Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 25, 2009

or

 

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission file number 333-122531

 

 

THE MONEY TREE INC.

(Exact name of registrant as specified in its charter)

 

 

 

Georgia		58-2171386
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

114 South Broad Street

Bainbridge, Georgia 39817

(Address, including zip code, of principal executive offices)

Registrant’s telephone number, including area code (229) 246-6536

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    þ  Yes    ¨  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    ¨  Yes    ¨  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer  ¨				Accelerated filer  ¨
Non-accelerated filer  ¨  (Do not check if a smaller reporting company)				Smaller reporting company   þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    ¨  Yes    þ  No

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the last practicable date.

 

Class		Outstanding at December 25, 2009
Class A, Voting		2,686 Shares
Class B, Non-Voting		26,860 Shares

 

 

 

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Table of Contents

THE MONEY TREE INC.

FORM 10-Q

December 25, 2009

TABLE OF CONTENTS

Index to Financial Statements

 

Item No.				Page
		PART I – FINANCIAL INFORMATION
1		Financial Statements
		Consolidated Balance Sheets as of December 25, 2009 (Unaudited) and September 25, 2009		3
		Consolidated Statements of Operations for the three months ended December 25, 2009 and 2008 (Unaudited)		4
		Consolidated Statements of Cash Flows for the three months ended December 25, 2009 and 2008 (Unaudited)		5
		Notes to Consolidated Financial Statements (Unaudited)		7
2		Management’s Discussion and Analysis of Financial Condition and Results of Operations		16
3		Quantitative and Qualitative Disclosures About Market Risk		29
4		Controls and Procedures		29
		PART II – OTHER INFORMATION
1		Legal Proceedings		30
1A		Risk Factors		30
2		Unregistered Sales of Equity Securities and Use of Proceeds		30
3		Defaults Upon Senior Securities		30
4		Submission of Matters to a Vote of Security Holders		30
5		Other Information		30
6		Exhibits		30

 

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The Money Tree Inc. and Subsidiaries

Consolidated Balance Sheets

 

		December 25, 2009				September 25, 2009
		(Unaudited)
Assets
Cash and cash equivalents		$	1,801,701			$	2,921,777
Finance receivables, net			55,076,964				56,282,881
Other receivables			829,464				716,661
Inventory			1,489,064				2,201,966
Property and equipment, net			4,097,245				4,226,555
Other assets			1,788,934				1,831,146
Total assets		$	65,083,372			$	68,180,986
Liabilities and Shareholders’ Deficit
Liabilities
Accounts payable and other accrued liabilities		$	2,630,931			$	2,489,269
Accrued interest payable			13,332,385				13,462,931
Senior debt			52,945				326,517
Variable rate subordinated debentures			73,274,565				73,602,821
Demand notes			3,612,763				3,146,707
Total liabilities			92,903,589				93,028,245
Commitments and contingencies (see Note 10)
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			(29,497,864	)			(26,524,906	)
Total shareholders’ deficit			(27,820,217	)			(24,847,259	)
Total liabilities and shareholders’ deficit		$	65,083,372			$	68,180,986

See accompanying notes to the consolidated financial statements.

 

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The Money Tree Inc. and Subsidiaries

Consolidated Statements of Operations

 

Three months ended December 25,		2009				2008
		(Unaudited)
Interest and fee income		$	3,304,672			$	4,594,648
Interest expense			(1,809,971	)			(1,917,223	)
Net interest and fee income before provision for credit losses			1,494,701				2,677,425
Provision for credit losses			(1,965,137	)			(2,234,641	)
Net revenue (loss) from interest and fees after provision for credit losses			(470,436	)			442,784
Insurance commissions			1,753,864				2,564,830
Commissions from motor club memberships from company owned by related parties			454,326				463,840
Delinquency fees			334,586				403,578
Other income			122,736				133,108
Net revenue before retail sales			2,195,076				4,008,140
Retail sales			3,427,973				4,593,979
Cost of sales			(2,100,071	)			(2,980,207	)
Gross margin on retail sales			1,327,902				1,613,772
Net revenues			3,522,978				5,621,912
Operating expenses
Personnel expense			(3,705,940	)			(4,008,695	)
Facilities expense			(1,042,087	)			(1,045,556	)
General and adminstrative expenses			(670,799	)			(850,520	)
Other operating expenses			(1,092,831	)			(1,346,005	)
Total operating expenses			(6,511,657	)			(7,250,776	)
Net operating loss			(2,988,679	)			(1,628,864	)
Gain on sale of property and equipment			15,721				—
Loss before income tax expense			(2,972,958	)			(1,628,864	)
Income tax expense			—				—
Net loss		$	(2,972,958	)		$	(1,628,864	)
Net loss per common share, basic and diluted		$	(100.62	)		$	(55.13	)
Weighted average shares outstanding			29,546				29,546

See accompanying notes to the consolidated financial statements.

 

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The Money Tree Inc. and Subsidiaries

Consolidated Statements of Cash Flows

 

Three months ended December 25,		2009				2008
		(Unaudited)
Cash flows from operating activities
Net loss		$	(2,972,958	)		$	(1,628,864	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Provision for credit losses			1,965,137				2,234,641
Depreciation			197,967				237,873
Amortization			254				1,310
Gain on sale of property and equipment			(15,721	)			—
Change in assets and liabilities:
Other receivables			(112,803	)			(947,309	)
Inventory			712,902				401,004
Other assets			41,958				86,443
Accounts payable and other accrued liabilities			141,662				219,254
Accrued interest payable			(130,546	)			(495,524	)
Net cash (used in) provided by operating activities			(172,148	)			108,828
Cash flows from investing activities
Finance receivables originated			(13,373,253	)			(17,293,604	)
Finance receivables repaid			12,614,033				15,575,598
Purchase of property and equipment			(77,736	)			(155,224	)
Proceeds from sale of property and equipment			24,800				—
Net cash used in investing activities			(812,156	)			(1,873,230	)
Cash flows from financing activities
Net proceeds (repayments) on:
Senior debt			(273,572	)			(272,385	)
Demand notes			466,056				(445,956	)
Proceeds-variable rate subordinated debentures			3,611,092				1,596,418
Repayments-variable rate subordinated debentures			(3,939,348	)			(6,394,693	)
Net cash used in financing activities			(135,772	)			(5,516,616	)
Net change in cash and cash equivalents			(1,120,076	)			(7,281,018	)
Cash and cash equivalents, beginning of period			2,921,777				12,541,302
Cash and cash equivalents, end of period		$	1,801,701			$	5,260,284

See accompanying notes to the consolidated financial statements.

 

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Consolidated Statements of Cash Flows (continued)

 

Three months ended December 25,		2009			2008
		(Unaudited)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the quarter for:
Interest		$	1,920,065		$	2,392,295
Income taxes		$	—		$	—

See accompanying notes to the consolidated financial statements.

 

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The Money Tree Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

NOTE 1 – BASIS OF PRESENTATION

The consolidated financial statements of The Money Tree Inc., a Georgia corporation, and all of its subsidiaries (collectively, the “Company”) included herein have been prepared by the Company without audit, pursuant to the rules and regulations of the United States Securities and Exchange Commission (SEC). Certain information and footnote disclosure normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been omitted. For a description of significant accounting policies used by the Company in the preparation of its consolidated financial statements, see Note 1 to the Consolidated Financial Statements in the Company’s 2009 Annual Report on Form 10-K.

The consolidated financial statements include the accounts of the Company after eliminating all significant intercompany transactions and reflect all normal, recurring adjustments which are, in the opinion of management, necessary to present a fair statement of the results of operations of the Company in conformity with U.S. generally accepted accounting principles for the interim periods reported. The results of operations for the three months ended December 25, 2009 and 2008 are not necessarily indicative of the results for the full fiscal year.

NOTE 2 – NATURE OF BUSINESS

The business of The Money Tree Inc. and subsidiaries consists of: the operation of finance company offices 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 two 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 service 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.

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 reflect continued pressure from an uncertain economy and the negative impact of the turmoil in the credit markets. For the three months ended December 25, 2009 and the fiscal year ended September 25, 2009, respectively, the Company has incurred net losses of $2,972,958 and $11,951,193, and has had a deficiency in net interest margin (net loss from interest and fees after provision for credit losses) of $470,437 and $1,651,833, and as of December 25, 2009 and September 25, 2009, had a shareholders’ deficit of $27,820,217 and $24,847,259, 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.

 

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Notes to Consolidated Financial Statements (Unaudited)

 

NOTE 2 – NATURE OF BUSINESS (CONTINUED)

 

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; 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 three months ended December 25, 2009, the Company tightened its risk management controls related to new loans, resulting in a decrease in loan originations of $3.9 million from the same period in 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. We believe the cash flow from our operations coupled with sales of the debentures and demand notes will be sufficient to cover our liquidity needs and cash flow requirements during 2010. However, there can be no assurances that the Company’s actions will be successful. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

On January 26, 2010, the Company temporarily suspended our offerings of variable rate subordinated debentures and subordinated demand notes for sale in compliance with Section 10(a)(3) of the Securities Act of 1933, as amended. Pursuant to Undertaking 1(i) of the Company’s registration statements on Form S-1, we filed post effective amendments to such registration statements with the SEC on January 12, 2010 to update our financial information. We will not resume offering these securities until such time as these registration statements are declared effective by the SEC.

NOTE 3 – 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 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 FASB 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.

 

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Notes to Consolidated Financial Statements (Unaudited)

 

NOTE 3 – RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)

 

In June 2009, the FASB issued revised guidance 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. These revisions to FASB ASC 810, “Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities,” also require an ongoing reconsideration of the primary beneficiary, and amend 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. This guidance is effective at the start of an entity’s first annual reporting period beginning after November 15, 2009. We are currently evaluating the impact, if any, this guidance will have on our consolidated financial statements.

NOTE 4 – FINANCE RECEIVABLES AND ALLOWANCE FOR CREDIT LOSSES

Finance receivables consisted of the following:

 

		December 25, 2009				September 25, 2009
		(Unaudited)
Finance receivables, direct consumer		$	28,502,601			$	29,019,345
Finance receivables, consumer sales finance			16,024,957				15,176,373
Finance receivables, auto sales finance			28,359,756				30,151,923
Total gross finance receivables			72,887,314				74,347,641
Unearned insurance commissions			(2,132,508	)			(1,996,614	)
Unearned finance charges			(8,834,886	)			(9,243,875	)
Accrued interest receivable			499,261				608,209
Finance receivables, before allowance for credit losses			62,419,181				63,715,361
Allowance for credit losses			(7,342,217	)			(7,432,480	)
Finance receivables, net		$	55,076,964			$	56,282,881

An analysis of the allowance for credit losses is as follows:

 

		As of and for the three months ended December 25, 2009				As of and for the year ended September 25, 2009				As of and for the three months ended December 25, 2008
		(Unaudited)								(Unaudited)
Beginning balance		$	7,432,480			$	8,876,327			$	8,876,327
Provisions for credit losses			1,965,137				9,629,722				2,234,641
Charge-offs			(2,109,066	)			(11,367,962	)			(2,614,501	)
Recoveries			52,971				231,604				63,914
Other			695				62,789				38,848
Ending balance		$	7,342,217			$	7,432,480			$	8,599,229

 

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Notes to Consolidated Financial Statements (Unaudited)

 

NOTE 5 – INVENTORY

Inventory consisted of the following:

 

		December 25, 2009			September 25, 2009
		(Unaudited)
Used automobiles		$	759,910		$	1,159,473
Home furnishings and electronics			729,154			1,042,493
Total inventory		$	1,489,064		$	2,201,966

NOTE 6 – ACCOUNTS PAYABLE AND OTHER ACCRUED LIABILITIES

Accounts payable and other accrued liabilities consisted of the following:

 

		December 25, 2009			September 25, 2009
		(Unaudited)
Accounts payable		$	424,908		$	150,144
Insurance payable, loan related			522,034			414,470
Accrued payroll			503,372			472,772
Accrued payroll taxes			37,428			35,642
Sales tax payable			1,015,048			1,072,007
Other liabilities			128,141			344,234
Total accounts payable and other accrued liabilities		$	2,630,931		$	2,489,269

 

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Notes to Consolidated Financial Statements (Unaudited)

 

NOTE 7 – DEBT

Debt consisted of the following:

 

		December 25, 2009			September 25, 2009
		(Unaudited)
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 2010. The carrying values of the collateral at December 25, 2009 and September 25, 2009 were $66,182 and $362,206, respectively.		$	52,945		$	326,517
Total senior debt			52,945			326,517
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.			27,555,149			30,730,844
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.			45,719,416			42,871,977
Total subordinated debentures			73,274,565			73,602,821

 

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Notes to Consolidated Financial Statements (Unaudited)

 

NOTE 7 – DEBT (CONTINUED)

 

		December 25, 2009			September 25, 2009
		(Unaudited)
Demand notes issued by The Money Tree of Georgia Inc.: due to individuals, unsecured, interest at 3.0% to 4.0%, due on demand.			363,631			441,747
Demand notes issued by The Money Tree Inc.: due to individuals, unsecured, interest at 3.0% to 4.0%, due on demand.			3,249,132			2,704,960
Total demand notes			3,612,763			3,146,707
Total debt		$	76,940,273		$	77,076,045

NOTE 8 – INCOME TAXES

At the end of each quarter, the Company makes its best estimate of the effective tax rate expected to be applicable for the full fiscal year and uses that rate in providing for income taxes on a current year-to-date basis.

NOTE 9 – RELATED PARTY TRANSACTIONS

Martin Family Group, LLLP owns the real estate of thirteen branch offices, one used car lot, and the Company’s principal executive offices. The estate of the Company’s founder and former CEO is a limited partner of Martin Family Group, LLLP 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, L.L.C., 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. As noted above, a Company shareholder is the President of Martin Investments, Inc., which ultimately controls Martin Sublease, L.L.C. Total rents paid were $538,586 and $555,976 for the three months ended December 25, 2009 and 2008, respectively and are included in operating expense in the accompanying unaudited consolidated statements of operations.

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. Commissions earned on the sale of these memberships were $454,326 and $463,840 for the three months ended December 25, 2009 and 2008, respectively.

The Company also engages from time to time in other transactions with related parties. Refer to the “Related Party Transactions” disclosure in the notes to the Company’s Consolidated Financial Statements as of and for the year ended September 25, 2009.

 

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Notes to Consolidated Financial Statements (Unaudited)

 

NOTE 10 – CONTINGENT LIABILITIES

The Company is a party to litigation arising in the normal course of business. With respect to all such lawsuits, claims, and proceedings, the Company establishes reserves when it is probable a liability has been incurred and the amount can reasonably be estimated. In the opinion of management, the resolution of such matters will not have a material effect on the financial position, cash flows or results of operations of the Company.

NOTE 11 – DISCRETIONARY BONUSES

From time to time, the Company pays discretionary bonuses to its employees. The amount of these bonuses charged to operating expenses was $561,920 and $589,466 for the three months ended December 25, 2009 and 2008, respectively.

NOTE 12 – SEGMENT FINANCIAL INFORMATION

FASB 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 Automotive Finance and Sales.

Consumer finance and sales segment

This segment is comprised of original core operations of the Company representing 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 markets they serve. All, with few exceptions, offer consumer goods for sale acting as an agent for another subsidiary of the Company, Home Furniture Mart Inc., which is aggregated in this segment since its sales are generated through these finance offices. This segment is structured with branch management reporting through a regional management level to an operational manager and ultimately to the chief operating decision maker.

Automotive finance and sales segment

This segment is comprised of two used automobile sales locations and offers financing in conjunction with these sales. These locations target similar customers in the Bainbridge, GA and Dublin, GA markets and surrounding areas who generally cannot qualify for traditional financing. The sales and the financing organizations are aggregated in the segment. A general manager is responsible for sales and finance administration at each of the locations and reports to an operational manager and ultimately to the chief operating decision maker.

Accounting policies of the segments are the same as those described in the summary of significant accounting policies in the Company’s Annual Report on Form 10-K. Performance is measured by various factors such as segment profit, loan volumes and delinquency and loss management. All corporate expenses are allocated to the segments. Provision for income taxes are not allocated to segments.

 

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Notes to Consolidated Financial Statements (Unaudited)

 

NOTE 12 – SEGMENT FINANCIAL INFORMATION (CONTINUED)

 

Three months ended December 25, 2009		Consumer Finance & Sales Division				Automotive Finance & Sales Division				Total Segments
In Thousands		(Unaudited)
Net revenues (loss) before retail sales		$	2,267			$	(72	)		$	2,195
Gross margin on retail sales			1,017				311				1,328
Segment operating expenses			(5,637	)			(875	)			(6,512	)
Segment operating loss		$	(2,353	)		$	(636	)		$	(2,989	)
December 25, 2009
In Thousands
Assets
Total segment assets		$	38,040			$	23,637			$	61,677
RECONCILIATION:										December 25, 2009
										(Thousands)
Assets:
Total assets for reportable segments										$	61,677
Cash and cash equivalents at corporate level											(219	)
Other receivables at corporate level											829
Property and equipment, net at corporate level											1,007
Other assets at corporate level											1,789
Consolidated Assets										$	65,083

 

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Notes to Consolidated Financial Statements (Unaudited)

 

NOTE 12 – SEGMENT FINANCIAL INFORMATION (CONTINUED)

 

Three months ended December 25, 2008		Consumer Finance & Sales Division				Automotive Finance & Sales Division				Total Segments
In Thousands		(Unaudited)
Net revenues (loss) before retail sales		$	4,111			$	(103	)		$	4,008
Gross margin on retail sales			943				671				1,614
Segment operating expenses			(6,353	)			(898	)			(7,251	)
Segment operating loss		$	(1,299	)		$	(330	)		$	(1,629	)
December 25, 2008
In Thousands
Assets
Total segment assets		$	51,626			$	25,902			$	77,528
RECONCILIATION:										December 25, 2008
										(Thousands)
Assets:
Total assets for reportable segments										$	77,528
Cash and cash equivalents at corporate level											1,228
Other receivables at corporate level											1,904
Property and equipment, net at corporate level											1,308
Other assets at corporate level											2,410
Consolidated Assets										$	84,378

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Forward-Looking Statements

The discussion set forth below, as well as other portions of this quarterly report, contains forward-looking statements within the meaning of federal securities law. Words such as “may,” “will,” “expect,” “anticipate,” “believe,” “estimate,” “continue,” “predict,” or other similar words, identify forward-looking statements. Forward-looking statements include statements regarding our management’s intent, belief or current expectation about, among other things, trends affecting the markets in which we operate, our business, our financial condition and our growth strategies. Although we believe that the expectation reflected in these forward-looking statements are based on reasonable assumptions, forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Actual results may differ materially from those predicted in the forward-looking statements as a result of various factors, including, but not limited to, those risk factors set forth in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on December 23, 2009. Other factors not identified herein could also have such an effect. If any of these risk factors occur, they could have an adverse effect on our business, financial condition and results of operations. When considering forward-looking statements keep these risks in mind. These forward-looking statements are made as of the date of this filing. You should not place undo reliance on any forward-looking statement. We are not obligated to update forward-looking statements and will not update any forward-looking statements in this quarterly report to reflect future events or developments.

The following discussion should be read in conjunction with our unaudited consolidated financial statements and related notes and other financial data included elsewhere in this report. See also the notes to our consolidated financial statements, Selected Consolidated Financial Data and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K as of and for the year ended September 25, 2009.

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 two used automobile dealerships in the State of Georgia. We also offer insurance products, prepaid phone services and automobile club memberships to our loan customers.

We fund our consumer loan demand through a combination of cash collections from our consumer loans, proceeds raised from the sale of debentures and demand notes and loans from various banks and other financial institutions. Our consumer loan business consists of making, purchasing and servicing direct consumer loans, consumer sales finance contracts and motor vehicle installment sales contracts. Direct consumer loans generally serve individuals with limited access to other sources of consumer credit, such as banks, savings and loans, other consumer finance businesses and credit cards. Direct consumer loans are general loans made typically to people who need money for some unusual or unforeseen expense, for the purpose of paying off an accumulation of small debts or for the purchase of furniture and appliances. The following table sets forth certain information about the components of our finance receivables for the periods presented:

 

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Description of Loans and Contracts

 

		As of, or for, the Three Months Ended December 25,
		2009				2008
Direct Consumer Loans:
Number of Loans Made to New Borrowers			7,905				15,666
Number of Loans Made to Former Borrowers			15,518				12,441
Number of Loans Made to Existing Borrowers			12,869				13,794
Total Number of Loans Made			36,292				41,901
Total Volume of Loans Made		$	12,124,724			$	15,792,769
Average Size of Loans Made		$	334			$	377
Number of Loans Outstanding			50,609				68,072
Total of Loans Outstanding*		$	21,840,443			$	33,498,425
Percent of Total Loans and Contracts			32.98	%			41.37	%
Average Balance on Outstanding Loans		$	432			$	492
Motor Vehicle Installment Sales Contracts:
Total Number of Contracts Made			100				184
Total Volume of Contracts Made		$	1,736,191			$	3,323,862
Average Size of Contracts Made		$	17,362			$	18,064
Number of Contracts Outstanding			2,658				2,703
Total of Contracts Outstanding*		$	28,359,756			$	30,260,514
Percent of Total Loans and Contracts			42.82	%			37.37	%
Average Balance on Outstanding Contracts		$	10,670			$	11,195
Consumer Sales Finance Contracts:
Number of Contracts Made to New Customers			689				860
Number of Loans Made to Former Customers			15				30
Number of Loans Made to Existing Customers			1,121				890
Total Contracts Made			1,825				1,780
Total Volume of Contracts Made		$	5,908,107			$	5,902,407
Number of Contracts Outstanding			6,665				7,439
Total of Contracts Outstanding*		$	16,024,957			$	17,222,368
Percent of Total Loans and Contracts			24.20	%			21.26	%
Average Balance of Outstanding Contracts		$	2,404			$	2,315

 

*	Contracts outstanding are exclusive of the following aggregate amounts of consumer bankrupt accounts: $6,662,158 as of December 25, 2009 and $7,123,584 as of December 25, 2008.

 

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Below is a table showing our total gross outstanding finance receivables and bankrupt accounts:

 

		As of December 25,
		2009			2008
Total Finance Receivables Outstanding (gross):
Direct Consumer Loans		$	21,840,443		$	33,498,425
Motor Vehicle Installment			28,359,756			30,260,514
Consumer Sales Finance			16,024,957			17,222,368
Consumer Bankrupt Accounts			6,662,158			7,123,584
Total Gross Outstanding		$	72,887,314		$	88,104,891

Below is a roll-forward of the balance of each category of our outstanding finance receivables. Loans originated reflect the gross amount of loans made or purchased during the period presented inclusive of pre-computed interest, fees and insurance premiums. Collections represent cash receipts in the form of repayments made on our loans as reflected in our Consolidated Statements of Cash Flows. Refinancings represent the amount of the pay off of loans refinanced. Charge offs represent the gross amount of loans charged off as uncollectible (charge offs are shown net of non-file insurance receipts in our Allowance for Credit Losses). Rebates represent reductions to gross loan amounts of precomputed interest and insurance premiums resulting from loans refinanced and other loans paid off before maturity. Other adjustments primarily represent accounts transferred to and from the department that administers bankrupt accounts.

 

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		For the Three Months Ended December 25,
		2009				2008
Direct Consumer Loans:
Balance—beginning		$	22,257,244			$	34,859,944
Finance receivables originated			12,124,724				15,792,769
Collections			(8,001,700	)			(10,694,706	)
Refinances			(2,756,330	)			(3,424,774	)
Charge offs, gross			(1,330,034	)			(2,111,910	)
Rebates / other adjustments			(453,461	)			(922,898	)
Balance—end		$	21,840,443			$	33,498,425
Consumer Sales Finance Contracts:
Balance—beginning		$	15,176,373			$	16,793,743
Finance receivables originated			5,908,107				5,902,407
Collections			(1,921,439	)			(1,881,695	)
Refinances			(1,957,432	)			(1,879,975	)
Charge offs, gross			(562,400	)			(1,229,080	)
Rebates / other adjustments			(618,252	)			(483,032	)
Balance—end		$	16,024,957			$	17,222,368
Motor Vehicle Installment Sales Contracts:
Balance—beginning		$	30,151,923			$	30,707,329
Finance receivables originated			1,736,191				3,323,862
Collections			(2,690,894	)			(2,999,197	)
Refinances			—				—
Charge offs, gross			(397,232	)			(429,750	)
Rebates / other adjustments			(440,232	)			(341,730	)
Balance—end		$	28,359,756			$	30,260,514
Total Active Accounts:
Balance—beginning		$	67,585,540			$	82,361,016
Loans originated			19,769,022				25,019,038
Collections			(12,614,033	)			(15,575,598	)
Refinances			(4,713,762	)			(5,304,749	)
Charge offs, gross			(2,289,666	)			(3,770,740	)
Rebates / other adjustments			(1,511,945	)			(1,747,660	)
Balance—end		$	66,225,156			$	80,981,307
Total Consumer Bankrupt Accounts:
Balance—beginning		$	6,762,101			$	6,794,358
Charge offs, gross			(364,300	)			(302,329	)
Adjustments			264,357				631,555
Balance—end		$	6,662,158			$	7,123,584
Total Gross Outstanding Receivables		$	72,887,314			$	88,104,891

 

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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.

 

		Three Months Ended December 25,
		2009				2008
Finance Receivables Originated:
Direct consumer		$	12,124,724			$	15,792,769
Consumer sales finance			5,908,107				5,902,407
Motor vehicle installment sales			1,736,191				3,323,862
Total gross finance receivables originated			19,769,022				25,019,038
Non-cash items included in gross finance receivables*			(6,395,769	)			(7,725,434	)
Finance receivables originated—cash flows		$	13,373,253			$	17,293,604
Finance Receivables Repaid:
Collections
Direct consumer		$	8,001,700			$	10,694,706
Consumer sales finance			1,921,439				1,881,695
Motor vehicle installment sales			2,690,894				2,999,197
Finance receivables repaid—cash flows		$	12,614,033			$	15,575,598

 

*

Includes precomputed interest and fees (since these amounts are included in the gross amount of finance receivables originated but are not advanced in the form of cash to customers) and refinanced receivables balances (since there is no cash generated from the repayment of original finance receivables refinanced).

Segments and Seasonality

We segment our business operations into the following two segments:

 

•

consumer finance and sales; and

 

•

automotive finance and sales.

The consumer finance and sales segment is comprised primarily of small consumer loans and sales of consumer goods such as furniture, appliances and electronics. We typically experience our strongest financial performance for the consumer finance and sales segment during the holiday season, which is our first fiscal quarter ending December 25.

The automotive finance and sales segment is comprised exclusively of used vehicle sales and their related financing. We typically experience our strongest financial performance for the automotive finance and sales segment during our second fiscal quarter ending March 25 when used car sales are the highest. Please refer to Note 12 in the “Notes to Consolidated Financial Statements” for a detail of our operations by segment.

Net Interest Margin

A principal component of our profitability is our net interest margin, which is the difference between the interest that we earn on finance receivables and the interest that we pay on borrowed funds. In some states, statutes regulate the interest rates that we may charge our customers, while, in other locations, competitive market conditions establish interest rates that we may charge. Differences also exist in the interest rates that we earn on the various components of our finance receivable portfolio.

 

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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.

The decrease in the net interest margin for the three months ended December 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.

 

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The following table presents important data relating to our net interest margin:

 

		As of, or for, the Three Months Ended December 25,
		2009				2008
Average net finance receivables (1)		$	62,604,045			$	75,908,452
Average notes payable (2)		$	76,833,663			$	81,867,040
Interest income		$	2,319,434			$	3,349,011
Loan fee income, excluding delinquency fees			985,238				1,245,637
Total interest and fee income			3,304,672				4,594,648
Interest expense			1,809,971				1,917,223
Net interest and fee income before provision for credit losses		$	1,494,701			$	2,677,425
Average interest rate earned (annualized)			21.1	%			24.2	%
Average interest rate paid (annualized)			9.4	%			9.4	%
Net interest rate spread (annualized)			11.7	%			14.8	%
Net interest margin (annualized) (3)			9.6	%			14.1	%

 

(1)	Averages are computed using month-end balances of finance receivables (net of unearned interest/fees, unearned insurance commissions, and unearned discounts) during the period presented.

(2)	Averages are computed using month-end balances of interest bearing debt during the period presented.

(3)	Net interest margin represents net interest income (before provision for credit losses) divided by the average net finance receivables.

Analysis of Allowance for Credit Losses

An allowance for credit losses is maintained to account for the probable losses inherent in the finance receivable portfolio. The allowance is calculated based upon management’s estimate of the expected collectability of loans outstanding based upon a variety of factors, including, without limitation, periodic analysis of the loan portfolio, current economic trends impacting our customers, 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 calculated ratios of charge offs to average notes receivable and other 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 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.

The following table shows these ratios of charge offs to average notes receivable for the categories of our finance receivables. The average net finance receivables are computed using monthly balances, net of unearned interest, unearned insurance commissions and unearned discounts. Charge offs are shown at gross amounts as presented in the receivable roll-forward on page 19. Recoveries represent receipts from non-file insurance claims and cash recoveries.

 

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		As of, or for, the Three Months Ended December 25,
		2009				2008
Direct Consumer Loans and Consumer Sales Finance Contracts:
Average net finance receivables		$	38,443,307			$	50,708,516
Charge offs—direct consumer		$	1,330,034			$	2,111,910
Charge offs—consumer sales finance			562,400				1,229,080
Charge offs—bankruptcy			364,300				302,329
Total gross charge offs			2,256,734				3,643,319
Recoveries (all direct consumer)			(597,871	)			(1,522,482	)
Charge offs, net		$	1,658,863			$	2,120,837
Percent of net charge offs to average receivables			4.3	%			4.2	%
Motor Vehicle Installment Sales Contracts:
Average outstanding finance receivables		$	24,160,738			$	25,199,936
Charge offs, gross		$	397,232			$	429,750
Recoveries			—				—
Charge offs, net		$	397,232			$	429,750
Percent of net charge offs to average receivables			1.6	%			1.7	%
Total Receivables:
Average outstanding finance receivables		$	62,604,045			$	75,908,452
Charge offs, gross		$	2,653,966			$	4,073,069
Recoveries (all direct consumer)			(597,871	)			(1,522,482	)
Charge offs, net		$	2,056,095			$	2,550,587
Percent of net charge offs to average receivables			3.3	%			3.4	%

Although net charge offs for the three months ended December 25, 2009 decreased by $0.5 million as compared to the same period last year, continued adverse economic conditions are negatively affecting our operations. The allowance for credit losses was $7.3 million or 11.8% of the net outstanding finance receivables at December 25, 2009 and $7.4 million or 11.7% at September 25, 2009.

 

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Delinquency Information

Our delinquency levels reflect, among other factors, changes in the mix of loans in the portfolio, the quality of receivables, the success of collection efforts, bankruptcy trends and general economic conditions. The delinquency information in the following tables is computed on the basis of the amount past due in accordance with the original payment terms of the loan (contractual method). We use the contractual method for all external reporting purposes. Management closely monitors delinquency using this method to measure the quality of our loan portfolio and the probability of credit loss. We also use other tools, such as a recency report, which shows the date of the last full contractual payment received on the loan, to determine a particular customer’s willingness to pay. For example, if a delinquent customer has made a recent payment, we may decide to delay more serious collection measures, such as repossession of collateral. However, such a payment will not change the non-accrual status of the account until all of the principal and interest amounts contractually due are brought current (we receive one or more full contractual payments and the account is less than 60 days contractually delinquent), at which time we believe future payments are reasonably assured. Below is certain information relating to the delinquency status of each category of our receivables for the quarters ended December 25, 2009 and 2008:

 

		As of December 25, 2009
		Direct Consumer Sales				Consumer Sales Finance Contracts				Motor Vehicle Installment Sales Contracts*				Consumer Bankruptcy Accounts				Total
Gross Loans and Contracts Receivables		$	21,840,443			$	16,024,957			$	28,359,756			$	6,662,158			$	72,887,314
Loans and Contracts 60—90 days past due		$	553,951			$	298,376			$	441,251			$	177,540			$	1,471,118
Percentage of Outstanding			2.5	%			1.9	%			1.6	%			2.7	%			2.0	%
Loans and Contracts greater than 90 days past due		$	4,156,816			$	1,963,518			$	921,731			$	4,311,834			$	11,353,899
Percentage of Outstanding			19.0	%			12.3	%			3.3	%			64.7	%			15.6	%
Loans and Contracts greater than 60 days past due		$	4,710,767			$	2,261,894			$	1,362,982			$	4,489,374			$	12,825,017
Percentage of Outstanding			21.6	%			14.1	%			4.8	%			67.4	%			17.6	%

 

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		As of December 25, 2008
		Direct Consumer Sales				Consumer Sales Finance Contracts				Motor Vehicle Installment Sales Contracts*				Consumer Bankruptcy Accounts				Total
Gross Loans and Contracts Receivables		$	33,498,425			$	17,222,368			$	30,260,514			$	7,123,584			$	88,104,891
Loans and Contracts 60—90 days past due		$	935,140			$	406,198			$	565,597			$	265,496			$	2,172,431
Percentage of Outstanding			2.8	%			2.4	%			1.9	%			3.7	%			2.5	%
Loans and Contracts greater than 90 days past due		$	6,864,709			$	2,890,506			$	539,810			$	4,411,767			$	14,706,792
Percentage of Outstanding			20.5	%			16.8	%			1.8	%			61.9	%			16.7	%
Loans and Contracts greater than 60 days past due		$	7,799,849			$	3,296,704			$	1,105,407			$	4,677,263			$	16,879,223
Percentage of Outstanding			23.3	%			19.1	%			3.7	%			65.7	%			19.2	%

 

*	Motor Vehicle Installment Sales Contracts aging categories exclude accounts in bankruptcy and accounts in legal or repossession process in the amounts of $5,211,007 at December 25, 2009 and $5,366,365 at December 25, 2008.

Results of Operations

Comparison of Three Months Ended December 25, 2009 and 2008

Net Revenues

Net revenues were $3.5 million and $5.6 million for the three months ended December 25, 2009 and 2008, respectively. Liquidity issues continue to hamper our efforts to originate sufficient levels of finance receivables to maintain interest, fees and other revenues connected with our lending at historical levels. Gross finance receivable originations decreased by $5.2 million (20%) as compared to the same period last year. Retail sales and the gross margin on those sales also decreased by $1.2 million and $0.3 million, respectively, for the three months ended December 25, 2009 and 2008.

Net Interest and Fee Income Before Provision for Credit Losses

Net interest and fee income before provision for credit losses was $1.5 million and $2.7 million for the three months ended December 25, 2009 and 2008, respectively. During the three months ended December 25, 2009, gross interest income decreased $1.3 million, from $4.6 million for the three months ended December 25, 2008, to $3.3 million, as a result of the decrease in finance receivables originated as mentioned above. Interest income was also impacted by a decrease in the average interest rate earned on finance receivables caused by a significant decrease in higher-earning direct consumer loans. We are formulating a plan to increase originations of direct consumer loans in order to increase interest and fee income. Interest expense was $1.8 million and $1.9 million for the three-month periods ended December 25, 2009 and 2008, respectively.

Provision for Credit Losses

Provision for credit losses was $2.0 million and $2.2 million for the three months ended December 25, 2009 and 2008, respectively. Net finance receivables charged off decreased approximately $0.5 million compared to the same period last year. Liquidity issues have caused us to strengthen our risk management controls on new loans. Although this has resulted in a significant decrease in finance receivable originations, it has had a positive impact on our delinquency trends. We believe these trends will continue for the near term.

 

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Insurance and Other Products

Income from commissions on insurance products, motor club memberships, delinquency fees and other income decreased approximately $0.9 million for the three months ended December 25, 2009 as compared to the three months ended December 25, 2008. This is a result of the aforementioned decrease in finance receivable originations.

Gross Margin on Retail Sales

Gross margins on retail sales were $1.3 million and $1.6 million for the three months ended December 25, 2009 and 2008, respectively. Sales in the automotive segment decreased approximately $1.0 million compared to the same period last year while gross margin decreased $0.4 million. In the consumer segment sales were down $0.1 million and gross margins increased $0.1 million as compared to last year’s first quarter sales and margins. We ceased sales operations in one of our used car lots in October 2009, causing the decrease in our retail sales in the automotive segment.

Operating Expenses

Operating expenses were $6.5 million and $7.3 million for the three months ended December 25, 2009 and 2008, respectively. Personnel expenses were $0.3 million lower than last year due to lower health benefit cost and reductions in staffing levels. General & administrative expenses and other operating expenses decreased $0.4 million as compared to the prior year. This was a result of our focus on reducing discretionary spending throughout the Company. We are continuing to closely monitor expenses and plan to reduce spending wherever possible.

Liquidity and Capital Resources

General

Liquidity is our ability to meet short-term financial obligations whether through collection of receivables, sales of debentures and demand notes or by generating additional funds through sales of assets to our competitors (such as our finance receivables or vehicle inventory). Continued liquidity is, therefore, largely dependent on the collection of our receivables and the sale of debt securities that meet the investment requirements of the public. We believe the cash flow from our operations coupled with sales of the debentures and demand notes will be sufficient to cover our liquidity needs and cash flow requirements during 2010.

Liquidity management refers to our ability to generate sufficient cash to fund the following primary uses of cash:

 

•

meet all of our debenture and demand note redemption obligations;

 

•

pay interest on all of our debentures and demand notes;

 

•

pay operating expenses; and

 

•

fund consumer finance loan demand and used automobile vehicle inventory.

The primary objective for liquidity management is to ensure that at all times we can meet the redemption obligations of our note holders. A secondary purpose of liquidity management is profit management. Because profit and liquidity are often conflicting objectives, we attempt to maximize our net interest margin by making adequate, but not excessive, liquidity provisions. To the extent we have adequate cash

 

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to meet our redemption obligations and pay interest to our note holders, we will use remaining cash to make consumer finance loans, purchase used automobile vehicle inventory and invest in other sources of potential revenues. However, as noted elsewhere in this report, during the three months ended December 25, 2009, the Company tightened its risk management controls related to new loans, resulting in a decrease in loan originations of $3.9 million from the same period in the prior year, and we (1) received gross proceeds of $3.6 million from the sale of debentures, (2) paid $3.9 million for redemption of debentures issued by us and our subsidiary, The Money Tree of Georgia Inc. and (3) received $0.4 million in net sales of demand notes. Consequently, 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.

Changes in our liquidity position result from operating, investing and financing activities. Cash flows from operating activities are generally the cash effects of transactions and other events that enter into the determination of our net income, including, without limitation, purchases of used automobiles, electronics, furnishings and other consumer goods for resale to our customers. The primary investing activities include consumer loan originations and purchases and collections on such consumer loans. Our financing activities focus almost entirely on the sale of Debentures and Demand Notes.

Cash and cash equivalents were $1.8 million at December 25, 2009, a decrease of $3.5 million from $5.3 million at December 25, 2008. During the three months ended December 25, 2009, cash and cash equivalents decreased $1.1 million, primarily as a result of $0.8 million of net cash used in investing activities as finance receivables originated exceeded finance receivables repaid. During the three months ended December 25, 2008, cash and cash equivalents decreased $7.3 million, primarily as a result of $5.5 million of net cash used in financing activities and $1.9 million of cash used in investing activities. During the three months ended December 25, 2008, we redeemed an unusually high amount of debentures ($6.4 million) while the proceeds from the sale of debentures were only $1.6 million. We also redeemed $0.4 million more in demand notes than were sold. Finance receivables originated exceeded finance receivables repaid by approximately $1.7 million.

During 2010, we expect to continue to use a significant amount of cash to fund redemption obligations and pay interest on our securities.

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 fund other Company working capital.

During the three months ended December 25, 2009, we (1) received gross proceeds of $3.6 million from the sale of debentures, (2) paid $3.9 million for redemption of debentures issued by us and our subsidiary, The Money Tree of Georgia Inc. and (3) received $0.4 million in net sales of demand notes. As of December 25, 2009, we had $73.3 million of debentures and $3.6 million of demand notes outstanding, compared to $73.6 million of debentures and $3.1 million of demand notes outstanding as of September 25, 2009.

On January 26, 2010, the Company temporarily suspended our offerings of variable rate subordinated debentures and subordinated demand notes for sale in compliance with Section 10(a)(3) of the Securities Act of 1933, as amended. Pursuant to Undertaking 1(i) of the Company’s registration statements on Form S-1, we filed post effective amendments to such registration statements with the SEC on January 12, 2010 to update our financial information. We will not resume offering these securities until such time as these registration statements are declared effective by the SEC.

 

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Recent Accounting Pronouncements

Recent accounting pronouncements have been issued that may have a future effect on operations. Refer to Note 3 to the unaudited consolidated financial statements for a discussion of these pronouncements and their possible effects.

Critical Accounting Policies

Our accounting and reporting policies conform with U.S. generally accepted accounting principles (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 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. Related accrued interest and fees are reversed against current period income.

When a loan is impaired, interest accrued but uncollected is generally reversed against interest income. Cash receipts on impaired loans are generally applied to reduce the unpaid principal balance.

We recognize deferred tax assets and liabilities for the future tax effects of temporary differences, net operating loss carry-forwards and tax credits. Deferred tax assets are subject to management’s judgment based upon available evidence that future realization is more likely than not. If management determines that we may be unable to realize all or part of net deferred tax assets in the future, a direct charge to income tax expense may be required to reduce the recorded value of the net deferred tax asset to the expected realizable amount.

We have not substantially changed any aspect of our overall approach in the application of the foregoing policies. There have been no material changes in assumptions or estimation techniques utilized as compared to previous years.

Impact of Inflation

Although inflation has not had a material adverse effect on our financial condition or results of operations, increases in the inflation rate are generally associated with increased interest rates. A significant and sustained increase in the interest rates would likely unfavorably impact our profitability by reducing the interest rate spread between the rate of interest we receive on our customer loans and interest rates we pay to our note holders, banks and finance companies. Inflation may also negatively affect our operating expenses.

 

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

A smaller reporting company, as defined in Item 10 of Regulation S-K, is not required to provide the information required by this Item.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) that are designed to ensure that information required to be disclosed in the Company’s reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and that such information is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosures.

In connection with the presentation of the Form 10-Q, management, under the supervision and with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the fiscal quarter which is the subject of this Quarterly Report. Based on this evaluation, our principal executive officer and principal financial officer have concluded that the design and operation of our disclosure controls and procedures are effective as of December 25, 2009.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting during the quarter ended December 25, 2009, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings

We were not involved in any material legal proceedings during the quarter ended December 25, 2009 requiring disclosure under Item 103 of Regulation S-K.

Item 1A. Risk Factors

A smaller reporting company, as defined in Item 10 of Regulation S-K, is not required to provide the information required by this Item.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Submission of Matters to a Vote of Security Holders

None.

Item 5. Other Information

None.

Item 6. Exhibits

 

31.1		Certification of Principal Executive Officer pursuant to Section 302 of The Sarbanes-Oxley Act of 2002
31.2		Certification of Principal Financial Officer pursuant to Section 302 of The Sarbanes-Oxley Act of 2002
32.1		Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

				THE MONEY TREE INC.
February 8, 2010				/s/ Bradley D. Bellville
Date				Bradley D. Bellville President (Principal Executive Officer)
February 8, 2010				/s/ Steven P, Morrison
Date				Steven P. Morrison Chief Financial Officer (Principal Financial Officer)

 

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