<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20459
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (date of earliest event reported): September 24, 1997
CREDIT DEPOT CORPORATION
------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 0-19420 58-1909265
-------- ------- ----------
(State or other jurisdiction (Commission file number) (I.R.S. Employer
of incorporation or organization) Identification No.)
700 Wachovia Center
Gainesville, Georgia
--------------------
(Address of principal executive offices)
30501
-----
(Zip code)
(770) 531-9927
----------------
(Registrant's telephone number, including area code)
1
<PAGE> 2
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(c) Exhibits
Exhibit No.
13.1 Audited Financial Statements of Credit Depot Corporation for the year ended
June 30, 1997, 1996, and 1995 with Report of Independent Auditors.
2
<PAGE> 3
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CREDIT DEPOT CORPORATION
------------------------
(Registrant)
Date: September 24, 1997 /s/ Charles D. Farrahar
-----------------------------------
Charles D. Farrahar
(Vice President and Chief Financial Officer)
3
<PAGE> 1
EXHIBIT 13.1
AUDITED FINANCIAL STATEMENTS
CREDIT DEPOT CORPORATION
Years ended June 30, 1997, 1996 and 1995
with Report of Independent Auditors
<PAGE> 2
CREDIT DEPOT CORPORATION
AUDITED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors.............................. F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Stockholders' Equity............. F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 3
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Credit Depot Corporation
We have audited the accompanying consolidated balance sheets of Credit
Depot Corporation and subsidiaries (the "Company") as of June 30, 1997 and 1996
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended June 30, 1997. 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 audits 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Credit Depot
Corporation and subsidiaries at June 30, 1997 and 1996 and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended June 30, 1996, in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully described in Note 12,
the Company has incurred significant recurring operating losses and significant
operating cash flow deficiencies, has significant amounts of debt maturing
within the next fiscal year, and has a significant accumulated deficit. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are described in
Note 12. The consolidated financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities that may result from the
outcome of this uncertainty.
August 29, 1997
/s/ Ernst & Young, LLP
F-2
<PAGE> 4
CREDIT DEPOT CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
----------------------------
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Loans receivable (Notes 2 and 4):
Consumer, collateralized by real estate................... $ 5,517,002 $ 6,958,903
Allowance for credit losses............................... (260,484) (250,260)
------------ ------------
Net loans receivable........................................ 5,256,518 6,708,640
Cash........................................................ 1,332,934 1,681,433
Cash subject to withdrawal restrictions (Note 7)............ 203,318 25,887
Property and equipment (Note 2)............................. 524,695 493,560
Real estate held for sale................................... 89,021 42,397
Other assets:
Receivable due from related parties (net of a reserve of
$200,000 and $-- for 1997 and 1996, respectively)...... 17,398 222,209
Prepaid expenses and other assets......................... 269,750 345,064
Servicing asset (Note 5).................................. 77,007 193,038
Interest-only strips receivable (Note 5).................. 7,268,930 1,317,075
Accrued interest receivable............................... 35,503 113,577
Deferred financing costs.................................. 1,338,822 957,158
Goodwill.................................................. 910,825 --
------------ ------------
Total assets...................................... $ 17,324,721 $ 12,100,041
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Convertible notes (Note 7).................................. $ 10,440,000 $ 8,500,000
Warehouse line of credit (Note 7)........................... 3,356,386 --
Advance on interest-only strips receivable (Note 7)......... 2,100,651 --
Other borrowings (Note 7)................................... 500,000 1,925,000
Accounts payable............................................ 291,235 54,393
Accrued liabilities......................................... 85,340 329,322
Dividends payable........................................... 174,271 144,000
------------ ------------
Total liabilities........................................... 16,947,883 10,952,715
Commitments (Note 9)
Stockholders' equity (Notes 3 and 11):
Series "A" Preferred stock, $.001 par value; 2,000,000
shares authorized, 315,000 and 320,000 shares issued at
June 30, 1997 and 1996................................. 315 320
Series "B" Preferred Stock, $.001 par value; 60,000 shares
authorized, 16,740 shares issued at June 30, 1997...... 17 --
Common stock, $.001 par value; 15,000,000 shares
authorized, 4,072,761 and 3,378,761 shares issued and
outstanding at June 30, 1997 and 1996.................. 4,073 3,379
Additional paid-in capital................................ 16,435,808 13,242,231
Accumulated deficit....................................... (16,063,375) (12,098,604)
------------ ------------
Total stockholders' equity........................ 376,838 1,147,326
------------ ------------
Total liabilities and stockholders' equity........ $ 17,324,721 $ 12,100,041
============ ============
</TABLE>
See accompanying notes.
F-3
<PAGE> 5
CREDIT DEPOT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Finance income and fees earned.................... $ 756,847 $ 640,390 $ 566,648
Gain on sale of receivables....................... 5,141,695 1,578,088 898,546
Other............................................. 19,918 60,421 113,148
----------- ----------- -----------
5,918,460 2,278,899 1,578,342
Expenses:
Salaries and employee benefits.................... 4,194,149 2,733,814 2,711,812
Legal and professional fees....................... 525,333 288,012 347,041
Other operating expenses.......................... 2,893,121 1,980,443 1,828,387
Provision for credit losses (Note 4).............. 225,231 185,000 534,899
Interest expense and amortization of financing
costs.......................................... 1,443,625 1,206,450 947,141
----------- ----------- -----------
9,281,459 6,393,719 6,369,280
----------- ----------- -----------
Loss before provision for income taxes.............. (3,362,999) (4,114,820) (4,790,938)
Provision for income taxes (Note 8)................. -- -- --
Net loss............................................ $(3,362,999) $(4,114,820) $(4,790,938)
----------- ----------- -----------
Preferred dividends................................. 601,772 415,677 --
----------- ----------- -----------
Net loss attributable to common shareholders........ $(3,964,771) $(4,530,497) $(4,790,938)
=========== =========== ===========
Net loss per share of common stock (Note 2)......... $ (1.07) $ (1.34) $ (1.42)
=========== =========== ===========
Weighted average shares outstanding................. 3,701,574 3,378,761 3,380,386
=========== =========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE> 6
CREDIT DEPOT CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK
----------------------------------
SERIES "A" SERIES "B" COMMON STOCK ADDITIONAL TOTAL
---------------- --------------- ------------------ PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT EQUITY
------- ------ ------ ------ --------- ------ ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at July 1, 1994.... -- $ -- -- $-- 3,378,761 $3,379 $ 7,788,382 $(2,777,169) $ 5,014,592
Net loss................. -- -- -- -- -- -- -- (4,790,938) (4,790,938)
------- ---- ------ --- --------- ------ ----------- ------------ -----------
Balance at June 30, 1995... -- -- -- -- 3,378,761 3,379 7,788,382 (7,568,107) 223,654
Issuance of preferred
stock.................. 320,000 320 -- -- -- -- 5,453,849 -- 5,454,169
Dividends declared on
preferred stock........ -- -- -- -- -- -- -- (415,677) (415,677)
Net loss................. -- -- -- -- -- -- -- (4,114,820) (4,114,820)
------- ---- ------ --- --------- ------ ----------- ------------ -----------
Balance at June 30, 1996... 320,000 320 -- -- 3,378,761 3,379 13,242,231 (12,098,604) 1,147,326
Issuance of preferred
stock.................. -- -- 16,740 17 -- -- 1,412,266 -- 1,412,283
Dividends declared on
preferred stock........ -- -- -- -- -- -- -- (601,772) (601,772)
Conversion of preferred
stock.................. (5,000) (5) -- -- 40,000 40 (35) -- --
Conversion of convertible
loan participation..... -- -- -- -- 160,000 160 399,840 -- 400,000
Conversion of convertible
debt................... -- -- -- -- 344,000 344 838,656 -- 839,000
Issuance of common
stock.................. -- -- -- -- 150,000 150 542,850 -- 543,000
Net loss................. -- -- -- -- -- -- -- (3,362,999) (3,362,999)
------- ---- ------ --- --------- ------ ----------- ------------ -----------
Balance at June 30, 1997... 315,000 $315 16,740 $17 4,072,761 $4,073 $16,435,808 $(16,063,375) $ 376,838
======= ==== ====== === ========= ====== =========== ============ ===========
</TABLE>
See accompanying notes.
F-5
<PAGE> 7
CREDIT DEPOT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss......................................... $ (3,362,999) $ (4,114,820) $ (4,790,938)
Adjustments to reconcile net loss to cash used in
operating activities:
Provision for credit losses.................... 225,231 185,000 534,899
Depreciation and amortization.................. 393,983 672,673 401,184
Changes in operating assets and liabilities:
Cash subject to withdrawal restrictions..... (177,431) (25,887) --
Due from related parties.................... 204,811 (22,515) (171,846)
Prepaid expenses and other.................. 95,148 12,558 353,429
Deferred financing costs.................... (600,964) 191,004 (759,050)
Loans originated............................ (79,322,866) (37,035,070) (29,541,542)
Loans repurchased........................... (3,115,846) (1,061,976) (1,620,140)
Deferred fee income......................... -- (8,672) (9,716)
Servicing asset............................. 116,031 218,864 618,308
Interest-only strips receivable............. (5,951,855) (1,317,075) --
Proceeds from loans sold -- servicing
retained.................................. -- -- 1,616,359
Proceeds from loans sold -- servicing
released.................................. 82,263,716 32,827,220 26,064,652
Principal collections on loans not sold..... 1,401,890 1,801,102 2,483,118
Accounts payable and accrued liabilities.... (530,725) (25,571) 11,992
------------ ------------ ------------
Net cash used in operating activities............ (8,361,876) (7,703,165) (4,809,291)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment............... (177,538) (94,933) (220,294)
Disposal of property and equipment............... -- 37,599 --
Purchase of assets and liabilities, net of cash
received....................................... (25,905) -- --
------------ ------------ ------------
Net cash used in investing activities............ (203,443) (57,334) (220,294)
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from preferred stock issuance....... 1,412,283 2,954,169 --
Dividends on preferred stock..................... (427,500) (415,677) --
Proceeds from warehouse line of credit........... 3,356,386 -- 25,511,084
Payments on warehouse line of credit............. -- -- (26,632,640)
Proceeds from issuance of convertible notes...... 2,800,000 7,570,000 5,550,000
Payment on issuance of convertible notes......... -- (5,550,000) --
Proceeds from other borrowings................... 2,100,651 3,250,000 1,300,000
Payment on other borrowings...................... (1,025,000) (125,000) --
------------ ------------ ------------
Net cash provided by financing activities........ 8,216,820 7,683,492 5,728,444
------------ ------------ ------------
Net (decrease) increase in cash.................. (348,499) (77,007) 698,859
Cash at beginning of period...................... 1,681,433 1,758,440 1,059,581
------------ ------------ ------------
Cash at end of period............................ $ 1,332,934 $ 1,681,433 $ 1,758,440
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for interest......... $ 1,194,232 $ 654,877 $ 680,556
============ ============ ============
Conversion of loans receivable to real estate
held for sale.................................. $ 645,202 $ 491,667 $ 969,489
============ ============ ============
</TABLE>
See accompanying notes.
F-6
<PAGE> 8
CREDIT DEPOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
Credit Depot Corporation ("CDC" or the "Company") was organized in August
1990 under the name of NBL Corporation. Concurrent with its formation, NBL was
merged with the business of Equithrift, Inc. (the "Predecessor Company") and its
name changed to Credit Depot Corporation. CDC expanded operations in the fiscal
year ended June 30, 1994 ("Fiscal 1994") into South Carolina, North Carolina,
Ohio, Florida and Tennessee through the creation of wholly owned subsidiaries.
Prior to Fiscal 1994, the Company operated solely in Georgia. During the year
ended June 30, 1996, CDC expanded operations into Missouri and Kentucky. During
the year ended June 30, 1997, the Company expanded operations into Illinois,
Michigan, Mississippi and Indiana and discontinued branch operations in Missouri
and Kentucky. Reference herein to the "Company" includes CDC and its wholly
owned subsidiaries.
CDC is a mortgage finance company which provides residential first mortgage
loans through its branch offices. The Company's borrowers are generally unable
or unwilling to obtain financing from conventional lending sources due to an
established pattern of credit weakness, unverifiable income, insufficient credit
history, or a previous bankruptcy or insolvency. The Company is subject to
competition from other financial institutions.
On April 1, 1997, the Company acquired Cash Back Mortgage Corporation
("Cash Back") through a newly-organized wholly owned subsidiary of the Company,
Cash Back Acquisition Corporation. Cash Back is a mortgage finance company which
provides residential first mortgage loans generally to individuals in Ohio. The
Company acquired substantially all of the assets and liabilities of Cash Back in
exchange for 150,000 shares of common stock in the Company at the date of
acquisition. An additional 600,000 shares of common stock in the Company are
currently held in escrow for future distribution in accordance with the purchase
agreement to the shareholders of Cash Back. Additional consideration is based
solely on the achievement of various performance targets by Cash Back. The
acquisition of Cash Back was accounted for as a purchase. The results of three
months of operations of Cash Back are included in the consolidated financial
statements. In conjunction with this transaction, goodwill of $910,825 was
recorded. This amount is being amortized on a straight-line basis over 15 years.
Goodwill is measured periodically for impairment and any impairment is
recognized as a charge to current period earnings.
During fiscal year 1997, the Company sold the majority of its loan
production to a major loan securitizer for inclusion in asset securitizations.
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles. All significant intercompany balances
and transactions have been eliminated in consolidation. In preparing the
consolidated financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of the
date of the balance sheet and revenues and expenses for the period. Material
estimates that are particularly susceptible to significant change in the
near-term relate to the determination of the allowance for credit losses and
valuation of the interest-only strips receivable. In connection with the
determination of the allowance for credit losses, management considers
independent appraisals previously obtained for all properties while prepayment
experience, both Company and industry, is used as the basis for estimating
future prepayment rates in valuing the interest-only strips receivable.
Additionally, the ultimate collectibility of the Company's loans receivable are
susceptible to changes in market conditions.
F-7
<PAGE> 9
CREDIT DEPOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Interest income on loans receivable is recognized over the term of the
loans using methods which generally result in level rates of return on principal
amounts outstanding. Loans receivable are generally placed on nonaccrual status
when full payment of principal or interest is in doubt.
Gain on sale of receivables principally represents the present value of the
differential between the interest rates charged by the Company and the interest
rates passed on to the purchaser of the receivables, after considering the
effects of estimated prepayments and in the case of loans sold with servicing
retained, contractually specified servicing fees. Gains on the sale of loans
receivable are recorded on the settlement date generally using the specific
identification method. Gains on the sale of a portion of a loan are based on the
relative fair market value of the loan portion sold as compared to that portion
retained.
Finance income includes servicing fees and interest income on loans
retained by the Company. The servicing asset is carried at the lower of
amortized cost or fair value. Interest-only strips receivable are carried at
fair value.
The fair value of the interest-only strip receivable is analyzed quarterly
by the Company on a dissaggregated basis to determine whether prepayment and
default experience has an impact on this fair value. Expected cash flows of the
underlying loans sold are reviewed based upon current economic conditions and
are revised as necessary using the original discount rate used in calculating
the gain on sale. The interest-only strip receivable is classified as a trading
security. Accordingly, unrealized gains and losses are recorded in income.
LOAN RECEIVABLES
All loans receivable are considered to be held for sale and are carried at
the lower of aggregate cost or market values. Market value is determined by
outstanding commitments from investors or current investor yield requirements.
There was no allowance for market losses on loans receivable held for sale at
June 30, 1997 and 1996.
CREDIT LOSSES
Provisions for credit losses are charged to income in amounts sufficient to
maintain the allowance at a level considered adequate by management to absorb
possible losses of principal and interest in the existing portfolio, based on
calculations of the collectibility of loans receivable and prior credit loss
experience. Loans receivable are charged against the allowance for credit
losses, based on a loan-by-loan review, when management believes that the
collectibility of the principal is unlikely. The Company's exposure to credit
loss in the event of nonperformance by the borrower is represented by the
outstanding principal balance of the respective loans less the value of
collateral obtained. The amount of collateral obtained is based on management's
credit evaluation pursuant to the Company's lending and underwriting policies.
While management uses available information to recognize losses on loans,
future additions to the allowance may be necessary based on changes in economic
conditions.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Loans receivable are recorded on the balance sheet at an amount that
approximates fair market value. The servicing asset is periodically evaluated
for impairment and, as such, are recorded at values that approximate fair market
value. Interest-only strips receivable are recorded at fair value. The carrying
value of fixed rate debt is a reasonable estimate of fair value due to the
relatively stable rate environment during the fiscal year and the time period in
which the debt was originated.
F-8
<PAGE> 10
CREDIT DEPOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are provided on a straight-line
basis over the estimated useful lives of furniture and equipment (five years) or
the term of the related lease.
Property and equipment are as follows:
<TABLE>
<CAPTION>
JUNE 30,
---------------------
1997 1996
---------- --------
<S> <C> <C>
Furniture and equipment..................................... $1,138,407 $854,390
Leasehold improvements...................................... 64,679 63,495
---------- --------
1,203,086 917,885
Less accumulated depreciation and amortization.............. 678,391 424,325
---------- --------
$ 524,695 $493,560
========== ========
</TABLE>
INCOME TAXES
The Company accounts for income taxes using the liability method. Under
this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
LOSS PER SHARE
Loss per share amounts for all periods presented have been computed using
the weighted average number of common and, when dilutive, common equivalent
shares (stock options and warrants) outstanding.
RECLASSIFICATIONS
Certain reclassifications of prior years' amounts have been made to conform
to the current year presentation.
STOCK OPTIONS
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
interpretations in accounting for its employee stock options. Under APB 25,
because the exercise price of the Company's stock options equals the market
price of the underlying stock on the date of grant, no compensation expense is
recognized.
RECENT ACCOUNTING PRONOUNCEMENTS
During the year ended June 30, 1997, the Company adopted the requirements
of FASB Statement No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities." This new standard requires
application of a financial components approach that focuses on control and
recognition of financial assets and liabilities upon execution of a transfer of
such instruments. FASB Statement No. 125 is required to be applied to transfers
of assets occurring after January 1, 1997. The effect of adopting the new
standard was not material.
In February 1997, the Financial Accounting Standards Board issued FASB
Statement No. 128, "Earnings Per Share." This new standard establishes standards
for computing and presenting earnings per share (EPS) and applies to entities
with publicly held common stock. FASB Statement No. 128 simplifies the standards
for computing earnings per share previously found in APB Opinion No. 15 and
makes them
F-9
<PAGE> 11
CREDIT DEPOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
comparable to international EPS standards. It replaces the presentation of
primary EPS with a presentation of basic EPS. It also requires dual presentation
of basic and diluted EPS on the face of the statement of earnings for all
entities with complex capital structures and requires a reconciliation of the
numerator and denominator of the diluted EPS computation. FASB Statement No. 128
is effective for financial statements issued for periods ending after December
15, 1997, and earlier application is not permitted.
In June 1997, the Financial Accounting Standards Board issued FASB
Statement No. 130, "Reporting Comprehensive Income," which is effective for
annual and interim periods ending after December 15, 1997. This statement
requires that all items that are required to be recognized under accounting
standards as comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements.
In June 1997, the Financial Accounting Standards Board issued FASB
Statement No. 131, "Disclosures about Segments of an Enterprise and Related
Information," which is effective for annual and interim periods ending after
December 15, 1997. This statement establishes standards for the method that
public entities use to report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographical areas and major customers.
3. COMMON STOCK TRANSACTIONS
In June 1993, the market price of the Company's Common Stock attained the
market price required to permit the Company to redeem the warrants issued as
part of the initial public offering units at $.01. The warrant holders had the
option of receiving $.01 per warrant or exercising the warrant to purchase
common stock at $5.50 per share. Warrant holders converted 259,225 warrants at
the $5.50 exercise price prior to June 30, 1993, net of expenses of
approximately $145,000. In the first quarter of 1994, 539,475 additional
warrants were exercised at the $5.50 option price, net of expenses of
approximately $119,000. The remaining 6,300 warrants were redeemed by the
Company.
As partial consideration for successfully obtaining a $6,000,000 warehouse
line of credit, the Company granted warrants to purchase 200,000 shares of
common stock exercisable through May 31, 2003 at $9.00 per share to certain
intermediaries. This warehouse line of credit matured on June 16, 1995 and was
not renewed.
As partial consideration related to obtaining a $3,000,000 financing
arrangement discussed in Note 7, the Company granted warrants to purchase
201,389 shares of common stock exercisable through August 12, 2000 at $2.50 per
share to an underwriter.
As partial consideration for successfully obtaining $5,550,000 in
convertible notes, as discussed in Note 7, the Company granted warrants to
purchase 92,500 shares of common stock exercisable through January 25, 2000 at
$7.25 per share to an investment banker.
As partial consideration for successfully obtaining a $2,300,000 warehouse
lending agreement, as discussed in Note 7, the Company granted warrants to
purchase 920,000 shares of common stock exercisable through June 30, 2001 at
$2.50 per share, subject to certain anit-dilution adjustments.
As partial consideration for successfully obtaining a financing agreement
with Greenwich Capital, as discussed in Note 7, the Company granted warrants to
purchase 300,000 shares of common stock at a price of $5.25 per share
exercisable at the option of the lender at any time on or prior to November 8,
2000.
As partial consideration for successfully obtaining $6,400,000 in Series
"A" Convertible Preferred Stock, as discussed in Note 7, the Company granted
warrants to an underwriter to purchase up to 146,250 shares of common stock at a
price of $2.50 per share, subject to certain anti-dilution adjustments,
exercisable at the option of the underwriter at anytime on or prior to October
10, 1999.
F-10
<PAGE> 12
CREDIT DEPOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As partial consideration for obtaining $9,000,000 in 10% convertible
secured notes, as discussed in Note 7, the Company granted warrants to purchase
540,000 shares of common stock exercisable through August 12, 2000 at $2.50 per
share, subject to certain anti-dilution adjustments, to the underwriter.
As partial consideration for obtaining $1,674,000 in 11% Series "B"
Convertible Redeemable Preferred stock, as discussed in Note 7, the Company
granted warrants to purchase 669,600 shares of common stock exercisable through
April 21, 2002 at $2.50 per share, subject to certain anti-dilution adjustments,
to the underwriter.
As partial consideration for obtaining two warehouse lines-of-credit
totaling $550,000, as discussed in Note 6, the Company granted warrants to
purchase 18,000 shares of common stock exercisable through March 25, 1999 at
$3.25 per share to an agent.
As partial consideration for services in connection with investor
relations, the Company granted warrants to purchase 150,000 shares of common
stock exercisable through November 1, 2001 at $2.50 per share.
As partial consideration for consulting services, the Company granted
warrants to purchase 40,000 and 35,000 shares of common stock exercisable
through December 19, 1997 and January 15, 2001 at $5.25 and $4.00 per share,
respectively.
4. LOANS RECEIVABLE
Prior to June 30, 1994, sales of loans were generally made with the
provision that the Company would repurchase at the request of the investor any
loan that becomes past due by over 90 days or in accordance with those
circumstances which may occur from time to time as outlined in the respective
sale agreements. Investors may not request or demand repurchase without cause as
defined in the respective sale agreement. The balance subject to repurchase
under these agreements included in the Company's servicing portfolio is
$1,967,000. Loans sold during 1996 and 1997 to a major loan securitizer are
subject to limited recourse provisions. At June 30, 1997, the aggregate balance
of loans originated by the Company subject to limited repurchase provisions was
approximately $82,483,000, of which none was past due over 90 days and subject
to repurchase at the option of the investor. These loans were sold servicing
released with an interest-only strip retained on the loans. At June 30, 1997 the
Company's servicing portfolio totaled approximately $7,232,000 including
approximately $5,205,000 of Company-owned loans receivable.
It is the Company's experience that a substantial portion of the Company's
loan portfolio generally is sold, repaid or foreclosed upon before contractual
maturity dates. Additionally, the Company may extend the maturity of a loan
receivable for past due payments.
At June 30, 1997, there were loans receivable with an aggregate principal
balance of approximately $379,000 for which the accrual of interest had been
suspended. Borrowers with loans totaling approximately $626,965 were paying
under a court-approved bankruptcy plan at June 30, 1997. Of this amount, 6
borrowers representing $203,418 aggregate principal balance were delinquent per
the terms of the bankruptcy plan.
F-11
<PAGE> 13
CREDIT DEPOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Changes in the allowance for credit losses were as follows:
<TABLE>
<S> <C>
Balance as of June 30, 1995................................. $ 184,794
Provision for credit losses............................... 185,000
Charge-offs............................................... (171,584)
Recoveries................................................ 52,050
---------
Balance as of June 30, 1996................................. 250,260
Provision for credit losses............................... 225,231
Charge-offs............................................... (235,657)
Recoveries................................................ 20,650
---------
Balance as of June 30, 1997................................. $ 260,484
=========
</TABLE>
The allowance for credit losses includes a provision for credit losses that
may be incurred as a result of the obligation to repurchase certain loans sold.
This reserve is included in the allowance for credit losses since it has been
the Company's practice to repurchase loans sold to investors under continuing
servicing agreements prior to foreclosure. The resulting gain or loss on the
foreclosed property is recognized on the books of the Company.
5. SERVICING ASSET AND INTEREST-ONLY STRIPS RECEIVABLE
The servicing asset represents the unamortized balance of previously
recognized servicing rights and excess servicing receivables This amount is
amortized over the estimated lives of the underlying receivables sold. The
carrying value of the servicing asset at June 30, 1997, 1996, and 1995
approximates fair value.
The activity in the servicing asset is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------
1997 1996 1995
-------- -------- ----------
<S> <C> <C> <C>
Balance, beginning of year........................ $193,038 $411,902 $1,030,210
Additions from sales of loans receivable.......... -- -- 257,321
Unscheduled amortization.......................... (81,421) (118,765) (605,118)
Scheduled amortization............................ (34,610) (100,099) (270,511)
-------- -------- ----------
Balance, end of year.............................. $ 77,007 $193,038 $ 411,902
======== ======== ==========
</TABLE>
The interest-only strips receivable represents the unamortized balance of
the present value of the interest rate differential between the rate charged to
the borrower and the contractual rate paid by the Company to the investor for
the pool of loans after taking into consideration the Company's estimate for any
early prepayments and bad debt expense resulting from the sale of loans
servicing released. This amount is amortized in relation to the related cash
flows over the estimated lives of the underlying receivables sold. Discount
rates of 12% and 9% were used to compute the interest-only strips receivable at
June 30, 1997 and 1996, respectively. The carrying value of the interest-only
strips receivable at year-end approximates fair value.
The activity in the interest-only strips receivable account is summarized
as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------
1997 1996
----------- ----------
<S> <C> <C>
Balance, beginning of year................................. $ 1,317,075 $ --
Additions from sales of loans receivable................... 7,162,973 1,384,843
Scheduled amortization..................................... (1,211,118) (67,768)
----------- ----------
Balance, end of year....................................... $ 7,268,930 $1,317,075
=========== ==========
</TABLE>
F-12
<PAGE> 14
CREDIT DEPOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In fiscal 1997 and 1996, the Company recognized approximately $40,000 and
$119,000, respectively, in expenses related to the write down of the servicing
asset resulting from unanticipated prepayments. These prepayments are primarily
a result of certain competitors targeting the higher interest rate loans
serviced by the Company (and primarily originated subject to underwriting
practices prior to fiscal 1994) and refinancing such loans at lower interest
rates.
6. MORTGAGE WAREHOUSE LINE-OF-CREDIT
On June 11, 1997, the Company obtained a $3,000,000 mortgage warehouse
line-of-credit from a mortgage warehouse lender. The Company utilizes this
line-of-credit for the purpose of financing the origination of single family
residential mortgage loans. This line bears interest at prime plus 2% payable
monthly and the Company generally has an available borrowing base equivalent to
the lesser of $3,000,000 or 95% of the original mortgage amount or the
commitment price on the related take-out commitment of eligible mortgage loans
as defined under the agreement. The maturity date of the line is the earlier of
(1) the 90th day after funding of each note or (2) the date on which funds are
received from the take-out investor for purchase of the eligible mortgage loan
securing such note. As of June 30, 1997, the outstanding balance was $2,806,386.
On March 25, 1997 and March 31, 1997, the Company obtained warehouse
lines-of-credit in the amounts of $450,000 and $100,000, respectively, from
individuals. The Company utilitizes the lines-of-credit for the purpose of
financing the origination of single family residential mortgage loans. The lines
bear an interest rate of 12% and mature one year from the date of origination.
In connection with this agreement, the Company issued warrants to purchase
15,000 shares of common stock at $3.25 exercisable at the option of the lenders
at any time on or prior to March 25, 1999.
7. CONVERTIBLE NOTES AND OTHER BORROWINGS
On July 27, 1994 the Company completed a private placement offering of 8%
notes due 2004, convertible into common shares of the Company at $5 per share.
Interest on the notes is payable each July 1 and January 1. The gross proceeds
of the offering totaled $5,550,000. Approximately $545,000 in expenses related
to the offering were deferred and are being amortized over the term of the
notes. The private placement resulted in net proceeds to the Company of
approximately $5,005,000. The notes are subordinate to any warehouse
lines-of-credit up to $50 million and the Company is required to comply with
various restrictive covenants. During fiscal year 1996, all outstanding
principal and interest due per the agreement was paid in full. One lender
accepted a warehouse lending agreement in lieu of cash in the amount of
$2,300,000. The borrowings, which accrue interest at the rate of 10% per annum
payable quarterly, are secured by the underlying mortgage loans. The Company
must provide loans to secure the promissory note in an amount equivalent to 110%
of the principal amount of the note. In the event of a shortfall in collateral,
the Company is required to pledge cash in a segregated account. At June 30, 1997
and 1996, the Company had pledged $203,318 and $25,887, respectively, in cash to
secure the note. Such agreement expires on April 30, 2001. In addition, as
discussed in Note 3, the Company has issued warrants to the lender for the
purchase of up to 920,000 shares of the Company's $.001 par value common stock
at a price of $2.50 per share exercisable at the option of the lender at any
time on or prior to June 30, 2001.
On June 16, 1995, the Company entered into an agreement for the placement
of up to $3,000,000 in available borrowings to be used expressly for the purpose
of originating and acquiring mortgage loans. In connection with this agreement,
warrants to purchase 27,779 shares of common stock at $2.50 per share were
issued to the lenders which are exercisable at the option of the lenders at any
time on or prior to June 16, 1999. This agreement expired on June 16, 1997.
During fiscal year 1996, $2,500,000 of the borrowings were converted into Series
"A" 9% Non-voting Convertible Preferred Stock. At June 30, 1997 and 1996, $-0-
and $500,000 was outstanding under this agreement. An additional $500,000 in
borrowings was obtained through a similar agreement. These borrowings are
convertible into 9% Convertible Preferred Stock at $2.50 per share.
F-13
<PAGE> 15
CREDIT DEPOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In connection with this agreement, warrants to purchase 100,000 shares of common
stock at $2.50 per share were issued to the lender which are exercisable at the
option of the lender at any time on or prior to February 22, 2000. The
borrowings, which accrue interest at the rate of 10% per annum payable monthly,
are secured by the underlying mortgage loans. The agreement contains a default
interest of 16% which accrues to the extent such borrowings are not repaid on or
prior to the maturity date. At June 30, 1997, $500,000 was outstanding under
this agreement. Such agreement matures on February 22, 1998. The Company has
pledged loans receivable as collateral related to these borrowings.
In conjunction with a separate agreement with Greenwich Capital, dated
February 1, 1995, the Company from time-to-time received advances from Greenwich
Capital equivalent to 95% during fiscal year 1996 and 90% during fiscal year
1995 of the principal amount of mortgage loans associated with such advances.
The Company pays interest to Greenwich at prime plus 1% and has the option to
repurchase such mortgages, or repay such advances, within one year of the date
of the advance. During 1996 and 1995, the Company was advanced approximately
$7,628,000 and $10,600,000 in connection with this agreement. The maximum amount
outstanding under such agreement during 1996 and 1995 was approximately
$7,628,000 and $5,600,000. No amounts were outstanding at June 30, 1995 and the
agreement had expired as of June 30, 1996. In connection with this agreement, as
discussed in Note 3, the Company has issued warrants to the lender for the
purchase of up to 300,000 shares of common stock at a price of $5.25 per share
exercisable at the option of the lender at any time on or prior to November 8,
2000.
On October 10, 1995, the Company issued 250 units at an offering price of
$20,000 per unit, each unit consisting of 1,000 shares of Series "A" 9%
Non-voting Convertible Preferred Stock and warrants to purchase 2,500 shares of
common stock at $2.50 per share, subject to certain adjustments, in exchange for
the conversion of $2,500,000 of other borrowings and $2,500,000 in cash. An
additional 70 units of the preferred stock were issued for cash in the amount of
$1,400,000. These warrants are exercisable at the option of the holder at any
time on or prior to October 10, 1999. Dividends on the 9% Convertible Preferred
Stock are cumulative from the date of issuance and payable on a quarterly basis
commencing on December 31, 1995. Shares of the preferred stock, totaling an
initial investment of $100,000 in preferred stock, were converted during the
year ended June 30, 1997 into 40,000 shares of common stock at $2.50 per share.
On January 18, 1996, the Company entered into an agreement to borrow
$1,050,000 from a third party lender. The loan is collateralized by mortgage
loans and bears interest at a rate of 12% per annum. The loan matured on
February 18, 1997. At June 30, 1997 and 1996, there was $-0- and $925,000
outstanding under this agreement, respectively.
On May 24, 1996, the Company commenced a $9,000,000 10% convertible secured
note offering. The notes are partially secured by essentially all otherwise
unpledged assets of the Company. The notes are convertible into 3,600,000 shares
of common stock at an exercise price of $2.50 per share and impose limitations
on the payments of dividends to common stockholders. In August 1996, the Company
became fully subscribed to the maximum offering amount of $9,000,000. The notes
mature on June 30, 2001. During 1997, $860,000 of the notes, net of were
converted by the debt holders into 344,000 shares of common stock of the Company
at $2.50 per share. This amount was netted against filing fees in the amount of
$21,000.
On November 12, 1996, the Company entered into an agreement with a major
loan securitizer by where the Company receives advances on the interest-only
strips receivable on the loans sold to be placed in securitizations, as
discussed in Note 5. The lender has the right to offset all sums owed to them by
the Company against the amounts owed by the Company under the loan sales
agreement. The interest rate on the advances is the 30-day LIBOR plus 400 basis
points. In the event of a default, the interest rate increases to the 30-day
LIBOR plus 700 basis points. The 30-day LIBOR rate at June 30, 1997 was 5.69%.
Each advance is repaid over a 36-month period from the day the loan sale
commitment that it pertains to is filled. As of June 30, 1997, $2,100,651 was
outstanding under this agreement.
F-14
<PAGE> 16
CREDIT DEPOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On March 24, 1997, the Company issued 16,740 shares of Series "B" 11%
Non-voting Convertible Redeemable Preferred Stock at an offering price of $100
per share and warrants to purchase 669,600 shares of common stock at $2.50 per
share, subject to certain adjustments exercisable at the option of the
stockholders at any time on or prior to April 12, 2000. Dividends on the 11%
Convertible Redeemable Preferred Stock are cumulative from the date of issuance
and payable on a quarterly basis commencing on July 1, 1997. Through July 1,
1998, dividends are payable, at the Company's option, either in cash or in
shares of preferred stock valued at the lessor of (1) the conversion price per
share or (2) the average closing bid price of the Company's common stock on the
Nasdaq SmallCap Market for the twenty consecutive trading day period ending five
days prior to the dividend record date. Thereafter, dividends are payable in
cash. The Company has the right at any time more than 913 days after the final
closing date to redeem for cash all or a portion of the outstanding shares of
this preferred stock at the original purchase price of $100 per share plus all
accrued and unpaid dividends.
The aggregate maturities for long-term debt are as follows:
<TABLE>
<S> <C>
1998........................................................ $ 1,257,646
1999........................................................ 757,646
2000........................................................ 585,359
2001........................................................ 10,440,000
2002 and thereafter......................................... --
-----------
$13,040,651
===========
</TABLE>
8. INCOME TAXES
Income tax expense (benefit) differs from the amount computed by applying
the graduated statutory federal income tax rates for the following reasons:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Income tax expense (benefit) at statutory
federal income tax rate applied to income
(loss) before income taxes.................... $(1,143,420) $(1,540,369) $(1,628,919)
State income tax, net of federal income tax
benefit....................................... (110,979) (149,506) (158,070)
Tax benefit not currently recognizable.......... 1,254,399 1,689,875 1,786,989
----------- ----------- -----------
$ -- $ -- $ --
=========== =========== ===========
</TABLE>
F-15
<PAGE> 17
CREDIT DEPOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income taxes reflect the impact of temporary differences between
the amount of assets and liabilities recognized for financial reporting purposes
and such amounts recognized for income tax purposes. The primary sources of
these differences are the differing methods utilized for recognition of gains
associated with loan sales, accelerated tax depreciation, and the allowance for
credit losses. Significant components of the Company's deferred tax liabilities
and assets are as follows:
<TABLE>
<CAPTION>
JUNE 30,
-------------------------
1997 1996
----------- -----------
<S> <C> <C>
Deferred tax liabilities:
Interest-only strips receivable basis differences......... $(2,711,000) $ (491,000)
Other, net................................................ (39,000) (37,000)
----------- -----------
Total deferred tax liabilities.................... (2,750,000) (528,000)
Deferred tax assets:
Allowance for credit losses............................... 97,000 93,000
Other reserves............................................ 15,000 33,000
Other, net................................................ 71,000 62,000
Net operating loss carryforwards -- state................. 876,000 672,000
Net operating loss carryforwards -- Federal............... 5,475,000 4,200,000
----------- -----------
Total deferred tax assets......................... 6,534,000 5,060,000
Valuation allowance for deferred tax assets................. (3,784,000) (4,532,000)
----------- -----------
Net deferred tax assets..................................... 2,750,000 528,000
----------- -----------
Net deferred tax assets (liabilities)....................... $ -- $ --
=========== ===========
</TABLE>
At June 30, 1997, the Company had net operating loss carryforwards for
Federal and state income tax purposes available to offset future taxable income
of approximately $14,600,000 expiring from 2009 through 2012.
9. COMMITMENTS
The Company leases space for its corporate and branch offices in Georgia,
Indiana, Ohio, South Carolina, North Carolina, Kentucky, Missouri, Florida, and
Tennessee. Future lease payments under all such operating lease agreements are
as follows:
<TABLE>
<S> <C>
1998........................................................ $390,124
1999........................................................ 324,228
2000........................................................ 105,704
2001 and thereafter......................................... --
--------
$838,056
========
</TABLE>
Rental expense totaled $516,435, $480,779 and $353,185 for the years ended
June 30, 1997, 1996 and 1995, respectively.
10. OTHER RELATED PARTY TRANSACTIONS
During the year ended June 30, 1996, the Company advanced $100,000 to a
stockholder and director, due on September 15, 1996. On August 11, 1997, the
maturity date was extended to August 20, 1998. The note bears interest at 8% and
is payable at maturity. The borrower was not a director of the Company as of
June 30, 1997. A reserve has been recorded for the advance in the full amount of
the outstanding balance.
F-16
<PAGE> 18
CREDIT DEPOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During the year ended June 30, 1995, the board approved an advance in the
amount of $100,000 to a director. This loan bears interest at 11% and all
interest and principal is due and payable on May 20, 1996. During the year ended
June 30, 1996, the maturity date was extended to May 20, 1997. As of June 30,
1997, the advance remained outstanding. A reserve has been recorded for the
advance in the full amount of the outstanding balance.
11. STOCK OPTION PLAN
In October 1990, the Company adopted the 1990 Stock Option Plan (the "1990
Plan") under which 250,000 shares of the Company's common stock are reserved for
issuance, pursuant to which officers, directors and key employees are eligible
to receive incentive and/or non-qualified stock options. In March 1992, the
Company amended the 1990 Plan and increased the number of shares reserved from
250,000 to 400,000 shares.
In January 1993, subject to stockholder approval which was obtained in May
1993, the Company adopted the 1993 Stock Option Plan (the "1993 Plan") under
which 250,000 shares of the Company's common stock are reserved for issuance
similar to the 1990 Plan. Subsequently, the Company has amended the 1993 Plan
and increased the number of shares reserved to 1,200,000 shares. The 1990 Plan
and the 1993 Plan (collectively, the "Plans") are administered by a committee of
the Board of Directors. The option prices underlying all such agreements are
based upon the fair value of the stock on the date of grant.
On July 25, 1996, each option outstanding under the Plans, including
options held by directors and executive officers of the Company, with an
exercise price exceeding $4.00 was canceled and reissued with an exercise price
equal to $3.50 per share, compared to the then current market price of $2.75 per
share. Options to purchase 1,151,000 shares of common stock at exercise prices
ranging from $4.25 to $10.00 per share, with a weighted average exercise price
of $6.11 were repriced. All other terms and conditions of these options remained
the same.
In 1997, options for the purchase of 265,500 shares were granted to
employees and directors of the Company at a per share price ranging from $2.75
to $4.00. In 1996, options for the purchase of 265,500 shares were granted to
employees and directors of the Company at a per share price of $3.50 to $4.25.
At June 30, 1997, there were a total of 1,357,000 options outstanding with
exercise prices ranging from $2.75 to $8.00. No options were exercised during
1996 or 1997; however, 1,107,125 options outstanding are vested and exercisable
at June 30, 1997.
Pro forma information regarding net income and earnings per share is
required by FASB Statement No. 123, "Accounting for Stock-Based Compensation",
and has been determined as if the Company had accounted for its stock options
under the fair value method of that Statement. The fair value in these options
was estimated at the date of grant using the "minimum value" method allowed by
the Statement. Pro forma net loss and net loss per share were $(3,858,651) and
$(1.21) and $(4,582,052) and $(1.48) for the years ended June 30, 1997 and 1996,
respectively. The weighted average fair value of options granted during the
years ended June 30, 1997 and 1996 was $486,290 and $722,774.
At June 30, 1997, 1,107,125 shares under the Plans had vested but had not
been exercised.
F-17
<PAGE> 19
CREDIT DEPOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table reflects changes in the stock options issued under the
Plans:
<TABLE>
<CAPTION>
APPROXIMATE
PRICE RANGE
SHARES PER SHARE
--------- -----------
<S> <C> <C>
Options outstanding at July 1, 1994......................... 891,500 $4-10
Granted................................................... 402,500 5
Exercised................................................. -- --
Canceled.................................................. (84,500) 6-10
--------- -----
Options outstanding at June 30, 1995........................ 1,209,500 4-10
Granted................................................... 194,000 4-6
Exercised................................................. -- --
Canceled.................................................. (88,500) 5-7
--------- -----
Options outstanding at June 30, 1996........................ 1,315,000 4-8
Granted................................................... 265,500 2-4
Exercised................................................. -- --
Canceled.................................................. (223,500) 2-4
--------- -----
Options outstanding at June 30, 1997........................ 1,357,000 $2-8
========= =====
</TABLE>
12. GOING CONCERN
During the fiscal year ended June 30, 1997, the Company incurred losses of
$3,362,999 compared to losses of $4,114,820 for the year ended June 30, 1996. In
addition, as of June 30, 1997, the Company had an accumulated deficit of
$16,063,375. Although the Company had modest earnings for its 1992 fiscal year,
it has incurred losses during all of its other years since 1991. In view of its
geographic expansion and the increased size of its corporate infrastructure in
connection therewith, the Company has been unable to generate sufficient gain on
sales of its mortgage loans in either individual sales, bulk sales or through
securitization to provide sufficient revenues to achieve appropriate returns.
The Company has experienced significant operating cash flow deficiencies
over the past year. By its nature, the Company's business requires continual
access to short-term and long-term sources of debt and equity capital. The
Company's capital requirements arise principally from loan originations and loan
repurchases, payments of operating and interest expenses, capital expenditures,
and start-up expenses for new geographic markets. To date, in addition to the
Company's capital raising efforts, the sources of liquidity have been (1) sales
of the loans it originates and purchases into secondary markets, (2) borrowings
under its mortgage warehouse line of credit secured by its loans, in most cases
until such loans are sold and the lender can be repaid, (3) finance income and
fees generated by the loan servicing portfolio, and (4) the conversion of the
servicing asset and interest-only strips receivable into cash over the lives of
the loans sold.
The Company has approximately $1,260,000 in debt that will be due within
the next twelve months. In addition, subsequent to June 30, 1997, the Company
was not in compliance with a minimum net worth covenant under its warehouse
lending arrangement with one of its warehouse lenders primarily as a result of
recurring operating losses. Since waiver of this covenant has not been obtained,
the right to use this line to finance originations and purchases of mortgage
loans could be restricted or terminated at the option of the lender.
The Company's net worth as of June 30, 1997 was $376,838. The Company has
received notification from Nasdaq stating that the Company has failed to
maintain a $1.00 minimum bid price on its common stock and
F-18
<PAGE> 20
CREDIT DEPOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
also does not appear to meet the $2,000,000 minimum in net tangible assets
necessary for continued listing on the Nasdaq Small Cap Market. The Company must
respond by October 22, 1997 with a plan and schedule to bring the Company into
compliance with these requirements. In the event the Company is not in
compliance by October 22, 1997 or Nasdaq does not accept the Company's plan for
achieving compliance, a formal notice of deficiency would be issued by Nasdaq
specifying a delisting date for the Company's common stock.
There can be no assurance that the Company will be able to obtain necessary
financing or additional capital in the future or that the Company will continue
to be listed on the Nasdaq Small Cap Market. To the extent that the Company
experiences cash shortages in the future, it may be required to sell off
mortgage loans on less favorable terms than it might otherwise be able to
obtain. There can be no assurance that the Company will be able to obtain, on
acceptable terms, additional funds under lines of credit, or otherwise, when
needed, in which event the Company would be required to curtail its lending
activities and could be unable to comply with the terms of covenants contained
in the agreements relating to its outstanding indebtedness.
MANAGEMENT'S PLANS
The Company is currently in the process of extending a conversion offer to
the holders of the 10% convertible secured notes and the Series "A" 9%
Non-voting Convertible Preferred Stock in order to enable the Company to raise
additional capital to meet its operating expenses and to continue as a going
concern. The Company does not have sufficient authorized common stock to permit
it to issue the shares of common stock pursuant to the conversion offer. As a
means of increasing the number of shares of authorized common stock available
for issuance by the Company, the board of directors has approved, subject to
stockholder approval, a proposal to amend the certificate of incorporation to
effect a five-for-one reverse stock split. The board of directors believes that
the reverse stock split, by decreasing the number of shares outstanding, should
increase the bid price per common stock, and is necessary in order to permit the
company to meet the requirements for continued listing on the Nasdaq Small Cap
Market.
In addition, the Company plans to execute a private placement up to
$3,000,000 of Series "B" 11% Non-voting Convertible Redeemable Preferred Stock,
convertible into common stock at $.40 per share. This offering, if executed,
will serve to provide additional cash flow and improve the net worth of the
Company. In connection therewith, the conversion price of the 16,740 currently
outstanding shares of the Series "B" 11% Non-voting Convertible Redeemable
Preferred Stock will also be adjusted to $.40 per share.
There can be no assurances that the conversion offer or the private
placement will be successful or that the successful completion of those actions
will substantially improve the condition of the Company.
F-19
