24,443) - (24,443)
Proceeds from loans sold - 3,129,486 379,338 - 3,508,824
Loans originated and purchased - (3,453,842) (369,129) - (3,822,971)
Loans repurchased - (9,059) - - (9,059)
Sale of certain interest-only strip
receivables - - - - -
Decrease (increase) in other receivables (191) 49,896 (80,117) - (30,412)
Increase in interest-only strip receivables - - (196,070) - (196,070)
Increase (decrease) in accounts payable and other
liabilities 9,692 17,982 (1,425) - 26,249
Other, net (11,153) 5,790 (862) - (6,225)
------------- ------------ ------------ ------------ ------------
Net cash provided by (used in) operating activities 236 (186,326) (281,328) - (467,418)
------------- ------------ ------------ ------------ ------------
Cash flows from investing activities:
Purchase of property and equipment - (16,684) (782) - (17,466)
Construction in progress - - - - -
Payment for purchase of servicing company, net of cash
acquired - - - - -
Payment for purchase of assets of mortgage company - - - - -
Investment in and advances to subsidiaries (373,689) 100,528 273,161 - -
------------- ------------ ------------ ------------ ------------
Net cash provided by (used in) investing activities (373,689) 83,844 272,379 - (17,466)
Cash flows from financing activities:
Net increase (decrease) in secured credit facilities 84,861 (389) - - 84,472
Net increase in unsecured credit facilities 5,000 - - - 5,000
Principal payments on unsecured senior note (245,000) - - - (245,000)
Proceeds from unsecured notes 555,000 - - - 555,000
Principal payments on subordinated debt - - - - -
Proceeds from subordinated debt - - - - -
Debt issuance costs (2,902) - - - (2,902)
Net increase (decrease) in collections payable - 79,009 (392) - 78,617
Net proceeds from issuance of preferred stock - - - - -
Net proceeds from issuance of common stock - - - - -
Proceeds from exercise of stock options 1,640 - - - 1,640
Dividends paid (3,492) - - - (3,492)
------------- ------------ ------------ ------------ ------------
Net cash provided by (used in) financing activities 395,107 78,620 (392) - 473,335
Effect of exchange rate changes on cash and cash
equivalents - - - - -
------------- ------------ ------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents 21,654 (23,862) (9,341) - (11,549)
Cash and cash equivalents at the beginning of period 146,713 (37,531) 5,302 - 114,484
------------- ------------ ------------ ------------ ------------
Cash and cash equivalents at the end of period $ 168,367 $ (61,393) $ (4,039) $ - $ 102,935
============= ============ ============ ============ ============
</TABLE>
