<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1
TO
FORM 10-K
---------------
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the fiscal year ended July 31, 1999
[ ] 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 333-66853
CREDIT CONCEPTS, INC.
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
-----------------------
Oregon 93-1236587
- -----------------------------------------------------------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
2149 Centennial Plaza, Suite 2, Eugene, OR 97401
- -----------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on
which registered
- ------------------------------------- ------------------------------------
Securities registered pursuant to Section 12(g) of the Exchange Act:
- -------------------------------------------------------------------------------
(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by
Section 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 [X]
No [ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-
KSB. [ X ]
State issuer's revenues for its most recent fiscal year: $1,300,100
----------------
State the aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price at which the
common equity was sold, or the average bid and asked price of such common
equity, as of a specified date within the past 60 days. (See definition of
affiliate in Rule 12b-2 of the Exchange Act.): NONE OF CREDIT CONCEPTS'
COMMON EQUITY IS HELD BY NON-AFFILIATES.
Note: If determining whether a person is an affiliate will involve an
unreasonable effort and expense, the issuer may calculate the aggregate market
value of the common equity held by non-affiliates on the basis of reasonable
assumptions, if the assumptions are stated.
(ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
----------------------------------------------------------------------
Check whether the issuer has 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 [ ] INAPPLICABLE
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
-----------------------------------------
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date. 300 SHARES OF COMMON STOCK.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
NONE.
Transitional Small Business Disclosure Form (Check one): Yes [ ] No [X]
<PAGE>
PART I
-------
ITEM 1. DESCRIPTION OF BUSINESS.
- ------- ------------------------
Credit Concepts, Inc. is in the business of purchasing retail installment
contracts that have been originated by regional used automobile dealers in
connection with the financing of used automobiles and other vehicles. Upon the
purchase of a contract, Credit Concepts obtains the right to receive all
remaining payments under the contract and a security interest in the vehicle
financed. Credit Concepts seeks to collect the principal and interest due on
the contracts that it purchases. Credit Concepts does not acquire contracts in
bulk but acquires them individually, usually from originating used automobile
dealers, after a credit review and analysis of the specific borrower. Payments
under the contracts extend for up to 66 months, and it is the strategy of
Credit Concepts to match approximately the maturities of the investment
certificates that it is presently offering to the public with the payment
schedules under the contracts it purchases in order to reduce the financial
risks associated with unforeseen declines in interest rates. Credit Concepts'
operations consist primarily of evaluating which contracts to purchase,
negotiating the terms of the purchase, and arranging for Credit Concepts'
financing of the purchase.
Credit Concepts has been issued a consumer finance license by the Oregon
Department of Consumer and Business Services, which allows Credit Concepts to
make loans directly to the purchasers of used vehicles rather than having
Credit Concepts purchase the loans from the dealers after they have been made.
While Credit Concepts has originated a significant number of directs loans, it
expects to continue to develop and maintain their portfolio of accounts
receivables through the purchase of contracts from dealers.
Economy Of Lane County, Oregon.
- -------------------------------
The availability and credit-worthiness of the underlying borrowers on the
Credit Concepts' contracts are influenced by the state of the economy for Lane
County, Oregon, which includes the cities of Eugene and Springfield, the market
area for the used automobile dealers that originate most of Credit Concepts'
contracts. The timber and forest products industry and the University of
Oregon have historically been significant influences on the economy of Lane
County, Oregon, although in recent years an impact has resulted from the
location of various technology companies in the region. In recent years
California has been an important source of in-migration. In view of the
sprawling lay-out of the cities of Eugene and Springfield and surrounding
neighborhoods, and of the fact that, on the average, in over one-third of the
days during the year there is measurable precipitation, most workers in the
Lane County area regularly commute to work by automobile, and, indeed, for many
jobs, automobile transportation is the only practical means of commuting to
work. For this reason, Credit Concepts believes that access to an automobile
is essential to job retention for a significant portion of the Lane County work
force and that this influences the payment priority for many workers in the
region with outstanding consumer credit.
The following table shows population growth for Lane County since 1960:
<TABLE>
POPULATION OF LANE COUNTY, OREGON 1960 - 1990
---------------------------------------------
<CAPTION>
10-Year
Year Population Change
---- ---------- -------
<S> <C> <C> <C>
1960 162,890
1970 215,401 +32.2%
1980 275,226 +27.8%
1990 282,912 +2.8%
</TABLE>
The number of vehicles registered in Lane County has increased each year
over the past ten years. The following table shows the number of vehicle
licenses issued for vehicles in Lane County for each of the past ten years for
which information is available:
<TABLE>
NUMBER OF VEHICLE LICENSES ISSUED FOR VEHICLES IN LANE COUNTY
-------------------------------------------------------------
<CAPTION>
Year Number of Vehicle Licenses
---- --------------------------
<S> <C> <C>
1989 235,771
1990 237,045
1991 241,959
1992 243,817
1993 249,398
1994 254,689
1995 255,790
1996 263,066
1997 271,285
1998 276,031
</TABLE>
Marketing.
- ----------
Credit Concepts does not originate a significant number of its own loans
on the sale of vehicles but relies primarily upon used automobile dealers in
the Lane County, Oregon area to originate them and sell the contracts to Credit
Concepts. In connection with its ongoing purchase of contracts, Credit
Concepts has entered into master dealer agreements with fourteen automobile
dealers that sell used automobiles to borrowers in Lane County and with four
dealers that sell used automobiles to borrowers in the neighboring counties of
Linn, Marion and Polk. These dealers also sell contracts to certain of Credit
Concepts' competitors.
Credit Concepts' has been able to purchase a reasonable number of
contracts upon advantageous terms from dealers that sell to borrowers in Lane
County and neighboring counties and expects to be able to continue to do so for
the foreseeable future. During the twelve months ended July 31, 1999, Credit
Concepts has purchased 25% in value of its vehicle contracts from Lithia Toyota
of Springfield, 14% in value of its vehicle contracts from Lithia Nissan of
Eugene, and 10% in value of its vehicle contracts from Kieffer's Eugene Mazda.
No other dealer has accounted for as much as 10% of the value of vehicle
contracts purchased during this period. Credit Concepts expects that the
purchase of contracts outside of Lane County will increase in the future as
management pursues its goal of improving the quality of the contract portfolio
by selecting contracts from a larger number of nearby dealers.
Credit Concepts has been granted by the Oregon Department of Consumer and
Business Services a consumer finance license that allows Credit Concepts to
make loans directly to the purchasers of used automobiles rather than having to
purchase the loans from the dealer after they have been made. However, Credit
Concepts expects to continue to purchase the major portion of the contracts in
its portfolio from used automobile dealers in and around Lane County.
Under the master dealer agreements, a contract may be purchased with full
and partial guarantees of the used automobile dealers selling the contracts.
Before entering into a master dealer agreement with a used automobile dealer,
Credit Concepts investigates the viability of the dealer to assess the ability
of the dealer to perform its guarantee or obligation to repurchase contracts in
the event of defaults on the contracts by the underlying borrowers.
Approximately 9.5% of the dollar value of contracts outstanding on July 31,
1999 were covered by full or partial guarantees by the used automobile dealers
supplying contracts to Credit Concepts.
Vehicle Contracts.
- ------------------
Almost all of Credit Concepts' business consists of the purchase and
collection of vehicle contracts from used automobile dealers. The form of the
contract is a standard one widely used within the automobile industry. The
price that Credit Concepts pays for a contract anticipates that total payments
under the contract will exceed the net cost of the vehicles, plus anticipated
financing and other costs, and a return to Credit Concepts. Under the terms of
the contract, the borrower is obligated to maintain, insure and pay taxes on
the vehicle for the term of the contract.
Credit Concepts' credit personnel review the credit record of the
underlying borrower for each contract that Credit Concepts purchases and, based
upon that review, make the decision whether or not to purchase the contract.
Credit Concepts purchases contracts individually after such a credit review and
as a matter of policy does not purchase contracts in bulk. Credit Concepts
considers a number of factors in determining the credit-worthiness of the
underlying borrowers for the contracts it purchases. Recently, for ease of
servicing the contracts, Credit Concepts has decided to limit its contract
purchases to those with borrowers that reside within seventy miles of Credit
Concepts' offices. In this regard, roughly 40% of the borrowers under Credit
Concepts' contracts make their contract payments by personal visit to Credit
Concepts' offices in Eugene, Oregon. Further, Credit Concepts' employees are
within a relatively short drive to most of the dealers from which it purchases
contracts and to the residences of the underlying borrowers, which allows the
employees to inspect vehicles before a contract is purchased and assists in
repossession upon a default, should either be necessary or desirable. The
close working relationship which Credit Concepts maintains with its automobile
dealers allows Credit Concepts' credit personnel to be apprised of surpluses
and shortages of particular makes and models of used automobiles in and around
Lane County, which provides insight at the time of contract purchase into the
extent of realization on the vehicle collateral in the event of default.
Credit Concepts does not buy contracts on vehicles owned by persons who are not
both employed and have a permanent residence in and around Lane County.
Credit Concepts purchases contracts on a variety of vehicles. Certain
information for contract receivables as of July 31, 1999, and January 31, 1999,
is shown below:
<TABLE>
CERTAIN INFORMATION FOR CONTRACT RECEIVABLES AS OF
JULY 31, 1999 AND JANUARY 31, 1999
--------------------------------------------------
<CAPTION>
July 31 Jan. 31
----------- -----------
<S> <C> <C>
Number of Contracts 1,073 958
Cost of Contracts 5,819,676 $5,277,494
Contract Receivables Outstanding $3,806,889 $4,159,635
Average Annual Percentage Rate
(APR) of Interest 30.9% 30.8%
Average Contract Balance $3,548 $4,323
Average Term of Contract 37 months 39 months
Average Age of Contract 11 months 9 months
Average Payment per Month $217 $212
</TABLE>
Credit Concepts purchases contracts for a large variety of borrowers and
vehicles. The largest, smallest and average contracts purchased during the six
months ended January 31, 1999 were $19,698, $398 and $4,630, respectively. The
largest, smallest and average contracts purchased during the six months ended
July 31, 1999 were $20,771, $845 and $5,423 respectively. The longest term was
66 months and the shortest was 6 months for both periods.
Credit Loss Experience.
- -----------------------
Credit Concepts commenced business in October, 1997 and has sufficient
operating experience to confirm the adequacy of the provisions for credit
losses on its contracts reflected on Credit Concepts' financial statements.
For the twelve months ended July 31, 1999, Credit Concepts has increased the
provision for credit losses to a level that is consistent with those of the
industry for this type of lending.
At January 31, 1999, total balances owing on contracts and loans
receivable past due from 60 to 89 days was $78,115, or 1.78% of total contracts
and loans receivable, and on contracts and loans past due 90 days and over was
$104,104, or 2.37% of total contracts and loans receivable. At July 31, 1999,
the total balance owing on contracts and loans receivable past due from 60 to
89 days was $87,600, or 2.04% of total contracts and loans receivable, and on
contracts and loans past due 90 days and over was $99,537, or 2.32% of total
contracts and loans receivable.
A contract receivable is considered past due if any portion of any
installment is or remains 30 days delinquent. Credit Concepts' policy is not
to extend or renew past due accounts. Credit Concepts stops accruing revenue
on a past due receivable when the account is in litigation, the vehicle is
repossessed, or at such earlier time as, in the judgment of management, full
collection of the contract becomes doubtful.
Credit Concepts itself does not engage in repossessions of collateral
vehicles but uses for this purpose the services of a licensed and bonded
independent contractor that specializes in vehicle repossessions. After the
vehicle is sold under the procedures of the collateral agreement, Credit
Concepts pursues the deficiencies to a judgment against the borrower and
collects by garnishment or other appropriate procedure.
Certain statutory provisions, including federal and state bankruptcy and
insolvency laws applicable to individuals, may limit or delay the ability of
Credit Concepts to repossess and resell vehicles under the contracts or
anticipated loans, or to enforce a deficiency judgment against a borrower under
a contract. Oregon law prohibits the collection of a deficiency judgment
following the repossession or voluntary surrender of a vehicle where the
balance due on the contract or loan is less than $1,250, but does not limit
Credit Concepts' right to collect the contract balance in situations where
Credit Concepts does not obtain possession of the vehicle or to collect damages
where the vehicle has been wrongfully damaged. In addition, Credit Concepts
may determine in its discretion that a deficiency judgment is not an
appropriate or economically viable remedy against a particular borrower, or may
settle at a significant discount any deficiency judgment that it does obtain.
Although Credit Concepts may obtain a security interest in the vehicles
for the payment of the contracts it acquires, and, when properly licensed will
include the loans it originates, Oregon state law provides for the priority
over Credit Concepts' security interest of statutory liens for certain repairs
made to or unpaid taxes assessed against a vehicle. In addition, federal laws
permit the confiscation of a vehicle used in unlawful activities - drugs or
prostitution, for example - that may serve as collateral for contracts and
loans. Those laws may result in the loss of Credit Concepts' priority security
interests in confiscated property or in additional expenses in recovering
confiscated property that serves as collateral for contracts or for loans. To
date, none of the vehicles serving as collateral for Credit Concepts' contracts
has been confiscated.
The following table shows Credit Concepts' realization experience on those
past due contracts receivable for which realization efforts have been completed
during the seven months ended July 31, 1998, and the twelve months ended July
31, 1999
<TABLE>
PAST DUE CONTRACT RECEIVABLES FOR WHICH
REALIZATION EFFORTS HAVE BEEN COMPLETED
- ----------------------------------------------------------------------------
<CAPTION>
Number of Total Total Average
Period Past Due Amount Amount Percentage
Ending Contracts Past Due Realized Realized
- ------------- --------- --------- --------- ----------
<S> <C> <C> <C> <C>
July 31, 1998 17 $82,794 $42,665 51.5%
July 31, 1999 99 $504,007 $302,449 60.0%
</TABLE>
The credit loss experience of Credit Concepts for the seven months ended
July 31, 1998 and the twelve months ended July 31, 1999 is as follows:
<TABLE>
CREDIT LOSS EXPERIENCE
----------------------
<CAPTION>
Additions
Reserve at to reserve Charge offs Reserve at
Period beginning charged to net of end of
Ending of period operations recoveries period
- ------ ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
July 31,1998 $ - $231,129 $40,129 $191,000
(4.7%)(1) (1.7%)(2) (4.4%)(3)
July 31, 1999 $191,000 $336,558 $201,558 $326,000
(7.8%) (4.6%) (8.0%)
- --------------------
1 Percentage of new receivables for the period.
2 Percentage of average receivables outstanding.
3 Percentage of receivables outstanding at end of period.
</TABLE>
Financing Of Contracts.
- -----------------------
Credit Concepts is continuously engaged in financing in order to be able
to purchase contracts from automobile dealers as vehicles are sold to qualified
borrowers. To date Credit Concepts has relied primarily upon bank borrowings
and the purchase of debt and equity by its founders and others for this
purpose. However, Credit Concepts has begun to reach the limits of its
presently available bank credit and, like certain of its competitors, is now
seeking to finance a portion of its contracts through the public offer and sale
of unsecured investment certificates, which are now underway. Credit Concepts
intends to finance the purchase of its contracts in this manner for the
indefinite future.
Credit Concepts has entered into loan agreements and issued promissory
notes in connection with its bank lines-of-credit. Those agreements and
promissory notes require Credit Concepts to comply with and maintain various
financial and other covenants in order to avoid default. Those covenants
include the necessity to maintain a minimum net worth of $300,000 and a debt to
tangible net worth ratio of less than 10 to 1 at December 31, 1999, as well as
for it to comply with payment and performance obligations of its bank lines-of-
credit and other contractual obligations. Credit Concepts' bank indebtedness
is secured by all of its assets, including its finance receivable portfolio.
The investment certificates are unsecured, but the proceeds from their sale
will be used to purchase contracts that serve as collateral for the bank
indebtedness. For this reason, the unsecured debt represented by the
certificates will be treated as equity for purposes of the ratios and capital
minimums that must be maintained under the bank line-of-credit agreement. As a
result, sale of the certificates in this offering and the purchase of contracts
with the proceeds will increase the assets of Credit Concepts available as
collateral for its bank line-of-credit and is expected to allow Credit Concepts
to increase the size of its bank line of credit should it desire to do so.
Credit Concepts plans for its business to grow significantly in ensuing
years through the purchase of contracts and the origination of loans.
Virtually all of this increase in business is expected to be financed by a
corresponding increase in Credit Concepts' indebtedness of all types, including
bank indebtedness and the sale and issuance of investment certificates.
Credit Concepts intends to amend its present offering of investment
certificates to pay interest at a rate that will be more competitive and to
apply the proceeds from this offering to pay down the balance on its existing
line of credit. Because the investment certificates are subordinated to bank
indebtedness and thus not included as debt in the financial covenants of the
bank loan agreements, this application of proceeds should strengthen Credit
Concepts' borrowing ability. To the extent that the proceeds from this
offering are used to purchase contracts rather than to pay down the line of
credit, these contracts will serve as additional collateral under the line of
credit and increase the amount that may be borrowed. It is expected that these
credit resources will enable the orderly repayment of principal and interest on
the investment certificates as they come due.
Competition.
- ------------
Credit Concepts consumer credit business is highly competitive with other
consumer credit businesses in and around Lane County, Oregon. Most of Credit
Concepts' competitors are more established, larger and have greater resources
than does Credit Concepts. In addition to companies that engage in the
consumer credit business in and around Lane County, Oregon, many banks,
financial institutions and other types of finance companies in Credit Concepts'
market area originate and purchase used vehicle contracts and offer consumers
debt investment instruments in competition with Credit Concepts. Competition
is generally based upon the price paid for contracts, which determines the rate
of return, and the interest rate on the investment instruments, as well as the
credit-worthiness of the underlying borrowers. An increase in competition in
the financing of vehicle contracts in Credit Concepts' market area may decrease
the return from such contracts to Credit Concepts.
Governmental Regulation.
- ------------------------
Credit Concepts is subject to significant governmental regulation at both
the federal and state levels. Numerous federal and state consumer laws and
related regulations impose substantial requirements upon lenders and services
involved in consumer finance, and upon the origination and collection of
consumer loans, including Credit Concepts' loans, and retail installment
contracts. Some laws and regulations with which Credit Concepts must comply
include, together with other similar federal and state laws:
The Truth-in-Lending Act
The Equal Credit Opportunity Act
The Federal Trade Commission Act
The Fair Credit Billing Act
The Fair Credit Reporting Act
The Fair Debt Collection Practices Act
The Magnuson-Moss Warranty Act
The Federal Reserve Board's Regulations B and Z
The Federal Consumer Credit Protection Act
The Oregon Unlawful Debt Collection Practices
Oregon law also contains express statutory provisions regulating the
form, content, terms and enforcement of retail installment contracts involving
motor vehicles.
A rule of the Federal Trade Commission and certain provisions of
Oregon law have the effect of subjecting Credit Concepts to all claims and
defenses which the borrower in the transaction could assert against the
automobile dealer that sold the vehicle. In addition, in order to conduct its
consumer loan business, Credit Concepts must continue to maintain its consumer
finance license from the state of Oregon in good standing.
Credit Concepts believes it currently holds all material licenses
necessary to carry on its business as presently conducted in the state of
Oregon. Any failure of Credit Concepts to maintain its licenses should not
affect the quality of its then existing portfolio of contracts.
Employees.
- ----------
Credit Concepts has a total of seven full-time employees, including
its management, of which two are engaged in credit analysis and contract
purchasing, two are engaged in contract collection, including vehicle
repossession, and three are administrative and clerical. Credit Concepts also
uses the services of an independent contractor in repossession efforts and
another for bookkeeping services.
Credit Concepts provides partial medical benefits to its employees.
Credit Concepts has recently established an IRA program for its employees and
will contribute matching funds, subject to certain limitations. Credit
Concepts believes that its relations with its employees are satisfactory.
Risk Factors.
- -------------
THE FOLLOWING ARE CERTAIN RISKS THAT YOU SHOULD CONSIDER IN DECIDING
WHETHER OR NOT TO PURCHASE CREDIT CONCEPTS' INVESTMENT CERTIFICATES. ONLY
OREGON RESIDENTS ARE PRESENTLY ELIGIBLE TO INVEST. THESE RISK FACTORS ARE NOT
PRESENTED IN ANY PARTICULAR ORDER OF SIGNIFICANCE.
LOW PRIORITY OF INVESTMENT CERTIFICATES MAY INTERFERE WITH THEIR
REPAYMENT. Investment certificates are unsecured general obligations of Credit
Concepts. There is no collateral or security interest securing repayment of
the investment certificates, and repayment of the investment certificates is
not guaranteed or insured by any governmental agency or other third party. As
an unsecured general creditor of Credit Concepts, in the event of liquidation
of Credit Concepts, you as a holder of investment certificates would share
equally with other general creditors of Credit Concepts in the remaining
unsecured assets of Credit Concepts, if any. However, investment certificates
are subordinated to Credit Concepts' past and future bank indebtedness, and the
bank indebtedness is secured by all of the Credit Concepts' assets, including
contracts receivable. These contracts receivable, which constitute Credit
Concepts' principal asset, would first be applied to satisfy that bank
indebtedness upon any liquidation of Credit Concepts before being available to
general creditors such as you as a holder of the investment certificates. At
July 31, 1999, Credit Concepts had $2,695,509 of secured bank borrowings
outstanding and $211,000 of unsecured borrowings of all kinds.
PAYMENT OF ENTIRE INVESTMENT CERTIFICATE AT MATURITY MAY IMPEDE CREDIT
CONCEPTS' ABILITY TO PAY. The investment certificates do not provide for the
payment of any amount of principal prior to maturity, whether in installments
or otherwise, nor has Credit Concepts established a reserve for the payment of
principal or interest through a payment pool or sinking fund. Accordingly, the
entire amount of the principal must be paid by Credit Concepts at the date of
maturity or at such earlier date as may be required under a pre-maturity
liquidation notice. The ability of Credit Concepts to pay you upon maturity of
the investment certificates or upon a pre-maturity liquidation notice will
depend upon the status of Credit Concepts' cash and credit resources at the
time such payment is required.
ANY RESALE OF THIS INVESTMENT TO OTHERS MAY BE DIFFICULT DUE TO THE LACK
OF A TRADING MARKET FOR THE INVESTMENT CERTIFICATES. Although the investment
certificates may be transferred on Credit Concepts' investment certificate
ownership records by signing the form of assignment on the back of the
investment certificate and delivering it to the new owner, there is no trading
market for Credit Concepts' investment certificates, and Credit Concepts does
not expect that a trading market will arise in the future. Accordingly, you
should be prepared to rely solely upon Credit Concepts' ability to repay the
investment certificates as general unsecured obligations when they become due.
CREDIT CONCEPTS HAS A LIMITED OPERATING AND PROFIT HISTORY. For the 12
months ended July 31, 1999, Credit Concepts has generated revenues of
$1,300,110 and $68,990 of net operating profit. At July 31, 1999, Credit
Concepts had $81,904 in cash, $4,024,841 of net finance receivables, after
deducting an allowance for credit losses of $326,000 and adding capitalized
loan origination costs of $53,662, approximately $3,845,417 of indebtedness of
all types and a shareholders' equity of $300,260. There can be no assurance
that Credit Concepts' operations will continue to generate sufficient revenues,
earnings or cash flows to pay the principal and interest on the investment
certificates when they become due.
CREDIT CONCEPTS IS DEPENDENT UPON ONGOING FINANCING, BUT HAS NO
ARRANGEMENTS FOR ADDITIONAL FINANCING OTHER THAN THIS OFFERING. The nature of
Credit Concepts' business is such that it is required to engage in ongoing
financing in order to have the funds to continue to purchase contracts. Credit
Concepts has begun to reach the limits of its presently available bank credit
and is now seeking to finance its contracts through the sale of unsecured
investment certificates. Credit Concepts has not previously attempted to
finance its purchase of contracts in this manner, and the success of this
approach is uncertain. Should Credit Concepts fail to sell sufficient
investment certificates on an ongoing basis to enable it to purchase a
satisfactory amount of contracts, Credit Concepts will be required to seek
other methods of financing the contracts or Credit Concepts would self-
liquidate over time as investment certificates and contracts mature. Credit
Concepts does not presently have any arrangements for alternate financing and
may not be able to timely arrange alternate financing on acceptable terms
should it seek to do so. There can be no assurance that Credit Concepts'
founders will be willing to continue to guarantee bank lines-of-credit as they
have for existing bank lines-of-credit or that Credit Concepts will be able to
continue to secure bank lines-of-credit in the future beyond existing renewal
dates.
CREDIT CONCEPTS' PLANNED SUBSTANTIAL INCREASES IN CORPORATE INDEBTEDNESS
AND RELATED DEBT-SERVICE OBLIGATIONS INCREASE THE RISK THAT THE INVESTMENT
CERTIFICATES MAY NOT BE REPAID WHEN DUE. Credit Concepts plans significant
growth in its business in ensuing years through the purchase of contracts and
the origination of loans. Virtually all of this increase in business is
expected to be financed by a corresponding increase in indebtedness of all
types, including bank indebtedness that will be secured and prior in right of
payment to the investment certificates in this offering, as well as unsecured
debt that will be on a parity with the investment certificates. Although this
increase in business is expected to increase assets and revenues and generate
earnings, it will concurrently increase the level of debt service required, and
should Credit Concepts' anticipated operational success fail to materialize as
planned, the increased burden of this debt service could adversely affect
Credit Concepts' ability to timely pay interest and principal on the
certificates when they become due.
ANY SIGNIFICANT ADJUSTMENTS TO DEBT SERVICE COVERAGE ESTIMATES, WHICH ARE
UNCERTAIN BECAUSE OF LIMITED CREDIT LOSS EXPERIENCE FOR CONTRACTS RECEIVABLE,
COULD RESULT IN DEFAULT ON FINANCIAL COVENANTS FOR BANK INDEBTEDNESS, WHICH
INDEBTEDNESS HAS PRIORITY OVER THE INVESTMENT CERTIFICATES. Because the
provision for credit losses on Credit Concepts' financial statements is such a
significant portion of the charge against its revenues in the determination of
net income, any significant adjustments to the allowance for credit losses
through significant charges against the provision for credit losses is apt to
have a material effect upon net income, which could be adverse. In this
regard, the contracts in Credit Concepts' loan portfolio are primarily "higher
risk" loan contracts originated by dealers in used vehicles. Furthermore, the
statistics for credit losses on used vehicle contracts in the industry within
recent years reflect to some extent the health of the U.S. economy during that
period, and may not prove valid during periods of recession. Any significant
adverse adjustments to the allowance for credit losses could result in a
default under the loan covenants for Credit Concepts' bank indebtedness. That
bank indebtedness has priority in right of payment over the investment
certificates in this offering.
THE RECEIPT BY CREDIT CONCEPTS OF MULTIPLE PRE-MATURITY LIQUIDATION
NOTICES COULD PRECIPITATE A LIQUIDITY CRISIS AND IMPAIR TIMELY PAYMENT OF
INVESTMENT CERTIFICATES. Should Credit Concepts receive over a short period of
time an unexpectedly large number of pre-maturity liquidation notices from
investors in the certificates, Credit Concepts may not then have available
sufficient cash and credit resources to retire these certificates in an orderly
fashion and may be required under the circumstances to liquidate contracts in
the market on unfavorable terms in order to meet its obligations under the
terms of the certificates, to Credit Concepts' detriment. Such an event might
occur because of liquidity requirements of investors in the event of a sharp
economic recession, or because of a sudden appearance of alternative
investments with more attractive rates within the areas in which Credit
Concepts' investment certificates have been sold, as well as for other possible
reasons. There can be no assurance, should Credit Concepts receive an
unanticipated volume of liquidation notices within a short period of time, that
Credit Concepts would be able to sell sufficient contracts to meet these
obligations, and Credit Concepts might be required to make payment beyond the
90 day period provided in the certificates, which would constitute a default
under the terms of the certificates and the cross-default provisions of Credit
Concepts' secured bank loans.
INVESTORS MAY NOT BE ABLE TO TIMELY PROTECT THEMSELVES IN THE EVENT OF A
DEFAULT ON BANK LOAN COVENANTS BECAUSE, ALTHOUGH A DEFAULT ON BANK INDEBTEDNESS
WOULD ACCELERATE BANK DEBT MATURITIES, A DEFAULT ON BANK INDEBTEDNESS WOULD NOT
ACCELERATE INVESTMENT CERTIFICATE MATURITIES. Credit Concepts' loan agreements
and promissory notes in connection with Credit Concepts' bank lines-of-credit
require Credit Concepts to comply with and maintain various financial and other
covenants in order to avoid default. Any default upon Credit Concepts' bank
lines-of-credit, which is secured by all of Credit Concepts' assets, including
contracts receivable, and senior in right of payment to the investment
certificates, could immediately severely and adversely affect Credit Concepts'
ability to pay the investment certificates. The investment certificates do not
have cross-default provisions, so that any default upon Credit Concepts' bank
indebtedness or other obligations would not result in an acceleration of
maturities or provide other default remedies to you as a holder of the
investment certificates.
CREDIT CONCEPTS IS SUBJECT TO RISKS FROM ITS LACK OF KEY PERSONNEL
EMPLOYMENT AGREEMENTS AND INSURANCE. Credit Concepts is highly dependent upon
the skills and efforts of its employees, including those that serve as its
management, for the operation of its business. However, Credit Concepts does
not have employment contracts with any of its management or employees, nor does
it maintain key man insurance on any of their lives, except for insurance
payable to Credit Concepts' bank. There is no guarantee that any of Credit
Concepts' current employees will continue to be employed by Credit Concepts in
the future, and if key employees should unexpectedly leave the employment of
Credit Concepts, voluntarily or by reason of death or disability, such could
have a material adverse effect on Credit Concepts and its ability to pay
investment certificates.
CREDIT CONCEPTS COULD BE ADVERSELY AFFECTED BY A DOWNTURN IN THE LOCAL
ECONOMIES OF LANE COUNTY, OREGON AND NEIGHBORING COUNTIES. The availability
and credit-worthiness of the underlying borrowers on Credit Concepts' contracts
are influenced by the state of the economies for Lane County, Oregon and
neighboring counties, the market area for the used automobile dealers that
originate Credit Concepts' contracts. Should there be an economic downturn
within this area, whether as a result of weakness in the economy of the region
or in the U.S. economy as a whole, the ability of Credit Concepts to collect on
its contracts and ultimately to pay on its certificates could be adversely
affected. The same effect would apply to loans made directly to the purchasers
of vehicles under Credit Concepts' Oregon consumer finance license.
CREDIT CONCEPTS COULD SUFFER BUSINESS DISRUPTION FROM COMPUTER APPLICATION
FAILURE AT YEAR 2000. Because the real-time clocks in many existing computer
chips do not properly recognize a year that begins with "20" rather than "19,"
many computer applications based upon those chips could fail or create
erroneous results at and after midnight on December 31, 1999. Because many of
these chips are embedded in existing items of equipment and are non-
programmable, components or all of the equipment must be replaced to obviate
these failures or erroneous results. To the extent that faulty chips are not
replaced in critical components of equipment, heat, power, telephone and other
services to Credit Concepts, as well as Credit Concepts' own computers, could
fail, causing disruption to Credit Concepts' business. Credit Concepts has
made inquiry of its computer, communications, power and automobile suppliers,
and, in particular, has inquired of its automobile dealers whether any computer
chip component in any make of used automobile that serves as collateral for
Credit Concepts contracts contains a real-time clock that could be subject to
failure, and has received assurances that no failures will occur. However, in
view of the subtlety of the problem and the unfamiliarity with the scope of the
problem by many in the business community, there can be no assurance that
Credit Concepts will not encounter some form of computer or service failures at
or after midnight on December 31, 1999 which could result in disruption of
Credit Concepts' business, perhaps materially so, to Credit Concepts'
detriment.
CREDIT CONCEPTS' BUSINESS IS DEPENDENT UPON THIRD PARTY SUPPLIERS OF
CONTRACTS, OVER WHICH CREDIT CONCEPTS HAS NO CONTROL. Although Credit Concepts
believes that it will be able to continue to be able to purchase a reasonable
number of contracts upon advantageous terms from dealers within Lane County and
neighboring counties, there can be no assurance that it will be able to
continue to do so. Even though Credit Concepts has been issued a consumer
finance license allowing it to originate loans directly from borrowers
purchasing vehicles, Credit Concepts will in all probability remain dependent
upon used automobile dealers for the major portion of the contracts in its
portfolio of accounts receivable.
THE FINANCIAL VIABILITY OF AUTOMOBILE DEALERS GUARANTEEING CREDIT
CONCEPTS' CONTRACTS RECEIVABLE IS UNCERTAIN. Although Credit Concepts
investigates the viability of the used automobile dealers that sell contracts
to Credit Concepts, there is a risk that one or more of such suppliers of
contracts to Credit Concepts may not be able to perform its guarantee or
obligation to repurchase contracts in the event of defaults on the contracts by
the underlying borrowers. Any such default by a contract supplier could
adversely affect Credit Concepts, perhaps materially so. At July 31, 1999,
$365,169, or approximately 8% of the dollar value, of contracts then
outstanding were covered by full or partial guarantees by the used automobile
dealer suppliers of contracts to Credit Concepts.
SUBJECTIVE NATURE OF CREDIT DECISIONS ON UNDERLYING BORROWERS UNDER THE
CONTRACTS MAY LEAD TO CUMULATIVE ERROR. Although Credit Concepts considers a
number of standardized factors in determining the credit-worthiness of the
underlying borrowers for the contracts it purchases, Credit Concepts' credit
decisions in these purchases are to some extent subjective in nature and to
that extent dependent upon the skills of Credit Concepts' personnel who makes
the credit and contract purchase decisions. Although Credit Concepts believes
that these personnel are highly skilled, because Credit Concepts only uses the
services of these personnel to make contract purchase decisions, and they
primarily communicate with one another in establishing the weight to be
attributed to these credit worthiness factors, should these persons as a group
establish and repeat the same type of error in the evaluation of a number of
separate credit reports, any such an error could be cumulative and result in
losses that could be material in the aggregate.
BANKRUPTCIES AND DEFICIENCY JUDGMENTS AGAINST BORROWERS MAY IMPEDE
COLLECTION UNDER CONTRACTS AND LOANS AND INCREASE OPERATING COSTS. Certain
statutory provisions, including federal and state bankruptcy and insolvency
laws applicable to individuals, may limit or delay the ability of Credit
Concepts to repossess and resell vehicles serving as collateral to secure
payment of the contracts or loans, or to enforce a deficiency judgment against
a borrower under the contract. In the event that a significant number of
deficiency judgments are not obtained, are not satisfied, are satisfied at a
discount or are discharged in whole or in part in bankruptcy proceedings, the
vehicles securing the contracts and loans would not serve their intended
purpose of providing collateral with an underlying realizable value, thereby
reducing the collectibility of the contracts or loans, which may increase
Credit Concepts' costs and adversely affect the ability of Credit Concepts to
pay the investment certificates.
PRIORITY LIENS IN FAVOR OF OTHERS ON VEHICLE COLLATERAL FOR CREDIT
CONCEPTS' CONTRACTS AND LOANS MAY ADVERSELY AFFECT CREDIT CONCEPTS' ABILITY TO
PAY PRINCIPAL AND INTEREST ON INVESTMENT CERTIFICATES. The imposition of a
significant number of liens for repairs or taxes, or a substantial confiscation
of vehicles because of use for unlawful activities, during the term of any
contracts or loans, could adversely affect their value as collateral under the
contracts and adversely affect Credit Concepts' ability to pay interest or
principal on the investment certificates.
CREDIT CONCEPTS' INTERNAL BUDGETS AND FORWARD-LOOKING INFORMATION ARE
UNCERTAIN. Although Credit Concepts has prepared its internal budgets and its
other forward-looking information, some of which is reflected in this report,
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.
ITEM 2. DESCRIPTION OF PROPERTY.
- ------- ------------------------
Credit Concepts maintains an approximately 1,300 square foot leased office
at 2149 Centennial Plaza, Suite 2, Eugene, Oregon pursuant to a three-year
lease that expires on October 31, 2000. The annual rental rate is currently
$15,233, which will increase to $15,840 in the third year. Payments under the
lease are guaranteed by two of Credit Concepts' founders. Credit Concepts owns
certain computer equipment and office furniture at its office and is expected
to acquire similar equipment needed as operations expand. Credit Concepts
expects that its offices will be adequate for its purposes for the foreseeable
future.
ITEM 3. LEGAL PROCEEDINGS.
- ------- ------------------
Except for routine litigation by Credit Concepts to obtain deficiency
judgments upon defaulted contracts in the ordinary course of its business,
neither Credit Concepts nor any of its property is a party to any pending legal
proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- ------- ----------------------------------------------------
No matter was submitted during the fourth quarter of the fiscal year
ended July 31, 1999 to a vote of Credit Concepts' security holders, through the
solicitation of proxies or otherwise.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
- ------- ---------------------------------------------------------
Credit Concepts has not sold any of its common stock or other equity
securities during the period covered by this report.
With respect to the registration under the Securities Act of 1933 of
Credit Concepts' investment certificates that became effective May 5, 1999
(Registration No. 333-66853), Credit Concepts commenced offering the
investment certificates directly and without an underwriter on May 5, 1999
and has continued to offer them in that manner since that date. As of
July 31, 1999, Credit Concepts had sold none of the investment certificates
and had incurred expenses of $100,271 in connection with the offering, none
of which expenses were direct or indirect payments: to directors or officers
of Credit Concepts or their associates, to any of Credit Concepts' 10% or
greater shareholders, or to any affiliates of Credit Concepts. Credit
Concepts is presently reviewing whether to amend the interest rates paid
on its investment certificates to make them more competitive in the current
market.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
- ------- ----------------------------------------------------------
For the twelve months ended July 31, 1999 Credit Concepts has generated
$1,300,110 of revenues and $68,990 of net operating profits. At July 31,
1999, Credit Concepts had approximately $81,904 in cash, $4,024,841 in net
finance receivables (after deducting an allowance for credit losses of
$326,000 and adding capitalized loan origination costs of $53,662,
approximately $3,845,417 of indebtedness of all types and a shareholders'
equity of approximately $300,260.
Credit Concepts expects to be able to sell all or a substantial portion of
its $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.
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 report,
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 Six Months Ended January 31, 1999.
- ----------------------------------------------------------------
Credit Concepts generated $693,500 of revenues and $17,505 of net
operating income during the six months ended January 31, 1999. At January 31,
1999 Credit Concepts had approximately $46,012 in cash, $4,140,848 in net
finance receivables (after deducting an allowance for credit losses of $298,987
and adding capitalized loan origination costs of $55,683), approximately
$4,115,359 of indebtedness of all types and a shareholders' equity of
approximately $188,775.
Credit Concepts originated approximately $638,667 of loans and contracts
during the period, which accounted for approximately 13% of total finance
receivables outstanding during the period. Contract receivables declined by
$165,527 from $4,325,162 to $4,159,635 due to attrition and refinancing into
direct loans. Overall, total gross finance receivables increased by 1.4% to
$4,384,152. Net income during the period was $17,505 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 months
period ended July 31, 1998. The allowance for credit losses was increased from
$191,000 at July 31, 1998 to $298,987 at January 31, 1999.
Results Of Operations For Twelve Months Ended July 31, 1999.
- ------------------------------------------------------------
Credit Concepts total finance receivables decreased $27,983, or 0.6%
during the twelve months ended July 31, 1999 from $4,325,162 to $4,297,179.
Interest income was $1,295,228 with other miscellaneous income of $4,882 for a
total of $1,300,110. Through the use of its consumer finance license, Credit
Concepts plans to increase revenues in the future at little 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 charge offs for the twelve-months period were $201,558 or 4.6% of
average finance receivables outstanding during the period. However, the loss
provision of $336,558, representing 7.8% of finance receivables, includes
$135,000 added to the allowance for credit losses and charged to operations for
the period. This resulted in an allowance for credit losses of $326,000, or
7.6% of finance receivables outstanding at the end of the period.
Reflecting in part the $336,558 provision for credit losses charged
to expense, which constituted 27.3% of the $1,231,120 of total expenses for the
twelve-months period, Credit Concepts reported a net profit for the period of
$68,990. Interest expense of $468,719 constituted 38.0% of these total
expenses, and salaries and benefits of $200,631 constituted 16.3%. 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 net profit for the period was limited to $68,990 due to the
increase in the provision for credit losses and legal and accounting expenses
associated with the investment certificate program, net cash flows for the
period were $81,904, with operating activities generating a positive cash flow
of $757,619.
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 $1,149,908 remained outstanding at July 31,
1999.
On June 15, 1999 Credit Concepts renewed its 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 75% 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 less than 10 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 July 31, 1999 Credit Concepts had outstanding secured
bank indebtedness of $2,695,509 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 its current 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 December 15, 2000 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 December 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>
ITEM 7. FINANCIAL STATEMENTS.
- ------- ---------------------
CREDIT CONCEPTS, INC.
FINANCIAL STATEMENTS
Year Ended July 31, 1999 and 7 Months
Ended July 31, 1998
<PAGE>
<TABLE>
TABLE OF CONTENTS
<CAPTION>
Page
<S> <C>
INDEPENDENT AUDITORS' REPORT 1
FINANCIAL STATEMENTS
Balance Sheets 2
Statements of Income 3
Statement of Stockholders' Equity 4
Statements of Cash Flows 5
Notes to the Financial Statements 6
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Credit Concepts, Inc.
Eugene, Oregon
We have audited the accompanying balance sheets of Credit Concepts, Inc. as of
July 31, 1999 and 1998, and the related statements of income, stockholders'
equity, and cash flows for the year ended July 31, 1999, and period from
January 1, 1998, to July 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Credit Concepts, Inc. as of
July 31, 1999 and 1998, and the results of its operations and its cash flows
for the year and period then ended, in conformity with generally accepted
accounting principles.
MOSS ADAMS, LLP
/s/ MOSS ADAMS, LLP
Portland, Oregon
September 15, 1999
<PAGE>
<TABLE>
CREDIT CONCEPTS, INC.
BALANCE SHEETS
July 31, 1999 and 1998
<CAPTION>
ASSETS
------
1999 1998
------------ ------------
<S> <C> <C>
Cash $ 81,904 $ 55,003
Finance receivables (Note 2):
Contracts 3,807,582 4,325,162
Direct loans 489,597 -
Loan origination costs 53,662 35,148
Allowance for credit losses (326,000) (191,000)
------------ ------------
Finance Receivables, Net 4,024,841 4,169,310
Interest receivable on contracts 67,300 64,500
Equipment and leasehold improvements, 29,079 33,685
net (Note 3)
Other assets 26,113 41,133
------------ ------------
TOTAL $ 4,229,237 $ 4,363,631
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Debt (Note 4):
Bank line of credit $ 2,695,509 $ 2,687,431
Other notes payable 211,000 301,500
Subordinated notes payable to stockholders 938,908 1,165,976
Accounts payable and accrued expenses 14,800 14,305
Interest payable 40,294 23,149
Deferred income 28,466 -
------------ ------------
Total Liabilities 3,928,977 4,192,361
------------ ------------
STOCKHOLDERS' EQUITY
Common stock, no par value, 1,000 shares
authorized, 300 issued and outstanding 150,000 150,000
Stock subscription receivable (60,000) (120,000)
Additional paid-in-capital 206,842 206,842
Retained earnings 3,418 (65,572)
------------ ------------
Total Stockholders' Equity 300,260 171,270
------------ ------------
TOTAL $ 4,229,237 $ 4,363,631
============ ============
The accompanying notes are an integral part of the these financial statements.
</TABLE>
<PAGE>
<TABLE>
CREDIT CONCEPTS, INC.
STATEMENTS OF INCOME
For The Year Ended July 31, 1999 And The 7 Months Ended July 31, 1998
<CAPTION>
1999 1998
------------ -----------
<S> <C> <C>
REVENUES
Interest on contracts $ 1,295,228 $ 468,116
Other income 4,882 3,140
----------- -----------
Total Revenues 1,300,110 471,256
----------- -----------
EXPENSES
Interest 468,719 154,671
Salaries and benefits 200,631 79,584
Provision for credit losses (Note 2) 336,558 231,129
Other operating expenses 225,212 71,444
----------- -----------
Total Expenses 1,231,120 536,828
----------- -----------
NET INCOME (LOSS) $ 68,990 $ (65,572)
=========== ===========
The accompanying notes are an integral part of the these financial statements.
</TABLE>
<PAGE>
<TABLE>
CREDIT CONCEPTS, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
For the Year Ended July 31, 1999 and the
7 Months Ended July 31, 1998
<CAPTION>
Credit
Concepts, LLC Credit Concepts, Inc.
------------- -----------------------------------------------------------------------
Members' Common Stock Subscription Additional Retained
Equity Stock Receivable Paid-in Capital Earnings Totals
------------- ---------- ------------------ --------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 $ 407,842 $ - $ - $ $ - $ 407,842
Transfer of Interest to Corporation
at 1/1/98 in exchange for:
Stock (236,842) 30,000 - 206,842 - -
Notes (171,000) - - - - (171,000)
Additional stock subscriptions - 120,000 (120,000) - - -
Net (loss) - - - - (65,572) (65,572)
---------- --------- ----------- ---------- ---------- ----------
Balance at July 31, 1998 - 150,000 (120,000) 206,842 (65,572) 171,270
Payments received - - 60,000 - - 60,000
Net Income - - - - 68,990 68,990
---------- --------- ----------- ---------- ---------- ----------
Balance at July 31, 1999 $ - $ 150,000 $ (60,000) $ 206,842 $ 3,418 $ 300,260
========== ========= =========== ========== ========== ==========
The accompanying notes are an integral part of the these financial statements.
</TABLE>
<PAGE>
<TABLE>
CREDIT CONCEPTS, INC.
STATEMENTS OF CASH FLOWS
For the Year Ended July 31, 1999 and the
7 Months Ended July 31, 1998
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ 68,990 $ (65,572)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Provision for credit losses on finance
receivables 336,558 231,129
Depreciation and amortization 9,810 37,616
Recoveries of finance receivables previously
charged off 302,449 42,665
Changes in assets and liabilities:
Accrued interest on finance receivables (2,800) (64,500)
Loan origination costs (18,514) (35,148)
Other assets 15,020 (57,081)
Accounts payable, accrued and other
liabilities 17,640 34,174
Deferred income 28,466 -
------------ ------------
Total Adjustments 688,629 188,855
------------ ------------
Net Cash Provided by Operating Activities 757,619 123,283
------------ ------------
CASH FLOW FROM INVESTING ACTIVITIES:
Loans and contracts originated or purchased (2,886,555) (4,410,614)
Loans and contracts repaid 2,410,531 478,778
Additions to equipment and leasehold
improvements (5,204) (8,655)
------------ ------------
Net Cash (Used) by Investing Activities (481,228) (3,940,491)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt 507,545 4,506,664
Repayment of debt (757,035) (662,757)
------------ ------------
Net Cash Provided (Used) by Financing
Activities (249,490) 3,843,907
------------ ------------
NET INCREASE IN CASH 26,901 26,699
CASH AT BEGINNING OF PERIOD 55,003 28,304
------------ ------------
CASH AT END OF PERIOD $ 81,904 $ 55,003
============ ============
The accompanying notes are an integral part of the these financial statements.
</TABLE>
<PAGE>
CREDIT CONCEPTS, INC.
NOTES TO THE FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS ACTIVITY - Credit Concepts, Inc. (the Company) is in the business of
purchasing retail installment contracts from automobile dealers in connection
with the financing of used automobiles and making loans directly to consumers.
The Company originally formed on August 29, 1997, as Credit Concepts, L.L.C.
and began operations during October 1997. Effective January 1, 1998, the
Company incorporated the operations into the existing entity via a tax-free
incorporation.
USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FINANCE RECEIVABLES - Finance receivables that management has the intent and
ability to hold for the foreseeable future or until maturity or payoff are
reported at their outstanding unpaid principal balances reduced by any charge-
off or specific valuation accounts and net of any deferred fees or costs on
originated loans, or unamortized premiums or discounts on purchased loans.
Loan origination fees and certain direct origination costs are capitalized and
recognized as an adjustment of the yield of the related contract or loan.
Provisions for credit losses are recognized in amounts sufficient to maintain
the allowance for credit losses at a level adequate to cover losses of
principal and accrued interest in the existing finance receivable portfolio.
The allowance for credit losses is based upon management's evaluation of the
economic environment and the condition of outstanding loans and contracts
receivable at year end. In addition, management reviews comparable industry
information, delinquency status of loans and recency of payments received. All
of these elements are considered in determining the adequacy of the provision
for credit losses.
During the year, the unpaid balances of delinquent contracts receivable in
excess of any related dealer guarantees are charged against the allowance for
credit losses when management determines that no further collection efforts are
economically beneficial. Changes in the allowance for credit losses may occur
in the near term and such changes may be material to the financial position,
results of operations and cash flows.
INTEREST INCOME RECOGNITION - For financial statement purposes, interest income
from finance receivables is recognized using the interest method. Accrual of
interest income on finance receivables is suspended when the Company's
management determines the loan recovery to be doubtful. While a loan is
classified as nonaccrual and the future collectibility of the recorded loan
balance is doubtful, collections of interest and principal are generally
applied as a reduction of principal.
<PAGE>
CREDIT CONCEPTS, INC.
NOTES TO THE FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
EQUIPMENT AND LEASEHOLD IMPROVEMENTS - Equipment and leasehold improvements are
stated at cost. Depreciation and amortization is provided on a straight-line
basis over the estimated useful lives of the related assets. Maintenance and
repairs are charged to expense as incurred; expenditures for additions,
improvements and replacements are capitalized. Upon disposal or retirement of
assets, the accounts are relieved of the related costs and accumulated
depreciation and resulting gains or losses are recognized in operations.
DEFERRED INCOME - Deferred income consists of deferred loan fees and insurance
commissions. These are recognized into income as an adjustment to yield using
the straight-line method over the term of the related contracts or loans.
RECLASSIFICATIONS - Certain prior year amounts have been reclassified to
conform to the current year presentation.
CORPORATE FORM AND INCOME TAXES - As noted, on January 1, 1998, Credit
Concepts, Inc. converted from a Limited Liability Company to an S Corporation
pursuant to the Internal Revenue Code. As an S Corporation, the income tax
liability arising from the taxable earnings of the Company is the
responsibility of the stockholders. The company reports its income for tax
purposes on a calendar year basis. Differences exist between the financial
statement and tax basis of certain assets and liabilities. These differences
were not significant at July 31, 1999.
CASH AND CASH EQUIVALENTS - For purposes of the statement of cash flows, the
company considers all highly liquid debt instruments purchased with an original
maturity of three months or less to be cash equivalents.
NOTE 2 - FINANCE RECEIVABLES AND ALLOWANCE FOR CREDIT LOSSES
As of July 31, 1999, information regarding the finance receivables is as
follows:
<TABLE>
<S> <C>
Number of contracts and loans 1,234
Average Annual Percentage Rate (APR) of interest 30.9%
Average original balance $ 5,213
Average term of contract 160 wks
Average age of contract 48 wks
Average payment per week $ 50
</TABLE>
The terms of contracts are generally from one to five years. The Company
anticipates that a majority of contracts will be paid or renewed prior to
contractual maturity dates. Cash collections of finance receivables from
August 1, 1998 to July 31, 1999, were $2,410,531. Additionally, the ratio of
cash collections to average period-end balances was approximately 56% for the
year ended July 31, 1999.
<PAGE>
CREDIT CONCEPTS, INC.
NOTES TO THE FINANCIAL STATEMENTS
NOTE 2 - FINANCE RECEIVABLES AND ALLOWANCE FOR CREDIT LOSSES, continued
Change in the allowance for credit losses is as follows:
<TABLE>
<S> <C>
Balance at January 1, 1998 $ -
Provision charged to expense 231,129
Accounts charged off (82,794)
Recoveries 42,665
------------
Balance at July 31, 1998 191,000
Provisions charged to expense 336,558
Accounts charged off (504,007)
Recoveries 302,449
------------
Balance at July 31, 1999 $ 326,000
============
</TABLE>
NOTE 3 - EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consist of the following:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Computer equipment $ 25,945 $ 21,777
Office furniture and equipment 14,817 13,705
Leasehold improvements 2,142 2,223
--------- ---------
42,904 37,705
Less: Accumulated depreciation and amortization (13,825) (4,020)
--------- ---------
$ 29,079 $ 33,685
========= =========
</TABLE>
<PAGE>
CREDIT CONCEPTS, INC.
NOTES TO THE FINANCIAL STATEMENTS
NOTE 4 - DEBT
Following is a summary of all debt held by the Company at July 31, 1999 and
1998:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Bank line of credit (available credit line -
$3,000,000) - without collateral, interest at
the institution's prime rate (8% at
July 31, 1999) plus 2%, due
December 15, 2000, guaranteed by the
stockholders of Credit Concepts, Inc. $ 2,695,509 $ 2,687,431
Notes payable to various individuals -
without collateral, maturities to 2004,
with interest from 10% to 12%. 211,000 240,000
Notes payable to related party - without
collateral, no maturity, with interest at 12%. - 61,500
------------ -----------
Total other notes payable 211,000 301,500
Subordinated notes payable to stockholders -
without collateral, no stated maturity, with
interest at 12%. 938,908 1,165,976
------------ ------------
Total $ 3,845,417 $ 4,154,907
============ ============
</TABLE>
The subordinated notes payable provide for subordination to any present and
future debt owed by Credit Concepts, Inc. to any bank, insurance company or
other financial institution. Subordinated debt with stockholders and officers
of Credit Concepts, Inc. of $938,908 is also subordinated to other notes
payable of $211,000.
Scheduled maturities of debt in subsequent fiscal years are as follows:
<TABLE>
<S> <C> <C>
2000 $ 2,755,509
2001 -
2002 -
2003 -
2004 -
Thereafter 1,089,908
------------
$ 3,845,417
============
</TABLE>
<PAGE>
CREDIT CONCEPTS, INC.
NOTES TO THE FINANCIAL STATEMENTS
NOTE 5- OPERATING LEASES
The company leases its office space in Eugene, Oregon under an operating lease
expiring on October 31, 2000.
The minimum future rental payments under this non-cancelable operating lease
are:
<TABLE>
<S> <C> <C>
Year ending July 31, 2000 $ 15,690
Year ending July 31, 2001 3,960
----------
$ 19,650
==========
</TABLE>
NOTE 6 - SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Cash paid during the year for interest $ 451,574 $ 131,522
</TABLE>
Non-cash financing activities consisted of issuance of additional stock
subscriptions in the amount of $120,000, during 1998.
NOTE 7 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument for which it is practicable to estimate that
value:
CASH AND CASH EQUIVALENTS
For cash, the carrying amount is the estimated fair value.
FINANCE RECEIVABLES
There are generally no quoted market prices available for finance receivables.
The net fair value of such receivables is estimated to approximate the net
carrying value based upon interest rates as of July 31, 1999.
NOTE 8 - CONCENTRATION OF CREDIT RISK
Financial investments which potentially subject the company to credit risk
consist of cash and finance receivables. The company's cash balances are with
reputable banks and periodically exceed insured limits. The company's finance
receivables are from customers in the Eugene/Springfield area of Oregon.
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
- ------- ----------------------------------------------------------------
Effective on September 1, 1999, Yergen and Meyer, LLP merged its practice
with Moss Adams LLP and, accordingly, the independent certified public
accountant for this and future filings for Credit Concepts, Inc. is Moss Adams
LLP. Yergen and Meyer, LLP audited the Company's financial statements as of
July 31, 1998 and for the periods from inception on October 27, 1997 to
December 31, 1997 and January 1, 1998 to July 31, 1998, and rendered its
unqualified opinion thereon. There have not been any disagreements between the
Company and Yergen and Meyer, LLP up to the date of the Form 8-K, nor did
Credit Concepts, Inc. consult with Moss Adams LLP prior to the merger.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
- ------- -------------------------------------------------------------
The Officers and Directors of Credit Concepts are as follows:
<TABLE>
<CAPTION>
Name Position
---------------- --------------------------------------
<S> <C> <C>
Tom W. Palmer President and Director
Eugene C. Albert Vice-President, Secretary and Director
F. Scott Graham Vice-President of Operations
Ted W. Palmer Director
</TABLE>
Tom W. Palmer is the son of Ted W. Palmer.
The career experience of the Credit Concepts' key personnel is as follows:
TOM W. PALMER, 43, President and Director. Tom W. Palmer has been the
Company's President and Chief Executive Officer since it was founded in August,
1997. Mr. Palmer's duties with Credit Concepts include developing and
maintaining banking and investor relations, managing the purchasing of
contracts for Credit Concepts' loan portfolio, financial management, business
development and the development and implementation of Credit Concepts
investment certificate financing program described in this prospectus. For in
excess of five years prior to that time he was president and a director of RDS
Inc. d.b.a. Mobile Advantage of Eugene, Oregon, which designs and manufactures
custom food delivery vehicles, primarily for retail food outlets. Mr. Palmer
also served as secretary and director of Woodcrafters Cabinets Inc., which
ceased doing business in 1997.
EUGENE C. ALBERT, 41, Vice-President, Secretary and Director. Eugene C.
Albert has acted as Credit Concepts' Vice-President, Secretary and Chief
Financial Officer since its inception in August 1997. His duties include
coordination of capital funding of Credit Concepts, evaluating and managing
credit losses, and the supervision of financing and credit operations. For in
excess of five years prior to his employment by Credit Concepts, Mr. Albert
served as secretary-treasurer and a director of Mansell Development. Inc., a
real estate development company in Eugene, Oregon, for which he was responsible
for arranging development and long-term financing.
F. SCOTT GRAHAM, 37, Vice President of Operations. F. Scott Graham has
been employed in the financial service industry since 1981. Mr. Graham has
held various positions, from collection manager to more recently vice president
of operations, for the Auto Finance Division of The Money Store. During Mr.
Graham's tenure with The Money Store, he supervised indirect auto financing for
its Western Division, which consisted of 20 dealer service centers and had
assets in excess of $250 million. Mr. Graham supervised the operations in
marketing, risk management, compliance, training, lending, collections, profit
and loss, locations and human resource issues.
TED W. PALMER, 66, Director. Ted W. Palmer was a founder, major
shareholder, president and chairman of Kalama Chemical, Inc., now a wholly-
owned subsidiary of B.F. Goodrich Company. Mr. Palmer sold his interest in
Kalama Chemical, Inc. in 1986 and since his retirement as Chairman and Chief
Executive Officer of Kalama Chemical, Inc. in 1989 has been primarily engaged
in the management of his personal investment portfolio. Since 1996, Mr. Palmer
has been a director of Pend Oreille Bank, a state-chartered commercial bank in
Newport, Washington.
Credit Concepts does not have a class of equity securities registered
pursuant to Section 12 of the Securities Exchange Act of 1934, and thus the
beneficial owners of more than 10% of its common stock (which is its only class
of equity securities outstanding), and its directors and officers, are not
subject to the requirements of Section 16(a) of that Act.
ITEM 10. EXECUTIVE COMPENSATION.
- -------- -----------------------
The cash and other direct remuneration of members of management of Credit
Concepts for the fiscal year ended July 31, 1999 is as follows:
<TABLE>
DIRECT COMPENSATION TO MANAGEMENT FOR 1999
------------------------------------------
<CAPTION>
Name Salary Other
- ------------------------------------------------- -------- -------
<S> <C> <C>
Officers, Directors and Management as a Group (1) $148,608 $16,903
- -----------------------
(1) Consists of Tom W. Palmer, Eugene C. Albert, Kimberly M. Coleman and
Ted W. Palmer. Ms. Coleman resigned as General Manager of Credit Concepts
effective June 4, 1999.
</TABLE>
Credit Concepts had entered into a five-year employment agreement expiring
September 15, 2002 with Kimberly M. Coleman pursuant to which Ms. Coleman acted
as Credit Concepts' General Manager. Under the terms of the agreement, Ms.
Coleman received an annual salary commencing at $48,000 and increasing to
$60,000, plus annual bonuses of 0.85% of contracts receivable booked, with
limits of $15,000 the first year and $20,000 the second year, and thereafter of
6% of Credit Concepts' net profits, without limitation. The agreement
precludes Ms. Coleman from competing with Credit Concepts for two years
following termination, except for termination by Credit Concepts without cause.
Ms. Coleman resigned as General Manager of Credit Concepts effective June 4,
1999.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
- -------- ---------------------------------------------------------------
The following table sets forth information concerning the shares of Credit
Concepts' common stock presently owned of record and beneficially by each
person known to Credit Concepts to own of record or beneficially 5% or more of
Credit Concepts' common stock; each officer or director of Credit Concepts who
owns of record or beneficially any common stock; and stock holdings of all
officers and directors of Credit Concepts as a group.
<TABLE>
<CAPTION>
Beneficial Ownership
----------------------------------------------
Owner's Percent after
Name & Address Shares Percent this Offering
- ------------------ ------ ------- -------------
<S> <C> <C> <C>
Tom W. Palmer 100 33.3% 33.3%
2274 Marie Lane
Eugene, OR 97408
Eugene C. Albert 100 33.3% 33.3%
2358 Birch Lane
Eugene, OR 97403
Ted W. Palmer Trust 100 33.3% 33.3%
Almost Idaho Ranch
Shearer Lake on Bench Road
Newport, WA 99156
(All Officers and
Directors as a Group) 300 100.0% 100.0%
</TABLE>
Tom W. Palmer, Eugene C. Albert and Ted W. Palmer may be deemed to be
promoters and parents of Credit Concepts within the meaning of the Securities
Act of 1933 and state securities laws.
Tom W. Palmer, Eugene C. Albert and Ted W. Palmer through the Ted W.
Palmer Trust have entered into an agreement granting each other a right to
purchase their respective shares in Credit Concepts from each other and an
option first for Credit Concepts to purchase, and then for each other to
purchase, the shares of any of them that may become deceased, disabled or
divorced. This arrangement is intended to foster stability within Credit
Concepts by inhibiting a change in control of Credit Concepts upon the death,
disability or divorce of any of the founding shareholders.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- -------- -----------------------------------------------
In connection with the founding of Credit Concepts in August 1997, Tom W.
Palmer, Eugene C. Albert and Ted W. Palmer were issued equal amounts of the
equity interests of Credit Concepts, L.L.C., and on January 20, 1998 the assets
of that limited liability company were transferred to Credit Concepts, Inc. On
January 20, 1998, each of those persons purchased 100 shares of capital stock
of that corporation for $50,000. Each of such persons paid $10,000 of such
amount in cash and $40,000 of such amount by giving a $40,000 promissory note
to Credit Concepts.
By 12% unsecured demand loans, Eugene C. Albert, the Vice-President,
Secretary and a Director of Credit Concepts, lent an aggregate of $78,000 to
Credit Concepts between October 1997 and March 1998. By similar loans,
Kimberly M. Coleman, the General Manager of Credit Concepts, and her husband
lent an aggregate of $67,500 to Credit Concepts between January and April 1998.
By similar loans, Tom W. Palmer, the President and a Director of Credit
Concepts, and his wife lent an aggregate of $173,000 to Credit Concepts between
November 1997 and June 1998. By similar loans, Ted W. Palmer, a Director of
Credit Concepts, lent an aggregate of $600,000 to Credit Concepts between
October 1997 and June 1998. These unsecured loans are on parity with the
investment certificates in the present offering.
In addition, Tom W. Palmer and Eugene C. Albert have each guaranteed an
aggregate of $3,000,000 under Credit Concepts' secured bank line-of-credit, and
Ted W. Palmer has guaranteed an aggregate of $1,000,000 under that line-of-
credit. If Tom W. Palmer, Ted W. Palmer and Eugene C. Albert should be required
to pay under the guarantees bank indebtedness, they would succeed to the banks'
secured rights with respect to the indebtedness, including rights to
collateral.
In July 1998, Tom W. Palmer, Eugene C. Albert and Ted W. Palmer became
personally liable on a $450,000 unsecured loan by South Umpqua State Bank.
This loan accrues interest at the rate of 9.25% per annum and is due in full on
August 1, 2000. These persons lent the money to Credit Concepts on the same
basis.
In April and June 1998, Credit Concepts borrowed $40,000 and $70,000,
respectively, from Amvesco, Inc. dba Western Pioneer Title Co. of Lane County.
Tom W. Palmer and Eugene C. Albert are personally obligated on these loans, and
Mr. Albert has collateralized these loans with real estate owned by him.
Credit Concepts' founders, Tom W. Palmer, Eugene C. Albert and Ted W.
Palmer, have agreed not to demand payment of the notes they hold until on or
after December 31, 2000.
Tom W. Palmer and Eugene Albert have personally guaranteed the payments
under the three-year lease of Credit Concepts' principal offices, which expires
October 31, 2000. The current annual rental rate under the lease is $15,233,
which increases to $15,840 in the third year.
In the future, all material transactions and loans between Credit Concepts
and affiliated persons, including its owners and directors Tom W. Palmer,
Eugene C. Albert and Ted W. Palmer, will be entered into on terms that are no
less favorable to Credit Concepts than those that can be obtained from
unaffiliated third parties. Further, all future transactions and loans, and
any forgiveness of loans, with affiliated persons will be approved by a
majority of Credit Concepts' then independent directors who do not have an
interest in the transactions and who have had access, at Credit Concepts'
expense, to Credit Concepts' or independent legal counsel.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
- -------- ---------------------------------
Exhibit
No. Description
- ------ ------------------------------------------------------------------
3(a) Articles of Incorporation **
3(b) By-Laws **
4(a) Specimen Short-Term Investment Certificate **
4(b) Specimen Long-Term Investment Certificate **
10(a) Form of Master Dealer Agreement with automobile dealers, including
Amendment to Master Dealer Agreement **
10(b) Form of Contract purchased from automobile dealers **
10(c) Bill of Sale and Assumption of Liabilities dated January 20, 1998
with Albert Credit, LLC **
10(d) Loan Agreement dated April 6, 1998 with Pacific Continental Bank,
and Amendment to Loan Agreement dated November 4, 1998 **
10(e) Promissory Note in favor of Pacific Continental Bank dated April 6,
1998 **
10(f) Commercial Guaranty by Thomas W. Palmer dated April 6, 1998 **
10(g) Commercial Guaranty by Eugene C. Albert dated April 6, 1998 **
10(h) Commercial Guaranty by Ted W. Palmer dated April 6, 1998 **
10(i) Commercial Security Agreement dated April 6, 1998 with Pacific
Continental Bank **
10(j) Commercial Security Agreement dated April 6, 1998 with Pacific
Continental Bank, including as collateral Thomas W. Palmer's life
insurance policy **
10(k) Commercial Security Agreement dated April 6, 1998 with Pacific
Continental Bank, including as collateral Eugene C. Albert's life
insurance policy **
10(l) Agreement to Provide Insurance dated April 6, 1998 with Pacific
Continental Bank **
10(m) Assignment of Life Insurance Policy as Collateral dated March 10,
1998 with Pacific Continental Bank for Thomas W. Palmer's life
insurance policy **
10(n) Assignment of Life Insurance Policy as Collateral dated March 10,
1998 with Pacific Continental Bank for Eugene C. Albert's life
insurance policy **
10(o) Employment Agreement dated September 24, 1997 with Kimberly M.
Coleman **
10(p) Buy-Sell Agreement dated January 20, 1998 between Ted W. Palmer,
Thomas W. Palmer and Eugene C. Albert **
10(q) Lease Agreement dated October 14, 1997 with Keypac Leasing,
including Limited Guaranty **
10(r) Form of Promissory Note evidencing loans from private investors **
10(s) Master Dealer Agreement dated October 23, 1997 with
Hutchins Imported Motors, Inc. (now known as "Lithia Toyota of
Springfield") **
10(t) Master Dealer Agreement dated November 11, 1997 with Hutchins
Eugene Nissan, Inc. (now known as "Lithia Nissan of Eugene") **
10(u) Master Dealer Agreement dated February 4, 1998 with JKL Automotive,
Inc. d/b/a Kieffer's Eugene Mazda **
10(v) Master Dealer Agreement dated November 28, 1997 with Kendall Ford
Inc. **
10(w) Master Dealer Agreement dated December 15, 1997 with Guaranty Chev
Pont Olds Co. Inc. **
10(x) Forbearance Agreement dated March 23, 1999 by Thomas W. Palmer **
10(y) Forbearance Agreement dated March 24, 1999 by Eugene C. Albert **
10(z) Forbearance Agreement dated March 24, 1999 by Ted W. Palmer **
23 Consent of Moss Adams LLP ***
24(a) Power of Attorney (see signature page of Registration Statement) *
27 Financial Data Schedule ***
- --------------------------------------
* Incorporated by reference to registrant's Registration Statement on
Form SB-2 dated November 5, 1998 and filed with the Securities and
Exchange Commission on November 5, 1998.
** Incorporated by reference to registrant's Amendment No. 2 to
Registration Statement on Form SB-2 dated April 28, 1999 and filed
with the Securities and Exchange Commission on April 29, 1999.
*** Filed herewith.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
CREDIT CONCEPTS, INC.
(Registrant)
By: /s/ Tom W. Palmer
_________________________________
Tom W. Palmer, President
Date: October 29, 1999
_______________________________
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
/s/ Tom W. Palmer President and Director 10/29/99
- ----------------------- (Title) ------------------
Tom W. Palmer (Date)
/s/ Eugene C. Albert Vice-President, 10/29/99
- ----------------------- Secretary and Director ------------------
Eugene C. Albert (Title) (Date)
/s/ Ted W. Palmer Director 10/29/99
- ----------------------- (Title) ------------------
Ted W. Palmer (Date)
<PAGE>
EXHIBIT 23
Moss Adams LLP
Certified Public Accountants 4650 S.W. Macadam, Suite 300
P.O. Box 69509
Portland, OR 97201
Phone 503.295.1288
Fax 503.295.1299
Offices in Principal Cities of
Washington, Oregon and California
We hereby consent to the use of our report dated September 15, 1999, on the
financial statements of Credit Concepts, Inc. in the Annual Report on Form 10-
KSB (File No. 333-66853).
MOSS ADAMS LLP
/s/ Moss Adams LLP
Portland, Oregon
October 28, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEETS AND STATEMENTS OF INCOME FOUND ON PAGES 23 AND 24 OF THE COMPANY'S FORM
10-KSB FOR THE YEAR ENDED JULY 31, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-START> AUG-01-1998
<PERIOD-END> JUL-31-1999
<CASH> 81,904
<SECURITIES> 0
<RECEIVABLES> 4,350,841
<ALLOWANCES> 326,000
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 42,904
<DEPRECIATION> 13,825
<TOTAL-ASSETS> 4,229,237
<CURRENT-LIABILITIES> 55,094
<BONDS> 3,845,417
0
0
<COMMON> 150,000
<OTHER-SE> 150,260
<TOTAL-LIABILITY-AND-EQUITY> 4,229,237
<SALES> 0
<TOTAL-REVENUES> 1,300,110
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,231,120
<LOSS-PROVISION> 336,558
<INTEREST-EXPENSE> 468,719
<INCOME-PRETAX> 68,990
<INCOME-TAX> 0
<INCOME-CONTINUING> 68,990
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 68,990
<EPS-BASIC> 229.97
<EPS-DILUTED> 229.97
</TABLE>
