<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark one)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 1999
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission file number 333-66853
CREDIT CONCEPTS, INC.
-----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Oregon 91-1236587
- --------------------------------- ---------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
2149 Centennial Plaza, Suite 2, Eugene, Oregon 97401
----------------------------------------------------
(Address of principal executive offices)
(541) 342-8545
--------------------------
(Issuer's telephone number)
N/A
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act during the past 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. Yes [ ] No [X]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
As of June 11, 1999, 300 shares of common stock of the Registrant were
outstanding.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
<PAGE>
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Balance Sheets at April 30, 1999 (unaudited), April 30, 1998
(unaudited) and July 31, 1998
Statements of Income for the Three Months Ended April 30, 1999
(unaudited) and April 30, 1998 (unaudited)
Statements of Income for the Nine Months Ended April 30, 1999
(unaudited) and for the Four Months Ended April 30, 1998
(unaudited)
Statements of Cash Flows for the Nine Months Ended April 30,
1999 (unaudited) and for the Four Months Ended April 30, 1998
(unaudited)
Notes to Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis or Plan of Operation.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
<PAGE>
CREDIT CONCEPTS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
------
April 30 July 31
(Unaudited)
--------------------------- -------------
1999 1998 1998
------------ ------------ ------------
<S> <C> <C> <C>
Cash $ 74,930 $ 21,584 $ 55,003
------------ ------------ ------------
Finance receivables:
Contracts 3,844,074 2,655,869 4,325,162
Loans 381,898 - -
Loan origination costs 49,819 26,361 35,148
Allowance for credit losses (333,787) (117,284) (191,000)
------------ ------------ ------------
Finance Receivables, Net 3,942,004 2,564,946 4,169,310
------------ ------------ ------------
Interest receivable on contracts 72,753 - 64,500
Stock subscriptions receivable 120,000 120,000 120,000
Equipment and leasehold
improvements, net 31,775 27,476 33,685
Other assets 5,659 26,068 41,133
------------ ------------ ------------
TOTAL $ 4,247,121 $ 2,760,074 $ 4,483,631
============ ============ ============
</TABLE>
<PAGE>
CREDIT CONCEPTS, INC.
BALANCE SHEETS
(Continued)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
April 30 July 31
(Unaudited)
--------------------------- ------------
1999 1998 1998
------------ ------------ ------------
<S> <C> <C> <C>
LIABILITIES
- -----------
Debt:
Bank line of credit $ 2,564,064 $ 1,873,931 $ 2,687,431
Other notes payable 285,272 230,000 301,500
Subordinated notes payable
to stockholders 1,013,839 420,294 1,165,976
Accounts payable and
accrued expenses 17,860 6,326 14,305
Interest payable 38,669 3,149 23,149
Capital lease payable 3,357 - -
------------ ------------ ------------
Total Liabilities 3,923,061 2,563,700 4,192,361
------------ ------------ ------------
STOCKHOLDERS' EQUITY
- --------------------
Common stock, no par value, 1,000
shares authorized, 300 issued
and outstanding 150,000 150,000 150,000
Additional paid-in-capital 206,842 206,842 206,842
Retained (deficit) (32,782) (130,468) (65,572)
------------ ------------ ------------
Total Stockholders' Equity 324,060 226,374 291,270
------------ ------------ ------------
TOTAL $ 4,247,121 $ 2,760,074 $ 4,483,631
============ ============ ============
</TABLE>
<PAGE>
CREDIT CONCEPTS, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months
Ended April 30
(Unaudited)
-----------------------------
1999 1998
------------ ------------
<S> <C> <C>
REVENUES
- --------
Interest on contracts $ 284,159 $ 117,081
Other income 15,914 1,051
Collection charges 4,542 -
------------ ------------
Total Revenues 304,615 118,132
------------ ------------
EXPENSES
- --------
Interest 85,287 42,615
Salaries 52,031 13,160
Provision for credit losses 95,179 97,302
Other operating expenses 56,833 46,041
------------ ------------
Total Expenses 289,330 199,118
------------ ------------
NET INCOME (LOSS) 15,285 (80,986)
RETAINED (DEFICIT), BEGINNING OF PERIOD (48,067) (49,482)
------------- ------------
RETAINED (DEFICIT), END OF PERIOD $ (32,782) $ (130,468)
============= ============
</TABLE>
<PAGE>
CREDIT CONCEPTS, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Nine Months Four Months
Ended April 30 Ended April 30
(Unaudited)
------------------------------
1999 1998
------------ -------------
<S> <C> <C>
REVENUES
Interest on contracts $ 962,791 $ 129,477
Other income 16,127 1,076
Collection charges 17,521 -
------------ ------------
Total Revenues 996,439 130,553
------------ ------------
EXPENSES
Interest 343,823 48,503
Salaries 145,347 21,926
Provision for credit losses 293,991 132,613
Other operating expenses 180,488 57,979
------------ ------------
Total Expenses 963,649 261,021
------------ ------------
NET INCOME (LOSS) 32,790 (130,468)
RETAINED (DEFICIT), BEGINNING OF PERIOD (65,572) -
------------ ------------
RETAINED (DEFICIT), END OF PERIOD $ (32,782) $ (130,468)
============ ============
</TABLE>
<PAGE>
CREDIT CONCEPTS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Four Months
Ended April 30 Ended April 30
(Unaudited)
------------------------------
1999 1998
------------ -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
- -------------------------------------
Net Income $ 32,790 $ (130,468)
------------- -------------
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for credit losses on
finance receivables 293,991 117,284
Depreciation and amortization 20,256 7,285
Recoveries of finance receivables
previously charged off 267,827 -
Changes in assets and liabilities:
Accrued interest on finance receivables (8,253) -
Loan origination costs 9,272 -
Other assets 22,131 (14,131)
Accounts payable, accrued and
other liabilities 22,432 6,195
------------- -------------
Total Adjustments 627,656 116,633
------------- -------------
Net Cash Provided (Used) by
Operating Activities 660,446 (13,835)
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
- -------------------------------------
Loans and contracts originated or
purchased (2,082,614) (2,206,110)
Loans and contracts repaid 1,738,830 -
Additions to equipment and leasehold
improvements (5,003) -
------------ -------------
Net Cash (Used) by Investing Activities (348,787) (2,206,110)
------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
- -------------------------------------
Proceeds from debt - 479,294
Net proceeds from credit line - 1,733,931
Repayment of debt, net of borrowings (291,732) -
------------- -------------
Net Cash Provided (Used) by
Financing Activities (291,732) 2,213,225
------------- -------------
NET INCREASE (DECREASE) IN CASH 19,927 (6,720)
CASH, BEGINNING OF PERIOD 55,003 28,304
------------- -------------
CASH, END OF PERIOD $ 74,930 $ 21,584
============= =============
</TABLE>
<PAGE>
CREDIT CONCEPTS, INC.
NOTES TO FINANCIAL STATMENTS (UNAUDITED)
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- -------------------------------------------------------------------------------
The Company's financial statements reflect all adjustments which, in the
opinion of management, are necessary for a fair statement of the results of
operations for the periods presented. The financial statements for the nine
month and four month periods should be read in conjunction with the financial
statements and notes thereto for the period ended July 31, 1998.
Reclassifications
- -----------------
Certain reclassifications have been made to the financial statements for the
periods presented from amounts previously reported to conform with
classifications currently adopted. Such reclassifications had no effect on
previously reported shareholders' equity or results of operations.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
Credit Concepts commenced operations in October 1997 and through April
30, 1999 has generated $1,473,842 of revenues and $32,782 of net operating
losses. At April 30, 1999 Credit Concepts had approximately $74,930 in cash,
$3,942,004 in net finance receivables (after deducting an allowance for credit
losses of $333,787 and adding capitalized loan origination costs of $49,819,
approximately $3,923,061 of indebtedness of all types and a shareholders'
equity of approximately $324,060.
PLAN OF OPERATION.
Credit Concepts is in the process of setting up an Investment
Certificate program to raise additional capital from outside investors.
Management expects to be able to sell all or a substantial portion of the
$5,000,000 of investment certificates within the ensuing twelve months and to
use the net proceeds to purchase vehicle contracts with reliable borrowers
within the Lane County, Oregon region. Because the investment certificates are
subordinated to bank borrowings and the contracts purchased do not
collateralize the investment certificates but may be used to collateralize
future bank borrowings, Credit Concepts expects to be able to borrow at least
an additional $8,500,000 from banks if all of the investment certificates are
sold and used in this fashion. If Credit Concepts is able to properly manage
the credit losses on the vehicle contracts it thus purchases, so that a
significant portion of the spread between the 31% effective interest rate on
the vehicle contracts and the 8% to 12% cost of funds is retained, it should be
able to meet all of the debt service obligations of the bank indebtedness and
investment certificates, including a reserve in the form of provision for
credit losses, and generate in addition a meaningful profit. It is Credit
Concepts' intention to implement this plan within the ensuing twelve months,
and to become profitable within the ensuing six months. There can be no
assurance that Credit Concepts will be successful in this endeavor.
Over the next twelve months, it is the goal of management to increase
the loan portfolio by 20-25%. This increase will be primarily obtained through
the purchase of retail installment contracts from automobile dealers.
Credit Concepts' business is not seasonal in nature. Its fiscal year
ends July 31.
UNCERTAINTY OF INTERNAL BUDGETS AND FORWARD-LOOKING INFORMATION.
Although Credit Concepts has prepared its internal budgets and its other
forward-looking information, some of which is reflected in this prospectus, in
accordance with the best of management's knowledge and belief, there will be
differences between the projected and actual results because events and
circumstances frequently do not occur as expected, and those differences may be
material and adverse. Credit Concepts' forward-looking information is based on
a number of estimates and assumptions that, though considered reasonable by
Credit Concepts' management, are inherently subject to significant economic and
competitive uncertainties and contingencies beyond the control of Credit
Concepts or its management and upon assumptions with respect to future business
decisions which are subject to change. Accordingly, there can be no assurance
that the anticipated results will be realized, and actual results may vary from
those projected. If actual results are lower than those anticipated, or if the
assumptions used in making the projections are not realized, Credit Concepts'
ability to achieve reasonable rates of revenues and earnings and to make timely
payment of its investment certificates may be adversely affected.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED APRIL 30, 1999.
Credit Concepts generated $996,439 of revenues and $32,790 of net
operating income during the nine months ended April 30, 1999. At April 30,
1999 Credit Concepts had approximately $74,930 in cash, $3,942,004 in net
finance receivables (after deducting an allowance for credit losses of $333,787
and adding capitalized loan origination costs of $49,819), approximately
$3,923,061 of indebtedness of all types and a shareholders' equity of
approximately $324,060.
Credit Concepts purchased or originated approximately $1,230,204 of
contracts and loans during the period, which accounted for approximately 31%
of total finance receivables outstanding during the period. Contracts
receivable declined by $481,088 from $4,325,162 to $3,844,074 due to attrition
and refinancing into direct loans. Net income during the period was $32,790
reflecting a higher and more seasoned finance receivable base and added fees
from direct lending activities that had not existed during the immediately
preceding seven-month period ended July 31, 1998. The allowance for credit
losses was increased from $191,000 at July 31, 1998 to $333,787 at April 30,
1999.
RESULTS OF OPERATIONS FOR SEVEN MONTHS ENDED JULY 31, 1998.
Credit Concepts experienced rapid growth during the first seven months
of 1998. In particular, as the result of the purchase of contracts, finance
receivables increased by 803% from $476,120 at December 31, 1997 to $4,298,310
at July 31, 1998. Interest on finance receivables contributed $468,116, or
99.3%, to the total revenues of $471,256 for the seven months ending July 31,
1998. Through use of its recently obtained consumer finance license, Credit
Concepts plans to increase revenues in the future with little or no additional
expense through the generation of loan and other fees by originating loans
directly with borrowers purchasing vehicles in addition to purchasing contracts
from dealers.
Net chargeoffs for the seven-month period were $40,129 or 1.7% of
average finance receivables outstanding during the period. However, a loss
provision of $231,129, representing 4.7% of new finance receivables, was
established and charged to operations for the period. This resulted in an
allowance for credit losses of $191,000, or 4.4% of finance receivables
outstanding at the end of the period. Credit Concepts expects that additional
loss provisions in excess of net chargeoffs will be charged to operations in
future periods, with the result that over time the allowance for credit losses
will increase both in absolute terms and as a percentage of finance receivables
outstanding at the end of future periods.
Reflecting in part the $231,129 provision for credit losses, which
constituted 43.1% of the $536,828 of total expenses for the seven-month period,
Credit Concepts incurred a net loss for the period of $65,572. Interest
expense of $154,671 constituted 28.8% of these total expenses, and salaries of
$79,017 constituted 14.7%. Credit Concepts plans to reduce the impact of
interest expense in future periods by borrowing through the sale of investment
certificates in this offering at interest rates that are lower than those it is
currently paying. Even though Credit Concepts incurred a net loss for the
period of $65,572, net cash flows for the period were $26,699, with operating
activities generating a positive cash flow of $123,283.
LIQUIDITY AND CAPITAL RESOURCES.
The finance nature of Credit Concepts' business results in its being
capital intensive. To date, Credit Concepts has relied primarily on secured
bank financing and shareholder loans to fund its purchase of contracts.
From inception to December 31, 1997, Credit Concepts borrowed an
aggregate of $386,000 from its management, and during the ensuing seven months
ended July 31, 1998, it borrowed an additional $814,000 from Credit Concepts
management and $472,500 from friends and family of management in private
transactions. Most of these funds were borrowed pursuant to 12% promissory
notes, most of which are payable upon demand. Certain of these borrowings have
been repaid and an aggregate of $1,467,476 remained outstanding at July 31,
1998.
On April 6, 1998 Credit Concepts entered into a loan agreement with
Pacific Continental Bank that establishes a $3,000,000 line-of-credit secured
by Credit Concepts' assets, including its contract and loan portfolio. Under
the terms of the loan agreement, Credit Concepts may borrow an amount equal to
70% of eligible contract and loan accounts and is obligated, among other
things, to maintain: a tangible net worth of not less than $300,000, a debt to
tangible net worth ratio of 5 to 1, life insurance on each of the lives of Tom
W. Palmer and Eugene C. Albert of $250,000, personal guarantees of the loan of
$3,000,000 by Tom W. Palmer and Eugene C. Albert and of $1,000,000 by Ted W.
Palmer, and compliance with the terms and conditions of all other agreements to
which it is a party. At April 30, 1999 Credit Concepts had outstanding secured
bank indebtedness of $2,564,064 pursuant to this credit facility.
As yet, Credit Concepts has not experienced difficulties in obtaining
financing. However, it has begun to reach the limits of its current bank line-
of-credit and expects to rely increasingly upon sales of the investment
certificates in the present offering, which have lower interest rates than
interest rates that Credit Concepts is currently paying, for financing the
purchase of contracts and the funding of loans in the future. Because the
proceeds from the sale of investment certificates will be used to purchase
contracts and originate loans that serve as collateral for bank borrowings, and
because the investment certificates are subordinated to bank borrowings, the
sale of investment certificates is expected to increase the ability of Credit
Concepts to borrow from commercial banks. If Credit Concepts is able to
successfully sell investment certificates at interest rates that are lower than
the rates charged by commercial banks, as Credit Concepts' competitors have
been able to do over the years, Credit Concepts plans in the future to rely
upon the sale of investment certificates over bank borrowings to fund its
portfolio of contracts and loans.
If Credit Concepts is able to sell all of the $5,000,000 of investment
certificates in this offering within the ensuing twelve months, it does not
anticipate the need to raise additional funds from other sources, other than
through bank borrowings which it believes will then be available to it, within
that period. In this regard, based upon discussions with Credit Concepts'
banks, Credit Concepts expects to refinance the outstanding $2.7 million line-
of-credit due June 15, 1999 to Pacific Continental Bank; however, Credit
Concepts presently has no commitment from any bank to do so. Credit Concepts
met the covenants of the loan agreement with Pacific Continental Bank at
December 31, 1998, including the requirement that Credit Concepts have a
tangible net worth of not less than $300,000 at December 31, 1998. Credit
Concepts expects to extend this line of credit beyond its termination date of
June 15, 1999 with either Pacific Continental bank or another lender on terms
at least as good as the present ones. However, Credit Concepts presently has
no commitment for such an extension, and there can be no assurance that it will
timely obtain one on favorable terms.
YEAR 2000 ISSUES.
Credit Concepts has made inquiry of its computer, communications, power
and automobile suppliers, and, in particular, has inquired of its dealers
whether any computer chip component in any make of used automobile that serves
as collateral for the Company's Contracts contains a real-time clock that could
be subject to failure, and has received assurances that no failures will occur.
Further, Credit Concepts' automobile dealer suppliers have indicated that they
do not expect any disruption in the availability and sale of used vehicles as
the result directly or indirectly of Year 2000 systems failures. However, in
view of the subtlety of the problem and the unfamiliarity with the scope of the
problem by many in the business community, Credit Concepts expects to develop
contingency plans in the event it should encounter some form of computer or
service failures at or after midnight on December 31, 1999 as the result of
Year 2000 problems. Credit Concepts is continuing to explore the scope and
nature of the effects upon its business that may result from Year 2000 computer
failures and errors and has deferred the establishment of contingency plans
pending the development of further information concerning the impact of the
Year 2000 issue upon Credit Concepts and the alternatives available to it.
However, Credit Concepts does not expect that the costs associated with these
contingency plans will be material.
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
three months ended April 30, 1999.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
Exhibit 27 Financial Data Schedule
Reports on Form 8-K
None.
<PAGE>
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.
CREDIT CONCEPTS, INC.
Date: June 11, 1999 By: /s/ Tom W. Palmer
------------------------------
Tom W. Palmer, President
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED APRIL 30, 1999, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-START> AUG-1-1998
<PERIOD-END> APR-30-1999
<CASH> 74,930
<SECURITIES> 0
<RECEIVABLES> 4,275,791
<ALLOWANCES> (333,787)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 42,703
<DEPRECIATION> (10,928)
<TOTAL-ASSETS> 4,247,121
<CURRENT-LIABILITIES> 59,886
<BONDS> 3,863,175
0
0
<COMMON> 150,000
<OTHER-SE> 174,060
<TOTAL-LIABILITY-AND-EQUITY> 4,247,121
<SALES> 0
<TOTAL-REVENUES> 996,439
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 963,649
<LOSS-PROVISION> 293,991
<INTEREST-EXPENSE> 343,823
<INCOME-PRETAX> 32,790
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 32,790
<EPS-BASIC> 109.30
<EPS-DILUTED> 109.30
</TABLE>
