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, 2010

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 definitions 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, 2010
Class A, Voting Class B, Non-Voting		2,686 Shares 26,860 Shares

---

Table of Contents

THE MONEY TREE INC.

FORM 10-Q

December 25, 2010

TABLE OF CONTENTS

Index to Financial Statements

 

Item  No.					Page
		PART I – FINANCIAL INFORMATION
1		Financial Statements
		Consolidated Balance Sheets as of December 25, 2010 (Unaudited) and September 25, 2010			3
		Consolidated Statements of Operations for the three months ended December 25, 2010 and 2009 (Unaudited)			4
		Consolidated Statements of Cash Flows for the three months ended December 25, 2010 and 2009 (Unaudited)			5
		Notes to Consolidated Financial Statements (Unaudited)			6
2		Management’s Discussion and Analysis of Financial Condition and Results of Operations			18
3		Quantitative and Qualitative Disclosures About Market Risk			32
4		Controls and Procedures			32
		PART II – OTHER INFORMATION
1		Legal Proceedings			33
1A		Risk Factors			33
2		Unregistered Sales of Equity Securities and Use of Proceeds			33
3		Defaults Upon Senior Securities			33
4		(Removed and Reserved)			33
5		Other Information			33
6		Exhibits			33

 

2

---

Table of Contents

The Money Tree Inc. and Subsidiaries

Consolidated Balance Sheets

 

		December 25, 2010				September 25, 2010
		(Unaudited)
Assets
Cash and cash equivalents		$	1,124,676			$	2,115,538
Finance receivables, net			33,855,425				35,448,066
Other receivables			510,116				492,696
Inventory			1,239,537				1,201,953
Property and equipment, net			3,214,218				3,369,242
Other assets			528,410				598,286
Total assets		$	40,472,382			$	43,225,781
Liabilities and Shareholders’ Deficit
Liabilities
Accounts payable and other accrued liabilities		$	1,906,794			$	1,835,034
Accrued interest payable			12,570,377				12,733,503
Senior debt			216,950				164,625
Variable rate subordinated debentures			72,436,562				71,226,698
Demand notes			3,354,953				3,174,913
Total liabilities			90,485,636				89,134,773
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			(51,690,901	)			(47,586,639	)
Total shareholders’ deficit			(50,013,254	)			(45,908,992	)
Total liabilities and shareholders’ deficit		$	40,472,382			$	43,225,781

See accompanying notes to consolidated financial statements.

 

3

---

Table of Contents

The Money Tree Inc. and Subsidiaries

Consolidated Statements of Operations

 

Three months ended December 25,		2010				2009
		(Unaudited)
Interest and fee income		$	2,461,268			$	3,304,672
Interest expense			(1,760,018	)			(1,809,971	)
Net interest and fee income before provision for credit losses			701,250				1,494,701
Provision for credit losses			(2,362,223	)			(2,927,709	)
Net loss from interest and fees after provision for credit losses			(1,660,973	)			(1,433,008	)
Insurance commissions			1,276,270				1,753,864
Commissions from motor club memberships from company owned by related parties			375,979				454,326
Delinquency fees			279,462				334,586
Other income			54,931				122,736
Net revenue before retail sales			325,669				1,232,504
Retail sales			2,287,566				3,427,973
Cost of sales			(1,491,720	)			(2,100,071	)
Gross margin on retail sales			795,846				1,327,902
Net revenues			1,121,515				2,560,406
Operating expenses
Personnel expense			(2,773,921	)			(3,705,940	)
Facilities expense			(960,673	)			(1,042,087	)
General and adminstrative expenses			(577,081	)			(670,799	)
Other operating expenses			(840,266	)			(905,453	)
Total operating expenses			(5,151,941	)			(6,324,279	)
Net operating loss			(4,030,426	)			(3,763,873	)
Gain (loss) on sale/disposal of property and equipment			(73,836	)			15,721
Loss before income tax benefit			(4,104,262	)			(3,748,152	)
Income tax benefit			-				-
Net loss		$	(4,104,262	)		$	(3,748,152	)
Net loss per common share, basic and diluted		$	(138.91	)		$	(126.86	)
Weighted average shares outstanding			29,546				29,546

See accompanying notes to consolidated financial statements.

 

4

---

Table of Contents

The Money Tree Inc. and Subsidiaries

Consolidated Statements of Cash Flows

 

Three months ended December 25,		2010				2009
		(Unaudited)
Cash flows from operating activities
Net loss		$	(4,104,262	)		$	(3,748,152	)
Adjustments to reconcile net loss to net cash used in operating activities:
Provision for credit losses			2,362,223				2,740,331
Depreciation			173,717				197,967
Amortization			-				254
Loss (gain) on sale/disposal of property and equipment			73,836				(15,721	)
Change in assets and liabilities:
Other receivables			(17,420	)			(112,803	)
Inventory			(37,584	)			712,902
Other assets			69,876				41,958
Accounts payable and other accrued liabilities			71,760				141,662
Accrued interest payable			(163,126	)			(130,546	)
Net cash used in operating activities			(1,570,980	)			(172,148	)
Cash flows from investing activities
Finance receivables originated			(10,058,822	)			(13,373,253	)
Finance receivables repaid			9,289,240				12,614,033
Purchase of property and equipment			(92,529	)			(77,736	)
Proceeds from sale of property and equipment			-				24,800
Net cash used in investing activities			(862,111	)			(812,156	)
Cash flows from financing activities
Net proceeds (repayments) on:
Senior debt			52,325				(273,572	)
Demand notes			180,040				466,056
Proceeds-variable rate subordinated debentures			3,769,172				3,611,092
Repayments-variable rate subordinated debentures			(2,559,308	)			(3,939,348	)
Net cash provided by (used in) financing activities			1,442,229				(135,772	)
Net change in cash and cash equivalents			(990,862	)			(1,120,076	)
Cash and cash equivalents, beginning of period			2,115,538				2,921,777
Cash and cash equivalents, end of period		$	1,124,676			$	1,801,701
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest		$	1,902,692			$	1,920,065

See accompanying notes to consolidated financial statements.

 

5

---

Table of Contents

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 (U.S.) Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) 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 fiscal year 2010 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 GAAP for the interim periods reported. The results of operations for the three months ended December 25, 2010 and 2009 are not necessarily indicative of the results for the full fiscal year.

Certain reclassifications have been made to the prior period financial statements to conform with the method of presentation used in fiscal year 2011.

NOTE 2 – NATURE OF BUSINESS

The business of The Money Tree Inc. and subsidiaries consists of: the operation of finance company offices in 91 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.

The Company’s loan portfolio consists of consumer sales finance contracts receivables, auto sales finance contracts and direct consumer loan receivables. Consumer sales finance contracts receivables consist principally of retail installment sale contracts collateralized primarily by consumer goods sold by our consumer good dealerships, subject to credit approval, in the locations where the Company operates offices. Auto sales finance contracts are motor vehicle installment contracts collateralized by motor vehicles sold by our auto segment dealerships. 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 fiscal year ended September 25, 2010, the Company incurred net losses of $12,134,947 and a deficiency in net interest margin (net loss from interest and fees after provision for credit losses) of $851,341. For the three months ended December 25, 2010 and 2009 the Company incurred net losses of $4,104,262 and 3,748,152, respectively. The Company had a deficiency in net interest margin of $1,660,973 and $1,433,008 for the three months ended December 25, 2010 and 2009, respectively. As of December 25, 2010 and September 25, 2010, the Company had a shareholders’ deficit of $50,013,254 and $45,908,992, 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.

 

6

---

Table of Contents

The Money Tree Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

 

NOTE 2 – NATURE OF BUSINESS (CONTINUED)

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 ultimately attain successful operations. 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. Therefore, we have substantially curtailed the amount of funds we have been loaning to our customers and are focusing on collections to increase cash flow and address our current cash flow problems.

The recessionary economy has negatively impacted investor confidence and, on two occasions during the past two years, we temporarily suspended the offering of our debt securities to the public while we restated previously issued financial statements to correct errors detected in those statements.

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.

The average term of direct consumer loans is less than seven months; therefore, if management anticipates 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, 2010, the Company tightened its risk management controls related to new loans, resulting in a decrease in loan originations of $3.3 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. Management believes the cash flow from our operations coupled with sales of our variable rate subordinated debentures and subordinated demand notes will be sufficient to cover our liquidity needs and cash flow requirements during fiscal year 2011. 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.

NOTE 3 – RECENT ACCOUNTING PRONOUNCEMENTS

In July 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2010-20, “Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” The amendments to the FASB Accounting Standards Codification™ (FASB ASC) will enhance the current disclosure requirements to assist users of financial statements in assessing an entity’s credit risk exposure and evaluating the adequacy of an entity’s allowance for credit losses. ASU 2010-20 requires entities to disclose the nature of credit risk inherent in their finance receivables, the procedure for analyzing and assessing credit risk, and the changes in both the receivables and the allowance for credit losses by portfolio segment and class. ASU 2010-20 is effective for interim and annual reporting periods ending on or after December 15, 2010. We adopted this guidance for the quarter ended December 25, 2010 and its adoption did not have a material impact on our consolidated financial statements.

 

7

---

Table of Contents

The Money Tree Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

 

NOTE 3 – RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)

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 adopted this guidance on September 26, 2010 and its adoption did not 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,” are effective as of the beginning of an 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 adopted this guidance on September 26, 2010 and its adoption did not have a material impact on our consolidated financial statements.

NOTE 4 – FINANCE RECEIVABLES AND ALLOWANCE FOR CREDIT LOSSES

Finance receivables consisted of the following:

 

		December 25, 2010				September 25, 2010
			(Unaudited)
Finance receivables, direct consumer		$	15,080,718			$	14,790,670
Finance receivables, consumer sales finance			11,792,000				12,192,962
Finance receivables, auto sales finance			21,034,417				22,584,170
Total gross finance receivables			47,907,135				49,567,802
Unearned insurance commissions			(1,652,233	)			(1,662,796)
Unearned finance charges			(5,575,208	)			(5,926,738)
Accrued interest receivable			354,348				341,173
Finance receivables, before allowance for credit losses			41,034,042				42,319,441
Allowance for credit losses			(7,178,617	)			(6,871,375)
Finance receivables, net		$	33,855,425			$	35,448,066

 

8

---

Table of Contents

The Money Tree Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

 

NOTE 4 – FINANCE RECEIVABLES AND ALLOWANCE FOR CREDIT LOSSES (CONTINUED)

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

 

		As of and for the         three months ended         December 25, 2010				As of and for the         year ended         September 25, 2010				As of and for the          three months ended       December 25, 2009
		(Unaudited)								(Unaudited)
Beginning balance		$	6,871,375			$	8,925,381			$	8,925,381
Provisions for credit losses			2,362,223				5,682,584				2,927,709
Charge-offs
Direct consumer			(1,030,620)				(5,447,963)				(1,592,460	)
Consumer sales finance			(953,042)				(2,519,125)				(737,350	)
Auto sales finance			(727,109)				(1,942,229)				(397,232	)
Write-downs incurred on the transfer of loans to loans held for sale			-				(528,157)				(187,378	)
Recoveries - non-file insurance (direct consumer)			417,308				1,874,343				544,900
Recoveries - other			244,605				854,203				202,781
Other			(6,123)				(27,662)				695
Ending balance		$	7,178,617			$	6,871,375			$	9,687,046

 

9

---

Table of Contents

The Money Tree Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

 

NOTE 4 – FINANCE RECEIVABLES AND ALLOWANCE FOR CREDIT LOSSES (CONTINUED)

An analysis of the allowance for credit losses and recorded investment for the three segments of financing receivables is as follows:

 

		As of and for the three months ended December 25, 2010
		(Unaudited)
		Direct Consumer				Consumer Sales Finance				Auto Sales Finance				Total
Allowance for credit losses
Beginning balance		$	2,215,745			$	2,418,333			$	2,237,297			$	6,871,375
Provisions for credit losses			452,109				1,188,352				721,762				2,362,223
Charge-offs			(1,030,620	)			(953,042	)			(727,109	)			(2,710,771	)
Recoveries - non-file insurance			417,308				-				-				417,308
Recoveries - other			244,605				-				-				244,605
Other			(9,882	)			-				3,759				(6,123	)
Ending balance		$	2,289,265			$	2,653,643			$	2,235,709			$	7,178,617
Financing receivables, net
Ending balance:
Collectively evaluated for impairment		$	13,611,403			$	9,246,143			$	18,176,496			$	41,034,042

Due to the nature of the Company’s finance receivable portfolio, which consists of a large number of homogenous loans with similar credit quality characteristics at the time of origination, individual impairment analysis is not performed; rather finance receivables are evaluated collectively as a group within each segment of the portfolio. Different loss rates are not applied to impaired or non-impaired loans since the adjusted benchmark percentage is applied to each segment of the net finance receivable portfolio in total.

 

10

---

Table of Contents

The Money Tree Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

 

NOTE 4 – FINANCE RECEIVABLES AND ALLOWANCE FOR CREDIT LOSSES (CONTINUED)

The table below illustrates the net carrying amount of loans by credit quality indicator at December 25, 2010:

 

		Performing				Non-performing				Total
Direct consumer		$	10,676,981			$	2,934,422			$	13,611,403
Consumer sales finance			6,827,017				2,419,126				9,246,143
Auto sales finance			14,268,096				3,908,400				18,176,496
		$	31,772,094			$	9,261,948			$	41,034,042

The table below provides an aging analysis of past due loans and non-accrual loans by segment at December 25, 2010. Amounts are show at gross loan balance:

 

		As of December 25, 2010
		31 - 90 days				Over 90 days				Total				Non-accrual				Current				Total loans
Direct consumer		$	1,072,942			$	2,934,422			$	4,007,364			$	2,934,422			$	11,073,354			$	15,080,718
Consumer sales finance			818,397				2,419,126				3,237,523				2,419,126				8,554,477				11,792,000
Auto sales finance			1,021,676				1,484,000				2,505,676				1,484,000				18,528,741				21,034,417
		$	2,913,015			$	6,837,548			$	9,750,563			$	6,837,548			$	38,156,572			$	47,907,135

NOTE 5 – INVENTORY

Inventory consisted of the following:

 

		December 25, 2010				September 25, 2010
		(Unaudited)
Used automobiles		$	627,493			$	622,296
Home furnishings and electronics			612,044				579,657
Total inventory		$	1,239,537			$	1,201,953

 

11

---

Table of Contents

The Money Tree Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

 

NOTE 6 – ACCOUNTS PAYABLE AND OTHER ACCRUED LIABILITIES

Accounts payable and other accrued liabilities consisted of the following:

 

		December 25, 2010				September 25, 2010
		(Unaudited)
Accounts payable		$	447,072			$	242,878
Insurance payable, loan related			356,636				369,753
Accrued payroll			361,074				367,218
Accrued payroll taxes			26,822				28,007
Sales tax payable			610,349				670,021
Other liabilities			104,841				157,157
Total accounts payable and other accrued liabilities		$	1,906,794			$	1,835,034

 

12

---

Table of Contents

The Money Tree Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

 

NOTE 7 – DEBT

Debt consisted of the following:

 

		December 25, 2010				September 25, 2010
		(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 2011. The carrying values of the collateral at December 25, 2010 and September 25, 2010 were $216,950 and $164,625, respectively.		$	216,950			$	164,625
Total senior debt			216,950				164,625
Variable rate subordinated debentures issued by The Money Tree of Georgia Inc.: due to individuals, unsecured, interest at 4.0% to 8.7%, due at various dates through 2014.			21,168,349				22,490,296
Variable rate subordinated debentures issued by The Money Tree Inc.: due to individuals, unsecured, interest at 5.0% to 8.7%, due at various dates through 2014.			51,268,213				48,736,402
Total subordinated debentures			72,436,562				71,226,698
Demand notes issued by The Money Tree of Georgia Inc.: due to individuals, unsecured, interest at 3.0% to 4.0%, due on demand.			258,343				303,746
Demand notes issued by The Money Tree Inc.: due to individuals, unsecured, interest at 3.0% to 4.0%, due on demand.			3,096,610				2,871,167
Total demand notes			3,354,953				3,174,913
Total debt		$	76,008,465			$	74,566,236

 

13

---

Table of Contents

The Money Tree Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

 

NOTE 8 – INCOME TAXES

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

NOTE 9 – RELATED PARTY TRANSACTIONS

Martin Family Group, L.L.L.P. owns the real estate of thirteen branch offices, one used car lot, and the Company’s principal executive offices. A shareholder and director of the Company and his two siblings are limited partners of Martin Family Group, L.L.L.P. A former Company shareholder is the president of Martin Investments, Inc., which is the managing general partner of Martin Family Group, L.L.L.P. 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 37 branch office locations, one auto finance collection office and one used car lot 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 former Company shareholder is the president of Martin Investments, Inc., the company which ultimately controls Martin Sublease, L.L.C. Total rents paid were $407,946 and $538,586 for the three months ended December 25, 2010 and 2009, 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 majority shareholder and President, a shareholder and director of the Company and that shareholder’s two siblings, pursuant to an Agency Sales Agreement. Commissions earned on the sale of these memberships were $375,979 and $454,326 for the three months ended December 25, 2010 and 2009, 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, 2010.

 

14

---

Table of Contents

The Money Tree Inc. and Subsidiaries

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 consolidated financial position, consolidated cash flows or consolidated 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 $178,576 and $561,920 for the three months ended December 25, 2010 and 2009, 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 the original core operations of the Company representing the small consumer loan business in the four states in which the Company operates. The 91 offices that make up this segment are similar in size and in the markets they serve. All, with a 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.

 

15

---

Table of Contents

The Money Tree Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

 

NOTE 12 – SEGMENT FINANCIAL INFORMATION (CONTINUED)

 

Three months ended December 25, 2010		Consumer Finance         & Sales Division				Automotive Finance         & Sales Division				Total         Segments
In Thousands		(Unaudited)
Net revenues (loss) before retail sales		$	1,053			$	(727	)		$	326
Gross margin on retail sales			508				288				796
Segment operating expenses			(4,491	)			(661	)			(5,152	)
Segment operating loss		$	(2,930	)		$	(1,100	)		$	(4,030	)
December 25, 2010
In Thousands
Assets
Total segment assets		$	21,925			$	17,062			$	38,987
Cash and cash equivalents at corporate level											(374	)
Other receivables at corporate level											510
Property and equipment, net at corporate level											821
Other assets at corporate level											528
Consolidated Assets										$	40,472

 

16

---

Table of Contents

The Money Tree Inc. and Subsidiaries

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		$	1,492			$	(259	)		$	1,233
Gross margin on retail sales			1,017				311				1,328
Segment operating expenses			(5,637	)			(688	)			(6,325	)
Segment operating loss		$	(3,128	)		$	(636	)		$	(3,764	)
December 25, 2009
In Thousands
Assets
Total segment assets		$	28,338			$	23,637			$	51,975
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										$	55,381

NOTE 13 – SUBSEQUENT EVENTS

The Company has registered with the Securities and Exchange Commission on Form S-1 Registration Statements, $75,000,000 of Series B Variable Rate Subordinated Debentures (Commission File No. 333-157701) and $35,000,000 of Subordinated Demand Notes (Commission File No. 333-157700). The latest Post-Effective Amendments to these Registration Statements were declared effective on January 11, 2011. These securities have also been registered with the State of Georgia.

Between December 26, 2010 and January 25, 2011, the Company sold $1.5 million of debentures and $0.2 million of demand notes. For the same period the Company redeemed $0.8 million of debentures and $0.2 million of demand notes. These include amounts that were redeemed through our subsidiary, The Money Tree of Georgia Inc.

 

17

---

Table of Contents

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, 2010. 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 fiscal year ended September 25, 2010.

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. Over the past few months, we consolidated eight of our branch offices into other locations due to overlapping service coverage. These consolidations occurred in cities where we operated either two or three branch offices or had one branch office that was in close proximity to another branch office and believed operational cost savings would be realized in these consolidations. We believe that this had a minimal effect on overall revenues or customer loyalty and allowed us to allocate capital resources more efficiently. We will continue to evaluate other locations for future consolidations.

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:

 

18

---

Table of Contents

Description of Loans and Contracts

 

		As of, or for, the Three Months Ended December 25,
		2010				2009
Direct Consumer Loans:
Number of Loans Made to New Borrowers			7,296				7,905
Number of Loans Made to Former Borrowers			12,435				15,518
Number of Loans Made to Existing Borrowers			9,611				12,869
Total Number of Loans Made			29,342				36,292
Total Volume of Loans Made		$	8,884,093			$	12,124,724
Average Size of Loans Made		$	303			$	334
Number of Loans Outstanding			39,222				48,975
Total of Loans Outstanding		$	15,080,718			$	21,145,450
Percent of Loans Outstanding			31.48	%			32.27	%
Average Balance on Outstanding Loans		$	384			$	432
Auto Sales Finance Contracts:
Total Number of Contracts Made			86				100
Total Volume of Contracts Made		$	1,442,946			$	1,736,191
Average Size of Contracts Made		$	16,778			$	17,362
Number of Contracts Outstanding			2,204				2,658
Total of Contracts Outstanding		$	21,034,417			$	28,359,756
Percent of Total Loans and Contracts			43.91	%			43.28	%
Average Balance on Outstanding Contracts		$	9,544			$	10,670
Consumer Sales Finance Contracts:
Number of Contracts Made to New Customers			506				689
Number of Loans Made to Former Customers			4				15
Number of Loans Made to Existing Customers			869				1,121
Total Contracts Made			1,379				1,825
Total Volume of Contracts Made		$	3,800,832			$	5,908,107
Number of Contracts Outstanding			5,520				6,665
Total of Contracts Outstanding		$	11,792,000			$	16,024,957
Percent of Total Loans and Contracts			24.61	%			24.45	%
Average Balance of Outstanding Contracts		$	2,136			$	2,404

 

19

---

Table of Contents

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

 

		As of December 25,
		2010				2009
Total Finance Receivables Outstanding (gross):
Direct Consumer Loans		$	15,080,718			$	21,145,450
Consumer Sales Finance			11,792,000				16,024,957
Auto Sales Finance			21,034,417				28,359,756
Total Gross Outstanding		$	47,907,135			$	65,530,163

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. Rebates/other adjustments primarily represent reductions to gross loan amounts of precomputed interest and insurance premiums resulting from loans refinanced and other loans paid off before maturity.

 

20

---

Table of Contents

		For the Three Months Ended December 25,
		2010				2009
Direct Consumer Loans:
Balance - beginning		$	14,790,670			$	20,098,661
Finance receivables originated			8,884,093				12,124,724
Collections			(5,682,918	)			(8,001,700	)
Refinancings			(1,852,037	)			(2,756,330	)
Charge offs, gross			(1,030,620	)			(1,592,460	)
Rebates / other adjustments			(28,470	)			1,272,555
Balance - end		$	15,080,718			$	21,145,450
Consumer Sales Finance Contracts:
Balance - beginning		$	12,192,962			$	16,663,172
Finance receivables originated			3,800,832				5,908,107
Collections			(1,406,998	)			(1,921,439	)
Refinancings			(1,469,240	)			(1,957,432	)
Charge offs, gross			(953,042	)			(737,350	)
Rebates / other adjustments			(372,514	)			(1,930,101	)
Balance - end		$	11,792,000			$	16,024,957
Auto Sales Finance Contracts:
Balance - beginning		$	22,584,170			$	30,151,923
Finance receivables originated			1,442,946				1,736,191
Collections			(2,199,324	)			(2,690,894	)
Charge offs, gross			(727,109	)			(397,232	)
Rebates / other adjustments			(66,266	)			(440,232	)
Balance - end		$	21,034,417			$	28,359,756
Total:
Balance - beginning		$	49,567,802			$	66,913,756
Loans originated			14,127,871				19,769,022
Collections			(9,289,240	)			(12,614,033	)
Refinancings			(3,321,277	)			(4,713,762	)
Charge offs, gross			(2,710,771	)			(2,727,042	)
Rebates / other adjustments			(467,250	)			(1,097,778	)
Balance - end		$	47,907,135			$	65,530,163

 

21

---

Table of Contents

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,
		2010				2009
Finance Receivables Originated:
Direct consumer		$	8,884,093			$	12,124,724
Consumer sales finance			3,800,832				5,908,107
Auto sales finance			1,442,946				1,736,191
Total gross finance receivables originated			14,127,871				19,769,022
Non-cash items included in gross finance receivables*			(4,069,049	)			(6,395,769	)
Finance receivables originated per statement of cash flows		$	10,058,822			$	13,373,253
Finance Receivables Repaid:
Collections
Direct consumer		$	5,682,918			$	8,001,700
Consumer sales finance			1,406,998				1,921,439
Auto sales finance			2,199,324				2,690,894
Finance receivables repaid per statement of cash flows		$	9,289,240			$	12,614,033

 

*

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

Segments and Seasonality

We segment our business operations into the following two segments:

 

•

consumer finance and sales; and

 

•

automotive finance and sales.

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

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

Net Interest Margin

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

 

22

---

Table of Contents

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 (before provision for credit losses) for the three months ended December 25, 2010 was primarily a result of the decrease in 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.

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

 

		As of, or for, the Three Months Ended December 25,
		2010				2009
Average net finance receivables (1)		$	41,366,282			$	55,899,520
Average notes payable (2)		$	75,787,306			$	76,833,663
Interest income		$	1,716,124			$	2,319,434
Loan fee income, excluding delinquency fees			745,144				985,238
Total interest and fee income			2,461,268				3,304,672
Interest expense			1,760,018				1,809,971
Net interest and fee income before provision for credit losses		$	701,250			$	1,494,701
Average interest rate earned (annualized)			23.8	%			23.6	%
Average interest rate paid (annualized)			9.3	%			9.4	%
Net interest rate spread (annualized)			14.5	%			14.2	%
Net interest margin (annualized) (3)			6.8	%			10.7	%

⁽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

At the end of each reporting period, management is required to take a “snapshot” of the risk of probable losses inherent in the finance receivables portfolio and to reflect that risk in our allowance calculations. We use a systematic approach to calculate the allowance for credit losses whereby we apply historical charge-off benchmarks to groups of loans and then adjust (either

 

23

---

Table of Contents

positively or negatively), as and if applicable, for relevant factors. This method prevents the calculation from becoming simply a mathematical exercise, but instead addresses matters affecting loan collectibility. Historically, the relevant items impacting our allowance have included, but are not limited to, a variety of factors, such as historic loan loss experience, borrowers’ ability to repay, collateral considerations and non-file insurance recoveries, levels of and trends in delinquencies, effects of any changes in risk selection and lending policies and practices, and general economic conditions impacting our portfolio.

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 21. Recoveries represent receipts from non-file insurance claims and cash and bankruptcy recoveries. The benchmark charge-off ratio is calculated using a rolling average of data from the previous 12 months as shown below.

 

24

---

Table of Contents

		As of, or for the 12 Months Ended December 25,
		2010				2009
Direct Consumer Loans
Ending net finance receivables		$	13,611,403			$	19,487,005
Average net finance receivables(1)		$	14,495,970			$	22,268,569
Charge-offs, gross(3)		$	5,005,898			$	7,674,845
Recoveries (2)			(2,643,473	)			(1,881,815	)
Charge-offs, net of recoveries		$	2,362,425			$	5,793,030
% of net charge offs to average net receivables
12 month trend			16.3	%			26.0	%
Actual allowance %			16.8	%			26.0	%
Actual allowance		$	2,289,265			$	5,068,621
Consumer Sales Finance Contracts:
Ending net finance receivables		$	9,246,143			$	11,800,009
Average net finance receivables(1)		$	10,452,844			$	12,854,988
Charge-offs, gross		$	2,734,817			$	3,211,722
% of net charge offs to average net receivables
12 month trend			26.2	%			25.0	%
Actual allowance %			28.7	%			25.0	%
Actual allowance		$	2,653,643			$	2,952,002
Auto Sales Finance Contracts:
Ending net finance receivables		$	18,176,496			$	23,775,106
Average outstanding finance receivables(1)		$	21,081,969			$	25,180,457
Charge-offs, gross(3)		$	2,493,110			$	1,955,548
% of net charge offs to average net receivables
12 month trend			11.8	%			7.8	%
Actual allowance %			12.3	%			7.0	%
Actual allowance		$	2,235,709			$	1,666,422

 

25

---

Table of Contents

		As of, or for the 12 Months Ended December 25,
		2010				2009
Total Receivables:
Ending net finance receivables		$	41,034,042			$	55,062,120
Average outstanding finance receivables(1)		$	46,030,783			$	60,304,014
Charge-offs, gross(3)		$	10,233,825			$	12,842,115
Recoveries (2)			(2,643,473	)			(1,881,815	)
Charge-offs, net of recoveries		$	7,590,352			$	10,960,300
% of net charge offs to average net receivables
12 month trend			16.5	%			18.2	%
Actual allowance %			17.5	%			17.6	%
Actual allowance		$	7,178,617			$	9,687,045

 

(1)

Average net outstanding finance receivables are computed using the monthly balances net of unearned interest/fees, unearned insurance commissions and unearned discounts.

(2)

Recoveries represent receipts from non-file insurance claims, cash recoveries and bankruptcy recoveries.

(3)

Includes write downs incurred on the transfer of loans to loans held for sale.

During the three months ended December 25, 2010, there were no significant signs of economic recovery. We noted during this period an increase in delinquencies in all three segments of our loan portfolio. After consideration of the benchmark percentages, the delinquency increases, and other relevant factors, we increased the allowance percentage over the 12-month trend in each segment as follows: for net outstanding direct consumer loans, increase of 50 basis points to 16.8%; for net outstanding consumer sales finance contracts, increase of 250 basis points to 28.7%; and for net outstanding auto sales finance contracts, increase of 50 basis points to 12.3%, in each case as a percentage of the ending balance at December 25, 2010. The allowance for credit losses was $7.2 million (17.5% of the net outstanding finance receivables) at December 25, 2010 and $9.7 million (17.6%) at December 25, 2009.

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 expected. Below is certain information relating to the delinquency status of each category of our receivables as of December 25, 2010 and 2009:

 

26

---

Table of Contents

		As of December 25, 2010
		Direct       Consumer       Sales				Consumer       Sales Finance       Contracts				Auto Sales   Finance       Contracts*				Total
Gross Loans and Contracts Receivable		$	15,080,718			$	11,792,000			$	21,034,417			$	47,907,135
Loans and Contracts greater than 180 days past due		$	1,635,000			$	1,294,030			$	788,025			$	3,717,055
Percentage of Outstanding			10.8	%			11.0	%			3.7	%			7.8	%
Loans and Contracts greater than 90 days past due		$	2,934,422			$	2,419,126			$	1,484,000			$	6,837,548
Percentage of Outstanding			19.5	%			20.5	%			7.1	%			14.3	%
Loans and Contracts greater than 60 days past due		$	3,387,474			$	2,774,938			$	1,832,570			$	7,994,982
Percentage of Outstanding			22.5	%			23.5	%			8.7	%			16.7	%

 

		As of December 25, 2009
		Direct       Consumer       Sales				Consumer       Sales Finance       Contracts				Auto Sales   Finance       Contracts*				Total
Gross Loans and Contracts
Receivable		$	19,585,101			$	17,585,306			$	28,359,756			$	65,530,163
Loans and Contracts greater   than 180 days past due		$	2,712,368			$	1,179,509			$	0			$	3,891,877
Percentage of Outstanding			13.8	%			6.7	%			0.0	%			5.9	%
Loans and Contracts greater   than 90 days past due		$	4,156,816			$	1,963,519			$	921,731			$	7,042,066
Percentage of Outstanding			21.2	%			11.2	%			3.3	%			10.7	%
Loans and Contracts greater   than 60 days past due		$	4,710,767			$	2,261,894			$	1,362,982			$	8,335,643
Percentage of Outstanding			24.1	%			12.9	%			4.8	%			12.7	%

* Auto Sales Finance Contracts aging categories exclude accounts in legal or repossession process in the amounts of $3,120,375 at December 25, 2010 and $5,211,007 at December 25, 2009.

Results of Operations

Comparison of Three Months Ended December 25, 2010 and 2009

Net Revenues

Net revenues were $1.1 million and $2.6 million for the three months ended December 25, 2010 and 2009, respectively. We have experienced significant liquidity issues over the past two years due to the lack of net sales in our debt offerings. Because of this and the current economic environment, to preserve cash, we implemented tighter risk management controls in fiscal year 2009, which continued through the three months ended December 25, 2010, resulting in fewer loans being originated and causing decreases in

 

27

---

Table of Contents

earned amounts of interest, fees and other components of income connected with our lending. Gross finance receivable originations decreased by $5.6 million (29%) as compared to the same period last year. Retail sales and the gross margin on those sales also decreased by $1.1 million and $0.5 million, respectively, for the three months ended December 25, 2010 compared to 2009.

Net Interest and Fee Income Before Provision for Credit Losses

Net interest and fee income before provision for credit losses was $0.7 million and $1.5 million for the three months ended December 25, 2010 and 2009, respectively. During the three months ended December 25, 2010, gross interest income decreased $0.8 million, from $3.3 million for the three months ended December 25, 2009, to $2.5 million, as a result of the decrease in finance receivables originated as mentioned above. We are exploring options to raise capital that will allow us to increase originations of direct consumer loans in order to increase interest and fee income. However, we expect interest and fee income to continue to be lower than comparable periods last year until we can sell sufficient amounts of our debt offerings or secure other capital resources. Interest expense was $1.8 million for each of the three-month periods ended December 25, 2010 and 2009, respectively.

Provision for Credit Losses

Provision for credit losses was $2.4 million and $2.9 million for the three months ended December 25, 2010 and 2009, respectively. Net finance receivables charged off were approximately $2.0 million for each of the three-month periods ended December 25, 2010 and 2009. However, additional provisions were made to the allowance for credit losses as of December 25, 2009 based on our charge-off analysis and other relevant factors. We expect the provision for credit losses to continue to be less than the prior year throughout fiscal year 2011.

Insurance and Other Products

Income from commissions on insurance products, motor club memberships, delinquency fees and other income decreased approximately $0.7 million for the three months ended December 25, 2010 as compared to the three months ended December 25, 2009. This is a result of the aforementioned decrease in finance receivable originations. We expect this decrease to continue until we finalize and execute our plan to increase loan volumes, as mentioned above.

Gross Margin on Retail Sales

Gross margins on retail sales were $0.8 million and $1.3 million for the three months ended December 25, 2010 and 2009, respectively. Sales in the automotive segment decreased approximately $0.1 million compared to the same period last year while gross margins were approximately the same. In the consumer segment sales were down $1.0 million and gross margins decreased $0.5 million as compared to the prior year’s first quarter sales and margins. Weak demand for consumer goods continues to impact our sales and margins. We do not expect a significant increase in retail sales in the near term.

Operating Expenses

Operating expenses were $5.2 million and $6.3 million for the three months ended December 25, 2010 and 2009, respectively. Personnel expenses were $0.9 million lower than in the previous year while facilities expense was $0.1 million lower , as we realized the cost savings of the branch consolidations and other cutbacks implemented during fiscal year 2010. General and administrative expenses and other operating expenses decreased $0.1 million as compared to the prior year. We continue to closely monitor expenses and plan to reduce spending wherever possible.

 

28

---

Table of Contents

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. 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 2011. However, there can be no assurances that we will sell any debentures or demand notes or that our other actions to generate cash flow will be successful.

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 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 indicated in the notes to the accompanying consolidated financial statements included in this report, we have experienced significant liquidity issues due to the lack of net sales in our debt offerings during the fiscal year ended September 25, 2009 and continuing through the quarter ended December 25, 2010. The recessionary economy has negatively impacted investor confidence and, on two occasions during the past two years, we temporarily suspended the offering of our debt securities to the public while we restated previously issued financial statements to correct errors detected in those statements. In order to preserve cash, we tightened our risk management controls related to new loans resulting in a decrease in gross loan originations of $5.6 million for the three months ended December 25, 2010 compared to the same period in the prior year, and we (1) received gross proceeds of $3.8 million from the sale of debentures, (2) paid $2.6 million for redemption of debentures issued by us and our subsidiary, The Money Tree of Georgia Inc. and (3) received $0.2 million in net sales of demand notes. Also, for the fiscal year ended September 25, 2010, the Company incurred net losses of $12,134,947 and a deficiency in net interest margin (net loss from interest and fees after provision for credit losses) of $851,341. For the three months ended December 25, 2010 and 2009 the Company incurred net losses of $4,104,262 and 3,748,152, respectively. The Company had a deficiency in net interest margin of $1,660,973 and $1,433,008 for the three months ended December 25, 2010 and 2009, respectively. As of December 25, 2010 and September 25, 2010, the Company had a shareholders’ deficit of $50,013,254 and $45,908,992, 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. Consequently, our operations and other sources of funds may not provide sufficient available cash flow to meet our continued redemption

 

29

---

Table of Contents

obligations if the amount of redemptions continues at its current pace or we continue to suffer losses and use funds from operations to fund redemptions.

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.

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 currently focus almost entirely on the sale of debentures and demand notes.

Cash and cash equivalents were $1.1 million at December 25, 2010, a decrease of $0.7 million from $1.8 million at December 25, 2009. During the three months ended December 25, 2010, cash and cash equivalents decreased $1.0 million, primarily as a result of $0.9 million of net cash used in investing activities as finance receivables originated exceeded finance receivables repaid. 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 2011, we expect to continue to use a significant amount of cash to fund redemption obligations and pay interest on our securities. If we are unable to raise sufficient cash to fund these redemptions and make interest payments on outstanding debentures and demand notes, we may be forced to reduce new loans to customers. To the extent that we are required to continue using cash from operations (as opposed to net proceeds from sales of debentures and demand notes) to fund redemptions and make interest payments, we will make fewer loans to customers, which will result in a material adverse effect on our liquidity, financial condition and ability to continue as a going concern.

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, 2010, we (1) received gross proceeds of $3.8 million from the sale of debentures, (2) paid $2.6 million for redemption of debentures issued by us and our subsidiary, The Money Tree of Georgia Inc. and (3) received $0.2 million in net sales of demand notes. As of December 25, 2010, we had $72.4 million of debentures and $3.4 million of demand notes outstanding, compared to $71.2 million of debentures and $3.2 million of demand notes outstanding as of September 25, 2010.

 

30

---

Table of Contents

Subsequent Events

We have registered with the Securities and Exchange Commission on Form S-1 Registration Statements, $75,000,000 of Series B Variable Rate Subordinated Debentures (Commission File No. 333-157701) and $35,000,000 of Subordinated Demand Notes (Commission File No. 333-157700). The latest Post-Effective Amendments to these Registration Statements were declared effective on January 11, 2011. These securities have also been registered with the State of Georgia.

Between December 26, 2010 and January 25, 2011, we sold $1.5 million of debentures and $0.2 million of demand notes. For the same period we redeemed $0.8 million of debentures and $0.2 million of demand notes. These include amounts that were redeemed through our subsidiary, The Money Tree of Georgia Inc.

Recent Accounting Pronouncements

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

Critical Accounting Policies

Our accounting and reporting policies conform with accounting principles generally accepted in the United States of America (GAAP) and predominant practice within the financial services industry. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates.

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. 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.

 

31

---

Table of Contents

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

Impact of Inflation and General Economic Conditions

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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 this Form 10-Q, management, under the supervision and with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of 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 our disclosure controls and procedures were effective as of December 25, 2010.

Changes in Internal Control Over Financial Reporting

Except for the material weakness in the Company’s internal control over financial reporting and the subsequent measures to remedy such material weakness that were described in the Company’s 2010 Annual Report on Form 10-K, there have been no changes in our internal control over financial reporting during the quarter ended December 25, 2010, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

32

---

Table of Contents

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

We were not involved in any material legal proceedings during the quarter ended December 25, 2010 requiring disclosure under item 103 of Regulation S-K.

Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part 1, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended September  25, 2010 that could materially affect our business, financial condition or future results.

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

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. (Removed and Reserved)

Item 5. Other Information

None.

Item 6. Exhibits

 

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

 

33

---

Table of Contents

SIGNATURES

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

 

				THE MONEY TREE INC.
February 8, 2011				/s/ Bradley D. Bellville
Date				Bradley D. Bellville
				President (Principal Executive Officer)
February 8, 2011				/s/ Steven P, Morrison
Date				Steven P. Morrison
				Chief Financial Officer (Principal Financial Officer)

 

34