UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended December 25, 2006
or
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 333-122531
THE MONEY TREE INC
(Exact name of registrant as specified in its charter)
| | |
| Georgia | | 58-2171386 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
114 South Broad Street
Bainbridge, Georgia 39817
(Address, including zip code, of principal executive offices)
Registrant’s telephone number, including area code (229) 246-6536
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ¨ Yes x No
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the last practicable date.
| | |
Class | | Outstanding at December 25, 2006 |
| Class A, Voting | | 2,686 Shares |
| Class B, Non-Voting | | 26,860 Shares |
THE MONEY TREE INC.
FORM 10-Q
December 25, 2006
TABLE OF CONTENTS
Index to Financial Statements
1
The Money Tree Inc. and Subsidiaries
Consolidated Balance Sheets
| | | | | | | | |
| | | December 25, 2006 | | | September 25, 2006 | |
| | | (Unaudited) | | | | |
Assets | | | | | | | | |
| | |
Cash and cash equivalents | | $ | 13,904,553 | | | $ | 12,919,524 | |
Finance receivables, net | | | 78,156,778 | | | | 76,657,536 | |
Other receivables | | | 1,255,752 | | | | 1,012,913 | |
Employee receivables | | | 4,862 | | | | 2,029 | |
Inventory | | | 2,024,453 | | | | 2,195,463 | |
Property and equipment, net | | | 4,031,576 | | | | 4,580,804 | |
Deferred income taxes | | | 645,000 | | | | 645,000 | |
Intangible assets | | | 1,401,844 | | | | 1,403,273 | |
Other assets | | | 1,430,328 | | | | 2,070,412 | |
| | | | | | | | |
Total assets | | $ | 102,855,146 | | | $ | 101,486,954 | |
| | | | | | | | |
Liabilities and Shareholders’ Deficit | | | | | | | | |
| | |
Liabilities | | | | | | | | |
Accounts payable and other accrued liabilities | | $ | 3,973,223 | | | $ | 3,525,278 | |
Accrued interest payable | | | 12,204,127 | | | | 11,581,412 | |
Senior debt | | | 577,569 | | | | 668,549 | |
Senior subordinated debt | | | 450,000 | | | | 600,000 | |
Variable rate subordinated debentures | | | 78,795,432 | | | | 77,910,202 | |
Demand notes | | | 7,510,460 | | | | 8,136,850 | |
Junior subordinated debt, related parties | | | 265,000 | | | | 370,000 | |
| | | | | | | | |
Total liabilities | | | 103,775,811 | | | | 102,792,291 | |
| | | | | | | | |
Shareholders’ deficit | | | | | | | | |
Common stock: | | | | | | | | |
Class A voting, no par value; 500,000 shares authorized, 2,686 shares issued and outstanding | | | 1,677,647 | | | | 1,677,647 | |
Class B non-voting, no par value; 1,500,000 shares authorized, 26,860 shares issued and outstanding | | | — | | | | — | |
Accumulated deficit | | | (2,598,312 | ) | | | (2,982,984 | ) |
| | | | | | | | |
Total shareholders’ deficit | | | (920,665 | ) | | | (1,305,337 | ) |
| | | | | | | | |
Total liabilities and shareholders’ deficit | | $ | 102,855,146 | | | $ | 101,486,954 | |
| | | | | | | | |
See accompanying notes to the consolidated financial statements.
2
The Money Tree Inc. and Subsidiaries
Consolidated Statements of Income
| | | | | | | | |
Three months ended December 25, | | 2006 | | | 2005 | |
| | | (Unaudited) | |
Interest and fee income | | $ | 5,134,605 | | | $ | 5,227,513 | |
Interest expense | | | (1,941,069 | ) | | | (1,708,569 | ) |
| | | | | | | | |
Net interest and fee income before provision for credit losses | | | 3,193,536 | | | | 3,518,944 | |
Provision for credit losses | | | (1,126,703 | ) | | | (1,550,844 | ) |
| | | | | | | | |
Net interest and fee income after provision for credit losses | | | 2,066,833 | | | | 1,968,100 | |
Insurance commissions | | | 2,696,423 | | | | 3,248,373 | |
Commissions from motor club memberships from company owned by related parties | | | 544,987 | | | | 563,802 | |
Other income | | | 592,580 | | | | 581,965 | |
| | | | | | | | |
Net revenue before retail sales | | | 5,900,823 | | | | 6,362,240 | |
| | | | | | | | |
Retail sales | | | 5,085,267 | | | | 5,414,882 | |
Cost of sales | | | (3,195,578 | ) | | | (3,543,165 | ) |
| | | | | | | | |
Gross margin on retail sales | | | 1,889,689 | | | | 1,871,717 | |
| | | | | | | | |
Net revenues | | | 7,790,512 | | | | 8,233,957 | |
| | | | | | | | |
Operating expenses | | | | | | | | |
Personnel expense | | | (3,859,278 | ) | | | (4,184,497 | ) |
Facilities expense | | | (959,265 | ) | | | (999,770 | ) |
General and administrative expenses | | | (766,879 | ) | | | (806,960 | ) |
Other operating expenses | | | (1,280,247 | ) | | | (1,493,647 | ) |
| | | | | | | | |
Total operating expenses | | | (6,865,669 | ) | | | (7,484,874 | ) |
Net operating income | | | 924,843 | | | | 749,083 | |
Loss on sale of property and equipment | | | (9,638 | ) | | | (5,114 | ) |
| | | | | | | | |
Income before income tax expense | | | 915,205 | | | | 743,969 | |
Income tax expense | | | (530,533 | ) | | | (313,753 | ) |
| | | | | | | | |
Net income | | $ | 384,672 | | | $ | 430,216 | |
| | | | | | | | |
Net income per common share, basic and diluted | | $ | 13.02 | | | $ | 14.56 | |
Weighted average shares outstanding | | | 29,546 | | | | 29,546 | |
See accompanying notes to the consolidated financial statements.
3
The Money Tree Inc. and Subsidiaries
Consolidated Statements of Cash Flows
| | | | | | | | |
Three months ended December 25, | | 2006 | | | 2005 | |
| | | (Unaudited) | |
Cash flows from operating activities | | | | | | | | |
Net income | | $ | 384,672 | | | $ | 430,216 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | |
Provision for credit losses | | | 1,126,703 | | | | 1,550,844 | |
Depreciation | | | 217,640 | | | | 238,063 | |
Amortization | | | 1,429 | | | | 2,202 | |
Deferred income taxes | | | — | | | | (78,000 | ) |
Loss on sale of property and equipment | | | 9,638 | | | | 5,114 | |
Change in assets and liabilities | | | | | | | | |
Other receivables | | | (242,839 | ) | | | (690,881 | ) |
Employee receivables | | | (2,833 | ) | | | 547 | |
Inventory | | | 171,010 | | | | (229,859 | ) |
Other assets | | | 640,084 | | | | (98,307 | ) |
Accounts payable and other accrued liabilities | | | 447,945 | | | | 601,061 | |
Accrued interest payable | | | 622,715 | | | | 430,062 | |
| | | | | | | | |
Net cash provided by operating activities | | | 3,376,164 | | | | 2,161,062 | |
| | | | | | | | |
Cash flows from investing activities | | | | | | | | |
Finance receivables originated | | | (20,523,890 | ) | | | (23,852,426 | ) |
Finance receivables repaid | | | 17,897,945 | | | | 17,818,357 | |
Purchase of property and equipment | | | (133,982 | ) | | | (335,425 | ) |
Proceeds from sale of property and equipment | | | 455,932 | | | | 25,880 | |
| | | | | | | | |
Net cash used in investing activities | | | (2,303,995 | ) | | | (6,343,614 | ) |
| | | | | | | | |
Cash flows from financing activities | | | | | | | | |
Net proceeds (repayments) on: | | | | | | | | |
Senior debt | | | (90,980 | ) | | | 469,728 | |
Senior subordinated debt | | | (150,000 | ) | | | — | |
Junior subordinated debt and related parties | | | (105,000 | ) | | | — | |
Demand notes | | | (626,390 | ) | | | (1,538,324 | ) |
Proceeds-variable rate subordinated debentures | | | 3,900,099 | | | | 6,880,055 | |
Payments-variable rate subordinated debentures | | | (3,014,869 | ) | | | (3,705,901 | ) |
| | | | | | | | |
Net cash provided by (used in) financing activities | | | (87,140 | ) | | | 2,105,558 | |
| | | | | | | | |
Net change in cash and cash equivalents | | | 985,029 | | | | (2,076,994 | ) |
| | |
Cash and cash equivalents, beginning of period | | | 12,919,524 | | | | 9,618,557 | |
| | | | | | | | |
Cash and cash equivalents, end of period | | $ | 13,904,553 | | | $ | 7,541,563 | |
| | | | | | | | |
See accompanying notes to the consolidated financial statements.
4
The Money Tree Inc. and Subsidiaries
Consolidated Statements of Cash Flows (continued)
| | | | | | |
Three months ended December 25, | | 2006 | | 2005 |
| | | (Unaudited) |
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | | | | | | |
Cash paid during the quarter for: | | | | | | |
Interest | | $ | 1,269,028 | | $ | 1,278,507 |
| | | | | | |
Income taxes | | $ | 6,949 | | $ | 817,325 |
| | | | | | |
See accompanying notes to the consolidated financial statements.
5
The Money Tree Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
NOTE 1 – BASIS OF PRESENTATION
The consolidated financial statements of The Money Tree Inc., a Georgia corporation (the “Parent”) and subsidiaries (collectively with the Parent, the “Company”) included herein have been prepared by the Company without audit, pursuant to the rules and regulations of the United States Securities and Exchange Commission. Certain information and footnote disclosure normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been omitted.
The consolidated financial statements include the accounts of the Company and all of its subsidiaries after eliminating all significant intercompany transactions and reflect all normal, recurring adjustments which are, in the opinion of management, necessary to present a fair statement of the results of operations of the Company in conformity with accounting principles generally accepted in the United States for the interim periods reported. The results of operations for the three months ended December 25, 2006 and 2005 are not necessarily indicative of the results for the full fiscal year.
As described in the Company’s 10-K/A for the year ended September 25, 2005, certain components of amounts contained in the Company’s net finance receivables were understated due to an inadvertent omission of certain loans from the computation of unearned interest beginning in the year ended September 25, 2003 and continuing through the year ended September 25, 2006. The result of this omission was an overstatement of net finance receivables and interest and fee income for the years ended September 25, 2003, 2004, and 2005 and the interim periods within these years. Also, the omission resulted in an overstatement of finance receivables and an understatement of interest and fee income for the first three quarters of the year ended September 25, 2006.
After recording adjustments to correct the misstatements resulting from the unearned interest matter described above, the Company’s statements of operations reflected cumulative losses in recent years, as that term is used in Financial Accounting Standards Board Statement No. 109,Accounting for Income Taxes (“FAS 109”). The Company therefore considered such cumulative losses and other evidence affecting the assessment of the realizability of the net deferred tax assets and concluded that it was no longer more likely than not that the net deferred tax assets were realizable based on the guidance provided in FAS 109. Accordingly, the Company increased the valuation allowance to fully offset the net deferred tax assets through a prior period adjustment to the shareholders’ deficit balance as of September 25, 2002. For periods subsequent to September 25, 2002, the Company has maintained a valuation allowance to offset all net deferred tax assets with the exception of amounts considered more likely than not realizable due to anticipated tax refunds that are believed likely of collection.
As a result of the above omission the Company restated its Consolidated Financial Statements as of, and for the years ended September 25, 2005, 2004 and 2003. This restatement affected the Consolidated Balance Sheet at December 25, 2005 as follows:
| | | | | | | | |
| | | As reported | | | As restated | |
Finance receivables, net | | $ | 81,624,015 | | | $ | 79,143,464 | |
Deferred tax assets | | | 2,063,000 | | | | 723,000 | |
Other assets | | | 1,334,626 | | | | 1,838,390 | |
Accounts payable and other accrued liabilities | | | 5,010,556 | | | | 4,631,917 | |
Accumulated deficit | | | (144,187 | ) | | | (3,082,335 | ) |
The effect of the restatement of the Consolidated Statements of Operations for the years ended September 25, 2003, 2004 and 2005 did not have a material effect on the interim Statements of Operations for the three months ended December 25, 2005. The effect of the restatement on the consolidated financial statements for the three months ended March 25, 2006 and June 25, 2006 will be disclosed in the respective Form 10-Q when issued.
NOTE 2 – NATURE OF BUSINESS
The Company’s business consists of: the operation of finance company offices in 103 locations throughout Georgia, Alabama, Louisiana and Florida; sales of retail merchandise (principally furniture, appliances, and electronics) at certain finance company locations; and the operation of three used automobile dealerships in the state of Georgia. The Company also earns revenues from commissions on premiums written for certain insurance products, when requested by loan customers, as an agent for a non-affiliated insurance company. Revenues are also generated from commissions on the sales of prepaid phone service and automobile club memberships.
The Company’s loan portfolio consists of sales finance loan receivables and direct consumer loan receivables. Sales finance loan receivables consist principally of retail installment sale contracts collateralized by used automobiles and consumer goods which are initiated by automobile and consumer good dealerships, subject to credit approval, in the locations where the Company operates offices. Direct loan receivables are loans originated directly to customers.
NOTE 3 – RECENT ACCOUNTING PRONOUNCEMENTS
In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS 157, “Fair Value Measurements.” SFAS 157 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact the adoption of this statement could have on its financial condition, results of operations and cash flows.
In July 2006, the FASB issued FASB Interpretation (FIN) No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes.” FIN 48 clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. The interpretation applies to all tax positions related to income taxes subject to SFAS 109. FIN 48 is effective for fiscal years beginning after December 15, 2006. Differences between the amounts recognized in the statements of financial position prior to the adoption of FIN 48 and the amounts reported after adoption should be accounted for as a cumulative-effect adjustment recorded to the beginning balance of retained earnings. The Company is currently evaluating the impact the adoption of this statement could have on its financial condition, results of operations and cash flows.
6
The Money Tree Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
NOTE 3 – RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.” SFAS 158 requires an employer to recognize the overfunded or underfunded status of a defined benefit plan as an asset or liability in the balance sheet and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. This pronouncement will be effective for financial statements issued for fiscal years beginning after December 15, 2006. The Company is evaluating the impact of SFAS 158 on its financial statements, but it does not expect the adoption of SFAS 158 to have an impact on its financial position and results of operations.
In September 2006, the Securities and Exchange Commission published Staff Accounting Bulletin (“SAB”) No. 108 (Topic 1N), “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.”SAB No. 108 requires registrants to quantify misstatements using both the balance sheet and income-statement approaches, with adjustment required if either method results in a material error. The provisions of SAB No. 108 are effective for financial statements for the first fiscal year ending after November 15, 2006. The Company is currently evaluating the effect, if any, SAB No. 108 may have on its financial statements, but it does not expect the adoption of SAB No. 108 to have an impact on its financial position or results of operations.
NOTE 4 – FINANCE RECEIVABLES AND ALLOWANCE FOR CREDIT LOSSES
Finance receivables consisted of the following:
| | | | | | | | |
| | | December 25, 2006 | | | September 25, 2006 | |
| | | (Unaudited) | | | | |
Finance receivables, direct consumer | | $ | 51,828,938 | | | $ | 51,690,600 | |
Finance receivables, consumer sales finance | | | 13,069,814 | | | | 11,813,566 | |
Finance receivables, auto sales finance | | | 31,568,578 | | | | 31,280,840 | |
| | | | | | | | |
Total gross finance receivables | | | 96,467,330 | | | | 94,785,006 | |
Unearned insurance commissions | | | (3,262,764 | ) | | | (3,128,529 | ) |
Unearned finance charges | | | (12,838,372 | ) | | | (12,781,597 | ) |
Accrued interest receivable | | | 890,743 | | | | 925,874 | |
Unearned discounts | | | (1,889 | ) | | | (3,859 | ) |
| | | | | | | | |
Finance receivables, before allowance for credit losses | | | 81,255,048 | | | | 79,796,895 | |
Allowance for credit losses | | | (3,098,270 | ) | | | (3,139,359 | ) |
| | | | | | | | |
Finance receivables, net | | $ | 78,156,778 | | | $ | 76,657,536 | |
| | | | | | | | |
7
The Money Tree Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
NOTE 4 – FINANCE RECEIVABLES AND ALLOWANCE FOR CREDIT LOSSES (CONTINUED)
An analysis of the allowance for credit losses is as follows:
| | | | | | | | | | | | |
| | | As of and for the three months ended December 25, 2006 | | | As of and for the year ended September 25, 2006 | | | As of and for the three months ended December 25, 2005 | |
| | | (Unaudited) | | | | | | (Unaudited) | |
| | | |
Beginning balance | | $ | 3,139,359 | | | $ | 2,631,814 | | | $ | 2,631,814 | |
| | | |
Provisions for credit losses | | | 1,126,703 | | | | 4,737,644 | | | | 1,550,844 | |
| | | |
Charge-offs | | | (1,195,639 | ) | | | (4,392,129 | ) | | | (1,414,312 | ) |
| | | |
Recoveries | | | 27,932 | | | | 165,379 | | | | 23,683 | |
| | | |
Other | | | (85 | ) | | | (3,349 | ) | | | 7,299 | |
| | | | | | | | | | | | |
Ending balance | | $ | 3,098,270 | | | $ | 3,139,359 | | | $ | 2,799,328 | |
| | | | | | | | | | | | |
NOTE 5 – INVENTORY
Inventory consisted of the following:
| | | | | | |
| | | December 25, 2006 | | September 25, 2006 |
| | | (Unaudited) | | |
| | |
Used automobiles | | $ | 1,498,689 | | $ | 1,587,963 |
| | |
Home furnishings and electronics | | | 525,764 | | | 607,500 |
| | | | | | |
Total inventory | | $ | 2,024,453 | | $ | 2,195,463 |
| | | | | | |
NOTE 6 – ACCOUNTS PAYABLE AND OTHER ACCRUED LIABILITIES
Accounts payable and other accrued liabilities consisted of the following:
| | | | | | |
| | | December 25, 2006 | | September 25, 2006 |
| | | (Unaudited) | | |
| | |
Accounts payable | | $ | 57,401 | | $ | 98,875 |
Insurance payable, loan related | | | 917,473 | | | 659,350 |
Accrued payroll | | | 514,786 | | | 513,968 |
Accrued payroll taxes | | | 39,580 | | | 40,114 |
Money orders | | | 987,907 | | | 799,694 |
Sales tax payable | | | 1,324,569 | | | 1,260,163 |
Other liabilities | | | 131,507 | | | 153,114 |
| | | | | | |
Total accounts payable and other accrued liabilities | | $ | 3,973,223 | | $ | 3,525,278 |
| | | | | | |
8
The Money Tree Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Note 7 – DEBT
Debt consisted of the following:
| | | | | | |
| | | December 25, 2006 | | September 25, 2006 |
| | | (Unaudited) | | |
Senior debt: due to banks and commercial finance companies, collateralized by inventory and certain automotive equipment, and certain notes include personal guarantees of the sole director, interest at 4.49% to 8.25% (some variable), due 2007 to 2009. The carrying values of the collateral at December 25, 2006 and September 25, 2006 were $ 730,557 and $1,145,801, respectively. | | $ | 577,569 | | $ | 668,549 |
| | | | | | |
Total senior debt | | | 577,569 | | | 668,549 |
| | | | | | |
Senior subordinated debt: due to credit insurance company, unsecured, guaranteed by a Company shareholder, interest at prime plus 1% (9.5% and 9.5% at December 25, 2006 and September 25, 2006, respectively) (8% floor, 12% ceiling), interest payable quarterly, principal due August 5, 2007. | | | 450,000 | | | 600,000 |
| | | | | | |
Total senior subordinated debt | | | 450,000 | | | 600,000 |
| | | | | | |
Variable rate subordinated debentures issued by The Money Tree of Georgia Inc.: due to individuals, unsecured, interest at 4.25% to 9.6%, due at various dates through 2010. | | | 62,030,096 | | | 64,678,723 |
| | |
Variable rate subordinated debentures issued by The Money Tree Inc.: due to individuals, unsecured, interest at 6.0% to 8.7%, due at various dates through 2010. | | | 16,765,336 | | | 13,231,479 |
| | | | | | |
Total subordinated debentures | | | 78,795,432 | | | 77,910,202 |
| | | | | | |
Demand notes issued by The Money Tree of Georgia Inc.: due to individuals, unsecured, interest at 4.25% to 5.0%, due on demand. | | | 1,896,071 | | | 2,155,217 |
| | |
Demand notes issued by The Money Tree Inc.: due to individuals, unsecured, interest at 4.25% to 5.0%, due on demand. | | | 5,614,389 | | | 5,981,633 |
| | | | | | |
Total demand notes | | | 7,510,460 | | | 8,136,850 |
| | | | | | |
Junior subordinated debt, related parties: due to a shareholder, interest rate at 8% due June 28, 2008. | | | 265,000 | | | 370,000 |
| | | | | | |
Total junior subordinated debt, related parties | | | 265,000 | | | 370,000 |
| | | | | | |
Total debt | | $ | 87,598,461 | | $ | 87,685,601 |
| | | | | | |
9
The Money Tree Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
NOTE 8 – INCOME TAXES
At the end of each quarter, the Company makes its best estimate of the effective tax rate expected to be applicable for the full fiscal year and uses that rate in providing for income taxes on current year-to-date basis.
NOTE 9 - RELATED PARTY TRANSACTIONS
Martin Family Group, LLLP owns the real estate of thirteen branch offices, one used car lot, and the Company’s principal executive offices. The estate of the Company’s founder and former CEO is a limited partner of Martin Family Group, LLLP. The Company’s President is the president of Martin Investments, Inc. which is the managing general partner of Martin Family Group LLLP. The Company has entered into lease agreements whereby rent is paid monthly for use of these locations. In addition, Martin Sublease LLC, which is controlled by Martin Investments Inc., leases, and then subleases to the Company, another 54 branch office locations and two used car lots for amounts greater than are paid in the underlying leases. This spread is generally to cover property operating cost or improvements made directly by these entities. In the opinion of management, rates paid for these are comparable to those obtained from third parties. Total rents paid were $506,660 and $751,470 for the three months ended December 25, 2006 and 2005, respectively and are included in operating expense in the Accompanying Unaudited Consolidated Statements of Income.
The Company receives commissions from sales of motor club memberships from an entity, owned by the estate of the Company’s founder and former CEO and his three children (including the Company’s President), pursuant to an Agency Sales Agreement. Commissions earned on the sale of these memberships were $544,986 and $563,802 for the three months ended December 25, 2006 and 2005, respectively.
The Company also engages from time to time in other transactions with related parties. Refer to the “Related Party Transactions” disclosure in the notes to the Company’s Consolidated Financial Statements as of and for the year ended September 25, 2005.
NOTE 10 – CONTINGENT LIABILITIES
The Company is a party to litigation arising in the normal course of business. With respect to all such lawsuits, claims, and proceedings, the Company establishes reserves when it is probable a liability has been incurred and the amount can reasonably be estimated. In the opinion of management, the resolution of such matters will not have a material effect on the financial position or results of operations of the Company.
NOTE 11 – DISCRETIONARY BONUSES
From time to time, the Company pays discretionary bonuses to its employees. The amount of these bonuses charged to operating expenses was $530,798 and $594,526 for the three months ended December 25, 2006 and 2005, respectively.
NOTE 12 – SEGMENT FINANCIAL INFORMATION
Statement of Financial Accounting Standards No. 131, “Disclosure about Segments of an Enterprise and Related Information” (SFAS 131), requires companies to determine segments based on how management makes decisions about allocating resources to segments and measuring their performance.
10
The Money Tree Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
NOTE 12 – SEGMENT FINANCIAL INFORMATION (CONTINUED)
The Company has two reportable segments: Consumer Finance and Sales and Automotive Finance and Sales.
Consumer finance and sales segment
This segment is comprised of original core operations of the Company: the small consumer loan business in the four states in which the Company operates. The 103 offices that make up this segment are similar in size and in the markets they serve. All, with few exceptions, offer consumer goods for sale acting as an agent for another subsidiary of the Company, Home Furniture Mart Inc., which is aggregated in this segment since its sales are generated through these finance offices. This segment is structured with branch management reporting through a regional management level to an operational manager and ultimately to the chief operating decision maker.
Automotive finance and sales segment
This segment is comprised of three used automobile sales locations and offers financing in conjunction with these sales. These locations target similar customers in the Bainbridge, GA, Columbus, GA and Dublin, GA markets and surrounding areas who generally cannot qualify for traditional financing. The sales and the financing organizations are aggregated in the segment. A general manager is responsible for sales and finance administration at each of the locations and reports to an operational manager and ultimately to the chief operating decision maker.
Accounting policies of the segments are the same as those described in the summary of significant accounting policies. Performance is measured by various factors such as segment profit, loan volumes and delinquency and loss management. All corporate expenses are allocated to the segments. Provision for income taxes are not allocated to segments.
11
The Money Tree Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
NOTE 12 – SEGMENT FINANCIAL INFORMATION (CONTINUED)
| | | | | | | | | | | | |
Three months ended December 25, 2006 | | Consumer Finance & Sales Division | | | Automotive Finance & Sales Division | | | Total Segments | |
| In Thousands | | (Unaudited) | |
Net revenues before retail sales | | $ | 5,681 | | | $ | 220 | | | $ | 5,901 | |
| | | | | | | | | | | | |
Gross margin on retail sales | | | 940 | | | | 950 | | | | 1,890 | |
| | | | | | | | | | | | |
Segment operating expenses | | | (5,894 | ) | | | (972 | ) | | | (6,866 | ) |
| | | | | | | | | | | | |
Segment operating profit | | $ | 727 | | | $ | 198 | | | $ | 925 | |
| | | | | | | | | | | | |
| | | |
December 25, 2006 | | | | | | | | | | | | |
| In Thousands | | | | | | | | | |
Assets | | | | | | | | | | | | |
Total segment assets | | $ | 65,211 | | | $ | 27,194 | | | $ | 92,405 | |
| | | |
RECONCILIATION: | | | | | | | | 12/25/06 | |
| | | | | | | | | (Thousands) | |
Assets: | | | | | | | | | | | | |
Total assets for reportable segments | | | | | | | | | | $ | 92,405 | |
| | | |
Cash and cash equivalents at corporate level | | | | | | | | | | | 6,292 | |
Other receivables at corporate level | | | | | | | | | | | 1,256 | |
Employee receivables at corporate level | | | | | | | | | | | 5 | |
Property and equipment, net at corporate level | | | | | | | | | | | 822 | |
Deferred income taxes at corporate level | | | | | | | | | | | 645 | |
Other assets at corporate level | | | | | | | | | | | 1,430 | |
| | | | | | | | | | | | |
Consolidated Assets | | | | | | | | | | $ | 102,855 | |
| | | | | | | | | | | | |
12
The Money Tree Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
NOTE 12 – SEGMENT FINANCIAL INFORMATION (CONTINUED)
| | | | | | | | | | | | |
Three months ended December 25, 2005 | | Consumer Finance & Sales Division | | | Automotive Finance & Sales Division | | | Total Segments | |
| In Thousands | | (Unaudited) | |
| | | |
Net revenues before retail sales | | $ | 6,279 | | | $ | 83 | | | $ | 6,362 | |
| | | | | | | | | | | | |
| | | | | | | | | | | — | |
| | | | | | | | | | | | |
Gross margin on retail sales | | | 712 | | | | 1,160 | | | | 1,872 | |
| | | | | | | | | | | | |
Segment operating expenses | | | (6,264 | ) | | | (1,221 | ) | | | (7,485 | ) |
| | | | | | | | | | | | |
Segment operating profit | | $ | 727 | | | $ | 22 | | | $ | 749 | |
| | | | | | | | | | | | |
| | | |
December 25, 2005 | | | | | | | | | |
| In Thousands | | | | | | | | | |
Assets | | | | | | | | | | | | |
Total segment assets | | $ | 67,263 | | | $ | 29,625 | | | $ | 96,888 | |
| | | |
RECONCILIATION: | | | | | | | | 12/25/05 | |
| | | | | | | | | (Thousands) | |
Assets: | | | | | | | | | | | | |
Total assets for reportable segments | | | | | | | | | | $ | 96,888 | |
| | | |
Cash and cash equivalents at corporate level | | | | | | | | | | | 45 | |
Other receivables at corporate level | | | | | | | | | | | 1,790 | |
Employee receivables at corporate level | | | | | | | | | | | 5 | |
Property and equipment, net at corporate level | | | | | | | | | | | 1,394 | |
Deferred income taxes at corporate level | | | | | | | | | | | 2,063 | |
Other assets at corporate level | | | | | | | | | | | 1,129 | |
| | | | | | | | | | | | |
Consolidated Assets | | | | | | | | | | $ | 103,314 | |
| | | | | | | | | | | | |
13
The Money Tree Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
NOTE 13 – DEBT REGISTRATIONS
The Money Tree Inc. has registered with the Securities and Exchange Commission on Form S-1 Registration Statements (1) $75,000,000 of Series A Variable Rate Subordinated Debentures (Commission File No. 333-122531) and (2) $35,000,000 of Subordinated Demand Notes (Commission File No. 333-122533). These Registration Statements were declared effective on November 4, 2005. We have also registered these securities with the state regulatory authorities in the States of Georgia, Florida and Louisiana.
NOTE 14 – VOTING COMMON STOCK SALE
On December 30, 2005, Vance R. Martin, former Chief Executive Officer of The Money Tree Inc., sold and transferred 1,475 shares of voting common stock (55% of the outstanding shares) to the Vance Rudolph Martin Defective Grantor Trust u/t/a dated December 28, 2005. W. Derek Martin, President of The Money Tree Inc. and son of Vance R. Martin, served as the sole trustee of the trust and, accordingly, had the power to vote the shares held by the trust. Vance R. Martin retained ownership of the remaining 1,211 shares of voting common stock (45% of the outstanding shares).
After Vance R. Martin’s death, 1,475 shares of voting common stock were transferred from the Vance Rudolph Martin Defective Grantor Trust u/t/a dated December 28, 2005 to the Vance R. Martin Family Trusts u/t/a dated September 20, 2005 effective as of August 10, 2006. W. Derek Martin, President and Sole Director of The Money Tree Inc. and son of Vance R. Martin, serves as the sole trustee of the trust and, accordingly, has the power to vote the shares held by the trust. The Estate of Vance R. Martin was transferred ownership of 1,211 shares of voting common stock effective as of August 10, 2006.
14
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
Forward-Looking Statements
The discussion set forth below, as well as other portions of this quarterly report, contains forward-looking statements within the meaning of federal securities law. Words such as “may,” “will,” “expect,” “anticipate,” “believe,” “estimate,” “continue,” “predict,” or other similar words, identify forward-looking statements. Forward-looking statements include statements regarding our management’s intent, belief or current expectation about, among other things, trends affecting the markets in which we operate, our business, our financial condition and our growth strategies. Although we believe that the expectation reflected in these forward-looking statements are based on reasonable assumptions, forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Actual results may differ materially from those predicted in the forward-looking statements as a result of various factors, including, but not limited to, those risk factors set forth in our post-effective amendment to registration statement on Form S-1 filed with the Securities and Exchange Commission on January 25, 2007. Other factors not identified herein could also have such an effect. If any of these risk factors occur, they could have an adverse effect on our business, financial condition and results of operations. When considering forward-looking statements keep these risks in mind. These forward-looking statements are made as of the date of this filing. You should not place undo reliance on any forward-looking statement. We are not obligated to update forward-looking statements and will not update any forward-looking statements in this quarterly report to reflect future events or developments.
The following discussion should be read in conjunction with our unaudited consolidated financial statements and related notes and other financial data included elsewhere in this report. See also the notes to our consolidated financial statements, Selected Consolidated Financial Data and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our annual report on Form 10-K for the year ended September 25, 2006.
Overview
We make consumer finance loans and provide other financial products and services through our branch offices in Georgia, Alabama, Louisiana and Florida. We sell retail merchandise, principally furniture, appliances and electronics, at certain of our branch office locations and operate three used automobile dealerships in the State of Georgia. We also offer insurance products, prepaid phone services and automobile club memberships to our loan customers.
We fund our consumer loan demand through a combination of cash collections from our consumer loans, proceeds raised from the sale of debentures and demand notes and loans from various banks and other financial institutions. Our consumer loan business consists of making, purchasing and servicing direct consumer loans, consumer sales finance contracts and motor vehicle installment sales contracts. Direct consumer loans generally serve individuals with limited access to other sources of consumer credit, such as banks, savings and loans, other consumer finance businesses and credit cards. Direct consumer loans are general loans made typically to people who need money for some unusual or unforeseen expense, for the purpose of paying off an accumulation of small debts or for the purchase of furniture and appliances. The following table sets forth certain information about the components of our finance receivables for the periods presented:
15
Description of Loans and Contracts
| | | | | | | | |
| | | As of, or for, the Three Months Ended December 25, | |
| | | 2006 | | | 2005 | |
Direct Consumer Loans: | | | | | | | | |
| | |
Number of Loans Made to New Borrowers | | | 6,071 | | | | 6,182 | |
| | |
Number of Loans Made to Former Borrowers | | | 14,281 | | | | 13,924 | |
| | |
Number of Loans Made to Existing Borrowers | | | 20,352 | | | | 25,613 | |
Total Number of Loans Made | | | 40,704 | | | | 45,719 | |
Total Volume of Loans Made | | $ | 20,750,756 | | | $ | 24,506,115 | |
Average Size of Loans Made | | $ | 510 | | | $ | 536 | |
Number of Loans Outstanding | | | 74,171 | | | | 72,897 | |
Total of Loans Outstanding* | | $ | 46,005,060 | | | $ | 51,911,429 | |
Percent of Loans Outstanding | | | 50.75 | % | | | 55.35 | % |
| | |
Average Balance on Outstanding Loans | | $ | 620 | | | $ | 712 | |
| | |
Motor Vehicle Installment Sales Contracts: | | | | | | | | |
Total Number of Contracts Made | | | 234 | | | | 288 | |
Total Volume of Contracts Made | | $ | 4,251,753 | | | $ | 4,930,148 | |
Average Size of Contracts Made | | $ | 18,170 | | | $ | 17,119 | |
Number of Contracts Outstanding | | | 2,709 | | | | 2,489 | |
Total of Contracts Outstanding* | | $ | 31,568,578 | | | $ | 30,966,025 | |
Percent of Total Loans and Contracts | | | 34.83 | % | | | 33.02 | % |
| | |
Average Balance on Outstanding Contracts | | $ | 11,653 | | | $ | 12,441 | |
| | |
Consumer Sales Finance Contracts: | | | | | | | | |
| | |
Number of Contracts Made to New Customers | | | 41 | | | | 42 | |
| | |
Number of Loans Made to Former Customers | | | 852 | | | | 746 | |
| | |
Number of Loans Made to Existing Customers | | | 893 | | | | 760 | |
Total Contracts Made | | | 1,786 | | | | 1,548 | |
Total Volume of Contracts Made | | $ | 5,125,678 | | | $ | 4,099,525 | |
Number of Contracts Outstanding | | | 6,365 | | | | 5,900 | |
Total of Contracts Outstanding* | | $ | 13,069,814 | | | $ | 10,908,574 | |
Percent of Total Loans and Contracts | | | 14.42 | % | | | 11.63 | % |
| | |
Average Balance of Outstanding Contracts | | $ | 2,053 | | | $ | 1,849 | |
| * | Contracts outstanding are exclusive of the following aggregate amounts of bankrupt accounts: $5,823,878 as of December 25, 2006 and $5,391,788 as of December 25, 2005. |
16
Below is a table showing our total gross outstanding finance receivables and bankrupt accounts:
| | | | | | |
| | | As of December 25, |
| | | 2006 | | 2005 |
Total Finance Receivables Outstanding (gross): | | | | | | |
| | |
Direct Consumer Loans | | $ | 46,005,060 | | $ | 51,911,429 |
Motor Vehicle Installment | | | 31,568,578 | | | 30,966,025 |
Consumer Sales Finance | | | 13,069,814 | | | 10,908,574 |
Bankrupt Accounts | | | 5,823,878 | | | 5,391,788 |
| | | | | | |
Total Gross Outstanding | | $ | 96,467,330 | | $ | 99,177,816 |
| | | | | | |
Below is a roll-forward of the balance of each category of our outstanding finance receivables. Loans originated reflect the gross amount of loans made or purchased during the period presented inclusive of pre-computed interest, fees and insurance premiums. Collections represent cash receipts in the form of repayments made on our loans as reflected in our Consolidated Statements of Cash Flows. Refinancings represent the amount of the pay off of loans refinanced. Charge offs represent the gross amount of loans charged off as uncollectible (charge offs are shown net of non-file insurance receipts in our Allowance for Credit Losses). Rebates represent reductions to gross loan amounts of precomputed interest and insurance premiums resulting from loans refinanced and other loans paid off before maturity. Other adjustments primarily represent accounts transferred to and from the department that administers bankrupt accounts.
17
| | | | | | | | |
| | | For the Three Months Ended
December 25, | |
| | | 2006 | | | 2005 | |
Direct Consumer Loans: | | | | | | | | |
Balance - beginning | | $ | 46,071,669 | | | $ | 48,840,570 | |
Finance receivables originated | | | 20,750,756 | | | | 24,506,115 | |
Collections | | | (13,164,231 | ) | | | (13,705,994 | ) |
Refinances | | | (5,280,243 | ) | | | (4,545,814 | ) |
Charge offs, gross | | | (1,016,304 | ) | | | (1,431,743 | ) |
Rebates / other adjustments | | | (1,356,587 | ) | | | (1,751,705 | ) |
| | | | | | | | |
Balance - end | | $ | 46,005,060 | | | $ | 51,911,429 | |
| | | | | | | | |
Consumer Sales Finance Contracts: | | | | | | | | |
Balance - beginning | | $ | 11,813,566 | | | $ | 9,661,474 | |
Finance receivables originated | | | 5,125,678 | | | | 4,099,525 | |
Collections | | | (1,339,170 | ) | | | (1,091,493 | ) |
Refinances | | | (1,505,672 | ) | | | (1,156,315 | ) |
Charge offs, gross | | | (455,672 | ) | | | (119,158 | ) |
Rebates / other adjustments | | | (568,916 | ) | | | (485,459 | ) |
| | | | | | | | |
Balance - end | | $ | 13,069,814 | | | $ | 10,908,574 | |
| | | | | | | | |
Motor Vehicle Installment Sales Contracts: | | | | | | | | |
Balance - beginning | | $ | 31,280,840 | | | $ | 29,765,603 | |
Finance receivables originated | | | 4,251,753 | | | | 4,930,148 | |
Collections | | | (3,394,544 | ) | | | (3,020,870 | ) |
Refinances | | | — | | | | — | |
Charge offs, gross | | | (287,010 | ) | | | (356,900 | ) |
Rebates / other adjustments | | | (282,461 | ) | | | (351,956 | ) |
| | | | | | | | |
Balance - end | | $ | 31,568,578 | | | $ | 30,966,025 | |
| | | | | | | | |
Total Active Accounts: | | | | | | | | |
Balance - beginning | | $ | 89,166,075 | | | $ | 88,267,647 | |
Loans originated | | | 30,128,187 | | | | 33,535,788 | |
Collections | | | (17,897,945 | ) | | | (17,818,357 | ) |
Refinances | | | (6,785,915 | ) | | | (5,702,129 | ) |
Charge offs, gross | | | (1,758,986 | ) | | | (1,907,801 | ) |
Rebates / other adjustments | | | (2,207,964 | ) | | | (2,589,120 | ) |
| | | | | | | | |
Balance - end | | $ | 90,643,452 | | | $ | 93,786,028 | |
| | | | | | | | |
Total Bankrupt Accounts: | | | | | | | | |
Balance - beginning | | $ | 5,618,931 | | | $ | 4,921,905 | |
Charge offs, gross | | | (167,566 | ) | | | (211,707 | ) |
Adjustments | | | 372,513 | | | | 681,590 | |
| | | | | | | | |
Balance - end | | $ | 5,823,878 | | | $ | 5,391,788 | |
| | | | | | | | |
Total Gross O/S Receivables | | $ | 96,467,330 | | | $ | 99,177,816 | |
| | | | | | | | |
18
Below is a reconciliation of the amounts of the loans originated and repaid (collections) from the receivable roll-forward to the amounts shown in our Consolidated Statements of Cash Flows.
| | | | | | | | |
| | | Three Months Ended December 25, | |
| | | 2006 | | | 2005 | |
Finance Receivables Originated: | | | | | | | | |
Direct consumer | | $ | 20,750,756 | | | $ | 24,506,115 | |
Consumer sales finance | | | 5,125,678 | | | | 4,099,525 | |
Motor vehicle installment sales | | | 4,251,753 | | | | 4,930,148 | |
| | | | | | | | |
Total gross finance receivables originated | | | 30,128,187 | | | | 33,535,788 | |
Non-cash items included in gross finance receivables* | | | (9,604,297 | ) | | | (9,683,362 | ) |
| | | | | | | | |
Finance receivables originated - cash flows | | $ | 20,523,890 | | | $ | 23,852,426 | |
| | | | | | | | |
Finance Receivables Repaid: | | | | | | | | |
Collections | | | | | | | | |
Direct consumer | | $ | 13,164,231 | | | $ | 13,705,994 | |
Consumer sales finance | | | 1,339,170 | | | | 1,091,493 | |
Motor vehicle installment sales | | | 3,394,544 | | | | 3,020,870 | |
| | | | | | | | |
Finance receivables repaid - cash flows | | $ | 17,897,945 | | | $ | 17,818,357 | |
| | | | | | | | |
| * | Includes precomputed interest and fees (since these amounts are included in the gross amount of finance receivables originated but are not advanced in the form of cash to customers) and refinanced receivables balances (since there is no cash generated from the repayment of original finance receivables refinanced). |
Segments and Seasonality
We segment our business operations into the following two segments:
| | • | | consumer finance and sales; and |
| | • | | automotive finance and sales. |
The consumer finance and sales segment is comprised primarily of small consumer loans and sales of consumer goods such as furniture, appliances and electronics. We typically experience our strongest financial performance for the consumer finance and sales segment during the holiday season, which is our first fiscal quarter ending December 25.
The automotive finance and sales segment is comprised exclusively of used vehicle sales and their related financing. We typically experience our strongest financial performance for the automotive finance and sales segment during our second fiscal quarter ending March 25 when used car sales are the highest. Please refer to Note 12 in the “Notes to Consolidated Financial Statements” for a breakdown of our operations by segment.
Net Interest Margin
A principal component of our profitability is our net interest margin, which is the difference between the interest that we earn on finance receivables and the interest that we pay on borrowed funds. In some states, statutes regulate the interest rates that we may charge our customers, while, in other locations, competitive market conditions establish interest rates that we
19
may charge. Differences also exist in the interest rates that we earn on the various components of our finance receivable portfolio.
Unlike our interest income, our interest expense is sensitive to general market interest rate fluctuations. These general market fluctuations directly impact our cost of funds. Our general limited ability to increase the interest rates earned on new and existing finance receivables restricts our ability to react to increases in our cost of funds. Accordingly, increases in market interest rates generally will narrow our interest rate spread and lower our profitability, while decreases in market interest rates generally will widen our interest rate spread and increase our profitability. Significant increases in market interest rates will likely result in a reduction in our liquidity and profitability and impair our ability to pay interest and principal on the debentures. See “Quantitative and Qualitative Disclosures About Market Risk” below.
The following table presents important data relating to our net interest margin:
| | | | | | | | |
| | | As of, or for, the Three Months Ended December 25, | |
| | | 2006 | | | 2005 | |
Average net finance receivables(1) | | $ | 80,150,494 | | | $ | 79,870,730 | |
Average notes payable(2) | | $ | 87,428,317 | | | $ | 86,555,846 | |
| | |
Interest income | | $ | 3,867,537 | | | $ | 4,136,558 | |
Loan fee income | | | 1,267,068 | | | | 1,090,955 | |
| | | | | | | | |
Total interest and fee income | | | 5,134,605 | | | | 5,227,513 | |
Interest expense | | | 1,941,069 | | | | 1,708,569 | |
| | | | | | | | |
Net interest and fee income before provision for credit losses | | $ | 3,193,536 | | | $ | 3,518,944 | |
| | | | | | | | |
Average interest rate earned (annualized) | | | 25.6 | % | | | 26.2 | % |
| | |
Average interest rate paid (annualized) | | | 8.9 | % | | | 7.9 | % |
| | |
Net interest rate spread (annualized) | | | 16.7 | % | | | 18.3 | % |
Net interest margin (annualized)(3) | | | 15.9 | % | | | 17.6 | % |
(1) | Averages are computed using month-end balances of finance receivables (net of unearned interest/fees, unearned insurance commissions, and unearned discounts) during the period presented. |
(2) | Averages are computed using month-end balances of interest bearing debt during the period presented. |
(3) | Net interest margin represents net interest income (before provision for credit losses) divided by the average net finance receivables. |
Analysis of Allowance for Credit Losses
An allowance for credit losses is maintained to account for the probable losses inherent in the finance receivable portfolio. The allowance is calculated based upon management’s estimate of the expected collectability of loans outstanding based upon a variety of factors, including, without limitation, periodic analysis of the loan portfolio, historic loan loss experience,
20
borrowers’ ability to repay and collateral considerations. We maintain an allowance for credit losses at a level that we consider adequate to provide for probable losses based on historical ratios of charge-offs to average notes receivable.
The following table shows these ratios of charge offs to average notes receivable for the categories of our finance receivables. The average net finance receivables are computed using monthly balances, net of unearned interest, unearned insurance commissions and unearned discounts. Charge offs are shown at gross amounts as presented in the receivable roll-forward on page 18. Recoveries represent receipts from non-file insurance claims and cash recoveries.
| | | | | | | | |
| | | As of, or for, the Three Months Ended December 25, | |
| | | 2006 | | | 2005 | |
Direct Consumer Loans and Consumer Sales Finance Contracts: | | | | | | | | |
| | |
Average net finance receivables | | $ | 54,670,518 | | | $ | 55,013,834 | |
| | |
Charge offs - direct consumer | | $ | 1,016,304 | | | $ | 1,431,743 | |
Charge offs - consumer sales finance | | | 455,672 | | | | 119,158 | |
Charge offs - bankruptcy | | | 167,566 | | | | 211,707 | |
| | | | | | | | |
Total gross charge offs | | | 1,639,542 | | | | 1,762,608 | |
Recoveries (all direct consumer) | | | (758,845 | ) | | | (728,879 | ) |
| | | | | | | | |
Charge offs, net | | $ | 880,697 | | | $ | 1,033,729 | |
Percent of net charge offs to average receivables | | | 1.6 | % | | | 1.9 | % |
| | |
Motor Vehicle Installment Sales Contracts: | | | | | | | | |
| | |
Average outstanding finance receivables | | $ | 25,479,976 | | | $ | 24,856,895 | |
| | |
Charge offs, gross | | $ | 287,010 | | | $ | 356,900 | |
Recoveries | | | — | | | | — | |
| | | | | | | | |
Charge offs, net | | $ | 287,010 | | | $ | 356,900 | |
Percent of net charge offs to average receivables | | | 1.1 | % | | | 1.4 | % |
| | |
Total Receivables: | | | | | | | | |
| | |
Average outstanding finance receivables | | $ | 80,150,494 | | | $ | 79,870,729 | |
| | |
Charge offs, gross | | $ | 1,926,552 | | | $ | 2,119,508 | |
Recoveries (all direct consumer) | | | (758,845 | ) | | | (728,879 | ) |
| | | | | | | | |
Charge offs, net | | $ | 1,167,707 | | | $ | 1,390,629 | |
Percent of net charge offs to average receivables | | | 1.5 | % | | | 1.7 | % |
21
As of December 25, 2006 and September 25, 2006, our allowance for credit losses was $3.1 million and $3.1 million, respectively. The growth in outstanding finance receivables was the primary reason for the increase in our allowance for credit losses.
Delinquency Information
Our delinquency levels reflect, among other factors, changes in the mix of loans in the portfolio, the quality of receivables, the success of collection efforts, bankruptcy trends and general economic conditions. The delinquency information in the following tables is computed on the basis of the amount past due in accordance with the original payment terms of the loan (contractual method). We use the contractual method for all external reporting purposes. Management closely monitors delinquency using this method to measure the quality of our loan portfolio and the probability of credit loss. We also use other tools, such as a recency report, which shows the date of the last full contractual payment received on the loan, to determine a particular customer’s willingness to pay. For example, if a delinquent customer has made a recent payment, we may decide to delay more serious collection measures, such as repossession of collateral. However, such a payment will not change the non-accrual status of the account until all of the principal and interest amounts contractually due are brought current (we receive one or more full contractual payments and the account is less than 60 days contractually delinquent), at which time we believe future payments are reasonably assured. Below is certain information relating to the delinquency status of each category of our receivables for the quarters ended December 25, 2006 and 2005:
| | | | | | | | | | | | | | | | | | | | |
| | | As of December 25, 2006 | |
| | | Direct
Consumer
Sales | | | Consumer
Sales Finance
Contracts | | | Motor Vehicle
Installment
Sales
Contracts | | | Bankruptcy
Accounts | | | Total | |
Gross Loans and Contracts Receivables | | $ | 46,005,060 | | | $ | 13,069,814 | | | $ | 31,568,578 | | | $ | 5,823,878 | | | $ | 96,467,330 | |
Loans and Contracts 60 - 90 days past due | | $ | 700,767 | | | $ | 209,320 | | | $ | 7,211 | | | $ | 238,516 | | | $ | 1,155,814 | |
Percentage of Outstanding | | | 1.5 | % | | | 1.6 | % | | | 0.0 | % | | | 4.1 | % | | | 1.2 | % |
Loans and Contracts greater than 90 days past due | | $ | 10,763,772 | | | $ | 2,741,714 | | | $ | — | | | $ | 3,026,160 | | | $ | 16,531,646 | |
Percentage of Outstanding | | | 23.4 | % | | | 21.0 | % | | | 0.0 | % | | | 52.0 | % | | | 17.1 | % |
Loans and Contracts greater than 60 days past due | | $ | 11,464,539 | | | $ | 2,951,034 | | | $ | 7,211 | | | $ | 3,264,676 | | | $ | 17,687,460 | |
Percentage of Outstanding | | | 24.9 | % | | | 22.6 | % | | | 0.0 | % | | | 56.1 | % | | | 18.3 | % |
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| | | | | | | | | | | | | | | | | | | | |
| | | As of December 25, 2005 | |
| | | Direct
Consumer
Sales | | | Consumer
Sales Finance
Contracts | | | Motor Vehicle
Installment
Sales
Contracts | | | Bankruptcy
Accounts | | | Total | |
Gross Loans and Contracts Receivables | | $ | 51,911,429 | | | $ | 10,908,574 | | | $ | 30,966,025 | | | $ | 5,391,788 | | | $ | 99,177,816 | |
Loans and Contracts 60 - 90 days past due | | $ | 696,344 | | | $ | 154,387 | | | $ | — | | | $ | 238,759 | | | $ | 1,089,490 | |
Percentage of Outstanding | | | 1.3 | % | | | 1.4 | % | | | 0.0 | % | | | 4.4 | % | | | 1.1 | % |
Loans and Contracts greater than 90 days past due | | $ | 9,278,169 | | | $ | 2,442,171 | | | $ | 40,012 | | | $ | 2,775,633 | | | $ | 14,535,985 | |
Percentage of Outstanding | | | 17.9 | % | | | 22.4 | % | | | 0.1 | % | | | 51.5 | % | | | 14.7 | % |
Loans and Contracts greater than 60 days past due | | $ | 9,974,513 | | | $ | 2,596,558 | | | $ | 40,012 | | | $ | 3,014,392 | | | $ | 15,625,475 | |
Percentage of Outstanding | | | 19.2 | % | | | 23.8 | % | | | 0.1 | % | | | 55.9 | % | | | 15.8 | % |
Results of Operations
Comparison of Three Months Ended December 25, 2006 and 2005
Net Revenues
Net revenues were $7.8 million and $8.2 million for the three months ended December 25, 2006 and 2005, respectively. In fiscal year 2006, we modified our business plan to curtail larger, longer-term loans and to focus on smaller, shorter-term lending. This resulted in a significant slowing of the growth we had experienced in previous years that has continued into the first quarter of fiscal year 2007. Gross loan volume was down approximately 10% from the first quarter of 2006 and the corresponding decreases in interest, fees and related charges earned on customers’ loans, as well as the sale of various ancillary products to such customers, as described in more detail below.
Net Interest Income Before Provision for Credit Losses
Net interest income before provision for credit losses was $3.2 million and $3.5 million for three months ended December 25, 2006 and 2005, respectively. The decrease was due primarily to the decrease in loan volume, as mentioned above. During the first quarter of fiscal year 2007, gross interest income decreased $0.1 million to $5.1 million. Interest expense was $1.9 million and $1.7 million for the three-month periods ended December 25, 2006 and 2005, respectively. The increase in interest expense was due to the additional borrowings, primarily from the sale of debentures.
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Provision for Credit Losses
Provision for credit losses was $1.1 million and $1.6 million for three months ended December 25, 2005 and 2004, respectively. Finance receivables charged off decreased approximately $0.2 million from the previous year, while recoveries of charge offs remained relatively stable. Bankruptcy filings increased dramatically in the early part of the first quarter of fiscal 2006 due to bankruptcy reform legislation that went into effect in October 2005.
Insurance and Other Products
Income from commissions on insurance products and motor club memberships decreased $0.6 million, from $3.8 million to $3.2 million for the three months ended December 25, 2005 and 2006, respectively. This decrease is consistent with our overall decrease in income and loan volume during the first quarter of fiscal 2007. Other income remained approximately the same as last year.
Gross Margin on Retail Sales
Gross margins on retail sales were $1.9 million and $1.9 million for three months ended December 25, 2006 and 2005, respectively. The closing of one of our used car lots in June 2006 resulted in a decrease in sales in the automotive segment of $0.7 million compared to the same period last year. Gross margin was down $0.2 million. Sales in the consumer segment were up $0.4 million to last year’s first quarter sales resulting in increased margins of approximately $0.2 million.
Operating Expenses
Operating expenses were $6.9 million and $7.5 million for three months ended December 25, 2006 and 2005, respectively. Personnel expenses were down 8% over the same period last year primarily due to decreases in discretionary bonuses paid and decreases in health benefit related costs. Other operating expenses were down approximately 14% due to decreased level of spending for advertising, postage, and other solicitation costs as well as decreases in travel related cost.
Liquidity and Capital Resources
General
Liquidity is our ability to meet short-term financial obligations whether through collection of receivables, sales of Debentures and Demand Notes or by generating additional funds through sales of assets to our competitors (such as our finance receivables or vehicle inventory). Continued liquidity is, therefore, largely dependent on the collection of our receivables and the sale of debt securities that meet the investment requirements of the public. We believe the cash flow from our operations coupled with sales of the Debentures and Demand Notes will be sufficient to cover our liquidity needs and cash flow requirements during 2007.
Liquidity management refers to our ability to generate sufficient cash to fund the following primary uses of cash:
| | • | | meet all of our debenture and demand note redemption obligations; |
| | • | | pay interest on all of our debentures and demand notes; |
| | • | | pay operating expenses; and |
| | • | | fund consumer finance loan demand and used automobile vehicle inventory. |
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The primary objective for liquidity management is to ensure that at all times we can meet the redemption obligations of our note holders. A secondary purpose of liquidity management is profit management. Because profit and liquidity are often conflicting objectives, we attempt to maximize our net interest margin by making adequate, but not excessive, liquidity provisions. To the extent we have adequate cash to meet our redemption obligations and pay interest to our note holders, we will use remaining cash to make consumer finance loans, purchase used automobile vehicle inventory and invest in other sources of potential revenues.
Changes in our liquidity position result from operating, investing and financing activities. Cash flows from operating activities are generally the cash effects of transactions and other events that enter into the determination of our net income, including, without limitation, purchases of used automobiles, electronics, furnishings and other consumer goods for resale to our customers. The primary investing activities include consumer loan originations and purchases and collections on such consumer loans. Our financing activities focus almost entirely on the sale of Debentures and Demand Notes.
Cash and cash equivalents increased from $7.5 million at December 25, 2005 to $13.9 million at December 25, 2006. Cash and cash equivalents increased $1.0 million during the three months ended December 25, 2006 primarily a result of a decrease in funds used in investing activities by virtue of decreased amounts of loans made to our customers net of repayments of loans of $2.6 million. During the first quarter of fiscal 2007, the primary sources of cash were net cash provided by operating activities of $3.4 million. Net cash used in financing activities was $0.1 million, although we issued $3.9 million in debentures but redeemed $3.0 million of debentures and reduced other components of debt. Cash and cash equivalents decreased $2.1 million during the three months ended December 25, 2005. Net cash used in investing activities was $6.3 million as a result of loan originated exceeding loans repaid by $6.0 million. Proceeds from the sale of debentures exceeded redemptions of debentures by $3.2 million and demand note redemptions exceeded sales of demand notes by $1.5 million accounting for the $2.1 million increase in net cash provided by financing activities.
During 2007, we expect to continue to use a significant amount of net offering proceeds we raise from the sale of Debentures and Demand Notes to fund redemption obligations and pay interest on our securities. We will use any remaining net offering proceeds to fund our consumer loan demand, purchase used automobiles, open new branch office locations and to fund the other company activities.
Debentures and Demand Notes
During the three months ended December 25, 2006, we (1) received gross proceeds of $3.9 million from the sale of debentures, and (2) paid $3.0 million for redemption of debentures issued by our subsidiary, The Money Tree of Georgia Inc. and $0.6 million for net redemptions of demand notes issued by us and this subsidiary. As of December 25, 2006, we and this subsidiary had $78.8 million of debentures and $7.5 million of demand notes outstanding compared to $77.9 million of debentures and $8.1 million of demand notes outstanding, as of September 25, 2006.
Recent Accounting Pronouncements
Recent accounting pronouncements have been issued that may have a future effect on operations. Refer to Note 3 to the unaudited consolidated financial statements for a discussion of these pronouncements and their possible effects.
Critical Accounting Policies
Our accounting and reporting policies conform with accounting principles generally accepted in the United States of America (GAAP) and predominant practice within the financial services industry. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates.
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We believe that the determination of our allowance for credit losses involves a higher degree of judgment and complexity than our other significant accounting policies. The Allowance for Credit Losses is calculated with the objective of maintaining a reserve level believed by management to be sufficient to absorb estimated credit losses. Management’s determination of the adequacy of the allowance is based on periodic evaluations of the loan portfolio and other relevant factors. However, this evaluation is inherently subjective as it requires material estimates, including, among others, expected default probabilities, loss given default, the amounts and timing of expected future cash flows on impaired loans, and general amounts for historical loss experience. We also consider economic conditions, uncertainties in estimating losses and inherent risks in the loan portfolio. All of these factors may be susceptible to significant change. To the extent actual outcomes differ from management’s estimates, additional provisions for credit losses may be required that would adversely impact earnings in future periods.
Finance receivables are considered impaired, i.e. income recognition ceases, as a result of past-due status or a judgment by management that, although payments are current, such action is prudent. Finance receivables on which payments are past due 90 days or more are considered impaired unless they are well-secured and in the process of collection or renewal. Any losses incurred from finance receivables that are impaired are charged off at 180 days past due. Related accrued interest and fees are reversed against current period income.
When a loan is impaired, interest accrued but uncollected is generally reversed against interest income. Cash receipts on impaired loans are generally applied to reduce the unpaid principal balance.
We recognize deferred tax assets and liabilities for the future tax effects of temporary differences, net operating loss carry-forwards and tax credits. Deferred tax assets are subject to management’s judgment based upon available evidence that future realization is more likely than not. If management determines that we may be unable to realize all or part of net deferred tax assets in the future, a direct charge to income tax expense may be required to reduce the recorded value of the net deferred tax asset to the expected realizable amount.
We have not substantially changed any aspect of our overall approach in the application of the foregoing policies. There have been no material changes in assumptions or estimation techniques utilized as compared to previous years.
Impact of Inflation and General Economic Conditions
Although inflation has not had a material adverse effect on our financial condition or results of operations, increases in the inflation rate are generally associated with increased interest rates. A significant and sustained increase in the interest rates would likely unfavorably impact our profitability by reducing the interest rate spread between the rate of interest we receive on our customer loans and interest rates we pay to our note holders, banks and finance companies. Inflation may also negatively affect our operating expenses.
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
Our profitability and financial performance are sensitive to changes in the U.S. Treasury yields and the spread between the effective rate of interest we receive on customer loans and the interest rates we pay on our borrowings. Our finance income is generally not sensitive to fluctuations in market interest rates. The primary exposure that we face is changes in interest rates on our borrowings. A substantial and sustained increase in market interest rates would likely adversely affect our growth and profitability since we will be required to increase the interest rates we pay to holders of debentures at the end of each interest adjustment period. We would also face pressure to increase interest rates on our demand notes to stay competitive. The overall objective of our interest rate risk management strategy is to mitigate the effects of changing interest rates on our interest expense through the utilization of short-term variable rate debt and medium and long term fixed rate debt. We have not entered into any derivative instruments to manage our interest rate risk. Please see Note 7 in the notes to our unaudited consolidated financial statements for information on our debt, including maturities and interest rates.
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| Item 4. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) that are designed to ensure that information required to be disclosed in the Company’s reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and that such information is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosures.
In connection with the presentation of this Form 10-Q, management, under the supervision and with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the fiscal quarter which is the subject of this Quarterly Report. In making this evaluation, management considered the matters relating to the restatement of our financial statements and the material weakness discussed below. Based on this evaluation, our principal executive officer and principal financial officer have concluded that the design and operation of our disclosure controls and procedures are effective as of December 25, 2006.
Changes in Internal Control Over Financial Reporting
Except as set forth below, there were no changes in our internal control over financial reporting during the quarter ended December 25, 2006, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
As previously disclosed, during December 2006 management identified a material weakness in internal control over financial reporting at September 25, 2005. Management determined that as of September 25, 2005, the Company lacked sufficient internal control processes and procedures over amounts included in the determination of the net finance receivables. This material weakness resulted in errors in accounting for net finance receivables, interest and fee income, and income tax expense or benefit and the related income tax asset or liability. In light of this material weakness, we performed additional analyses and other procedures to ensure that our consolidated financial statements included in this Form 10-Q were prepared in accordance with generally accepted accounting principles (GAAP). These measures include, among other things, expansion of our document review procedures and dedication of significant internal resources to scrutinize the computation of the net finance receivables. As a result, we concluded that the consolidated financial statements included in this Form 10-Q present fairly, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with GAAP.
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PART II – OTHER INFORMATION
We were not involved in any material legal proceedings during the quarter ended December 25, 2006 requiring disclosure under item 103 of Regulation S-K.
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended September 25, 2006, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
None.
| Item 3. | Defaults Upon Senior Securities |
None.
| Item 4. | Submission of Matters to a Vote of Security Holders. |
None.
None.
| | |
| 31.1 | | Certification of Principal Executive Officers pursuant to Section 302 of The Sarbanes-Oxley Act of 2002 |
| |
| 31.2 | | Certification of Principal Financial Officer pursuant to Section 302 of The Sarbanes-Oxley Act of 2002 |
| |
| 32.1 | | Certifications of President and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | |
| | | | THE MONEY TREE INC. |
| | |
| | | | |
| February 8, 2007 | | | | /s/ W. Derek Martin |
| Date | | | | W. Derek Martin |
| | | | President (Principal Executive Officer) |
| | |
| February 8, 2007 | | | | /s/ Steven P. Morrison |
| Date | | | | Steven P. Morrison |
| | | | Chief Financial Officer (Principal Financial Officer) |
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