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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 2, 2001
REGISTRATION NO. 333-______
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
THE CREDIT STORE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 6199 87-0296990
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NO.)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
3401 NORTH LOUISE AVENUE
SIOUX FALLS, SOUTH DAKOTA 57107
(800) 240-1855
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA
CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
RICHARD S. ANGEL, ESQ.
THE CREDIT STORE, INC.
3401 NORTH LOUISE AVENUE
SIOUX FALLS, SOUTH DAKOTA 57107
(800) 240-1855
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA
CODE, OF AGENT FOR SERVICE)
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Approximate date of commencement of proposed sale to public: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box: [x]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [ ]
CALCULATION OF REGISTRATION FEE
=================================================================================================================================
TITLE OF EACH CLASS OF AMOUNT TO BE PROPOSED MAXIMUM OFFERING PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PRICE PER UNIT AGGREGATE OFFERING PRICE REGISTRATION FEE (1)
RENEWABLE NOTES $100,000,000 100% $100,000,000 $25,000
=================================================================================================================================
(1)Estimated solely for the purpose of calculating the registration fee.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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The information in this prospectus is not complete and may be changed without
notice. The Credit Store, Inc. may not sell these securities until the
registration statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these securities, and the
Credit Store, Inc. is not soliciting offers to buy these securities in any state
where the offer or sale of these securities is not permitted.
Subject to Completion, Dated ______________, 2001
[COMPANY LOGO]
$100,000,000 Principal Amount of Renewable Notes
THE CREDIT STORE, INC.
----------------------
The following terms apply to the subordinated renewable notes we are
offering. For a more detailed description of these securities, see "Summary --
Further Highlights of Terms of the Renewable Notes Offered" and "Description of
the Renewable Notes Offered and the Indenture."
HIGHLIGHTS OF TERMS OF RENEWABLE NOTES
Annual Interest Rate Fixed upon issuance based upon the term
length chosen and the total principal
amount of the note portfolio of the
holder.
Payment of Interest At the election of the holder,
interest may be paid monthly,
quarterly, semi-annually, annually or at
maturity. Holders can choose the day
of the month on which they want to receive
their interest payments.
Redemption at request of Upon death or total disability of
holder prior to maturity natural persons, as described in
this prospectus, without penalty;
otherwise, within 30 days of receipt of
written notice, subject to a penalty equal
to the lesser of simple interest on the
principal amount at the stated interest
rate for a period equal to the original
term or six months' simple interest on the
principal amount at the stated interest
rate; provided, that we will not be
required to redeem more than $1 million of
redeemable notes in any calendar quarter
pursuant to holder requests.
Redemption by us prior Redeemable upon 30 days prior
to maturity written notice to the holder at the
principal amount plus accrued
interest without any penalty.
Maturity 3 months to 120 months, as stated in the
note at time of issuance.
Subordination Subordinated in right of payment to
all of our other existing and
future senior indebtedness, except
debt that is primarily held by our
affiliates and subsidiaries (other
than special purpose entities) or
control persons.
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Transferability Upon our prior written consent.
The renewable notes will be offered by us and on a best efforts basis by
any placement agents or underwriters we engage from time to time.
We will provide the interest rates (and any additional terms of the
renewable notes) currently being offered on the renewable notes in amendments to
this prospectus. You should read this prospectus and any amendments carefully
before you invest.
These renewable notes are not certificates of deposit or other obligations
of or guaranteed by a depository institution. The payment of principal and
interest on these renewable notes is not insured by the FDIC or guaranteed by
any governmental or private insurance fund or any other entity. Our sources of
funds for the repayment of principal at maturity and the ongoing payment of
interest on these renewable notes include income from operations, including the
securitization or sale of receivables from our portfolios, working capital, and
cash generated from additional debt financing, including the sale of renewable
notes. These renewable notes are unsecured. We do not contribute funds to a
separate account such as a sinking fund to repay the debt represented by these
renewable notes upon maturity.
These renewable notes are subordinated in right of payment to all of our
existing and future senior debt; except debt that is primarily held by our
affiliates and subsidiaries or control persons. "Senior debt" means any of our
indebtedness, whether outstanding on the date of this prospectus or incurred by
us or our subsidiaries after the date of this prospectus, owed to a bank, trust
company, insurance company, any other lender or other entity which lends funds
or extends credit, whether such indebtedness is or is not specifically
designated by us as being senior debt in its defining instruments. The exception
for debt held by our affiliates and subsidiaries or control persons does not
apply to debt held by special purposes entities, which debt will be senior to
the renewable notes. Special purpose entities are entities that are formed for
the purpose of acquiring non-performing debt and/or securitizing our credit card
receivables.
There is no public trading market for these securities and it is unlikely
that an active trading market will develop. The renewable notes may not be
transferred without our written consent.
AN INVESTMENT IN THE RENEWABLE NOTES INVOLVES CERTAIN RISKS. THESE
RENEWABLE NOTES ARE UNSECURED OBLIGATIONS, WHICH ARE SUBORDINATED TO OUR SENIOR
DEBT, AS DISCUSSED IN THIS PROSPECTUS. YOU SHOULD CONSIDER CAREFULLY THE RISK
FACTORS AND THE OTHER INFORMATION SET FORTH IN THIS PROSPECTUS BEFORE YOU DECIDE
TO PURCHASE THESE RENEWABLE NOTES. SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR
INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE RENEWABLE
NOTES.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed on the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
The date of this prospectus is __________, 2001
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You should rely only on the information contained in this prospectus. We
have not authorized any other person to provide you with different information.
This prospectus is not an offer to sell, nor is it seeking an offer to buy,
these securities in any state where the offer or sale is not permitted. The
information in this prospectus is complete and accurate as of the date on the
front cover, but the information may have changed since that date.
TABLE OF CONTENTS
PAGE
----
SUMMARY ............................................................... 1
RISK FACTORS .......................................................... 7
USE OF PROCEEDS ....................................................... 14
DESCRIPTION OF RENEWABLE NOTES OFFERED AND THE INDENTURE .............. 14
SELECTED CONSOLIDATED FINANCIAL DATA .................................. 27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS ...................................................... 29
BUSINESS .............................................................. 37
MANAGEMENT ............................................................ 48
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ........................ 56
MARKET PRICE OF AND DIVIDENDS ON THE COMPANY'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS ................................................ 58
PLAN OF DISTRIBUTION .................................................. 60
EXPERTS ............................................................... 61
WHERE YOU CAN FIND MORE INFORMATION ................................... 61
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS ............................ F-1
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SUMMARY
The items in the following summary are described in more detail later in
this prospectus. This summary provides an overview of selected information and
does not contain all the information you should consider. Therefore, you should
also read the more detailed information set out in this prospectus, including
the financial statements.
GENERAL INFORMATION REGARDING OUR BUSINESS
The Credit Store, Inc. is a technology based, financial services company
that provides credit card products to consumers who may otherwise fail to
qualify for a traditional unsecured bank credit card. We reach these consumers
by acquiring portfolios of non-performing consumer receivables and offering a
new credit card to those consumers who agree to pay all or a portion of the
outstanding amount due on their debt and who meet our underwriting guidelines.
The new card is issued with an initial balance and credit line equal to the
agreed repayment amount. After consumers have made a certain number of on-time
payments on their outstanding credit card balance, we seek to sell or securitize
the credit card receivables generated by this business strategy. We offer other
forms of settlement to those consumers who do not accept our credit card offer.
We were incorporated in 1972 in Utah as Valley West Development
Corporation, changed our corporate domicile to Delaware in 1995, and changed our
name to Credit Store, Inc. on October 8, 1996. Prior to October 8, 1996, we
discontinued operations of our prior line of business, which was unrelated to
our current operations. On December 4, 1996, we acquired from Taxter One LLC all
the capital stock of Service One Holdings, Inc. At the time of the acquisition,
Service One Holdings' sole asset was the capital stock of Service One
International Corporation, which had been engaged since January 1996 in the
business of acquiring non-performing consumer debt portfolios, and the marketing
and servicing of credit cards generated from these portfolios. From 1982 through
December 1995, Service One International Corporation had been a marketer and
servicer of secured credit cards for a South Dakota bank under a contractual
arrangement which expired in December 1995. Following the acquisition of Service
One Holdings, we engaged directly, and through Service One International
Corporation and its affiliates, in the acquisition of non-performing consumer
debt and the marketing and servicing of credit cards generated from these
portfolios. In February 1998, Service One Holdings and Credit Store Mortgage,
Inc., our wholly-owned subsidiary, were each merged into us. In March 1998,
Service One International Corporation was merged into us and our name was
changed to The Credit Store, Inc.
We are primarily in the business of providing credit card products to
consumers who may otherwise fail to qualify for a traditional unsecured bank
credit card. We focus on consumers who have previously defaulted on a debt and
reach these consumers by acquiring their defaulted debt. We acquire these
defaulted accounts in large portfolios typically from the original lender and
from subsequent owners of the debt for a nominal percentage of the face amount
of the debt, ranging from 0.50% to 3.00%. An increasing amount of our
acquisitions come from our cash for conversions ("CFC") program, through which
we pay the debt owner an agreed upon price for each account we convert to a
credit card. Under a CFC, we typically pay a higher price per account, but we
only pay for the accounts we convert to a credit card. Through our direct mail
and telemarketing operations, we locate and offer a new credit card to those
consumers who agree to pay all or a portion of the outstanding amount due on
their debt and who meet our underwriting guidelines. The new card is issued with
an initial balance and credit line equal to the agreed repayment amount. We
currently issue our credit cards through two issuing banks, The Bank of Hoven
and First National Bank in Brookings. Our objective is to ultimately sell and/or
securitize these receivables at a price in excess of our investment in the
receivables. To date, we have considered an account available to sell or
securitize when the consumer has made eight or more on-time payments on the
consumer's outstanding credit card balance.
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Under our marketing approach, consumers are offered an opportunity to:
- Settle their debt, typically at a discount,
- Transfer the settled amount to a newly issued unsecured
MasterCard(R) or Visa(R) credit card, and
- Establish a positive credit history on their newly issued card by
making timely and consistent payments.
After making principal payments on the transferred balance, the consumer
can begin using the credit card for new purchases or cash advances and may be
granted increased credit limits over time based on their payment performance.
Our credit card offer is attractive to those consumers who, given the
non-performing status of their debt, are typically receiving few or no
solicitations from traditional credit card companies. Many of these consumers:
- Cannot easily obtain an unsecured credit card,
- May benefit by having the opportunity to establish a positive
payment history on their newly issued credit card, or
- Have experienced the negative aspects of not having access to the
credit card payment system for travel and the daily purchase of
goods and services.
Our approach differs from traditional credit card companies that compete
for new customers through mass marketing and direct mail campaigns on the basis
of interest rates, fees, and services offered.
OFFICE LOCATION
Our principal executive offices are located at 3401 North Louise Avenue,
Sioux Falls, South Dakota 57107 and our telephone number is 800-240-1855.
OVERVIEW OF THE OFFERING
THE OFFERING. We are offering up to $100 million of renewable notes. The
renewable notes will be issued pursuant to an indenture between us and a trustee
to be named in the indenture discussed below. There is no minimum amount of
renewable notes that must be sold in the offering. We may withdraw or cancel the
offering at any time. In the event of such withdrawal or cancellation, the
renewable notes previously sold will remain outstanding until maturity or
earlier redemption in accordance with their terms and pending orders will be
irrevocable after the expiration of the rescission period. See "Plan of
Distribution."
UNSECURED OBLIGATIONS. The renewable notes are not insured, guaranteed or
secured by any lien on any of our assets. We do not contribute funds to a
separate fund, such as a sinking fund, to provide funds to repay the renewable
notes upon maturity. See "Risk Factors -- Since we do not set aside funds to
repay the renewable notes offered, holders of the renewable notes must rely on
our income from operations and other sources for repayment."
SUBORDINATED OBLIGATIONS. The renewable notes are subordinated in right of
repayment to our senior debt. "Senior debt" means any of our indebtedness,
whether outstanding on the date of this prospectus or incurred by us or our
subsidiaries after the date of this prospectus, owed to a bank, trust company,
insurance company, any other lender or other entity which lends funds or extends
credit, whether such indebtedness is or is not specifically designated by us as
being senior debt in its defining instruments. The renewable notes will have
equal rights with all of our other unsecured indebtedness,
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unless such indebtedness is specifically subordinated to the renewable notes. As
of November 30, 2000, we had approximately $26.4 million of senior debt
outstanding. Except for the requirement that we maintain certain leverage
ratios, there is no limitation, under the terms of the renewable notes or the
indenture, on the amount of senior debt or other indebtedness we may incur.
Senior debt, however, does not include any of our debt that is primarily
held by our affiliates and subsidiaries or control persons, which debt will be
subordinated to the renewable notes. As of November 30, 2000, we had an
aggregate of $19.5 million in outstanding principal amount and accrued interest
that has specifically agreed to be subordinated to the renewable notes. The
subordination of debt held by our affiliates and subsidiaries or control persons
to the renewable notes does not apply to debt held by our special purposes
entities, which debt is senior to the renewable notes. Special purpose entities
are entities that are formed for the purpose of acquiring non-performing debt
and/or securitizing our credit card receivables. See "Description of the
Renewable Notes Offered and the Indenture" for a description of what constitutes
senior debt and a discussion of the terms of the debt that is expressly
subordinated to the renewable notes.
SUBSCRIPTIONS. After the expiration of the rescission period discussed
below, your subscription for renewable notes is irrevocable upon submission to
us. We may reject your order in whole or in part, for any reason. If your
subscription is not accepted by us, we will promptly refund the funds you paid
with your subscription to you without deduction of any costs and without
interest. See "Plan of Distribution." Upon our acceptance of a subscription, we
will send a book-entry receipt to each purchaser which shows each purchaser's
ownership. This receipt is not a negotiable instrument, and no rights of
ownership in the security may be transferred by the endorsement and delivery of
the receipt by a purchaser. Within three business days after you send your
subscription to us, you may rescind your subscription. Upon our receipt of
written notice from you that you have rescinded your subscription, which notice
must be postmarked no later than three business days after the postmark date of
your subscription, we will promptly refund your subscription amount without
deduction of any costs and without interest. See "Description of Renewable Notes
Offered and the Indenture" for information regarding the limited transferability
of the renewable notes.
OVERVIEW OF TERMS OF RENEWABLE NOTES. For an overview of the renewable
notes, see "Further Highlights of Terms of Renewable Notes Offered" and
"Description of the Renewable Notes Offered and the Indenture" appearing in this
prospectus.
USE OF PROCEEDS. We intend to use the net proceeds resulting from the sale
of the renewable notes for our general corporate purposes, including funding
acquisitions of non-performing consumer debt, capital expenditures, and general
operating activities. Proceeds may also be used to pay, redeem and refinance
existing debt, including debt subordinated or senior to the renewable notes and
repurchase our outstanding capital stock, depending on market conditions, and we
may use proceeds from the sale of new renewable notes offered hereby to pay
interest on existing renewable notes or to retire maturing renewable notes. In
addition, proceeds from the sale of the renewable notes may be used to fund
future acquisitions of related businesses or assets, although we have no present
commitments, agreements or understandings with respect to any such acquisitions.
See "Use of Proceeds."
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FURTHER HIGHLIGHTS OF TERMS OF THE RENEWABLE NOTES OFFERED
Types of Security Offered Unsecured, fixed term subordinated debt
security.
Denomination of Initial Minimum purchase: $1,000 per
Purchase and Additional note. No fixed denominations;
Purchases notes are issued for the exact
investment amount.
Annual Interest Rate Fixed upon issuance based upon the term
length chosen and the total principal
amount of the note portfolio of the
holder. The amount of the note portfolio
of the holder is determined at the time a
note is purchased by aggregating the
principal amount of all notes currently
owned by the holder and the holder's
immediate family members. Immediate
family members include parents, children,
siblings, grandparents and grandchildren.
Members of sibling families are also
considered immediate family members if
both siblings are note holders. A holder
will have the ability to identify his or
her immediate family members in the
subscription documents. Interest will be
compounded daily.
Payment of Interest At the election of the holder,
interest may be paid monthly,
quarterly, semi-annually, annually or at
maturity. Holders can choose the day of
the month on which they want to receive
their interest payments. Holders can
change the date on which interest is paid
one time only during the term of a
renewable note.
Redemption at request of Upon death or total disability of
holder prior to maturity natural persons, as described in
this prospectus, without penalty.
Otherwise, within 30 days of receipt of
written notice by a Holder, subject to a
penalty equal to the lesser of simple
interest on the principal amount of the
renewable note at the stated interest rate
for a period equal to the original term of
the renewable note or six months' simple
interest on the principal amount of the
renewable note at the stated interest
rate, which will be collected by reducing
the amount payable upon such redemption.
However, we will not be required to redeem
more than $1 million of renewable notes in
any calendar quarter pursuant to these
redemption requests. For purposes of the
$1 million limit, redemption requests will
be honored in the order in which they are
received and any redemption request not
honored in a calendar quarter will be
honored in the next calendar quarter;
however, redemptions in the next calendar
quarter will also be subject to the $1
million limitation.
Redemption by us prior to Redeemable upon 30 days written
maturity notice to the holder at the
principal amount plus accrued
interest without any penalty.
Form/Transferability In book-entry form and non-negotiable. A
book-entry receipt will be issued, not an
individual promissory note. Not
transferable
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without our prior written consent.
Maturity Renewable notes are offered with
maturities ranging from 3 to 120
months; the term of each note is
established by the investor at the
time of purchase. If the renewable
notes are not automatically
extended, as discussed below, then
we will pay principal and remaining
accrued interest as follows:
o We will pay within 5 days of the stated
date of maturity if we receive notice
from the holder prior to or on the date
of the stated date of maturity of the
holder's intent to not extend the
renewable note, or if we provide notice
to the holder that we will not extend
the renewable note.
o We will pay within 5 days of the date we
receive notice from the holder of the
holder's intent to not renew the
renewable note of such notice is
received within the 15 day period
discussed in Automatic Extension
section below.
Subordination Subordinated in right of payment to
all of our other existing and
future senior debt, except our debt
that is primarily held by our
affiliates and subsidiaries, other
than special purpose entities, or
control persons. "Senior debt"
means any of our indebtedness,
whether outstanding on the date of
this prospectus or incurred by us
or our subsidiaries after the date
of this prospectus, owed to a bank,
trust company, insurance company,
any other lender or other entity
which lends funds or extends
credit, whether such indebtedness
is or is not specifically
designated by us as being senior
debt in its defining instruments.
Automatic Extension Renewable notes will be
automatically extended for a period
equal to the original term unless:
(i) we notify the holder at least
seven days prior to the maturity
date that an extension will not be
provided; or (ii) the holder elects
to redeem his or her note within 15
days after the stated maturity
date. Renewable notes to be
extended will be extended at a
fixed rate equal to the rate then
being offered to holders with similar
sized note portfolios on newly issued
renewable notes of like tenor, term
and denomination at their
respective maturity dates.
Rescission Right The holder has the right to rescind
his or her investment without
penalty within the first three
business days after submission of
his/her subscription; no interest
will be earned for the time the
rescinded note is outstanding.
Periodic Statements Quarterly statements detailing the
current balance and interest
paid on each note will be mailed to each
holder no later than the 10th business day
following the end of each calendar
quarter.
The preceding terms of the renewable notes may be modified or supplemented
by us from time to time, in our sole discretion, in a prospectus supplement to
this prospectus.
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SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA
(in thousands, except other data)
PREDECESSOR(1) THE CREDIT STORE, INC.
------------------------- ----------------------------------------------------------------------------
JANUARY 1,
DECEMBER 31 1996 TO YEAR ENDED MAY 31
OCTOBER 8, ---------------------------------------------------------- NOVEMBER 30,
1995 1996 1997 1998 1999 2000 2000
----------- ---------- ------------ ------------ ------- ------- ------------
CONSOLIDATED
BALANCE SHEET DATA:
Cash and cash
equivalents and
restricted cash $ 279 $ 58 $ 2,686 $ 8,205 $ 4,284 $ 2,449 $ 3,671
Investments in
receivable
portfolios, net 10,760 18,592 21,648 33,892 38,735
Total assets 525 2,885 24,744 39,723 45,781 64,388 63,555
Notes payable -- 1,158 429 5,902 6,087 23,609 22,790
Subordinated notes
and accrued
interest
payable-related
Party -- 880 10,446 31,807 19,247 19,139 19,487
Total liabilities 280 4,007 18,118 47,367 33,692 50,014 52,530
Total stockholders'
equity (deficit) 245 (1,122) 6,625 (7,643) 12,089 14,374 11,025
CONSOLIDATED OTHER
DATA:
Ratio of earnings to
fixed charges * N/A N/A -- -- 1.4x 1.4x --
Deficiency of
earnings to fixed
charges* -- -- (12,447,120) (19,295,853) -- -- (800,241)
* The ratios of earnings to fixed charges have been computed by dividing
earnings available for fixed charges by fixed charges. Earnings available
for fixed charges includes income or loss before income taxes, plus fixed
charges and adjustments for equity interests in investees. Fixed charges
consist of interest expenses and a portion of rental expense that is
estimated to be interest.
(1) The information for the fiscal year ended December 31, 1995 and for
the period from January 1, 1996 to October 8, 1996 relates to Service One
International Corporation, our predecessor. See "Business - General
Development of Business".
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RISK FACTORS
CAUTIONARY STATEMENTS AND FACTORS THAT MAY AFFECT FUTURE RESULTS. This
prospectus contains forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. All forward-looking statements are inherently
uncertain as they are based on current expectations and assumptions concerning
future events or our future performance. Readers are therefore cautioned not to
place undue reliance on these forward-looking statements, which are only
predictions and speak only as of the date this report was filed. Forward-looking
statements are not descriptions of historical facts. The words or phrases
"believes," "expects," "may," "will," "could," "should," "seeks," "pro forma,"
"as adjusted," "look for," "project," "anticipates," or similar expressions are
intended to identify forward-looking statements, and are subject to numerous
known and unknown risks and uncertainties. Actual results could differ
materially from those currently anticipated due to a number of factors,
including those identified in the "Risk Factors" below and discussed elsewhere
in this prospectus, and in our other filings with the Securities and Exchange
Commission. We undertake no obligation to update or publicly announce revisions
to any forward-looking statements to reflect future events or developments.
THE RENEWABLE NOTES OFFERED BY THIS PROSPECTUS ARE NOT INSURED AGAINST
LOSS BY ANY GOVERNMENTAL AGENCY. No governmental or private agency insures the
debt securities offered by this prospectus. The holder of the debt securities is
dependent solely upon sources such as our income from operations, proceeds from
the sale or securitization of receivables, and our working capital for repayment
of principal at maturity and the ongoing payment of interest on the debt
securities.
SINCE THE RENEWABLE NOTES ARE UNSECURED AND SUBORDINATE IN RIGHT OF
REPAYMENT TO OUR SENIOR DEBT DUE TO OTHER PERSONS, IN THE EVENT OF INSOLVENCY,
RENEWABLE NOTE HOLDERS WOULD BE REPAID ONLY IF SUFFICIENT FUNDS REMAIN AFTER THE
REPAYMENT OF OUR SENIOR DEBT. The renewable notes offered by this prospectus
will be subordinated in right of repayment to our senior debt. "Senior debt"
means any of our indebtedness, whether outstanding on the date of this
prospectus or incurred by us or our subsidiaries after the date of this
prospectus, owed to a bank, trust company, insurance company, any other lender
or other entity which lends funds or extends credit, whether such indebtedness
is or is not specifically designated by us as being senior debt in its defining
instruments. The renewable notes will have equal rights with all of our other
unsecured indebtedness, unless such indebtedness is specifically subordinated to
the renewable notes. As of November 30, 2000 there was approximately $26.4
million of senior debt outstanding. Except for the requirement that we maintain
certain leverage ratios, there is no limitation, under the terms of the
renewable notes or the indenture, on the amount of senior debt we can incur,
although certain of our existing senior debt agreements may provide certain
limitations on new senior debt. These borrowings do not have to be specifically
designated as "senior debt." If we were to become insolvent, our senior debt
would have to be paid in full prior to payment of renewable notes in our
liquidation. In addition, in the event of liquidation or dissolution of a
subsidiary, no assets of that subsidiary may be used to make payment to the
holders of the renewable notes until the creditors of that subsidiary are paid
in full from the assets of that subsidiary. Furthermore, we may have significant
debt other than senior debt that has rights upon our liquidation or dissolution
equal to that of the renewable notes being offered. There may not be adequate
funds remaining to pay the principal and interest on the renewable notes. See
"Description of the Renewable Notes Offered and the Indenture."
SINCE WE DO NOT SET ASIDE FUNDS TO REPAY THE RENEWABLE NOTES OFFERED,
HOLDERS OF THE RENEWABLE NOTES MUST RELY ON OUR INCOME FROM OPERATIONS AND OTHER
SOURCES FOR REPAYMENT. We do not contribute funds to a separate account,
commonly known as a sinking fund, to repay the renewable notes upon maturity.
Since no funds are set aside periodically for the repayment of the renewable
notes over their term, holders of the renewable notes must rely on our income
from operations, proceeds from the sale or securitization of receivables, our
working capital and sales of renewable notes. To the extent income from
operations is not
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sufficient to repay the debt, holders may lose all or a part of their
investment. See "Description of the Renewable Notes Offered and the Indenture."
YOUR ABILITY TO LIQUIDATE YOUR INVESTMENT IS LIMITED BECAUSE OF TRANSFER
RESTRICTIONS, THE LACK OF A TRADING MARKET AND THE LIMITATION ON EARLY
REDEMPTIONS. The renewable notes sold under this prospectus may not be
transferred without our prior written consent. There is no established trading
market for the renewable notes. Due to the non-transferable nature of the
renewable notes and the lack of a market for the sale of the renewable notes,
even if we permitted a transfer, investors would be unable to liquidate their
investment. Also, early redemptions of the renewable notes at the request of
holders of renewable notes are subject to an aggregate limitation of $1 million
per calendar quarter. See "Description of the Renewable Notes Offered and the
Indenture."
THE INDENTURE COVENANTS ARE UNLIKELY TO PROTECT HOLDERS OF THE RENEWABLE
NOTES IN THE EVENT WE SUFFER A MATERIAL ADVERSE CHANGE. The covenants in the
indenture are not designed to protect holders of renewable notes in the event of
a material adverse change in our financial condition or results of operations.
Except for the requirement that we maintain certain leverage ratios, these
covenants do not place any restrictions on our ability, among other things, to
create or incur senior debt or other indebtedness, and only restrict our ability
to pay dividends in limited cases.
BECAUSE THERE IS NO FIRM UNDERWRITING COMMITMENT, THE ULTIMATE PROCEEDS
FROM THE OFFERING OF THE RENEWABLE NOTES IS UNCERTAIN. The renewable notes are
initially being offered by us, although we may engage placement agents or
underwriters to offer the renewable notes from time to time in the future. We
have not established a minimum amount of proceeds that we must receive in the
offering before this offering becomes effective, which means that no assurance
can be given as to the principal amount of renewable notes that will be sold in
the offering.
OUR MANAGEMENT HAS BROAD DISCRETION OVER HOW TO USE THE PROCEEDS FROM THE
OFFERING. Since no specific allocation of the proceeds has been determined as of
the date of this prospectus, our management will have broad discretion in
determining how the proceeds of the offering will be used. See "Use of
Proceeds."
WE MAY NOT GENERATE SUFFICIENT CASH FLOWS FROM OUR RECEIVABLES TO FUND OUR
OPERATIONS. We are primarily in the business of providing credit card products
to consumers who have previously defaulted on a debt. Prior to our acquisition
of the receivables, the originating institutions and intermediary owners, if
any, have generally made numerous attempts to collect on the non-performing
accounts. We acquire the receivables at a discounted price and we believe we can
successfully generate cash flows on the new credit card accounts in excess of
its acquisition cost for the receivables. We may not be able to generate
sufficient cash from our receivables to cover the costs associated with
purchasing receivables and operating our business if any of the following occur:
- the conversion of charged-off accounts to credit card accounts is
less than anticipated;
- the collection on receivables is less than anticipated; or
- if the new credit card accounts experience higher delinquency rates
or losses than anticipated.
BECAUSE THE MARKET FOR OUR CREDIT CARD RECEIVABLES IS LIMITED, WE MAY NOT
BE ABLE TO SELL OR SECURITIZE THESE PORTFOLIOS TO GENERATE REQUIRED CASH. Our
future is highly dependent upon our ability to sell or securitize the portfolios
of credit cards that have been generated from non-performing debt that we
acquire. Although we have sold several portfolios and completed several
securitizations, no assurance can be given that any more will be sold or
securitized. While there have been securitizations completed by companies that
purchase non-performing consumer debt portfolios and subsequently attempt to
collect on these accounts, we are unaware of any significant securitization of
credit card receivables generated
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from portfolios of non-performing debt. We believe that the market for
receivables of this nature is limited and that there can be no assurance that
any such market will develop to the stage where we can be assured of buyers for
our securitizations and portfolio sales.
In addition, financial institutions that buy credit card receivables or
invest in securitizations may become subject to increasing regulatory burdens or
requirements that could affect the pricing or the size of the market for such
sales or securitizations. This could negatively affect our profitability and our
ability to securitize or sell our credit card receivable portfolios.
WE MAY NOT BE ABLE TO MANAGE OUR GROWTH OR OBTAIN THE RESOURCES NECESSARY
TO ACHIEVE OUR GROWTH PLANS. If we cannot manage our growth, we may experience
fluctuations in net income or sustain net losses. Since inception, we have grown
rapidly, placing significant demands on our management, administrative,
operational and financial resources. We seek to continue our growth trends,
which could place additional demands on our resources. Future growth will depend
on numerous factors, including the following:
- development of additional relationships with banks willing to issue
credit cards for us;
- availability of additional non-performing portfolios for purchase;
- availability of financing to purchase these portfolios and finance
ongoing operations;
- ability to sell and securitize our seasoned credit card receivables;
- ability to maintain a high quality of customer service; and
- recruitment, motivation and retention of qualified personnel.
Sustained growth also may require implementation of enhancements to our
operational and financial systems and additional management, operational and
financial resources. There can be no assurance that we will be able to manage
our expanding operations effectively or to maintain our historical level of cash
flows from the portfolios we have purchased, or that we will be able to maintain
or accelerate our growth. Our failure of to manage growth could harm our results
of operations or financial condition.
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE, WHICH MAY AFFECT OUR
ABILITY TO FINANCE OUR GROWTH AND OPERATIONS. The timing of portfolio
acquisitions and the timing of credit card receivables sales and securitizations
can affect the timing of recorded income and result in periodic fluctuations in
our quarterly operating results, as well as affecting our cash requirements. The
timing of any sale or securitization transaction is affected by a number of
factors beyond our control including market conditions and the presence of
investors and lenders interested in our seasoned credit card accounts. An
account is seasoned when a consumer has made a certain number of on-time
payments on the consumer's outstanding credit card balance.
BECAUSE OUR CASH REQUIREMENTS MAY FLUCTUATE FROM PERIOD TO PERIOD, WE MAY
HAVE INSUFFICIENT CASH TO MEET OUR OBLIGATIONS UNDER THE NOTES AND OTHERWISE. We
may experience seasonal fluctuations in cash requirements due to a variety of
factors beyond our control including the rate at which customers pay down their
credit card balance and the rate at which the customers make new purchases and
cash advances on their accounts. We may experience higher cash requirements
during the year-end holiday season and at other times during the year when
customers make new purchases on their credit cards at a faster rate than they
pay their debts.
WE HAVE INCURRED NET LOSSES AND MAY INCUR LOSSES IN FUTURE PERIODS; WE
HAVE AN ACCUMULATED DEFICIT. We have incurred substantial net losses and have an
accumulated deficit of approximately $41.5 million at November 30, 2000. There
can be no assurance that we will be able to achieve and maintain profitability
long enough to recover the accumulated deficit. Significant
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expenditures have been made to build the infrastructure necessary to acquire
charged-off portfolios, market and create new credit card accounts from these
portfolios, and service the resulting base of credit card accounts. Results of
operations will depend upon numerous factors, including without limitation, the
following:
- purchase costs of charged-off consumer debt portfolios;
- marketing, origination and servicing costs for our credit card
receivables;
- revenue generated from our credit card portfolio;
- availability of additional financing to purchase non-performing
consumer debt portfolios and finance working capital;
- performance of our receivables;
- ability to sell and securitize our credit card receivables; and
- market acceptance of our products and services.
WE MAY BE UNABLE TO MEET OUR ADDITIONAL LIQUIDITY REQUIREMENTS. There is
no assurance that we will be able to meet our future liquidity requirements. We
have a substantial ongoing need for liquidity to finance our operations, and
this need is expected to increase along with the growth in our business. Our
primary operating cash requirements include the purchase of non-performing
portfolios, the marketing, servicing and collection of credit cards, and ongoing
administrative expenses. We fund our cash requirements through a combination of
cash flow from operations, asset sales and securitizations, loans and other
financing transactions. In the event additional financing is unavailable to us
and additional receivable sales and securitizations are not completed, our
ability to operate our business will be limited and our financial condition,
operating results or cash flows could be materially adversely affected.
WE USE ESTIMATES IN OUR ACCOUNTING. Income from credit card receivables
and securitization income and asset sales have constituted, and are likely to
continue to constitute, a significant portion of our net income and other
comprehensive income. Portions of this income are based on the cash flow we
expect to receive from the credit cards we originate and own and from the credit
cards that have been securitized and in which we hold a retained interest.
Differences between actual and expected performance of the receivables may cause
fluctuations in our net income and other comprehensive income. The expected cash
flows are based on our estimates of interest rates, default rates, new account
origination rates, repayment rates, and new charges made by cardholders. These
estimates are based on a variety of factors, many of which are not within our
control. As a result, these estimates may differ from actual performance.
LACK OF MATURITY OF OUR CREDIT CARD PORTFOLIO MAY RESULT IN INCREASED
DELINQUENCIES AND DEFAULTS. The average age of a credit card issuer's portfolio
of accounts is an indicator of the stability of delinquency and default levels
of that portfolio; a portfolio of older accounts generally behaves more
predictably than a newly originated portfolio. The majority of the credit card
receivables owned by us are less than three years old as of November 30, 2000.
As a result there can be no assurance as to the levels of delinquencies and
defaults, which may affect our earnings through net charge-offs over time. Any
material increases in delinquencies and defaults above management's expectations
would have a material adverse effect on our results of operations and financial
condition.
ADVERSE PUBLICITY MAY IMPAIR ACCEPTANCE OF OUR PRODUCTS. Critics of the
credit card industry have in the past focused on marketing practices that they
claim encourage consumers to borrow more money than they should, as well as on
pricing practices that they claim are either confusing or result in prices that
are too high. Increased criticism of the industry or criticism of us in the
future could hurt client acceptance of our products or lead to changes in the
law or regulatory environment, either of which would significantly harm our
business.
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WE HAVE PLEDGED ALL OF OUR ASSETS WHICH MAY MAKE FUTURE FINANCING MORE
DIFFICULT. On April 30, 1998, to secure our payment and performance under our
senior secured debt financing, we granted the lender a security interest in all
of our assets including, among other things, all receivables, inventory and
equipment. We had previously pledged our assets to our major stockholder as
collateral for the loans evidenced by certain notes held by our stockholder. All
notes held by our stockholder have been subordinated to our senior debt lender.
By pledging all of our assets to secure financings, we may find it more
difficult to secure additional financing in the future.
BECAUSE WE CANNOT ISSUE OUR OWN CREDIT CARDS, THE FAILURE TO CONTINUE
RELATIONSHIPS WITH THIRD-PARTY CREDIT CARD ISSUERS COULD SEVERELY DISRUPT OUR
BUSINESS. We are not licensed to nor do we currently have the ability to
independently issue credit cards. Accordingly, we are dependent upon third-party
financial institutions to issue credit cards to our customers. We currently have
two banks through which cards are issued. If our existing credit card issuers
discontinue their agreements with us and we cannot find a new credit card issuer
willing to issue cards to consumers with impaired credit history, we would not
be able to operate our business as it is currently conducted. In addition, we
may not be able to enter into an agreement with an alternate provider on terms
that we consider favorable or in a timely manner without disruption of our
business.
In addition, the third-party financial institutions upon which we rely are
subject to extensive governmental regulation. If such regulators impose
additional regulations or restrictions on third-party financial institutions in
connection with issuing credit cards, such regulations or restrictions could
impose additional costs or limitations upon our operations. These costs and/or
limitations could reduce our profitability and adversely affect financial
results.
WE DO NOT HAVE BACKUP ARRANGEMENTS FOR ALL SERVICES AND EXISTING
ARRANGEMENTS MAY BE INSUFFICIENT. Through the issuing bank's arrangement with
First Data Resources, we use First Data Resources for third-party processing of
credit card data and services. We provide credit card data to First Data
Resources on a daily basis and such data is backed up and stored by First Data
Resources. In addition, our marketing data on our purchased portfolios is backed
up on a daily basis and is stored off-site.
While we are currently evaluating a back-up servicer for our servicing
portfolio of credit cards, we do not have a back-up telemarketer for our
marketing programs. In the event of a disaster or other occurrence that closes
our main facility or shuts down our primary and redundant data connections to
First Data Resources, our business would be interrupted during the period
required to repair our data lines and/or facilities or to relocate to temporary
facilities. Such interruption in our operations could have a material adverse
impact on our business and revenues. We are evaluating back-up servicing and
marketing solutions that can seamlessly move servicing and marketing operations
to alternative locations or to third-party service providers in a manner that
would minimize losses in the event of a disaster or other occurrence that
affects our primary facility or data transmission to third parties.
LABOR SHORTAGES AND HIGH EMPLOYEE TURNOVER RATES COULD INCREASE COSTS
SIGNIFICANTLY AND IMPACT REVENUE. The credit card industry is labor intensive
and generally experiences a high rate of turnover in personnel. A high turnover
rate among our employees would increase our recruiting and training costs and
could adversely impact the overall recovery of our receivables. In addition,
Sioux Falls, South Dakota experiences a low incidence of unemployment. If we
were unable to recruit and retain a sufficient number of employees, we would be
forced to limit our growth or possibly curtail our operations. Growth in our
business will require us to continue to recruit and train significant numbers of
qualified personnel. There can be no assurance that we will be able to hire,
train and retain a sufficient number of qualified employees.
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WE MAY NOT BE ABLE TO ACQUIRE ENOUGH RECEIVABLES ON FAVORABLE TERMS TO
OPERATE PROFITABLY. To obtain additional credit card customers, we depend on the
continued availability of non-performing portfolios that meet our requirements.
Any decrease in availability of receivables or any increase in the cost of
receivables could reduce our profitability and liquidity and have a material
adverse affect on our results of operations or financial condition. The
availability of portfolios of receivables for future purchase at prices
favorable to us depends on a number of factors outside of our control. These
factors may include, but are not limited to:
- continuation of the current growth trend in credit card and consumer
installment debt;
- the ability of consumers to obtain credit, especially unsecured
credit cards;
- entry of new competitors;
- if traditional credit card lenders rehabilitate their own
non-performing credit card receivables; and
- overly aggressive pricing by competitors.
FLUCTUATIONS IN ECONOMIC CONDITIONS COULD ADVERSELY AFFECT OUR BUSINESS.
During strong economic cycles, available credit, including consumer credit,
generally increases and payment delinquencies and defaults generally decrease.
During periods of economic slowdown and recession, such delinquencies and
defaults generally increase. No assurances can be given that our credit card
losses and delinquencies would not worsen in a weak economic cycle. Significant
increases in credit card losses would weaken our financial condition.
WE MAY NOT BE ABLE TO SUCCESSFULLY ANTICIPATE, INVEST IN OR ADOPT
TECHNOLOGICAL ADVANCES WITHIN OUR INDUSTRY. Our success is dependent in large
part on our continued investment in sophisticated telecommunications and
computer systems, including predictive dialers, automated call distribution
systems and digital switching equipment. We have invested significantly in
technology in an effort to remain competitive and anticipate that it will be
necessary to continue to do so. Moreover, computer and telecommunications
technologies are evolving rapidly and are characterized by short product life
cycles, which require us to anticipate and stay current with technological
developments. There can be no assurance that we will be successful in
anticipating, managing or adopting such technological changes on a timely basis
or that we will have the capital resources available to invest in new
technologies.
WE ARE DEVELOPING NEW PRODUCTS AND SERVICES WHICH MAY NOT BE SUCCESSFUL.
While we may, from time to time, develop additional products and services, there
can be no assurance that such products and services will be completed or
successfully marketed and implemented. Consumer preferences for credit card and
credit related products are difficult to predict, specifically where consumers
have experienced past credit difficulties. There can be no assurance that the
products and services we introduce will be accepted by credit card holders, or
that our methodology for restructuring past consumer debt delinquency will be
accepted by the consumer. Failure to obtain significant customer satisfaction or
market share for our products and services would have a material adverse effect
on our operations and financial condition.
WE ARE DEPENDENT ON OUR KEY PERSONNEL. We are dependent upon the continued
contributions of our officers and other key employees. The loss of the services
of one or more of our executive officers or key employees could disrupt our
operations. We have entered into employment agreements with Kevin T. Riordan,
our President and Chief Operating Officer, and Michael J. Philippe, our
Executive Vice President and Chief Financial Officer. Although our written
agreement with Richard Angel, our Executive Vice President and General Counsel,
has expired, we have an oral employment agreement with Mr. Angel with no fixed
term. The loss of the services of any such individual or the services of certain
other officers or key employees would cause us to incur costs for recruiting
replacements, could result in the loss of the valuable expertise and business
relationships, and could have a material adverse effect on our business and
prospects.
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CERTAIN OF OUR MAJOR STOCKHOLDERS ARE RELATED AND HAVE THE ABILITY TO
CONTROL STOCKHOLDER ACTIONS ON FUNDAMENTAL CORPORATE MATTERS. Jay L. Botchman,
one of our directors, is the beneficial owner of 40.3% of our outstanding shares
of common stock . As such and through his beneficial ownership of all of our
outstanding Series A Preferred Stock, he has control over our affairs through
his ability to elect our directors and determine the outcome of votes by our
stockholders on fundamental corporate matters, including mergers, sales of all
or substantially all of our assets, charter amendments and other matters subject
to stockholder approval.
Mr. Botchman, individually and through his control of certain entities,
beneficially owns all of our Series A, C, D and E Preferred Stock. The Series A
Preferred Stock contains certain preferential voting rights. The outstanding
shares of Series A Preferred Stock initially represented 80% of all votes
entitled to be voted at any meeting of the shareholders, subject to dilution to
the extent we issue additional shares of capital stock. Currently, the shares of
the Series A Preferred Stock represent approximately 78% of all votes entitled
to be voted at any meeting of our stockholders.
OUR OPERATIONS DEPEND, IN PART, UPON THE PROTECTION OF CERTAIN PROPRIETARY
INFORMATION. Our operations are dependent, in part, upon certain proprietary
data and analytical computer programs, methods and related know-how for our
day-to-day operations. We currently rely upon a combination of confidentiality
agreements, contract provisions and trade secret laws to protect our proprietary
rights. Although we intend to protect our rights vigorously, there can be no
assurance that we will be successful in protecting our proprietary rights. If we
are not able to protect such rights, or if such information and data become
widely available, we may lose a competitive advantage within our market niche.
Such loss of competitive advantage could result in decreased revenues and
profitability.
FAILURE TO COMPLY WITH CONSUMER AND DEBTOR PROTECTION LAWS AND REGULATIONS
COULD ADVERSELY AFFECT OUR BUSINESS. Our collection practices, business
operations and credit card receivables are subject to numerous federal and state
consumer protection laws and regulations imposing licensing and other
requirements with respect to purchasing, collecting, making and enforcing
consumer loans. We conduct periodic compliance reviews and implements procedures
to bring us into compliance with all applicable state and federal regulatory
requirements. Our failure by us to comply with such statutes or regulations
could have a material adverse effect on our results of operations or financial
condition. In addition, due to the consumer-oriented nature of the collections
and credit card industry, there is a risk that we or other industry participants
may be named as defendants in litigation involving alleged violations of federal
and state laws and regulations, including consumer protection laws, and consumer
law torts, including fraud. A significant judgment against us or within the
industry in connection with any such litigation could have a material adverse
effect on our results of operations or financial condition. See "Business --
Government Regulation."
PENDING AND FUTURE LITIGATION MAY MATERIALLY ADVERSELY AFFECT US. From
time to time, we have been named as a defendant in class action lawsuits, of
which currently three are pending against us. A significant judgment against us
in one or more of the lawsuits, or in a future lawsuit, could subject us to a
monetary judgment that could substantially affect our liquidity and
profitability. In addition, a loss may also require us to modify our methods of
operation to the extent our operations are deemed to not comply with applicable
legal standards, which could have a material adverse effect on our profitability
and ability to conduct our operations. See "Business -- Legal Proceedings."
WE HAVE ACCUMULATED CASH DIVIDENDS AND ANY REQUIREMENT TO PAY THESE
DIVIDENDS WOULD DECREASE OUR LIQUIDITY AND OPERATIONAL FLEXIBILITY. As of
November 30, 2000, we had accumulated approximately $5.2 million in undeclared
and unpaid dividends on our preferred stock. Although our board of directors has
not declared, and therefore we have not paid, such dividends to date, we may be
called on to pay such dividends in the future. To the extent such preferred
stock remains outstanding, additional cash dividends will accumulate. If we are
required to pay the dividends, such payments would limit the amount of cash
available to use in other operations and may, therefore, decrease our cash
liquidity. Such a decrease in liquidity may require us to seek additional
financing if our operations are not sufficient to fund our cash needs.
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USE OF PROCEEDS
The primary purposes of this offering are to provide additional financing
for our anticipated growth and to increase our financial flexibility. Net
proceeds, including interest earned thereon, to us from the sale of the
renewable notes will be used for general corporate purposes, including funding
acquisitions of non-performing consumer debt, capital expenditures and general
operating activities. Proceeds may also be used to pay, redeem and refinance
existing debt, including debt subordinated or senior to the renewable notes and
repurchase our outstanding capital stock, depending on market conditions, and we
may use proceeds from the sale of new renewable notes offered hereby to pay
interest on existing renewable notes or to retire maturing notes. As of February
1, 2001, the aggregate outstanding amount of principal and accrued interest on
the existing debt is approximately $45.6 million, the interest rate on the debt
ranged from 6.5% to 12% and the debt had maturities ranging from being payable
on demand to August 2002. In addition, proceeds from the sale of the renewable
notes may be used to fund future acquisitions of related businesses or assets,
although we have no present commitments, agreements or understandings with
respect to any such acquisitions.
There is no minimum number or amount of renewable notes required to be
sold in order to deposit and use the proceeds from sale of renewable notes, and
there can be no assurance that all or any portion of the renewable notes will be
sold. Accordingly, the amount of renewable notes sold may be substantially less
than the maximum offered hereby.
DESCRIPTION OF RENEWABLE NOTES OFFERED AND THE INDENTURE
GENERAL. The renewable notes represent our unsecured debt obligations. The
renewable notes will be issued under the indenture between the trustee to be
named in the indenture and us. The terms of the renewable notes include those
stated in the indenture and those made part of the indenture by reference to the
Trust Indenture Act of 1939, in effect on the date the indenture is qualified
under that act. The renewable notes are subject to all terms and conditions of
the indenture and Trust Indenture Act. We refer you to the indenture and the
Trust Indenture Act for a complete understanding of the renewable notes. The
following includes a summary of some provisions of the indenture, and a copy of
the indenture is available from us upon request. This summary does not purport
to be complete and is qualified in entirety by reference to the indenture,
including the definitions therein of certain terms used below.
The renewable notes will be subordinated in right of payment to the prior
payment in full of all senior debt as further described in this prospectus,
whether outstanding on the date of the indenture or incurred following the date
of the indenture. Subject to the leverage ratio covenants under the indenture
discussed below, there is no limit under the indenture on the amount of senior
debt we may incur. See "-- Subordination" below.
The renewable notes are not secured by any collateral or lien. There are
no provisions for a sinking fund or similar fund providing for payments on the
renewable notes. See "Risk Factors -- Since we do not set aside funds to repay
the renewable notes offered, holders of the renewable notes must rely on our
income from operations and other sources for repayment."
Renewable notes may be purchased in the minimum amount of $1,000 or any
amount in excess of $1,000. You may not cumulate separate purchases to satisfy
the minimum denomination requirement.
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The terms of the renewable notes described in this prospectus may be
modified or supplemented by us from time to time, in our sole discretion, in an
amendment to this prospectus; provided, that, except as set forth under
" -- Amendment, Supplement and Waiver" below, any modification or amendment will
not affect outstanding renewable notes.
MATURITY. We are offering renewable notes with terms ranging from 3 to 120
months. You will select the term of each renewable note upon your subscription.
BOOK-ENTRY. Upon acceptance of a subscription, we will credit our
book-entry registration and transfer system to the account of the purchaser of
the renewable note the principal amount of such security owned of record by such
purchaser, which record holder is referred to as the holder or registered holder
in this document and in the indenture. Also upon acceptance of a subscription,
we will send each holder a book-entry receipt which will indicate our acceptance
of the subscription. You will have three business days to rescind your
subscription after the date on which you send your subscription to us. If either
we reject your subscription or you rescind it during the three-day revocation
period, all funds deposited, without any interest, will be promptly returned to
you.
Investors will receive a book-entry receipt but will not receive any or be
entitled to receive physical delivery of a note or certificate evidencing such
indebtedness. The holders of the accounts we establish upon the purchase or
transfer of renewable notes shall be deemed to be the owners of the renewable
notes under the indenture. The holder of the renewable notes must rely upon the
procedures established by the trustee to exercise any rights of a holder of
renewable notes under the indenture. We will provide the trustee with
information regarding the establishment of new accounts and the transfer of
existing accounts on a monthly basis.
We will provide the trustee with information, as requested, regarding the
total amount of any principal and/or interest due to holders with regard to the
renewable notes on any interest payment date or upon redemption. On each
interest payment date, we will credit interest due on each account. We shall
determine the interest payments to be made to the book-entry accounts and
maintain, supervise and review any records relating to book-entry beneficial
interests in the renewable notes.
Book-entry notations in the accounts evidencing ownership of the renewable
notes are exchangeable for actual notes in denominations of $1,000 and any
amount in excess of $1,000 and fully registered in those names as we direct only
if: (i) we, at our option, advise the trustee in writing of our election to
terminate the book-entry system, or (ii) after the occurrence of an event of
default under the indenture, holders of the renewable notes aggregating more
than 50% of the aggregate outstanding amount of the renewable notes advise the
trustee in writing that the continuation of a book-entry system is no longer in
the best interests of the holders of renewable notes and the trustee notifies
all registered holders of the occurrence of any such event and the availability
of definitive notes. Subject to the exceptions described above, the book-entry
interests in these securities shall not otherwise be exchangeable for fully
registered notes.
INTEREST. The interest rate payable on a renewable note will be determined
based upon market conditions, the maturity date and term established for such
renewable note at the time of subscription and the total principal amount of the
note portfolio of the holder. The amount of the note portfolio of the holder is
determined at the time a note is purchased by aggregating the principal amount
of all notes currently owned by the holder and the holder's immediate family
members. Immediate family members include parents, children, siblings,
grandparents and grandchildren. Members of sibling families are also considered
immediate family members if both siblings are note holders. A holder will have
the ability to identify his or her immediate family members in the subscription
documents. We will establish the interest rates payable on the renewable notes
from time to time based on market conditions and our financial requirements. We
constantly re-evaluate our interest rates based upon this analysis. Once
determined, the rate of interest payable on a renewable note will remain fixed
for the original term of the renewable note.
We will compute interest on renewable notes on the basis of an actual
calendar year and interest will compound daily. Holders of renewable notes may
elect at the time a subscription agreement is
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completed to have interest paid either monthly, quarterly, semi-annually,
annually or at maturity. This election may be changed one time only by the
holder during the term of the renewable notes. Requests to change the election
must be made in writing to us and will be effective on the 45th day following
the date we receive the election. No specific change in election form is
required. Any interest not otherwise paid on an interest payment date will be
paid at maturity.
We reserve the right to vary from time to time, at our discretion, the
interest rates we offer on the renewable notes based on numerous factors in
addition to length of term to maturity and aggregate principal amount. These
factors may include, but are not limited to:
- the desire to attract new investors;
- renewable notes in excess of certain principal amounts;
- renewable notes purchased for IRA and/or Keogh accounts;
- encouraging rollover investments by existing holders; and
- renewable notes beneficially owned by persons residing in particular
geographic localities.
AUTOMATIC EXTENSION. Each renewable note will be automatically extended
for a term identical to the term of the original renewable note unless:
- We notify the holder at least seven days prior to the maturity date
of our intention not to extend the renewable note; or
- The holder elects to redeem the renewable note within fifteen days
after the stated maturity date.
The renewable notes will continue to renew in this manner until
termination or redemption under the indenture and the renewable notes by either
the holder or us. Interest shall continue to accrue from the first day of such
renewed term. Each renewed renewable note will continue in all its provisions,
including provisions relating to payment, except that the interest rate payable
during any renewed term shall be the interest rate which is then being offered
to holders with similar sized note portfolios on similar renewable notes being
offered as of the renewal date. If similar renewable notes are not then being
offered, the interest rate upon renewal will be the rate specified by us on or
before the maturity date, or the renewable note's then current rate if no such
rate is specified. Holders may request an interest rate term sheet prior to the
expiration of a term of a note to determine the interest rate applicable to an
extension of the note.
If we notify the holder of our intention to repay a renewable note at
maturity, no interest will accrue after the stated date of maturity and we will
pay the holder within 5 days of the expiration of the stated maturity date.
Similarly, if, within 15 days after its stated maturity date, a holder requests
repayment, we will not pay interest during the period after its stated maturity
date and prior to repayment and will pay the holder within 5 days of the date on
which we receive such notice from the holder or within 5 days of the stated date
of maturity if such notice is received on or before the stated date of maturity.
As a courtesy, we provide a request for repayment form with notice of the end of
the term of the note. Use of such form by a holder is not a condition of
repayment. Requests for repayment may also be made to us in writing.
PLACE AND METHOD OF PAYMENT. Principal and interest on the renewable notes
will be payable at our principal executive office, as it may be established from
time to time, or at such other place as we may designate for that purpose;
provided, however, that payments may be made at our option by check or draft
mailed to the person entitled thereto at his/her address appearing in the
register which we maintain for that purpose or through an electronic deposit to
an account specified by a holder in the subscription documents.
REDEMPTION BY US. We have the right to redeem any renewable note at any
time, prior to its stated maturity, upon 30 days written notice to the holder of
the note at the principal amount thereof plus accrued interest without any
penalty or premium. The holder has no right to require us to prepay any such
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renewable note prior to its maturity date as originally stated or as it may be
extended, except as indicated below.
REDEMPTION BY THE HOLDER UPON DEATH OR TOTAL PERMANENT DISABILITY OF THE
HOLDER. Renewable notes may be redeemed at the election of the holder, who is a
natural person (including if the renewable notes are held in an individual
retirement account), by giving us written notice within 45 days following
his/her total permanent disability, as established to our satisfaction, or by
his/her estate following his/her death. The redemption price, in the event of
such a death or disability, will be the principal amount of the renewable note,
plus interest accrued and not previously paid up to the date of redemption. If
spouses are joint registered holders of a renewable note, the election to redeem
will apply when either registered holder dies or becomes subject to a total
permanent disability. If the renewable note is held by a person who is not a
natural person such as a trust, partnership, corporation or other similar
entity, the redemption upon death or disability does not apply. In addition, we
will not be required to redeem any renewable notes in excess of $1 million
aggregate principal amount per calendar quarter, which $1 million includes any
redeemable notes that we redeem pursuant to the holders' right to elect
redemption, as described below. For purposes of the $1 million limit, redemption
requests will be honored in the order in which they are received and any
redemption request not honored in a calendar quarter will be honored in the next
calendar quarter; however, redemptions in the next calendar quarter will also be
subject to the $1 million limitation.
We may modify the foregoing policy on redemption after death or disability
in the future. However, no modification will affect the right of redemption
applicable to any outstanding renewable note.
REDEMPTION AT THE HOLDER'S ELECTION. In addition to the right to elect
redemption upon death or disability, a holder may elect to redeem renewable
notes at any time by giving us written notice, and we will redeem the holder's
renewable note(s) specified in the notice within 30 days of receipt of the
notice. The redemption price, in the event of such election, will be the
principal amount of the renewable note, plus interest accrued and not previously
paid (up to the date of redemption), minus a redemption penalty equal to the
lesser of simple interest on the principal amount of the renewable note at the
stated interest rate for a period equal to the original term of the renewable
note or six months' simple interest on the principal amount of the renewable
note at the stated interest rate. However, we will not be required to redeem any
renewable notes in excess of $1 million per calendar quarter, which $1 million
includes any redeemable notes that we redeem pursuant to the death or disability
of a holder as described above. For purposes of the $1 million limit, redemption
requests will be honored in the order in which they are received and any
redemption request not honored in a calendar quarter will be honored in the next
calendar quarter; however, redemptions in the next calendar quarter will also be
subject to the $1 million limitation.
We may modify the foregoing policy on redemption in the future. However,
no modification will affect the right of redemption applicable to any renewable
note outstanding at that time.
QUARTERLY STATEMENTS. We will provide holders of the renewable notes with
quarterly statements, which will indicate, among other things, the current
account balance (including interest paid). These statements will be mailed not
later than the tenth business day following the end of each calendar quarter.
FORM AND DENOMINATIONS/TRANSFERS. The renewable notes are not negotiable
debt instruments and, subject to certain exceptions, will be issued only in
book-entry form. Upon the submission of a subscription, we will issue a
book-entry receipt reflecting the ownership of a renewable note to each
purchaser upon our acceptance of the subscription. The book-entry receipt is not
a negotiable instrument, and no rights of record ownership can be transferred
without our prior written consent. Each holder of a renewable note will receive
a periodic statement indicating any transactions in the holder's account, as
well as interest credited. Ownership of renewable notes may be transferred on
our register only by written notice to us signed by the owner(s) or such owner's
duly authorized representative on a form to be
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supplied by us and with our written consent, which consent shall not be
unreasonably withheld. We may also, in our discretion, require an opinion from
such holder's counsel that the proposed transfer will not violate any applicable
securities laws and a signature guarantee in connection with such transfer. Upon
transfer of a renewable note, we will provide the new owner of the renewable
note with a book-entry receipt which will evidence the transfer of the account
on our records.
INTEREST ACCRUAL DATE. Interest on the renewable notes will accrue from
the date of purchase. The date of purchase will be deemed to be, for accepted
subscriptions, the date we receive funds, if the funds are received prior to
3:00 p.m. on a business day, or the next business day if the funds are received
on a non-business day or after 3:00 p.m. on a business day. For this purpose,
our business days will be deemed to be Monday through Friday, except for legal
holidays in the State of South Dakota.
RESCISSION RIGHT. The holder has the right to rescind his or her
investment without penalty within the first three business days after submission
of his/her subscription; no interest will be earned for the time the rescinded
note is outstanding. We will promptly return any funds sent with a subscription
that is subsequently properly rescinded.
SUBORDINATION. The indebtedness evidenced by the renewable notes, and any
interest thereon, are subordinated in right of payment to all of our senior
debt. "Senior debt" means any of our indebtedness, whether outstanding on the
date of this prospectus or incurred by us or our subsidiaries after the date of
this prospectus, owed to a bank, trust company, insurance company, any other
lender or other entity which lends funds or extends credit, whether such
indebtedness is or is not specifically designated by us as being senior debt in
its defining instruments. The indenture does not prevent holders of senior debt
to dispose of, or exercise any other rights with respect to, any or all of the
collateral to the senior debt. The renewable notes will have equal rights with
all of our other unsecured indebtedness, unless such indebtedness is
specifically subordinated to the renewable notes. As of November 30, 2000, we
had approximately $26.4 million of senior debt outstanding. Except for the
maintenance of certain leverage ratios, there is not limitation, under the terms
of the renewable notes or the indenture, on the amount of senior debt or other
indebtedness we may incur, although certain of our existing senior debt
agreements may provide certain limitations on new senior debt.
The renewable notes are not guaranteed by any of our subsidiaries,
affiliates or control persons. Accordingly, in the event of a liquidation or
dissolution of one of our subsidiaries, the law requires that creditors of that
subsidiary be paid in full, or provision for such payment be made, from the
assets of that subsidiary prior to distributing any remaining assets to us as a
shareholder of that subsidiary. Therefore, in the event of liquidation or
dissolution of a subsidiary, no assets of that subsidiary may be used to make
payment to the holders of the renewable notes until the creditors of that
subsidiary are paid in full from the assets of that subsidiary.
Senior debt, however, does not include any of our debt that is primarily
held by our affiliates and subsidiaries or control persons, which debt will be
subordinated to the renewable notes. However, as long as we make required
payments on the renewable notes and there exists no default under the notes or
the indenture, we may also make required payments and pre-payments on, and
complete payment of, our debt held by our affiliates, subsidiaries and control
persons. As of November 30, 2000, we had an aggregate of $19.5 million in
outstanding principal amount and accrued interest that has specifically agreed
to be subordinated to the renewable notes. The subordination of debt held by our
affiliates and subsidiaries or control persons to the renewable notes does not
apply to debt held by our special purpose entities that may be our affiliates or
subsidiaries, which debt is senior to the renewable notes. Special purpose
entities are entities that are formed for the specific purpose of acquiring
non-performing debt and/or securitizing our credit card receivables.
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In the event of any liquidation, dissolution or any other winding up of
us, or of any receivership, insolvency, bankruptcy, readjustment, reorganization
or similar proceeding under the U.S. Bankruptcy Code or any other applicable
federal or state law relating to bankruptcy or insolvency, or during the
continuation of any event of default on the senior debt, no payment may be made
on the renewable notes until all senior debt has been paid in full. If any of
the above events occurs, holders of senior debt may also submit claims on behalf
of holders of the renewable notes and retain the proceeds for their own benefit
until they have been fully paid, and any excess will be turned over to the
holders of the renewable notes. If any distribution is nonetheless made to
holders of the renewable notes, the money or property distributed to them must
be paid over to the holders of the senior debt to the extent necessary to pay
senior debt in full. Furthermore, we may have significant debt other than senior
debt that has rights upon our liquidation or dissolution equal to that of the
renewable notes being offered, which debt would reduce the amount of funds
available to pay the principal and interest on the outstanding renewable notes,
in which event payment will be made on the renewable notes pro-rata with all
other debts of equal ranking until the funds are exhausted. See "Risk Factors --
Since the renewable notes are unsecured and subordinate in right of repayment to
our senior debt due to other persons, in the event of insolvency, renewable note
holders would be repaid only if sufficient funds remain after the repayment of
our senior debt."
In the event and during the continuation of any default in the payment of
principal of or interest on any senior debt, we will not make any payment,
direct or indirect, on the renewable notes and any other indebtedness being
subordinated to the payment of the renewable notes unless and until (i) the
default has been cured or waived or has ceased to exist or (ii) the end of the
payment blockage period. Any payment blockage period will commence on the date
the trustee receives written notice of default from a holder of the senior debt
and will end on the earlier of (a) 179 days after the trustee's receipt of the
notice of default; (b) the trustee's receipt of a valid waiver of default from
the holder of senior debt; or (c) the trustee's receipt of a written notice from
the holder of senior debt terminating the payment blockage period.
COVENANTS CONTAINED IN INDENTURE
The indenture contains certain restrictive covenants that apply to us.
Maintenance of Certain Financial Standards
The indenture provides that
- we will maintain a positive tangible net worth, which includes
stockholder's equity and subordinated debt, and
- our ratio of total liabilities, exclusive of subordinated debt, to
tangible net worth, which tangible net worth includes stockholder's
equity and subordinated debt, will not exceed 5.0:1 at the end of
any fiscal quarter.
Prohibition on Certain Actions
The indenture provides that, so long as the renewable notes are
outstanding, we will
- not pay any dividends on our common or preferred stock unless
- there is no event of default with respect to the renewable
notes, and
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- we maintain an aggregate Debt Service Coverage Ratio of at
least 1.10:1 for the previous six months; and
- not guarantee, endorse or otherwise become liable for any
obligations of any of our control persons, or other parties
controlled by or under common control with any of our control
persons, provided however, that we and our subsidiaries may make
investments in entities that are special purpose entities.
"Debt Service Coverage Ratio" means earnings before interest, taxes,
depreciation, amortization, and provision for losses divided by required
principal and interest payments on Senior Debt.
"Senior Debt" means indebtedness, whether outstanding on the date of this
prospectus, or incurred by us or our subsidiaries after the date of this
prospectus, owed to a bank, trust company, insurance company, or from any other
lender or other entity which lends funds or extends credit, whether the
indebtedness is or is not specifically designated by us as being "senior debt"
in its defining instruments.
CONSOLIDATION, MERGER OR SALE
The indenture generally permits a consolidation or merger between us and
another entity. It also permits the sale or transfer by us of all or
substantially all of our property and assets. These transactions are permitted
if:
- the resulting or acquiring entity, if other than us, is organized
and existing under the laws of a domestic jurisdiction and assumes
all of our responsibilities and liabilities under the indenture,
including the payment of all amounts due on the renewable notes and
performance of the covenants in the applicable indenture; and
- immediately after the transaction, and giving effect to the
transaction, no event of default under the indenture exists.
If we consolidate or merge with or into any other entity or sell or lease
all or substantially all of our assets according to the terms and conditions of
the indenture, the resulting or acquiring entity will be substituted for us in
the indenture with the same effect as if it had been an original party to the
indenture. As a result, such successor entity may exercise our rights and powers
under the indenture, in our name and, except in the case of a lease, we will be
released from all our liabilities and obligations under the indenture and under
the renewable notes.
EVENTS OF DEFAULT. The indenture provides that each of the following
constitutes an event of default:
- default for 5 days in the payment of interest when due on the
renewable notes (whether or not prohibited by the subordination
provisions of the indenture);
- default in payment of principal when due on the renewable notes
(whether or not prohibited by the subordination provisions of the
indenture) and continuation of the default for 2 days;
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- our failure to observe or perform any material covenant or our
breach of any material representation or warranty; but only after we
have been given notice of such failure or breach and such failure or
breach is not cured within 60 days after our receipt of notice; and
- certain events of bankruptcy or insolvency with respect to us.
If any event of default occurs and is continuing, the trustee or the
holders of at least a majority in principal amount of the then outstanding
renewable notes may declare the unpaid principal of and any accrued interest on
the renewable notes to be due and payable immediately. However, so long as any
senior debt is outstanding, a declaration of this kind will not become effective
until the earlier of (i) the day which is five business days after the receipt
by representatives of senior debt of such written notice of acceleration or (ii)
the date of acceleration of any senior debt. In the case of an event of default
arising from certain events of bankruptcy or insolvency, with respect to us, all
outstanding renewable notes will become due and payable without further action
or notice. Holders of the renewable notes may not enforce the indenture or the
renewable notes except as provided in the indenture. Subject to certain
limitations, holders of a majority in principal amount of the then outstanding
renewable notes may direct the trustee in its exercise of any trust or power.
The trustee may withhold from holders of the renewable notes notice of any
continuing default or event of default (except a default or event of default
relating to the payment of principal or interest) if the trustee determines that
withholding notice is in the interest of the holders.
The holders of a majority in aggregate principal amount of the renewable
notes then outstanding by notice to the trustee may, on behalf of the holders of
all of the renewable notes, waive any existing default or event of default and
its consequences under the indenture, except a continuing default or event of
default in the payment of interest on, or the principal of, the renewable notes.
We are required to deliver to the trustee annually a statement regarding
compliance with the indenture, and we are required upon becoming aware of any
default or event of default, to deliver to the trustee a statement specifying
such default or event of default.
AMENDMENT, SUPPLEMENT AND WAIVER. Except as provided in this prospectus or
the indenture, the terms of the renewable notes then outstanding may be amended
or supplemented with the consent of the holders of at least a majority in
principal amount of the renewable notes then outstanding, and any existing
default or compliance with any provision of the indenture or the renewable notes
may be waived with the consent of the holders of a majority in principal amount
of the then outstanding renewable notes.
Without the consent of each holder of the renewable notes affected, an
amendment or waiver may not, with respect to any renewable notes held by a
nonconsenting holder of renewable notes:
- reduce the principal of or change the fixed maturity of any
renewable note or alter the redemption provisions or the price at
which we shall offer to redeem the renewable note;
- reduce the rate of or change the time for payment of interest,
including default interest, if any, on any renewable note;
- waive a default or event of default in the payment of principal or
premium, if any, or interest on or redemption payment with respect
to the renewable notes except a rescission of acceleration of the
renewable notes by the holders of at least a majority in aggregate
principal amount of the renewable notes and a waiver of the payment
default that resulted from such acceleration;
- make any renewable note payable in money other than that stated in
the renewable notes;
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- make any change in the provisions of the indenture relating to
waivers of past defaults or the rights of holders of renewable notes
to receive payments of principal of or interest on the renewable
notes;
- make any change to the subordination provisions of the indenture
that has a material adverse effect on holders of renewable notes;
- modify or eliminate holders' redemption rights; or
- make any change in the foregoing amendment and waiver provisions.
Notwithstanding the foregoing, without the consent of any holder of the
renewable notes, we or the trustee may amend or supplement the indenture or the
renewable notes:
- to cure any ambiguity, defect or inconsistency;
- to provide for assumption of our obligations to holders of the
renewable notes in the case of a merger or consolidation;
- to provide for additional certificates or certificated securities;
- to make any change that would provide any additional rights or
benefits to the holders of the renewable notes or that does not
materially adversely affect the legal rights under the indenture of
any such holder, including an increase in the aggregate dollar
amount of renewable notes which may be outstanding under the
indenture;
- to modify our policy regarding redemptions elected by a holder of
renewable notes and our policy regarding redemptions of the
renewable notes upon the death or total permanent disability of any
holder of the renewable notes, but such modifications shall not
materially adversely affect any then outstanding renewable notes; or
- to comply with requirements of the SEC in order to effect or
maintain the qualification of the indenture under the Trust
Indenture Act.
THE TRUSTEE. The indenture contains certain limitations on the rights of
the trustee, should it become one of our creditors, to obtain payment of claims
in certain cases, or to realize on certain property received in respect of any
claim as security or otherwise. The trustee will be permitted to engage in other
transactions with us.
Subject to certain exceptions, the holders of a majority in principal
amount of the then outstanding renewable notes will have the right to direct the
time, method and place of conducting any proceeding for exercising any remedy
available to the trustee. The indenture provides that in case an event of
default specified in the indenture shall occur and not be cured, the trustee
will be required, in the exercise of its power, to use the degree of care of a
reasonable person in the conduct of his own affairs. Subject to such provisions,
the trustee will be under no obligation to exercise any of its rights or powers
under the indenture at the request of any holder of renewable notes, unless the
holder shall have offered to the trustee security and indemnity satisfactory to
it against any loss, liability or expense.
REPORTS TO TRUSTEE. We will provide the trustee with quarterly reports
which shall contain the information reasonably requested by the trustee. These
quarterly reports will include information
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regarding the outstanding balance, interest credited, withdrawals made and
interest rate paid on each account related to each account we maintain during
the preceding quarterly period.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS.
No director, officer, employee, incorporator or stockholder of ours, shall have
any liability for any obligations of ours under the renewable notes, the
indenture or for any claim based on, in respect to, or by reason of, these
obligations or their creation. Each holder of the renewable notes waives and
releases these persons from any liability. The waiver and release are part of
the consideration for issuance of the renewable notes. We have been advised that
the waiver may not be effective to waive liabilities under the federal
securities laws and it is the view of the SEC that such a waiver is against
public policy.
SERVICE CHARGES. We reserve the right to assess service charges for
changing the registration of any renewable note to reflect a change in name of
the holder, or a transfer (whether by operation of law or otherwise) of a
renewable note by the holder to another person.
ADDITIONAL SECURITIES. We may offer from time to time additional classes
of securities with terms and conditions different from the renewable notes being
offered. We will amend or supplement this prospectus if and when we decide to
offer to the public any additional class of security under this prospectus.
VARIATIONS BY STATE. We reserve the right to offer different securities
and to vary the terms and conditions of the offer (including, but not limited
to, additional interest payments and service charges for all notes) depending
upon the state where the purchaser resides.
CERTAIN U.S. FEDERAL TAX CONSIDERATIONS
This summary is based on the Internal Revenue Code of 1986, or the "Code,"
regulations issued under the Code, judicial authority and administrative rulings
and practice, all of which are subject to change. Any such change may be applied
retroactively and may adversely affect the federal tax consequences described in
this prospectus. This summary addresses only tax consequences to investors that
purchase the renewable notes at initial issuance, and own the notes as capital
assets and not as part of a "straddle" or a "conversion transaction" for federal
income tax purposes, or as part of some other integrated investment. This
summary does not discuss all of the tax consequences that may be relevant to
particular investors, especially non-U.S. persons, or to investors subject to
special treatment under the federal income tax laws (such as insurance
companies, financial institutions, tax-exempt organizations, retirement plans,
regulated investment companies, securities dealers, expatriates or persons whose
functional currency for tax purposes is not the U.S. dollar). We will not seek a
ruling from the Internal Revenue Service, or the "IRS," with respect to any
matters discussed in this section, and we cannot assure you that the IRS will
not challenge one or more of the tax consequences described below. PERSONS
CONSIDERING THE PURCHASE OF THE NOTES SHOULD CONSULT THEIR OWN TAX ADVISORS
CONCERNING THE APPLICATION OF U.S. FEDERAL TAX LAWS TO THEIR PARTICULAR
SITUATIONS AS WELL AS ANY CONSEQUENCES OF THE PURCHASE, BENEFICIAL OWNERSHIP AND
DISPOSITION OF THE RENEWABLE NOTES ARISING UNDER THE LAWS OF ANY OTHER TAXING
JURISDICTION.
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FEDERAL INCOME TAX CONSEQUENCES TO U.S. HOLDERS
The following is a general discussion of certain U.S. federal income tax
consequences of the purchase, ownership and disposition of the renewable notes
by a holder that is a United States person, or a "U.S. Holder." For purposes of
this discussion, a U.S. Holder means:
- a citizen or resident of the United States;
- a corporation, partnership or other business entity created or
organized in or under the laws of the United States or any State or
political subdivision thereof or therein (including the District of
Columbia);
- an estate whose income is subject to U.S. federal income taxation
regardless of its source; or
- a trust if a court within the United States is able to exercise
primary supervision over its administration and one or more United
States persons have the authority to control all of its substantial
decisions, or certain electing trusts that were in existence on
August 19, 1996, and were treated as domestic trusts on that date.
An individual may, subject to certain exceptions, be deemed to be a resident of
the United States by reason of being present in the United States for at least
31 days in the calendar year and for an aggregate of at least 183 days during a
three-year period ending in the current calendar year (counting for such
purposes all of the days present in the current year, one-third of the days
present in the immediately preceding year and one-sixth of the days present in
the second preceding year.)
TREATMENT OF INTEREST
Interest paid on the renewable notes, to the extent treated as "qualified
stated interest," as defined below, will generally be taxable to a U.S. Holder
as ordinary income as the interest accrues or is paid in accordance with the
U.S. Holder's method of tax accounting).
NOTES ISSUED WITH OID
We will not issue the notes with original issue discount, or "OID." For
federal income tax purposes, OID is the excess of the stated redemption price at
maturity of a note over its issue price. However, OID is assumed to be zero if
such excess is less than the de minimis amount of 1/4 of 1% of the renewable
note's stated redemption price at maturity multiplied by the number of complete
years to maturity. The "issue price" of each renewable note, as used in this
summary, equals the first price at which a substantial amount of such renewable
note has been sold to the public, ignoring sales to bond houses, brokers, or
similar persons or organizations acting as underwriters, placement agents, or
wholesalers. The "stated redemption price at maturity" of a renewable note will
equal the sum of all payments required under the note other than payments of
"qualified stated interest." "Qualified stated interest" is stated interest
unconditionally payable in cash or property, other than debt instruments of the
issuer, at least annually during the entire term of the renewable note at a
single fixed rate or certain variable rates of interest and that takes into
account the interval between stated interest payments.
A. U.S. Holder of a renewable note issued with OID will be required to
include any qualified stated interest payments in income in accordance with the
holder's method of accounting. A U.S. Holder of such a renewable note that
matures more than one year from its date of issuance will be required to include
OID in income as it accrues in accordance with a constant yield method, before
the receipt of cash payments attributable to such income and regardless of that
holder's regular tax accounting method.
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Under the constant yield method, a holder of such a renewable note generally
will be required to include in income increasingly greater amounts of OID.
A "short-term OID note," a renewable note with a term of one year or less,
will be treated as having been issued with OID because none of the interest will
be treated as qualified stated interest. In general, a cash method U.S. Holder
of a short-term OID note is not required to accrue OID currently unless it
elects to do so. In general, an accrual method U.S. Holder of a short-term OID
note is required to include the OID in income currently as it accrues. Accrual
method U.S. Holders, and cash method U.S. Holders who elect to include OID in
income currently, must recognize such OID income on a straight-line basis unless
the holder elects to accrue the OID under a constant yield method. For cash
method U.S. Holders who do not include OID in income currently, any gain
realized on the sale, exchange or retirement of a short-term OID note will be
ordinary income to the extent of the accrued OID. In addition, such cash method
U.S. Holders will be required to defer deductions for certain interest paid on
indebtedness related to purchasing or carrying short-term OID notes until such
OID is included in such holder's income.
The renewable notes may be redeemed at our option or repaid at the
holder's option before maturity. Notes containing such feature may be subject to
rules that differ from the general rules discussed in this prospectus.
Purchasers of renewable notes should carefully examine the applicable pricing
supplement with respect to such features since the tax consequences with respect
to OID will depend on the particular terms of the note.
TREATMENT OF DISPOSITIONS OF RENEWABLE NOTES
Upon the sale, exchange, retirement or other taxable disposition of a
renewable note, a U.S. Holder generally will recognize gain or loss equal to the
difference between the amount received on such disposition and the U.S. Holder's
adjusted tax basis in the renewable note. For these purposes, the amount
received does not include any amount attributable to accrued interest on the
renewable note, which will be taxable as such unless previously taken into
account. A U.S. Holder's adjusted tax basis in a renewable note will be, in
general, the cost of the renewable note to the U.S. Holder, increased by the
amount of any OID previously included in income by the holder and reduced by any
payments that do not constitute qualified stated interest, such as principal
payments. Gain or loss realized on the sale, exchange or retirement of a
renewable note generally will be capital gain or loss, and will be long-term
capital gain or loss if, at the time of such sale, exchange or retirement, the
renewable note has been held for more than one year. Net long-term capital gain
recognized by a non-corporate U.S. Holder is generally subject to a maximum U.S.
federal rate of 20%.
FEDERAL TAX CONSEQUENCES TO NON-U.S. HOLDERS
The following is a general discussion of the U.S. federal income and
estate tax consequences of the purchase, beneficial ownership and disposition of
the notes by a holder that is not a United States person, or a "Non-U.S.
Holder." The tax consequences for holders that are not United States persons is
not addressed by this prospectus. Any such person should seek the advice of
competent tax counsel before purchasing any renewable notes. For purposes of the
following discussion, any interest income and any gain realized on the sale,
exchange or other disposition of the notes will be considered "U.S. trade or
business income" if such interest income or gain is (i) effectively connected
with the conduct of a trade or business in the United States, or (ii) in the
case of a treaty resident, attributable to a permanent establishment (or in the
case of an individual, to a fixed base) in the United States.
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U.S. INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING TAX
When required, we will report to the holders of the renewable notes and
the IRS amounts paid on or with respect to the renewable notes and the amount of
any tax withheld from such payments.
Certain non-corporate U.S. Holders may be subject to backup withholding at
a rate of 31% on payments made on or with respect to the notes. In general,
backup withholding will apply to a U.S. Holder only if the U.S. Holder:
- fails to furnish its Taxpayer Identification Number, or "TIN," which
for an individual would be his or her Social Security Number;
- furnishes an incorrect TIN;
- is notified by the IRS that it has failed to properly report
payments of interest and dividends; or
- under certain circumstances, fails to certify, under penalties of
perjury, that it has furnished a correct TIN and has not been
notified by the IRS that it is subject to backup withholding for
failure to report interest and dividend payments.
A U.S. Holder will be eligible for an exemption from withholding by providing a
properly completed IRS Form W-9 to us.
Backup withholding is not an additional tax and may be refunded or
credited against the holder's U.S. federal income tax liability, provided that
certain required information is furnished. The information reporting
requirements may apply regardless of whether withholding is required. Copies of
the information returns reporting such interest and withholding may be made
available to the tax authorities in foreign countries under the provisions of a
tax treaty or agreement.
THE FEDERAL TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL
INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A HOLDER'S PARTICULAR
SITUATION. HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE TAX
CONSEQUENCES TO THEM OF THE OWNERSHIP AND DISPOSITION OF THE RENEWABLE NOTES,
INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN AND OTHER TAX LAWS
AND THE POSSIBLE EFFECTS OF CHANGES IN FEDERAL OR OTHER TAX LAWS.
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SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below should be read in
conjunction with our consolidated financial statements and the notes thereto.
The selected consolidated statement of operations data with respect to the year
ended December 31, 1995 and the period from January 1, 1996 to October 8, 1996
and the selected consolidated balance sheet data at December 31, 1995 and at
October 8, 1996 are derived from the audited consolidated financial statements
of our predecessor. The consolidated statement of operations data with respect
to the years ended May 31, 1997, 1998, 1999, and 2000 and the consolidated
balance sheet data at May 31, 1997, 1998, 1999, and 2000 are derived from, and
are qualified by reference to, our audited consolidated financial statements.
The consolidated financial statements as of and for the years ended May 31,
1998, 1999 and 2000 were audited by Grant Thornton LLP, independent certified
public accountants, and the consolidated financial statements as of and for the
year ended May 31, 1997 were audited by Tanner & Co., independent auditors. We
derived our selected financial data as of November 30, 2000 and for the six
months ended November 30, 1999 and 2000 from our unaudited condensed,
consolidated financial statements included elsewhere in the prospectus; and this
financial data reflects all adjustments (consisting of only normal recurring
adjustments) necessary for a fair presentation of results for such periods. The
results for the six months ended November 30, 2000 are not necessarily
indicative of the results to be expected for the entire year. The following
financial information should be read in conjunction with our financial
statements appearing elsewhere in this prospectus and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" below.
PREDECESSOR(1) THE CREDIT STORE, INC.
--------------------------------- --------------------------------------------------------------------
FOR THE YEAR JANUARY 1,
ENDED 1996 TO FOR THE YEAR ENDED MAY 31
DECEMBER 31 OCTOBER 8, --------------------------------------------------------------------
1995 1996 1997 1998 1999 2000
---------- ----------- ------------ ------------ ------------ ------------
CONSOLIDATED
STATEMENT
OF OPERATIONS DATA:
Income from
receivables* $ 975,108 $ 12,089,724 $ 28,747,368 $ 31,102,808
Securitization income
and asset sales -- -- 11,851,080 12,599,265
Servicing fees and
other income $6,528,503 $ 2,078,506 1,601,228 1,292,596 1,564,356 2,684,554
---------- ----------- ------------ ------------ ------------ ------------
Total revenue 6,258,503 2,078,506 2,576,336 13,382,320 42,162,804 46,386,627
Provision for losses -- -- 1,494,001 6,483,736 4,607,081 5,680,975
---------- ----------- ------------ ------------ ------------ ------------
Net revenue 6,258,503 2,078,506 1,082,335 6,898,584 37,555,723 40,705,652
Net income (loss) 2,727,711 (1,512,488) (14,405,555) (29,445,031) 3,875,680 3,072,195
Dividends on
preferred stock* (7,397) (399,996) (1,799,999) (2,000,000)
---------- ----------- ------------ ------------ ------------ ------------
Net income (loss)
applicable to
common shareholders $2,727,711 $(1,512,488) $(14,412,952) $(29,845,027) $ 2,075,681 $ 1,072,195
========== =========== ============ ============ ============ ============
Net income (loss) per
share, basic $ 0.55 $ (0.30) $ (0.56) $ (0.90) $ 0.06 $ 0.03
========== =========== ============ ============ ============ ============
Net income (loss) per
share, diluted $ 0.55 $ (0.30) $ (0.56) $ (0.90) $ 0.06 $ 0.03
========== =========== ============ ============ ============ ============
THE CREDIT STORE, INC.
-------------------------------
FOR THE
SIX MONTHS
ENDED NOVEMBER 30
-------------------------------
1999 2000
------------ ------------
CONSOLIDATED
STATEMENT
OF OPERATIONS DATA:
Income from
receivables* $ 15,171,683 $ 20,436,636
Securitization income
and asset sales 6,336,221 568,382
Servicing fees and
other income 1,346,061 1,782,581
------------ ------------
Total revenue 22,853,965 22,787,599
Provision for losses 3,737,867 5,605,969
------------ ------------
Net revenue 19,116,098 17,181,630
Net income (loss) 526,542 (4,474,205)
Dividends on
preferred stock* (1,000,000) (1,000,000)
------------ ------------
Net income (loss)
applicable to
common shareholders $ (473,458) $ (5,474,205)
============ ============
Net income (loss) per
share, basic $ (0.01) $ (0.16)
============ ============
Net income (loss) per
share, diluted $ (0.01) $ (0.16)
============ ============
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PREDECESSOR(1) THE CREDIT STORE, INC.
------------------------- --------------------------------------------------------------------------------
FOR THE
FOR THE YEAR JANUARY 1, SIX MONTHS
ENDED 1996 TO FOR THE YEAR ENDED MAY 31 ENDED
DECEMBER 31 OCTOBER 8, --------------------------------------------------------------- NOVEMBER, 30,
1995 1996 1997 1998 1999 2000 2000
------------ ---------- -------------- ------------- ------------ -------------- ------------
CONSOLIDATED
BALANCE SHEET DATA:
Cash and cash
equivalents and
restricted cash $279,357 $ 58,162 $ 2,685,581 $ 8,205,071 $ 4,283,930 $ 2,448,879 $ 3,670,869
Investments in
receivable
portfolios, net* 10,760,362 18,592,485 21,648,100 33,892,290 38,735,026
Total assets 524,579 2,884,860 24,743,871 39,723,418 45,780,956 64,388,192 63,554,931
Notes payable -- 1,158,336 428,973 5,902,041 6,086,766 23,609,326 22,789,616
Subordinated notes
and accrued
interest
payable-related
party -- 880,000 10,446,043 31,807,322 19,246,595 19,139,028 19,486,903
Total liabilities 279,960 4,007,145 18,118,396 47,366,528 33,692,311 50,013,724 52,529,904
Total stockholders'
equity (deficit) 244,619 (1,122,285) 6,625,475 (7,643,112) 12,088,645 14,374,468 11,025,027
SELECTED CONSOLIDATED
OPERATING DATA:
Outstanding balance
of non-performing
debt acquired
during the period* $1,067,579,343 $ 890,634,206 $891,904,454 $1,771,707,748 $654,346,058
Credit card
receivables owned
and managed* 35,709,395 84,830,552 89,149,715 96,127,819 116,876,725
Number of accounts
owned and managed* 26,803 84,351 94,278 76,732 87,778
Total employees, end
of period* 233 292 305 305 360
- ------------
* Information not applicable for predecessor company.
(1) The information for the fiscal year ended December 31, 1995 and for the
period from January 1, 1996 to October 8, 1996 relates to Service One
International Corporation, our predecessor. See "Business - General Development
of Business".
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read in connection with our consolidated financial
statements and notes thereto appearing elsewhere herein. The following
discussion contains certain forward-looking statements that involve risk and
uncertainties. Our actual results could differ materially from those discussed
herein. Factors that could cause or contribute to such differences include, but
are not limited to:
- risks and uncertainties related to the need for additional funds,
and
- the rapid growth of the operations and the ability of us to operate
profitably after the initial growth period is completed.
For a more extensive discussion of such risks and uncertainties, see "Risk
Factors" above.
OVERVIEW
The Credit Store, Inc. is a technology based, financial services company
that provides credit card products to consumers who may otherwise fail to
qualify for a traditional unsecured bank credit card. We reach these consumers
by acquiring portfolios of non-performing consumer receivables and offering a
new credit card to those consumers who agree to pay all or a portion of the
outstanding amount due on their debt and who meet our underwriting guidelines.
The new card is issued with an initial balance and credit line equal to the
agreed repayment amount. After the consumers have made a certain number of
on-time payments on their outstanding credit card balance, we seek to finance,
sell, or securitize the credit card receivables generated by this business
strategy. We offer other forms of settlement to those consumers who do not
accept the credit card offer.
INVESTMENTS IN RECEIVABLE PORTFOLIOS ACCOUNTING.
Effective June 1, 2000, we account for our investments in receivable
portfolios on the accrual basis of accounting in accordance with the provisions
of the AICPA's Practice Bulletin 6, "Amortization of Discounts on Certain
Acquired Loans." Prior to June 1, 2000, we used the cost recovery method of
accounting. Practice Bulletin 6 requires that the accrual basis of accounting be
used at the time the amount and timing of portfolio projected cash flows can be
reasonably estimated and collection is probable. We have established projection
models from historical portfolio data that we believe provides appropriate
information to reasonably estimate future cash flows.
Under the accrual method of accounting, static pools are typically
established for each portfolio acquired. Once a static pool is established, the
receivables are permanently assigned to the pool. We account for each static
pool as a unit for the economic life of the pool for recognition of income from
receivable portfolios, for collections applied to principal of receivable
portfolios and for provision for loss or impairment. Income from receivable
portfolios is accrued based on the effective interest rate determined for each
pool applied to each pool's carrying value as of June 1, 2000 or its cost if
purchased after June 1, 2000, adjusted for unpaid accrued income and principal
paydowns. The effective interest rate is the internal rate of return determined
based on the timing and amounts of actual cash received since the date of
adoption or since inception if purchased after June 1, 2000 and anticipated
future cash flow projections for each pool.
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We monitor impairment of receivable portfolios based on discounted
projected future cash flows of each portfolio compared to each portfolio's
carrying amount. The receivable portfolios are evaluated for impairment
periodically based on current market and cash flow assumptions. Provisions for
losses are charged to earnings when it is determined that the investment in a
receivable portfolio is greater than the present value of expected future cash
flows. No such provision for losses was recorded in the three or six months
ended November 30, 2000.
Under the cost recovery method, we record the purchase price of a
portfolio and any costs directly related to the purchase as an investment in
non-performing consumer debt on the balance sheet. We apply cash flows related
to the acquired portfolio as a reduction of the investment on the balance sheet.
Once the cost of a portfolio has been recovered, the remaining cash flow is
recorded as excess of revenue over cost recovered. The application of cost
recovery can have a material impact on revenue and net income during periods of
increasing or decreasing portfolio acquisitions. We made significant investments
in portfolio acquisitions during fiscal year 1998 totaling $15.6 million, and
the application of cost of recovery resulted in decreased revenue during the
period. The decreases occurred because cash flows from an acquired portfolio are
applied first to reduce the investment in that portfolio to zero, which takes
between 9 and 13 months on the average, depending upon the performance of the
acquired portfolio. During the same period, we expensed, as incurred, all costs
to market and service the portfolios which, when, combined with the effects of
cost recovery on revenue, contributed to the large losses experienced in fiscal
1998. During fiscal 1999 and 2000, the majority of the portfolios acquired
during the two preceding years experienced full cost recovery, leading to a
significant increase in revenue in excess of cost recovered. In addition,
portions of our performing credit card receivables had matured to the point
where we were able to sell and securitize certain portfolios at prices well in
excess of the cost bases of those receivables, generating gains on the sale of
those portfolios. The above factors contributed to the net income of $3.1
million in fiscal 2000 and $3.9 million in fiscal 1999 and a net loss of $29.4
million in fiscal year 1998.
RESULTS OF OPERATIONS
SIX MONTHS ENDED NOVEMBER 30, 2000 COMPARED TO SIX MONTHS ENDED NOVEMBER
30, 1999:
REVENUES. Net revenue for the six months ended November 30, 2000 was
$17.18 million, a 10.1% decrease from the $19.12 million recorded during the six
months ended November 30, 1999. Core revenue (income from receivables, servicing
fees and other income) increased 34.5% during the first six months of fiscal
year 2001 as compared to the first six months of fiscal year 2000, and was
impacted positively by the adoption of accrual accounting for receivable
portfolios. Gains from sales of portfolios and retained interests in securitized
receivables decreased 91.0% from $6.34 million in the six months ended November
30, 1999 to $0.57 million in the six months ended November 30, 2000 due to the
sale of three special purpose entities in November 1999 with no similar event
during the first six months of fiscal year 2001. The provision for losses
increased 50.0% from $3.74 million in the six months ended November 30, 1999 to
$5.61 million in the six months ended November 30, 2000 and increased as a
percentage of core revenue from 22.6% in the six months ended November 30, 1999
to 25.2% in the six months ended November 30, 2000.
During the first quarter of fiscal 2001, we adopted the accrual method of
accounting for our investment in receivable portfolios. Prior to June 1, 2000,
we used the cost recovery method of accounting. Under cost recovery all cash
receipts relating to individual portfolios of nonperforming consumer debt are
applied first to recover the cost of the portfolios, prior to recognizing any
revenue. For the first six months of fiscal 2001, the adoption of the accrual
method of accounting resulted in an increase of $8.50 million in income from
credit card receivables, and an increase of $3.00 million in provision for
losses on credit card receivables.
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EXPENSES. Total operating expenses for the six months ended November 30,
2000 were $18.85 million, a 24.3% increase from $15.16 million in the six months
ended November 30, 1999. Increased expenses were largely related to a 169%
increase in new credit card originations from $19.45 million for the six months
ended November 30, 1999 to $52.26 million for the six months ended November 30,
2000. Salaries and employee benefits increased 4.6% from $6.62 million in the
six months ended November 30, 1999 to $6.92 million in the six months ended
November 30, 2000 due to an increase in the number of employees from 314 to 360,
and decreased as a percentage of core revenue from 40.1% in the six months ended
November 30, 1999 to 31.2% in the six months ended November 30, 2000.
Professional and financing fees increased 41.1% from $1.87 million in the six
months ended November 30, 1999 to $2.63 million in the six months ended November
30, 2000 and as a percentage of core revenue remained fairly constant at 11.3%
in the six months ended November 30, 1999 compared to 11.9% in the six months
ended November 30, 2000. Credit card servicing increased 32.6% from $3.19
million in the six months ended November 30, 1999 to $4.23 million in the six
months ended November 30, 2000 and as a percentage of core revenue remained
fairly constant at 19.3% in the six months ended November 30, 1999 compared to
19.0% in the six months ended November 30, 2000. Other expenses increased 100.5%
from $1.77 million in the six months ended November 30, 1999 to $3.54 million in
the six months ended November 30, 2000 due to royalties paid on a related
increase in the amount of credit card receivables eligible under two mutual
business development agreements with third parties. The mutual business
development agreements are currently in dispute. See "Certain Relationships and
Related Transactions." Other expenses increased as a percent of core revenues
from 10.7% in the six months ended November 30, 1999 to 15.9% in the six months
ended November 30, 2000.
INTEREST EXPENSE. Interest expense increased 30.9% from $2.14 million in
the six months ended November 30, 1999 to $2.80 million in the six months ended
November 30, 2000, based on a higher average amount of debt outstanding. As a
percentage of core revenue, interest expense decreased from 13.0% in the six
months ended November 30, 1999 to 12.6% in the six months ended November 30,
2000.
INCOME TAX EXPENSE. We recorded a $1.29 million tax expense during the six
months ended November 30, 1999 as a result of the gain from sale of the retained
interests in our securitizations. No income tax benefits related to the net loss
were recorded in the six months ended November 30, 2000 due to the uncertainty
as to the recognition of these future tax benefits.
NET INCOME (LOSS). Net income was $0.53 million for the six months ended
November 30, 1999 compared to a net loss of $4.47 million in the six months
ended November 30, 2000. After providing for preferred dividends of $1.0 million
in each six month period, the net loss applicable to common shareholders was
($0.47) million, or ($.01) per common share, in the first six months of fiscal
year 2000, compared to a net loss of ($5.47) million, or ($.16) per common
share, in the first six months of fiscal year 2001.
FISCAL YEAR ENDED MAY 31, 2000 COMPARED TO FISCAL YEAR ENDED MAY 31, 1999:
REVENUES. Total revenue for the fiscal year ended May 31, 2000 was $46.4
million a 10% increase from $42.2 million during the year ended May 31, 1999.
Income from credit card receivables increased 51% from $6.4 million to $9.7
million due to a higher amount of funded credit card receivables during the
period. Income from credit card receivables represents interest and fees on new
advances or purchases made by holders of our credit cards on an accrual basis.
Revenue in excess of costs recovered decreased 1% from $22.3 million to $21.4
million. Securitization income and asset sales increased 6% from $11.9 million
to $12.6 million primarily due to entrance into the re- sale market of
nonperforming consumer accounts. Securitization income and asset sales
represents the excess of cash proceeds over the cost basis in those assets.
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During fiscal year 2000, we sold our retained interests in three special
purpose entities, completed a securitization of $14.3 million in receivables,
sold $1.4 million of receivables to an unaffiliated bank, and sold
non-performing assets in the market. Servicing fees and other income increased
72% from $1.6 million to $2.7 million due to the increased number of accounts
serviced. Core revenues (revenues other than securitization income and asset
sales) increased 11% from $30.3 million in fiscal year 1999 to $33.8 million in
fiscal year 2000 due to higher amount of funded credit card receivables and
increased number of accounts serviced. The provision for losses increased 23%
from $4.6 million to $5.7 million based on increasing volume of new charges
funded. The above combined to produce net revenue of $40.6 million for the
fiscal year ended May 31, 2000, an 8% increase over $37.6 million recorded for
the year ended May 31, 1999.
EXPENSES. Total operating expenses increased 7% from $31.6 million in
fiscal year 1999 to $33.7 million in fiscal year 2000 but decreased as a
percentage of core revenues from 104% to 100%. Salaries and employee benefits
increased 8% to $13.5 million from $12.5 million based on an average higher
number of full time personnel but decreased as percentage of core revenues from
41% to 40%. Professional fees decreased 4% from $2.7 million in fiscal year 1999
to $2.6 million in fiscal year 2000. Depreciation and amortization decreased 5%
from $2.6 million in fiscal year 1999 to $2.5 million in fiscal year 2000. Third
party service fees decreased 2% from $4.7 million in fiscal year 1999 to $4.6
million in fiscal year 2000 and decreased as a percentage of core revenues from
16% to 14% as our cost per account declined. Communication expense increased 18%
from $2.3 million in fiscal year 1999 to $2.8 million in fiscal year 2000 in
line with increased portfolio acquisition activity. Royalty expense, pursuant to
two mutual business development agreements, increased 12% from $1.5 million in
fiscal year 1999 to $1.7 million in fiscal year 2000. The royalty expense is
accrued when new credit card accounts make their third payment according to the
terms of the cardholder agreement or when cash from non-card accounts is
collected. Increased royalty expense is due to a higher percentage of cards
reaching a third payment due to increased portfolio acquisition activity in
fiscal year 2000. The mutual business development agreements are currently in
dispute. See "Certain Relationships and Related Transactions." Financing fees
increased 416% from $0.2 million to $1.1 million reflecting our ability to
obtain two additional financing sources in fiscal year 2000. Interest expense
increased 15% from $4.0 million in fiscal year 1999 to $4.6 million in fiscal
year 2000 based on a higher average amount of debt outstanding resulting from
increased portfolio acquisition activity.
INCOME TAX BENEFIT. Revenues and expenses combined for income before
income taxes of $2.0 million in fiscal year 2000 compared to income before
income taxes of $1.9 million in fiscal year 1999. We recognized a tax benefit of
$1.0 million in fiscal year 2000 resulting in net income of $3.1 million
compared to a tax benefit of $2.0 million in fiscal year 1999 resulting in net
income of $3.9 million. The tax benefit in fiscal year 2000 consists of the
recognition of $1.0 million of tax expenses related to the reclassification of
comprehensive income and the reduction of $2.0 million of a valuation allowance
related to net operating loss carryforward. We have reviewed the adequacy of our
valuation allowance and determined that based on fiscal year 2000 and 1999
pretax income and forecasted future earnings it was more likely than not that a
portion of its net operating loss carryforward would be utilized. We will
continue to evaluate the remaining valuation allowance and will recognize tax
benefits as factors indicate that it is more likely than not that future tax
benefits will be realized.
NET INCOME (LOSS). Dividends on preferred stock have accumulated but have
not been declared and are not yet payable. We, however, treat the dividends as
declared and payable for the purpose of calculating net income applicable to
common shareholders and earnings per share. Preferred dividends for fiscal year
2000 increased 11% from $1.8 million in fiscal year 1999 to $2.0 million. After
the effect of preferred dividends, net income applicable to common shareholders
in fiscal year 2000 was $1.1 million compared to net income applicable to common
shareholders of $2.1 million for fiscal year 1999.
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FISCAL YEAR ENDED MAY 31, 1999 COMPARED TO FISCAL YEAR ENDED MAY 31, 1998:
REVENUES. During the fiscal year ended May 31, 1999, total revenue
increased from $13.4 million to $42.2 million, a 215%. The increase was
primarily due to a combination of increased revenues from a maturing credit card
portfolio, portfolio securitizations and portfolio sales. Income from credit
card receivables increased 63% from $4.0 million to $6.4 million due to an
increase in the weighted average credit card receivables funded. Revenue in
excess of costs recovered increased 174% from $8.1 million to $22.3 million due
to increased cash flow related to acquired portfolios and the effect of fully
recovering the acquisition costs on the majority of the portfolios acquired
during the two previous fiscal years. Our performing credit card receivables had
matured to the stage where we achieved the sale or securitization of
approximately $27.4 million in receivables. Our securitization income and asset
sales resulted in an $11.9 million gain which represents the excess of cash
proceeds over the cost basis in those assets. There were no such sales in the
previous fiscal year. Servicing fees and other income increased 21% from $1.3
million to $1.6 million due to a higher average number of accounts under
management subject to a servicing fee. Core revenues, that is all revenues other
than gains on sales, increased 127% to $30.3 million, in fiscal year 1999 from
$13.4 million in fiscal year 1998 due to the effect of fully recovering the
acquisition costs of the majority of portfolios in the two previous years
through the cost recovery methodology of applying payments received. The
provision for losses decreased 29% from $6.5 million to $4.6 million based on
the experience of a more matured portfolio. The above combined to produce net
revenue of $37.6 million for the fiscal year ended May 31, 1999, a 452% increase
over the $6.8 million recorded for the year ended May 31, 1998.
EXPENSES. Salaries and employee benefits decreased 6% from $13.3 million
to $12.5 million based on an average lower number of full-time personnel.
Professional fees decreased 36% from $4.2 million in fiscal year 1998 to $2.7
million in fiscal year 1999 as we moved beyond our startup period requiring
fewer outside professional services. Depreciation and amortization decreased 19%
from $3.2 million in fiscal year 1998 to $2.6 million in fiscal year 1999.
Fiscal year 1998 included an $0.8 million writedown of existing software
systems. Third party card service fees increased 36% from $3.5 million in fiscal
year 1998 to $4.7 million in fiscal year 1999, in line with the increase in the
average number of accounts under management. Communication expense increased 12%
from $2.0 million in fiscal year 1998 to $2.3 million in fiscal year 1999
largely in line with increased marketing campaigns on existing portfolios of
non-performing debt. Royalty expense, pursuant to two mutual business
development agreements, increased 644% from $0.2 million in fiscal year 1998 to
$1.5 million in fiscal year 1999. The royalty expense increased because a higher
percentage of cards reached a third payment as a result of to a more thorough
sales process and better account retention in the early months of a new account.
The mutual business development agreements are currently in dispute. See
"Certain Relationships and Related Transactions." Interest expense decreased 15%
from $4.8 million in fiscal year 1998 to $4.0 million in fiscal year 1999 for
two reasons. We had a lower average amount of debt outstanding due to the
conversion of $10.0 million of subordinated debt to preferred stock in May 1998
and the conversion of $10.0 million of subordinated debt in August 1998. Second,
we benefited from a reduction in the interest rate on senior debt.
INCOME TAX BENEFIT. Revenues and expenses combined for income before
income taxes of $1.9 million in fiscal year 1999 compared to a loss before
income taxes of $29.4 million in fiscal year 1998. We recognized a tax benefit
of $2.0 million for the year ended May 31, 1999 due to the reduction of a
valuation allowance related to net operating loss carryforwards. We did not
recognize a tax benefit for the year ended May 31, 1998.
NET INCOME (LOSS). Dividends on preferred stock have accumulated but have
not been declared and are not yet payable. We, however, treat the dividends as
declared and payable for the purpose of calculating net income applicable to
common shareholders and earnings per share. Preferred dividends for fiscal year
1999 increased 350% from $0.4 million in fiscal year 1998 to $1.8 million due to
the previously discussed conversion of debt to Series D and E Preferred Stock.
After the effect of
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preferred dividends, net income applicable to common shareholders in fiscal year
1999 was $2.1 million compared to a net loss applicable to common shareholders
of $29.8 million for fiscal year 1998.
LIQUIDITY AND CAPITAL RESOURCES
We seek to maintain an adequate level of liquidity through active
management of assets and liabilities, through sales or securitizations of credit
card receivables, and through debt and equity financing. Because the
characteristics of our assets and liabilities change, liquidity management is a
dynamic process affected significantly by the maturity of our assets and the
seasonality of the credit card business. We anticipate that we will need
additional working capital to accommodate anticipated increases in credit card
receivables and to meet other operating expenses. We believe that we will have
sufficient sources of liquidity to meet these funding needs.
At November 30, 2000, we had $2.4 million of cash and cash equivalents,
compared to $8.2 million at May 31, 1998, $4.2 million at May 31, 1999 and $2.4
million at May 31, 2000. We maintain restricted cash reserves at two banks to
facilitate the funding of new charges and advances on our customer's credit
cards. These restricted balances were $1.0 million at May 31, 1998, $0.8 million
at May 31, 1999, $1.0 million at May 31, 2000, and $1.3 million at November 30,
2000.
A significant source of liquidity for us has been the sale and
securitization of credit card receivables. During the fiscal year ended May 31,
2000, we sold our retained interest in three special purpose entities to the
senior beneficial interest holder for approximately $8.6 million in cash,
realizing a pretax gain of approximately $6.5 million. In May 2000, we completed
a $12.1 million securitization of seasoned credit card receivables which had a
principal balance of approximately $14.2 million with an unconsolidated
wholly-owned qualifying special purpose entity. The qualifying special purpose
entity provided $10.0 million for the purchase and the remaining $2.1 million of
the purchase price was recorded by us as retained interest. We recognized a
pretax gain of approximately $3.8 million.
During the fiscal year ended May 31, 1999, we sold approximately $7.0
million in face amount of receivables to an unaffiliated bank for $5.0 million
and raised approximately $13.0 million from three securitizations of credit card
receivables totaling $20.4 million. We intend to securitize receivables in the
capital markets and sell receivables to unaffiliated credit card banks in the
ordinary course of business.
We also maintain a senior secured revolving credit line with Coast
Business Credit, a division of Southern Pacific Bank. We established the credit
line in April 1998 for $5.0 million and it subsequently increased to $10.0
million in June 1999, and to $15.0 million in December 1999. The line of credit
expires in July 2001 and we secured it by substantially all of our assets.
Borrowings under the credit line are based on a formula, which is dependent
primarily upon the performance and maturing of our credit card receivables.
There was $11.9 million outstanding under the credit line at November 30, 2000.
We have also received secured financing from a related party, J.L.B. of
Nevada, Inc., which is subordinated to the senior secured revolving credit line.
In August 1998, we converted $10.0 million of this debt to Series E preferred
stock. The principal amount outstanding on these notes totaled $17.3 million and
accrued but unpaid interest totaled $2.2 million at November 30, 2000.
On September 20, 1999, we entered into a repurchase agreement with Bank of
Hoven. Under the agreement, the bank purchased credit card receivables from us.
The initial agreement had a purchase price of $3.0 million which was increased
to $6.0 million in March 2000. The agreement was replaced by a new repurchase
agreement for $8.0 million in December 2000. For accounting purposes, we treat
the repurchase agreement as a financing transaction.
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In October 1999, through a bankruptcy remote special purpose entity, we
established a $17.5 million secured revolving credit line with General Electric
Capital Corporation to finance the acquisition of non-performing consumer debt
portfolios, which credit line expires in August 2002. There was $1.6 million
outstanding under the credit line at November 30, 2000 with $0.44 million
available under the borrowing base for future borrowings. The transfer of
receivables to this special purpose entity by us does not qualify for sale
treatment under SFAS 140. The special purpose entity is fully consolidated with
our financial results.
During the year ended May 31, 2000, we established a new wholly-owned
qualified special purpose entity, TCS Funding IV, Inc. ("TCS IV"), for the
purpose of purchasing performing credit card receivables from us. TCS IV entered
into a $40.0 million credit facility with a lending institution to finance the
purchase of credit card receivables. The initial $12.1 million sale of credit
card receivables to the special purpose entity included receivables with a
principal balance of approximately $14.2 million. TCS IV provided $10.0 million
for the purchase and the remaining $2.1 million of the purchase price was
recorded by us as retained interest. Future borrowings under the facility are
subject to the lender's discretion and a number of other conditions.
The TCS IV credit facility requires interest payments only during the
first 18 months and allows for multiple advances during this period up to $40.0
million. Borrowings in excess of $10.0 million are governed by a borrowing base
and are contingent upon the senior beneficial interests receiving a minimum BBB-
rating from a nationally recognized rating agency. The credit facility advances
70% of the receivables balance, of which 5% must be deposited into a reserve
account. We are in the process of attaining a rating on behalf of TCS IV. The
terms of the credit facility require that all credit cards receivables purchased
by TCS IV must be current with a minimum of eight payments made on each account
and must meet certain other eligibility requirements.
During the first 18 months of the credit facility, after new charges are
funded and fees and interest are paid, excess cash collections can be used by
the special purpose entity to purchase additional accounts from us or pay down
the senior beneficial interest. Following the first 18 months, all cash
collections relating to the senior debt interest in the receivables are used to
repay principal, after the payment-related servicing fees and interest are made.
All new charges on the sold accounts are either sold to the special purpose
entity or contributed in exchange for a retained interest until such time as the
senior debt interest is paid down. While the senior debt interest is in place,
there are restrictions on payments that can be made by us to certain related
parties.
During October 2000, we established a new wholly-owned qualified special
purpose entity, Credit Store Services, Inc. ("CSSI"), for the purpose of
purchasing non-performing consumer debt portfolios from the Company.
Non-performing consumer debt portfolio sales to CSSI are equal to the Company's
book value. CSSI entered into a $25.0 million credit facility with a lending
institution to finance a portion of non-performing consumer debt portfolio
acquisitions at the lender's discretion, which facility expires in October 2003.
As of November 30, 2000, the outstanding balance under CSSI's credit facility
was $1.0 million, with $23.96 million available for future borrowings at the
lender's discretion. The terms of the credit facility also provide that a
percentage of the future cash flow of the purchased accounts be paid to the
lender after the payment of principal and interest for amounts borrowed.
CAPITAL EXPENDITURES AND PORTFOLIO ACQUISITIONS
During the first six months of fiscal year 2001, we invested $3.5 million
to acquire portfolios of non-performing consumer debt, a decrease of 60% from
the $8.5 million invested in the first six months of fiscal year 2000. During
fiscal year 2000, we invested $13.8 million to acquire portfolios of
non-performing consumer debt, an increase of 60% over the $8.6 million invested
in fiscal year 1999, which was a 45% decrease from the $15.6 million invested in
fiscal year 1998. The decrease in fiscal year 1999
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was due in part to a shortage of available financing for the industry in general
and a shortage of available portfolios for purchase by us that met our
requirements and were available for acceptable prices. During fiscal year 2000
we also invested $4.1 million to acquire a portfolio of fully performing credit
card receivables, at a discount.
We invested $1.2 million in property and equipment during the first six
months of fiscal year 2001 compared to $0.9 million during fiscal year 2000,
$1.1 million in fiscal year 1999, and $4.2 million in fiscal year 1998. A large
portion of the hardware commitments to build our business platform was made in
fiscal year 1998.
We plan to make continued investments in technology and non-performing
portfolios, the amount of which will depend on the amount of financing and new
capital available for such investments. We believe that our asset securitization
programs, together with the revolving credit facility, long term debt issuance,
equity issuance, and cash flow from operations, will provide adequate liquidity
to us for meeting anticipated cash needs, although no assurance can be given to
that effect.
INFLATION
We believe that inflation has not had a material impact on our results of
operations for the six months ended November 30, 2000 or for the fiscal years
ended May 31, 1998, 1999 and 2000.
MARKET RISK
Market risk is the risk of loss from adverse changes in market prices and
rates. Our principal market risk is due to changes in interest rates. These
changes affect us directly in our lending and borrowing activities, as well as
indirectly as interest rates may impact the payment performance of our credit
card holders.
To manage our direct risk to market interest rates, our management
actively monitors the interest rates and the interest sensitive components of
our balance sheet to minimize the impact changes in interest rates have on the
fair value of assets, net income and cash flow. Our management seeks to minimize
the impact of changes in interest rates on us primarily by matching asset and
liability repricings.
Our credit card receivables earn interest at a fixed annual percentage
rate. Our fixed annual percentage rate credit card receivables have no stated
maturity or repricing period. However, we may reprice our credit card
receivables upon providing the required prior notice to the customer, which is
generally no more than 60 days. The interest rates on our liabilities are
generally indexed to the prime rate. These characteristics of our receivables
and liabilities expose us to repricing risk, which results from differences
between the timing of rate changes and the timing of cash flows. These
differences could impact net interest income if liabilities reprice more often
than assets. The principal objective of our asset/liability risk management
activities is to monitor and control our exposure to adverse effects resulting
from movements of interest rates over time. We have not entered into derivative
transactions to hedge repricing risk.
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BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
We are a technology based, financial services company that provides credit
card products to consumers who may otherwise fail to qualify for a traditional
unsecured bank credit card. We reach these consumers by acquiring portfolios of
non-performing consumer receivables and offering a new credit card to those
consumers who agree to pay all or a portion of the outstanding amount due on
their debt and who meet our underwriting guidelines. The new card is issued with
an initial balance and credit line equal to the agreed repayment amount. After
the consumers have made a certain number of on-time payments on their
outstanding credit card balance, we seek to sell or securitize the credit card
receivables generated by this business strategy. We offer other forms of
settlement to those consumers who do not accept the credit card offer.
We were incorporated in 1972 in Utah as Valley West Development
Corporation, changed our corporate domicile to Delaware in 1995, and changed our
name to Credit Store, Inc. on October 8, 1996. Prior to October 8, 1996, we
discontinued operations of our prior line of business, which was unrelated to
our current operations. On December 4, 1996, we acquired from Taxter One LLC all
the capital stock of Service One Holdings, Inc. At the time of the acquisition,
Service One Holdings' sole asset was the capital stock of Service One
International Corporation, which had been engaged since January 1996 in the
business of acquiring non-performing consumer debt portfolios, and the marketing
and servicing of credit cards generated from these portfolios. From 1982 through
December 1995, Service One International Corporation had been a marketer and
servicer of secured credit cards for a South Dakota bank under a contractual
arrangement which expired in December 1995. Following the acquisition of Service
One Holdings, we engaged directly, and through Service One International
Corporation and its affiliates, in the acquisition of non-performing consumer
debt and the marketing and servicing of credit cards generated from these
portfolios. In February 1998, Service One Holdings and Credit Store Mortgage,
Inc., our wholly-owned subsidiary, were each merged into us. In March 1998,
Service One International Corporation was merged into us and our name was
changed to The Credit Store, Inc.
NARRATIVE DESCRIPTION OF BUSINESS
We are primarily in the business of providing credit card products to
consumers who may otherwise fail to qualify for a traditional unsecured bank
credit card. We focus on consumers who have previously defaulted on a debt and
reach these consumers by acquiring their defaulted debt. We acquire these
defaulted accounts in large portfolios typically from the original lender for a
nominal percentage of the face amount of the debt, ranging from 0.50% to 3.00%.
An increasing amount of our acquisitions come from our cash for conversions
("CFC") program, through which we pay the debt owner an agreed upon price for
each account we convert to a credit card. Under a CFC, we typically pay a higher
price per account, but we only pay for the accounts we convert to a credit card.
Through our direct mail and telemarketing operations, we locate and offer a new
credit card to those consumers who agree to pay all or a portion of the
outstanding amount due on their debt and who meet our underwriting guidelines.
The new card is issued with an initial balance and credit line equal to the
agreed repayment amount. We currently issue our credit cards through two issuing
banks, The Bank of Hoven and First National Bank in Brookings. Our objective is
to ultimately sell and/or securitize these receivables at a price in excess of
our investment in the receivables. To date, we have considered an account
available to sell or securitize when the consumer has made eight or more on-time
payments on the consumer's outstanding credit card balance.
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Under our marketing approach, consumers are offered an opportunity to:
- Settle their debt, typically at a discount,
- Transfer the settled amount to a newly issued unsecured
MasterCard(R) or Visa(R) credit card; and
- Establish a positive credit history on their newly issued card by
making timely and consistent payments.
After making principal payments on the transferred balance, the consumer
can begin using the credit card for new purchases or cash advances and may be
granted increased credit limits over time based on their payment performance.
Our credit card offer is attractive to those consumers who, given the
non-performing status of their debt, are typically receiving few or no
solicitations from traditional credit card companies. Many of these consumers:
- Cannot easily obtain an unsecured credit card,
- May benefit by having the opportunity to establish a positive
payment history on their newly issued credit card, or
- Have experienced the negative aspects of not having access to the
credit card payment system for travel and the daily purchase of
goods and services.
Our approach differs from traditional credit card companies that compete
for new customers through mass marketing and direct mail campaigns on the basis
of interest rates, fees, and services offered.
OFFICE LOCATION
Our principal executive offices are located at 3401 North Louise Avenue,
Sioux Falls, South Dakota 57107 and our telephone number is 800-240-1855.
INDUSTRY OVERVIEW
We operate in the consumer finance industry, competing with issuers of
revolving credit products and other buyers of non-performing consumer debt.
The United States Federal Reserve reported that American consumers owed an
aggregate of $1.53 trillion of debt at the end of November 2000, exclusive of
home mortgages, and that the size of the revolving credit market in the United
States was in excess of $664 billion as of the end of November 2000, up from
$592 billion in November 1999. The United States Federal Reserve also reported
that pools of securitized revolving credit assets totaled $346 billion at the
end of November 2000, up from $319 billion in November 1999. We believe that the
purchasing convenience associated with unsecured credit cards has driven the
growth of credit cards and has made them the preferred consumer credit vehicle.
In addition, we believe that the purchase of consumer goods and services over
the Internet will continue to fuel the demand for credit cards. We also believe
that the relative liquidity and predictability of these assets has fostered the
widespread acceptance of revolving credit securitizations by investors.
While traditional banking organizations have enjoyed significant
advantages in consumer lending compared to non-bank providers of consumer loans,
greater access to capital and the emergence of securitization markets, coupled
with technological advances, has allowed non-banks to compete effectively with
banks in this arena. We believe that future success in the credit card industry
will
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continue to be experienced primarily by highly focused organizations that are
adept at using information and technology to market their products and manage
risk within their portfolios.
Credit card issuers make credit cards available to their clients in a
variety of ways. Many issuers offer cards as a convenience to existing clients,
a strategy to create greater affinity and client loyalty. This is generally the
case with credit cards offered by department stores, who offer private label
credit cards, as well as smaller banks and credit unions. In contrast, the
larger credit card issuers, who control the vast majority of the market, use
mass mailing of credit card offers to consumers as the most cost-effective means
of achieving the growth rates they seek. Often this process is accomplished by
obtaining a list of names of individuals who meet the issuer's credit guidelines
from one of the national credit bureaus.
We, however, source our customers by purchasing charged-off consumer debt
from banks and finance companies and believe that the purchase of charged-off
debt is an efficient means to source new credit card customers in our target
market. We believe that the market for buying and selling non-performing
consumer debt portfolios has expanded due to a steadily increasing volume of
charged-off consumer debt coupled with a shift by originating institutions
toward selling their portfolios of non-performing consumer loans. Historically,
originating institutions had relied upon large internal collection staffs for
their initial collection efforts and outside collection agencies for accounts
delinquent more than 180 days. As buyers emerged to purchase non-performing
debt, originating institutions have increasingly sold these portfolios for cash.
Institutions will usually sell accounts when the market prices exceed the net
present value of retaining and working the accounts. In deciding whether to sell
accounts, sellers also evaluate the potential return on investment of
reinvesting the cash proceeds from portfolio sales in the core operations of
originating and servicing new loans.
According to Faulkner & Gray, a leading receivables management publisher,
the sales volume of charged-off debt by initial credit grantors has grown from
$2.5 billion in 1990 to an estimated $52.0 billion in 2000. The 2000 estimate
includes resale volume. Sellers have developed a variety of ways to sell
non-performing receivables. Some originating institutions pursue auction type
sales by constructing a portfolio of receivables and seeking bids from specially
invited competing parties. This approach has resulted in an increase in the
number of receivables portfolios offered for sale by account brokers. Other
means of selling receivables include privately negotiated direct sales when the
originating institution contacts known, reputable purchasers. Originating
institutions have also entered into "forward flow" sales contracts. These
contracts require an originating institution to sell some or all of its
receivables that meet specified criteria, such as balance size and elapsed time
since delinquency, to a single purchaser during a specified period of time for
an agreed upon price.
BUSINESS OPERATIONS
Our operations integrate the following disciplines: (1) portfolio
acquisitions and divestitures; (2) marketing and card origination; (3) customer
service and collections; and (4) receivables sales and securitizations.
PORTFOLIO ACQUISITIONS AND DIVESTITURES:
We acquire non-performing credit card receivables, consumer installment
loans, and automobile deficiencies on a nationwide basis, from a wide range of
originating institutions, including banks and finance companies. We have
acquired in excess of $4.8 billion in receivables. We have purchased portfolios
for prices typically ranging from 0.50% to 3.00% of the receivable balance. An
increasing amount of our acquisitions come from our CFC program, through which
we pay the debt owner an agreed upon price for each account we convert to a
credit card. Under a CFC, we typically pay a higher price per account, but we
only pay for the accounts we convert to a credit card. A typical portfolio
contains
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between 5,000 and 150,000 consumer accounts that typically were charged-off by
the original lending institution and passed through various stages of collection
efforts. Usually, the size of each account was between $1,000 and $6,000, with
an average balance of approximately $2,100.
The consumer debt and credit card industries generally categorize
delinquent and charged-off accounts into three groups: primary, secondary and
tertiary. Primary accounts are typically 120 to 270 days past due and are in the
process of being placed with collection agencies or collection attorneys for the
first time. Secondary accounts are 270 to 360 days past due and may have already
been placed with one collection agency. Tertiary accounts have already been
placed unsuccessfully with more than two collection agencies. Most of the
accounts we acquire are tertiary accounts.
We have also purchased "bankruptcy" and "out of statute" accounts. A
"bankruptcy account" is one in which the debtor has filed a bankruptcy petition
and its debt may have been discharged. We do not presently offer credit cards to
bankruptcy accounts. An "out of statute account" is one in which the statute of
limitations for collection of the debt has expired. Debt that is "out of
statute" will not be enforced by a court of law. Accordingly, the likelihood of
recoveries from such accounts is lower than on accounts that are currently
enforceable by a court of law.
We continually seek new non-performing portfolios for purchase. Once new
portfolios are located, an acquisition team is responsible for coordinating due
diligence, stratifying and analyzing the portfolio characteristics, projecting
conversions to new credit cards and the total cash collections on the accounts.
The acquisition team is also responsible for preparing bid proposals for review
and approval by our senior management, processing and tracking the bids,
documenting and closing the purchase, and coordinating the receipt of account
documentation and media for acquired portfolios.
We use our proprietary analytical methodology and database to evaluate a
potential portfolio purchase. We have developed a large and valuable database of
performance characteristics from the $4.8 billion of receivables we purchased
since inception that enables us to estimate future portfolio performance. This
methodology and database comprise the model which we use to analyze and price
the potential portfolio purchase. We believe that our methodology permits us to
accurately price portfolio purchases so we may realize an appropriate return on
capital from our new credit card originations and the subsequent cash flows
generated from these new credit cards.
We have developed a discipline of reselling portfolios into the secondary
market. In general, we resell portfolios when the price that other debt buyers
are willing to pay exceeds the net present value of the cash flows that we
expect to generate over the remaining life of the portfolio. To date, we have
resold approximately $1.8 billion of non-performing debt into the secondary
market through auctions and directly negotiated transactions.
MARKETING AND CARD ORIGINATION:
MARKETING. Once a portfolio acquisition is completed, the receivables and
accounts in the acquired portfolio are processed by our marketing and card
origination departments. We believe that our consumer friendly and hands-on
approach to the consumer is a key component of our business strategy. Many of
the receivables we acquire represent obligations of individuals who have, in the
past several years, experienced some life-altering event, such as divorce,
career displacement or major medical illness, and have recovered or currently
are recovering financially from their setback. We contact potential customers
through direct mail and by telephone and offer them the opportunity to settle
their debt and obtain an unsecured credit card which they can use to make new
purchases. A customer who accepts our offer, and meets our underwriting
guidelines, is issued a new unsecured credit card by one of our unaffiliated
issuing banks. The card has an outstanding balance and credit limit equal to the
amount agreed upon by the customer to settle the outstanding debt. As the
customer makes principal payments on
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the outstanding balance, the customer frees up the credit limit for new
purchases. In addition, we may increase the credit limit for customers who make
a certain number of payments on the settled amount. We report the payment
history on the credit card to the major credit bureaus. We believe that our
credit card product provides our customers with an opportunity to establish a
positive payment history on their credit record by making timely and consistent
payments on their new credit cards.
We believe our credit card product affords us more flexibility in working
with the consumer than the originating institution or third-party collection
agency who are simply attempting to recover all or a portion of the amount owed
on an account. Factors that contribute to this increased flexibility include:
- we are able to settle the account with the consumer at an amount
that fits within the consumer's budget because we acquire the
account at a typical range of 0.50% to 3.00% of the actual
outstanding balance;
- we offer a new unsecured credit card which has utility to the
consumer due to its revolving nature;
- we are not limited by many of the cultural and regulatory
constraints that influence account resolution decisions of banks,
savings and loan and other financial institutions; and
- we are not bound by the limited time periods to collect funds faced
by third-party collection agencies.
CARD ORIGINATION. In our experience, much of the account information
contained in the portfolios we acquire is stale. Accordingly, once a particular
portfolio has been purchased, a "scrubbing" process begins. Scrubbing describes
the process of electronically updating phone numbers and addresses on each
account purchased and searching for bankrupt and deceased accounts. Scrubbing is
performed by a third party that specializes in locating consumers with little or
no credit history. We have also developed proprietary models which allow us to
focus on accounts with the best marketing potential. We believe that using
third-party scrubbing services produces quality results and allows us to
efficiently focus our resources on marketing and servicing our customers.
Contemporaneously with the initial scrubbing, we conduct an analysis to
determine which accounts in the acquired portfolio should be returned to the
seller because they do not meet the criteria established under the terms of the
portfolio acquisition agreement. Although the terms of each portfolio
acquisition agreement differ, examples of accounts that may be returned under
the typical portfolio acquisition agreement include debts paid off prior to our
acquisition, debts in which the consumer filed bankruptcy prior to our
acquisition and debts in which the consumer was deceased prior to our
acquisition. Typically, the agreement with the seller of the portfolio allows us
to return such non-qualifying accounts in the portfolio for a specified period
of time, which is generally between 120 and 180 days from the date of purchase.
Under the typical portfolio acquisition agreement, the seller either replaces a
returned account or refunds the portion of the purchase price attributable to
the account.
Once the portfolio has been scrubbed, we use both direct mail and phone
contact to market our credit card product. We operate a 25,000 square foot mail
center in Sioux Falls, South Dakota. Our mail center is equipped with high-speed
printing, folding, inserting, zip sorting and mailing equipment capable of
sending 180,000 pieces per day. Having our direct mail operations in-house
allows us to manage high quality direct mail campaigns in a cost-effective
manner. Our mail center is linked electronically with our operation center,
allowing our mail center to receive database information to print and mail
specific mail campaigns. We also maintain a trained sales force that operates
from our Sioux Falls, South Dakota headquarters. The group is supported by a
state-of-the-art auto-dialer, which enables sales agents to effectively manage
their large inventory of accounts. We employ approximately 45 sales agents and
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we currently have space and system capacity to significantly expand our
telemarketing sales force. The auto-dialer enhances productivity via high-speed
dialing coupled with a screening process to detect no-answers, nonexistent
numbers and answering machines. This technology allows our sales agents to
concentrate their efforts on actual customers. In addition to outgoing calls, we
receive incoming calls that are prompted by mailings. Incoming calls are routed
directly to the telemarketing department where sales agents service the inquiry.
Our sales agents are trained to understand our customer base, keeping in
mind that the individual has experienced collection efforts employed by several
agencies. We believe an unsecured credit card often is a major benefit to this
segment of consumers because they may not qualify for a traditional unsecured
account. We also believe that an important feature of our program is the
opportunity to settle an old account and to gain the opportunity to establish a
positive payment history on one's credit record by making timely and consistent
payments on a new credit card.
The table below summarizes our standard credit card program as currently
offered:
Initial Credit Line: Settlement amount
Annual Fee: $0 the 1st year; $35
annual thereafter
Interest Rate: 18.9% or 19.9%
Grace Period: 25 Days
Late Fee: $10.00
Over Limit Fee: $10.00
Cash Advance Fee: Greater of 2% or $2.00
Minimum Payment: Greater of 3% or $10.00
Applicants who meet defined underwriting or exception criteria are
notified of acceptance into the program and issued a card. Although the initial
credit limit of the credit card is fully utilized when issued, an applicant
regains availability of credit on the card as and to the extent the applicant
makes principal payments. The applicant may also earn additional credit by
establishing a positive payment history with us. Applicants failing to meet the
defined underwriting or exception criteria are notified of denial in accordance
with the Equal Credit Opportunity Act. Such applicants are offered installment
and lump sum payment options to settle their debt. Historically, over 90% of the
applicants have qualified for the credit card.
Once a customer has accepted the offer and has cleared the underwriting
process, the relevant data is transmitted to First Data Resources, Inc. to
establish the new account on First Data Resources' credit card processing
system. We have arranged, through two unaffiliated banks, to issue the credit
cards and for First Data Resources to provide certain cardholder services
including data processing, card issuance, monthly customer statement processing,
and customer correspondence. First Data Resources is a subsidiary of First Data
Corporation, a provider of information processing and related services,
including cardholder processing and merchant processing, for major financial
institutions throughout the United States. We believe that outsourcing these
services to First Data Resources gives us certain operational efficiencies and
the flexibility to handle additional growth.
We also offer the convenience of an Automatic Payment Program to our
customers, whereby the customer authorizes us to withdraw from the customer's
bank account the monthly minimum credit card payment. Approximately 18% of our
customers are currently using the Automatic Payment Program. Accounts on the
Automatic Payment Program have a lower incidence of delinquency than those
accounts that are not on the Automatic Payment Program.
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For any customer who does not wish to maintain a new credit card account
but who agrees to settle the previously charged-off debt account, we have a
resolutions department whereby the customer can make an installment or lump sum
payment to settle the obligation.
CARDHOLDER SERVICES:
We believe that in order to maximize the customer's payment performance,
it is imperative to have a sophisticated, highly structured hands-on approach to
educating and servicing the customers and addressing situations that would
result in default without our attention and assistance. The retention group, the
cardholder services group, and the servicing (collections) group are key
components of our credit card servicing and collections functions.
The retention group conducts, among other services, our "Welcome Aboard"
program by verifying that the customer has received the credit card and that the
customer thoroughly understands the program and how to use the credit card. In
addition, the retention group places calls to customers at other critical
junctures, including approximately fifteen days prior to the first payment due
date and at various other specified times if a customer becomes delinquent in
his or her payments. The retention group also pursues all first payment
defaults. These calls are a part of our educational approach with customers that
stresses the importance and benefits of making timely and consistent payments.
The cardholder services group handles calls from customers regarding their
accounts, including balance inquiries, billing inquires and disputes, requests
for replacement cards, requests for temporary credit line increases and requests
for evidence of account activity. Cardholder services representatives counsel
the customer on use of the card and continue the process of instilling the
importance and benefits of making timely and consistent payments.
The servicing group is responsible for collection of delinquent credit
card accounts in a prompt, professional and thorough manner in order to reduce
net credit losses. We use state of the art predictive and power dialing
technology to maximize collector productivity, and heavily emphasize the
"instant payment" products such as Western Union Quick Collect. Collection calls
are prioritized using a special scoring model implemented through the First Data
Resources servicing platform and are based on models developed by us for our
specific customer base. We maintain a strict re-age policy which allows accounts
to be re-aged if the cardholder displays a desire to correct the status of the
account as well as an ability to continue making monthly payments on the
account. We have systemic restrictions in place which prevent customer service
representatives from performing unauthorized re-aging of accounts. In an effort
to maximize cash flow, the settlement of an account may be negotiated in cases
where we have determined that the account is destined to become a charge-off and
there is no potential to retain the customer. Accounts are charged off and taken
as a loss either after formal notification of bankruptcy or when they become
contractually 180 days past due, which time period we recently extended from 120
days based on general industry practices. Accounts identified as fraud losses
are immediately reserved for and charged off no later than 90 days after the
last activity. Charged-off accounts are referred to our Resolutions Department
for further recovery efforts.
FINANCINGS, RECEIVABLE SALES, AND SECURITIZATIONS:
An important piece of our business strategy is to securitize seasoned
receivables and/or sell seasoned receivables to third parties for cash, thereby
realizing a gain in an amount equal to the excess of the cash proceeds from the
sale or securitization over our cost basis in the receivables. To date, we have
considered an account available to sell or securitize when the consumer has made
eight or more on-time payments on the consumer's outstanding credit card
balance.
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We use a variety of debt instruments to fund our operations and portfolio
acquisitions including subordinated debt, senior secured debt, and non-recourse
debt. The ability to borrow based on the collateral value of our asset base is
integral to our operations and growth plans.
We have significant ongoing cash needs to fund our operations and to fund
the purchase of non-performing consumer debt portfolios. Our ability to sell or
securitize the receivables and/or finance these receivables on-balance sheet is
critical to the future and growth of the business. In order to finance, sell or
securitize our receivables, we maintain a detailed database concerning the
status and performance of each of the receivables in our portfolios. Maintaining
this database is necessary for us to provide historical performance information
to potential lenders and purchasers of our receivables. Potential lenders and
purchasers assess our portfolio of receivables according to a variety of factors
including monthly repayment rates by the cardholders and annualized default
rates.
COMPETITIVE CONDITIONS
We experience competition in all aspects of our business operations. We
compete with a wide range of third-party collection companies and other
financial services companies seeking to purchase portfolios of non-performing
consumer debt and with traditional collection companies seeking consignments of
such debt for collection. We also compete with companies that provide financing
to consumers that have previously defaulted on a debt obligation. As more buyers
enter the market to purchase portfolios of non-performing consumer debt, the
price for the purchase of such portfolios may increase and our business strategy
may become less profitable or viable. Some of these competitors may have
substantially greater personnel and financial resources than we do. In addition,
to the extent consumers with negative credit history have less difficulty
obtaining credit, especially obtaining unsecured credit cards, there may be less
consumer demand for our product. We believe we compete effectively based on what
we believe are superior information technology capabilities, which enable us to
evaluate and purchase receivables more effectively than some of our competitors.
Further, we believe we differentiate ourselves from most of our competitors
through our innovative credit card program, which allows the consumer to resolve
a prior obligation in a positive manner.
We anticipate that additional competitors will seek to enter our niche
within the financial services market. Because of the high costs in developing
and servicing a credit card program and the high costs of acquiring
non-performing consumer debt, we believe that new competitors will likely be
large, established finance companies.
GOVERNMENT REGULATION
Our collection practices, business operations and credit card receivables
are subject to numerous federal and state consumer protection laws and
regulations imposing licensing and other requirements with respect to
purchasing, collecting, making and enforcing consumer loans. We conduct periodic
compliance reviews and, if necessary, implement procedures to bring us into
compliance with all applicable state and federal regulatory requirements. Our
failure to comply with such statutes or regulations could have a material
adverse effect on our results of operations or financial condition.
The federal Fair Debt Collection Practices Act and comparable state
statutes establish specific guidelines and procedures that debt collectors must
follow to communicate with consumer debtors, including the time, place and
manner of such communications. Our policy is to comply with the provisions of
the Fair Debt Collection Practices Act and comparable state statutes in all of
our collection activities, although we may not be specifically subject to these
laws. If these laws apply to some or all of our collection activities, our
failure to comply with such laws could have a material adverse effect on our
results of operations and financial condition.
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As a purchaser of consumer receivables, we may acquire certain receivables
subject to legitimate claims, defenses or rights of offset on the part of the
consumer. As a result, we may not be able to collect certain receivables we have
purchased. For example, we, as previously described, acquire "out of statute"
accounts which are subject to a statute of limitations defense, and may also
acquire some credit card accounts where customers cannot be held liable for, or
their liability may be limited with respect to, charges to a credit card account
that were a result of an unauthorized use of a credit card.
While we are not a credit card issuer ourselves, certain of our operations
are affected by federal and state consumer protection and related laws and
regulations that apply to the marketing and extension of credit by a credit card
issuer because many of our receivables are originated through credit card
transactions. Significant laws include the federal Truth-In-Lending Act, the
Fair Credit Billing Act, the Equal Credit Opportunity Act, the Fair Credit
Reporting Act, the federal Credit Repair Organization Act, and the Electronic
Funds Transfer Act (and the Federal Reserve Board's regulations which relate to
these Acts), as well as comparable statutes in those states in which customers
reside or in which the originating institutions are located. State laws may also
limit the interest rate and the fees that a credit card issuer or other consumer
lender may impose on its customers. Among other things, the laws and regulations
applicable to credit card issuers impose disclosure requirements when a credit
card account is advertised, when it is applied for and when it is opened, at the
end of monthly billing cycles and at year end. Federal law requires credit card
issuers to disclose to consumers the interest rates, fees, grace periods and
balance calculation methods associated with their credit card accounts, among
other things. In addition, customers are entitled under current laws to have
payments and credits applied to their credit card accounts promptly, to receive
prescribed notices and to require billing errors to be resolved promptly. In
addition, some laws prohibit certain discriminatory practices in connection with
the extension of credit. Failure by the originating institutions or by us to
comply with applicable statutes, rules and regulations could create claims
and/or rights of offset by the customers which could have a material adverse
effect on us.
Changes in any such laws or regulations, or in the interpretation or
application thereof, could have a material adverse effect on us. Various
proposals which could affect our business have been introduced in Congress in
recent years, including, among others, proposals relating to imposing a
statutory cap on credit card interest rates, substantially revising the laws
governing consumer bankruptcy, limiting the use of social security numbers,
permitting affiliations between banks and commercial, insurance or securities
firms, and other regulatory restructuring proposals. There have also been
proposals in state legislatures in recent years to restrict telemarketing
activities, impose statutory caps on consumer interest rates, limit the use of
social security numbers and expand consumer protection laws. It is impossible to
determine whether any of these proposals will become law and, if so, what impact
they might have on us and our operations.
Due to the consumer-oriented nature of the collections and credit card
industry, there is a risk that we or other industry participants may be named as
defendants in litigation involving alleged violations of federal and state laws
and regulations, including consumer protection laws and consumer law torts,
including fraud. A significant judgment against us or within the industry in
connection with any such litigation could have a material adverse effect on our
results of operations or financial condition. See " -- Legal Proceedings."
EMPLOYEES
As of November 30, 2000, we had 360 employees. No employee group is
covered under a collective bargaining agreement. We believe our relationship
with our employees is good.
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TECHNOLOGY AND SYSTEMS
We utilize a variety of management information and telecommunications
systems to enhance productivity in all areas of our business. We utilize the
latest technology in our operations and employ multiple levels of backup to
minimize the risk of systemic breakdown. We believe that advanced technology is
key to maintaining a competitive advantage and we seek to maximize the use of
technology. New technologies are continually evaluated for business
appropriateness and cost effectiveness.
We use a proprietary credit card origination and servicing system ("NOCS")
which incorporates all aspects of our operation on a seamless platform from the
time a new portfolio is purchased until an account is converted to a new credit
card and set up on the First Data Resources credit card servicing platform. NOCS
includes specialized applications for telesales, underwriting, non-card
collections, payment processing, account scrubbing, portfolio stratification,
and customer service.
The overall computing platform is client-server, Windows NT/SQL based, and
is scaleable to accommodate our growth plans. We employ the latest technology in
telephony, including a predictive auto-dialer and voice recognition technology.
The telephony platform is capable of supporting in excess of 2,000 workstations
and we believe it is easily expandable to accommodate our growth plans.
We use image-based technology and processing to minimize paper flow
wherever possible. We have also invested in the latest electronic data
warehousing technologies to support our data mining strategies. We believe data
warehousing gives us a distinct competitive advantage in the portfolio analysis
and acquisitions aspect of our business. In addition, we believe data
warehousing will give us an advantage in the securitization markets through our
ability to provide a sophisticated level of performance detail to investors.
THIRD-PARTY SERVICING
At November 30, 2000, we serviced over 17,000 accounts subject to third
party servicing agreements. These accounts were largely owned by our wholly
owned special purpose entities. We intend to concentrate on servicing our own
accounts and accounts that we have either securitized or sold to third party
investors.
PROPERTIES
Our headquarters consist of a 30,000 square foot leased facility in Sioux
Falls, South Dakota. The lease expires on September 30, 2011. We own an
additional five acres of undeveloped property adjacent to this site that can be
utilized for expansion purposes.
Our Mail Center consists of a separate 25,000 square foot leased facility
in Sioux Falls, South Dakota. The lease was renewed to extend the terms of the
lease for one year commencing on March 1, 2001 and ending on February 28, 2002.
We also lease approximately 4,500 square feet of additional office space
in Sioux Falls, South Dakota. The lease commenced on June 1, 2000 and expires on
May 31, 2001.
LEGAL PROCEEDINGS
In the ordinary course of business, we receive notices of consumer
complaints from regulatory agencies and review these complaints in accordance
with our internal policy. Certain of the litigation pending against us is
described below.
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On May 21, 1999, we were sued on behalf of a class of Arizona debtors in
the United States District Court for the District of Arizona in an action
entitled Bingham v. The Credit Store, Inc. The action alleges that
communications we sent to class members violate the Fair Debt Collection
Practices Act and similar state laws in connection with attempts to collect
out-of-statute debt. The complaint seeks monetary damages and a declaratory
judgment that our mailers violate statutory provisions. Our motion to dismiss
the case has been granted and the suit has been dismissed but is subject to a
motion for reconsideration, which is pending.
On August 25, 2000, we were named as a co-defendant in an action brought
on behalf of a class of debtors in the United States District Court for the
Eastern District of Texas in an action entitled Barnett v. Experian Information
Solutions, et al. The plaintiffs claim that their debt was improperly reported
as a bad debt on a credit-reporting bureau, Experian Information Solutions,
Inc., which was also named as a defendant. Plaintiffs asserted claims against us
under the Fair Debt Collection Practices Act and RICO and sought unspecified
actual damages.
On October 20, 2000, we were named in an action on behalf of California
debtors filed in Superior Court for the State of California, San Diego County,
styled Maugeri v. The Credit Store, Inc., et al. The suit seeks damages and
injunctive relief barring us from offering our credit card program to California
debtors whose debt is out-of-statute and/or cannot be reported on a credit
bureau as bad debt. Claims are asserted against us under the California Business
and Professions Code and related state statutes.
In addition, during the past twelve months we have settled or have
obtained the dismissal of three other actions, including one class action that
was the consolidation of three separate class actions.
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We are vigorously defending these lawsuits. We do not believe that pending
litigation and regulatory complaints involving us will have a material adverse
effect on our consolidated financial position and results of operations.
However, a significant judgment against us in one or more of the lawsuits could
subject us to a monetary judgment and/or require us to modify our methods of
operation, either of which could have a material adverse effect on our results
of operations or financial condition.
MANAGEMENT
DIRECTORS
The following sets forth certain information as to each of our directors:
Name Age Position
- ---- --- --------
Jay L. Botchman 68 Director
Barry E. Breeman 51 Director
J. Richard Budd, III 48 Director
Kevin T. Riordan 49 President, Chief Operating Officer and Director
Geoffrey A. Thompson 60 Interim Chairman of the Board of Directors
JAY L. BOTCHMAN. Mr. Botchman has joined our Board of Directors in October
1996. From October 1996 through May 1998, Mr. Botchman served as the Chairman of
our board of directors. Mr. Botchman also serves as the Chairman and majority
owner of Taxter LLC. For more than the past five years, Mr. Botchman has been
the owner of J.L.B. Equities, Inc. and J.L.B. of Nevada, Inc., both of which are
investment and commercial finance companies. In addition, Mr. Botchman acts as a
consultant to various entities in the consumer finance business.
BARRY E. BREEMAN. Mr. Breeman joined our board of directors in September
1998. Since April 1998, Mr. Breeman has been Vice Chairman and Chief Investment
Officer of Manley-Berenson Realty & Development, LLC. From January 1991 to the
present, Mr. Breeman has been the managing member of Cambridge Real Estate
Services, LLC, and predecessor entities, a real estate investment banking
services business.
J. RICHARD BUDD, III. Mr. Budd joined our board of directors in September
1998. Mr. Budd presently serves as a consultant to troubled companies and to
creditors of troubled companies. Mr. Budd served as Senior Vice President of
Metallurg, Inc., an international specialty metals producer, from July 1994 to
October 1998. From July 1994 to January 1996, Mr. Budd served as Vice President
of Cityscape Corp.
KEVIN T. RIORDAN. Mr. Riordan has been our President and Chief Operating
Officer since April 1997. From February 1995 to March 1997, Mr. Riordan served
as President and Chief Executive Officer of Long Beach Acceptance Corp., a
subsidiary of Long Beach Mortgage Corp. From February 1985 to February 1995, Mr.
Riordan was President and Chief Executive Officer of Alliance Funding Company
and its successor in interest Alliance Funding Company, a division of Superior
Bank FSB.
GEOFFREY A. THOMPSON. Mr. Thompson joined our board of directors in April
1999. Mr. Thompson has served as interim Chairman of the Board of Directors
since September 22, 2000. Mr. Thompson retired from Marine Midland Bank, Inc.,
Buffalo, New York in October 1992, where he had served as President and Chief
Executive Officer. In addition, he serves on the boards of four privately-held
corporations and four not-for-profit corporations.
None of our directors are related to each other or to any of our executive
officers.
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COMPENSATION OF DIRECTORS
Directors J. Richard Budd, III, Barry E. Breeman and Geoffrey A. Thompson
each receive $50,000 as annual compensation for their services on our board of
directors. In addition, Mr. Budd and Mr. Breeman were each granted options to
purchase 75,000 shares with an exercise price of $2.00 per share. Mr. Thompson
received options to purchase 75,000 shares an exercise price of $2.19 per share.
Jay Botchman does not receive compensation for his services as a director. The
board of directors may authorize the payment of compensation to directors for
their attendance at regular and special meetings of the board of directors and
for attendance at meetings of committees of the board of directors as is
customary for similar companies. Directors are reimbursed for their reasonable
out-of-pocket expenses incurred in connection with their duties as directors or
officers.
COMMITTEES OF THE BOARD OF DIRECTORS AND MEETING ATTENDANCE
AUDIT COMMITTEE. We have an audit committee consisting of Barry E.
Breeman, J. Richard Budd, III, and Geoffrey A. Thompson. The audit committee had
8 meetings in fiscal year 2000. The audit committee meets with the Chief
Financial Officer and our Controller and independent public accountants, and
monitors and reviews our accounting, auditing and reporting practices, system of
internal controls, approves the scope and timing of the independent public
accountants' audit and discusses the meaning and significance of the audited
financial results.
COMPENSATION COMMITTEE. We have a compensation committee consisting of
Barry E. Breeman, J. Richard Budd, III, and Geoffrey A. Thompson, which grants
or makes recommendations to our board of directors concerning employee stock
options, bonuses and other compensation.
EXECUTIVE OFFICERS
The following is certain information regarding the current executive
officers of the Company other than Kevin T. Riordan:
Name Age Position
- ---- --- --------
Michael J. Philippe 43 Executive Vice President, Chief Financial
Officer and Treasurer
Richard S. Angel 42 Executive Vice President and General Counsel
William Buriak 46 Senior Vice President and Chief Information
Officer
Cynthia D. Hassoun 50 Senior Vice President and Corporate Secretary
Michael L. Neher 36 Senior Vice President
Patrick Steffl 35 Senior Vice President
MICHAEL J. PHILIPPE. Mr. Philippe joined our company in June 1997 as Vice
President of Finance and became Chief Financial Officer in September 1997. In
June 1999, Mr. Philippe was elected Executive Vice President, Chief Financial
Officer and Treasurer of the Company. The prior 13 years, Mr. Philippe served as
a Vice President and Manager for The Sumitomo Bank, Ltd. and its predecessors.
RICHARD S. ANGEL. Mr. Angel joined our company in August 1997 as Vice
President, Secretary and Corporate Counsel. In June 1999, Mr. Angel was elected
Executive Vice President and General Counsel of our company. From January 1992
to August 1997, Mr. Angel was a shareholder in the law firm of Buchalter, Nemer,
Fields & Younger in Los Angeles, California.
WILLIAM G. BURIAK. In September 1999, Mr. Buriak was our elected Senior
Vice President and Chief Information Officer. Mr. Buriak joined our company as
Chief Information Officer July 1999.
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From November 1996 to July 1999, Mr. Buriak was Director of Management
Information Services and Director of Business Office Operations for CCDM, a
non-profit healthcare system in Perth Amboy, New Jersey. From June 1986 to
November 1996, Mr. Buriak was Assistant Vice President at Beneficial Finance
Corporation in Peapack, New Jersey.
CYNTHIA D. HASSOUN. Ms. Hassoun joined our company in October 1997 as
Chief Coordinating Officer. In April 1999, Ms. Hassoun was our elected Corporate
Secretary and she was elected Senior Vice President of The Credit Store in June
1999. From April 1997 to September 1997, Ms. Hassoun served as a consultant to
our company. From January 1992 to November 1996, Ms. Hassoun was Vice President
of Customer Service for Superior Bank FSB, a savings bank.
MICHAEL L. NEHER. Mr. Neher joined our company as Senior Vice President
responsible for Non-Card Resolutions and Portfolio Divestitures in November
1999. In February 2001, Mr. Neher was named Senior Vice President responsible
for Business Development. From September 1998 to October 1999, Mr. Neher was the
Assistant Vice President for Outsourcing-Card Services/Consumer Products of the
Atlanta, Georgia operation of the Bank of Hawaii. From December 1995 to
September 1998, he was the Regional Sales Manager for Primus Automotive
Financial Services, Atlanta, Georgia. From June 1993 to November 1995, Mr. Neher
served as the Business Line Supervisor, Collections and Recovery-Consumer Loans
for Ocwen Federal Bank & Trust FSB, West Palm Beach, Florida.
PATRICK STEFFL. Mr. Steffl was elected Senior Vice President of our
company in June 1999. Prior to joining The Credit Store in August 1997 as Vice
President of Marketing, Mr. Steffl had been with Fingerhut Companies, Inc. in
Minnetonka, Minnesota since 1989, managing mail and telemarketing media of six
phone centers throughout the country.
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EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following table shows, for our former
Chief Executive Officer and each of our other four most highly compensated
executive officers of our company (collectively, the "Named Executive
Officers"), information concerning compensation earned for services in all
capacities during the fiscal year ended May 31, 2000, as well as compensation
earned by each such person for the two previous fiscal years:
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
--------------------------------------------------- -----------------
NUMBER OF
FISCAL OTHER SECURITIES
NAME AND PRINCIPAL POSITION YEAR(1) SALARY BONUS COMPENSATION UNDERLYING OPTION
- --------------------------- ------- ------ ----- ------------ -----------------
Martin J. Burke, III (2) 2000 $ 61,304 $60,505 -- --
1999 60,000 -- -- --
1998 62,518 -- -- 1,000,000
Kevin Riordan 2000 $305,919 -- -- 200,000
President and Chief 1999 305,769 -- -- 100,000
Operating Officer 1998 305,968 -- -- 300,000
Michael J. Philippe 2000 $214,188 $50,000 -- 200,000
Executive Vice President, 1999 184,951 5,000 -- 100,000
Chief Financial Officer and 1998 161,233 -- -- 100,000
Treasurer
Richard S. Angel 2000 $244,765 $60,000 $ 43,956 100,000
Executive Vice President 1999 220,154 -- -- 100,000
and General Counsel 1998 153,989 -- -- 100,000
Cynthia D. Hassoun 2000 $162,698 -- -- 15,000
Senior Vice President and 1999 152,884 -- -- --
Corporate Secretary 1998 92,223 $50,000 -- 75,000
- ----------------------------------
(1) The Named Executive Officers commenced their employment with us as
follows: Mr. Burke, October 1996; Mr. Riordan, April 1997; Mr. Philippe,
June 1997; Mr. Angel, August 1997; Ms. Hassoun, October 1997.
(2) Mr. Burke resigned as Chairman of our board of directors and our Chief
Executive Officer effective September 22, 2000. We entered into a
Separation Agreement and Release with Mr. Burke, which is described below
under "--Employment Agreements."
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STOCK OPTION TABLES
The following tables summarize stock option grants to and exercises by the
Named Executive Officers during the fiscal year ended May 31, 2000, and certain
other information relative to such options:
OPTION GRANTS IN LAST FISCAL YEAR
The following table contains information concerning the grant of stock
options to the Named Executive Officers for our fiscal year ended May 31, 2000.
These grants are also reflected in the Summary Compensation Table, above.
PERCENTAGE
OF TOTAL
NUMBER OF OPTIONS POTENTIAL REALIZABLE VALUE
SECURITIES GRANTED TO EXERCISE AT ASSUMED ANNUAL RATES OF
UNDERLYING EMPLOYEES PRICE STOCK PRICE APPRECIATION
OPTIONS IN FISCAL PER FOR OPTION TERM(2)
NAME GRANTED(1) YEAR SHARE EXPIRATION DATE 5% 10%
- ------------------- ----------- --------- -------- --------------- -------- --------
Kevin Riordan 200,000 22% $2.40 June 1, 2004 $132,000 $294,000
Michael J. Philippe 200,000 22% $2.40 June 1, 2004 $132,000 $294,000
Richard S. Angel 100,000 11% $2.40 June 1, 2004 $ 66,000 $147,000
Cynthia D. Hassoun 15,000 2% $3.44 November 19, 2004 $ 14,250 $ 31,500
- ------------------
(1) Option granted pursuant to our 1997 Stock Option Plan, as amended.
(2) Potential realized values shown above represent the potential gains based
upon compound price appreciation of 5% and 10% from the date of grant
through the full option term. The actual value realized, if any, on stock
option exercises will be dependent upon overall market conditions and our
future performance. There is no assurance that the actual value will
approximate the amounts reflected in this table.
AGGREGATE OPTION EXERCISES IN FISCAL 2000 AND FISCAL YEAR-END OPTION VALUES
SHARES NUMBER OF SHARES VALUE OF UNEXERCISED
ACQUIRED VALUE UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
NAME ON EXERCISE REALIZED OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END(1)
---- ----------- -------- -------------------------- ---------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
Martin J. Burke -- -- 1,000,000(2) -- $2,812,000 $ --
Kevin Riordan -- -- 600,000 -- $1,537,200 $ --
Michael J. Philippe -- -- 350,000 50,000 $ 834,200 $ 140,600
Richard S. Angel -- -- 250,000 50,000 $ 593,000 $ 140,600
Cynthia D. Hassoun -- -- 57,500 32,500 $ 150,890 $ 80,590
- ---------------------
(1) Value is based on the per share closing price of our Common Stock on May
31, 2000, the last trading day of fiscal 2000, which was $4.812.
(2) The shares of Common Stock subject to this option and the proceeds, if
any, received from any sale of those shares are subject to a Security
Agreement between Mr. Burke and us and secure Mr. Burke's obligations to
us under the secured promissory note described under "--Employment
Agreements" below.
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EMPLOYMENT AGREEMENTS
Prior to his resignation, Mr. Burke was employed as our Chief Executive
Officer under a five-year agreement dated March 27, 1997. Mr. Burke was paid
an annual salary of $60,000 per year. The agreement provided Mr. Burke with
the right to receive a bonus of (i) 1.5% of our annual net earnings before
taxes and (ii) options to purchase 1,000,000 shares of our Common Stock at a
purchase price of $2.00 per share, which are exercisable through March 26,
2002. Mr. Burke had a $450,000 credit line from the Company. Mr. Burke
resigned as a director, officer and employee of our company effective
September 22, 2000.
In connection with his resignation, we entered into a Separation Agreement
and Release with Mr. Burke, which was executed in February 2001 and was
effective December 11, 2000. Under the separation agreement, the parties agree
to terminate Mr. Burke's existing employment agreement, along with the
compensation, benefits and other obligations under the employment agreement. In
the separation agreement, we agree to make severance payments to Mr. Burke of
$2,500 every other week of each month from September 29, 2000 through March 26,
2002 and to pay Mr. Burke's health insurance premiums during such period. We
also agree to pay Mr. Burke a bonus, if any, of 1.5% of our annual pre-tax net
earnings for both the 2001 and 2002 fiscal years (with the 2002 payment, if any,
being pro-rated over 10 months). We also agree that Mr. Burke may retain his
option to purchase 1,000,000 shares of our Common Stock. Finally, we agreed to
loan Mr. Burke $25,000 to pay his legal fees in connection with the separation
agreement. In the separation agreement, Mr. Burke agreed to pay the credit line
debt he owes to us, which was $504,801 on December 11, 2000, and to repay the
$25,000 loan for his legal fees for a total $529,801, which amount is evidenced
by a secured promissory note, which bears interest at 8% per annum, is payable
monthly and matures on December 1, 2002. Mr. Burke's obligations to us under
the separation agreement and the promissory note are secured by the amounts
payable to him under the agreement and by his stock option, with his obligations
to us to be paid in full before any amounts are paid to him.
On April 1, 1997, we entered into a five year employment agreement with
Kevin Riordan, our President and Chief Operating Officer. Under the terms of the
employment agreement, Mr. Riordan receives an annual base salary of $300,000 for
each year of his employment subject to annual review by the board of directors.
In addition to the base salary, we agreed to pay Mr. Riordan a signing bonus of
$2,000,000. Additionally, he was granted options to purchase 300,000 shares of
our Common Stock at an exercise price of $2.00 per share. Such options are
exercisable commencing April 1, 1999, and shall expire on the earlier of March
31, 2002, or the termination of Mr. Riordan's employment with us. The employment
agreement also entitles Mr. Riordan to all of our employee benefit plans. Under
the employment agreement, employment terminates upon death or total disability
of Mr. Riordan and we may terminate his employment for cause (such as
misconduct, disregard of instructions from the board of directors, commission of
certain crimes or acts or a material breach of the terms of the employment
agreement.) On September 22, 2000, Mr. Riordan was appointed to our board of
directors to fill the open directorship from Mr. Burke's resignation.
On June 17, 1997, we entered into an employment agreement with Michael J.
Philippe, our Chief Financial Officer and an Executive Vice President, which was
amended effective June 1, 1999 to extend the term of the agreement to June 20,
2002. Under the terms of the employment agreement, as amended, Mr. Philippe
receives an annual base salary of $210,000 subject to annual review by the board
of directors. In addition, Mr. Philippe received under the terms of the
employment agreement options to purchase 100,000 shares of our Common Stock at a
purchase price of $2.00 per share. The options to
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purchase the shares were all vested as of June 17, 2000. The options are
exercisable, according to their vesting schedules, for a period of five years
from the date they were granted. The employment agreement also entitles Mr.
Philippe to all of our employee benefit plans. Under the terms of the employment
agreement, employment terminates upon death or total disability of Mr. Philippe
and we may terminate for cause (such as misconduct, disregard of instructions
from the board of directors, commission of certain crimes or acts or a material
breach of the terms of the employment agreement.) The employment agreement
contains a change in control provision that provides Mr. Philippe with the right
to terminate his employment within 60 days of the date of a change in control
and have such termination treated as a termination without cause, meaning that
Mr. Philippe shall have the right to continue to be compensated through the term
of the employment agreement. For purposes of the employment agreement, a change
of control is deemed to have occurred at such time as either (a) Taxter One LLC
owns directly or indirectly less than 10% of our Common Stock and less than 50%
of each other outstanding class of securities the majority vote of which is
required for shareholder action, or (b) Jay Botchman owns less than 50% of the
membership interests in Taxter One LLC.
On August 1, 1997, we entered into an employment agreement with Richard S.
Angel, our General Counsel and an Executive Vice President, which was amended
effective June 1, 1999 to extend the term of the agreement to September 30,
2000. Mr. Angel's agreement has not been renewed in writing but Mr. Angel's
employment continues under an oral agreement with us providing for the same
terms as his expired written agreement but with no fixed term. Under the terms
of the employment agreement, as amended, Mr. Angel receives an annual base
salary of $240,000 per year subject to annual review by the board of directors.
In addition, Mr. Angel received under the terms of the employment agreement
options to purchase 100,000 shares of our Common Stock at a purchase price of
$2.00 per share. The options to purchase the option shares were all vested as of
July 31, 2000. The options are exercisable, according to their vesting
schedules, for a period of five years from the date they were granted. The
employment agreement also entitles Mr. Angel to all of our employee benefit
plans. Under the terms of the employment agreement, employment terminates upon
death or total disability of Mr. Angel and we may terminate his employment for
cause (such as misconduct, disregard of instructions from the board of
directors, commission of certain crimes or acts or a material breach of the
terms of the employment agreement.) The employment agreement contains a change
in control provision that provides Mr. Angel with the right to terminate his
employment within 60 days of the date of a change in control and have such
termination treated as a termination without cause, meaning that Mr. Angel shall
have the right to continue to be compensated through the term of the employment
agreement. For purposes of the employment agreement, a change of control is
deemed to have occurred at such time as either (a) Taxter One LLC owns directly
or indirectly less than 10% of our Common Stock and less than 50% of each other
outstanding class of securities the majority vote of which is required for
shareholder action, or (b) Jay Botchman owns less than 50% of the membership
interests in Taxter One LLC.
On October 15, 1997, we entered into a three-year agreement with Cynthia
Hassoun, our Corporate Secretary and a Senior Vice President. Under the terms of
the agreement, as amended, Ms. Hassoun receives an annual base salary of
$165,000. In addition, Ms. Hassoun received a $50,000 signing bonus,
compensation for all relocation expenses and 75,000 stock options. Under the
terms of the agreement, 25,000 of Ms. Hassoun's stock options vest on October 15
of the years 1998, 1999 and 2000. The exercise price of all of the options is
$2.00 per share. The letter agreement also entitles Ms. Hassoun to all of our
employee benefit plans. The agreement renews automatically for successive
one-year terms unless terminated by the parties 90 days prior to the renewal
date. Neither party gave notice to terminate as of October 15, 2000 and the
agreement renewed for an additional one-year term expiring October 15, 2001.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of February 1, 2001, the ownership of
our common and preferred stock by each stockholder who is known by us to own
beneficially more than 5% of our outstanding common and preferred stock, each
director, each executive officer named in the Summary Compensation Table on page
51, and all executive officers and directors as a group. At February 1, 2001
there were 34,851,465 shares of Common Stock, par value $.01, issued and
outstanding, each of which is entitled to one vote.
COMMON STOCK PREFERRED STOCK (1)
---------------------------------- --------------------------------
NUMBER PERCENTAGE NUMBER PERCENTAGE
OF SHARES OF SHARES OF SHARES OF SHARES
--------- --------- --------- ---------
Principal Stockholders:
Taxter One LLC 7,678,000 22.0% 1,200,000(2) 100%(2)
565 Taxter Road
Elmsford, NY 10523
J.L.B. of Nevada, Inc. 10,650,000(3) 23.4% 20,000(4) 100%(4)
1500 E. Tropicana Ave
Suite 100
Las Vegas, NV 89119
Blum Family Trust 4,000,000 11.5% 400,000(5) 50%(5)
c/o Silverman Perlstein &
Acampora, LLP
100 Jericho Quadrangle, Suite 300
Jericho, NY 11753
Renaissance Trust I 4,000,000 11.5% 400,000(6) 50%(6)
c/o Skadden, Arps, Slate, Meagher
& Flom
One Rodney Square, 7th Floor
Wilmington, Delaware 19801
Michael Lauer, Lancer Partners, L.P., 8,252,500(7) 23.7% -- --
and Lancer Offshore, Inc.
375 Park Avenue, Suite 2006
New York, NY 10166
Directors and Named Executive Officers:
Kevin T. Riordan 815,000(8) 2.3% -- --
Michael J. Philippe 405,334(9) 1.1% -- --
Richard S. Angel 300,000(10) * -- --
Cynthia D. Hassoun 90,000(11) * -- --
Jay L. Botchman 18,328,000(12) 40.3% 1,225,000(13) 100%(13)
Barry E. Breeman 75,000(14) * -- --
J. Richard Budd, III 91,300(15) * -- --
Geoffrey A. Thompson 95,000(16) * -- --
All directors and executive officers 20,356,134(17) 42.8% 1,225,000(13) 100%(13)
as a group (12 persons)
- ----------------------------------------
* Less than 1%
(1) We currently have outstanding 1,200,000 shares of Series A Preferred
Stock, 800,000 shares of Series B Preferred Stock, 5,000 shares of Series
C Preferred Stock, 10,000 shares of Series D Preferred Stock, and 10,000
shares of Series E Preferred Stock. All percentages indicated are for each
separate class of preferred stock, rather than for all preferred stock
classes as a whole.
(2) Consists of 1,200,000 shares of Series A Preferred Stock.
(3) Includes 3,800,000 shares of Common Stock issuable upon conversion of
10,000 shares of Series D Preferred Stock, 2,850,000 shares of Common
Stock issuable upon conversion of 10,000 shares of Series E Preferred
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Stock and 4,000,000 shares of Common Stock issuable upon the exercise of a
warrant at a price of $3.25 per share.
(4) Consists of 10,000 shares of Series D Preferred Stock and 10,000 shares of
Series E Preferred Stock.
(5) Consists of 400,000 shares of Series B Preferred Stock.
(6) Consists of 400,000 shares of Series B Preferred Stock.
(7) Consists of 2,987,500 shares of Common Stock owned by Lancer Partners,
L.P., 4,730,000 shares of Common Stock owned by Lancer Offshore, Inc., and
535,000 shares of Common Stock owned by Michael Lauer. Mr. Lauer is the
investment manager for Lancer Partners, L.P. and Lancer Offshore, Inc. and
has the authority to vote and dispose of all shares of Common Stock owned
by these entities. Based on information as of February 27, 2000 contained
in a Form 3 filed with the Securities and Exchange Commission.
(8) Consists of shares issuable upon the exercise of options exercisable in
the following amounts and prices: 300,000 shares at $2.00 per share,
100,000 shares at $2.70 per share, and 200,000 shares at $2.40 per share.
Includes 215,000 shares owned by Mr. Riordan's wife, of which shares Mr.
Riordan disclaims beneficial ownership.
(9) Includes shares issuable upon the exercise of options exercisable in the
following amounts and prices: 100,000 shares at $2.00 per share, 100,000
shares at $2.70 per share, and 200,000 shares at $2.40 per share.
(10) Consists of shares issuable upon the exercise of options exercisable in
the following amounts and prices: 100,000 shares at $2.00 per share,
100,000 shares at $2.70 per share, and 100,000 shares at $2.40 per share.
(11) Consists of 75,000 shares issuable upon the exercise of options
exercisable at a price of $2.00 per share, and 15,000 shares at $3.44 per
share.
(12) Consists of 7,678,000 shares of Common Stock owned by Taxter One LLC,
6,650,000 shares of Common Stock issuable upon conversion of shares of
Series D and E Preferred Stock, and 4,000,000 shares of Common Stock
issuable upon the exercise of warrants at a price of $3.25 per share, each
held of record by J.L.B. of Nevada, Inc. Mr. Botchman owns 100% of the
membership interests in Taxter One LLC and owns 100% of the outstanding
capital stock of J.L.B. of Nevada, Inc.
(13) Includes 5,000 shares of Series C Preferred Stock held of record by Jay L.
Botchman, 1,200,000 shares of Series A Preferred Stock held by Taxter One
LLC, 10,000 shares of Series D Preferred Stock held of record by J.L.B. of
Nevada, Inc., and 10,000 shares of Series E Preferred Stock held of record
by J.L.B. of Nevada, Inc.
(14) Consists of 75,000 shares issuable upon the exercise of options
exercisable at a price of $2.00 per share.
(15) Includes 75,000 shares issuable upon the exercise of options exercisable
at a price of $2.00 per share.
(16) Includes 75,000 shares issuable upon the exercise of options exercisable
at a price of $2.19 per share.
(17) Includes 156,000 shares issuable upon the exercise of options in addition
to those shares set forth in footnotes 8 through 12 and footnotes 14
through 17. Also includes 500 shares owned by William Buriak's wife.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During fiscal year 1998, we issued subordinated promissory notes to J.L.B.
of Nevada, Inc., a corporation wholly-owned by Jay L. Botchman, one of our
directors, totaling $40,000,000 which are payable on demand and bear interest at
the rate of 12% per annum. $30,000,000 of the new notes were issued in exchange
for outstanding notes totaling $11,518,042 which carried an interest rate of 12%
per annum and $18,481,958 in new debt. Interest expense on these notes was
$2,307,467 and $3,635,891 for the years ended May 31, 1999 and 1998,
respectively. On May 29, 1999, J.L.B. of Nevada, Inc. forgave $5,000,000 of
accrued interest on these subordinated notes in return for warrants to purchase
4,000,000 shares of our Common Stock and for our assumption of the payment
obligations under personal property lease agreements of certain entities
affiliated with J.L.B. of Nevada, Inc. J.L.B. of Nevada, Inc. had previously
guaranteed the payment of these obligations on behalf of the entities. On the
date of the assumption of the obligations, the fair value of the obligations was
$1.7 million and the warrants had a fair market value of $3.3 million. The
warrant is exercisable one year after the grant date at an exercise price of
$3.25 per share and expires May 29, 2004. At May 31, 2000 accrued interest
related to subordinated notes payable to J.L.B. of Nevada, Inc. was
approximately $1.5 million.
On February 27, 1998, we issued a subordinated promissory note payable to
Mr. Botchman in the amount of $350,000 payable on demand with interest of 12%
per annum. Interest expense for the year ended May 31, 2000 was $18,200. This
note was issued per an agreement dated February 27, 1998
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between Mr. Botchman and The Credit Store. As part of the terms of the
agreement, we agreed to purchase an interest in certain investment securities,
owned by Mr. Botchman, of a subprime mortgage banking company. The mortgage
company had subsequent financial difficulties and ceased operations. We wrote
off this investment and a receivable due from this company of approximately
$189,000 during the fiscal year ended May 31, 1998.
As of May 31, 2000, we, through our wholly-owned subsidiary, American
Credit Alliance, Inc., have an $880,000 note payable to J.L.B. of Nevada, Inc.
with an interest rate of 10% per annum. Interest expense for the year ended May
31, 2000 was $89,467. American Credit Alliance, Inc. is the managing member and
owns 50% of the membership interests in Dakota Card Fund II, LLC, an entity that
owns performing credit card receivables.
We acquired all of the capital stock of Service One Holdings Inc. from
Taxter One LLC on December 4, 1996. Our Series A Preferred Stock and Series B
Preferred Stock were each issued at $1.00 per share (for a total of $2,000,000)
for all of Taxter One LLC's shares of Service One Holdings. The outstanding
shares of Series A Preferred Stock initially represented 80% of all votes
entitled to be voted at any meeting of the stockholders, subject to dilution to
the extent we issue additional shares of capital stock. Currently, the shares of
the Series A Preferred Stock represent approximately 78% of all votes entitled
to be voted at any meeting of our stockholders. The Series B Preferred Stock has
one vote per share. The Series A Preferred Stock and the Series B Preferred
Stock each have a liquidation preference of $1.00 per share. The Series A
Preferred Stock earns cumulative dividends of $.05 per share and the Series B
Preferred Stock earns cumulative dividends at a rate of 5% per annum. After
December 31, 2001, (i) the Series A Preferred Stock and the Series B Preferred
Stock will be redeemable at our option, and (ii) the Series B Preferred Stock
will be convertible at the option of the holder into Series A Preferred Stock on
a share-for-share basis.
On December 31, 1996, we issued 5,000 shares of Series C Preferred Stock
to Mr. Botchman for $5,000,000 consideration. The Series C Preferred Stock earns
cumulative dividends at 6% per annum. The shares also have liquidation
preference of $1,000 per share. The Series A, B, D and E Preferred Stock rank
senior to the Series C Preferred Stock with respect to dividend and liquidation
rights.
On May 29, 1998, we issued 10,000 shares of Series D Preferred Stock to
J.L.B. of Nevada, Inc. in exchange for the cancellation of the outstanding
principal amount of the $10,000,000 promissory note dated August 1, 1997,
payable by us to J.L.B. of Nevada, Inc. The Series D Preferred Stock is
non-voting and earns a dividend of 8% of stated value per annum payable annually
on December 31. The shares have a par value of $0.001 per share and a stated
value of $1,000 per share. The shares have a liquidation preference of $1,000
per share. The Series D Preferred Stock ranks senior to the Series A, B and C
with respect to dividend and liquidation rights. Each share of Series D
Preferred Stock is convertible into 380 shares of our Common Stock. Our
agreement with J.L.B. of Nevada, Inc. regarding the issuance of the Series D
Preferred Stock grants J.L.B. of Nevada, Inc. piggyback registration rights for
any Common Stock issuable upon conversion of the shares of Series D Preferred
Stock.
On August 31, 1998, we issued 10,000 shares of Series E Preferred Stock at
a price of $1,000 per share to J.L.B. of Nevada, Inc. in exchange for J.L.B. of
Nevada, Inc. agreeing to cancel $10,000,000 of the principal amount outstanding
under a subordinated promissory note dated August 1, 1997 in the original
principal amount of $20 million. The Series E Preferred Stock is non-voting and
earns a dividend of 8% of stated value per annum payable annually on December
31. The shares have a par value of $0.001 per share and a stated value of $1,000
per share. The shares have a liquidation preference of $1,000 per share. The
Series E Preferred Stock ranks senior to the Series A, B, C, and D with respect
to the dividend and liquidation rights. Each share of Series E Preferred Stock
is convertible into 285 shares of Common Stock. Our agreement with J.L.B. of
Nevada, Inc. regarding the issuance of the Series E
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Preferred Stock grants J.L.B. of Nevada, Inc. piggyback registration rights for
any Common Stock issuable upon conversion of the shares of Series E Preferred
Stock.
As of May 31, 2000, accumulated but undeclared and unpaid preferred
dividends on preferred stock amounted to approximately $4.2 million. Such
dividends have not been declared by our board of directors, and, accordingly
have not been paid by us, and remain our outstanding obligations. Such dividends
have not been paid because we believe it to be in our best interest at this time
to retain our earnings to reinvest in our operations. In addition, we are a
party to certain loan agreements that contain restrictions on our ability to pay
dividends.
Taxter One LLC, an entity in which Mr. Botchman is a managing member, as
part of the purchase price of acquiring Service One Holdings, granted the former
owners of Service One Holdings a future interest in Service One Holdings in the
form of an identical option to each former owner of Service One Holdings to
purchase 2,000 shares of Service One Holdings from Taxter One LLC for $500,000.
Following our acquisition of Service One Holdings, these options were amended to
enable each of the former owners of Service One Holdings to purchase 4,000,000
shares of our Common Stock and 400,000 shares of our Series B Preferred Stock
for $500,000. Each of the options were fully exercised during October 2000,
resulting in payment to Taxter One LLC of $1.0 million and the transfer by
Taxter One LLC of an aggregate 8,000,000 shares of our Common Stock and 800,000
shares of our Series B Preferred Stock. This transaction did not increase or
decrease the number of Common Stock or Preferred Stock outstanding.
On October 8, 1996, Service One International Corporation entered
into two substantially similar Business Development Agreements (the "Development
Agreements"), one with Renaissance Trust I and the other with O. Pappolimberis
Trust. In March 1998, Service One International Corporation merged into us.
Renaissance Trust I is the beneficial owner of 4,000,000 shares of our Common
Stock and 400,000 shares of our Series B Preferred Stock.
Both Development Agreements are currently in dispute. We have questioned
whether the Development Agreements provide adequately for consideration to us,
and if so, whether that consideration has been provided to us. We discontinued
our payment of royalties under both Development Agreements in February 2001. The
issue of our continuing obligation under both Development Agreements is
currently under discussion among the contracting parties.
The royalty is equal to five percent of the balance transfer amount, as
defined, on all converted credit card accounts which: (i) are delivered to a
pre-securitization credit facility, (ii) become a qualifying receivable, or
(iii) meet other specified account age and payment parameters. A qualifying
receivable is defined as any converted account on which the cardholder has made
three consecutive payments within certain time restrictions. In addition, the
Development Agreements provide for royalties equal to five percent of all
principal cash collections on certain accounts that are not converted to credit
cards. Except for the extension referred to below, the term of the Development
Agreements expires in 2002 and the total royalty, if earned, payable under each
of the two Development Agreements, after certain deductions and exclusions,
shall not exceed $25,000,000. For the years ended May 31, 2000, 1999, and 1998,
$1,733,412, $1,541,944 and $207,238 of royalty expenses were incurred with
$740,487, $702,075 and $261,667 accrued at May 31, 2000, 1999 and 1998. One of
the Development Agreements was amended on September 1, 1998 impacting on the
amount and timing of payments, giving us a buyout option, alternate royalty
payment options and extending the term of the agreement to May 31, 2005.
MARKET PRICE OF AND DIVIDENDS ON THE COMPANY'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
Effective August 28, 2000, our Common Stock has been traded on the
American Stock Exchange under the trading symbol "CDS". Prior to August 27,
2000, our Common Stock was traded on the Over the Counter under the trading
symbol "PLCR".
The high and low bid prices for the our Common Stock for each quarter
for the past three fiscal years were as follows:
Period High Low
-------------- ------------ -----------
1999 First Quarter $ 3 7/8 $ 1 7/8
Second Quarter 2 3/4 1 3/4
Third Quarter 2 15/16 1 7/8
Fourth Quarter 2 5/8 1 15/16
2000 First Quarter $ 3 13/16 $ 2 1/4
Second Quarter 5 3/4 2 1/2
Third Quarter 5 1/4 3 15/16
Fourth Quarter 5 1/2 3 1/4
2001 First Quarter $ 4 7/8 $ 3 11/16
Second Quarter 4 11/16 2 3/16
As of February 1, 2000, there were 237 holders of record of our Common
Stock.
We have not paid any cash dividends on our Common Stock and do not
anticipate paying cash dividends in the foreseeable future. We anticipate that
we will follow a policy of retaining earnings, if
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any, to finance our expansion and development. Our board of directors will
review our dividend policy from time to time to determine the feasibility and
desirability of paying dividends, after giving consideration to our results of
operations, financial condition, capital requirements and such other factors as
the board of directors deems relevant.
Each issued and outstanding share of our Series A Preferred Stock and
our Series B Preferred Stock will be entitled, as and when declared by the board
of directors, to receive, out of any assets at the time legally available
therefor, dividends at $.05 per share for Series A Preferred Stock and at the
rate of 5% per share per annum for Series B Preferred Stock. Such dividends on
our Series A and Series B Preferred Stock are prior in preference to any
outstanding shares of our Common Stock or of our Preferred Stock, other than our
Series D and Series E Preferred Stock.
Subject to the right of the holders of our Series A, B, D and E
Preferred Stock to receive a preferential dividend, the holders of shares of our
Series C Preferred Stock will be entitled, as and when declared by the board of
directors, to receive, out of any assets at the time legally available therefor,
dividends at the rate of 6% per share per annum, payable in cash commencing on
December 31, 1997. Such dividends on our Series C Preferred Stock are prior in
preference to any declaration or payment of any distribution on any outstanding
shares of Common Stock or any Preferred Stock, other than Series A, Series B,
Series D and Series E Preferred Stock.
The holder of shares of our Series D Preferred Stock will be entitled,
as and when declared by the board of directors, to receive, out of any assets at
the time legally available therefor, dividends calculated on the stated value
per share at the rate of 8% per share per annum, payable in cash commencing on
December 31, 1998 and thereafter on the last day of December of each year that
any such shares are outstanding. Such dividends on our Series D Preferred Stock
are prior in preference to any declaration or payment of any distribution on any
other outstanding shares of Common Stock or of Preferred Stock, other than
Series E Preferred Stock.
The holders of shares of our Series E Preferred Stock shall be entitled
to receive, out of any assets at the time legally available therefor and when
and as declared by the board of directors, dividends calculated on the stated
value per share at the rate of 8% per share per annum, payable in cash
commencing on December 31, 1998, and thereafter on the last day of December of
each year that any such shares shall be outstanding. Such dividends on our
Series E Preferred Stock are prior in preference to any declaration or payment
of any distribution on any other outstanding shares of Common Stock or Preferred
Stock.
Other than the foregoing, we do not anticipate the declaration or
payment of any dividends in the foreseeable future. There can be no assurance
that cash dividends of any kind will ever be paid.
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PLAN OF DISTRIBUTION
We do not currently use a broker-dealer or agent to assist in the sales
of the renewable notes. We may employ the services of a National Association of
Securities Dealers, Inc. member broker-dealer in the future for purposes of
offering the renewable notes on a "best-efforts" or agency basis. If an
agreement concerning the use of the services of any broker-dealer is reached, we
may pay any such broker-dealer a commission which we estimate will range from
.5% to 10% of the sale price of any renewable notes sold through the
broker-dealer, depending on numerous factors. We may also agree to indemnify the
broker-dealer against certain liabilities, including liabilities under the
Securities Act and to reimburse the broker-dealer for its costs and expenses, up
to a maximum to be determined, based upon the total dollar value of the
securities sold. We will otherwise offer the renewable notes through our
employees in accordance with Rule 3a4-1 under the Securities Exchange Act of
1934.
We may reject any order, in whole or in part, for any reason. In the
event your order is not accepted, we will promptly refund your funds, without
deduction of any costs and without interest. We expect that orders that are not
accepted will be refunded within 48 hours after receipt. Once your order has
been accepted, the applicable order funds will be promptly deposited in our
account. We will send a receipt to you as soon as practicable after acceptance
of your order. No minimum number of renewable notes must be sold in the
offering. You will not know at the time of order whether we will be successful
in completing the sale of any or all of the renewable notes being offered. We
reserve the right to withdraw or cancel the offering at any time. In the event
of such withdrawal or cancellation, orders previously received will be
irrevocable after the expiration of the rescission period, and no funds will be
refunded. You may rescind your subscription by sending a notice of rescission to
us within three days of sending us your subscription.
We may from time to time offer investment incentives to investors.
These incentives could take the form of favorable interest rates or other rate
term, or other incentives which would be awarded to investors who satisfy total
investment, length of investment or other criteria. There are no specific
incentive programs in place on the date of this prospectus. Any specific
incentive program would be disclosed in a prospectus supplement. Investors must
consider that they will recognize income for income tax purposes based upon the
value of any incentive received.
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EXPERTS
Our consolidated financial statements as of May 31, 2000, 1999, and
1998 and for the years then ended, included in this prospectus, have been
audited by Grant Thornton LLP, independent certified public accountants, as
indicated in their report thereon, and are included herein in reliance upon the
authority of such firm as experts in giving said report.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form S-1 with the SEC for the
securities we are offering by this prospectus. This prospectus does not include
all of the information contained in the registration statement. You should refer
to the registration statement and its exhibits for additional information.
Whenever we make reference in this prospectus to any of our contracts,
agreements or other documents, the references are not necessarily complete and
you should refer to the exhibits attached to the registration statement for
copies of the actual contract, agreement or other document. We also file annual,
quarterly and special reports, proxy statements and other information with the
SEC.
You can read our SEC filings, including the registration statement,
over the Internet at the SEC's web site at http://www.sec.gov. You may also read
and copy any document we file with the SEC at its public reference facilities at
450 Fifth Street, NW, Washington, DC 20549, 7 World Trade Center, Suite 1300,
New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511. You may also obtain copies of the documents
at prescribed rates by writing to the Public Reference Section of the SEC at 450
Fifth Street, NW, Washington, DC 20549. Please call the SEC at 1-800-SEC-0330
for further information on the operation of the public reference facilities. Our
SEC filings are also available at the offices of the American Stock Exchange at
86 Trinity Place, New York, New York 10006.
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THE CREDIT STORE, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Certified Public Accountants F-2
Consolidated Balance Sheets (audited) as of May 30, 1999 and 2000 F-3
Consolidated Statements of Operations (audited) for the years ended May 30,
1998, 1999 and 2000 F-4
Consolidated Statements of Stockholders' Equity (audited) for the years
ended May 30, 1998, 1999 and 2000 F-5
Consolidated Statements of Cash Flows (audited) for the years ended May 30,
1998, 1999 and 2000 F-7
Notes to Consolidated Financial Statements (audited) F-9
Condensed Consolidated Balance Sheets as of November 30, 2000
(unaudited) and May 31, 2000 F-25
Condensed Consolidated Statement of Operations (unaudited) for the
three months ended November 30, 1999 and 2000 F-26
Condensed Consolidated Statement of Operations (unaudited) for the six
months ended November 30, 1999 and 2000 F-27
Condensed Consolidated Statements of Cash Flows (unaudited) for the six
months ended November 30, 1999 and 2000 F-28
Notes to Condensed Consolidated Financial Statements (unaudited) F-29
F-1
67
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
The Credit Store, Inc.
We have audited the accompanying consolidated balance sheets of The
Credit Store, Inc. (a Delaware corporation) and subsidiaries as of May 31, 2000
and 1999, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended May 31,
2000. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of The
Credit Store, Inc. and subsidiaries as of May 31, 2000 and 1999, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended May 31, 2000 in conformity with
accounting principles generally accepted in the United States of America.
/s/ GRANT THORNTON LLP
Minneapolis, Minnesota
July 24, 2000
F-2
68
THE CREDIT STORE, INC.
CONSOLIDATED BALANCE SHEETS
MAY 31,
ASSETS 2000 1999
---- ----
Cash and cash equivalents $ 1,423,248 $ 3,533,930
Restricted cash 1,025,631 750,000
Accounts and notes receivable, net 2,765,882 1,150,207
Prepaid expenses 1,341,516 618,198
Amounts due from special purpose entities 9,332,890 1,230,700
Investments
Investments in nonperforming consumer debt, net 9,648,090 3,016,697
Credit card receivables, net 24,244,200 18,631,403
Investment in unconsolidated affiliate 1,279,888 1,612,648
Retained interest in securitized credit card 2,142,846 5,130,372
receivables
Property and equipment, net 4,790,060 6,132,612
Goodwill, net 2,347,999 2,555,175
Deferred tax asset 2,700,000 700,000
Other assets 1,345,942 719,014
------------ ------------
$ 64,388,192 $ 45,780,956
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable and accrued expenses $ 4,499,142 $ 4,313,409
Notes payable 23,609,326 6,086,766
Capitalized lease obligations 2,766,228 4,045,541
Subordinated notes and accrued interest payable --
related party 19,139,028 19,246,595
------------ ------------
Total liabilities 50,013,724 33,692,311
------------ ------------
COMMITMENTS AND CONTINGENCIES -- --
------------ ------------
STOCKHOLDERS' EQUITY
Series A, B, C, D and E Preferred Stock 27,000,000 27,000,000
Common stock, $.001 par value; 65,000,000 shares
authorized at May 31, 2000 and 50,000,000
shares authorized at May 31, 1999; 34,761,965
shares issued and outstanding at May 31, 2000
and 1999 34,762 34,762
Additional paid-in capital 23,743,260 22,670,711
Unrealized gain from retained interest in
securitized credit card receivables, net of tax 638,227 2,497,148
Accumulated deficit (37,041,781) (40,113,976)
------------ ------------
Total stockholders' equity 14,374,468 12,088,645
------------ ------------
Total liabilities and
stockholders' equity $ 64,388,192 $ 45,780,956
============ ============
The accompanying notes are an integral part of these statements.
F-3
69
THE CREDIT STORE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MAY 31,
2000 1999 1998
---- ---- ----
Revenue
Income from credit card receivables $ 9,706,247 $ 6,438,460 $ 3,951,602
Revenue in excess of cost recovered 21,396,561 22,308,908 8,138,122
Securitization income and asset sales 12,599,265 11,851,080 --
Servicing fees and other income 2,684,554 1,564,356 1,292,596
------------ ------------ ------------
Total revenue 46,386,627 42,162,804 13,382,320
Provision for losses 5,680,975 4,607,081 6,483,736
------------ ------------ ------------
Net revenue 40,705,652 37,555,723 6,898,584
Expenses
Salaries and employee benefits 13,502,074 12,484,582 13,268,863
Professional fees 2,604,992 2,701,016 4,215,891
Depreciation and amortization 2,494,489 2,614,216 3,223,620
Third-party credit card services 3,972,785 4,468,992 3,486,915
Third-party scrubbing services 665,078 264,536 --
Communication expense 2,769,077 2,272,513 2,035,380
Occupancy and equipment rental 858,325 766,832 825,517
Royalty expense 1,733,412 1,541,944 207,238
Financing fees 1,092,286 211,864 90,182
Other 4,001,365 4,310,466 4,229,104
------------ ------------ ------------
Total expenses 33,693,883 31,636,961 31,582,710
------------ ------------ ------------
Operating income (loss) 7,011,769 5,918,762 (24,684,126)
Interest expense 4,981,949 4,029,491 4,760,905
------------ ------------ ------------
Income (loss) before income taxes 2,029,820 1,889,271 (29,445,031)
Income tax benefit 1,042,375 1,986,409 --
------------ ------------ ------------
NET INCOME (LOSS) 3,072,195 3,875,680 (29,445,031)
Dividends on preferred stock (2,000,000) (1,799,999) (399,996)
------------ ------------ ------------
Net income (loss), applicable to common
shareholders $ 1,072,195 $ 2,075,681 $(29,845,027)
============ ============ ============
Net income (loss) per share
Basic $ 0.03 $ 0.06 $ (0.90)
Diluted $ 0.03 $ 0.06 $ (0.90)
Weighted-average common shares outstanding
Basic 34,761,965 34,761,965 33,109,781
============ ============ ============
Diluted 36,924,208 35,091,550 33,109,781
============ ============ ============
The accompanying notes are an integral part of these statements.
F-4
70
THE CREDIT STORE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED MAY 31,
COMMON STOCK
--------------------- SERIES A SERIES B SERIES C SERIES D
SHARES AMOUNT PREFERRED PREFERRED PREFERRED PREFERRED
------ ------ --------- --------- --------- ---------
Balance at June 1, 1997 32,207,465 $32,208 $1,200,000 $800,000 $5,000,000 $ --
Net loss -- -- -- -- -- --
Issuance of Series D Preferred
Stock in exchange for $10 million
subordinated note -- -- -- -- -- 10,000,000
Issuance of common stock 2,554,500 2,554 -- -- -- --
---------- ------- ---------- -------- ---------- -----------
Balance at May 31, 1998 34,761,965 34,762 1,200,000 800,000 5,000,000 10,000,000
Net income -- -- -- -- -- --
Unrealized gain and accretion on
retained interest in
securitization, net of tax -- -- -- -- -- --
Comprehensive income -- -- -- -- -- --
Issuance of Series E Preferred
Stock in exchange for $10 million
subordinated note -- -- -- -- -- --
Issuance of warrants in lieu of
payment of accrued interest on
subordinated debt -- -- -- -- -- --
---------- ------- ---------- -------- ---------- -----------
Balance at May 31, 1999 34,761,965 34,762 1,200,000 800,000 5,000,000 10,000,000
Net income -- -- -- -- -- --
Unrealized gain and accretion on
retained interest in
securitization, net of tax -- -- -- -- -- --
Sale of retained interest in
securitized receivables, net of
tax -- -- -- -- -- --
Comprehensive income -- -- -- -- -- --
Issuance of warrants and stock
options in lieu of payment for
services and assets -- -- -- -- -- --
---------- ------- ---------- -------- ---------- -----------
Balance at May 31, 2000 34,761,965 $34,762 $1,200,000 $800,000 $5,000,000 $10,000,000
========== ======= ========== ======== ========== ===========
The accompanying notes are an integral part of these statements.
F-5
71
THE CREDIT STORE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - CONTINUED
YEARS ENDED MAY 31,
ADDITIONAL OTHER TOTAL
SERIES E PAID-IN ACCUMULATED COMPREHENSIVE STOCKHOLDERS'
PREFERRED CAPITAL DEFICIT INCOME EQUITY
--------- ------- ------- ------ ------
Balance at June 1, 1997 $ -- $14,137,892 $(14,544,625) $ -- $ 6,625,475
Net loss -- -- (29,445,031) -- (29,445,031)
Issuance of Series D Preferred Stock
in exchange for $10 million
subordinated note -- -- -- -- 10,000,000
Issuance of common stock -- 5,173,890 -- -- 5,176,444
----------- ----------- ------------ ----------- ------------
Balance at May 31, 1998 -- 19,311,782 (43,989,656) -- (7,643,112)
Net income -- -- 3,875,680 -- 3,875,680
Unrealized gain and accretion on
retained interest in
securitization, net of tax -- -- -- 2,497,148 2,497,148
------------
Comprehensive income -- -- -- -- 6,372,828
Issuance of Series E Preferred Stock
in exchange for $10 million
subordinated note 10,000,000 -- -- -- 10,000,000
Issuance of warrants in lieu of
payment of accrued interest on
subordinated debt -- 3,358,929 -- -- 3,358,929
----------- ----------- ------------ ----------- ------------
Balance at May 31, 1999 10,000,000 22,670,711 (40,113,976) 2,497,148 12,088,645
Net income -- -- 3,072,195 -- 3,072,195
Unrealized gain and accretion on
retained interest in
securitization, net of tax -- -- -- 2,062,292 2,062,292
Sale of retained interest in
securitized receivables, net
of tax -- -- -- (3,921,213) (3,921,213)
------------
Comprehensive income -- -- -- -- 1,213,274
Issuance of warrants and stock
options in lieu of payment for
services and assets -- 1,072,549 -- -- 1,072,549
----------- ----------- ------------ ----------- ------------
Balance at May 31, 2000 $10,000,000 $23,743,260 $(37,041,781) $ 638,227 $ 14,374,468
=========== =========== ============ =========== ============
The accompanying notes are an integral part of these statements.
F-6
72
THE CREDIT STORE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MAY 31,
2000 1999 1998
---- ---- ----
Cash flows from operating activities:
Net income (loss) $ 3,072,195 $ 3,875,680 $(29,445,031)
Adjustments to reconcile net income (loss) to net
cash used in operating activities
Provision for credit card losses 5,680,975 4,607,081 6,483,736
Amortization of discount on performing credit
card portfolio (1,344,418) -- --
Provision for losses on accounts and notes
receivable 100,000 768,860 780,027
Depreciation and amortization 2,494,489 2,614,216 3,223,620
Deferred tax benefit (1,042,375) (1,986,409) --
Gain on sale of interest in affiliates (5,260,358) -- --
(Gain)loss from unconsolidated affiliates 332,760 (325,183) (277,159)
Gain on sale of credit card receivable
portfolios (5,771,007) (11,851,080) --
Services received for stock options granted 38,500 -- 176,444
Changes in operating assets and liabilities:
Restricted cash (275,631) 250,000 --
Accounts and notes receivable (1,715,675) (1,426,401) (473,436)
Receivable from unconsolidated affiliate (8,102,190) (1,230,700) --
Prepaid expenses (723,318) (173,362) (327,177)
Accrued interest on funds advanced on
credit cards (511,096) 82,488 (263,255)
Accrued fees (1,197,790) 291,161 (48,382)
Other assets 407,121 (177,085) (383,338)
Unearned fees 264,855 184,551 216,721
Accounts payable and accrued expenses 185,733 (193,277) 1,230,841
Accrued interest payable on subordinated
notes 242,433 2,439,273 3,675,381
------------ ------------ ------------
Net cash used in operating activities (13,124,797) (2,250,187) (15,431,008)
Cash flows from investing activities:
Collection of funds advanced on credit cards 18,581,055 13,305,543 1,887,306
Collection of consumer debt 7,180,106 11,278,295 18,162,596
Funds advanced on securitized credit card
receivables (1,840,282) (1,346,815) --
Proceeds from sale of credit card receivable
portfolios 12,244,229 17,129,109 --
Funds advanced on credit cards (30,849,101) (29,460,286) (18,629,185)
Purchase of nonperforming consumer debt portfolios (13,811,499) (8,622,478) (15,641,657)
Proceeds from sale of beneficial interest in
affiliates 8,643,233 -- --
Purchase of performing consumer debt portfolios (4,082,114) -- --
Development of proprietary software (207,587) (460,497) --
Purchase of property and equipment (737,172) (682,539) (4,170,472)
------------ ------------ ------------
Net cash provided by (used in)
investing activities (4,879,132) 1,140,332 (18,391,412)
------------ ------------ ------------
The accompanying notes are an integral part of these statements.
F-7
73
THE CREDIT STORE, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS - CONTINUED
FOR THE YEARS ENDED MAY 31,
2000 1999 1998
---- ---- ----
Cash flows from financing activities:
Proceeds from debt $ 19,128,881 $ 576,643 $ 33,240,887
Payments on debt (1,956,321) (2,032,989) (101,921)
Borrowings from sale/leaseback transactions 896,018 559,713 3,146,275
Payments on capital lease obligations (2,175,331) (1,664,653) (1,943,331)
Proceeds from issuance of stock -- -- 5,000,000
------------ ------------ ------------
Net cash provided by (used in)
financing activities 15,893,247 (2,561,286) 39,341,910
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH (2,110,682) (3,671,141) 5,519,490
Cash and cash equivalents at beginning of period 3,533,930 7,205,071 1,685,581
------------ ------------ ------------
Cash and cash equivalents at end of period $ 1,423,248 $ 3,533,930 $ 7,205,071
============ ============ ============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 4,178,571 $ 1,592,864 $ 1,006,663
Noncash financing activities:
Series D and E preferred stock issued in
exchange for subordinated note -- 10,000,000 10,000,000
Obligations assumed in lieu of payment of
accrued interest on subordinated debt -- 1,641,071 --
Issuance of warrants in lieu of payment of
accrued interest on subordinated debt -- 3,358,929 --
Issuance of warrants and stock options in
lieu of payment for services and assets 1,072,549 -- --
The accompanying notes are an integral part of these statements.
F-8
74
THE CREDIT STORE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2000, 1999 AND 1998
NOTE A - ORGANIZATION
The Credit Store, Inc. (the "Company") is a technology based financial
services company that provides credit card products to consumers who may
otherwise fail to qualify for a traditional unsecured bank credit card. The
Company reaches these consumers by acquiring portfolios of non-performing
consumer receivables and offering a new credit card to those consumers who
agree to pay all or a portion of the outstanding amount due on their debt
and who meet the Company's underwriting guidelines. The new card is issued
with an initial balance and credit line equal to the agreed repayment
amount. After the consumers have made a certain number of on-time payments
on their outstanding credit card balance, the Company seeks to sell or
securitize the credit card receivables generated by this business strategy.
The Company offers other forms of settlement to those consumers who do not
accept the credit card offer.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany transactions
have been eliminated.
Cash and Cash Equivalents
For purposes of the statements of cash flows, cash includes all cash and
investments with original maturities of three months or less when purchased,
except restricted cash. The Company's restricted cash is on deposit with two
banks in order to facilitate funding of credit card loans. The Company
maintains its cash in bank deposit accounts, which at times may exceed
federally insured limits.
Investments
Investments in nonperforming consumer debt consist of portfolios of consumer
debt purchased by the Company, which are recorded at cost, less cost
recovered. Cost is substantially less than the remaining outstanding balance
on these portfolios. To the extent that the cost of a particular portfolio
of debt purchased exceeds the present value of the estimated amount of cash
expected to be collected, a valuation allowance would be recognized in the
amount of such impairment.
Credit card receivables consist of amounts funded by the Company for new
purchases or advances, accrued interest on new purchases and advances, and
accrued fees, less a provision for losses and unearned fees.
Investment in unconsolidated affiliate represents the Company's 50%
ownership interest in an entity involved in substantially the same business
as the Company and is recorded on the equity method of accounting.
F-9
75
Securitization Accounting
Statement of Financial Accounting Standards No. 125 ("SFAS No. 125"),
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," requires an entity to recognize the
financial and servicing assets it controls and the liabilities it has
incurred and to derecognize financial assets when control has been
surrendered. The proceeds of securitized financial assets are allocated to
the assets sold, the servicing asset or liability and retained interest
based on their relative fair values at the transfer date in determining the
gain on the securitization transaction.
SFAS No. 125 requires an entity to recognize a servicing asset or servicing
liability each time it undertakes an obligation to service financial assets
that have been securitized and amortize it over the period of estimated net
servicing income or loss. The Company received adequate compensation for the
servicing of securitized credit card receivables and therefore no servicing
asset or liability was recorded.
Retained Interest in Securitized Credit Card Receivables
The retained interest in securitized credit card receivables is treated as a
debt security classified as available-for-sale in accordance with Statement
of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," and is carried at fair value.
Fair value is based on the discounted anticipated future cash flows on a
"cash out" basis. The cash out method projects cash collections to be
received only after all amounts owed to investors have been remitted.
Adjustments to fair value (net of related income taxes) are recorded as a
component of other comprehensive income.
Income on the retained interest is accrued based on the effective interest
rate applied to its original cost basis, adjusted for accrued interest and
principal payments. The effective interest rate is the internal rate of
return determined based on the timing and amounts of anticipated future cash
flows for the underlying pool of securitized credit card receivables.
The retained interest is evaluated for impairment by management monthly
based on current market and cash flow assumptions applied to the underlying
receivables. Provisions for losses are charged to earnings when it is
determined that the retained interest's original cost basis, adjusted for
accrued interest and principal payments, is greater than the present value
of expected future cash flows. No provision for losses was recorded during
the fiscal years ended May 31, 2000, 1999 and 1998.
Property and Equipment
Property and equipment are recorded at cost, less accumulated depreciation
and amortization. Depreciation and amortization are determined using the
straight-line method over the estimated useful lives of the assets or terms
of the capital lease. Expenditures for maintenance and repairs are expensed
when incurred.
Goodwill
Goodwill originating from the acquisition of companies acquired in purchase
transactions is being amortized using the straight-line method over fifteen
years. The Company evaluates the impairment of goodwill based on
expectations of future non-discounted cash flows and operating income
related to purchased businesses. As of May 31, 2000 and 1999, accumulated
amortization was $759,646 and $552,470.
F-10
76
Revenue Recognition
Income from credit cards receivable represents interest and fees on new
advances or purchases made by holders of the Company's credit cards on an
accrual basis.
For the portfolios of nonperforming consumer debt, revenue in excess of cost
recovery is accounted for on a pool basis using the cost recovery method of
accounting in accordance with Practice Bulletin No. 6, "Amortization of
Discounts on Certain Acquired Loans." Under the cost recovery method of
accounting, all cash receipts relating to individual portfolios of
nonperforming consumer debt are applied first to recover the cost of the
portfolios, prior to recognizing any revenue. Cash receipts in excess of
cost of acquired portfolios are then recognized as revenue.
Servicing revenues are fees related to processing and managing credit cards
for third parties. These revenues are recognized when the related services
are provided.
The Company's policy is to accrue fee income and interest on new advances on
all credit card accounts including delinquent accounts, until the account is
charged off. A credit card is contractually delinquent if the minimum
payment is not received on the specified payment due date on the customer's
statement.
For performing credit card portfolios purchased, the Company uses models to
estimate the amount and timing of future cash flows. These models are based
on historical cash collection data from performing receivable portfolios and
are used to compute an effective interest rate for income recognition. For
these portfolios the fair value of credit card receivables is based upon
discounted expected cash flows. The discount rate is based upon an
acceptable rate of return adjusted for specific risk factors inherent in
each individual portfolio.
Allowance for Credit Card Losses
The provision for possible credit card losses includes current period losses
and an amount which, in the judgment of management, is necessary to maintain
the allowance for possible credit card losses at a level that reflects known
and inherent risks in the credit card portfolio. In evaluating the adequacy
of the allowance for credit card losses, management considers several
factors, including: historical trends of charge-off activity for each credit
card portfolio as well as current economic conditions and the impact that
such conditions might have on a borrowers' ability to repay. Significant
changes in these factors could affect the adequacy of the allowance for
credit card losses in the near term. Credit card accounts are generally
charged off at the end of the month during which the credit card receivable
becomes contractually 120 days past due, with the exception of bankrupt
accounts, which are charged off immediately upon formal notification of
bankruptcy, and accounts of deceased cardholders without a surviving,
contractually liable individual, which are also charged off immediately upon
notification.
The following table summarizes information about the Company's allowance for
credit card losses.
FOR THE YEARS ENDED MAY 31,
---------------------------
2000 1999
---- ----
Balance at beginning of period $ 2,846,533 $ 3,688,091
Provision for credit card losses 5,680,975 4,607,081
Credit card receivables
charged-off (6,051,670) (5,448,639)
----------- -----------
Balance at end of period $ 2,475,838 $ 2,846,533
=========== ===========
F-11
77
Accounts and Notes Receivable
As of May 31, 2000 and 1999, the accounts and notes receivable allowance for
doubtful accounts was $584,029 and $746,463.
Stock Based Compensation
The Company utilizes the intrinsic value method of accounting for its
stock-based employee compensation plans. Pro-forma information related to
the fair value based method of accounting is contained in note H.
Deferred Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Net Income (Loss) Per Share
Basic net income (loss) per share is computed by dividing net income (loss)
applicable to common stockholders by the weighted-average number of common
shares outstanding during the period. Net income (loss) applicable to common
stockholders is computed by deducting dividends on preferred stock from net
income (loss). Diluted net income (loss) per share is based on the
weighted-average number of common and common equivalent shares outstanding.
The calculation takes into account the shares that may be issued upon
exercise of stock options, reduced by the shares that may be repurchased
with the funds received from the exercise, based on the average price during
the period. In computing diluted net income (loss) per share, only potential
common shares that are dilutive (those that reduce net income per share) are
included. Exercise of stock options is not assumed if the result would be
antidilutive, such as when a net loss is reported.
Comprehensive Income
Comprehensive income, as defined by SFAS No. 130, "Reporting Comprehensive
Income," includes net income (loss) and items defined as other comprehensive
income. SFAS No. 130 requires that items defined as other comprehensive
income (loss), such as unrealized gains and losses on certain investments in
debt securities, be separately classified in the financial statements. Such
disclosures are included in the consolidated statements of stockholders'
equity.
Reclassifications
Certain reclassifications have been made to prior period amounts to conform
to the current period presentation.
Use of Estimates
In preparing financial statements in conformity with accounting principles
generally accepted in the United States of America, management is required
to make estimates and assumptions that affect the reported amounts of assets
and liabilities, the disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
F-12
78
Significant estimates have been made by management with respect to the
timing and amount of collection of future cash flows from nonperforming
consumer debt and credit card receivables ("portfolios"). Among other
things, the estimated future cash flows of the portfolios are used to
recognize impairment in investment in nonperforming consumer debt, provision
for losses on credit card receivables and fair value of retained interest in
securitized credit card receivables. On a periodic basis, management reviews
the estimate of future collections, and it is reasonably possible that these
estimates may change based on actual results and other factors. A change
could be material.
New Accounting Pronouncements
FASB Interpretation 44, Interpretation of APB Opinion 25 ("FIN 44"), was
issued in March 2000. FIN 44 provides an interpretation of APB Opinion 25 on
accounting for employee stock compensation and describes its application to
certain transactions. FIN 44 is effective on July 1, 2000. It applies on a
prospective basis to events occurring after that date, except for certain
transactions involving options granted to nonemployees, repriced fixed
options, and modifications to add reload option features, which apply to
awards granted after December 31, 1998. The provisions of FIN 44 are not
expected to have a material effect on transactions entered into through May
31, 2000.
NOTE C - INVESTMENTS IN NONPERFORMING CONSUMER DEBT AND CREDIT CARD RECEIVABLES
Investments in Nonperforming Consumer Debt
The Company acquires portfolios of nonperforming consumer installment debt,
credit card receivables, and automobile deficiency debt from originating
financial institutions. These debts are acquired at a substantial discount
from the actual consumer outstanding balance. The outstanding balance of the
debt acquired by the Company at May 31, 2000 and 1999 was approximately $3.1
billion and $2.0 billion. The Company's objective is to offer the consumer
an opportunity to settle these debts, typically at a discount, and transfer
the settled amount to a newly issued credit card. (See Credit Card
Receivables below.)
Investments in nonperforming consumer debt consist of the following at May
31:
2000 1999
---- ----
Cost of portfolios purchased including
capitalized acquisition costs of
$2,109,937 and $2,079,897 $ 51,907,168 $ 38,574,174
Cost recovered (42,259,078) (35,557,477)
------------ ------------
Investment in nonperforming consumer debt $ 9,648,090 $ 3,016,697
============ ============
Credit Card Receivables
Upon settlement of the debt, a credit card is issued to the consumer with
the opening balance and credit line equal to the settlement amount. The
Company expenses origination costs including direct mail and telemarketing
costs as incurred. The Company does not record a credit card asset until the
cardholder begins to make new charges on the account. For financial
statement purposes the Company records as credit card receivables the amount
funded on new advances and purchases, accrued interest on new advances and
accrued fees, less provision for losses on credit card receivables and
unearned fees. After making principal payments on the settlement amount, the
customer may use the credit card for new purchases and cash advances up to
their available credit limit, which may be increased from time to time based
on their payment history. Total credit card balances below represent the
total amount owed to the Company by the cardholders. Available credit
represents the
F-13
79
additional amount that the Company would be obligated to fund if the credit
cards were fully utilized by the cardholders.
MAY 31,
-------
2000 1999
----------- -----------
Total credit card balances $77,832,562 $55,184,540
=========== ===========
Available credit $ 7,837,918 $ 4,296,364
=========== ===========
Principal funded on new advances and
purchases $26,536,055 $21,303,274
Accrued interest on principal funded 420,383 243,489
Accrued fees 429,727 332,446
----------- -----------
27,386,165 21,879,209
----------- -----------
Less:
Provision for losses on credit card
receivables $ 2,475,838 $ 2,846,533
Unearned fees 666,127 401,273
----------- -----------
3,141,965 3,247,806
----------- -----------
Credit card receivables $24,244,200 $18,631,403
=========== ===========
NOTE D - SECURITIZATION AND GAIN ON SALES OF CREDIT CARD RECEIVABLE PORTFOLIOS
During the year ended May 31, 2000, the Company established a new
wholly-owned qualified special purpose entity (SPE), TCS Funding IV, Inc.
(TCS IV), for the purpose of purchasing performing credit card receivables
from the Company. TCS IV entered into a $40,000,000 credit facility with a
lending institution to finance the purchase of credit card receivables. The
initial approximately $12,100,000 sale of credit card receivables to the SPE
included receivables with a principal balance of approximately $14,200,000.
TCS IV provided $10,000,000 for the purchase and the remaining approximately
$2,100,000 of the purchase price was recorded by the Company as retained
interest. The transaction closed on May 31, 2000. The Company recognized a
pre-tax gain, of approximately $3,800,000. The unrealized gain of
approximately $638,000, included in the retained interest, was recorded net
of tax as a separate component of stockholders' equity.
At May 31, 2000, the Company recorded a receivable from the SPE for
$9,332,890. This balance represented sales proceeds due to the Company. The
receivable was guaranteed by the lending institution through an irrevocable
commitment to fund. The receivable was collected subsequent to May 31, 2000.
The TCS IV credit facility requires interest payments only during the first
18 months and allows for multiple advances during this period up to $40
million. Borrowings in excess of $10 million are governed by a borrowing
base and are contingent upon the senior beneficial interests receiving a
minimum BBB- rating from a nationally recognized rating agency. The credit
facility advances 70% of the receivables balance, of which 5% must be
deposited into a reserve account. The Company is in the process of attaining
a rating on behalf of TCS IV. The terms of the credit facility require that
all credit card receivables purchased by TCS IV must be current with a
minimum of eight payments made on each account and must meet certain other
eligibility requirements.
During the first 18 months of the credit facility, after new charges are
funded and fees and interest are paid, excess cash collections can be used
by the SPE to purchase additional accounts from the Company or pay down the
senior beneficial interest. Following the first 18 months, all cash
collections relating to the senior debt interest in the receivables are used
to repay principal, after the payment-related servicing fees and interest
are made. All new charges on the sold accounts are either sold to the SPE or
contributed in exchange for a residual interest until such time as the
senior debt interest is paid down. While the senior debt interest is in
place, there are restrictions on payments that can be made by the Company to
certain related parties.
F-14
80
During the year ended May 31, 2000, the Company also sold a portfolio of
receivables totaling approximately $1,400,000, with a carrying value of
approximately $644,000, for approximately $1,100,000 to an unrelated party
without recourse.
During the year ended May 31, 1999, the Company completed three
securitizations of seasoned credit card receivables ("Receivables") of
approximately $20,400,000 with three unconsolidated wholly-owned qualified
special purpose entities ("SPE's"). All receivables sold in these
transactions were current with a minimum of eight payments made on each
account. The SPE's purchased the Receivables from the Company for
approximately $17,300,000, which was funded with the sale of senior debt
interests. The remaining approximately $4,300,000 represented interest
retained by the Company.
Under the provisions of SFAS No. 125, the securitizations are accounted for
as sales. As a result, the Company recognized a pre-tax gain of
approximately $8,000,000 and recorded a retained interest in securitized
credit card receivables on an allocated basis in the amount of approximately
$1,300,000 based on its relative fair value as discussed in Note B.
At May 31, 1999, the allocated basis amount was adjusted to a fair value of
approximately $5,100,000, resulting in approximately $3,800,000 of
unrealized gain on the retained interest in securitized credit card
receivables. The unrealized gain was recorded net of tax of approximately
$1,300,000, resulting in approximately $2,500,000, as a component of
comprehensive income. The fair value of the retained interest was estimated
using a discount rate of 23% to calculate the present value of all projected
net cash flows from the credit cards reduced by servicing costs and an
annualized default rate of 12%. The discount rate was arrived at by
comparison to the market rate on investments of similar risk and term that
are available for the company to invest in. During November 1999, the
Company sold its retained interest in the three SPE's to the lender for
approximately $8,600,000, resulting in a pre-tax gain of approximately
$6,500,000.
As of May 31, 1999, the Company included $1,230,700 in amounts due from
SPE's representing funds advanced with respect to revolving period
requirements and servicing fee income which are paid to the Company on a
monthly basis.
During the year ended May 31, 1999, The Company also sold a portfolio of
credit card receivables with a total credit card balance of approximately
$7,000,000 and a carrying value of approximately $2,250,000 for $5,000,000
to an unrelated party without recourse.
NOTE E - PROPERTY AND EQUIPMENT
Property and equipment consist of the following at May 31:
USEFUL
LIFE
(IN YEARS) 2000 1999
---------- ---- ----
Computer equipment and software 3 - 5 $ 7,289,750 $ 6,631,043
Office equipment 5 - 7 2,280,037 2,275,037
Furniture and fixtures 5 - 7 1,241,458 1,183,400
Proprietary software 5 668,084 460,497
Leasehold improvements Life of
leases 669,884 654,475
------------ -----------
12,149,213 11,204,452
Less accumulated depreciation
and amortization (7,489,579) (5,202,266)
------------ -----------
4,659,634 6,002,186
Land 130,426 130,426
------------ -----------
$ 4,790,060 $ 6,132,612
============ ===========
F-15
81
NOTE F - NOTES PAYABLE
Notes payable consist of the following at May 31:
2000 1999
----------- ----------
Note payable - bank $13,442,597 $3,644,776
Note payable - other
lenders 10,065,808 2,217,714
Note payable - other 100,921 224,276
----------- ----------
$23,609,326 $6,086,766
=========== ==========
Note Payable - Bank
On April 30, 1998, the Company entered into a financing agreement with a
bank. The revolving line of credit, may not exceed an established dollar
amount or 50% of the Company's eligible receivables as defined by the
agreement and is used for general working capital purposes. The originally
established dollar amount, which was $5,000,000, was increased to
$10,000,000 on June 25, 1999 and increased to $15,000,000 on December 6,
1999. The line is collateralized by substantially all of the Company's
assets. The interest rate, which was originally at the prime rate plus 2.75%
per annum, was reduced to prime rate plus 2.5% per annum on June 25, 1999.
The agreement expires July 29, 2001. Interest expense for the years ended
May 31, 2000, 1999 and 1998 was $1,501,047, $617,249, and $27,936.
Note Payable - Other Lenders
The Company has uncollateralized installment notes with respect to purchases
of nonperforming consumer debt in addition to assuming installment
obligations from the closing of certain affiliated mortgage companies (see
Note L). The notes have various maturity dates through May 2002, with
interest rates ranging up to 23.7% per annum. The amount outstanding as of
May 31, 2000 and 1999 was $2,292,920 and $2,217,714. Interest expense for
the years ended May 31, 2000, 1999 and 1998 was $145,763, $65,353, and
$51,925.
On October 15, 1999, the Company, through a bankruptcy remote special
purpose entity (SPE), entered into a revolving line of credit ("revolving
line") with a financial institution. The revolving line, which may not
exceed $17,500,000, is non-recourse to the Company and is secured by all
assets of the SPE. The revolving line is used to acquire non-performing
consumer debt portfolios. The Company services the portfolios subject to an
agreement with the SPE and purchases all new credit card receivables for a
pre-determined price. The SPE is not a Qualified SPE for accounting purposes
and is fully consolidated with the Company in the accompanying consolidated
financial statements. Interest is charged at a floating daily rate and is
equal to the reference rate plus 2.5% per annum. The agreement is in effect
until August 31, 2002. The amount outstanding as of May 31, 2000 was
$1,772,888. Interest expense for the year ended May 31, 2000 was $151,547.
On September 20, 1999, the Company entered into a repurchase agreement with
a bank. Under the agreement the bank purchased credit card receivables from
the Company for $3,000,000. The agreement had an initial repurchase date of
December 20, 1999, which has been extended to September 15, 2000. In
addition, the agreement was increased to $6,000,000 effective March 17,
2000. Interest is charged at a rate of 15% per annum. Interest expense for
the year ended May 31, 2000 was $378,750.
F-16
82
At May 31, 2000, future minimum principal payments for all notes payable
were as follows:
YEAR AMOUNT
- ---- ------
2001 $ 8,156,058
2002 13,680,381
2003 1,772,887
-----------
$23,609,326
===========
NOTE G - CAPITAL LEASE OBLIGATIONS
The Company leases computer equipment and furniture and fixtures under
long-term leases and has the option to purchase the equipment for a nominal
cost at the termination of the lease. Assets under capital leases have been
capitalized at a cost of $6,953,160 and $6,526,915, and have accumulated
amortization of $5,023,793 and $3,646,314 at May 31, 2000 and 1999.
Future minimum lease payments for capitalized leases are as follows at May
31, 2000:
YEAR AMOUNT
---- ------
2001 $1,695,728
2002 1,325,048
2003 328,479
2004 27,282
----------
3,376,537
Less amount representing interest (610,309)
----------
$2,766,228
==========
Amortization expense for assets under capital leases for the years ended May
31, 2000, 1999 and 1998 was $1,377,479, $1,645,705 and $1,535,029.
NOTE H - STOCK OPTIONS
The Board of Directors of the Company approved the Company's 1997 Stock
Option Plan (the "Plan"). The Plan authorizes the grant of stock options
covering 4,000,000 shares of the Company's common stock. In addition, the
Board of Directors has granted stock options outside the Plan covering a
total of 1,550,000 shares of Common Stock. The Board of Directors has the
authority to determine the key employees, consultants, and directors who
shall be granted options as well as the number of options granted and the
nature of each grant. The options granted under the Plan may be either
incentive stock options or nonqualified stock options.
Transactions during each of the three years in the period ended May 31, 2000
are summarized as follows:
NUMBER OF WEIGHTED
SHARES UNDER AVERAGE
OPTION EXERCISE PRICE
------ --------------
Outstanding at June 1, 1997 2,550,000 $5.76
Granted 3,021,000 2.45
Cancelled (1,915,000) 5.93
----------
Outstanding at May 31, 1998 3,656,000 2.93
Granted 690,500 2.35
----------
Outstanding at May 31, 1999 4,346,500 2.84
F-17
83
NUMBER OF WEIGHTED
SHARES UNDER AVERAGE
OPTION EXERCISE PRICE
------ --------------
Granted 942,500 2.90
Cancelled (156,000) 2.08
----------
Outstanding at May 31, 2000 5,133,000 $2.88
==========
Options exercisable at May 31 are as follows:
1998 2,395,000 $3.39
1999 3,305,500 3.08
2000 4,750,000 2.88
The following table summarizes information about stock options outstanding
at May 31, 2000:
OPTIONS OUTSTANDING
---------------------------------------------
WEIGHTED
AVERAGE WEIGHTED
RANGE OF REMAINING AVERAGE
EXERCISE NUMBER LIFE EXERCISE
PRICES OUTSTANDING (YEARS) PRICE
------ ----------- ------- -----
$2.00 - $2.50 3,433,500 3.12 $2.09
$2.69 - $4.03 720,500 3.97 3.10
$4.50 - $5.50 979,000 1.90 5.48
---------
5,133,000 $2.88
========= =====
OPTIONS EXERCISABLE
---------------------------------
NUMBER WEIGHTED
RANGE OF EXERCISABLE AT AVERAGE
EXERCISE MAY 31, EXERCISE
PRICES 2000 PRICE
------ ---- -----
$2.00 - $2.50 3,250,500 $2.09
$2.69 - $4.03 532,500 2.96
$4.50 - $5.50 967,000 5.49
-------
4,750,000 $2.88
========= =====
On April 30, 1998, the Company granted warrants to purchase 650,247 shares
of the Company's common stock for $2.50 per share to a bank with which it
has a financing agreement. Warrants to purchase 278,677 shares were
exercisable immediately, while the remaining 371,570 warrants were
exercisable on June 25, 1999, when the Company's line of credit increased to
$10,000,000 (see Note F). The fair value of the warrants was $1.01 at the
date of grant. For the year ended May 31, 2000, $357,182 of amortization was
included in interest expense.
On March 18, 1999, the Company granted a five-year warrant to a vendor to
purchase 250,000 shares of the Company's common stock at $2.00 per share.
The fair value was $0.85 per warrant. For the year ended May 31, 2000,
expense was $72,262.
The Company's proforma net income (loss) applicable to common shareholders
and basic and diluted net income (loss) per share would have been as follows
had the fair value method been used for valuing stock options granted to
employees for the year ended May 31 are as follows:
2000 1999 1998
---- ---- ----
Net income (loss) applicable to
common shareholders $ (506,953) $ 50,109 $ (30,214,556)
Net income (loss) per share
Basic and diluted $ (0.01) $ 0.00 $ (0.91)
F-18
84
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions:
FOR THE YEARS ENDED MAY 31,
---------------------------
2000 1999 1998
---- ---- ----
Fair value of options
granted $2.12 $1.73 $1.52
Assumptions:
Dividend yield $0 $0 $0
Volatility 90% 90% 120%
Average term 5 or 10 years 5 or 10 years 5 or 10 years
Risk-free rate of return 6.05% - 6.47% 5.75% - 5.81% 4.50%
NOTE I - INCOME TAXES
Deferred income tax assets (liabilities) consist of the following at May 31:
2000 1999
------------ ------------
Deferred tax assets
Net operating loss carryforward $ 14,291,477 $ 17,065,146
Allowance for doubtful accounts 1,389,759 1,221,619
------------ ------------
Total deferred tax assets 15,681,206 18,286,765
Less valuation allowance (10,327,461) (12,270,988)
------------ ------------
5,353,745 6,015,777
Deferred tax liabilities
Gain on sales of portfolios (2,324,961) (4,029,368)
Unrealized gain on retained interest in
securitization (328,784) (1,286,409)
------------ ------------
Total deferred tax liabilities (2,653,745) (5,315,777)
------------ ------------
Net deferred tax asset $ 2,700,000 $ 700,000
============ ============
The difference between the total income tax benefit and the income tax
expense computed using the applicable Federal income tax rate was as follows
for the years ended May 31:
2000 1999 1998
----------- ----------- ------------
Computed Federal income taxes at 34% $ 690,139 $ 642,352 $(10,011,311)
Increase (decrease) of deferred tax
asset valuation allowance (1,732,514) (2,628,761) 10,011,311
----------- ----------- ------------
Income tax benefit $(1,042,375) $(1,986,409) $ --
=========== =========== ============
At May 31, 2000, the Company has a net operating loss carryforward available
to offset future taxable income of approximately $42,000,000, which will
begin to expire in 2012. The benefit of the net operating loss carryforwards
is dependent upon the tax laws in effect at the time the net operating loss
carryforwards are to be utilized and the change of control rules.
The Company continually reviews the adequacy of the valuation allowance and
recognizes those benefits only as the Company's assessment indicates that it
is more likely than not that future tax benefits will be realized. Based
upon actual pretax income and projected future earnings, the Company has
reduced the valuation allowance by $2,000,000 and $700,000 for the years
ended May 31, 2000 and 1999, respectively. The Company maintains a valuation
allowance for the remaining amount of deferred tax assets created by net
operating losses and the allowance for doubtful accounts.
NOTE J - EMPLOYEE BENEFIT PLANS
In January 1998, the Company adopted a defined contribution 401(k)
profit-sharing plan for its employees. All employees working at least 1,000
hours per year are eligible to participate in the plan. Employees can
contribute up to 15% of their salary up to $10,000 and $9,500 for the
calendar years
F-19
85
1999 and 1998. The plan requires the employer to match 100% of the first 3%
of compensation contributed to the plan by the employees. Employer
contributions vest at a rate of 20% per year. Additional employer
contributions are allowable at the discretion of the Board of Directors. The
Company expensed $217,271, $173,479 and $84,573 in 2000, 1999 and 1998
relating to this plan.
NOTE K - MUTUAL BUSINESS DEVELOPMENT AGREEMENTS
The Company is obligated to pay royalties to previous owners under the terms
of Mutual Business Development Agreements ("Development Agreements").
The royalty is equal to five percent of the balance transfer amount, as
defined, on all converted credit card accounts which: (i) are delivered to a
pre-securitization credit facility, (ii) become a qualifying receivable, or
(iii) meet other specified account age and payment parameters. A qualifying
receivable is defined as any converted account on which the cardholder has
made three consecutive payments within certain time restrictions. In
addition, the Company is required to pay royalties equal to five percent of
all principal cash collections on certain accounts that are not converted to
credit cards. The term of the Development Agreements expires in 2002 and the
total royalty, if earned, payable to each of the previous owners, after
certain deductions and exclusions, shall not exceed $25,000,000. For the
years ended May 31, 2000, 1999, and 1998, $1,733,412, $1,541,944, and
$207,238 of royalty expenses were incurred with $740,487, $702,075, and
$261,667 accrued at May 31, 2000, 1999, and 1998. One of the Development
Agreements was amended on September 1, 1998. The amendment clarifies the
amount and timing of payments, gives the Company a buyout option, alternate
royalty payment options, and extends the term of the agreement to May 31,
2005.
NOTE L - RELATED PARTY TRANSACTIONS
At May 31, 2000 and 1999, the Company owed amounts under subordinated
promissory notes to J.L.B. of Nevada, Inc. of Nevada, Inc. ("J.L.B. of
Nevada, Inc."), an entity wholly owned by Jay L. Botchman ("Botchman"), a
director, totaling $16,444,940 payable on demand with interest at 12% per
annum. Interest expense on these notes was $2,006,283, $2,307,467, and
$3,635,891 for the years ended May 31, 2000, 1999, and 1998. Accrued
interest related to subordinated promissory notes was approximately
$1,500,000, $1,300,000, and $4,000,000 at May 31, 2000, 1999, and 1998. The
notes are collateralized by substantially all the Company's assets, but
subordinated to the Company's revolving credit lines.
On May 29, 1999, J.L.B. of Nevada, Inc., in lieu of payment of $5,000,000 of
interest on the subordinated promissory notes, received a warrant to
purchase 4,000,000 shares of the Company's common stock with an exercise
price of $3.25 per share, expiring on May 29, 2004, and the Company's
assumption of equipment and related lease obligations from a company
affiliated with J.L.B. of Nevada, Inc. in the amount of approximately
$1,700,000. The fair value of the warrant was approximately $3,300,000.
On February 27, 1998, the Company issued a subordinated promissory note to
Botchman in the amount of $350,000 payable on demand with interest at 12%
per annum. The note was paid during fiscal 2000. Interest expense for the
years ended May 31, 2000, 1999 and 1998 was $18,200, $42,583, and $10,733.
The Company, through its wholly-owned subsidiary, American Credit Alliance,
Inc., has an $880,000 note payable to J.L.B. of Nevada, Inc. with an
interest rate of 10% per annum. American Credit Alliance Inc. is the
managing member and 50% owner of Dakota Card Fund II, LLC, an entity that
owns performing credit card receivables. Interest expense for the years
ended May 31, 2000, 1999, and
F-20
86
1998 was $89,467, $89,222 and $85,195. Accrued interest related to this note
payable was approximately $327,000, $238,000 and $152,649 at May 31, 2000,
1999 and 1998.
The Company made a series of investments during the period May 1997 through
December 1997 totaling $508,600 in a subprime mortgage banking company
affiliated with J.L.B. of Nevada, Inc.. At May 31, 1998, the investment was
written off due to the substantial doubt regarding the mortgage banking
company's ability to continue as a going concern. In addition, the Company
had a receivable due from this company of approximately $183,000, which was
also written off as of May 31, 1998.
The Series A and B Preferred Shares were issued at $1.00 per share (total of
$2,000,000) on December 4, 1996 to a related party. The Series A Preferred
Stock, as a class, has 80% of the voting rights in the Company. The Series B
Preferred Stock has one vote per share. The shares of Series A and B
Preferred Stock have a liquidation preference of $1.00 per share and will
earn cumulative dividends at a rate of 5% per annum. After five years, (i)
the Series A and B Preferred Stock will be redeemable at the option of the
Company, and (ii) while the Series B Preferred Stock is outstanding will be
convertible at the option of the holder into Series A Preferred Stock on a
share-for-share basis.
On December 31, 1996, the Company issued 5,000 shares of Series C Preferred
Stock to a related party for $5,000,000. The Series C Preferred Stock is
non-voting and will earn cumulative dividends at 6% per annum. The shares
have a liquidation preference of $1,000 per share. The Series A and B
Preferred Stock ranks senior to the Series C with respect to dividend and
liquidation rights.
On May 29, 1998, the Company issued 10,000 shares of Series D Preferred
Stock to a related party in exchange for cancellation of a $10,000,000
Promissory Note dated August 1, 1997. The Series D Preferred Stock is
non-voting and will earn a dividend of 8% per annum payable annually on
December 31. The shares have a liquidation preference of $1,000 per share.
The Series D Preferred Stock ranks senior to the Series A, B and C with
respect to dividend and liquidation rights. Each share of Series D Preferred
Stock is convertible into 380 shares of common stock. The agreement grants
piggyback registration rights with respect to the Common Stock issuable upon
conversion of the shares of Series D Preferred Stock.
On August 31, 1998, the Company issued 10,000 shares of Series E Preferred
Stock to a related party in exchange for agreeing to cancel a $10,000,000
subordinated promissory note. The Series E Preferred Stock is non-voting and
will earn a dividend of 8% per annum payable annually on December 31. Each
share of Series E Preferred Stock is convertible into 285 shares of common
stock at any time prior to August 31, 2001. The Series E Preferred Stock
ranks senior to the Series A, B, C and D with respect to dividend and
liquidation rights.
As of May 31, 2000, 1999, and 1998, accumulated preferred dividends
undeclared and unpaid on preferred stock amounted to approximately
$4,200,000, $2,200,000, and $400,000, respectively.
NOTE M - COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases certain properties, vehicles and equipment under
noncancelable operating leases. Total lease rentals charged to operations
were approximately $858,000, $766,000 and $776,000, for the years ended May
31, 2000, 1999 and 1998. Future minimum lease payments under the
noncancelable operating leases are as follows:
F-21
87
YEAR ENDING MAY 31, AMOUNT
------------------- ---------
2001 $644,000
2002 370,000
2003 311,000
2004 290,000
2005 285,000
Thereafter 2,019,000
---------
$3,919,000
==========
Contingencies and Litigation
The Company, in the ordinary course of business, receives notices of
consumer complaints from regulatory agencies and is named as a defendant in
legal actions filed by those who have been solicited to participate in its
credit card programs. Currently pending against the Company are: (i) three
class actions on behalf of persons purportedly solicited by the Company to
voluntarily repay debt that had been discharged in bankruptcy, alleging that
the Company had violated other provisions of federal or state law, including
violations of the Bankruptcy Code, the Fair Debt Collection Practices Act,
the Truth in Lending Act, various state consumer protection laws and, in one
case, RICO, and (ii) four class actions alleging violation of the Fair Debt
Collection Practices Act and similar state laws in connection with mailers
sent to prospective customers to collect out-of-statute debt. The Company is
defending itself vigorously in these lawsuits. The Company does not believe
that pending litigation and regulatory complaints involving the Company will
have a material adverse effect on the consolidated financial position and
consolidated results of operations. However, a significant judgment against
the Company in one or more of the lawsuits could subject the Company to a
monetary judgment and/or require the Company to modify its methods of
operation, either of which could have a material adverse effect on the
Company's consolidated results of operations or consolidated financial
condition.
NOTE N - FAIR VALUE OF FINANCIAL INSTRUMENTS
The accompanying financial statements include various estimated fair value
information as of May 31, 2000, 1999 and 1998. As required by SFAS No. 107,
"Disclosures About Fair Value of Financial Instruments," such information,
which pertains to the Company's financial instruments, is based on the
requirements set forth in the statement and does not purport to represent
the aggregate net fair value of the Company. None of the Company's financial
instruments are held for trading purposes.
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument for which it is practicable to
estimate fair value.
Cash, Cash Equivalents and Restricted Cash
The carrying amount approximates fair value.
Accounts and Notes Receivables
The carrying amount approximates fair value.
Amounts Due from Special Purpose Entities
The carrying amount approximates fair value.
F-22
88
Investments in Nonperforming Consumer Debt
The Company records investments in nonperforming consumer debt at the cost
of the purchased portfolios, net of costs recovered. As the debt was
purchased at a significant discount, the fair value of these portfolios may
be significantly higher than presented in the financial statements. The fair
value at May 31, 2000 and 1999 was estimated using a net present value
calculation of the cash flows the Company expects to generate from these
portfolios.
Credit Card Receivables
Credit card receivables are originated with an initial interest rate of
19.9% or 18.9%. As discussed in Note C, the settlement amount of the
receivables exceeds the credit card receivables reflected on the
consolidated balance sheet. Fair values at May 31, 2000 and 1999 have been
estimated based on a net present value of the cash flows expected to be
generated by the credit cards. The Company applied its actual static pool
experience of repayment rates and defaults to estimate fair value.
Retained Interest in Securitized Credit Card Receivables
The carrying amount approximates fair value. Fair value is estimated by
discounting anticipated future cash flows using a discount rate based on
specific factors. The anticipated future cash flows are projected on a "cash
out" basis to reflect the restriction of cash flows until the investors have
been fully paid.
Notes Payable
The carrying amount approximates fair value. Rates currently available to
the Company for debt with similar terms and remaining maturities are used to
estimate the fair value of existing debt.
Subordinated Notes and Accrued Interest Payable
Due to the related party relationship of these notes, it is not practical to
estimate fair value.
Accounts Payable and Accrued Expenses
The carrying amount approximates fair value.
The carrying amounts and estimated fair values of the Company's financial
instruments consisted of the following:
MAY 31,
-------------------------------------------------------------
2000 1999
---------------------------- ---------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
----- ---------- ----- ----------
Cash, Cash Equivalents and Restricted
Cash $ 2,448,879 $ 2,448,879 $ 4,283,930 $ 4,283,930
Accounts and Notes Receivable $ 2,765,882 $ 2,765,882 $ 1,150,207 $ 1,150,207
Amounts Due from Special Purpose
Entities $ 9,332,890 $ 9,332,890 $ 1,230,700 $ 1,230,700
Investments in Nonperforming Consumer
Debt $ 9,648,090 $21,000,000 $ 3,016,697 $14,400,000
Credit Card Receivables $24,244,200 $42,900,000 $18,631,403 $27,500,000
Retained Interest in Securitized
Credit Card Receivables $ 2,142,846 $ 2,142,846 $ 5,130,372 $ 5,130,372
Notes Payable $23,609,326 $23,609,326 $ 6,086,766 $ 6,086,766
Accounts Payable and Accrued Expenses $ 4,499,142 $ 4,499,142 $ 4,313,409 $ 4,313,409
F-23
89
Financial Accounting Standards Board Statement No. 107 excludes certain
financial instruments and all non-financial instruments from its disclosure
requirements. Accordingly, the aggregate estimated net fair value amount
does not represent, and should not be interpreted to represent, the fair
value of the Company.
NOTE O - NET INCOME (LOSS) PER SHARE
YEARS ENDED MAY 31,
-------------------
2000 1999 1998
----------- ----------- ------------
Basic net income (loss) per share
Net income (loss) available to
common stockholders $ 1,072,195 $ 2,075,681 $(29,845,027)
=========== =========== ============
Weighted-average shares outstanding 34,761,965 34,761,965 33,109,781
=========== =========== ============
Basic net income (loss) per share $ 0.03 $ 0.06 $ (0.90)
=========== =========== ============
Diluted net income (loss) per share
Net income (loss) available to
common stockholders $ 1,072,195 $ 2,075,681 $(29,845,027)
=========== =========== ============
Weighted-average shares outstanding 34,761,965 34,761,965 33,109,781
Effect of diluted securities options 2,162,243 329,585 *
----------- ----------- ------------
Weighted-average of diluted
shares outstanding 36,924,208 35,091,550 33,109,781
=========== =========== ============
Diluted net income (loss) per share $ 0.03 $ 0.06 $ (0.90)
=========== =========== ============
*Antidilutive.
NOTE P - PREFERRED STOCK
As of May 31, 2000 and 1999, Preferred Stock consists of the following:
2000 1999
---- ----
Series A Preferred Stock, $.001 par value; 2,000,000 shares
authorized; 1,200,000 shares issued and outstanding;
stated at liquidation value of $1 per share $ 1,200,000 $ 1,200,000
Series B Preferred Stock, $.001 par value; 800,000 shares
authorized, issued, and outstanding; stated at liquidation
value of $1 per share 800,000 800,000
Series C Preferred Stock, 5,000 shares authorized, issued, and
outstanding; stated at liquidation value of $1,000 per
share $ 5,000,000 $ 5,000,000
Series D Preferred Stock, $.001 par value; 10,000 shares
authorized, issued, and outstanding, convertible into
3,800,000 shares of common stock; stated at liquidation
value of $1,000 per share 10,000,000 10,000,000
Series E Preferred Stock, $.001 par value; 20,000 shares
authorized convertible into 5,700,000 shares of common
stock; 10,000 shares issued and outstanding; stated
at liquidation value of $1,000 per share 10,000,000 10,000,000
----------- -----------
Total $27,000,000 $27,000,000
=========== ===========
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90
THE CREDIT STORE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
NOVEMBER 30, MAY 31,
ASSETS 2000 2000
---- ----
(UNAUDITED)
Cash and cash equivalents $ 2,412,584 $ 1,423,248
Restricted cash 1,258,285 1,025,631
Accounts and notes receivable, net 2,824,306 2,765,882
Prepaid expenses 1,067,400 1,341,516
Amounts due from special purpose entities 567,843 9,332,890
Investments in receivable portfolios, net 38,735,026 33,892,290
Investment in unconsolidated affiliates 1,205,143 1,279,888
Retained interest in securitized receivables 3,339,727 2,142,846
Property and equipment, net of accumulated depreciation 5,109,907 4,790,060
Goodwill, net 2,244,411 2,347,999
Deferred tax asset 2,700,000 2,700,000
Other assets 2,090,299 1,345,942
------------ ------------
Total assets $ 63,554,931 $ 64,388,192
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable and accrued expenses $ 6,670,105 $ 4,499,142
Notes payable 22,789,616 23,609,326
Capitalized lease obligations 3,583,280 2,766,228
Subordinated notes and accrued interest payable -
related party 19,486,903 19,139,028
------------ ------------
Total liabilities 52,529,904 50,013,724
------------ ------------
STOCKHOLDERS' EQUITY
Preferred Stock, Series A, B, C, D and E 27,000,000 27,000,000
Common Stock, $.001 par value, 65,000,000 authorized,
34,847,965 and 34,761,965 outstanding at November 30, 2000 and May 31, 2000 34,848 34,762
Additional paid-in capital 23,964,374 23,743,260
Unrealized gain from retained interest in securitized
receivables, net of tax 1,541,791 638,227
Accumulated deficit (41,515,986) (37,041,781)
------------ ------------
Total stockholders' equity 11,025,027 14,374,468
------------ ------------
Total liabilities and stockholders' equity $ 63,554,931 $ 64,388,192
============ ============
The accompanying notes are an integral part of these statements.
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THE CREDIT STORE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
--------------------------------
NOVEMBER 30, NOVEMBER 30,
2000 1999
------------ ------------
Revenue
Income from receivables $ 10,241,597 $ 7,557,406
Gain on sales of portfolios and retained 362,630 6,345,247
interests
Servicing fees and other income 1,070,738 718,064
Provision for losses (2,724,324) (1,702,991)
------------ ------------
Net revenue 8,950,641 12,917,726
------------ ------------
Expenses
Salaries and employee benefits 3,358,312 3,348,192
Professional and financing fees 1,364,191 842,610
Credit card servicing 2,247,662 1,450,327
Occupancy and equipment expense 783,350 862,860
Other 1,351,510 860,756
------------ ------------
Total expenses 9,105,025 7,364,745
------------ ------------
Operating income (loss) (154,384) 5,552,981
Interest expense 1,424,721 1,131,552
------------ ------------
Income (loss) before income taxes (1,579,105) 4,421,429
Income tax expense -- (1,286,409)
------------ ------------
Net income (loss) (1,579,105) 3,135,020
Dividends on preferred stock (500,000) (500,000)
------------ ------------
Net income (loss), applicable to
common shareholders $ (2,079,105) $ 2,635,020
============ ============
Net income (loss) per share
Basic $ (.06) $ .08
============ ============
Diluted $ (.06) $ .07
============ ============
Weighted-average common shares outstanding
Basic 34,843,696 34,761,965
============ ============
Diluted 34,843,696 37,051,897
============ ============
The accompanying notes are an integral part of these statements.
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THE CREDIT STORE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
SIX MONTHS ENDED
---------------------------------
NOVEMBER 30, NOVEMBER 30,
2000 1999
------------ ------------
Revenue
Income from receivables $ 20,436,636 $ 15,171,683
Gain on sales of portfolios and retained 568,382 6,336,221
interests
Servicing fees and other income 1,782,581 1,346,061
Provision for losses (5,605,969) (3,737,867)
------------ ------------
Net revenue 17,181,630 19,116,098
------------ ------------
Expenses
Salaries and employee benefits 6,923,205 6,615,777
Professional and financing fees 2,634,689 1,867,458
Credit card servicing 4,227,231 3,188,592
Occupancy and equipment expense 1,529,437 1,726,016
Other 3,539,989 1,765,850
------------ ------------
Total expenses 18,854,551 15,163,693
------------ ------------
Operating income (loss) (1,672,921) 3,952,405
Interest expense 2,801,284 2,139,454
------------ ------------
Income (loss) before income taxes (4,474,205) 1,812,951
Income tax expense -- (1,286,409)
------------ ------------
Net income (loss) (4,474,205) 526,542
Dividends on preferred stock (1,000,000) (1,000,000)
------------ ------------
Net loss, applicable to
common shareholders $ (5,474,205) $ (473,458)
============ ============
Net loss per share
Basic $ (.16) $ (.01)
============ ============
Diluted $ (.16) $ (.01)
============ ============
Weighted-average common shares outstanding
Basic 34,809,166 34,761,965
============ ============
Diluted 34,809,166 34,761,965
============ ============
The accompanying notes are an integral part of these statements.
F-27
93
THE CREDIT STORE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
----------------------------------
NOVEMBER 30, NOVEMBER 30,
2000 1999
------------ ------------
Cash flows from operating activities:
Net income (loss) $ (4,474,205) $ 526,542
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities -
Provision for credit card losses 5,605,969 3,737,867
Provision for losses on trade receivables 4,506 30,551
Amortization of discount on performing
credit card portfolio (628,632) (626,110)
Accretion (8,730,717) --
Depreciation and amortization 953,502 1,333,893
(Gain) loss from unconsolidated affiliates 37,357 (33,506)
Gain on sale of portfolios and retained interests (568,382) (5,260,358)
Services received for stock options granted 18,900 --
Deferred tax expense -- 1,286,409
Changes in operating assets and liabilities:
Restricted cash (232,654) --
Accounts and notes receivable (62,930) (2,047,217)
Prepaid expenses 275,980 (269,907)
Receivable from unconsolidated
affiliate 8,765,047 1,230,701
Accrued interest and fees receivable (582,786) (932,849)
Other assets (745,356) 365,775
Unearned fees (121,237) 132,041
Accounts payable and accrued expenses 2,518,838 (703,235)
------------ ------------
Net cash provided by (used in)
operating activities 2,033,200 (1,229,403)
------------ ------------
Cash flows from investing activities:
Collection of investments in receivable portfolios 17,273,310 11,907,387
Funds advanced on securitized credit card (255,930) (2,036,060)
receivables
Funds advanced on credit cards (14,207,886) (14,282,863)
Purchase of consumer debt portfolios (3,452,621) (8,545,353)
Proceeds from sale of portfolios and retained 568,382 8,643,233
interests
Acquisition of property and equipment (1,168,761) (75,972)
------------ ------------
Net cash used in
investing activities (1,243,506) (4,389,628)
------------ ------------
Cash flows from financing activities:
Net proceeds (payments) from debt (819,710) 7,213,221
Borrowings from sale/leaseback transactions 1,615,620 424,000
Payments on capital lease obligations (798,568) (1,028,999)
Proceeds from exercises of stock options 202,300 --
------------ ------------
Net cash provided by
financing activities 199,642 6,608,222
------------ ------------
Net increase in cash and cash equivalents 989,336 989,191
Cash and cash equivalents at beginning of period 1,423,248 3,533,930
------------ ------------
Cash and cash equivalents at end of period $ 2,412,584 $ 4,523,121
============ ============
The accompanying notes are an integral part of these statements
F-28
94
THE CREDIT STORE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - ORGANIZATION
The Credit Store, Inc. is a technology based, financial services company that
provides credit card products to consumers who may otherwise fail to qualify for
a traditional unsecured bank credit card. The Company reaches these consumers by
acquiring portfolios of non-performing consumer receivables and offering a new
credit card to those consumers who agree to pay all or a portion of the
outstanding amount due on their debt and who meet the Company's underwriting
guidelines. The new card is issued with an initial balance and credit line equal
to the agreed repayment amount. After the consumers have made a certain number
of on-time payments on their outstanding credit card balance, the Company seeks
to finance, sell or securitize the credit card receivables generated by this
business strategy. The Company offers other forms of settlement to those
consumers who do not accept the credit card offer.
NOTE B - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although management believes that the disclosures are adequate to
make the information presented not misleading. These financial statements and
notes thereto should be read in conjunction with financial statements and notes
thereto included in the Company's audited consolidated financial statements for
the year ended May 31, 2000 contained in the Company's annual report on Form
10-K/A for the year ended May 31, 2000.
Preparation of the Company's consolidated financial statements requires
management to make estimates and assumptions that affect reported amounts of
assets and liabilities and related revenues and expenses. Actual results could
differ from the estimates used by management.
In the opinion of management, the unaudited condensed consolidated financial
statements contain all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the financial position as of November
30, 2000, the results of operations for the three months ended November 30, 2000
and November 30, 1999, and the results of operations and cash flows for the six
months ended November 30, 2000 and November 30, 1999. The results of operations
for the six months ended November 30, 2000 are not necessarily indicative of the
results for the full year.
NOTE C - INCOME (LOSS) PER SHARE
The Company's basic net income (loss) per share is computed by dividing net
income (loss) applicable to common stockholders by the weighted average number
of outstanding common shares outstanding during the period. Net income (loss)
applicable to common stockholders is computed by deducting dividends on
preferred stock from net income or net loss. The Company's diluted net income
(loss) per share is computed by dividing net income (loss) by the weighted
average number of outstanding common shares and common share equivalents
relating to stock options, when dilutive.
NOTE D - ACCOUNTING METHODOLOGY CHANGE FOR INVESTMENTS IN RECEIVABLE PORTFOLIOS
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95
Effective June 1, 2000, the Company accounts for its investment in receivable
portfolios on the accrual basis of accounting in accordance with the provisions
of the AICPA's Practice Bulletin 6, "Amortization of Discounts on Certain
Acquired Loans." Prior to June 1, 2000, the Company used the cost recovery
method of accounting. Practice Bulletin 6 requires that the accrual basis of
accounting be used at the time the amount and timing of portfolio projected cash
flows can be reasonably estimated and collection is probable. The Company has
established projection models from historical portfolio data that it believes
provides appropriate information to reasonably estimate future cash flows.
Under the accrual method of accounting, static pools are typically established
for each portfolio acquired. Once a static pool is established, the receivables
are permanently assigned to the pool. The discount (i.e., the difference between
the cost of each static pool and the related aggregate contractual receivable
balance) is not recorded because the Company expects to collect a relatively
small percentage of each static pool's contractual receivable balance.
The Company accounts for each static pool as a unit for the economic life of the
pool for recognition of income from receivable portfolios, for collections
applied to principal of receivable portfolios and for provision for loss or
impairment. Income from receivable portfolios is accrued based on the effective
interest rate determined for each pool applied to each pool's carrying value as
of June 1, 2000 or its cost if purchased after June 1, 2000, adjusted for unpaid
accrued income and principal paydowns. The effective interest rate is the
internal rate of return determined based on the timing and amounts of actual
cash received since the date of adoption or since inception if purchased after
June 1, 2000 and anticipated future cash flow projections for each pool.
The Company monitors impairment of receivable portfolios based on discounted
projected future cash flows of each portfolio compared to each portfolio's
carrying amount. The receivable portfolios are evaluated for impairment
periodically based on current market and cash flow assumptions. Provisions for
losses are charged to earnings when it is determined that the investment in a
receivable portfolio is greater than the present value of expected future cash
flows. No such provision for losses was recorded in the three or six months
ended November 30, 2000.
The change to the accrual method resulted in an increase of $8.5 million in
income from credit card receivables during the first six months of fiscal 2001,
compared to the amount that would have been reported under the cost recovery
method previously used, and an increase of $3.0 million in provision for losses
on credit card receivables. Prior periods are not required to be restated.
NOTE E - TRANSFERS OF FINANCIAL ASSETS
During the three month period ended November 30, 2000, the Company established a
new wholly-owned qualified special purpose entity, Credit Store Services, Inc.
("CSSI"), for the purpose of purchasing non-performing consumer debt portfolios
from the Company. CSSI entered into a $25,000,000 credit facility with a lending
institution to finance the purchase of non-performing consumer debt portfolios,
they are sold to CSSI within a very short period of time after acquisition.
Non-performing consumer debt portfolio sales to CSSI are at a price equal to the
Company's book value.
NOTE F - COMMITMENTS AND CONTINGENCIES
The Company, in the ordinary course of business, receives notices of consumer
complaints from regulatory agencies and is named as a defendant in legal actions
filed by those who have been solicited to participate in its credit card
programs. Currently pending against the Company are: (i) three class actions
(that were subsequently consolidated into one action) on behalf of persons
solicited by the Company to open credit card accounts and voluntarily to repay
debt that had been discharged in bankruptcy, which
F-30
96
action is subject to a settlement agreement between the Company and the
plaintiffs, which settlement agreement has received preliminary court approval,
(ii) three class actions alleging violation of the Fair Debt Collection
Practices Act and state law in connection with mailers sent to prospective
customers whose debt was out-of-statute, and (iii) one class action alleging
RICO claims arising out of the reporting of credit information . The Company is
defending itself vigorously in these lawsuits. The Company does not believe that
pending litigation and regulatory complaints involving the Company will have a
material adverse effect on the consolidated financial position and results of
operations. However, a significant judgment against the Company in one or more
of the lawsuits could subject the Company to a monetary judgment and/or require
the Company to modify its methods of operation, either of which could have a
material adverse effect on the Company's results of operations or financial
condition.
NOTE G - INVESTMENTS IN RECEIVABLE PORTFOLIOS
The Company acquires portfolios of non-performing consumer debt. These debts are
acquired at a substantial discount from the actual outstanding consumer balance.
The remaining outstanding balance of the debt acquired by the Company at
November 30, 2000 and May 31, 2000 was approximately $3.5 billion and $3.1
billion, respectively. The Company's objective is to offer the consumer an
opportunity to settle these debts, typically at a discount, and transfer the
settled amount to a newly issued credit card. The Company expenses origination
costs, including direct mail and telemarketing costs, as incurred.
The following summarizes the components in the balance of the investments in
receivable portfolios for the following periods:
NOVEMBER 30, MAY 31,
2000 2000
----------- -----------
(UNAUDITED)
Total credit card balances $97,865,122 $77,832,562
=========== ===========
Available credit $ 9,075,096 $ 7,837,918
=========== ===========
Cost and accretion $12,945,619 $ 9,648,090
----------- -----------
Principal funded on new advances and
purchases $30,905,190 $26,536,055
Accrued interest on principal funded 415,885 420,383
Accrued fees 348,593 429,727
----------- -----------
31,669,668 27,386,165
---------- ----------
Less
Provision for losses on credit card
receivables 5,335,371 2,475,838
Unearned fees 544,890 666,127
----------- -----------
5,880,261 3,141,965
----------- -----------
Investments in receivable portfolios $38,735,026 $33,892,290
=========== ===========
Total credit card balances in the chart above represent the total amount owed to
the Company by the cardholders. Available credit represents the amount that the
Company would be obligated to fund if the credit cards were fully utilized by
the cardholders.
F-31
97
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Expenses in connection with the issuance and distribution of the
renewable notes being registered hereunder are estimated below.
SEC registration fee............................. $ 25,000
Legal fees and expenses.......................... 75,000
Accounting fees and expenses..................... 50,000
Printing expenses................................ 20,000
Miscellaneous expenses........................... 10,000
----------
Total................................... $ 180,000
==========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
LIMITATION ON DIRECTOR'S LIABILITY
In accordance with the DGCL, the Company's Certificate of Incorporation
provides that the directors shall not be personally liable to the Company or its
stockholders for monetary damages for breach of duty as a director except (i)
for any breach of the director's duty of loyalty to the Company and its
stockholders; (ii) for acts or omissions not in good faith or which involve
intentional misconduct, or knowing violation of law; (iii) under Section 174 of
the DGCL, which relates to unlawful payments of dividends and unlawful stock
repurchases and redemptions; or (iv) for any transaction from which the director
derived an improper personal benefit. This provision does not eliminate a
director's fiduciary duties; it merely eliminates the possibility of damage
awards against a director personally which may be occasioned by certain
unintentional breaches (including situations that may involve grossly negligent
business decisions) by the director of those duties. The provision has no effect
on the availability of equitable remedies, such as injunctive relief or
rescission, which might be necessitated by a director's breach of his or her
fiduciary duties. However, equitable remedies may not be available as a
practical matter where transactions (such as merger transactions) have already
been consummated. The inclusion of this provision in the Certificate of
Incorporation may have the effect of reducing the likelihood of derivative
litigation against directors and may discourage or deter stockholders or
management from bringing a lawsuit against directors for breach of their duty of
care, even though such an action, if successful, might otherwise have benefited
the Company and its stockholders.
INDEMNIFICATION
The Certificate of Incorporation provides that the Company shall
indemnify its officers, directors, employees and agents to the fullest extent
permitted by the DGCL. Section 145 of the DGCL provides that the Company may
indemnify any person who was or is a party, or is threatened to be made a party,
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative (other than a "derivative"
action by or in the right of the Company) by reason of the fact that such person
is or was a director, officer, employee or agent of the Company, against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement in connection with such action, suit or proceeding if such person
acted in good faith and in a manner such person reasonably believed to be in or
not opposed to the best interests of the Company, and, with respect to any
criminal action or proceeding,
II-1
98
had no reasonable cause to believe was unlawful. A similar standard of care is
applicable in the case of derivative actions, except that no indemnification
shall be made where the person is adjudged to be liable to the Company, unless
and only to the extent that the Court of Chancery of the State of Delaware or
the court in which such action was brought determines that such person is fairly
and reasonably entitled to such indemnity and such expenses.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The Company issued the following securities during the past three years
without registering the securities under the Securities Act:
Issuance of Capital Stock:
1. On May 29, 1998, the Company issued 10,000 shares of Series D
Preferred Stock to J.L.B. of Nevada, Inc. in exchange for J.L.B. of
Nevada, Inc. agreeing to cancel $10.0 million of the principal
outstanding under the $10.0 million Subordinated Promissory Note dated
August 1, 1997.
2. On August 31, 1998, the Company issued 10,000 shares of Series E
Preferred Stock to J.L.B. of Nevada, Inc. in exchange for J.L.B. of
Nevada, Inc. agreeing to cancel $10.0 million of the principal
outstanding under the $20.0 million Subordinated Promissory Note dated
August 1, 1997.
Grant of Stock Options and Warrants:
1. On April 30, 1998, the Company issued to Coast Business Credit, a
division of Southern Pacific Bank, a warrant to purchase 650,247
shares of the Common Stock at an exercise price of $2.50. The warrant
was issued in connection with a loan from Coast Business Credit to the
Company.
2. On August 3, 1998, the Company granted options to purchase 10,000
shares of Common Stock under the Amended 1997 Stock Option Plan at an
exercise price of $3.00 per share to employees.
3. On August 10, 1998, the Company granted options to purchase 300,000
shares of Common Stock under the Amended 1997 Stock Option Plan at an
exercise price of $2.70 per share to employees.
4. On September 15, 1998, the Company granted options to purchase 10,000
shares of Common Stock under the Amended 1997 Stock Option Plan at an
exercise price of $2.00 per share to employees.
5. On November 23, 1998, the Company granted options to purchase a total
of 150,000 shares of Common Stock under the Amended 1997 Stock Option
Plan at an exercise price of $2.00 per share to two directors of the
Company.
6. On February 15, 1999, the Company granted options to purchase 13,000
shares of Common Stock under the Amended 1997 Stock Option Plan at an
exercise price of $2.38 per share to employees.
7. On March 17, 1999, the Company granted options to purchase 200,500
shares of Common Stock under the Amended 1997 Stock Option Plan at an
exercise price of $2.00 per share to employees.
II-2
99
8. On March 18, 1999, the Company issued a warrant to purchase 1,000,000
shares of Common Stock to Business Transactions Express, Inc. at an
exercise price of $2.00 per share. The warrant was issued in
connection with the execution of a strategic modeling services
agreement between the Company and Business Transactions Express, Inc.
9. On March 22, 1999, the Company granted options to purchase 3,500
shares of Common Stock under the Amended 1997 Stock Option Plan at an
exercise price of $2.30 per share to employees.
10. On March 29, 1999, the Company granted options to purchase 3,500
shares of Common Stock under the Amended 1997 Stock Option Plan at an
exercise price of $2.30 per share to employees.
11. On April 15, 1999, the Company granted options to purchase 75,000
shares of Common Stock under the Amended 1997 Stock Option Plan at an
exercise price of $2.19 per share to a director of the Company.
12. On June 1, 1999, the Company granted options to purchase 503,000
shares of Common Stock under the Amended 1997 Stock Option Plan at an
exercise price of $2.40 per share to employees.
13. On May 29, 1999, the Company issued a warrant to purchase 4,000,000
shares of Common Stock to J.L.B. of Nevada, Inc. at an exercise price
of $3.25 per share issued as partial consideration for J.L.B. of
Nevada, Inc.'s forgiveness of certain interest owed to J.L.B. of
Nevada, Inc. by the Company.
14. On July 26, 1999, the Company granted options to purchase 10,000
shares of Common Stock under the Amended 1997 Stock Option Plan at an
exercise price of $2.88 per share to employees.
15. On August 1, 1999, the Company granted options to purchase 22,000
shares of Common Stock under the Amended 1997 Stock Option Plan at an
exercise price of $3.00 per share to employees.
16. On August 3, 1999, the Company granted options to purchase 10,000
shares of Common Stock under the Amended 1997 Stock Option Plan at an
exercise price of $2.97 per share to employees.
17. On August 27, 1999, the Company granted options to purchase 10,000
shares of Common Stock under the Amended 1997 Stock Option Plan at an
exercise price of $2.69 per share to a consultant.
18. On September 1, 1999, the Company granted options to purchase 1,500
shares of Common Stock under the Amended 1997 Stock Option Plan at an
exercise price of $2.75 per share to employees.
19. On September 10, 1999, the Company issued a warrant to purchase 25,000
shares of Common Stock to Cappello Capital Corp. at an exercise price
of $2.56 per share. The warrant was issued in connection with Cappello
Capital Corp. providing financial advisory services to the Company.
20. On September 16, 1999, the Company granted options to purchase 8,000
shares of Common Stock under the Amended 1997 Stock Option Plan at an
exercise price of $2.75 per share to employees.
21. On October 18, 1999, the Company granted options to purchase 2,000
shares of Common Stock under the Amended 1997 Stock Option Plan at an
exercise price of $2.75 per share to employees.
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100
22. On October 25, 1999, the Company granted options to purchase 5,000
shares of Common Stock under the Amended 1997 Stock Option Plan at an
exercise price of $3.13 per share to employees.
23. On November 8, 1999, the Company granted options to purchase 10,000
shares of Common Stock under the Amended 1997 Stock Option Plan at an
exercise price of $3.88 per share to employees.
24. On November 19, 1999, the Company granted options to purchase 310,000
shares of Common Stock under the Amended 1997 Stock Option Plan at an
exercise price of $3.44 per share to employees and a consultant.
25. On November 29, 1999, the Company granted options to purchase 15,000
shares of Common Stock under the Amended 1997 Stock Option Plan at an
exercise price of $5.00 per share to employees.
26. On December 1, 1999, the Company granted options to purchase 2,000
shares of Common Stock under the Amended 1997 Stock Option Plan at an
exercise price of $4.69 per share to employees.
27. On January 10, 2000, the Company granted options to purchase 3,500
shares of Common Stock under the Amended 1997 Stock Option Plan at an
exercise price of $4.03 per share to employees.
28. On March 1, 2000, the Company granted options to purchase 2,000 shares
of Common Stock under the Amended 1997 Stock Option Plan at an
exercise price of $4.00 per share to employees.
29. On March 20, 2000, the Company granted options to purchase 5,500
shares of Common Stock under the Amended 1997 Stock Option Plan at an
exercise price of $4.00 per share to employees.
30. On April 3, 2000, the Company granted options to purchase 2,000 shares
of Common Stock under the Amended 1997 Stock Option Plan at an
exercise price of $4.00 per share to employees.
31. On April 17, 2000, the Company granted options to purchase 7,500
shares of Common Stock under the Amended 1997 Stock Option Plan at an
exercise price of $4.00 per share to employees.
32. On April 24, 2000, the Company granted options to purchase 3,500
shares of Common Stock under the Amended 1997 Stock Option Plan at an
exercise price of $3.88 per share to employees.
33. On May 1, 2000, the Company granted options to purchase 2,000 shares
of Common Stock under the Amended 1997 Stock Option Plan at an
exercise price of $4.88 per share to employees.
34. On May 15, 2000, the Company granted options to purchase 10,000 shares
of Common Stock under the Amended 1997 Stock Option Plan at an
exercise price of $4.50 per share to employees.
35. On June 1, 2000, the Company granted options to purchase 2,000 shares
of Common Stock under the Amended 1997 Stock Option Plan at an
exercise price of $4.50 per share to employees.
36. On June 26, 2000, the Company granted options to purchase 2,000 shares
of Common Stock under the Amended 1997 Stock Option Plan at an
exercise price of $4.38 per share to employees.
37. On July 10, 2000, the Company granted options to purchase 2,000 shares
of Common Stock under the Amended 1997 Stock Option Plan at an
exercise price of $4.31 per share to employees.
II-4
101
38. On July 17, 2000, the Company granted options to purchase 2,000 shares
of Common Stock under the Amended 1997 Stock Option Plan at an
exercise price of $4.31 per share to employees.
39. On July 19, 2000, the Company granted options to purchase 1,016,900
shares of Common Stock under the Amended 1997 Stock Option Plan at an
exercise price of $4.31 per share to employees and at an exercise
price of $6.47 to certain officers and employees of the Company.
40. On July 24, 2000, the Company granted options to purchase 2,000 shares
of Common Stock under the Amended 1997 Stock Option Plan at an
exercise price of $4.28 per share to employees.
The sales and issuance described in paragraphs 1 and 2 under "Issuances
of Capital Stock" and in paragraphs 1, 13 and 19 under "Grant of Stock Options
and Warrants" above were deemed to be exempt from registration under the
Securities Act by virtue of Rule 4(2), Regulation D promulgated thereunder or
Rule 701 of the Securities Act. The sales and issuances under Rule 4(2) and
Regulation D were conducted in a manner to avoid a public offering, were made to
a limited number of financially sophisticated persons or entities with a high
net worth and were not made pursuant to any general advertising or general
solicitation. The sales and issuances under Rule 701 were offered and sold
either pursuant to a written compensatory benefit plan or pursuant to a written
contract relating to compensation.
Appropriate legends are affixed to the stock certificates issued in the
aforementioned transactions. Similar legends were imposed in connection with any
subsequent sales of any of these securities. All recipients either received
adequate information about the Company or had access, through employment or
other relationships, to such information.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Index to Financial Statements
The Financial Statements required by this item are submitted in a
separate section beginning on page F-1 of this registration statement
PAGE
----
Report of Independent Certified Public Accountants F-2
Consolidated Balance Sheets (audited) as of May 30, 1999 and 2000 F-3
Consolidated Statements of Operations (audited) for the years ended F-4
May 30,1998, 1999 and 2000
Consolidated Statements of Stockholders' Equity (audited) for the years F-5
ended May 30, 1998, 1999 and 2000
Consolidated Statements of Cash Flows (audited) for the years ended F-7
May 30, 1998, 1999 and 2000
Notes to Consolidated Financial Statements (audited) F-9
Condensed Consolidated Balance Sheets as of November 30, 2000 F-25
(unaudited) and May 31, 2000
II-5
102
Condensed Consolidated Statement of Operations (unaudited) F-26
for the three months ended November 30, 1999 and 2000
Condensed Consolidated Statement of Operations (unaudited) for F-27
the six months ended November 30, 1999 and 2000
Condensed Consolidated Statements of Cash Flows (unaudited) F-28
for the six months ended November 30, 1999 and 2000
Notes to Condensed Consolidated Financial Statements (unaudited) F-29
(b) Index to Exhibits
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------ -----------------------
3.1 (1) Amended and Restated Certificate of Incorporation
3.2 (4) Amended and Restated By-Laws
4.1 (1) Specimen certificate representing shares of Common Stock
4.2* Form of Indenture
4.3* Form of Renewable Note
5* Opinion and Consent of Legal Counsel to the Company
10.1 (1) Amended and Restated Lease Agreement dated December 12,
1996 between Service One International Corporation and
Donald A. Dunham, Jr.
10.2 (1) Amendment No. One to the Amended and Restated Lease
Agreement dated June 11, 1997 between Service One
International Corporation and Donald A. Dunham, Jr.
10.3 (1) Amendment No. Two to the Amended and Restated Lease
Agreement dated July 31, 1997 between Service One
International Corporation and Donald A. Dunham, Jr.
10.4 (1) Lease Agreement dated February 28, 1997 between Service
One International Corporation and Eagle Properties, L.L.C.
10.5 (1) Addendum to Lease Agreement dated November 18, 1997
between Service One International Corporation and Eagle
Properties, L.L.C.
II-6
103
10.6 (1) Mutual Business Development Agreement dated as of October
8, 1996, between Service One International Corporation and
the O. Pappalimberis Trust
10.7 (1) Amendment dated as of December 16, 1997 to the Mutual
Business Development Agreement dated as of October 8,
1996, such amendment among O. Pappalimberis Trust, Taxter
One LLC, Service One International Corporation, Eikos
Management, LLC and Thesseus International Asset Fund
10.8 (1) Amendment dated September 1, 1998 to the Mutual Business
Development Agreement dated as of October 8, 1996, as
amended, between the Company and Eikos Management LLC
10.9 (1) Mutual Business Development Agreement dated as of October
8, 1996, between Service One International Corporation and
Renaissance Trust I
10.10 (1) Strategic Modeling Agreement dated March 18, 1999, between
the Company and Business Transactions Express, Inc.
10.11 (1) Warrant to purchase Common Stock of the Company issued to
J.L.B. of Nevada, Inc. on June 22, 1999
10.12 (1) Loan and Security Agreement, dated as of April 30, 1998,
between the Company and Coast Business Credit, a division
of Southern Pacific Bank
10.13 (1) First Amendment to Loan and Security Agreement, dated as
of September 30, 1998, between the Company and Coast
Business Credit, a division of Southern Pacific Bank
10.14 (1) Second Amendment to Loan and Security Agreement, dated as
of December 1, 1998, between the Company and Coast
Business Credit, a division of Southern Pacific Bank
10.15 (1) Amendment Number Two to Loan and Security
Agreement, dated as of April 27, 1999, between the
Company and Coast Business Credit, a division of
Southern Pacific Bank
10.16 (1) Fourth Amendment to Loan and Security Agreement, dated as
of May 27, 1999, between the Company and Coast Business
Credit, a division of Southern Pacific Bank
10.17 (1) Amendment Number Five to Loan and Security
Agreement, dated as of June 25, 1999, between the
Company and Coast Business Credit, a division of
Southern Pacific Bank
10.18 (1) Amendment Number Six to Loan and Security Agreement Dated
as of December 6, 1999 between the Company and Coast
Business Credit, a division of Southern Pacific Bank
II-7
104
10.19 (1) Security Agreement dated as of August 1, 1997, between
J.L.B. of Nevada, Inc., Credit Store Mortgage, Inc., New
Beginnings Corp., Consumer Debt Acquisitions, Inc., Sleepy
Hollow Associates, Inc., Service One Holdings Inc.,
Service One International Corporation, American Credit
Alliance, Inc., Service One Receivables Acquisition
Corporation, the Company, Service One Commercial
Corporation and Soiland Company
10.20 (1) First Amendment to Security Agreement, dated as of October
23, 1997 between J.L.B. of Nevada, Inc., the Company and
Credit Store Mortgage, Inc., New Beginnings Corp.,
Consumer Debt Acquisitions, Inc., Sleepy Hollow
Associates, Inc., Service One Holdings, Inc., Service One
International Corporation, Service One Receivables
Acquisition Corporation, the Company, Service One
Commercial Corporation and Soiland Company
10.21 (1) Second Amendment to Security Agreement, dated as of
November 21, 1997 between J.L.B. of Nevada, Inc., the
Company, Sleepy Hollow Associates, Inc., Service One
International Corporation, American Credit Alliance, Inc.
and Service One Receivables Acquisition Corporation
10.22 (1) Credit Agreement Dated as of October 15, 1999 among Credit
Store Capital Corp., the Company, The Lenders Signatory
thereto from time to time, and General Electric Capital
Corporation
10.23 (2) Amended 1997 Stock Option Plan of the Company
10.24 (1) Employment Agreement dated March 27, 1997, between the
Company and Martin Burke
10.25 (1) Letter from Martin Burke dated March 27, 1997, regarding
credit card repayment terms
10.26 (1) Employment Agreement dated April 1, 1997, between the
Company and Kevin Riordan
10.27 (1) Employment Agreement dated June 17, 1997, between the
Company and Michael Philippe
10.28 (1) Amendment to Employment Agreement between Company and
Michael Philippe dated December 15, 1999
10.29 (1) Employment Agreement dated August 1, 1997, between the
Company and Richard Angel
10.30 (1) Amendment to Employment Agreement between Company and
Richard Angel dated December 15, 1999
10.31 (1) Employment Agreement dated October 15, 1997, between the
Company and Cynthia Hassoun
10.32 (1) Bankcard Marketing Agreement between the Company and Bank
of Hoven dated February 9, 1999
10.33 (1) Purchase Agreement between Bank of Hoven and the Company
dated
II-8
105
February 9, 1999
10.34 (1) Bankcard Marketing Agreement between Service One
International Corporation and First National Bank in
Brookings dated October 2, 1997
10.35 (1) Purchase Agreement between First National Bank in
Brookings and Service One International Corporation doing
business as TCS Services, Inc. dated October 2, 1997
10.36 (1) Amendment to Purchase Agreement by First National Bank in
Brookings and the Company dated August 31, 1998
10.37 (1) Letter Agreement Regarding Bankcard Marketing Agreement
and Purchasing Agreement between the Company and First
National Bank in Brookings dated August 17, 1999
10.38 (1) Agreement Regarding Transfer of Accounts between the
Company and First National Bank in Brookings dated
December 14, 1998
10.39 (1) Subordinated Grid Promissory Note of the Company in favor
of J.L.B. of Nevada, Inc. dated August 1, 1997 in the
amount of $20,000,000
10.40 (1) Subordinated Grid Promissory Note of the Company in favor
of J.L.B. of Nevada, Inc. dated October 23, 1997 in the
amount of $5,000,000
10.41 (1) Subordinated Grid Promissory Note of the Company in favor
of J.L.B. of Nevada, Inc. dated November 21, 1997 in the
amount of $5,000,000
10.42 (4) Receivables Purchase Agreement, dated as of May 31, 2000,
by and between The Credit Store, Inc. and TCS Funding IV,
Inc.
10.43 (4) Master Credit and Security Agreement, dated as of May 31,
2000, by and among TCS Funding IV, Inc., The Credit Store,
Inc., and Miller & Schroeder Investments Corporation.
10.44 (4) Account Purchase Agreement, dated as of October 31, 2000,
by and among The Credit Store, Inc. and Credit Services,
Inc.
10.45 (4) Converted Accounts/Receivables Sale Agreement, dated as of
October 31, 2000, by and among Credit Store Services, Inc.
and The Credit Store, Inc.
10.46 (4) Master Loan and Servicing Agreement, dated October 31,
2000, by and among Credit Store Services, Inc., The Credit
Store, Inc., and The Varde Fund IV-A.#
10.47 (4) Repurchase Agreement, dated November 22, 2000, by and
between Bank of Hoven and The Credit Store, Inc.
10.48 Separation Agreement and Release by and between The Credit
Store, Inc. and Martin Burke dated December 11, 2000
10.49 Secured Promissory Note of American Credit Alliance, Inc.
in favor of J.L.B. of Nevada, Inc. dated August 16, 1996
in the amount of $880,000
II-9
106
12 Computation of Ratios of Earnings to Fixed Charges
21 (3) List of Subsidiaries
23.1 Consent of Grant Thornton LLP
23.2* Consent of Legal Counsel to the Company (contained in
Exhibit 5)
24 Powers of Attorney
25* Form T-1, Statement of Eligibility and Qualification of
______, as Trustee
- ------------
(1) Incorporated by reference to the like numbered Exhibit to the Company's
Registration Statement on Form 10 filed February 24, 2000 (File No. 000-28709).
(2) Incorporated by reference to Exhibit 4 to the Company's Registration
Statement on Form S-8 filed July 26, 2000 (File No. 333-42278).
(3) Incorporated by reference to the like numbered Exhibit to the Company's
Annual Report on Form 10-K filed August 29, 2000 (File No. 001-16083).
(4) Incorporated by reference to the like numbered Exhibit to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended November 30, 2000
(File No. 001-16083).
# Denotes confidential information that has been omitted from the exhibit
and filed separately, accompanied by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.
* To be filed by amendment.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers, and controlling persons of the
Registrant pursuant to the provisions summarized in Item 14 above, or otherwise,
the Registrant has been advised that, in the opinion of the Commission, such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification is
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit, or proceeding) is asserted by
such director, officer, or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act, and will be governed
by the final adjudication of such issue.
The undersigned Registrant hereby undertakes to provide to the
Underwriters, at the closing specified in the Underwriting Agreement,
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the
Securities Act, the information omitted from the form of prospectus
filed as part of this registration statement in reliance upon Rule 430A
and contained in a form of prospectus filed by the Registrant under
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be
deemed to be part of this registration statement as of the time it was
declared effective.
(2) For the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new
II-10
107
registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-11
108
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Sioux
Falls, State of South Dakota, on March 2, 2001.
THE CREDIT STORE INC.
By: /s/ Kevin T. Riordan
----------------------------------------
Kevin T. Riordan
President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on March 2, 2001.
SIGNATURE CAPACITY
/s/ Kevin T. Riordan President and Director
- ---------------------------------- (Principal Executive Officer)
Kevin T. Riordan
/s/ Michael J. Philippe Executive Vice President,
- ---------------------------------- Chief Financial Officer and Treasurer
Michael J. Philippe (Principal Financial and
Accounting Officer)
Jay Botchman* )
Barry E. Breeman* )
J. Richard Budd, III* ) Board of Directors
Geoffrey A. Thompson* )
- --------------------
* Michael J. Philippe, by signing his name hereto, does hereby sign this
document on behalf of each of the above-named officers and/or directors of
the Company pursuant to powers of attorney duly executed by such persons.
By: /s/ Michael J. Philippe
----------------------------------------
Michael J. Philippe, Attorney-in-Fact
II-12
109
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT METHOD OF FILING
------ ----------------------- ----------------
3.1 (1) Amended and Restated Certificate of Incorporation............ Incorporated by Reference
3.2 (1) Amended and Restated By-Laws................................. Incorporated by Reference
4.1 (1) Specimen certificate representing shares of Common Stock..... Incorporated by Reference
4.2* Form of Indenture............................................ To be Filed by Amendment
4.3* Form of Renewable Note....................................... To be Filed by Amendment
5* Opinion and Consent of Legal Counsel to the Company.......... To be Filed by Amendment
10.1 (1) Amended and Restated Lease Agreement dated December 12, 1996
between Service One International Corporation and Donald A.
Dunham, Jr................................................... Incorporated by Reference
10.2 (1) Amendment No. One to the Amended and Restated Lease
Agreement dated June 11, 1997 between Service One
International Corporation and Donald A. Dunham, Jr........... Incorporated by Reference
10.3 (1) Amendment No. Two to the Amended and Restated Lease
Agreement dated July 31, 1997 between Service One
International Corporation and Donald A. Dunham, Jr. ......... Incorporated by Reference
10.4 (1) Lease Agreement dated February 28, 1997 between Service One
International Corporation and Eagle Properties, L.L.C........ Incorporated by Reference
10.5 (1) Addendum to Lease Agreement dated November 18, 1997 between
Service One International Corporation and Eagle Properties,
L.L.C........................................................ Incorporated by Reference
10.6 (1) Mutual Business Development Agreement dated as of October 8,
1996, between Service One International Corporation and the
O. Pappalimberis Trust....................................... Incorporated by Reference
110
10.7 (1) Amendment dated as of December 16, 1997 to the Mutual
Business Development Agreement dated as of October 8, 1996,
such amendment among O. Pappalimberis Trust, Taxter One LLC,
Service One International Corporation, Eikos Management, LLC
and Thesseus International Asset Fund........................ Incorporated by Reference
10.8 (1) Amendment dated September 1, 1998 to the Mutual Business
Development Agreement dated as of October 8, 1996, as
amended, between the Company and Eikos Management LLC........ Incorporated by Reference
10.9 (1) Mutual Business Development Agreement dated as of October 8,
1996, between Service One International Corporation and
Renaissance Trust I.......................................... Incorporated by Reference
10.10 (1) Strategic Modeling Agreement dated March 18, 1999, between
the Company and Business Transactions Express, Inc........... Incorporated by Reference
10.11 (1) Warrant to purchase Common Stock of the Company issued to
J.L.B. of Nevada, Inc. on June 22, 1999...................... Incorporated by Reference
10.12 (1) Loan and Security Agreement, dated as of April 30, 1998,
between the Company and Coast Business Credit, a division of
Southern Pacific Bank........................................ Incorporated by Reference
10.13 (1) First Amendment to Loan and Security Agreement, dated as
of September 30, 1998, between the Company and Coast Business
Credit, a division of Southern Pacific Bank ................. Incorporated by Reference
10.14 (1) Second Amendment to Loan and Security Agreement, dated as
of December 1, 1998, between the Company and Coast Business
Credit, a division of Southern Pacific Bank.................. Incorporated by Reference
10.15 (1) Amendment Number Two to Loan and Security Agreement,
dated as of April 27, 1999, between the Company and Coast
Business Credit, a division of Southern Pacific Bank ........ Incorporated by Reference
10.16 (1) Fourth Amendment to Loan and Security Agreement, dated as
of May 27, 1999, between the Company and Coast Business
Credit, a division of Southern Pacific Bank.................. Incorporated by Reference
10.17 (1) Amendment Number Five to Loan and Security Agreement,
dated as of June 25, 1999, between the Company and Coast
Business Credit, a division of Southern Pacific Bank......... Incorporated by Reference
111
10.18 (1) Amendment Number Six to Loan and Security Agreement Dated
as of December 6, 1999 between the Company and Coast Business
Credit, a division of Southern Pacific Bank.................. Incorporated by Reference
10.19 (1) Security Agreement dated as of August 1, 1997, between
J.L.B. of Nevada, Inc., Credit Store Mortgage, Inc., New
Beginnings Corp., Consumer Debt Acquisitions, Inc., Sleepy
Hollow Associates, Inc., Service One Holdings Inc., Service
One International Corporation, American Credit Alliance,
Inc., Service One Receivables Acquisition Corporation, the
Company, Service One Commercial Corporation and Soiland
Company...................................................... Incorporated by Reference
10.20 (1) First Amendment to Security Agreement, dated as of October
23, 1997 between J.L.B. of Nevada, Inc., the Company and
Credit Store Mortgage, Inc., New Beginnings Corp., Consumer
Debt Acquisitions, Inc., Sleepy Hollow Associates, Inc.,
Service One Holdings, Inc., Service One International
Corporation, Service One Receivables Acquisition
Corporation, the Company, Service One Commercial Corporation
and Soiland Company.......................................... Incorporated by Reference
10.21 (1) Second Amendment to Security Agreement, dated as of November
21, 1997 between J.L.B. of Nevada, Inc., the Company, Sleepy
Hollow Associates, Inc., Service One International
Corporation, American Credit Alliance, Inc. and Service One
Receivables Acquisition Corporation.......................... Incorporated by Reference
10.22 (1) Credit Agreement Dated as of October 15, 1999 among Credit
Store Capital Corp., the Company, The Lenders Signatory
thereto from time to time, and General Electric Capital
Corporation.................................................. Incorporated by Reference
10.23 (2) Amended 1997 Stock Option Plan of the Company................ Incorporated by Reference
10.24 (1) Employment Agreement dated March 27, 1997, between the
Company and Martin Burke..................................... Incorporated by Reference
10.25 (1) Letter from Martin Burke dated March 27, 1997, regarding
credit card repayment terms.................................. Incorporated by Reference
10.26 (1) Employment Agreement dated April 1, 1997, between the
Company and Kevin Riordan.................................... Incorporated by Reference
10.27 (1) Employment Agreement dated June 17, 1997, between the
Company and Michael Philippe................................. Incorporated by Reference
10.28 (1) Amendment to Employment Agreement between Company and
Michael Philippe dated December 15, 1999..................... Incorporated by Reference
112
10.29 (1) Employment Agreement dated August 1, 1997, between the
Company and Richard Angel.................................... Incorporated by Reference
10.30 (1) Amendment to Employment Agreement between Company and
Richard Angel dated December 15, 1999 ....................... Incorporated by Reference
10.31 (1) Employment Agreement dated October 15, 1997, between the
Company and Cynthia Hassoun.................................. Incorporated by Reference
10.32 (1) Bankcard Marketing Agreement between the Company and Bank of
Hoven dated February 9, 1999................................. Incorporated by Reference
10.33 (1) Purchase Agreement between Bank of Hoven and the Company
dated February 9, 1999....................................... Incorporated by Reference
10.34 (1) Bankcard Marketing Agreement between Service One
International Corporation and First National Bank in
Brookings dated October 2, 1997.............................. Incorporated by Reference
10.35 (1) Purchase Agreement between First National Bank in Brookings
and Service One International Corporation doing business as
TCS Services, Inc. dated October 2, 1997..................... Incorporated by Reference
10.36 (1) Amendment to Purchase Agreement by First National Bank in
Brookings and the Company dated August 31, 1998.............. Incorporated by Reference
10.37 (1) Letter Agreement Regarding Bankcard Marketing Agreement and
Purchasing Agreement between the Company and First National
Bank in Brookings dated August 17, 1999...................... Incorporated by Reference
10.38 (1) Agreement Regarding Transfer of Accounts between the Company
and First National Bank in Brookings dated December 14, 1998 Incorporated by Reference
10.39 (1) Subordinated Grid Promissory Note of the Company in favor of
J.L.B. of Nevada, Inc. dated August 1, 1997 in the amount of
$20,000,000 ................................................. Incorporated by Reference
10.40 (1) Subordinated Grid Promissory Note of the Company in favor of
J.L.B. of Nevada, Inc. dated October 23, 1997 in the amount
of $5,000,000................................................ Incorporated by Reference
10.41 (1) Subordinated Grid Promissory Note of the Company in favor of
J.L.B. of Nevada, Inc. dated November 21, 1997 in the amount
of $5,000,000................................................ Incorporated by Reference
10.42 (4) Receivables Purchase Agreement, dated as of May 31, 2000, by
and between The Credit Store, Inc. and TCS Funding IV, Inc... Incorporated by Reference
113
10.43 (4) Master Credit and Security Agreement, dated as of May 31,
2000, by and among TCS Funding IV, Inc., The Credit Store,
Inc., and Miller & Schroeder Investments Corporation......... Incorporated by Reference
10.44 (4) Account Purchase Agreement, dated as of October 31, 2000, by
and among The Credit Store, Inc. and Credit Services, Inc.... Incorporated by Reference
10.45 (4) Converted Accounts/Receivables Sale Agreement, dated as of
October 31, 2000, by and among Credit Store Services, Inc.
and The Credit Store, Inc.................................... Incorporated by Reference
10.46 (4) Master Loan and Servicing Agreement, dated October 31, 2000,
by and among Credit Store Services, Inc., The Credit Store,
Inc., and The Varde Fund IV-A.#.............................. Incorporated by Reference
10.47 (4) Repurchase Agreement, dated November 22, 2000, by and
between Bank of Hoven and The Credit Store, Inc.............. Incorporated by Reference
10.48 Separation Agreement and Release by and between The Credit
Store, Inc. and Martin Burke dated December 11, 2000......... Filed Electronically
10.49 Secured Promissory Note of American Credit Alliance, Inc. in
favor of J.L.B. of Nevada, Inc. dated August 16, 1996 in the
amount of $880,000 .......................................... Filed Electronically
12 Computation of Ratios of Earnings to Fixed Charges........... Filed Electronically
21 (3) List of Subsidiaries......................................... Incorporated by Reference
23.1 Consent of Grant Thornton LLP ............................... Filed Electronically
23.2* Consent of Legal Counsel to the Company (contained in
Exhibit 5)................................................... To be Filed by Amendment
24 Powers of Attorney........................................... Filed Electronically
25* Form T-1, Statement of Eligibility and Qualification of
______, as Trustee........................................... To be Filed by Amendment
- ------------
(1) Incorporated by reference to the like numbered Exhibit to the Company's
Registration Statement on Form 10 filed February 24, 2000 (File No. 000-28709).
(2) Incorporated by reference to Exhibit 4 to the Company's Registration
Statement on Form S-8 filed July 26, 2000 (File No. 333-42278).
(3) Incorporated by reference to the like numbered Exhibit to the Company's
Annual Report on Form 10-K filed August 29, 2000 (File No. 001-16083).
(4) Incorporated by reference to the like numbered Exhibit to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended November 30, 2000
(File No. 001-16083).
# Denotes confidential information that has been omitted from the exhibit
and filed separately, accompanied by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.
* To be filed by amendment.