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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 March 31, 1998
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
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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
(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 April 30, 1998
- ----------------------------- -----------------------------
Common Stock $.001 Par Value 5,748,575
Transitional Small Business Disclosure Format (check one):
YES NO X
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CREDIT DEPOT CORPORATION
Table of Contents
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
<S> <C>
Item 1 -- Financial Statements (Unaudited)
Condensed Consolidated Balance
Sheets as of June 30, 1997 and
March 31, 1998 3
Condensed Consolidated Statements of Operations
for the Three Months Ended March 31, 1997
and 1998 and for the Nine Months Ended
March 31, 1997 and 1998 4
Condensed Consolidated Statements
of Cash Flows for the Nine Months
Ended March 31, 1997 and 1998 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 1 -- Legal Proceedings 13
Item 2 -- Changes in Securities 13
Item 5 -- Other Information 14
Item 6 -- Exhibits and Reports on Form 8-K 14
SIGNATURES 14
</TABLE>
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CREDIT DEPOT CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
June 30, MARCH 31,
1997 1998
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<S> <C> <C>
ASSETS
Loans receivable
Consumer, collateralized by real estate $ 5,517,002 $ 11,543,716
Allowance for credit losses (260,484) (267,352)
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Net loans receivable 5,256,518 11,276,364
Cash 1,332,934 135,129
Cash subject to withdrawal restrictions 203,318 1,449,490
Property and equipment, net 524,695 360,005
Real estate held for resale 89,021 37,944
Other assets:
Receivables due from related parties (net of reserve) 17,398 16,073
Prepaid expenses and other assets 269,750 282,479
Servicing asset 77,007 45,596
Interest-only strips receivable 7,268,930 4,822,628
Accrued interest receivable 35,503 123,458
Deferred financing costs 1,338,822 420,917
Goodwill 910,825 850,105
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TOTAL ASSETS $ 17,324,721 $ 19,820,188
============ ============
LIABILITIES
Convertible notes $ 10,440,000 $ 4,770,000
Warehouse line of credit 3,356,386 10,417,514
Advance on interest-only strips receivable 2,100,651 2,028,219
Other borrowings 500,000 500,000
Accounts payable 291,235 328,232
Accrued liabilities 85,340 248,621
Dividends payable 174,271 46,035
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TOTAL LIABILITIES 16,947,883 18,338,621
STOCKHOLDERS' EQUITY
Series "A" Preferred Stock, $.001 par value: 2,000,000 shares
authorized, 315,000 shares outstanding at June 30, 1997,
and no shares outstanding at March 31, 1998 315 --
Series "B" Preferred Stock, $.001 par value: 60,000
shares authorized, 16,740 shares issued and outstanding
at June 30, 1997, and March 31, 1998 17 17
Common stock, $.001 par value: 35,000,000 shares authorized,
814,573 shares outstanding at June 30, 1997 (1), and
5,748,575 shares outstanding at March 31, 1998 815 5,749
Additional paid-in capital 16,439,066 29,602,597
Accumulated deficit (16,063,375) (28,126,796)
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TOTAL STOCKHOLDERS' EQUITY 376,838 1,481,567
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 17,324,721 $ 19,820,188
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</TABLE>
(1) The number of shares of common stock 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 Nine Months Ended
March 31, March 31,
1997 1998 1997 1998
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<S> <C> <C> <C> <C>
Revenues:
Finance income and fees earned $ 16,991 $ (1,347,981) $ 277,541 $ (473,399)
Gain on sale of receivables 1,370,208 1,108,938 4,654,474 3,032,203
Other 7,793 2,232 41,107 2,530
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1,394,992 (236,811) 4,973,122 2,561,334
Expenses:
Salaries and employee benefits 1,079,988 1,127,799 2,741,662 3,570,180
Legal and professional fees 173,749 201,873 368,446 486,734
Other operating expenses 638,280 611,698 1,736,876 2,074,365
Provision for credit losses 10,000 108,750 75,000 271,875
Debt conversion expense -- -- -- 5,576,000
Interest expense and amortization of
financing costs 365,013 493,186 1,073,421 2,328,135
----------- ------------ ------------ ------------
2,267,030 2,543,306 5,995,405 14,307,289
Loss before provision for income taxes (872,038) (2,780,117) (1,022,283) (11,745,955)
Provision for income taxes -- -- -- --
----------- ------------ ------------ ------------
Net loss $ (872,038) $ (2,780,117) $ (1,022,283) $(11,745,955)
----------- ------------ ------------ ------------
Induced conversion of preferred stock -- -- -- 3,584,700
Dividends on preferred stock 141,750 46,035 427,500 317,744
----------- ------------ ------------ ------------
Net loss attributable to common shareholders $(1,013,788) $ (2,826,152) $ (1,449,783) $(15,648,399)
=========== ============ ============ ============
Net loss per share of common stock (1) $ (1.34) $ (0.49) $ (2.02) $ (3.82)
=========== ============ ============ ============
Net loss per share of common stock,
diluted (1) $ (1.34) $ (0.49) $ (2.02) $ (3.82)
=========== ============ ============ ============
Weighted average shares outstanding (1) 754,372 5,731,635 718,908 4,096,719
=========== ============ ============ ============
Weighted average shares outstanding,
diluted (1) 3,160,256 10,915,310 3,519,811 9,142,593
=========== ============ ============ ============
</TABLE>
(1) The weighted average number of shares of common stock and the corresponding
loss 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
loss per share.
See accompanying notes.
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CREDIT DEPOT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
March 31, MARCH 31,
1997 1998
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (1,022,283) $(11,745,955)
Adjustments to reconcile net loss
to cash used in operating activities:
Provision for credit losses 75,000 271,875
Depreciation and amortization 783,156 2,965,246
Write-down of interest-only strips receivable -- 2,006,000
Debt conversion expense -- 5,576,000
Changes in operating assets and liabilities:
Restricted cash -- (1,246,172)
Due from related parties (2,000) 1,325
Prepaid expenses and other 89,645 (100,684)
Deferred financing costs (486,886) (219,415)
Loans originated (64,583,876) (62,767,835)
Loans repurchased (1,855,639) (1,255,041)
Interest-only strips receivable (5,974,922) (1,150,857)
Proceeds from loans sold 66,683,947 57,758,210
Principal collections on loans not sold 1,079,743 350,742
Accounts payable and accrued liabilities 9,988 200,278
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Net cash used in operating activities (5,204,127) (9,356,283)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (151,413) (11,370)
Disposal of property and equipment -- 6,150
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Net cash used in investing activities (151,413) (5,220)
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends on preferred stock (427,500) --
Proceeds from issuance of convertible notes 2,800,000 2,200,000
Payments on convertible notes -- (1,025,000)
Proceeds from warehouse line of credit -- 62,843,959
Payments on warehouse line of credit -- (55,782,830)
Proceeds from other borrowings 725,000 --
Payments on other borrowings (977,373) --
Advance on interest-only strip receivable 1,664,249 804,656
Payments on advance on interest-only strip receivable -- (877,087)
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Net cash provided by financing activities 3,784,376 8,163,698
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Net decrease in cash (1,571,164) (1,197,805)
Cash at beginning of period 1,707,320 1,332,934
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Cash at end of period $ 136,156 $ 135,129
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for interest $ 641,541 $ 1,123,335
============ ============
Conversion of loans receivable to real estate held for sale $ 763,024 $ 506,665
============ ============
</TABLE>
See accompanying notes
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CREDIT DEPOT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying financial information includes the accounts of Credit
Depot Corporation (the "Company" or "Registrant") 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 LOSS PER SHARE
Dividends on preferred stock are added to net 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 earnings
per share- diluted 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 loss per
share- diluted calculation substitutes the basic 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 charges of $7,100 and $2,027,800 to earnings for anticipated
prepayments during the three months ended March 31, 1997 and 1998,
respectively. The 1998 charges consisted of $21,800 related to the Servicing
Asset and $2,006,000 related to the Interest-Only Strip Receivable
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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.
4. CONVERTIBLE NOTES
During the nine months ended March 31, 1998, the Company borrowed a
total of $2,250,000 in the form of secured debt bearing an interest rate of
10% convertible into common stock of the Company. The maturity date on this
debt, which was April 30, 1998, was extended to July 31, 1998. In
conjunction with this debt offering, the lenders were issued warrants to
purchase 1,100,000 shares of common stock of the Company at $2.00 per share.
5. REVERSE STOCK SPLIT/ CONVERSION OF SECURITIES
On October 29, 1997, the Company effected a one-for-five reverse stock
split.
On 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.
All holders of the 315,000 shares of Preferred Stock outstanding elected to
convert their Preferred Stock to Common Stock at a conversion rate of $0.65
per share.
The conversion of Notes and Preferred Stock, plus payment of accrued
interest and dividends thereon in the form of Common Stock, added 24,570,015
shares of Common Stock to the 4,072,861 existing shares of Common Stock
outstanding, resulting in a total of 28,642,876 shares issued and
outstanding, or 5,728,575 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 adjustment to the calculation was made pursuant to
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
fiscal 1997 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
will still require additional financing to retire the $2,200,000 bridge loan
due July 31, 1998 (see Note 4 above), 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 Operations".
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7. RECENT ACCOUNTING PRONOUNCEMENTS
Beginning January 1, 1998, the Company adopted SFAS No. 130
"Reporting Comprehensive Income," which is effective for the annual and interim
periods beginning after December 15, 1997. SFAS 130 establishes new rules for
the reporting and display of comprehensive income and its components; however,
the adoption of this Statement had no impact on the Company's net loss or
shareholders' equity.
Beginning January 1, 1998, the Company adopted the provisions of SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information,"
which is effective for annual and interim periods beginning after December 15,
1997. This statement established standards for the method that public entities
are to use to report information about operating segments in annual financial
statements and required that those enterprise reports be issued to shareholders,
beginning with the annual financial statements in 1998 and for interim and
annual financial statements thereafter. It also established standards for
related disclosures about products and services, geographical areas and major
customers.
ITEM 2. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Three Months Ended March 31, 1997 and 1998
The Company recorded a net loss of $2,780,000 for the three months
ended March 31, 1998 (the "1998 Three Months"), as compared to a net loss of
$872,000 for the three months ended March 31, 1997 (the "1997 Three Months").
Excluding the $2,006,000 reduction to the value of the Interest-Only Strip
Receivable (see Note 4 to the financial statements), the net loss for the 1998
Three Months was $774,000. Net loss per share of Common Stock after deducting
dividends on preferred stock was $(0.49) for the 1998 Three Months compared to a
net loss of $(1.34) per share for the 1997 Three Months. The write-down of the
Interest-Only Strip Receivable, which reduced revenue, was the largest single
variance between the comparable periods.
Net revenues decreased $1,632,000, from $1,395,000 in the 1997 Three
Months to $(237,000) in the 1998 Three Months. Excluding the $2,006,000 charge
to finance income for the write-down in value of the Interest-Only Strip
Receivable in the 1998 Three Months, net revenues increased $374,000 or 27%
between the comparable periods. Revenue from the gain on sale of loans decreased
$261,000 or 19% from $1,370,000 in the 1997 Three Months to $1,109,000 in the
1998 Three Months on loan sales of $23,555,000 and $22,745,000, respectively.
The net gain on sale percentage between the periods decreased from 5.8% for the
1997 Three Months to 4.9% for the 1998 Three Months. The Company sold all loans
Whole in the 1998 Three Months as opposed to the 1997 Three 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.
Total expenses increased 12% from $2,267,000 in the 1997 Three Months
to $2,543,000 in the 1998 Three Months. Labor costs increased $48,000 or 4% from
$1,079,000 in the 1997 Three Months to $1,127,000 in the 1998 Three Months. The
Company had 79 employees on a weighted average basis during the 1997 Three
Months as compared to 93 employees during the 1998 Three Months, although 33 of
the 93 employees in the 1998 Three Months were with Cash Back Mortgage, a
subsidiary acquired by the Company in April 1997. Excluding labor costs for Cash
Back Mortgage of $317,000 during the 1998 Three Months, labor costs for the
Company decreased $269,000 between the comparable periods. Other operating
expenses decreased $27,000 or 4% from $638,000 in the 1997 Three Months to
$612,000 in the 1998 Three Months. Excluding other operating expenses for Cash
Back Mortgage of $144,000 during the 1998 Three Months, other operating expenses
for the Company decreased $171,000 between the comparable periods.
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The provision for credit losses was $10,000 in the 1997 Three Months
compared to $109,000 in the 1998 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 $174,000 in the 1997 Three Months compared to $202,000 in
the 1998 Three Months. Most of the increase was a result of fees associated with
certain litigation (see Part II, Item 1, Legal Proceedings) .
Interest expense and amortization of goodwill and deferred finance
charges increased $128,000 or 35% from $365,000 the 1997 Three Months to
$493,000 in the 1998 Three Months. Interest expense increased $40,000 or 14%
from $295,000 in the 1997 Three Months to $335,000 in the 1998 Three Months.
Interest on the warehouse lines of credit and the secured debt (see Note 4 to
the financial statements) were the reason for the increase. Financing
amortization increased $88,000 or 125% from $70,000 in the 1997 Three Months to
$158,000 in the 1998 Three Months primarily from the write-off of deferred
financing charges associated with the paydown of convertible debt.
Nine Months Ended March 31, 1997 and 1998
The Company recorded a net loss of $11,746,000 for the nine months
ended March 31, 1998 (the "1998 Nine Months"), as compared to a net loss of
$1,022,000 for the nine months ended March 31, 1997 (the "1997 Nine 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), and the $2,006,000 write-down of the Interest-Only Strip
Receivable (see Note 3 to financial statements), the net loss for the 1998 Nine
Months was $3,321,000. 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
$(3.82) for the 1998 Nine Months compared to a net loss of $(2.02) per share for
the 1997 Nine Months.
Net revenues decreased $2,412,000, from $4,973,000 in the 1997 Three
Months to $2,561,000 in the 1998 Three Months. Excluding the $2,006,000 charge
to finance income for the write-down in value of the Interest-Only Strip
Receivable in the 1998 Nine Months, net revenues decreased $406,000 or 8%
between the comparable periods. Revenue from the gain on sale of loans decreased
$1,622,000 or 35% from $4,655,000 in the 1997 Nine Months to $3,032,000 in the
1998 Nine Months on sales of $65,860,000 and $57,758,000, respectively. The net
gain on sale percentage between the periods decreased from 7.1% for the 1997
Nine Months to 5.2% for the 1998 Nine Months. The Company sold a majority of
loans Whole in the 1998 Nine Months as opposed to the 1997 Nine 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 32% from
$5,995,000 in the 1997 Nine Months to $7,888,000 in the 1998 Nine Months. Labor
costs increased $829,000 or 30% from $2,742,000 in the 1997 Nine Months to
$3,570,000 in the 1998 Nine Months. However, labor expense for Cash Back
Mortgage, acquired in April 1997, was $942,000 during the 1998 Nine Months and
represented all of the increase in labor costs. Excluding Cash Back Mortgage,
the average number of employees during the 1998 Nine Months was 62, compared to
67 during the 1997 Nine Months. Other operating expenses increased $337,000 or
19% from $1,737,000 in the 1997 Nine Months to $2,074,000 in the 1998 Nine
Months. Other operating expenses for Cash Back Mortgage were $440,000.
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 $412,000 or 38% from $1,073,000
the 1997 Nine Months to $1,485,000 in the 1998 Nine Months. Interest expense
increased $206,000 or 22% from $924,000 in the 1997 Nine Months to $1,130,000 in
the 1998 Nine Months. While interest on the convertible notes was less in the
1998 Nine Months due to the conversion of most of the Notes in October 1997,
there were three items that represented all of the increase in the 1998 Nine
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
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of Cash Back Mortgage in April 1997 was $0 for the 1997 Nine Months and $61,000
for the 1998 Six Months. The remaining increase of $145,000 in amortization of
deferred financing costs is due to the write-down of deferred finance charges
associated with the planned reduction of a convertible note.
The provision for credit losses was $75,000 in the 1997 Nine Months
compared to $272,000 in the 1998 Nine 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 368,000 in the 1997 Nine Months compared to $487,000 in the 1998 Nine
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 legal fees associated with the two lawsuits
described in Part II, Item 1 "Legal Proceedings".
LIQUIDITY AND CAPITAL RESOURCES
Loans receivable increased from $5,517,000 at June 30, 1997 to
$11,544,000 at March 31, 1998. There are two main reasons for the increase.
First, the Company's average time period for holding a loan before sale was
extended somewhat as the result of a change in the Company's sales strategy made
during the 1998 Nine 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 obtained
warehouse lines of credit totaling $13,500,000, which allowed the Company to
begin holding loans. As the Company changed its sales method exclusively to
Whole loan sales in October 1997, a longer period of time was necessary to
accumulate loans in pools of sufficient size to attract bids from third party
purchasers. Second, the Company originated over $10,000,000 of loans in March
1998, the most loans ever originated in a single month in the history of the
Company without the aid of bulk purchases. Many of these loans were originated
in the second half of the month, and, as such, could not be sold before month
end, creating a significant increase in the receivable balance.
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 to reduce the principal balance of one note from $2,300,000 to
$1,400,000. Unrestricted cash has decreased as a result of funding operating
expenses.
Deferred financing costs and the balance of convertible notes decreased
from June 30, 1997 to March 31, 1998, 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
10
<PAGE> 11
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
into secondary markets of the loans the Company originates and purchases, (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. The balance of that facility was reduced to
$1,400,000 in November 1997 and to $800,000 in April 1998 as part of a planned
retirement of the facility by April 10, 2000.
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 shares 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 conjunction with the conversion offer of October 1997 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. In February 1998, the agreement was
modified. Under the terms of the modification, the maturity date was extended to
December 31, 1998, provided that $250,000 of the participation is repaid by June
30, 1998, and the interest rate was increased to 12% per annum. In April 1998,
$100,000 was remitted as a partial payment of the amount due on June 30, 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 March 31, 1998, $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 who converted their notes
was paid in common stock.
In November 1996, the Company entered into an agreement with Access
Financial, a loan securitizer, ("Access") 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 March 31, 1998,
the Company had been advanced $2,028,000 net of repayments under this agreement.
Reports received from Access during the 1998 Three Months indicated a
significant increase in the prepayment speed of the Company's loans sold to
Access for securitization. This information was the basis for the write-down in
the value of the Interest-Only Strip Receivable described in Note 3 to the
financial statements.
11
<PAGE> 12
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.The conversion rate of the preferred stock
is also reduced on a monthly basis as long as the underlying common stock is not
registered. At April 30, 1998, the conversion rate was $1.84 per share. On May
7, 1998, the Company filed a registration statement (which has yet to be
declared effective) with the Securities and Exchange Commission to register this
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. In January 1998, the Company obtained a third warehouse
line of credit and, in April 1998, retired the line obtained in July 1997. In
addition to containing provisions limiting the amount of time that a loan can
remain in the warehouse line, other provisions allow the lender to request that
loans be removed from the warehouse line at the lender's discretion. Currently,
the Company has a warehouse line capacity of $20,000,000 between the two
remaining lines.
During the 1998 Nine Months, the Company borrowed a total of $2,200,000
in a private placement of debt convertible into Common Stock in the form of a
"Bridge Loan". The maturity date of the original Bridge Loan has been extended
to July 31, 1998, or such earlier date as a secondary financing can be
completed. The holders of the Bridge Loan have been issued warrants to purchase
1,100,000 shares of Common Stock at an exercise price of $2.00 per share.
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% Notes and 100% of the 9%
Preferred Stock have converted 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, that the Company can achieve a
positive cash flow, and to provide money necessary to repay a $2,200,000 Bridge
Loan maturing on July 31, 1998, and a $250,000 mortgage participation maturing
in June 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 equity and/or 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 able 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 1. LEGAL PROCEEDINGS
On February 9, 1998, the Company and one of its wholly-owned subsidiaries were
named as defendants in an action filed in the Court of Common Pleas of Cuyahoga
County, Ohio (the "State Court") by Alan Schiff, a former employee of the
subsidiary (the "Plaintiff"). The case has been removed to the United States
District Court for the Northern District of Ohio (the "Federal Court").
Plaintiff's motion to remand the action to the State Court was denied. In
connection with the purchase by the subsidiary of an enterprise in which the
Plaintiff was a principal, the Plaintiff signed an employment contract and a
non-competition/non-solicitation agreement. The Plaintiff was terminated in
January 1998 and has asserted claims for (1) breach of the purchase and
employment agreements; (2) rescission of the purchase agreement and all other
agreements; (3) a declaration of his rights under the agreements; and (4) an
injunction enjoining the Company and the subsidiary from enforcing restrictive
covenants in the agreements which, pursuant to their terms, would prohibit the
Plaintiff from competing against the Subsidiary in the mortgage business, and
from any further alleged breaches of the agreements. The Plaintiff is seeking
compensatory damages of $1,000,000 and punitive damages of $2,000,000. The
Plaintiff moved for a temporary restraining order and a preliminary injunction
to prevent the Company and the Subsidiary from enforcing the non-competition
provisions. The Federal Court denied his motions. The Company believes that the
termination of the Plaintiff was proper, that both the Company and the
subsidiary have complied with the terms of their respective obligations to the
Plaintiff, and that the restrictive covenants are fully enforceable. The Company
and the subsidiary have denied the Plaintiff's substantive claims and asserted
counterclaims against the Plaintiff for (a) unspecified damages for (1) breach
of the purchase agreement; (2) breach of his employment agreement; (3) breach of
fiduciary duty; and (b) a declaratory judgment to the effect that the Company
and the subsidiary did not breach any agreement with the Plaintiff. The
proceeding has yet to reach the discovery stage and no estimate of potential
liability or recovery, if any, can be made at this time.
On February 27, 1998, Terry Lee Flowers and Rosemary Flowers, (the
"Plaintiffs") on behalf of themselves and a purported class of others brought an
action against another wholly-owned subsidiary of the Company in the United
States District Court for the Northern District of Mississippi. The Plaintiffs
alleged that the subsidiary made payments to mortgage brokers which constituted
referral fees, kickbacks and duplicative payments in violation of the Real
Estate Settlement Procedures Act ("RESPA") and certain rules and regulations
thereunder (the "Rules and Regulations") and, as a result, the Plaintiffs and
others were charged higher rates of interest by the subsidiary than would have
otherwise been the case. The Court has not ruled on whether the action will
proceed as a class action. The Plaintiffs are seeking a non-specified amount of
compensatory damages. In the event of a finding against the subsidiary in the
action, in addition to a material amount of monetary damages which may be
assessed against the subsidiary, the Company's ability to continue to obtain
referrals from mortgage brokers could be significantly impaired. Substantially
all of the Company's business is presently derived from referrals from mortgage
brokers. The subsidiary intends to vigorously defend the action.
Item 2. CHANGES IN SECURITIES
a) During the three months ended March 31, 1998, no instrument defining
the rights of the holders of any class of registered securities was
materially modified.
b) During the three months ended March 31, 1998, 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 nine months ended March 31, 1998, the Registrant received a
Bridge Loan in the amount of $2,200,000 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 primary 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
13
<PAGE> 14
rate of one share for each $2 in principal amount of the Secured Notes.
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. The purchasers of the Secured
Notes also received warrants to purchase an aggregate of 1,100,000
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.
Item 5. OTHER INFORMATION
In April 1998, the Company received a letter from the Nasdaq Stock
Market noting that the closing bid price of the Common Stock failed to maintain
the $1.00 minimum for thirty consecutive days. The letter stated that the
closing bid price of the Common Stock must be $1.00 or greater for 10
consecutive trading days prior to July 6, 1998 to avoid delisting of the Common
Stock from the Nasdaq SmallCap Market.
Additionally, by reporting tangible net assets less than $2,000,000 on
this report, the Company's Common Stock is subject to de-listing from the Nasdaq
SmallCap Market for failing to meet the minimum tangible net asset requirement.
If the Company is notified of an actual de-listing date from Nasdaq, it will
request a hearing to present its plan to achieve compliance with any listing
requirement for which it currently may not be in compliance.
On May 7, 1998, the Company filed a registration statement on Form S-3
with the Securities and Exchange Commission with respect to an aggregate of
8,419,630 shares of Common Stock to be offered by selling shareholders.
Substantially all of such shares underlie convertible securities and warrants
previously issued by the Company. The Company will not receive any proceeds from
the sale of the Common Stock.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial data schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the period.
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: May 13, 1998 /s/ Ralph J. DeBee, Jr.
----------------------------------------
Ralph J. DeBee, Jr.
(President and Chief Executive Officer)
Date: May 13, 1998 /s/ Charles D. Farrahar
----------------------------------------
Charles D. Farrahar
(Vice President and Chief Financial Officer)
14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF CREDIT DEPOT CORP. FOR THE NINE MONTHS ENDED MARCH 31,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 1,584,619
<SECURITIES> 0
<RECEIVABLES> 11,543,716
<ALLOWANCES> 267,352
<INVENTORY> 0
<CURRENT-ASSETS> 13,320,937
<PP&E> 360,005
<DEPRECIATION> 0
<TOTAL-ASSETS> 19,820,188
<CURRENT-LIABILITIES> 11,540,402
<BONDS> 4,770,000
0
17
<COMMON> 5,749
<OTHER-SE> 1,475,801
<TOTAL-LIABILITY-AND-EQUITY> 19,820,188
<SALES> 0
<TOTAL-REVENUES> 2,561,334
<CGS> 0
<TOTAL-COSTS> 6,131,279
<OTHER-EXPENSES> 5,576,000
<LOSS-PROVISION> 271,875
<INTEREST-EXPENSE> 2,328,135
<INCOME-PRETAX> (11,745,955)
<INCOME-TAX> 0
<INCOME-CONTINUING> (11,745,955)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,745,955)
<EPS-PRIMARY> 3.82
<EPS-DILUTED> 3.82
</TABLE>
