FILED PURSUANT TO RULE 424(B)(3)
REGISTRATION NO. 333-157701
THE MONEY TREE INC.
SERIES B VARIABLE RATE SUBORDINATED DEBENTURES
SUPPLEMENT NO. 3 DATED JANUARY 5, 2010
TO THE PROSPECTUS DATED APRIL 10, 2009
This document supplements, and should be read in conjunction with, the prospectus of The Money Tree Inc. dated April 10, 2009 relating to the Series B Variable Rate Subordinated Debentures. This Supplement No. 3 supersedes the information contained in Supplement No. 2 dated August 18, 2009, which Supplement No. 2 superseded Supplement No. 1 dated May 18, 2009. The purpose of this supplement is as follows:
| • | To update the status of the offering of debentures and demand notes; |
| • | To update the “Risk Factors” section of the prospectus; |
| • | To provide our consolidated audited financial statements for the fiscal year ended September 25, 2009; |
| • | To update the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of the prospectus for the financial information included in our consolidated audited financial statements; |
| • | To update the “Business” section of the prospectus; |
| • | To update the “Management” section of the prospectus; |
| • | To update the “Compensation Discussion and Analysis” section of the prospectus; and |
| • | To update various other sections of the prospectus for the financial information included in our consolidated audited financial statements. |
Status of Our Public Offerings
We commenced our public offerings of $35 million in Subordinated Demand Notes and $75 million in Series B Variable Rate Subordinated Debentures on April 10, 2009. As of December 25, 2009, we had raised $3,518,368 in gross offering proceeds from the sale of demand notes and $12,042,820 in gross offering proceeds from the sale of debentures in these public offerings.
Risk Factors
The following should be read in conjunction with and supplements the “Risk Factors” section beginning on page 11 of the prospectus.
There is uncertainty as to our ability to continue as a going concern.
The opinion of our independent registered accounting firm for the fiscal year ended September 25, 2009, which is included with our audited consolidated financial statements and related notes included in this supplement, contains a going concern qualification. This conclusion is based on our operating losses, a deficiency in net interest margin and our shareholders’ deficit. Those factors, as well as uncertainty in securing financing for continued operations, create an uncertainty regarding our ability to continue as a going concern.
We may be unable to meet our debenture and demand note redemption obligations which could force us to sell off our loan receivables and other operating assets or cease our operations.
In addition to the Demand Notes we issue pursuant to this prospectus, we may issue demand notes, debentures, or similar debt instruments to investors in order to raise funds for our operations. As of September 25, 2009, we had a total of $73,602,821 of debentures and $3,146,707 of demand notes outstanding, which demand notes may be redeemed by our investors at any time. Of this amount, our subsidiary, The Money Tree of Georgia Inc., has issued $30,730,844 of debentures and $441,747 of demand notes. While the maturing debentures of our subsidiary are subject to substantially similar early redemption and automatic extension provisions as the debentures, we cannot predict with any accuracy the number of debenture holders who will elect to redeem such debentures at or prior to maturity. We intend to pay these and any other redemption obligations using our normal cash sources, such as collections on finance receivables and used car sales, as well as proceeds from the sale of the debentures and demand notes. We are substantially reliant upon the net offering proceeds we receive from the sale of the debentures and demand notes. However, during the fiscal year ended September 25, 2009, we redeemed $18.6 million in debentures, while only receiving $10.0 million from the sale of new debentures. Therefore, we have had to use funds from operations to fund these net redemptions. Our operations and other sources of funds may not provide sufficient available cash flow to meet our continued redemption obligations if the amount of redemptions continues at its current pace and we continue to suffer losses and use funds from operations to fund redemptions. If we are unable to repay or redeem the principal amount of debentures or demand notes when due, and we are unable to obtain additional financing or other sources of capital, we may be forced to sell off our loan receivables and other operating assets or we might be forced to cease our operations, and you could lose some or all of your investment.
We suffered significant losses during fiscal years 2008 and 2009 and we anticipate such losses will likely continue in 2010.
Our net losses were approximately $12.0 million and $11.9 million during fiscal years 2008 and 2009, respectively. We anticipate that such significant losses will likely continue in 2010.
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If we default in our Debenture or Demand Note payment obligations, the indenture agreements relating to our Debentures and Demand Notes provide that the trustee could accelerate all payments due under the Debentures and Demand Notes, which would further negatively affect our financial position.
Our obligations with respect to the Debentures and Demand Notes are governed by the terms of indenture agreements with U.S. Bank National Association, as trustee. Under the indentures, in addition to other possible events of default, if we fail to make a payment of principal or interest under any Debenture or Demand Note and this failure is not cured within 30 days, we will be deemed in default. Upon such a default, the trustee or holders of 25% in principal of the outstanding Debentures or Demand Notes could declare all principal and accrued interest immediately due and payable. Since our total assets do not cover these debt payment obligations, we would most likely be unable to make all payments under the Debentures or Demand Notes when due, and we might be forced to cease our operations.
We suffered significant credit losses in 2008 and 2009 due to continued weakening economic conditions, and there is no guarantee such credit losses will not continue during this downturn in the economy or that our operations and profitability will not continue to be negatively affected.
Because our business consists mainly of making loans to individuals who depend on their earnings to make their repayments, our ability to operate on a profitable basis depends to a large extent on the continued employment of those individuals and their ability to meet their financial obligations as they become due. In the current recession and continued downturn in the U.S. and local economies in which we operate, our customers have been affected by the resulting unemployment and increases in the number of personal bankruptcies. Therefore, we continue to experience increased credit losses and our collection ratios and profitability could continue to be materially and adversely affected. This recession has negatively affected our customers’ disposable income, confidence and spending patterns and preferences, which in turn are negatively impacting our sales of consumer goods and vehicles and our customers’ ability to repay their obligations to us. As a result, we continue to experience significant credit losses through loan charge-offs. For the fiscal year ended September 25, 2009, our charge-offs, net of recoveries, for our entire loan portfolio were $11.1 million, or 15.8% of average net finance receivables, and charge-offs for the direct consumer loans and consumer sales finance contract segments were 20.7% of the related average receivables. These high levels of charge-offs have had a negative impact on our operations and profitability. Should the current economic conditions continue or worsen, our operations and profitability will continue to be materially and adversely affected.
The collectibility of our finance receivables has been severely and negatively affected by general economic conditions and we have not been able to recover the full amount of delinquent accounts by resorting to sale of collateral or receipt of non-filing insurance proceeds.
Our liquidity is dependent on, among other things, the collection of our finance receivables. We continually monitor the delinquency status of our finance receivables and promptly institute collection efforts on delinquent accounts. Collections of our consumer finance receivables have been severely and negatively affected by general economic conditions. Since we do not
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ordinarily perfect our security interest in collateral for loans, we have not been able to recover the full amount of outstanding receivables by resorting to the sale of collateral or receipt of non-filing insurance proceeds.
Selected Consolidated Financial Data
The information contained in the “Selected Consolidated Financial Data” section on pages 20 through 22 of the prospectus is hereby deleted in its entirety and replaced by the following information.
The following selected consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited consolidated financial statements and related notes included elsewhere in this supplement. The selected consolidated balance sheet data, as of September 25, 2009 and 2008, and the selected consolidated statement of operations data, for the fiscal years ended September 25, 2009, 2008 and 2007, have been derived from our audited consolidated financial statements and related notes included in this supplement. The selected consolidated balance sheet data, as of September 25, 2007, 2006, and 2005, and the selected consolidated statement of operations data, for the fiscal year ended September 25, 2006 and 2005, have been derived from our audited financial statements that are not included in this supplement.
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| As of, and for, the Fiscal Year Ended September 25, | ||||||||||||||||||||
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
Interest and fee income | $ | 15,589 | $ | 19,280 | $ | 19,481 | $ | 20,048 | $ | 18,843 | ||||||||||
Interest expense | (7,611 | ) | (8,275 | ) | (8,026 | ) | (7,350 | ) | (6,355 | ) | ||||||||||
Net interest and fee income before provision for credit losses | 7,978 | 11,005 | 11,455 | 12,698 | 12,488 | |||||||||||||||
Provision for credit losses | (9,630 | ) | (13,812 | ) | (4,983 | ) | (4,737 | ) | (2,768 | ) | ||||||||||
Net revenue (loss) from interest and fees after provision for credit losses | (1,652 | ) | (2,807 | ) | 6,472 | 7,961 | 9,720 | |||||||||||||
Insurance commissions | 8,354 | 9,615 | 10,120 | 11,263 | 10,490 | |||||||||||||||
Commissions from motor club memberships(1) | 1,602 | 1,844 | 1,947 | 1,957 | 1,475 | |||||||||||||||
Delinquency fees | 1,561 | 1,720 | 1,776 | 1,565 | 1,676 | |||||||||||||||
Income tax service income(2) | — | — | 3 | 83 | 162 | |||||||||||||||
Other income | 530 | 647 | 748 | 689 | 797 | |||||||||||||||
Net revenues before retail sales | 10,395 | 11,019 | 21,066 | 23,518 | 24,320 | |||||||||||||||
Retail sales | 16,019 | 17,164 | 19,002 | 17,972 | 15,061 | |||||||||||||||
Cost of sales | (10,366 | ) | (11,131 | ) | (12,170 | ) | (11,611 | ) | (9,358 | ) | ||||||||||
Gross margin on retail sales | 5,653 | 6,033 | 6,832 | 6,361 | 5,703 | |||||||||||||||
Net revenues | 16,048 | 17,052 | 27,898 | 29,879 | 30,023 | |||||||||||||||
Operating expenses | (28,426 | ) | (28,469 | ) | (27,604 | ) | (29,151 | ) | (29,205 | ) | ||||||||||
Net operating income (loss) | (12,378 | ) | (11,417 | ) | 294 | 728 | 818 | |||||||||||||
Other non-operating income | — | — | — | 151 | — | |||||||||||||||
Loss on sale of property and equipment | (11 | ) | (21 | ) | (19 | ) | (75 | ) | (81 | ) | ||||||||||
Income (loss) before income tax benefit (expense) | (12,389 | ) | (11,439 | ) | 275 | 804 | 737 | |||||||||||||
Income tax benefit (expense) | 438 | (528 | ) | 101 | (274 | ) | (304 | ) | ||||||||||||
Net income (loss) | $ | (11,951 | ) | $ | (11,966 | ) | $ | 376 | $ | 530 | $ | 433 | ||||||||
Ratio of earnings to fixed charges(3) | (4) | (4) | 1.03 | 1.10 | 1.10 | |||||||||||||||
Cash and cash equivalents | $ | 2,922 | $ | 12,541 | $ | 17,854 | $ | 12,920 | $ | 9,619 | ||||||||||
Finance receivables(5) | 63,715 | 76,606 | 79,549 | 79,797 | 77,292 | |||||||||||||||
Allowance for credit losses | (7,432 | ) | (8,876 | ) | (3,711 | ) | (3,139 | ) | (2,632 | ) | ||||||||||
Finance receivables, net | 56,283 | 67,730 | 75,838 | 76,658 | 74,660 | |||||||||||||||
Other receivables | 717 | 957 | 861 | 1,013 | 1,099 | |||||||||||||||
Inventory | 2,202 | 3,167 | 3,057 | 2,195 | 2,402 | |||||||||||||||
Property and equipment, net | 4,227 | 4,906 | 4,220 | 4,581 | 4,850 | |||||||||||||||
Total assets | 68,181 | 91,800 | 105,784 | 101,487 | 96,005 | |||||||||||||||
Senior debt | 327 | 695 | 512 | 669 | 1,186 | |||||||||||||||
Senior subordinated debt | — | — | — | 600 | 1,000 | |||||||||||||||
Subordinated debt, related parties | — | — | — | 370 | 800 | |||||||||||||||
Debentures(6) | 73,603 | 82,209 | 81,861 | 77,910 | 68,905 | |||||||||||||||
Demand notes(6) | 3,147 | 3,658 | 5,991 | 8,137 | 12,867 | |||||||||||||||
Shareholders’ deficit | $ | (24,847 | ) | $ | (12,896 | ) | $ | (930 | ) | $ | (1,305 | ) | $ | (1,835 | ) | |||||
| (1) | Received from Interstate Motor Club, Inc., an affiliated entity. |
| (2) | Received from Cash Check Inc. of Ga., an affiliated entity. |
| (3) | The ratio of earnings to fixed charges represents the number of times fixed charges are covered by earnings. For purposes of this ratio, “earnings” is determined by adding pre-tax income to “fixed charges,” which consists of interest on all indebtedness and an interest factor attributable to rent expense. |
| (4) | Calculation results in a deficiency in the ratio (i.e., less than one-to-one coverage). The deficiency in earnings to cover fixed charges was $12,388,726 for the year ended September 25, 2009 and $11,438,560 for the year ended September 25, 2008. |
| (5) | Net of unearned insurance commissions, unearned finance charges and unearned discounts. |
| (6) | Issued, in part, by our subsidiary, The Money Tree of Georgia Inc. See Note 7 to our consolidated audited financial statements for the year ended September 25, 2009. |
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Management’s Discussion and Analysis
of Financial Condition and Results of Operations
The information contained in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section on pages 23 through 43 of the prospectus is hereby deleted in its entirety and replaced by the following information.
The following discussion should be read in conjunction with the information under “Selected Consolidated Financial Data” and our audited consolidated financial statements and related notes and other financial data included elsewhere in this supplement.
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. Please see “Business” for a more detailed discussion of the various types of loans we make to our customers. The following table sets forth certain information about the components of our finance receivables:
| Description of Loans and Contracts | ||||||||||||
| As of, or for, the Year Ended September 25, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
Direct Consumer Loans: | ||||||||||||
Number of Loans Made to New Borrowers | 33,045 | 27,770 | 20,838 | |||||||||
Number of Loans Made to Former Borrowers | 64,774 | 57,862 | 55,117 | |||||||||
Number of Loans Made to Existing Borrowers | 50,504 | 85,329 | 110,364 | |||||||||
Total Number of Loans Made | 148,323 | 170,961 | 186,319 | |||||||||
Total Volume of Loans Made | $ | 48,940,971 | $ | 66,766,194 | $ | 73,350,400 | ||||||
Average Size of Loans Made | $ | 330 | $ | 391 | $ | 394 | ||||||
Number of Loans Outstanding | 52,684 | 66,862 | 76,284 | |||||||||
Total of Loans Outstanding* | $ | 22,257,244 | $ | 34,859,944 | $ | 40,719,291 | ||||||
Percent of Loans Outstanding | 32.9 | % | 42.3 | % | 46.6 | % | ||||||
Average Balance on Outstanding Loans | $ | 422 | $ | 521 | $ | 534 | ||||||
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| Description of Loans and Contracts | ||||||||||||
| As of, or for, the Year Ended September 25, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
Motor Vehicle Installment Sales Contracts: |
| |||||||||||
Total Number of Contracts Made | 775 | 763 | 977 | |||||||||
Total Volume of Contracts Made | $ | 14,097,733 | $ | 14,217,234 | $ | 17,965,678 | ||||||
Average Size of Contracts Made | $ | 18,191 | $ | 18,633 | $ | 18,389 | ||||||
Number of Contracts Outstanding | 2,742 | 2,726 | 2,798 | |||||||||
Total of Contracts Outstanding* | $ | 30,151,923 | $ | 30,707,329 | $ | 32,259,968 | ||||||
Percent of Total Loans and Contracts | 44.6 | % | 37.3 | % | 36.9 | % | ||||||
Average Balance on Outstanding Contracts | $ | 10,996 | $ | 11,265 | $ | 11,530 | ||||||
Consumer Sales Finance Contracts: | ||||||||||||
Number of Contracts Made to New Customers | 2,241 | 865 | 137 | |||||||||
Number of Loans Made to Former Customers | 68 | 3,161 | 2,684 | |||||||||
Number of Loans Made to Existing Customers | 3,112 | 3,211 | 3,120 | |||||||||
Total Contracts Made | 5,421 | 7,237 | 5,941 | |||||||||
Total Volume of Contracts Made | $ | 17,046,757 | $ | 18,883,178 | $ | 16,869,906 | ||||||
Number of Contracts Outstanding | 6,596 | 7,532 | 7,067 | |||||||||
Total of Contracts Outstanding* | $ | 15,176,373 | $ | 16,793,743 | $ | 14,466,682 | ||||||
Percent of Total Loans and Contracts | 22.5 | % | 20.4 | % | 16.5 | % | ||||||
Average Balance of Outstanding Contracts | $ | 2,301 | $ | 2,230 | $ | 2,047 | ||||||
| * | Contracts outstanding are exclusive of the following aggregate amounts of bankrupt accounts: $6,762,101 for the year ended September 25, 2009; $6,794,358 for the year ended September 25, 2008; and $6,115,375 for the year ended September 25, 2007. |
Below is a table showing our total gross outstanding finance receivables and bankrupt accounts:
| September 25, 2009 | September 25, 2008 | September 25, 2007 | |||||||
Total Loans and Contracts Outstanding (gross): | |||||||||
Direct Consumer Loans | $ | 22,257,244 | $ | 34,859,944 | $ | 40,719,291 | |||
Motor Vehicle Installment | 30,151,923 | 30,707,329 | 32,259,968 | ||||||
Consumer Sales Finance | 15,176,373 | 16,793,743 | 14,466,682 | ||||||
Bankrupt Accounts | 6,762,101 | 6,794,358 | 6,115,375 | ||||||
Total Gross Outstanding | $ | 74,347,641 | $ | 89,155,374 | $ | 93,561,316 | |||
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-filing 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
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paid off before maturity. See “Summary of Significant Accounting Policies – Income Recognition” in Note 2 to our Consolidated Financial Statements for further discussion related to rebates of interest. Other adjustments primarily represent accounts transferred to and from the department that administers bankrupt accounts.
| Fiscal Year Ended September 25, 2009 | Fiscal Year Ended September 25, 2008 | Fiscal Year Ended September 25, 2007 | ||||||||||
Direct Consumer Loans: | ||||||||||||
Balance - beginning | $ | 34,859,944 | $ | 40,719,291 | $ | 46,071,669 | ||||||
Loans originated | 48,940,971 | 66,766,194 | 73,350,400 | |||||||||
Collections | (40,671,119 | ) | (47,076,723 | ) | (52,252,511 | ) | ||||||
Refinancings | (10,912,645 | ) | (14,791,503 | ) | (18,154,981 | ) | ||||||
Charge-offs, gross | (7,228,663 | ) | (7,357,665 | ) | (4,066,752 | ) | ||||||
Rebates/other adjustments | (2,731,244 | ) | (3,399,650 | ) | (4,228,534 | ) | ||||||
Balance - end | $ | 22,257,244 | $ | 34,859,944 | $ | 40,719,291 | ||||||
Consumer Sales Finance Contracts: | ||||||||||||
Balance - beginning | $ | 16,793,743 | $ | 14,466,682 | $ | 11,813,566 | ||||||
Loans originated | 17,046,757 | 18,883,178 | 16,869,906 | |||||||||
Collections | (7,760,796 | ) | (7,267,346 | ) | (6,058,209 | ) | ||||||
Refinancings | (5,635,286 | ) | (5,460,970 | ) | (4,993,560 | ) | ||||||
Charge-offs, gross | (3,383,645 | ) | (1,862,589 | ) | (1,110,556 | ) | ||||||
Rebates/other adjustments | (1,884,400 | ) | (1,965,212 | ) | (2,054,465 | ) | ||||||
Balance - end | $ | 15,176,373 | $ | 16,793,743 | $ | 14,466,682 | ||||||
Motor Vehicle Installment Sales Contracts: | ||||||||||||
Balance - beginning | $ | 30,707,329 | $ | 32,259,968 | $ | 31,280,840 | ||||||
Loans originated | 14,097,733 | 14,217,234 | 17,965,678 | |||||||||
Collections | (11,502,246 | ) | (13,286,462 | ) | (14,469,121 | ) | ||||||
Refinancings | — | — | — | |||||||||
Charge-offs, gross | (1,768,170 | ) | (1,370,165 | ) | (1,185,753 | ) | ||||||
Rebates/other adjustments | (1,382,723 | ) | (1,113,246 | ) | (1,331,676 | ) | ||||||
Balance - end | $ | 30,151,923 | $ | 30,707,329 | $ | 32,259,968 | ||||||
Total Active Accounts: | ||||||||||||
Balance - beginning | $ | 82,361,016 | $ | 87,445,941 | $ | 89,166,075 | ||||||
Loans originated | 80,085,461 | 99,866,606 | 108,185,984 | |||||||||
Collections | (59,934,161 | ) | (67,630,531 | ) | (72,779,841 | ) | ||||||
Refinancings | (16,547,931 | ) | (20,252,473 | ) | (23,148,541 | ) | ||||||
Charge-offs, gross | (12,380,478 | ) | (10,590,419 | ) | (6,363,061 | ) | ||||||
Rebates/other adjustments | (5,998,367 | ) | (6,478,108 | ) | (7,614,675 | ) | ||||||
Balance - end | $ | 67,585,540 | $ | 82,361,016 | $ | 87,445,941 | ||||||
Total Bankrupt Accounts: | ||||||||||||
Balance - beginning | $ | 6,794,358 | $ | 6,115,375 | $ | 5,618,931 | ||||||
Charge-offs, gross | (1,782,967 | ) | (778,169 | ) | (790,514 | ) | ||||||
Adjustments | 1,750,710 | 1,457,152 | 1,286,958 | |||||||||
Balance - end | $ | 6,762,101 | $ | 6,794,358 | $ | 6,115,375 | ||||||
Total Gross O/S Receivables | $ | 74,347,641 | $ | 89,155,374 | $ | 93,561,316 | ||||||
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Below is a reconciliation of the amounts of the finance receivables originated and repaid (collections) from the receivable roll-forward to the amounts shown in our Consolidated Statements of Cash Flows.
| Fiscal Year Ended September 25, 2009 | Fiscal Year Ended September 25, 2008 | Fiscal Year Ended September 25, 2007 | ||||||||||
| Finance Receivables Originated: | ||||||||||||
Direct consumer loans | $ | 48,940,971 | $ | 66,766,194 | $ | 73,350,400 | ||||||
Consumer sales finance | 17,046,757 | 18,883,178 | 16,869,906 | |||||||||
Motor vehicle installment sales | 14,097,733 | 14,217,234 | 17,965,678 | |||||||||
Total gross loans originated | 80,085,461 | 99,866,606 | 108,185,984 | |||||||||
Non-cash items included in gross finance receivables* | (21,745,038 | ) | (26,531,233 | ) | (31,243,362 | ) | ||||||
Finance receivables originated - cash flows** | $ | 58,340,423 | $ | 73,335,373 | $ | 76,942,622 | ||||||
| Loans Repaid: | ||||||||||||
Collections | ||||||||||||
Direct consumer loans | $ | 40,671,119 | $ | 47,076,723 | $ | 52,252,512 | ||||||
Consumer sales finance | 7,760,796 | 7,267,346 | 6,058,208 | |||||||||
Motor vehicle installment sales | 11,502,246 | 13,286,462 | 14,469,121 | |||||||||
Finance receivables repaid - cash flows | $ | 59,934,161 | $ | 67,630,531 | $ | 72,779,841 | ||||||
| * | 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 receivable balances (since there is no cash generated from the repayment of original receivables refinanced). |
| ** | Includes amounts advanced to customers in conjunction with refinancings, which were $4,738,460 for the fiscal year ended September 25, 2009; $10,545,399 for the fiscal year ended September 25, 2008; and $10,545,399 for the fiscal year ended September 25, 2007. |
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 16 in the “Notes to Consolidated Financial Statements” for a breakdown of our operations by segment.
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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 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 generally 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 decrease in the net interest margin for the fiscal year ended September 25, 2009 was a result primarily of the suppressed average rate earned on outstanding finance receivables. Our liquidity issues have caused us to tighten our lending guidelines and significantly decrease our direct consumer loans, while we experienced only slight decreases in consumer sales finance contracts and motor vehicle installment contracts. These contracts generally yield a lower interest rate as compared to direct consumer loans. We also saw a slight increase in the average interest paid on our debt as a result of higher rates paid on short-term borrowings during fiscal year 2009.
The following table presents important data relating to our net interest margin:
| As of, or for, the Year Ended September 25, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
Average net finance receivables (1) | $ | 70,353,355 | $ | 79,929,788 | $ | 79,247,445 | ||||||
Average notes payable(2) | $ | 78,753,900 | $ | 87,985,623 | $ | 87,680,692 | ||||||
Interest income | $ | 11,506,002 | $ | 14,211,519 | $ | 14,742,029 | ||||||
Loan fee income | 4,083,072 | 5,068,550 | 4,738,711 | |||||||||
Total interest and fee income | 15,589,074 | 19,280,069 | 19,480,740 | |||||||||
Interest expense | 7,611,185 | 8,275,310 | 8,025,969 | |||||||||
Net interest and fee income before provision for credit losses | $ | 7,977,889 | $ | 11,004,759 | $ | 11,454,771 | ||||||
Average interest rate earned | 22.5 | % | 24.1 | % | 24.6 | % | ||||||
Average interest rate paid | 9.7 | % | 9.4 | % | 9.2 | % | ||||||
Net interest rate spread | 12.8 | % | 14.7 | % | 15.4 | % | ||||||
Net interest margin(3) | 11.6 | % | 13.8 | % | 14.5 | % | ||||||
| (1) | Averages are computed using month-end balances of finance receivables (net of unearned interest/fees, insurance commissions, and unearned discounts) during the year presented.Net finance receivables for this purpose include all outstanding finance receivables, including accounts in bankruptcy and non-accrual status. |
| (2) | Averages are computed using month-end balances of interest bearing debt (including senior debt, senior subordinated debt, subordinated debt to related parties, debentures and demand notes) during the year presented. |
| (3) | Net interest margin represents net interest and fee income (net of the provision for credit losses) divided by average net finance receivables. |
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Rate/Volume Analysis
The following table sets forth the effects of changing rates and volumes on our net interest income. Information is provided with respect to (i) effects on interest income attributable to changes in volume (changes in volume multiplied by prior rate), (ii) effects on interest income attributable to changes in rate (changes in rate multiplied by prior volume), and (iii) changes in rate/volume (change in rate multiplied by change in volume).
| Increase (Decrease) Due to | ||||||||||||||||||||||||||||||||
| Volume | Rate | Rate/Volume | Total net increase (decrease) | |||||||||||||||||||||||||||||
| 9/25/09 | 9/25/08 | 9/25/09 | 9/25/08 | 9/25/09 | 9/25/08 | 9/25/09 | 9/25/08 | |||||||||||||||||||||||||
| Earning assets: | ||||||||||||||||||||||||||||||||
Interest income on finance receivables: | $ | (2,517,649 | ) | $ | (136,473 | ) | $ | (1,005,772 | ) | $ | (55,899 | ) | $ | (167,574 | ) | $ | (8,299 | ) | $ | (3,690,995 | ) | $ | (200,671 | ) | ||||||||
Interest bearing liabilities: | ||||||||||||||||||||||||||||||||
Debentures & demand notes | (874,693 | ) | 19,996 | 131,167 | 303,295 | (15,990 | ) | 746 | (759,516 | ) | 324,037 | |||||||||||||||||||||
Other debt | 3,582 | (47,906 | ) | 93,744 | (16,611 | ) | (1,935 | ) | (10,179 | ) | 95,391 | (74,696 | ) | |||||||||||||||||||
Total interest expense | (871,111 | ) | (27,910 | ) | 224,911 | 286,684 | (17,925 | ) | (9,433 | ) | (664,125 | ) | 249,341 | |||||||||||||||||||
Net interest income | $ | (1,646,538 | ) | $ | (108,563 | ) | $ | (1,230,683 | ) | $ | (342,583 | ) | $ | (149,649 | ) | $ | 1,134 | $ | (3,026,870 | ) | $ | (450,012 | ) | |||||||||
Return on Deficit and Assets
Below is a table showing certain performance ratios for the fiscal years ended September 25, 2009 and 2008. These ratios are typically reported by financial institutions in connection with their annual financial performance.
Performance Ratios(1) | 2009 | 2008 | ||||
Return on average assets(2) | -16.4 | % | -10.9 | % | ||
Return on average shareholders’ deficit(3) | -61.9 | % | -181.6 | % | ||
Average deficit to average assets ratio(4) | -26.5 | % | -6.0 | % |
| (1) | Averages are computed using quarter end balances. |
| (2) | Calculated as net income divided by average total assets during the fiscal year. |
| (3) | Calculated as net income divided by average shareholders’ deficit during the fiscal year. |
| (4) | Calculated as average shareholders’ deficit divided by average total assets during the fiscal year. |
Analysis of Allowance for Credit Losses
An allowance for credit losses is maintained primarily to account for the probable losses inherent in the finance receivables portfolio. The allowance is calculated based upon management’s estimate of the expected collectibility of loans outstanding based upon a variety of factors, including, without limitation, periodic analysis of the loan portfolio, historic loan loss experience, 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
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and unearned discounts. Charge-offs are shown at gross amounts as presented in the receivable roll-forward above. Recoveries represent receipts from non-filing insurance claims and cash recoveries.
| As of, or for, the Fiscal Year Ended September 25, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| Direct Consumer Loans and Consumer Sales Finance Contracts: | ||||||||||||
Average net finance receivables | $ | 45,172,898 | $ | 54,074,302 | $ | 53,453,781 | ||||||
Charge-offs - direct consumer | $ | 7,228,663 | $ | 7,357,665 | $ | 4,066,752 | ||||||
Charge-offs - consumer sales finance | $ | 3,383,645 | $ | 1,862,589 | $ | 1,110,556 | ||||||
Charge-offs - bankruptcy | $ | 1,782,967 | $ | 778,169 | $ | 790,514 | ||||||
Total gross charge-offs | $ | 12,395,275 | $ | 9,998,423 | $ | 5,967,822 | ||||||
Recoveries (all direct consumer) | $ | (3,027,086 | ) | $ | (2,739,668 | ) | $ | (2,751,142 | ) | |||
Charge-offs, net | $ | 9,368,189 | $ | 7,258,755 | $ | 3,216,680 | ||||||
Percent of net charge-offs to average receivables | 20.7 | % | 13.4 | % | 6.0 | % | ||||||
| Motor Vehicle Installment Sales Contracts: | ||||||||||||
Average net finance receivables | $ | 25,180,457 | $ | 25,855,486 | $ | 25,793,664 | ||||||
Charge-offs, gross | $ | 1,768,170 | $ | 1,370,165 | $ | 1,185,753 | ||||||
Recoveries | — | — | — | |||||||||
Charge-offs, net | $ | 1,768,170 | $ | 1,370,165 | $ | 1,185,753 | ||||||
Percent of net charge-offs to average receivables | 7.0 | % | 5.3 | % | 4.6 | % | ||||||
| Total Receivables: | ||||||||||||
Average net finance receivables | $ | 70,353,355 | $ | 79,929,788 | $ | 79,247,445 | ||||||
Charge-offs, gross | $ | 14,163,445 | $ | 11,368,588 | $ | 7,153,575 | ||||||
Recoveries (all direct consumer) | $ | (3,027,086 | ) | $ | (2,739,668 | ) | $ | (2,751,142 | ) | |||
Charge-offs, net | $ | 11,136,359 | $ | 8,628,920 | $ | 4,402,433 | ||||||
Percent of net charge-offs to average receivables | 15.8 | % | 10.8 | % | 5.6 | % | ||||||
During fiscal year 2009, we continued to experience a high level of net charge-offs in both the consumer and automotive segments. Increases in unemployment and the recessionary economy continued to negatively impact our customer base. Net charge-offs in the consumer segment increased approximately $2.1 million over 2008 and the automotive segment saw increases of $0.4 million. See “Risk Factors – Risks Related to Our Business – We suffered significant credit losses in 2009 due to continued weakening economic conditions, and there is no guarantee such credit losses will not continue during this downturn in the economy or that our operations and profitability will not continue to be negatively affected.”
During fiscal year 2008, gross charge-offs of finance receivables in the consumer segment increased dramatically over 2007. During the fourth quarter of 2008, in conjunction with their initial Sarbanes-Oxley testing of controls over the charge-off process and the completion of its implementation of a new accounting system for loans, management performed an extensive analysis to determine the amount of past due loans over 180 days delinquent which had not been charged off. The purpose of the analysis was to determine branch level controls over the determination of collectibility of past due loans. Although delinquent loans were being actively monitored and collection efforts were taking place, which included active and ongoing legal processes, management
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determined that there was not sufficient evidence to support the deferral of probable losses inherent in these loans, especially given the change in the economy and current liquidity crisis. This resulted in an increase of approximately $4.0 million in consumer segment charge-offs and an increase of approximately $0.2 million in automotive segment charge-offs compared to fiscal year 2007.
As of September 25, 2009 and 2008, our allowance for credit losses was $7.4 million and $8.9 million, respectively. Based on both the significantly higher levels of 2009 and 2008 charge-offs and the continued extreme adverse economic conditions, management revised its methodology in determining the adequacy of its allowance to rely much more heavily on current data available rather than simply looking at average charge-offs over the most recent three years. In 2008, the revision in methodology in evaluating the sufficiency of the allowance resulted in an increase to the allowance and an additional provision of approximately $4.6 million. In 2009, the allowance decreased due to the decrease in net finance receivables over the course of fiscal year 2009. Our liquidity issues have caused us to significantly curtail our historical level of lending and thus caused us to tighten our lending guidelines. This has resulted in a lower delinquency amount and factored into the determination of the allowance. The allowance for credit losses has remained relatively constant at 11.7% and 11.6% of the net outstanding finance receivables at September 25, 2009 and 2008, respectively.
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. Our gross finance receivables on non-accrual status, including bankruptcy accounts, totaled approximately $14.6 million and approximately $17.8 million for the fiscal years ended September 25, 2009 and 2008, respectively. Suspended interest as a result of these non-accrual accounts totaled $0.9 million, $1.2 million and $1.1 million for the fiscal years ended September 25, 2009, 2008 and 2007, respectively. Generally, we do not refinance delinquent accounts. However, on occasion a past due account will qualify for refinancing. We use the following criteria for determining whether a delinquent account qualifies for refinancing: (1) a re-evaluation of the customer’s creditworthiness is performed to ensure additional credit is warranted; and (2) a payment must have been received on the account within the last 10 days. Since we refinance delinquent loans on such an infrequent basis, we do not maintain any statistics relating to this type of refinancing. Below is certain information relating to the delinquency status of each category of our receivables for the years ended September 25, 2009 and 2008.
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| As of September 25, 2009 | ||||||||||||||||||||
| Direct Consumer Sales | Consumer Sales Finance Contracts | Motor Vehicle Installment Sales Contracts | Bankrupt Accounts | Total | ||||||||||||||||
Gross Loans and Contracts Receivable | $ | 22,257,244 | $ | 15,176,373 | $ | 30,151,923 | $ | 6,762,101 | $ | 74,347,641 | ||||||||||
Loans and Contracts 60 - 90 days past due | $ | 682,094 | $ | 377,524 | $ | 424,429 | $ | 272,538 | $ | 1,756,585 | ||||||||||
Percentage of Outstanding | 3.06 | % | 2.49 | % | 1.41 | % | 4.03 | % | 2.36 | % | ||||||||||
Loans and Contracts greater than 90 days past due | $ | 4,774,562 | $ | 2,153,578 | $ | 787,638 | $ | 4,221,045 | $ | 11,936,823 | ||||||||||
Percentage of Outstanding | 21.45 | % | 14.19 | % | 2.61 | % | 62.42 | % | 16.06 | % | ||||||||||
Loans and Contracts greater than 60 days past due | $ | 5,456,656 | $ | 2,531,102 | $ | 1,212,067 | $ | 4,493,583 | $ | 13,693,408 | ||||||||||
Percentage of Outstanding | 24.52 | % | 16.68 | % | 4.02 | % | 66.45 | % | 18.42 | % | ||||||||||
| As of September 25, 2008 | ||||||||||||||||||||
| Direct Consumer Sales | Consumer Sales Finance Contracts | Motor Vehicle Installment Sales Contracts | Bankrupt Accounts | Total | ||||||||||||||||
Gross Loans and Contracts Receivable | $ | 34,859,944 | $ | 16,793,743 | $ | 30,707,329 | $ | 6,794,358 | $ | 89,155,374 | ||||||||||
Loans and Contracts 60 - 90 days past due | $ | 665,191 | $ | 300,922 | $ | 338,953 | $ | 242,639 | $ | 1,547,705 | ||||||||||
Percentage of Outstanding | 1.91 | % | 1.79 | % | 1.10 | % | 3.57 | % | 1.74 | % | ||||||||||
Loans and Contracts greater than 90 days past due | $ | 7,486,842 | $ | 3,212,367 | $ | 285,407 | $ | 4,093,590 | $ | 15,078,206 | ||||||||||
Percentage of Outstanding | 21.48 | % | 19.13 | % | 0.93 | % | 60.25 | % | 16.91 | % | ||||||||||
Loans and Contracts greater than 60 days past due | $ | 8,152,033 | $ | 3,513,289 | $ | 624,360 | $ | 4,336,229 | $ | 16,625,911 | ||||||||||
Percentage of Outstanding | 23.39 | % | 20.92 | % | 2.03 | % | 63.82 | % | 18.65 | % | ||||||||||
Results of Operations
Comparison of Fiscal Years Ended September 25, 2009 and 2008
Net Revenues
Net revenues were $16.0 million and $17.0 million for the fiscal years ended September 25, 2009 and 2008, respectively. The $1.0 million decrease in net revenues was primarily a result of the significant decrease in interest and fee income as well as other components of loan-related income. These decreases in income were partially offset by significant decreases in the provision for credit losses.
Net Interest and Fee Income Before Provision for Credit Losses
Net interest and fee income before provision for credit losses was $8.0 million and $11.0 million for the fiscal years ended September 25, 2009 and 2008, respectively. Total interest and fee income decreased $3.7 million. Liquidity issues caused us to curtail historical lending levels resulting in a 20% decrease in finance receivables originated in 2009 compared to 2008. Interest expense decreased $0.7 million from $8.3 million in 2008 to $7.6 million in 2009 due to a decrease in outstanding debt of $9.5 million during fiscal year 2009.
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Provision for Credit Losses
Provision for credit losses was $9.6 million and $13.8 million for the fiscal years ended September 25, 2009 and 2008, respectively. Charge-offs, net of recoveries, increased by $2.5 million, from $8.6 million to $11.1 million, in fiscal year 2009 over 2008. Charge-offs expressed as a percentage of average net finance receivables increased to 15.8% in fiscal year 2009, compared to 10.8% in fiscal year 2008. However, we experienced a significant decrease in the dollar amount of net finance receivables outstanding, which is the basis for determining the allowance for credit losses. This and other factors led us to establish the allowance for credit losses at a level that resulted in a decrease at September 25, 2009 as compared to September 25, 2008, with a corresponding decrease in the provision for credit losses. See “Risk Factors – Risks Related to Our Business – We suffered significant credit losses in 2009 due to continued weakening economic conditions, and there is no guarantee such credit losses will not continue during this downturn in the economy or that our operations and profitability will not continue to be negatively affected.”
Insurance and Other Products
Income from commissions on insurance products and motor club memberships decreased from $11.5 million in fiscal year 2008 to $10.0 million in fiscal year 2009. Of the total for fiscal year 2009, commissions on credit insurance products were $5.7 million and non-credit insurance products and motor club memberships were $4.3 million. Approximately 67.3% of our loans during this period included one or more of our insurance products or motor club memberships. Delinquency fees and other income were in aggregate $2.1 million and $2.4 million for fiscal years ended September 25, 2009 and 2008, respectively. This decrease is consistent with the decrease in all loan-related income components.
Gross Margin on Retail Sales
Gross margin on retail sales were $5.7 million and $6.0 million for the fiscal years ended September 25, 2009 and 2008, respectively. Sales and gross margins in the consumer segment were $6.6 million and $2.9 million, respectively for fiscal year 2009 and $7.4 million and $3.3 million, respectively, for fiscal year 2008. In the automotive segment, sales were $9.1 million, down $0.4 million from 2008 sales of $9.5 million. Gross margins remained the same as 2008 gross margins of $2.4 million. We were encouraged by the small decreases in overall sales during fiscal year 2009 in light of the poor general economic conditions. We view this as a positive indicator for retail sales entering fiscal year 2010.
Operating Expenses/Impairment loss from write-down of goodwill
Operating expenses were $28.4 million and $28.5 million for the fiscal years ended September 25, 2009 and 2008, respectively. Although our lending activities and resulting income in the fiscal year ended September 25, 2009 decreased significantly, many components of operating expenses do not vary with income levels. Personnel expenses increased $0.2 million in 2009 over 2008 due to increases in health insurance costs. Facilities expense increased $0.2 million due to higher utility expenses and scheduled increases in facility leases. General and administrative expenses decreased by $0.2 million based on lower communication and supplies expenses. Other operating expenses decreased $0.3 million due to an impairment charge to goodwill of $1.0 million in fiscal year 2008, which was offset by $0.5 million in legal costs associated with the settlement of a lawsuit and increases in other professional expenses in 2009. We also recorded a loss of $0.1 million on the sale of finance receivables in 2009.
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Income Tax Expense (Benefit)
Income tax benefit was $0.4 million and income tax expense was $0.5 million for the fiscal years ended September 25, 2009 and 2008, respectively. For the fiscal year ended September 25, 2009, we increased the valuation allowance for our deferred income tax asset by $4.2 million compared to $4.8 million for the fiscal year ended September 25, 2008, resulting in a difference between income taxes calculated using expected annual federal and state rates and actual income tax expense.
Comparison of Fiscal Years Ended September 25, 2008 and 2007
Net Revenues
Net revenues were $17.0 million and $27.9 million for the fiscal years ended September 25, 2008 and 2007, respectively. The decrease in net revenues was primarily as a result of the significant increase in provision for credit losses. Decreases in insurance commissions, interest and fee income and gross margin on retail sales also contributed to the $10.9 million overall decrease.
Net Interest and Fee Income Before Provision for Credit Losses
Net interest and fee income before provision for credit losses was $11.0 million and $11.5 million for the fiscal years ended September 25, 2008 and 2007, respectively. Total interest and fee income decreased $0.2 million while interest expense increased $0.3 million, from $8.0 million in 2007 to $8.3 million in 2008.
Provision for Credit Losses
Provision for credit losses was $13.8 million and $5.0 million for the fiscal years ended September 25, 2008 and 2007, respectively. Charge-offs net of recoveries increased by $4.2 million in fiscal year 2008 over 2007. During the fourth quarter of 2008, in conjunction with their initial Sarbanes-Oxley testing of controls over the charge-off process and the completion of its implementation of a new accounting system for loans, management performed an extensive analysis to determine the amount of past due loans over 180 days delinquent which had not been charged off. The purpose of the analysis was to determine branch level controls over the determination of collectibility of past due loans. Although delinquent loans were being actively monitored and collection efforts were taking place, which included active and ongoing legal processes, management determined that there was not sufficient evidence to support the deferral of probable losses inherent in these loans, especially given the change in the economy and current liquidity crisis. Accordingly, management expanded its analysis and scrutiny of delinquent loans, which resulted in an abnormal amount of charge-offs in fiscal year 2008. Based on both the abnormal 2008 charge-offs and the extreme adverse economic data published in the fourth quarter of fiscal year 2008, management revised its methodology in determining the adequacy of its allowance and now relies much more heavily on current data available rather than simply looking at average charge-offs over the most recent three years. The revision in methodology in evaluating the sufficiency of the allowance resulted in an increase to the allowance and an additional provision for credit losses of approximately $4.6 million in fiscal year 2009.
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Insurance and Other Products
Income from commissions on insurance products and motor club memberships decreased from $12.1 million in 2007 to $11.5 million in fiscal year 2008. During fiscal year 2008, commissions on credit insurance products were $6.6 million and non-credit insurance products and motor club memberships were $4.9 million. Approximately 65.8% of our loans during this period included one or more of our insurance products or motor club memberships. Delinquency fees and other income were in aggregate $2.3 million and $2.5 million for the fiscal years ended September 25, 2008 and 2007, respectively. This decrease was partially due to the decreases in delinquency fees as well as other miscellaneous charges and products included in other income.
Gross Margin on Retail Sales
Gross margin on retail sales were $6.0 million and $6.8 million for the fiscal years ended September 25, 2008 and 2007, respectively. Sales and gross margins in the consumer segment in fiscal year 2008 were $7.4 million and $3.3 million, respectively, an increase of $0.8 million and $0.3 million over fiscal year 2007. In the automotive segment, sales were $9.5 million, down $2.6 million from fiscal year 2007, and gross margins decreased $1.1 million from $3.8 million to $2.7 million. The decline in vehicle sales is consistent with the auto industry’s overall decrease in sales due to the poor general economic conditions and decline in consumer spending.
Operating Expenses
Operating expenses were $28.5 million and $27.6 million for the fiscal years ended September 25, 2008 and 2007, respectively. Personnel expenses increased $0.2 million in 2008 over 2007 due to increases in bonuses and other incentives. Other operating expenses increased $0.5 million or 9%. Although we have continued to refine our process for customer solicitation that resulted in savings in postage and other costs, we recorded an impairment charge to goodwill of $1.0 million in fiscal year 2008. We also curtailed the advertising for our securities offerings. Travel and related cost were also down from prior year levels due to a decreased number of personnel required to travel. General and administrative expenses increased approximately $0.1 million or 4% as a result of the cost associated with the implementation of a new computer system for our branch operations.
Income Tax Expense (Benefit)
Income tax expense was $0.5 million and income tax benefit was $0.1 million for the fiscal years ended September 25, 2008 and 2007, respectively. For the fiscal year ended September 25, 2008, we increased the valuation allowance for our deferred income tax asset by $4.8 million, resulting in a difference between income taxes calculated using expected annual federal and state rates and actual income tax expense.
Liquidity and Capital Resources
Cash and cash equivalents decreased by approximately $9.6 million during fiscal year 2009 from a balance of $12.5 million at September 25, 2008 to $2.9 million at September 25, 2009, as compared to a decrease of approximately $5.3 million during fiscal
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year 2008 from a balance of $17.9 million at September 25, 2007 to $12.5 million at September 25, 2008. During 2009, we redeemed an unusually high amount of debentures ($18.6 million) while the proceeds from the sale of debentures were $10.0 million. The primary source of cash was repayments from customers on finance receivables ($59.9 million) while cash used for origination of finance receivables was $58.3 million. Other uses of cash were purchases of property and equipment ($0.7 million), redemption of demand notes ($0.5 million) and repayments on senior debt ($0.4 million).
Below is a table showing the net effect of our cash flows from financing activities for our fiscal years ended September 25, 2009 and 2008:
| 2009 | 2008 | |||||||
Senior debt - borrowing | $ | 3,959,931 | $ | 2,805,819 | ||||
Senior debt - repayments | (4,328,304 | ) | (2,622,592 | ) | ||||
Net | $ | (368,373 | ) | $ | 183,227 | |||
Demand notes - borrowing | $ | 3,002,554 | $ | 3,151,573 | ||||
Demand notes - repayments | (3,514,007 | ) | (5,484,787 | ) | ||||
Net | $ | (511,453 | ) | $ | (2,333,214 | ) | ||
Debentures - borrowing | $ | 10,028,146 | $ | 15,435,214 | ||||
Debentures - repayments | (18,634,536 | ) | (15,087,019 | ) | ||||
Net | $ | (8,606,390 | ) | $ | 348,195 | |||
Cash payments for interest for the fiscal years ended September 25, 2009 and 2008 were as follows:
| 2009 | 2008 | |||||
Senior debt | $ | 176,312 | $ | 78,174 | ||
Debentures and demand notes | 8,826,819 | 7,671,351 | ||||
Total interest payments | $ | 9,003,131 | $ | 7,749,525 | ||
Debentures and Demand Notes
Historically, we or our subsidiary, The Money Tree of Georgia Inc., have offered debentures and demand notes to investors as a significant source of our required capital. We rely on the sale of debentures and demand notes to fund redemption obligations, make interest payments and to fund other company working capital.
During the fiscal year ended September 25, 2009, we (1) received gross proceeds of $10.0 million from the sale of debentures and $3.0 million from the sale of demand notes, and (2) paid $18.6 million for redemption of debentures and $3.5 million for redemption of demand notes. As of September 25, 2009, we and our subsidiary, The Money Tree of Georgia Inc., had $73.6 million of debentures and $3.1 million of demand notes outstanding, compared to $82.2 million of debentures and $3.6 million of demand notes outstanding as of September 25, 2008. Accrued interest payable on debentures and demand notes was $13.5 million and $14.9 million as of September 25, 2009 and 2008, respectively. This decrease is a result of the unusually high amount of debentures redeemed during fiscal year 2009. See “Risk Factors – Risks Related to Our Offering – We may be unable to meet our debenture and demand note redemption obligations which could force us to sell off our loan receivables and other operating assets or cease our operations.”
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Debentures may be redeemed at our investors’ option at the end of the interest adjustment period selected by them (one year, two years or four years) or at maturity. Demand notes may be redeemed by holders at any time.
Our obligations with respect to the debentures and demand notes are governed by the terms of indenture agreements with U.S. Bank National Association, as trustee. Under the indentures, in addition to other possible events of default, if we fail to make a payment of principal or interest under any debenture or demand note and this failure is not cured within 30 days, we will be deemed in default. Upon such a default, the trustee or holders of 25% in principal of the outstanding debentures or demand notes could declare all principal and accrued interest immediately due and payable. Since our total assets do not cover these debt payment obligations, we would most likely be unable to make all payments under the debentures or demand notes when due, and we might be forced to cease our operations.
Lack of a Significant Line of Credit
Although we have been without a significant line of credit for the past several years, we are evaluating the possibility of obtaining a line of credit or other forms of capital to meet our future liquidity needs. In fiscal year 2009, loans repaid were approximately $60.0 million. This represents approximately 81% of our average gross outstanding finance receivables during the period. The average term of our direct consumer loans is less than seven months; therefore, if we anticipate having short-term cash flow problems over the next 12 months, we could curtail the amount of funds we loan to our customers and focus on collections to increase cash flow, while continuing to explore other financing options if any are available. During the fiscal year ended September 25, 2009, we used $9.1 million of our operating cash flow from collections to fund net redemptions of debentures and demand notes.
We are evaluating the possibility of obtaining a line of credit for our long-term financing needs. If we fail to secure a line of credit, we will continue to be heavily reliant upon the sale of debentures and demand notes for our liquidity. If we are unable to sell sufficient debentures and demand notes for any reason and we fail to obtain a line of credit or other source of financing, our ability to meet our obligations, including our redemption obligations with respect to the debentures and demand notes, could be materially and adversely affected. Please see “Risk Factors – Risks Related to Our Business – Our lack of a significant line of credit could affect our liquidity” and “Risk Factors – Risks Related to Our Offering – We may be unable to meet our debenture and demand note redemption obligations which could force us to sell off our loan receivables and other operating assets or cease our operations.”
Subsequent Events
As of September 26, 2009, we ceased sales operation at our Columbus, Georgia used car lot due to poor sales performance and operating losses. Collection activity will continue at this location. In conjunction with this action, we moved one of our two loan offices in Columbus, Georgia to this facility.
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As of November 25, 2009, we had redeemed $0.4 million more in debentures than we had sold and we had sold $0.1 million more demand notes than we had redeemed. These include amounts that were redeemed through our subsidiary, The Money Tree of Georgia Inc.
Recent Accounting Pronouncements
Set forth below are recent accounting pronouncements that may have a future effect on operations.
In June 2009, the Financial Accounting Standards Board (FASB) issued new guidance effective for financial statements issued for periods ending after September 15, 2009. “The FASB Accounting Standards Codification” (FASB ASC) establishes the source of authoritative U.S. generally accepted accounting principles (GAAP) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date, the FASB ASC superseded all then-existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the ASC became non-authoritative. Our adoption of this guidance did not have a material impact on our consolidated financial statements.
In June 2009, the FASB issued revised guidance to improve the reporting for the transfer of financial assets resulting from (1) practices that have developed since the issuance of previous guidance that are not consistent with the original intent and key requirements of that guidance and (2) concerns of financial statement users that many of the financial assets (and related obligations) that have been derecognized should continue to be reported in the financial statements of transferors. These revisions to FASB ASC 860, “Transfers and Servicing,” must be applied as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. Earlier application is prohibited. We do not expect that the adoption of this guidance will have a material impact on our consolidated financial statements.
In June 2009, the FASB issued revised guidance to improve financial reporting by enterprises involved with variable interest entities and to provide more relevant and reliable information to users of financial statements. These revisions to FASB ASC 810, “Consolidation,” is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. We do not expect that the adoption of this guidance will have a material impact on our consolidated financial statements.
In April 2009, the FASB issued revised guidance for recognizing and measuring pre-acquisition contingencies in a business combination. These revisions which are a part of FASB ASC 805, “Business Combinations,” addresses application issues raised by preparers, auditors, and members of the legal profession on initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. This guidance is effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is on or after the beginning of
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the first annual reporting period beginning on or after December 15, 2008. This guidance is not expected to have a material impact on our consolidated financial statements.
In May 2008, the FASB issued revised guidance for accounting for financial guarantee insurance contracts. These revisions which are a part of FASB ASC 944, “Financial Services-Insurance,” clarifies the application of GAAP to financial guarantee insurance contracts included within the scope of the guidance. The guidance is effective for financial statements issued for fiscal years beginning after December 15, 2008, and all interim periods within those fiscal years. We do not expect this guidance will have a material impact on our consolidated financial statements.
In March 2008, the FASB issued new guidance concerning “Disclosures about Derivative Instruments and Hedging Activities,” which is included in FASB ASC 815. This guidance requires enhanced disclosures about an entity’s derivative and hedging activities and thereby improves the transparency of financial reporting. This guidance is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. This guidance encourages, but does not require, comparative disclosures for earlier periods at initial adoption. Management does not expect this guidance to have a material impact on our consolidated financial statements.
In December 2007, the FASB issued new guidance for the accounting of noncontrolling interests. This new guidance, which is part of FASB ASC 810, “Consolidations,” establishes accounting and reporting standards for the noncontrolling (minority) interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. We have not yet determined the impact, if any, that this guidance will have on its consolidated financial statements. This guidance is effective for our fiscal year beginning September 26, 2009.
In December 2007, the FASB issued revised guidance for the accounting of business combinations. These revisions to FASB ASC 805, “Business Combinations,” require that the acquisition method of accounting (previously the purchase method) be used for all business combinations and that an acquirer be identified for each business combination. This guidance also establishes principles and requirements for how the acquirer: a) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree; b) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and c) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The guidance will apply prospectively to business combinations for which the acquisition date is on or after September 26, 2009. While we have not yet evaluated this statement for the impact, if any, that this guidance will have on its consolidated financial statements, we will be required to expense costs related to any acquisitions after September 25, 2009.
In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)” (SFAS 167), which has not been codified. SFAS 167 amends FASB Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities” (FIN 46(R)) to require an enterprise to qualitatively assess the determination of the primary beneficiary of a variable interest entity (VIE) based on whether the entity (1) has the power to direct the activities of a VIE that most significantly impact the entity’s
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economic performance and (2) has the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE. Also, SFAS 167 requires an ongoing reconsideration of the primary beneficiary, and amends the events that trigger a reassessment of whether an entity is a VIE. Enhanced disclosures are also required to provide information about an enterprise’s involvement in a VIE. SFAS No. 167 is effective for interim and annual reporting periods ending after November 15, 2009. We are currently evaluating the impact, if any, this standard will have on our consolidated financial statements.
Critical Accounting Policies
Our accounting and reporting policies conform with 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.
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.
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In 2008, management revised its methodology in determining the adequacy of the allowance for credit losses and now relies much more heavily on current data available rather than simply looking at average charge-offs over the most recent three years. Otherwise, we have not substantially changed any aspect of our overall approach in the application of the foregoing policies. There have been no other material changes in assumptions or estimation techniques utilized as compared to previous years. Please refer to Note 2 in the notes to our audited consolidated financial statements for details regarding our significant accounting policies.
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 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.
Contractual Commitments and Contingencies
Our operations are carried on in branch office locations which we occupy pursuant to lease agreements. The leases typically provide for a lease term of five years. Please see Notes 11 and 14 in the notes to our audited consolidated financial statements for details relating to our rental commitments and contingent liabilities, respectively. Please also see “Properties” and “Certain Relationships and Related Transactions” for further discussion of our leases. Below is a table showing our contractual obligations under current debt financing and leasing arrangements as of September 25, 2009:
Contractual Obligations
| Payments Due by Period (in thousands) | |||||||||||||||
| Total | Less than 1 year | 1 – 3 years | 3 – 5 years | More than 5 years | |||||||||||
Long term debt | $ | 77,076 | $ | 23,770 | $ | 36,815 | $ | 16,491 | $ | — | |||||
| Operating leases | 6,801 | 2,753 | 2,966 | 974 | 108 | ||||||||||
Total obligations | $ | 83,877 | $ | 26,523 | $ | 39,781 | $ | 17,465 | $ | 108 | |||||
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 would 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 audited consolidated financial statements for information on our debt, including maturities and interest rates.
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Business
The information contained in the “Provision for Credit Losses” and “Allowance for Credit Losses” subsections of the “Business” section, which begins on page 43 of the prospectus, is hereby deleted in its entirety and replaced by the following information.
Provision for Credit Losses
Provision for credit losses (sometimes known as bad debt expense) is charged against income in amounts sufficient, in the opinion of senior management, to maintain an allowance for credit losses at a level considered adequate to cover the probable losses inherent in our finance receivable portfolio. Credit loss experience, contractual delinquency of finance receivables, the value of underlying collateral and management’s judgment are all factors used in assessing the overall adequacy of the allowance and the resulting provision for credit losses. Charge-offs are typically determined in one of two ways. First, an account that is at least 180 days past due with no payments made within the last 180 days may be charged off. Second, an account may be determined by senior management to be uncollectible under certain circumstances, as in the event of death of the customer who did not elect to purchase credit life insurance for his loan contract or in situations when repossession and sale of collateral occurs on consumer sales finance and motor vehicle installment sales contracts and the balance is not recoverable through legal process or other methods.
In addition to these general means of designating an account to be charged off, branch managers may encounter other situations when charge-off is appropriate. We require that a supervisor visit each branch to review all of their accounts that are potential charge-off accounts on a monthly basis. Then each supervisor meets with the operations manager for a final review. Prior to these visits, the branch manager is responsible for ensuring that all phases of the collection process have been followed. A comprehensive charge-off checklist has been developed to help the branch manager verify that all collection activities and procedures have been followed in order to have that account charged off. Senior management reviews the charge-off checklist to determine whether an account should be charged off or whether the branch manager should undertake further collection measures for the particular account.
Direct consumer loans are charged off net of proceeds from non-filing insurance. We purchase non-filing insurance on certain direct consumer loans in lieu of filing a Uniform Commercial Code financing statement. Premiums collected are remitted to the insurance company to cover possible losses from charge-offs as a result of not recording. Should we ever discontinue our practice of purchasing non-filing insurance, the proceeds from these claims would not be available to us to offset future credit losses and additional provisions for credit losses would be required.
For consumer sales finance and motor vehicle installment sales contracts, we are granted a security interest in the collateral for which the loan was made. In the event of default, the collateral on such contracts may be repossessed at 31 to 60 days’ delinquency (roughly two payments). After repossession, the collateral is sold (typically within 30 days) according to UCC-9 disposition of collateral rules and the proceeds of the sale are applied to the customer’s account. If the likelihood of collection on a judgment is
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favorable, a suit is filed for the deficiency balance remaining and, if granted, garnishment and/or execution follow for collection of the balance. If the collateral is not conducive to repossession because it is in unmarketable condition, judgment is sought without repossession and sale of collateral. If collection on a judgment is not favorable, the balance of the account is charged off.
For the fiscal years ended September 25, 2009 and 2008, our charge-offs, net of recoveries, were $11.1 million and $8.6 million, respectively. We have experienced a significant increase in net charge-offs in 2008 and 2009 when compared to previous years. The declining economy, increase in cost of consumer goods, and the rise in unemployment levels have had a negative impact on our customer base. These factors have played a role in the significant increase of loan defaults occurring over the past two years. Although we continue to seek remedies through the legal process to attempt to collect past due amounts, sufficient evidence did not exist to defer the losses associated with these defaults.
Allowance for Credit Losses
The allowance for credit losses (a deduction from finance receivables reported on our Consolidated Balance Sheet and sometimes known as a bad debt reserve) is determined by several factors. Historical loss experience coupled with an evaluation of loan delinquencies are the primary factors in the determination of the allowance for credit losses. An evaluation is performed to compare the amount of accounts charged off, net of recoveries of such accounts, in relation to the average net outstanding finance receivables for the period being reviewed. For the fiscal years ended September 25, 2009 and 2008, the charge-offs, net of recoveries, were $11.1 million and $8.6 million, respectively. These amounts represent 15.8% and 10.8% of the respective year’s net average outstanding receivables.
As discussed above, the poor economic conditions have played a role in the significant increase of loan defaults occurring over the past two years which has resulted in the subsequent increase in the relationship of net charge-offs to net outstanding finance receivables. Management has historically used this methodology to provide an adequate benchmark for determining the allowance due to our loan portfolio in the consumer segment, consisting primarily of a large number of smaller balance homogeneous loans. A review is also performed of loans that comprise the automotive segment to determine if the allowance should be adjusted based on possible exposure related to collectibility of these loans. In accordance with the auto sales contract, we may repossess the collateralized vehicle after 30 days without payment to protect the vehicle’s integrity and to minimize our loss. Net consumer segment charge-offs in fiscal year 2009 were 20.7% of the net outstanding finance receivables. In the automotive segment, net charge-offs to average outstanding receivables were 7.0%.
Based on both the significantly higher levels of 2009 and 2008 charge-offs and the continued extreme adverse economic conditions, management revised its methodology in determining the adequacy of its allowance to rely much more heavily on current data available rather than simply looking at average charge-offs over the most recent three years, as was the past practice. During the fourth quarter of 2008, in conjunction with their initial Sarbanes-Oxley testing of controls over the charge-off process and the completion of its implementation of a new accounting system for loans, management performed an extensive analysis to determine the amount of past due loans over 180 days delinquent which had not been charged-off. The purpose of the analysis was to ascertain branch level controls over the determination of collectibility of past due loans. Although delinquent loans were being actively
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monitored and collection efforts were taking place including active and ongoing legal processes, management determined that there was not sufficient evidence to support the deferral of probable losses inherent in these loans, especially given the change in the economy and current liquidity crisis.
Although the net charge offs as a percentage of the net finance receivables increased in fiscal year 2009 over the prior year’s percentage, we believe that this year’s percentage is distorted due to the significant decrease in the net outstanding finance receivables and the significant improvement in loan delinquencies during fiscal year 2009. Our liquidity issues have caused us to significantly curtail our historical level of lending and we have also tightened our lending guidelines resulting in fewer delinquencies. Based on these factors, management has decreased the allowance to the 2009 net charge-off rate by 570 basis points in the consumer segment and 50 basis points in the automotive segment to the aforementioned benchmark percentages. At September 25, 2009, we have established an allowance, expressed as a percentage of average net finance receivables, of 15.0% in the consumer segment and 6.5% in the automotive segment. The balance of the allowance for credit losses at September 25, 2009 and 2008 was $7.4 million and $8.9 million, respectively. While the balance of the allowance for credit losses has decreased, the percentage of the allowance in relation to the net average outstanding receivables has remained relatively constant at 11.7% and 11.6% at September 25, 2009 and 2008, respectively.
Management
Effective July 25, 2009, Jennifer Ard no longer holds the position of Vice President – Investment Retirement Accounts. Ms. Ard continues to serve as Corporate Secretary, a position she has held since May 2008.
Compensation Discussion and Analysis
The information contained in the “Compensation Discussion and Analysis” section on pages 59 through 64 of the prospectus is hereby deleted in its entirety and replaced by the following information.
This Compensation Discussion and Analysis describes our compensation philosophy and policies for fiscal year 2009 that applied to the executives named below in the Summary Compensation Table (the Named Executive Officers). It explains the structure and rationale associated with each material element of each Named Executive Officer’s total compensation, and it provides important context for the more detailed disclosure tables and specific compensation amounts provided following this discussion and analysis.
The following discussion and analysis contains statements regarding future company performance targets and goals. These targets and goals are disclosed in the limited context of our compensation programs and should not be understood to be statements of management’s expectations or estimates of results or other guidance. We specifically caution investors not to apply these statements to other contexts.
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Objectives of the Named Executive Officer Compensation Program
The objectives of our executive compensation program are to attract, retain and motivate highly talented executives and to align each executive’s incentives with our annual and long-term objectives. Specifically, our executive compensation program is designed to accomplish the following goals and objectives:
| • | maintain a compensation program that is equitable in our marketplace; |
| • | provide opportunities that integrate pay with the annual and long-term performance goals; |
| • | encourage achievement of strategic objectives; |
| • | recognize and reward individual initiative and achievements; |
| • | maintain an appropriate balance between base salary and short- and long-term incentive opportunity; and |
| • | allow us to compete for, retain and motivate talented executives critical to our success and consistent with our quality of life philosophy. |
Determining Named Executive Officer Compensation
We are a family-owned business with W. Derek Martin, our former Chairman of the Board of Directors, and his siblings beneficially owning all of the voting common stock. We do not have an official “compensation committee,” or other committee performing compensation-related activities on behalf of the Board of Directors. Until resigning from his position as President in August 2007, only W. Derek Martin determined the compensation of all of the Named Executive Officers. Thereafter, W. Derek Martin continued to determine Bradley D. Bellville’s compensation until Mr. Martin’s resignation from the Board of Directors in February 2008. With the exception of their own compensation, Mr. Bellville and Jefferey V. Martin, current members of our Board of Directors, now determine the compensation of all of the Named Executive Officers, but may on occasion receive information pertaining to compensation-based decisions from other Named Executive Officers. Mr. Bellville determines Jefferey Martin’s compensation and Jefferey Martin determines Mr. Bellville’s compensation.
Our determination and assessments of executive compensation are primarily driven by the following four factors: (1) market data based on the compensation levels, programs and practices of certain other comparable companies for comparable positions, (2) our financial performance, (3) the Named Executive Officer’s performance, and (4) the Named Executive Officer’s tenure. We believe these four factors provide a reasonably measurable assessment of executive performance in light of building value and creating a healthy financial position for us. The comparable companies that we analyze when making compensation decisions, which operate in similar markets with similar target customers, include 1st Franklin Financial Corporation, Pioneer Financial Services, Inc. and World Acceptance Corporation. Each of these comparable companies is regulated by most, if not all, of the same statutes, rules and regulations that affect us. Other comparable companies that we review are CapitalSouth Bancorp, a financial institution in Alabama with net income levels similar to ours, and PAB Bankshares, Inc., a Georgia-based financial institution with branch locations in several of the cities in which we operate. We rely upon our judgment about each individual Named Executive Officer,
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and not on rigid formulas or short-term changes in business performance, in determining the amount and mix of compensation elements and whether each particular payment or award provides an appropriate incentive and reward for performance that sustains and enhances our long-term growth.
2009 Named Executive Officer Compensation Components
Our executive compensation program consists primarily of base salary and bonuses. The program is complemented with other benefits such as 401(k) matching contributions, commissions, group health insurance, life insurance premiums and medical insurance premiums for all Named Executive Officers, and the provision of a company vehicle, country club memberships, and professional membership dues for certain Named Executive Officers.
Annual Base Salary
We intend to provide our Named Executive Officers with a level of assured cash compensation based on the individual’s position, experience, performance, past and potential contribution to us, and level of responsibility, as well as our overall financial performance. No specific weighting is applied to any one factor considered, and Mr. Bellville and Jefferey Martin used their own judgment and expertise in determining appropriate salaries for 2009 within the parameters of the compensation philosophy. Base salary is one fixed component of our Named Executive Officers’ total direct compensation. With the exception of W. Derek Martin, prior to his resignation, and Mr. Bellville, each Named Executive Officer’s individual performance was reviewed on a yearly basis by Mr. Bellville and the reviews were then discussed between Mr. Bellville and the Named Executive Officers. Prior to his resignation, W. Derek Martin reviewed Mr. Bellville’s annual performance, and as the Sole Director, W. Derek Martin did not receive an annual employment review. Since their appointment to the Board of Directors in February 2008, Mr. Bellville and Jefferey Martin now review on a yearly basis each Named Executive Officer’s individual performance, and the reviews are then discussed between Mr. Bellville and the Named Executive Officers. Mr. Bellville now reviews Jefferey Martin’s performance, and Jefferey Martin now reviews Mr. Bellville’s performance. The outcome of the yearly process is one tool Mr. Bellville and Jefferey Martin utilize in determining appropriate yearly salaries. For fiscal year 2010, the Named Executive Officers’ salaries are as follows:
Named Executive Officer | FY 2010 Salary | Percentage Increase / (Decrease) from FY 2009 Salary | ||||
Bradley D. Bellville | $ | 243,000 | 2.53 | % | ||
Steve Morrison | $ | 94,800 | 7.48 | % | ||
Natasha J. Wood | $ | 131,520 | 2.00 | % | ||
David Hill | $ | 79,452 | 0.00 | % | ||
Claud Haynes | $ | 106,836 | 2.00 | % | ||
Bonus Awards
In addition to base salary, Named Executive Officers may receive a monthly cash bonus or sales-based commission. Each monthly bonus is determined based on whether the Named Executive Officer meets certain monthly performance goals which may be based on, but are not limited to, cash collection amounts, loan volume, delinquent account reduction and ancillary product sales.
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Additionally, sales commissions are given, where applicable, for those Named Executive Officers who meet certain sales-based goals. The President of the Company, Bradley D. Bellville, will receive a bonus equal to 1% of the Company’s income before income taxes for fiscal year 2010, if any, as an incentive to return the Company to and maintain profitability. For fiscal year 2009, the bonus awards paid to Named Executive Officers were as follows:
Named Executive Officer | Bonus Award | ||
Bradley D. Bellville | $ | 7,219 | |
Steve Morrison | $ | 1,750 | |
Natasha J. Wood | $ | 7,510 | |
David Hill | $ | 42,278 | |
Claud Haynes | $ | 34,472 | |
The targets used to determine bonus awards include, but are not limited to:
| • | a minimum collection rate of 85% of payments due on finance receivable in a given month, |
| • | increased collections of delinquent contract receivables, |
| • | increased sales of consumer merchandise above a base amount established each year, |
| • | a minimum loan volume of $25,000 for each regional employee, and |
| • | increased gross profit on and turnover of motor vehicle inventories. |
Bonus amounts paid to each Named Executive Employee varied by their specific responsibilities, achievement of goals and personal performance. The Company believes the achievement of goals is necessary to continue operations and to reduce losses or return to profitability; therefore, awarding cash incentives to Named Executive Officers for achieving or exceeding these goals provides the Company with increased cash flows, retail sales and gross profits.
401(k) Plan
We sponsor The Money Tree 401(k) Plan in which all qualified employees may participate. The purpose of the 401(k) plan is to provide participating employees with an opportunity to accumulate capital for their future economic security through their elective deferrals and our contributions. We believe this plan creates a strong incentive for participating employees to remain with us and to prepare for their individual futures. This benefits both employee retention and employee morale.
Perquisites and Other Named Executive Officer Benefits
Perquisites and other executive benefits are a part of our Named Executive Officers’ overall compensation. Our Named Executive Officers are eligible for the same group health insurance plan as is provided to other eligible employees. This group health insurance plan includes medical, dental, vision, prescription drug coverage, basic life insurance and short-term disability. We reimburse Named Executive Officers for their life insurance premiums, and pay for varying amounts of medical insurance premiums for all Named Executive Officers. Additionally, company cars are provided to Messrs. Bellville, Hill and Haynes, and we pay monthly country club memberships for Mr. Bellville. Although we reimburse all Named Executive Officers for professional
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association dues, civic and social club membership dues for networking and entertaining, business-related meals and entertainment, and business-related cellular phone charges, these expenses are also paid on behalf of other employees for business use so we do not consider them personal perquisites.
For information on the incremental cost of these perquisites and other personal benefits, refer to the Summary Compensation Table. We believe the perquisites we provide to our Named Executive Officers are appropriate to ensure our executive compensation remains competitive.
Employment Agreements
We do not have any employment agreements with any of our Named Executive Officers.
Tax and Accounting Considerations
We consider and review the deductibility of executive compensation under Section 162(m) of the Internal Revenue Code (the Code), which generally provides that we may not deduct certain compensation of more than $1,000,000 that is paid to certain individuals. We do not have any Named Executive Officers that met this limit during fiscal year 2009.
We are aware of the regulatory developments under Code Section 409A, which was enacted as part of the American Jobs Creation Act of 2004. Section 409A imposes substantial limitations and conditions on non-qualified deferred compensation plans, including certain types of equity compensation and separation pay arrangements. We have amended our compensation arrangements to ensure their full compliance with Section 409A.
Conclusion
We believe our executive compensation program is reasonable and competitive with the compensation paid by other competing institutions of similar size and geographic location. The program is designed to reward managers for strong personal and company performance. Our Board monitors the various guidelines that make up the program and reserves the right to adjust them as necessary to continue to meet our objectives.
Compensation Committee Report
In the absence of a standing “compensation committee,” our Board of Directors reviewed and discussed with management the Compensation Discussion and Analysis for fiscal year 2009 as required by Item 402(b) of Regulation S-K and, based on such review and discussions, determined that the Compensation Discussion and Analysis be included in this prospectus.
The Board of Directors:
Bradley D. Bellville, Chairman
Jefferey V. Martin
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Summary Compensation Table
The following table provides certain summary information concerning the annual and long-term compensation paid or accrued by us and our subsidiaries to or on behalf of our Named Executive Officers.
Name and Principal Position | Fiscal Year | Salary (2) | Bonus (3) | All Other Compensation (4) | Total | |||||||||
Bradley D. Bellville, | 2009 2008 | $ $ | 237,500 226,000 | $ $ | 7,219 6,662 | $ $ | 9,501 15,240 | $ $ | 254,220 247,902 | |||||
Steve Morrison, | 2009 2008 | $ $ | 92,050 86,450 | $ $ | 1,750 4,400 |
| — — | $ $ | 93,800 90,850 | |||||
Natasha J. Wood, | 2009 2008 | $ $ | 130,123 126,243 | $ $ | 7,510 5,957 |
| — — | $ $ | 137,633 132,200 | |||||
David Hill, | 2009 2008 | $ $ | 79,452 49,049 | $ $ | 42,278 49,049 |
| — — | $ $ | 121,730 126,996 | |||||
Claud Haynes, | 2009 2008 | $ $ | 104,736 102,058 | $ $ | 34,472 27,684 |
| — — | $ $ | 139,208 129,742 | |||||
| (1) | Mr. Hill is the General Manager of Best Buy Autos of Bainbridge Inc., a subsidiary of The Money Tree of Georgia Inc. |
| (2) | The salary amounts shown are equal to the gross salary amounts that were paid to the Named Executive Officers during fiscal year 2009. As yearly salary increases are given, where appropriate, on the anniversary of the employee’s hire date, the salary reported may include a portion of the Named Executive Officer’s previous annual base salary and his or her current annual base salary. |
| (3) | This amount includes both performance-based bonuses, as detailed in “2009 Named Executive Officer Compensation Components – Bonus Awards,” and commissions paid to Mr. Haynes by Home Furniture Mart Inc., a subsidiary of The Money Tree Inc. |
| (4) | The details of “All Other Compensation” are set forth below: |
All Other Compensation
Name | Fiscal Year | Company Vehicle | Medical Insurance | Country Club Membership | Life Insurance | Total | |||||||||||
Bradley D. Bellville | 2009 2008 | $ $ | 5,300 6,552 | $ $ | 1,811 6,306 | $ $ | 1,886 1,800 | $ $ | 504 582 | $ $ | 9,501 15,240 | ||||||
Experts
The information contained in the “Experts” section on page 72 of the prospectus is hereby deleted in its entirety and replaced by the following information.
The consolidated financial statements appearing in this supplement have been audited by Carr, Riggs & Ingram, LLC, an independent registered public accounting firm, to the extent and for the periods indicated in their report appearing elsewhere herein and are included in reliance upon such report and upon the authority of such firm as experts in accounting and auditing.
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| Page | ||
| F-2 | ||
| Audited Consolidated Financial Statements | ||
Consolidated Balance Sheets as of September 25, 2009 and 2008 | F-3 | |
Consolidated Statements of Operations for the years ended September 25, 2009, 2008 and 2007 | F-4 | |
| F-5 | ||
Consolidated Statements of Cash Flows for the years ended September 25, 2009, 2008 and 2007 | F-6 | |
| F-8 | ||
F-1
Report of Independent Registered Public Accounting Firm
To the Directors and Shareholders
The Money Tree Inc. and subsidiaries
We have audited the accompanying consolidated balance sheets of The Money Tree Inc. and subsidiaries (the “Company”) as of September 25, 2009 and 2008, and the related consolidated statements of operations, shareholders’ deficit, and cash flows for each of the three years in the period ended September 25, 2009. 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated 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 Tree Inc. and subsidiaries as of September 25, 2009 and 2008, and the results of their operations and their cash flows for each of the three years in the period ended September 25, 2009, in conformity with U.S. generally accepted accounting principles.
The accompanying consolidated financial statements for the year ended September 25, 2009 have been prepared assuming the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regards to these matters are also described in Note 2. The consolidated financial statements do not contain any adjustments that might result from the outcome of these uncertainties.
/s/ Carr, Riggs & Ingram, LLC
Tallahassee, Florida
December 23, 2009
F-2
The Money Tree, Inc. and Subsidiaries
Consolidated Balance Sheets
September 25, | 2009 | 2008 | ||||||
Assets | ||||||||
Cash and cash equivalents | $ | 2,921,777 | $ | 12,541,302 | ||||
Finance receivables, net | 56,282,881 | 67,730,473 | ||||||
Other receivables | 716,661 | 956,752 | ||||||
Inventory | 2,201,966 | 3,167,021 | ||||||
Property and equipment, net | 4,226,555 | 4,906,189 | ||||||
Other assets | 1,831,146 | 2,498,205 | ||||||
Total assets | $ | 68,180,986 | $ | 91,799,942 | ||||
Liabilities and Shareholders’ Deficit | ||||||||
Liabilities | ||||||||
Accounts payable and other accrued liabilities | $ | 2,489,269 | $ | 3,278,870 | ||||
Accrued interest payable | 13,462,931 | 14,854,877 | ||||||
Demand notes | 3,146,707 | 3,658,160 | ||||||
Senior debt | 326,517 | 694,890 | ||||||
Variable rate subordinated debentures | 73,602,821 | 82,209,211 | ||||||
Total liabilities | 93,028,245 | 104,696,008 | ||||||
Commitments and contingencies (see Notes 11 and 14) | ||||||||
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 | (26,524,906 | ) | (14,573,713 | ) | ||||
Total shareholders’ deficit | (24,847,259 | ) | (12,896,066 | ) | ||||
Total liabilities and shareholders’ deficit | $ | 68,180,986 | $ | 91,799,942 | ||||
See accompanying notes to the consolidated financial statements.
F-3
The Money Tree, Inc. and Subsidiaries
Consolidated Statements of Operations
Years ended September 25, | 2009 | 2008 | 2007 | |||||||||
Interest and fee income | $ | 15,589,074 | $ | 19,280,069 | $ | 19,480,740 | ||||||
Interest expense | (7,611,185 | ) | (8,275,310 | ) | (8,025,969 | ) | ||||||
Net interest and fee income before provision for credit losses | 7,977,889 | 11,004,759 | 11,454,771 | |||||||||
Provision for credit losses | (9,629,722 | ) | (13,812,192 | ) | (4,982,494 | ) | ||||||
Net revenue (loss) from interest and fees after provision for credit losses | (1,651,833 | ) | (2,807,433 | ) | 6,472,277 | |||||||
Insurance commissions | 8,354,410 | 9,615,005 | 10,120,463 | |||||||||
Commissions from motor club memberships from company owned by related parties | 1,601,482 | 1,844,341 | 1,946,476 | |||||||||
Delinquency fees | 1,561,013 | 1,719,608 | 1,775,728 | |||||||||
Income tax service agreement income from company owned by related parties | — | — | 3,310 | |||||||||
Other income | 529,541 | 647,406 | 747,829 | |||||||||
Net revenue before retail sales | 10,394,613 | 11,018,927 | 21,066,083 | |||||||||
Retail sales | 16,019,081 | 17,164,407 | 19,001,858 | |||||||||
Cost of sales | (10,365,638 | ) | (11,131,463 | ) | (12,170,317 | ) | ||||||
Gross margin on retail sales | 5,653,443 | 6,032,944 | 6,831,541 | |||||||||
Net revenues | 16,048,056 | 17,051,871 | 27,897,624 | |||||||||
Operating expenses | ||||||||||||
Personnel expense | (15,732,538 | ) | (15,530,590 | ) | (15,349,102 | ) | ||||||
Facilities expense | (3,981,370 | ) | (3,807,540 | ) | (3,760,048 | ) | ||||||
General and administrative expenses | (3,062,752 | ) | (3,287,831 | ) | (3,150,330 | ) | ||||||
Other operating expenses | (5,649,625 | ) | (4,852,247 | ) | (4,978,335 | ) | ||||||
Impairment loss from writedown of goodwill | — | (991,243 | ) | (365,824 | ) | |||||||
Total operating expenses | (28,426,285 | ) | (28,469,451 | ) | (27,603,639 | ) | ||||||
Net operating income (loss) | (12,378,229 | ) | (11,417,580 | ) | 293,985 | |||||||
Loss on sale of property and equipment | (10,497 | ) | (20,980 | ) | (19,012 | ) | ||||||
Income (loss) before income tax benefit (expense) | (12,388,726 | ) | (11,438,560 | ) | 274,973 | |||||||
Income tax benefit (expense) | 437,533 | (527,806 | ) | 100,664 | ||||||||
Net income (loss) | $ | (11,951,193 | ) | $ | (11,966,366 | ) | $ | 375,637 | ||||
Net income (loss) per common share, basic and diluted | $ | (404.49 | ) | $ | (405.01 | ) | $ | 12.71 | ||||
See accompanying notes to the consolidated financial statements.
F-4
The Money Tree, Inc. and Subsidiaries
Consolidated Statements of Shareholders’ Deficit
| Common Stock | ||||||||||||||||||
| Class A Voting | Class B Non-voting | Total | ||||||||||||||||
| Shares | Stated Value | Shares | Stated Value | Accumulated Deficit | Shareholders’ Deficit | |||||||||||||
Balance at September 25, 2006 | 2,686 | $ | 1,677,647 | 26,860 | $ | — | $ | (2,982,984 | ) | $ | (1,305,337 | ) | ||||||
Net income | — | — | — | — | 375,637 | 375,637 | ||||||||||||
Balance at September 25, 2007 | 2,686 | 1,677,647 | 26,860 | — | (2,607,347 | ) | (929,700 | ) | ||||||||||
Net loss | — | — | — | — | (11,966,366 | ) | (11,966,366 | ) | ||||||||||
Balance at September 25, 2008 | 2,686 | 1,677,647 | 26,860 | — | (14,573,713 | ) | (12,896,066 | ) | ||||||||||
Net loss | — | — | — | — | (11,951,193 | ) | (11,951,193 | ) | ||||||||||
Balance at September 25, 2009 | 2,686 | $ | 1,677,647 | 26,860 | $ | — | $ | (26,524,906 | ) | $ | (24,847,259 | ) | ||||||
See accompanying notes to the consolidated financial statements.
F-5
The Money Tree, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years ended September 25, | 2009 | 2008 | 2007 | |||||||||
Cash flows from operating activities | ||||||||||||
Net income (loss) | $ | (11,951,193 | ) | $ | (11,966,366 | ) | $ | 375,637 | ||||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||||||||
Provision for credit losses | 9,629,722 | 13,812,192 | 4,982,494 | |||||||||
Depreciation | 880,119 | 793,776 | 794,418 | |||||||||
Amortization | 4,524 | 5,714 | 5,714 | |||||||||
Impairment loss from write-down of goodwill | — | 991,243 | 365,824 | |||||||||
Deferred income tax expense (benefit) | — | 1,210,000 | (565,000 | ) | ||||||||
Loss on sale of property and equipment | 10,497 | 20,980 | 19,012 | |||||||||
Loss on sale of finance receivables | 148,063 | — | — | |||||||||
Change in assets and liabilities: | ||||||||||||
Other receivables | 240,091 | (93,396 | ) | 151,586 | ||||||||
Inventory | 965,055 | (110,246 | ) | (861,312 | ) | |||||||
Other assets | 662,535 | (753,777 | ) | 360,762 | ||||||||
Accounts payable and other accrued liabilities | (789,601 | ) | (741,186 | ) | 494,778 | |||||||
Accrued interest payable | (1,391,946 | ) | 525,785 | 2,747,680 | ||||||||
Net cash (used in) provided by operating activities | (1,592,134 | ) | 3,694,719 | 8,871,593 | ||||||||
Cash flows from investing activities | ||||||||||||
Finance receivables originated | (58,340,423 | ) | (73,335,373 | ) | (76,942,622 | ) | ||||||
Finance receivables repaid | 59,934,161 | 67,630,531 | 72,779,841 | |||||||||
Purchase of property and equipment | (706,512 | ) | (1,586,379 | ) | (1,032,849 | ) | ||||||
Proceeds from sale of property and equipment | 495,530 | 85,319 | 580,338 | |||||||||
Proceeds from sale of finance receivables | 76,069 | — | — | |||||||||
Net cash provided by (used in) investing activities | 1,458,825 | (7,205,902 | ) | (4,615,292 | ) | |||||||
Cash flows from financing activities | ||||||||||||
Net proceeds (repayments) on: | ||||||||||||
Senior debt | (368,373 | ) | 183,227 | (156,886 | ) | |||||||
Demand notes | (511,453 | ) | (2,333,214 | ) | (2,145,476 | ) | ||||||
Repayments on senior subordinated debt | — | — | (600,000 | ) | ||||||||
Repayments on junior subordinated debt to related parties | — | — | (370,000 | ) | ||||||||
Proceeds-variable rate subordinated debentures | 10,028,146 | 15,435,214 | 14,132,396 | |||||||||
Payments-variable rate subordinated debentures | (18,634,536 | ) | (15,087,019 | ) | (10,181,582 | ) | ||||||
Net cash (used in) provided by financing activities | (9,486,216 | ) | (1,801,792 | ) | 678,452 | |||||||
Net change in cash and cash equivalents | (9,619,525 | ) | (5,312,975 | ) | 4,934,753 | |||||||
Cash and cash equivalents, beginning of year | 12,541,302 | 17,854,277 | 12,919,524 | |||||||||
Cash and cash equivalents, end of year | $ | 2,921,777 | $ | 12,541,302 | $ | 17,854,277 | ||||||
See accompanying notes to the consolidated financial statements.
F-6
The Money Tree, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (continued)
Years ended September 25, | 2009 | 2008 | 2007 | ||||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | |||||||||
Cash paid during the year for: | |||||||||
Interest | $ | 9,003,131 | $ | 7,749,525 | $ | 5,278,289 | |||
Income taxes | $ | — | $ | 268,642 | $ | 198,897 | |||
See accompanying notes to the consolidated financial statements.
F-7
The Money Tree Inc. and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 1 – NATURE OF BUSINESS
The business of The Money Tree Inc. and subsidiaries (the “Company”) consists of the operation of finance company offices which originates direct consumer loans and sales finance contracts in 102 locations throughout Georgia, Alabama, Louisiana and Florida; sales of merchandise (principally furniture, appliances, and electronics) at certain finance company locations; and the operation of three used automobile dealerships in 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 automobile club memberships from a company owned by related parties and commissions from sales of prepaid telephone and prepaid cellular services.
The Company’s loan portfolio consists of consumer sales finance contracts receivables and direct consumer loan receivables. Consumer sales finance contracts 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 consumer loan receivables are loans originated directly to customers for general use which are collateralized by existing automobiles or consumer goods, or are unsecured.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Financial Statement Presentation
The consolidated financial statements include the accounts of The Money Tree Inc. and its subsidiaries, all of which are wholly owned by The Money Tree Inc. All significant intercompany accounts and transactions are eliminated in consolidation. Subsequent events have been evaluated through the date the financial statements were issued.
In preparing the consolidated financial statements in conformity with U.S. generally accepted accounting principles (GAAP), management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the balance sheet and the reported amounts of revenues and expenses for the reporting period. Actual results could vary from those estimates. Significant estimates include the determination of the allowance for credit losses relating to the Company’s finance receivables. This evaluation is inherently subjective, and, as such, there is at least a reasonable possibility that recorded estimates could change by a material amount in the near term.
The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The operations of the Company in 2009 reflect continued pressure from an uncertain economy and the negative impact of the turmoil in the credit markets. For the years ended September 25, 2009 and 2008, respectively, the Company has incurred net losses of $11,951,193 and $11,966,366, and has had a deficiency in net interest margin (net loss from interest and fees after provision for credit losses) of $1,651,833 and $2,807,433 and, as of September 25, 2009 and 2008, had a shareholders’ deficit of $24,847,259 and $12,896,066, respectively. These factors among others raise substantial doubt about the Company’s ability to continue as a going concern for a reasonable period of time.
The Company has closely monitored and managed its liquidity position, understanding that this is of critical importance in the current economic environment; however, the current economic environment makes the cash forecast difficult to predict. The average term of our direct consumer loans is less than seven months and, therefore, if we anticipate having short-term cash flow problems, we could curtail the amount of funds we loan to our customers and focus on collections to increase cash flow. During the year ended September 25, 2009, the Company reduced its debt and related accrued interest by $10.9 million and tightened its risk management controls related to new loans, resulting in a decrease in loan originations of $15.0 million from the prior year. The Company’s continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations on a timely basis, originate new loans and to ultimately attain successful operations. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Cash and Cash Equivalents
Cash equivalents are short-term, highly liquid investments with original maturities of three months or less when purchased.
F-8
The Money Tree Inc. and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Finance Receivables
Finance receivables are stated at the amount of unpaid principal and accrued interest on certain loans where interest is recognized on an interest accrual basis. Finance receivables with precomputed finance charges are stated at the gross amount reduced by unearned interest, unearned insurance commissions and unearned discounts. In addition to these reductions, all finance receivables are stated net of the allowance for credit losses.
For loans acquired at a discount, the initial investment, which is accounted for in the aggregate, includes the amount paid to the seller plus any fees paid or less any fees received. The initial investment frequently differs from the related loan’s principal amount at the date of purchase. This difference is recognized as an adjustment of yield over the life of the loan. All other costs incurred in connection with acquiring loans, or committing to purchase loans are charged to expense as incurred.
Collectibility of the acquired loans is continually evaluated throughout the life of the acquired loan. If upon subsequent evaluation:
| • | the estimate of the total probable collections is more favorable, the amount of the discount to be amortized is adjusted accordingly. |
| • | the estimate of amounts probable of collection is less favorable, the loans may be considered to be impaired. |
| • | it is not possible to estimate the amount and timing of collection, then amortization ceases, and the cost-recovery method is implemented, which requires that all payments be applied to the principal amount of loan first and when that is reduced to zero, any additional amounts are recognized as income. |
Income Recognition
GAAP requires that an interest yield method be used to calculate income recognized on accounts which have precomputed finance charges. An interest yield method is used by the Company on each individual precomputed account to calculate income for ongoing accounts; however, state regulations often allow interest refunds to be made according to the Rule of 78s method for payoffs and renewals when customers take such actions on their accounts. Since the majority of the Company’s precomputed accounts are paid off or renewed prior to maturity, the result is that most precomputed accounts are adjusted to a Rule of 78s basis effective yield. Renewals and refinancings require that the borrower meet the underwriting guidelines similar to a new customer and, as a result, the interest rate and effective yield, as well as the other terms of the refinanced loans are at least as favorable to the lender as comparable loans with customers with similar risks who are not refinancing; therefore, all renewals and refinancings are treated as new loans. Further any unamortized net fees or costs and any prepayment penalties from the original loan are recognized in interest income when the new loan is granted. Rebates of interest, if applicable, are charged to interest income at the time of the new loan. The new loan is originated utilizing a portion of the proceeds to pay off the existing loan and the remaining portion advanced to the customer. The difference between income previously recognized under the interest yield method and the Rule of 78s method is recognized as an adjustment to interest income at the time of the rebate. Adjustments to interest income for the fiscal years ended September 25, 2009, 2008, and 2007 were $1,325,777, $2,227,772, and $2,504,285, respectively.
Recognition of interest income is suspended on accounts with precomputed interest charges when the account becomes more than 90 days delinquent. Accrual of interest income on other finance receivables is suspended when no payment has been made on an account for 60 days or more on a contractual basis. Loans are returned to active status and earning or accrual of income is resumed when all of the principal and interest amounts contractually due are brought current (one or more full contractual monthly payments are received and the account is less than 90 or 60 days contractually delinquent), at which time management believes future payments are reasonably assured. Interest accrued on loans charged off is reversed against interest income in the current period. Any amounts charged off that related to prior periods are not material for any period presented.
For loans acquired at a discount, the initial investment, which is accounted for in the aggregate, includes the amount paid to the seller plus any fees paid or less any fees received. The initial investment frequently differs from the related loan’s principal amount at the date of purchase. This difference is recognized as an adjustment of yield over the life of the loan. All other costs incurred in connection with acquiring loans, or committing to purchase loans are charged to expense as incurred.
F-9
The Money Tree Inc. and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The discount on an acquired loan is amortized over the period in which the payments are probable of collection. Discounts are amortized using the interest method.
The Company receives commissions from independent insurers for policies issued to finance customers. These insurance commissions are deferred and systematically amortized to income over the life of the related insurance contract since the insurance and lending activities are integral parts of the same transaction. Commissions for credit and non-credit insurance products are recognized over the risk period based on the method applicable to the insurance coverage’s risk exposure, which generally coincides with the term of the related loan contract. Insurance commissions for products that have constant risk exposure are earned using the straight-line method. Insurance commissions for insurance products with declining risk exposure or coverage are recognized using the Rule of 78s method that approximates the interest method. The auto and accidental death and dismemberment policies are earned over the policy’s predetermined schedule of coverage. The Company retains advance commissions that vary by products at the time the policies are written. Retrospective commissions are paid to the Company on an earned premium basis, net of claims and other expenses. Contingencies exist only to the extent of refunds due on early termination of policies that exceed the amount of advanced commissions retained. These refunds are netted against the gross amount of premiums written.
Commissions earned from Interstate Motor Club, Inc., a related party, on the sale of motor club memberships are recognized at the time the membership is sold. The Company has no obligations related to refund of membership fees on cancellations. Claims filed by members are the responsibility of the issuer of the membership.
Retail sales include sales of used automobiles, home furnishings, electronic equipment, and appliances. Warranties on selected used vehicles are available as an add-on item through an unaffiliated warranty company. Home furnishings, electronic equipment and appliances carry their own manufacturer’s warranties. Retail sales revenues are recognized at the time of sale when title and risk of loss is transferred to the customer. Warranty revenues are recognized at the time of sale.
Loan Origination Fees and Costs
Non-refundable loan origination fees and certain direct origination costs are deferred and recognized as an adjustment of the loan yield over the contractual life of the related loan. Unamortized amounts are recognized in income at the time loans are renewed or paid in full.
Credit Losses
The allowance for credit losses is determined by several factors. Recent historical loss experience is the primary factor in the determination of the allowance for credit losses. An evaluation is performed to compare the amount of accounts charged off, net of recoveries of such accounts, in relation to the average net outstanding finance receivables for the period being reviewed. Further, the Company adjusts the allowance to reflect any enhancement or deterioration in the quality of the loan portfolio, primarily based on a review of loan delinquencies. Management believes this evaluation process provides an adequate allowance for credit losses due to the Company’s loan portfolio in the consumer segment consisting of a large number of smaller balance homogeneous loans. Also, a review of loans that comprised the automotive segment is performed monthly to determine if the allowance should be adjusted based on possible exposure related to collectibility of these loans. In accordance with the auto sales contract, the Company may repossess the collateralized vehicle after 30 days without payment to protect the vehicle’s integrity and to minimize the Company’s loss. Management routinely evaluates the inherent risks and change in the composition of the loan portfolio based on their extensive experience in the consumer finance industry in consideration of estimating the adequacy of the allowance. Also considered are delinquency trends, economic conditions, and industry factors. In most instances, an insurance product is purchased in conjunction with the loan. In the event of the death or injury of the customer or damage to pledged collateral, the proceeds from the claims would generally pay off or continue payments on the loan, thereby negating any consideration in the allowance determination. In other instances, a non-filing or non-recording insurance policy is made in conjunction with the loan, (see description of non-filing insurance below). Proceeds from these claims are netted against charge-offs as recoveries in the determination of the allowance. Provisions for credit losses are charged to income in amounts sufficient to maintain an allowance for credit losses at a level considered adequate to cover the probable loss inherent in the finance receivable portfolio. Each month, regional management reviews potential accounts for charge-off with local branch management. A comprehensive charge-off checklist is utilized to assist management in verifying that all collection activity and procedures have been followed. Once completed, it is submitted to senior management for final review.
F-10
The Money Tree Inc. and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company’s charge-off policy requires that balances be charged off when they are 180 days since last payment, unless upon review by management, the balance is deemed collectible by garnishment of wages, bankruptcy proceedings or other collection methods. Also, an account may be charged off if it is determined by senior management that the account is uncollectible due to certain circumstances, as in the death of the customer who did not elect to purchase credit life insurance for the loan contract or in situations when repossession and sale of collateral occurs and the balance is not recoverable through the legal process or other methods. Loan balances charged off exclude accrued interest, which is reversed against interest income. Accounts that are to be disbursed under a plan of bankruptcy are monitored separately from other accounts. The charge-off policy generally coincides with the bankruptcy plan period while payments are scheduled under the loan. Direct consumer loans are charged off net of proceeds from non-filing insurance (see discussion below). For consumer sales finance and motor vehicle installment sales contracts, the Company is granted a security interest in the collateral for which the loan was made. In the event of default, the collateral on such contracts may be repossessed at 31 to 60 days delinquency (roughly two payments). After repossession, the collateral is sold according to UCC-9 disposition of collateral rules and the proceeds of the sale are applied to the customer’s account. If the likelihood of collection on a judgment is favorable, a suit is filed for the deficiency balance remaining and, if granted, garnishment and/or execution follows for collection of the balance. If the collateral is not conducive for repossession because of it being in unmarketable condition, judgment is sought without repossession and sale of collateral. If collection on a judgment is not favorable, the balance of the account is charged off.
Non-file insurance
Non-file premiums are charged on direct consumer loans at inception and renewal in lieu of recording and perfecting the Company’s security interest in the assets pledged on such loans and are remitted to a third-party insurance company for non-filing insurance coverage. Non-file insurance is not available for motor vehicle installment sales contracts and consumer sales finance contracts. Certain losses related to such direct consumer loans, which are not recoverable through life, accident and health, property, or unemployment insurance claims, are reimbursed through non-filing insurance claims subject to policy limitations. These limitations include: no loans may exceed $5,000 to any one customer; no loans may exceed 36 months in term; and no fraudulent loans. When accounts covered by non-filing insurance are deemed uncollectible, they are charged off and the claim filed with the insurance carrier, usually within 30 days. Proof of coverage and documentation of collection activity are submitted with the claim. Recoveries from non-filing insurance are reflected in the accompanying consolidated financial statements as a reduction in credit losses and receivables related to such claim recoveries are included in other receivables (see Note 3).
Inventory
Inventory is valued at the lower of cost (first-in, first-out basis) or market. Inventory generally consists of home furnishings, electronics and used automobiles.
Property and equipment, net
Property and equipment are recorded at cost. Depreciation is provided by the straight-line method over the estimated useful lives of the assets ranging from 5 to 10 years. Leasehold improvements are recorded at cost and amortized using the straight-line method over the shorter of the estimated useful life of the assets or the lease term. Such amortization is included in depreciation expense in the accompanying consolidated statements of cash flows.
Goodwill
During the years ended September 25, 2008 and 2007 in conjunction with the annual goodwill impairment testing process, the Company recorded impairment charges in the amount of $991,243 and $365,824, respectively. No goodwill was recorded as of September 25, 2009 and 2008.
F-11
The Money Tree Inc. and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Impairment of Long-Lived Assets (other than Goodwill)
The Company periodically evaluates whether events or circumstances have occurred that indicate the carrying amount of long-lived assets and certain identifiable intangible assets may warrant revision or may not be recoverable. When factors indicate that these long-lived assets and certain identifiable intangible assets should be evaluated for possible impairment, the Company assesses the recoverability by determining whether the carrying value of such assets will be recovered through the future undiscounted cash flows expected from the use of the asset and its eventual disposition. Amounts paid for covenants not to compete are amortized on a straight-line basis over a period of seven years. In management’s opinion, there has been no impairment of value of long-lived assets and certain identifiable intangible assets at September 25, 2009 and 2008.
Income Taxes
The Company provides for income taxes under the asset and liability method. Under this method, deferred income taxes are recognized for expected future tax consequences of temporary differences between financial statement carrying amounts and the tax bases of existing assets and liabilities using tax rates expected in the years in which those temporary differences are expected to be recovered or settled. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
Governmental Regulation
The Company is subject to various state and federal laws and regulations which, among other things, impose limits on interest rates, other charges, insurance premiums, and require licensing and qualification.
Fair Value of Financial Instruments
The following methods and assumptions are used by the Company in estimating fair values for financial instruments:
Cash and cash equivalents. Cash consists of cash on hand and with banks, either in commercial accounts, or money market accounts. The carrying value of cash and cash equivalents approximates fair value due to the relatively short period between the acquisition of the instruments and their expected realization.
Finance receivables. Finance receivables are reported net of unearned interest, insurance commissions, discounts and allowances for credit losses, which are considered short-term because the average life is approximately five months, assuming prepayments. The discounted cash flows of the loans approximate the net finance receivables.
Subordinated debentures. Fair value approximates $76,372,000 compared to the carrying value of $73,603,000 based on the calculation of the present value of the expected future cash flows associated with the debentures. The debenture holder also may redeem the debenture for 100 percent of the principal on demand subject to a 90-day interest penalty.
Demand notes. The carrying value approximates fair value due to rights to withdraw the balance at any time.
Senior debt. The carrying value of the Company’s senior debt approximates fair value due to the relatively short period of time from origination of the instruments and their expected payment.
Advertising Costs
Advertising costs are expensed as incurred. Advertising expenses totaled $412,823, $616,055, and $704,972 for the years ended September 25, 2009, 2008, and 2007, respectively.
Allocation of Expenses to Related Party
Employees of The Money Tree Inc. perform services in support of Interstate Motor Club, an affiliate of the Company. The Company assesses Interstate Motor Club an administration fee that approximates the cost of support provided to Interstate Motor Club.
Net Income (loss) Per Common Share
Net income (loss) per common share is computed based upon weighted–average common shares outstanding. There are no potentially dilutive securities issued or outstanding.
Reclassifications
Certain reclassifications have been made to the prior period financial statements to conform with the method of presentation used in 2009.
F-12
The Money Tree Inc. and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recent Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (FASB) issued new guidance effective for financial statements issued for periods ending after September 15, 2009. “The FASB Accounting Standards Codification” (FASB ASC) establishes the source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date, the FASB ASC superseded all then-existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the ASC became non-authoritative. Our adoption of this guidance did not have a material impact on our consolidated financial statements.
In June 2009, the FASB issued revised guidance to improve the reporting for the transfer of financial assets resulting from (1) practices that have developed since the issuance of previous guidance that are not consistent with the original intent and key requirements of that guidance and (2) concerns of financial statement users that many of the financial assets (and related obligations) that have been derecognized should continue to be reported in the financial statements of transferors. These revisions to FASB ASC 860, “Transfers and Servicing,” must be applied as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. Earlier application is prohibited. We do not expect that the adoption of this guidance will have a material impact on our consolidated financial statements.
In June 2009, the FASB issued revised guidance to improve financial reporting by enterprises involved with variable interest entities and to provide more relevant and reliable information to users of financial statements. These revisions to FASB ASC 810, “Consolidation,” is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. We do not expect that the adoption of this guidance will have a material impact on our consolidated financial statements.
In April 2009, the FASB issued revised guidance for recognizing and measuring pre-acquisition contingencies in a business combination. These revisions, which are a part of FASB ASC 805, “Business Combinations,” address application issues raised by preparers, auditors, and members of the legal profession on initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. This guidance is effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. This guidance is not expected to have a material impact on our consolidated financial statements.
In May 2008, the FASB issued revised guidance for accounting for financial guarantee insurance contracts. These revisions, which are a part of FASB ASC 944, “Financial Services-Insurance,” clarify the application of GAAP to certain financial guarantee insurance contracts included within the scope of the guidance. The guidance is effective for financial statements issued for fiscal years beginning after December 15, 2008, and all interim periods within those fiscal years. We do not expect this guidance will have a material impact on our consolidated financial statements.
In March 2008, the FASB issued new guidance concerning “Disclosures about Derivative Instruments and Hedging Activities,” which is included in FASB ASC 815. This guidance requires enhanced disclosures about an entity’s derivative and hedging activities and thereby improves the transparency of financial reporting. This guidance is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. This guidance encourages, but does not require, comparative disclosures for earlier periods at initial adoption. Management does not expect this guidance to have a material impact on our consolidated financial statements.
In December 2007, the FASB issued new guidance for the accounting of noncontrolling interests. This new guidance, which is part of FASB ASC 810, “Consolidations,” establishes accounting and reporting standards for the noncontrolling (minority) interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. We have not yet determined the impact, if any, that this guidance will have on its consolidated financial statements. This guidance is effective for our fiscal year beginning September 26, 2009.
F-13
The Money Tree Inc. and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In December 2007, the FASB issued revised guidance for the accounting of business combinations. These revisions to FASB ASC 805, “Business Combinations,” require that the acquisition method of accounting (previously the purchase method) be used for all business combinations and that an acquirer be identified for each business combination. This guidance also establishes principles and requirements for how the acquirer: a) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree; b) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and c) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The guidance will apply prospectively to business combinations for which the acquisition date is on or after September 26, 2009. While we have not yet evaluated this statement for the impact, if any, that this guidance will have on its consolidated financial statements, we will be required to expense costs related to any acquisitions after September 25, 2009.
In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)” (SFAS 167), which has not been codified. SFAS 167 amends FASB Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities” (FIN 46(R)) to require an enterprise to qualitatively assess the determination of the primary beneficiary of a variable interest entity (VIE) based on whether the entity (1) has the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and (2) has the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE. Also, SFAS 167 requires an ongoing reconsideration of the primary beneficiary, and amends the events that trigger a reassessment of whether an entity is a VIE. Enhanced disclosures are also required to provide information about an enterprise’s involvement in a VIE. SFAS No. 167 is effective for interim and annual reporting periods ending after November 15, 2009. We are currently evaluating the impact, if any, this standard will have on our consolidated financial statements.
NOTE 3 – FINANCE RECEIVABLES AND ALLOWANCE FOR CREDIT LOSSES
Finance receivables consisted of the following:
September 25, | 2009 | 2008 | ||||||
Finance receivables, direct consumer | $ | 29,019,345 | $ | 41,654,302 | ||||
Finance receivables, consumer sales finance | 15,176,373 | 16,793,743 | ||||||
Finance receivables, auto sales finance | 30,151,923 | 30,707,329 | ||||||
Total gross finance receivables | 74,347,641 | 89,155,374 | ||||||
Unearned insurance commissions | (1,996,614 | ) | (2,793,425 | ) | ||||
Unearned finance charges | (9,243,875 | ) | (10,621,034 | ) | ||||
Accrued interest receivable | 608,209 | 865,885 | ||||||
Finance receivables, before allowance for credit losses | 63,715,361 | 76,606,800 | ||||||
Allowance for credit losses | (7,432,480 | ) | (8,876,327 | ) | ||||
Finance receivables, net | $ | 56,282,881 | $ | 67,730,473 | ||||
F-14
The Money Tree Inc. and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 3 – FINANCE RECEIVABLES AND ALLOWANCE FOR CREDIT LOSSES (CONTINUED)
An analysis of the allowance for credit losses is as follows:
Years ended September 25, | 2009 | 2008 | 2007 | |||||||||
Beginning balance | $ | 8,876,327 | $ | 3,710,679 | $ | 3,139,359 | ||||||
Provisions for credit losses | 9,629,722 | 13,812,192 | 4,982,494 | |||||||||
Charge-offs, net of insurance recoveries | (11,367,962 | ) | (8,825,129 | ) | (4,583,650 | ) | ||||||
Recoveries | 231,604 | 196,208 | 181,218 | |||||||||
Other | 62,789 | (17,623 | ) | (8,742 | ) | |||||||
Ending balance | $ | 7,432,480 | $ | 8,876,327 | $ | 3,710,679 | ||||||
It is the Company’s experience that a substantial portion of the loan portfolio generally is renewed or repaid before contractual maturity dates. During the years ended September 25, 2009, 2008, and 2007, cash collections of receivables (including principal, renewals and finance charges since finance receivables are recorded and tracked at their gross precomputed amount) totaled $76,482,092, $87,883,004, and $95,928,382, respectively, and these cash collections were 104 percent, 102 percent, and 102 percent of average gross finance receivable balances (excluding accounts in bankruptcy), respectively.
Finance receivables in a non-accrual status, including accounts in bankruptcy, totaled $14,477,879, $17,778,974, and $20,132,798 at September 25, 2009, 2008 and 2007, respectively. Because of their delinquency status, the Company considers these loans to be impaired. Consequently, the amount of loans in non-accrual status represents the Company’s investment in impaired loans. Since the Company’s portfolio of finance receivables is comprised primarily of small balance, homogenous loans, individual impairment is not performed, but rather evaluated as a group. The allowance for credit losses related to the entire portfolio of loans was $7,432,480, $8,876,327, and $3,710,679 at September 25, 2009, 2008 and 2007, respectively.
The Company ceases the accrual of interest income on interest-bearing finance receivables when no payment has been made for 60 days or more. Recognition of interest income suspends at 90 days contractual delinquency on accounts with precomputed interest charges. Suspended interest totaled $916,802, $1,167,918, and $1,149,545 for the years ended September 25, 2009, 2008, and 2007, respectively.
Finance receivables charged off are net of proceeds from non-filing insurance. The Company purchases non-filing insurance on certain loans in lieu of filing a Uniform Commercial Code lien. Premiums collected are remitted to the insurance company to cover possible losses from charge-offs as a result of not recording these liens. Amounts recovered from non-filing insurance claims totaled $2,795,483, $2,543,460, and $2,569,924, for the years ended September 25, 2009, 2008, and 2007, respectively. If this insurance product was discontinued, these proceeds would not be available to offset future credit losses and additional provisions for credit losses would be required. Amounts receivable from the insurance company related to non-filing insurance claims were $421,132 and $514,897 at September 25, 2009 and 2008, respectively, and are included in other receivables in the accompanying consolidated balance sheets.
NOTE 4 – INVENTORY
Inventory consisted of the following:
September 25, | 2009 | 2008 | ||||
Used automobiles | $ | 1,159,473 | $ | 1,529,078 | ||
Home furnishings and electronics | 1,042,493 | 1,637,943 | ||||
Total inventory | $ | 2,201,966 | $ | 3,167,021 | ||
F-15
The Money Tree Inc. and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 5 – PROPERTY AND EQUIPMENT, NET
Property and equipment consisted of the following:
September 25, | 2009 | 2008 | ||||||
Furniture and equipment | $ | 6,025,876 | $ | 6,978,418 | ||||
Airplane | 174,000 | 609,155 | ||||||
Automotive equipment | 550,181 | 543,154 | ||||||
Leasehold improvements | 2,833,393 | 2,698,008 | ||||||
| 9,583,450 | 10,828,735 | |||||||
Accumulated depreciation | (5,356,895 | ) | (5,922,546 | ) | ||||
Total property and equipment, net | $ | 4,226,555 | $ | 4,906,189 | ||||
Depreciation expense totaled $880,119, $793,776, and $794,418, for the years ended September 25, 2009, 2008 and 2007, respectively.
NOTE 6 – ACCOUNTS PAYABLE AND OTHER ACCRUED LIABILITIES
Accounts payable and other accrued liabilities consisted of the following:
September 25, | 2009 | 2008 | ||||
Accounts payable | $ | 150,144 | $ | 271,815 | ||
Insurance payable, loan related | 414,470 | 639,167 | ||||
Accrued payroll | 472,772 | 507,484 | ||||
Accrued payroll taxes | 35,642 | 38,420 | ||||
Money orders | — | 530,888 | ||||
Sales tax payable | 1,072,007 | 1,210,579 | ||||
Other liabilities | 344,234 | 80,517 | ||||
Total accounts payable and other accrued liabilities | $ | 2,489,269 | $ | 3,278,870 | ||
F-16
The Money Tree Inc. and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 7 – DEBT
Debt consisted of the following:
September 25, | 2009 | 2008 | ||||
Senior debt: due to banks and commercial finance companies, collateralized by inventory and certain automotive equipment, and certain notes include personal guarantees of a shareholder, interest at prime plus 2%, due in 2010. The carrying values of the collateral at September 25, 2009 and 2008 were $362,206 and $ 725,910, respectively. | $ | 326,517 | $ | 694,890 | ||
Total senior debt | 326,517 | 694,890 | ||||
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 2013. | 30,730,844 | 45,020,194 | ||||
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 2013. | 42,871,977 | 37,189,017 | ||||
Total subordinated debentures | 73,602,821 | 82,209,211 | ||||
Demand notes issued by The Money Tree of Georgia Inc.: due to individuals, unsecured, interest at 3.0% to 4.0%, due on demand. | 441,747 | 613,442 | ||||
Demand notes issued by The Money Tree Inc.: due to individuals, unsecured, interest at 3.0% to 4.0%, due on demand. | 2,704,960 | 3,044,718 | ||||
Total demand notes | 3,146,707 | 3,658,160 | ||||
Total debt | $ | 77,076,045 | $ | 86,562,261 | ||
There are no pre-payment penalties on the senior debt or subordinated debt. At the Company’s discretion, these debt obligations could be satisfied by paying the outstanding principal balance plus accrued interest.
Effective December 25, 2005, the Company terminated the sale of debentures and demand notes through its subsidiary, The Money Tree of Georgia Inc. and commenced the sale of debentures and demand notes from the parent company.
Interest on the debentures is earned daily and is payable at any time upon request of the holder. Interest on the demand notes is payable only at the time demand is made by the holder for repayment of the note.
F-17
The Money Tree Inc. and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 7 – DEBT (CONTINUED)
The debentures may be redeemed at the holder’s option at the end of the interest adjustment period selected (one year, two years or four years) or at maturity. Redemption prior to maturity or interest adjustment period is at the Company’s discretion and subject to a 90 day interest penalty. Demand notes may be redeemed by holders at any time. The Company intends to meet its obligation to repay such debt with cash generated from sales of the debentures and demand notes, cash on hand, income from operations or working capital.
Our obligations with respect to the debentures and demand notes are governed by the terms of indenture agreements with U.S. Bank National Association, as trustee. Under the indentures, in addition to other possible events of default, if we fail to make a payment of principal or interest under any debenture or demand note and this failure is not cured within 30 days, we will be deemed in default. Upon such a default, the trustee or holders of 25% in principal of the outstanding debentures or demand notes could declare all principal and accrued interest immediately due and payable. Since our total assets do not cover these debt payment obligations, we would most likely be unable to make all payments under the debentures or demand notes when due, and we might be forced to cease our operations.
Aggregate debt maturities at September 25, 2009 are as follows:
| 2010 | 2011 | 2012 | 2013 | Total | |||||||||||
Senior debt, banks and finance companies | $ | 326,517 | $ | — | $ | — | $ | — | $ | 326,517 | |||||
Variable rate subordinated debentures | 20,296,448 | 15,974,606 | 20,840,806 | 16,490,961 | 73,602,821 | ||||||||||
Demand notes | 3,146,707 | — | — | — | 3,146,707 | ||||||||||
| $ | 23,769,672 | $ | 15,974,606 | $ | 20,840,806 | $ | 16,490,961 | $ | 77,076,045 | ||||||
Interest expense totaled $7,611,185, $8,275,310, and $8,025,969, for the years ended September 25, 2009, 2008 and 2007, respectively.
NOTE 8 – COMMON STOCK
The common stock of the Company is comprised of the following: Class A voting shares, no par value, 500,000 authorized, 2,686 shares issued and outstanding; and Class B non-voting shares, no par value, 1,500,000 authorized, 26,860 shares issued and outstanding.
NOTE 9 – INCOME TAXES
The Company accounts for income taxes in accordance with ASC 740, “Income Taxes”; accordingly deferred income taxes are provided at the enacted marginal rates on the difference between the financial statement and income taxes bases of assets and liabilities. Deferred income tax provisions or benefits are based on the change in the deferred tax assets and liabilities from period to period.
F-18
The Money Tree Inc. and Subsidiaries
Notes to Consolidated Financial Statements
The provision for income taxes for the years ended September 25, 2009, 2008 and 2007 consisted of the following:
Years ended September 25, | 2009 | 2008 | 2007 | |||||||||
Current tax expense (benefit) | ||||||||||||
Federal | $ | (437,533 | ) | $ | (626,984 | ) | $ | 393,010 | ||||
State | — | (55,210 | ) | 71,326 | ||||||||
Total current | (437,533 | ) | (682,194 | ) | 464,336 | |||||||
Deferred income tax expense (benefit) | ||||||||||||
Federal | (3,492,000 | ) | (3,050,000 | ) | (297,000 | ) | ||||||
State | (744,000 | ) | (590,000 | ) | (52,588 | ) | ||||||
(Decrease) increase in valuation allowance | 4,236,000 | 4,850,000 | (215,412 | ) | ||||||||
Total deferred | — | 1,210,000 | (565,000 | ) | ||||||||
Total provision (benefit) | $ | (437,533 | ) | $ | 527,806 | $ | (100,664 | ) | ||||
The income tax provision differs from the amount of income tax determined by applying the U.S. federal rate of 34% to pretax income for the years ended September 25, 2009, 2008 and 2007 due to the following:
Years ended September 25, | 2009 | 2008 | 2007 | |||||||||
Income tax expense at Federal statutory income tax rates | $ | (4,212,167 | ) | $ | (3,889,111 | ) | $ | 93,491 | ||||
Increase (decrease) in income taxes resulting from: | ||||||||||||
State income taxes, net of federal tax benefit | (490,594 | ) | (452,967 | ) | 10,889 | |||||||
Non-deductible expenses | 23,807 | 15,966 | 19,207 | |||||||||
Increase (decrease) in valuation allowance | 4,236,000 | 4,850,000 | (215,412 | ) | ||||||||
Other | 5,421 | 3,918 | (8,839 | ) | ||||||||
Total provision (benefit) | $ | (437,533 | ) | $ | 527,806 | $ | (100,664 | ) | ||||
Net deferred tax assets consist of the following components:
September 25, | 2009 | 2008 | ||||||
Deferred tax liability: | ||||||||
Property and equipment | $ | 472,000 | $ | 564,000 | ||||
| 472,000 | 564,000 | |||||||
Deferred tax assets: | ||||||||
Allowance for credit losses | 2,973,000 | 3,551,000 | ||||||
Net operating loss carryforwards | 6,888,000 | 1,918,000 | ||||||
Interest income | 154,000 | 86,000 | ||||||
Insurance commissions | 695,000 | 949,000 | ||||||
Goodwill and intangible assets | 352,000 | 414,000 | ||||||
| 11,062,000 | 6,918,000 | |||||||
Net deferred tax assets | 10,590,000 | 6,354,000 | ||||||
Valuation allowance | (10,590,000 | ) | (6,354,000 | ) | ||||
Net deferred tax assets, less valuation allowance | $ | — | $ | — | ||||
F-19
The Money Tree Inc. and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 9 – INCOME TAXES (CONTINUED)
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income and tax planning strategies in making this assessment. In order to fully realize the deferred tax asset, the Company will need to generate future taxable income prior to the expiration of the deferred tax assets governed by the tax code.
At the end of the fiscal year 2009, the Company’s statements of operations reflected cumulative losses in recent years, as that term is used in ASC 740. 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 ASC 740. Accordingly, the Company increased the valuation allowance to fully offset the net deferred tax assets.
The Company has available at September 25, 2009, unused Federal operating loss and charitable carryforwards of $15,997,023 and unused state operating loss and charitable carryforwards of $24,141,956 that expire in various amounts in years from 2010 through 2029.
NOTE 10 – RELATED PARTY TRANSACTIONS
Related party transactions and balances consisted of the following:
As of, or for the years ended September 25, | 2009 | 2008 | 2007 | ||||||
Interest expense, junior subordinated debt, related parties | $ | — | $ | — | $ | 6,941 | |||
Rent expense, companies controlled by shareholders | 2,180,780 | 2,150,371 | 2,033,291 | ||||||
Motor club commissions earned by The Money Tree Inc. and Subsidiaries represents sales of motor club memberships with the Company acting as agent for an affiliate owned by a shareholder and other related parties | 1,601,482 | 1,844,341 | 1,946,476 | ||||||
Income tax service agreement income from affiliated company owned by a shareholder and other related parties | — | — | 3,310 | ||||||
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 and also is the holder of the majority of the Company’s common stock. A Company shareholder 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 leases, and then subleases to the Company, another 53 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. A Company shareholder is the president of Martin Investments, Inc., the company which ultimately controls Martin Sublease LLC.
The Company receives commissions from sales of motor club memberships from an entity, owned by the Company’s President and late founder’s three children (of which one is a Director) pursuant to an Agency Sales Agreement.
F-20
The Money Tree Inc. and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 11 – OPERATING LEASES
The Company leases office locations under various non-cancelable agreements that require various minimum annual rentals.
Future minimum rental commitments at September 25, 2009 were as follows:
Year Ending September 25 | Companies controlled by related parties | Other | Total | ||||||
2010 | $ | 1,948,032 | $ | 804,596 | $ | 2,752,628 | |||
2011 | 1,326,471 | 651,148 | 1,977,619 | ||||||
2012 | 587,607 | 400,311 | 987,918 | ||||||
2013 | 309,905 | 291,762 | 601,667 | ||||||
2014 | 216,865 | 155,653 | 372,518 | ||||||
Thereafter | 11,600 | 96,549 | 108,149 | ||||||
| $ | 4,400,480 | $ | 2,400,019 | $ | 6,800,499 | ||||
Substantially all of the lease agreements are for a five-year term with one or more renewal options at end of the initial term. Rental expense totaled $2,981,593, $2,891,508, and $2,818,172, for the years ended September 25, 2009, 2008, and 2007, respectively.
NOTE 12 – CONCENTRATION OF CREDIT RISK
The Company’s portfolio of finance receivables is with consumers living throughout Georgia, Louisiana, Alabama and Florida, and consequently such consumers’ ability to honor their installment contracts may be affected by economic conditions in these areas. On sales finance contracts and certain other loans, the Company has access to any collateral supporting these receivables through repossession. Finance receivables are collateralized by personal property, automobiles, real property and mobile homes. On unsecured loans, a non-filing insurance policy is generally obtained so that in the event of default, a claim can be filed in order to recover the unpaid balance.
The Company maintains demand deposits with financial institutions. The Company’s policy is to maintain its cash balances at reputable financial institutions insured by the Federal Deposit Insurance Corporation (FDIC), which provides $250,000 of insurance coverage on each customer’s cash balances. At times during the years ended September 25, 2009 and 2008 the Company’s cash balances exceeded the FDIC insured coverage at certain financial institutions.
NOTE 13 – RETIREMENT PLAN
The Company has a 401(k) retirement plan and trust. The plan covers substantially all employees, subject to attaining age 21 and completing 1 year of service with the Company. Under the plan, an employee may contribute up to 15 percent of his or her compensation, with the Company matching 25 percent of these contributions up to a maximum of 6 percent of the employee’s compensation.
Retirement plan expense totaled $44,851, $47,337, and $32,946, for the years ended September 25, 2009, 2008, and 2007, respectively.
NOTE 14 – 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 consolidated financial statements.
F-21
The Money Tree Inc. and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 15 – DISCRETIONARY BONUSES
From time to time, the Company pays discretionary bonuses to its employees. The amount of these bonuses charged to operating expenses was $2,295,975, $2,243,839, and $2,075,668, for the years ended September 25, 2009, 2008, and 2007, respectively.
NOTE 16 – SEGMENT FINANCIAL INFORMATION
ASC 280, “Segment Reporting”, requires companies to determine segments based on how management makes decisions about allocating resources to segments and measuring their performance.
The Company has two reportable segments: Consumer Finance and Sales and also 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 102 offices that make up this segment are similar in size and in the market 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, Columbus and Dublin, Georgia 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. Provisions for income taxes are not allocated to segments.
F-22
The Money Tree Inc. and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 16 – SEGMENT FINANCIAL INFORMATION (CONTINUED)
Year ended September 25, 2009 | Consumer Finance & Sales Division | Automotive Finance & Sales Division | Total Segments | |||||||||
| (In Thousands) | ||||||||||||
Interest and fee income | $ | 12,585 | $ | 3,004 | $ | 15,589 | ||||||
Interest expense | (5,288 | ) | (2,323 | ) | (7,611 | ) | ||||||
Net interest and fee income before provision for credit losses | 7,297 | 681 | 7,978 | |||||||||
Provision for credit losses | (7,776 | ) | (1,854 | ) | (9,630 | ) | ||||||
Net interest and fee loss | (479 | ) | (1,173 | ) | (1,652 | ) | ||||||
Insurance commissions | 8,136 | 218 | 8,354 | |||||||||
Commissions from sale of motor club memberships from affiliated company | 1,601 | — | 1,601 | |||||||||
Delinquency fees | 1,437 | 124 | 1,561 | |||||||||
Other income | 510 | 21 | 531 | |||||||||
Net revenues (loss) before retail sales | 11,205 | (810 | ) | 10,395 | ||||||||
Gross margin on retail sales | 2,911 | 2,742 | 5,653 | |||||||||
Segment operating expenses | (24,706 | ) | (3,720 | ) | (28,426 | ) | ||||||
Segment operating loss | $ | (10,590 | ) | $ | (1,788 | ) | $ | (12,378 | ) | |||
Depreciation (included in segment operating expenses) | $ | 514 | $ | 75 | $ | 589 | ||||||
Total segment assets | $ | 39,019 | $ | 25,236 | $ | 64,255 | ||||||
Capital expenditures | $ | 338 | $ | 13 | $ | 351 | ||||||
RECONCILIATION: | 2009 | ||
Depreciation: | |||
Segment depreciation | $ | 589 | |
Depreciation at corporate level | 291 | ||
Total depreciation | $ | 880 | |
Total assets for reportable segments | $ | 64,255 | |
Cash and cash equivalents at corporate level | 345 | ||
Other receivables at corporate level | 717 | ||
Property and equipment, net at corporate level | 1,033 | ||
Other assets at corporate level | 1,831 | ||
Consolidated assets | $ | 68,181 | |
Total capital expenditures for reportable segments | $ | 351 | |
Capital expenditures at corporate level | 356 | ||
Total capital expenditures | $ | 707 | |
F-23
The Money Tree Inc. and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 16 – SEGMENT FINANCIAL INFORMATION (CONTINUED)
Year ended September 25, 2008 | Consumer Finance & Sales Division | Automotive Finance & Sales Division | Total Segments | |||||||||
| (In Thousands) | ||||||||||||
Interest and fee income | $ | 15,904 | $ | 3,376 | $ | 19,280 | ||||||
Interest expense | (5,974 | ) | (2,301 | ) | (8,275 | ) | ||||||
Net interest and fee income before provision for credit losses | 9,930 | 1,075 | 11,005 | |||||||||
Provision for credit losses | (12,260 | ) | (1,552 | ) | (13,812 | ) | ||||||
Net interest and fee loss | (2,330 | ) | (477 | ) | (2,807 | ) | ||||||
Insurance commissions | 9,084 | 531 | 9,615 | |||||||||
Commissions from sale of motor club memberships from affiliated company | 1,844 | — | 1,844 | |||||||||
Delinquency fees | 1,616 | 104 | 1,720 | |||||||||
Other income | 625 | 22 | 647 | |||||||||
Net revenues before retail sales | 10,839 | 180 | 11,019 | |||||||||
Gross margin on retail sales | 3,286 | 2,747 | 6,033 | |||||||||
Segment operating expenses | (24,769 | ) | (3,701 | ) | (28,470 | ) | ||||||
Segment operating loss | $ | (10,644 | ) | $ | (774 | ) | $ | (11,418 | ) | |||
Depreciation (included in segment operating expenses) | $ | 389 | $ | 90 | $ | 479 | ||||||
Total segment assets | $ | 51,990 | $ | 26,451 | $ | 78,441 | ||||||
Capital expenditures | $ | 1,132 | $ | 13 | $ | 1,145 | ||||||
RECONCILIATION: | 2008 | ||
Depreciation: | |||
Segment depreciation | $ | 479 | |
Depreciation at corporate level | 314 | ||
Total depreciation | $ | 793 | |
Total assets for reportable segments | $ | 78,441 | |
Cash and cash equivalents at corporate level | 8,527 | ||
Other receivables at corporate level | 957 | ||
Property and equipment, net at corporate level | 1,377 | ||
Other assets at corporate level | 2,498 | ||
Consolidated assets | $ | 91,800 | |
Total capital expenditures for reportable segments | $ | 1,145 | |
Capital expenditures at corporate level | 441 | ||
Total capital expenditures | $ | 1,586 | |
F-24
The Money Tree Inc. and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 16 – SEGMENT FINANCIAL INFORMATION (CONTINUED)
Year ended September 25, 2007 | Consumer Finance & Sales Division | Automotive Finance & Sales Division | Total Segments | |||||||||
| (In Thousands) | ||||||||||||
Interest and fee income | $ | 16,064 | $ | 3,417 | $ | 19,481 | ||||||
Interest expense | (5,708 | ) | (2,318 | ) | (8,026 | ) | ||||||
Net interest and fee income before provision for credit losses | 10,356 | 1,099 | 11,455 | |||||||||
Provision for credit losses | (3,712 | ) | (1,270 | ) | (4,982 | ) | ||||||
Net interest and fee income (loss) | 6,644 | (171 | ) | 6,473 | ||||||||
Insurance commissions | 9,569 | 551 | 10,120 | |||||||||
Commissions from sale of motor club memberships from affiliated company | 1,946 | — | 1,946 | |||||||||
Delinquency fees | 1,713 | 63 | 1,776 | |||||||||
Income tax service agreement from affiliated company | 3 | — | 3 | |||||||||
Other income | 731 | 17 | 748 | |||||||||
Net revenues before retail sales | 20,606 | 460 | 21,066 | |||||||||
Gross margin on retail sales | 2,986 | 3,846 | 6,832 | |||||||||
Segment operating expenses | (23,639 | ) | (3,965 | ) | (27,604 | ) | ||||||
Segment operating profit (loss) | $ | (47 | ) | $ | 341 | $ | 294 | |||||
Depreciation (included in segment operating expenses) | $ | 423 | $ | 103 | $ | 526 | ||||||
Total segment assets | $ | 62,836 | $ | 28,077 | $ | 90,913 | ||||||
Capital expenditures | $ | 173 | $ | 76 | $ | 249 | ||||||
RECONCILIATION: | 2007 | ||
Depreciation: | |||
Segment depreciation | $ | 526 | |
Depreciation at corporate level | 268 | ||
Total depreciation | $ | 794 | |
Total assets for reportable segments | $ | 90,913 | |
Cash and cash equivalents at corporate level | 9,762 | ||
Other receivables at corporate level | 861 | ||
Employee receivables at corporate level | 2 | ||
Property and equipment, net at corporate level | 1,286 | ||
Deferred income taxes at corporate level | 1,210 | ||
Other assets at corporate level | 1,750 | ||
Consolidated assets | $ | 105,784 | |
Total capital expenditures for reportable segments | $ | 249 | |
Capital expenditures at corporate level | 784 | ||
Total capital expenditures | $ | 1,033 | |
F-25
The Money Tree Inc. and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 17 – SUBSEQUENT EVENTS
As of September 26, 2009, we ceased sales operation at our Columbus, Georgia used car lot due to poor sales performance and operating losses. Collection activity will continue at this location. In conjunction with this action, we moved one of our two loan offices in Columbus, Georgia to this facility.
As of November 25, 2009, we had redeemed $0.4 million more in debentures than we had sold and we had sold $0.1 million more demand notes than we had redeemed. These include amounts that were redeemed through our subsidiary, The Money Tree of Georgia Inc.
F-26
