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FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20459
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 0-19420
CREDIT DEPOT CORPORATION
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(Exact name of small business issuer as specified in its charter)
Delaware 58-1909265
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
700 Wachovia Center
Gainesville, Georgia
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(Address of principal executive offices)
30501
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(Zip code)
(770) 531-9927
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(Issuer's telephone number)
Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Exchange Act of 1934 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
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State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
Class Outstanding at January 31, 1998
- ----------------------------- -------------------------------
Common Stock $.001 Par Value 5,727,008
Transitional Small Business Disclosure Format (check one):
YES NO X
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CREDIT DEPOT CORPORATION
Table of Contents
<TABLE>
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Page
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PART I. FINANCIAL INFORMATION
Item 1 -- Financial Statements (Unaudited)
Condensed Consolidated Balance
Sheets as of June 30, 1997 and
December 31, 1997 3
Condensed Consolidated Statements of Operations
for the Three Months Ended December 31, 1996
and 1997 and for the Six Months Ended
December 31, 1996 and 1997 4
Condensed Consolidated Statements
of Cash Flows for the Six Months
Ended December 31, 1996 and 1997 5
Notes to Condensed Consolidated
Financial Statements 6
Item 2 -- Management's Discussion and Analysis
of Financial Condition and Results of
Operations 8
Part II. OTHER INFORMATION
Item 2 -- Changes in Securities 13
Item 4 -- Submission of Matters to Vote of
Security Holders 13
Item 6 -- Exhibit and Reports on Form 8-K 14
SIGNATURES 15
</TABLE>
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CREDIT DEPOT CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
June 30, DECEMBER 31,
1997 1997
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ASSETS
Loans receivable
Consumer, collateralized by real estate ..................... $ 5,517,002 $ 7,523,106
Allowance for credit losses ................................. (260,484) (266,848)
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Net loans receivable ........................................... 5,256,518 7,256,258
Cash ........................................................... 1,332,934 124,972
Cash subject to withdrawal restrictions ........................ 203,318 1,302,950
Property and equipment, net .................................... 524,695 436,901
Real estate held for resale .................................... 89,021 100,256
Other assets:
Receivables due from related parties (net of reserve) ....... 17,398
17,847
Prepaid expenses and other assets ........................... 269,750 248,887
Servicing asset ............................................. 77,007 74,935
Interest-only strips receivable ............................. 7,268,930 7,222,329
Accrued interest receivable ................................. 35,503 118,832
Deferred financing costs .................................... 1,338,822 563,933
Goodwill .................................................... 910,825 865,285
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TOTAL ASSETS ................................................... $ 17,324,721 $ 18,333,395
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LIABILITIES
Convertible notes .............................................. $ 10,440,000 $ 4,020,000
Warehouse line of credit ....................................... 3,356,386 6,385,391
Advance on interest-only strips receivable ..................... 2,100,651 2,402,967
Other borrowings ............................................... 500,000 500,000
Accounts payable ............................................... 291,235 277,595
Accrued liabilities ............................................ 85,340 366,894
Dividends payable .............................................. 174,271 93,027
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TOTAL LIABILITIES .............................................. 16,947,883 14,045,874
STOCKHOLDERS' EQUITY
Series "A" Preferred Stock, $.001 par value: 2,000,000 shares
authorized, 315,000 shares outstanding at June 30, 1997,
and 3,334 shares outstanding at December 31, 1997 ......... 315 3
Series "B" Preferred Stock, $.001 par value: 60,000
shares authorized, 16,740 shares issued and outstanding
at June 30, 1997, and at December 31, 1997 ................ 17 17
Common stock, $.001 par value: 35,000,000 shares authorized,
814,573 shares outstanding at June 30, 1997 (1), and
5,727,008 shares outstanding at December 31, 1997 ......... 815 5,727
Additional paid-in capital ..................................... 16,439,066 29,582,417
Accumulated deficit ............................................ (16,063,375) (25,300,643)
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TOTAL STOCKHOLDERS' EQUITY ..................................... 376,838 4,287,521
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ..................... $ 17,324,721 $ 18,333,395
============ ============
</TABLE>
(1) The number of shares of common stock and have been retroactively adjusted to
give effect to a one-for-five reverse stock split which became effective on
October 29, 1997 (See Note 5).
See accompanying notes.
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CREDIT DEPOT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
1996 1997 1996 1997
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<S> <C> <C> <C> <C>
Revenues:
Finance income and fees earned ............. $ 109,254 $ 407,993 $ 260,550 $ 874,582
Gain on sale of receivables ................ 2,018,212 729,672 3,284,266 1,923,265
Other ...................................... 66,952 (26,026) 33,314 298
------------ ------------ ------------ ------------
2,194,418 1,111,639 3,578,130 2,798,145
Expenses:
Salaries and employee benefits ............. 915,987 1,198,057 1,661,674 2,442,381
Legal and professional fees ................ 97,986 163,755 194,697 284,861
Other operating expenses ................... 612,340 789,259 1,098,596 1,462,667
Provision for credit losses ................ 45,000 133,125 65,000 163,125
Debt conversion expense .................... -- 5,576,000 -- 5,576,000
Interest expense and amortization of
financing costs ....................... 399,157 1,289,361 708,408 1,834,949
------------ ------------ ------------ ------------
2,070,470 9,149,557 3,728,375 11,763,983
Income (loss) before provision for income taxes 123,948 (8,037,918) (150,245) (8,965,838)
Provision for income taxes .................... -- -- --
------------ ------------ ------------ ------------
Net income (loss) ............................. $ 123,948 $ (8,037,918) $ (150,245) $ (8,965,838)
------------ ------------ ------------ ------------
Induced conversion of preferred stock ......... -- 3,584,700 --
3,584,700
Dividends on preferred stock .................. 141,750 83,924 285,750 271,709
------------ ------------ ------------ ------------
Net loss attributable to common shareholders .. $ (17,802) $(11,706,542) $ (435,995) $(12,822,247)
============ ============ ============ ============
Net loss per share of common stock (1) ........ $ (0.02) $ (2.05) $ (0.62) $ (3.93)
============ ============ ============ ============
Net loss per share of common stock,
assuming dilution (1) .................... $ (0.02) $ (2.05) $ (0.62) $ (3.93)
============ ============ ============ ============
Weighted average shares outstanding (1) ....... 749,412 5,713,674 703,962 3,264,124
============ ============ ============ ============
Weighted average shares outstanding,
assuming dilution (1) .................... 3,148,696 9,839,326 3,087,866 7,715,241
============ ============ ============ ============
</TABLE>
(1) The weighted average number of shares of common stock and the corresponding
earnings per share figures have been retroactively adjusted to give effect to a
one-for-five reverse stock split which became effective on October 29, 1997. See
Note 5 concerning the reverse split and Note 2 concerning the calculation of
earnings per share.
See accompanying notes.
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CREDIT DEPOT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
December 31, DECEMBER 31,
1996 1997
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss .................................................. $ (150,245) $ (8,965,838)
Adjustments to reconcile net loss
to cash used in operating activities:
Provision for credit losses .......................... 65,000 163,125
Depreciation and amortization ........................ 158,394 138,563
Debt conversion expense .............................. -- 5,576,000
Changes in operating assets and liabilities:
Due from related parties ........................... (3,005) (459)
Prepaid expenses and other ......................... 158,305 (62,466)
Deferred financing costs ........................... (361,819) 774,889
Loans originated ................................... (41,108,754) (41,009,434)
Loans repurchased .................................. (590,429) (1,012,256)
Servicing asset .................................... 49,197 2,072
Interest-only strips receivable .................... (3,470,607) 46,601
Proceeds from loans sold ........................... 42,304,703 40,022,995
Principal collections on loans not sold ............ 898,653 201,030
Accounts payable and accrued liabilities ........... (63,674) 267,914
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Net cash used in operating activities ..................... (2,114,281) (3,857,264)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment ........................ (122,567) (11,189)
Disposal of property and equipment ........................ -- 4,800
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Net cash used in investing activities ..................... (122,567) (6,389)
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends on preferred stock .............................. (285,750) --
Proceeds from issuance of convertible notes ............... 2,800,000 425,000
Proceeds from warehouse line of credit .................... -- 36,977,920
Payments on warehouse line of credit ...................... -- (33,949,914)
Payments on other borrowings .............................. (977,373) --
Advance on interest-only strip receivable ................. 103,098 804,656
Payments on advance on interest-only strip receivable ..... -- (502,339)
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Net cash provided by financing activities ................. 1,639,975 3,755,323
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Net decrease in cash ...................................... (596,873) (108,330)
Cash at beginning of period ............................... 1,707,320 1,536,252
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Cash at end of period ..................................... $ 1,110,447 $ 1,427,922
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for interest .................. $ 628,951 $ 448,756
============ ============
Conversion of loans receivable to real estate held for sale $ 564,817 $ 376,354
============ ============
</TABLE>
See accompanying notes.
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CREDIT DEPOT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying financial information includes the accounts of Credit
Depot Corporation ("CDC" or the "Company") and its wholly owned subsidiaries.
The financial information is unaudited but includes all adjustments
consisting only of normal recurring adjustments which the Company's
management believes to be necessary for fair presentation of the periods
presented. Interim results are not necessarily indicative of results for a
full year. Dollar figures rounded to the nearest $1,000 in the following
discussion are approximate unless otherwise noted. The interim financial
statements should be read in conjunction with the Company's audited financial
statements for the year ended June 30, 1997.
2. NET INCOME (LOSS) PER SHARE
Dividends on preferred stock are subtracted from net income (loss) to
arrive at the numerator for this calculation. The denominator for the
earnings per share calculation is the weighted average number of common
shares actually issued and outstanding during the period indicated. The
denominator for the earnings per share assuming dilution is the total of
actual outstanding shares of common stock plus all common equivalent shares
(convertible securities, warrants and stock options) outstanding during the
period. Common share equivalents are included even if they are not currently
exercisable or even if the exercise price is below the current market value
of the common stock. The earnings per share calculation assuming dilution
substitutes the earnings per share denominator if the numerator is negative.
3. GAIN ON SALE OF RECEIVABLES
Gains on the sale of loans to third parties made during the past two
fiscal years wherein the Company retains an interest in the loan are
calculated as the present value of the interest rate differential between the
rate charged to the borrower and the rate earned by the third party (the
"Spread"), after taking into consideration several estimates made by the
Company including early prepayments and loan defaults. The corresponding
asset recorded at the time of the gain on sale of loans with a retained
interest, the "Interest-Only Strip Receivable", is amortized in proportion to
the income received from the rate differential retained by the Company over
the estimated lives of the underlying loans. The Interest-Only Strip
Receivable is analyzed quarterly on a disaggregated basis to determine
whether prepayment and default experience have impacted the fair value. The
Interest-Only Strip Receivable is classified as a trading security;
accordingly, unrealized gains and losses are recorded in income. In past
years the Company, in addition to selling loans with a retained interest,
also retained the servicing rights to the sold loans as well. The gain on
sale was recorded in a similar manner as with the Interest-Only Strip
Receivable, except the corresponding asset is referred to as a "Servicing
Asset". Both types of loans sales are referred to as "Accrual" sales, since
the gain on sale is accrued at the time of sale, and cash is received over
the life of the loans.
Because the gain recognized in the year of sale is equal to the present
value of the estimated future cash flows from the Spread, the amount of cash
actually received over the lives of the loans can exceed the gain previously
recognized at the time the loans were sold. In subsequent years, the Company
would recognize additional income and fees to the extent actual cash flows
from such loans exceed the amortization of the Interest- Only Strip
Receivable or Servicing Asset. If actual prepayments with respect to sold
loans occur faster than were projected at the time such loans were sold, the
carrying value of the Interest-Only Strip Receivable or Servicing Asset is
written down through a charge to earnings in the period of adjustment. There
were no charges to earnings for anticipated prepayments during the three
months ended December 31, 1996 or 1997.
Gains on sales of loans wherein the Company does not have any further
interest in the loan and does not retain any servicing rights are calculated
as the difference between the cash price paid by the third party and the
principal balance of the loan. This type of sale is also referred to as a
"Whole" loan sale. The Company has sold loans Whole exclusively since October
1997.
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4. CONVERTIBLE NOTES
During the six months ended December 31, 1997, the Company borrowed a
total of $1,450,000 in the form of secured debt bearing an interest rate of
10% convertible into common stock of the Company. In January 1998, an
additional $250,000 was borrowed pursuant to this arrangement. The maturity
date on this debt, which was originally October 31, 1997, was extended to
April 30, 1998. In conjunction with this debt offering, the lenders were
issued warrants to purchase 850,000 shares of common stock of the Company at
$2.00 per share.
5. REVERSE STOCK SPLIT/ CONVERSION OF SECURITIES
On October 24, 1997, a majority of the common shareholders of the Company
approved an Amendment to the Certificate of Incorporation effecting a reverse
stock split in which each five shares of issued common stock of the Company
(the "Common Stock") was reclassified and changed into one share of Common
Stock. This reverse stock split was effected on October 29, 1997.
At a Board of Directors Meeting held October 24, 1997, the Company
accepted conversion offers tendered by holders of 10% Convertible Secured
Notes (the "Notes") and 9% Series A Convertible Preferred Stock (the
"Preferred Stock"). Of the $8,140,000 of Notes outstanding, holders
representing $6,970,000 of Notes elected to convert their Notes to Common
Stock at a conversion rate of $0.50 per share. Of the 315,000 shares of
Preferred Stock outstanding, holders representing 311,666 shares of Preferred
Stock elected to convert their Preferred Stock to Common Stock at a
conversion rate of $0.65 per share. In January 1998, holders of the remaining
66,680 shares of Preferred Stock converted their Preferred Stock under the
same terms and conditions as those who converted in October 1997.
The conversion of Notes and Preferred Stock, plus payment of accrued
interest and dividends thereon in the form of Common Stock, added 24,462,179
shares of Common Stock to the 4,072,861 existing shares of Common Stock
outstanding, resulting in a total of 28,535,040 shares issued and
outstanding, or 5,707,008 shares of Common Stock after giving effect to the
one-for-five reverse stock split.
A non-cash charge of $5,576,000 was recorded as "Debt Conversion Expense"
pursuant to the guidelines of Financial Accounting Standards Board Statement
No. 84 "Induced Conversions of Convertible Debt". The calculation of this
figure utilized a market price of the common stock at conversion of $.50 per
share. Pursuant to the guidelines, this expense is credited to "Paid-In
Capital". Similarly, $3,584,700 was added to the loss attributable to common
shareholders to note the effect of the induced conversion of preferred stock.
This memo entry was made pursuant to Securities and Exchange Commission
Emerging Issues Task Force Topic No. D-42 "The Effect on the Calculation of
Earnings per Share for the Redemption or Induced Conversion of Preferred
Stock".
Also, $843,000 of deferred financing charges incurred during the original
issuance of the Notes were charged to expense as a direct result of the
conversion of the Notes.
6. GOING CONCERN
In the annual audited financial statements filed with the Company's annual
report on Form 10-KSB, the independent auditors opinion on those financial
statements included an explanatory paragraph stating that certain conditions
raise substantial doubt about the Company's ability to continue as a going
concern. These conditions include significant and recurring operating losses,
operating cash flow deficiencies, significant debt, maintenance of minimum
net worth necessary for continued listing on the Nasdaq SmallCap Market, and
accumulated deficit. Note 12 to those audited financial statements elaborated
on the basis for the explanatory paragraph and presented management's plans
for addressing some of the issues cited as a basis for the uncertainty. While
the conversion of Notes and Preferred Stock described above has reduced both
debt and cash outlays for dividend and interest, there can be no assurance
that these changes will result in reversing operating losses or cash flow
deficiencies. The Company still requires additional financing to retire a
$500,000 mortgage participation in February 1998 and a $1,700,000 loan due
April 30, 1998, and for working capital and debt reduction purposes during
the current fiscal year. See "Liquidity and Capital Resources" under Item 2
"Management's Discussions and Analysis of Financial Condition and Results of
Operation".
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Item 2. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
RESULTS OF OPERATIONS
Three Months Ended December 31, 1996 and 1997
The Company recorded a net loss of $8,038,000 for the three months
ended December 31, 1997 (the "1997 Three Months"), as compared to net income of
$124,000 for the three months ended December 31, 1996 (the "1996 Three Months").
Excluding the $5,576,000 debt conversion expense and $843,000 of amortization of
deferred financing charges associated with the conversion of debt (see Note 5 to
financial statements), the net loss for the 1997 Three Months was $1,619,000.
Net loss per share of Common Stock after deducting dividends on preferred stock
and recognizing a $3,584,700 charge for the conversion of Preferred Stock (see
Note 5 to the financial statements) was $(2.05) for the 1997 Three Months
compared to a net loss of $(0.02) per share for the 1996 Three Months. A
decrease in revenue was the largest single variance between the comparable
periods.
Net revenues decreased $1,082,000 or 49%, from $2,194,000 in the 1996
Three Months to $1,112,000 in the 1997 Three Months. The decrease in revenue was
primarily due to a decrease in gain on sale between the periods. Revenue from
the gain on sale of loans decreased $1,288,000 or 64% from $2,018,000 in the
1996 Three Months to $730,000 in the 1997 Three Months on sales of $23,369,000
and $21,335,000, respectively. The net gain on sale percentage between the
periods decreased from 9.4% for the 1996 Three Months to 3.4% for the 1997 Three
Months. The Company sold all loans Whole in the 1997 Three Months as opposed to
the 1996 Three months wherein most loans were sold on an Accrual basis (see Note
3 to the financial statements "Gain on Sale of Receivable"). Also, the Company
sold some loans during the 1997 Three Months that are not readily purchased by
the Company's traditional investors. These loans were sold at less than par
value. These sales had a negative impact on the Company's gain on sale
percentage, which averaged 4.7% on sales made to traditional investors during
the 1997 Three Months. While Whole loan sales have historically resulted in a
smaller gain on sale percentage than an Accrual sale, the Company believes the
benefits from improved cash flow from the Whole loan sale outweigh the smaller
margins as compared to an Accrual sale.
Excluding the $5,576,000 debt conversion expense and $843,000 of
amortization of deferred financing charges associated with the conversion of
debt (see Note 5 to financial statements), total expenses increased 32% from
$2,070,000 in the 1996 Three Months to $2,730,000 in the 1997 Three Months. The
largest increase in expenses between the comparable periods was in labor costs,
which increased $282,000 or 44% from $916,000 in the 1996 Three Months to
$1,198,000 in the 1997 Three Months. The Company had 63 employees on a weighted
average basis during the 1996 Three Months as compared to 88 employees during
the 1997 Three Months, although 30 of the 88 employees were with Cash Back
Mortgage, an acquisition made by the Company in April 1997. Labor costs for Cash
Back Mortgage during the 1997 Three Months were $320,000. Other operating
expenses increased $177,000 or 29% from $612,000 in the 1996 Three Months to
$789,000 in the 1997 Three Months. Other operating expenses for Cash Back
Mortgage were $153,000. Of the other operating expenses not attributable to Cash
Back Mortgage, the largest increase was in warehouse line fees, of which there
were none in the 1996 Three Months and $40,000 in the 1997 Three Months.
The provision for credit losses was $45,000 in the 1996 Three Months
compared to $133,000 in the 1997 Three Months. The increase in provision
resulted from adjusting the reserve for bad debts to a level deemed appropriate
after reviewing the quarterly analysis of loans receivable. Legal and
professional fees were $98,000 in the 1996 Three Months compared to $133,000 in
the 1997 Three Months. Most of the increase was a result of fees associated with
exploring various alternatives to the debt conversion offer and reverse stock
split consummated in October 1997.
Excluding $843,000 of amortization of deferred finance charges
associated with the conversion of debt, interest expense and amortization of
goodwill and deferred finance charges increased $46,000 or 12% from $399,000 the
1996 Three Months to $446,000 in the 1997 Three Months. Interest expense
increased $40,000 or 11% from $326,000 in the 1996 Three Months to $366,000 in
the 1997 Three Months. The reduction of interest expense from the converted debt
at the end of October 1997 was offset by interest on the warehouse lines of
credit and the secured debt (see Note 4 to the financial statements).
Amortization of goodwill associated with the acquisition of Cash Back Mortgage
in April 1997 was $0 for the 1996 Three Months and $15,000 for the 1997 Three
Months.
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Six Months Ended December 31, 1996 and 1997
The Company recorded a net loss of $8,966,000 for the six months ended
December 31, 1997 (the "1997 Six Months"), as compared to a net loss of $150,000
for the six months ended December 31, 1996 (the "1996 Six Months"). Excluding
the $5,576,000 debt conversion expense and $843,000 of amortization of deferred
financing charges associated with the conversion of debt (see Note 5 to
financial statements), the net loss for the 1997 Six Months was $2,547,000. Net
loss per share of Common Stock after deducting dividends on preferred stock and
recognizing a $3,584,700 charge for the conversion of Preferred Stock (see Note
5 to the financial statements) was $(3.93) for the 1997 Six Months compared to a
net loss of $(0.62) per share for the 1996 Six Months. Decrease in revenue was
the largest difference between the comparable periods.
Net revenues decreased $780,000 or 22%, from $3,578,000 in 1996 Six
Months to $2,798,000 in the 1997 Six Months. The decrease in revenue was
primarily due to a decrease in gain on sale between the periods. Revenue from
the gain on sale of loans decreased $1,361,000 or 41% from $3,284,000 in the
1996 Six Months to $1,923,000 in the 1997 Six Months on sales of $42,305,000 and
$40,023,000, respectively. The net gain on sale percentage between the periods
decreased from 8.5% for the 1996 Six Months to 4.8% for the 1997 Six Months. The
Company sold a majority of loans Whole in the 1997 Six Months as opposed to the
1996 Six months wherein most loans were sold on an Accrual basis (see Note 3 to
the financial statements "Gain on Sale of Receivable"). While Whole loan sales
have historically resulted in a smaller gain on sale percentage than an Accrual
sale, the Company believes the benefits from improved cash flow from the Whole
loan sale outweigh the smaller margins as compared to an Accrual sale.
Excluding the $5,576,000 debt conversion expense and $843,000 of
amortization of deferred financing charges associated with the conversion of
debt (see Note 5 to financial statements), total expenses increased 43% from
$3,728,000 in the 1996 Six Months to $5,345,000 in the 1997 Six Months. The
largest increase in expenses between the comparable periods was in labor costs,
which increased $781,000 or 47% from $1,662,000 in the 1996 Six Months to
$2,442,000 in the 1997 Six Months. The Company had 62 employees on a weighted
average basis during the 1996 Six Months as compared to 91 employees during the
1997 Six Months, although 27 of the 91 employees were with Cash Back Mortgage,
an acquisition made by the Company in April 1997. Labor costs for Cash Back
Mortgage during the 1997 Six Months were $625,000. The remaining increase in
labor costs resulted from a higher number of employees earlier in the 1997 Six
Months. Excluding Cash Back Mortgage, the Company had 80 employees at July 1,
1997 and 54 employees at December 31, 1997. Other operating expenses increased
$364,000 or 33% from $1,099,000 in the 1996 Six Months to $1,463,000 in the 1997
Three Months. Other operating expenses for Cash Back Mortgage were $288,000. Of
the other operating expenses not attributable to Cash Back Mortgage, the largest
increase was in warehouse line fees, of which there were none in the 1996 Six
Months and $92,000 in the 1997 Six Months.
Excluding $843,000 of amortization of deferred finance charges
associated with the conversion of debt, interest expense and amortization of
goodwill and deferred finance charges increased $284,000 or 40% from $708,000
the 1996 Six Months to $992,000 in the 1997 Six Months. Interest expense
increased $532,000 or 46% from $626,000 in the 1996 Six Months to $1,159,000 in
the 1997 Six Months. While interest on the convertible notes was slightly less
in the 1997 Six Months due to the conversion of most of the Notes in October
1997, there were three items that did not exist in the 1996 Six Months that had
significant impact in the 1997 Six Months- interest expense on the advance
against the Interest-Only Strip Receivable, interest expense on the warehouse
lines of credit, and interest expense on the secured debt (see Note 4 to the
financial statements). Amortization of goodwill associated with the acquisition
of Cash Back Mortgage in April 1997 was $0 for the 1996 Six Months and $46,000
for the 1997 Six Months.
The provision for credit losses was $65,000 in the 1996 Six Months
compared to $163,000 in the 1997 Six Months. The increase in provision resulted
from adjusting the reserve for bad debts to a level deemed appropriate after
reviewing the quarterly analysis of loans receivable. Legal and professional
fees were 195,000 in the 1996 Six Months compared to $284,000 in the 1997 Six
Months. Most of the increase was a result of fees associated with exploring
various alternatives to the debt conversion offer and reverse stock split
consummated in October 1997, and a higher level of consulting fees during the
first half of the 1997 Six Months.
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LIQUIDITY AND CAPITAL RESOURCES
Loans receivable increased from $5,517,000 at June 30, 1997 to
$7,523,000 at December 31, 1997, as the Company began holding loans for a longer
period of time before sale. This extended holding period was the result of a
change in the Company's sales strategy made during the 1997 Six Months, whereby
the Company began selling loans on a Whole loan basis as opposed to selling
loans on an Accrual basis to a loan securitizer. Under the agreement with the
securitizer, loans were sold on a "flow" basis, meaning the Company could sell
loans frequently in relatively small groups (called "pools"), a method that the
Company needed to use prior to June 1997 as the Company had no substantial
warehouse lines of credit with which to retain loans for an extended period. In
July 1997, the Company acquired $13,500,000 in warehouse lines, which allowed
the Company to begin holding loans. The Company stopped selling loans with a
residual interest in October 1997 and currently has no plans to resume Accrual
sales.
Cash subject to withdrawal restrictions ("restricted cash") is
segregated from cash not subject to any withdrawal restrictions ("unrestricted
cash"). While unrestricted cash can be used for any corporate purpose,
restricted cash generally represents cash pledged as collateral for certain
convertible notes and mortgage participations. Pursuant to these types of
agreements, the entire note amount is received in cash from the investor, and is
placed in a restricted cash account. Loans are funded with the restricted cash
and assigned to the investor, and when the loan is sold the proceeds
representing the principal balance of the loan are returned to the restricted
cash account. Therefore, the balance of unrestricted cash represents the
difference between the note amount and the amount of loans assigned to the
investor. Since the Company began funding most of its loan originations with
warehouse lines of credit acquired in June 1997, the amount of loans assigned as
collateral in these agreements has decreased, and thus the balance of restricted
cash has increased. In November 1997, the Company used a portion of the
restricted cash and reduced the principal balance of one note from $2,300,000 to
$1,400,000. Unrestricted cash has decreased as a result of funding operating
losses.
Deferred financing costs and the balance of convertible notes decreased
from June 30, 1997 to December 31, 1997, as a result of the conversion offer
described in Note 6 to the financial statements. The balance in the warehouse
lines of credit increased during the same period as the Company completed the
transition to funding most of its loans with these warehouse lines which were
acquired in June 1997. Prior to June 1997, most loans were funded with working
capital or the convertible note or mortgage participations described above.
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,
premiums paid for the purchase of loans, and start-up expenses for expansion
into new geographic markets. The Company has never generated a positive cash
flow, and it has required and expects to continue to require additional
financing to fund additional geographical expansion and to support its
infrastructure until such time, if ever, as it can increase the volume of loan
origination to a point of positive cash flow, and to realize greater returns on
sales of loans. The cash outlay for the current fiscal year was funded primarily
out of the proceeds of the Bridge Loan described below. Capital restraints have
from time to time adversely affected the volume of mortgage loans the Company
originates, and have negatively impacted its ability to hold such loans until a
sale could be arranged on more favorable terms. To the extent that the Company
is unable to obtain periodic infusions of capital, the Company could be required
to sell mortgage loans on less favorable terms than it might otherwise be
available or curtail lending activities. To date, in addition to the Company's
capital raising efforts, the sources of funds have been (1) sales of the loans
the Company originates and purchases into secondary markets, (2) borrowings
under a mortgage warehouse line of credit secured by its loans, (3) finance
income earned on Company owned loans and servicing fees generated on the loan
servicing portfolio, (4) other borrowings (discussed below), (5) the conversion
of the Servicing Asset and Interest-Only Strip Receivable into cash over the
lives of the loans in the servicing portfolio, and (6) advances against the cash
normally received over the life of the loan as noted in (5) above (discussed
below).
In July 1994, the Company completed the placement of $5,550,000 of 8%
Senior Subordinated Convertible Notes due 2004 (the "8% Notes"). In October
1995, the Company agreed to certain conditions as a prerequisite for obtaining a
waiver for technical covenant violations contained in the indenture relating to
the 8% Notes at September 30, 1995. When these conditions were not met at
December 31, 1995, the maturity date of 8% Notes was accelerated to March 30,
1996. The Company repaid $3,250,000 of the 8% Notes in June 1996 ($2,250,000 of
which was paid out of the proceeds of the sale of the 10% Notes described below)
and the remaining $2,300,000 of 8% Notes were exchanged for loans under a
secured warehouse lending facility.
10
<PAGE> 11
In June 1995, the Company completed an offering of $3,000,000 of
convertible mortgage participations and warrants to purchase common stock to be
used solely for the purpose of originating and acquiring mortgage loans. In
October 1995, $2,500,000 of the borrowings were converted by the holders of
these participations into Preferred Stock and warrants as part of a placement of
320,000 shares of Preferred Stock and warrants to purchase Common Stock. Of the
remaining $500,000 of participations, holders of $400,000 converted their
participations into Common Stock in September 1996 and the balance of $100,000
was repaid upon maturity. Of the 320,000 of Preferred Stock sold, one holder
converted 10,000 shares of Preferred Stock to common stock in December 1996. All
of the remaining 310,000 shares of Preferred Stock converted to Common Stock in
October 1997 and January 1998 as described in Note 6 to the financial
statements. Per the terms of this conversion, the accrued dividends (which were
not paid for the quarters ending June 30, 1997 and September 30, 1997 due to
capital constraints) through the date of conversion were paid in Common Stock.
In February 1996, the Company sold $500,000 of convertible mortgage
participations on similar terms to the $3,000,000 of participations sold in June
1995 described above to a single holder. This participation is still outstanding
and matures in February 1998.
The Company completed the sale of $9,000,000 of 10% Convertible Secured
Notes (the "10% Notes") in August 1996, resulting in net proceeds to the Company
after expenses of approximately $8,000,000. $3,250,000 of the proceeds were used
to repay the 8% Notes described above. The 10% Notes are partially secured by
essentially all otherwise unpledged assets of the Company and are convertible
into common stock. At December 31, 1997, $1,170,000 of the 10% Notes were still
outstanding, with the balance being converted into common stock in October 1997,
as described in Note 5 to the financial statements. Per the terms of this
conversion offer, interest due to the 10% Noteholders from July 1, 1997 to the
date of conversion was paid in common stock.
In November 1996, the Company entered into an agreement with a loan
securitizer wherein the Company would receive advances on the Company's portion
of the interest-only strip collected from the borrower over the life of the
loan. This advance is repaid over 36 months and bears an interest rate set at
the time the loans underlying the interest-only strip receivable were sold to
the securitizer. The advance and the interest charge associated with it are
deducted from the monthly collections of interest due to the Company by the
Securitizer. The Company ceased selling loans pursuant to this agreement in
October 1997 and therefore has not received any advances against the
Interest-Only Strip Receivable since that date. At December 31, 1997, the
Company had been advanced $2,403,000 net of repayments under this agreement.
In April 1997, the Company sold for $1,674,000 16,740 shares of a
Series B 11% Redeemable Convertible Preferred Stock (the "Series B Preferred
Stock"), convertible into Common Stock with customary adjustments to the
conversion price, resulting in net proceeds to the Company of approximately
$1,498,000. Dividends are payable quarterly in cash or in preferred stock until
July 1998, when a penalty for paying dividends in stock becomes effective. All
dividends paid to date on the Series B Preferred Stock have been paid with
additional Series B Preferred Stock.
In June 1997, the Company obtained a revolving warehouse line of credit
for $3,000,000. This line was subsequently increased, and a second line was
obtained in July 1997, bringing the total warehouse line capacity to $13,500,000
by August 1997 for these two lines. In January 1998, the Company obtained a
third warehouse line of credit for $5,000,000.
During the 1997 Six Months, the Company received a total of $1,450,000
in a private placement of debt convertible into Common Stock, referred to as the
"Bridge Loan". In January 1998, and additional $250,000 was received pursuant to
the Bridge Loan. The Bridge Loan matures on April 30, 1998, or such earlier date
as a secondary financing can be completed. The holders at December 31, 1997 have
been issued warrants to purchase 725,000 shares of Common Stock at an exercise
price of $2.00 per share, which was subsequently changed to $1.24 due to
anti-dilution adjustments contained within the agreement.
11
<PAGE> 12
In October 1997, the Company effected a one-for-five reverse stock
split on its Common Stock and concluded a conversion offer to the 9% Preferred
Stock holders and 10% Note holders as described above and in Note 5 of the
financial statements. Approximately 86% of the 10% Note holders and 100% of the
9% Preferred Stock holders have converted their securities into Common Stock. In
addition to the financial effects discussed in Note 5 of the financial
statements, the Company eliminated $697,000 in annual interest expense and
$567,000 in annual disbursements of dividends as a result of the conversion.
While this reduction in cash outflow is significant, it will not, by itself,
result in a positive cash flow for the Company. To achieve a positive cash flow,
the Company will have to increase loan sales above current levels without a
corresponding increase in expenses. To provide working capital until such time,
if ever, the Company can achieve a positive cash flow, and to provide money
necessary to repay a $1,700,000 Bridge Loan maturing on April 30, 1998, and a
$500,000 mortgage participation maturing in February 1998, the Company must
obtain additional financing. The Company has entered into discussions with the
primary placement agent for the Bridge Loan to convert the Bridge Loan to
preferred stock and raise additional equity in the form of preferred stock;
however, no assurance can be given that such additional financing will occur. In
the event that the Company does not obtain substantial additional financing, the
Company could be required to scale back or cease its operations. Even if the
Company is successful in obtaining additional financing, there can be no
assurance that it will be able to generate a positive cash flow, or that it will
be required to obtain additional financing in the near future.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements contained in "Item 2. Management's Discussion and
Analysis of Financial Condition and Results of Operations", such as statements
concerning the Company's future cash and financing requirements, the Company's
ability to originate and/or acquire mortgage loans, the Company's ability to
enter into securitization transactions and/or otherwise sell mortgage loans to
the third parties and the returns therefrom, and other statements contained
herein regarding matters that are not historical facts, but are forward looking
statements; actual results may differ materially from those contemplated in the
forward looking statements, which statements involve risks and uncertainties,
including but not limited to, the following: the Company's ability to obtain
future financings and market conditions and other factors relating to the
mortgage lending business. Investors are also directed to the other risks
discussed herein and in other documents filed by the Company with the
Commission.
12
<PAGE> 13
PART II. OTHER INFORMATION
Item 2. CHANGES IN SECURITIES
a) During the three months ended December 31, 1997, no instrument defining the
rights of the holders of any class of registered securities was materially
modified.
b) During the three months ended December 31, 1997, no rights evidenced by any
class of registered securities were materially limited or qualified by the
issuance or modification of any other class of securities.
c) During the six months ended December 31, 1997, the Registrant received a
Bridge Loan in the amount of $1,450,000 and issued its 10% Convertible
Secured Notes (the "Secured Notes") in such aggregate face amount. The
Secured Notes were sold to private investors and there were no principal
underwriters in connection with such sale. The Registrant paid the
placement agent a commission of $125,000. The Registrant claimed exemption
from the registration provisions of the Securities Act of 1933 pursuant to
the provisions of Section 4(2) thereof inasmuch as the sale of the Secured
Notes did not involve a public offering. The Secured Notes were originally
convertible into shares of the Registrant's common stock at the rate of one
share for each $2 in principal amount of the Secured Notes, as adjusted for
the reverse stock split effected on October 29, 1997. In addition to
customary adjustments to the conversion price, the conversion price with
respect to the Secured Notes will be reduced to the price of any shares of
common stock issued by the Registrant or the exercise or conversion price
of any convertible or exercisable securities issued by the Registrant.
Pursuant to such provisions, the conversion price has been reduced to one
share of the Registrant's common stock for each $1.24 of principal amount
of Secured Notes. The purchasers of the Secured Notes also received
warrants to purchase an aggregate of 725,000 shares of the Registrant's
common stock at $2.00 per share until March 31, 1999. The warrants contain
substantially the same adjustment provisions as to the Secured Notes.
Accordingly, the exercise price of the warrants has been reduced to $1.24.
Item 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
a) A special meeting of the shareholders (the "Special Meeting") and an Annual
Meeting of shareholders (the Annual Meeting") were held on October 24,
1997, and December 23, 1997, respectively:
b) Not applicable
c) At the Special Meeting, the following matters were submitted:
<TABLE>
<CAPTION>
Affirmative Negative
Votes Votes Abstentions
----------- -------- -----------
<S> <C> <C> <C>
1. Approval of an amendment to the Certificate
of Incorporation to permit a one-for-five
reverse stock split. 3,170,022 88,800 21,850
2. Approval to amend the Certificate of
Designation of the 9% Preferred Stock to
eliminate two provisions: 1) restriction on
payment of dividends on any stock ranking
pari passu to the 9% Preferred Stock without
declaring dividends on the 9% Preferred Stock,
and 2) restriction regarding the issuance of
preferred stock ranking senior to the 9%
Preferred Stock 1,559,661 78,200 35,250
</TABLE>
(Proposal Number 2 failed to obtain more than 50% of the voting stock
outstanding).
13
<PAGE> 14
At the Annual Meeting the following matters were submitted:
1. Election of Board of Directors
<TABLE>
<CAPTION>
Affirmative Votes
Votes Witheld
--------- -------
<S> <C> <C>
Heiko H. Thieme 1,448,409 127,715
Gerald F. Sullivan 1,450,409 125,715
John C. Thomas, Jr. 1,450,409 125,715
Ralph J. DeBee, Jr. 1,450,409 125,715
John R. Marshall 1,450,409 125,715
Marvin V. Bolt 1,450,409 125,715
Carlos Munoz 1,450,409 125,715
</TABLE>
<TABLE>
<CAPTION>
Affirmative Negative
Votes Votes Abstentions
----------- --------- -----------
<S> <C> <C> <C>
2. Approval of an amendment to the 1993 Stock
Option Plan to increase the number of shares
available for issuance from 505,000 shares
to 825,000 shares 1,179,628 322,887 806
3. Ratification of the election of Ernst & Young LLP
as the Company's independent auditors for the
fiscal year ending June 30, 1998 1,574,396 1,728 0
</TABLE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial data schedule (for SEC use only)
(b) Reports on Form 8-K
On October 27, 1997, a Form 8-K was filed reporting the
results of the conversion offer formally accepted by the Board of Directors at a
meeting held immediately after the Special Shareholders Meeting on October 24,
1997. These results are also described in Note 5 to the financial statements
included herein.
14
<PAGE> 15
SIGNATURES
In accordance with the requirements of the Exchange Act of 1934, the Registrant
has caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
CREDIT DEPOT CORPORATION
(Registrant)
Date: February 12, 1998 /s/ Ralph J. DeBee, Jr.
--------------------------------------------
Ralph J. DeBee, Jr.
(President and Chief Executive Officer)
Date: February 12, 1998 /s/ Charles D. Farrahar
--------------------------------------------
Charles D. Farrahar
(Vice President and Chief Financial Officer)
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF CREDIT DEPOT FOR THE SIX MONTHS ENDED DECEMBER 31, 1997
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,427,922
<SECURITIES> 0
<RECEIVABLES> 7,523,106
<ALLOWANCES> 266,848
<INVENTORY> 0
<CURRENT-ASSETS> 9,211,008
<PP&E> 436,901
<DEPRECIATION> 0
<TOTAL-ASSETS> 18,333,395
<CURRENT-LIABILITIES> 2,622,907
<BONDS> 4,020,000
0
20
<COMMON> 5,727
<OTHER-SE> 4,281,774
<TOTAL-LIABILITY-AND-EQUITY> 18,333,395
<SALES> 0
<TOTAL-REVENUES> 2,798,145
<CGS> 0
<TOTAL-COSTS> 4,189,909
<OTHER-EXPENSES> 5,576,000
<LOSS-PROVISION> 163,125
<INTEREST-EXPENSE> 1,834,949
<INCOME-PRETAX> (8,965,838)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,965,838)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,965,838)
<EPS-PRIMARY> (3.93)
<EPS-DILUTED> (3.93)
</TABLE>
