U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(MARK ONE)
[X] Annual Report pursuant Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended June 30, 2001
or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission File Number 000-28709
--------------------------------
THE CREDIT STORE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 87-0296990
(State or other jurisdiction of incorporation (I.R.S. Employer Identification
or organization) Number)
3401 NORTH LOUISE AVENUE
SIOUX FALLS, SOUTH DAKOTA 57107 (800) 240-1855
(Address of principal executive offices (Registrant's telephone number,
and zip code) including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name Of Each Exchange
Title Of Each Class On Which Registered
------------------- -------------------------
Common Stock AMERICAN STOCK EXCHANGE
par value $0.001 per Share
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
value $0.001 per Share
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Aggregate market value of common stock held by non-affiliates of Registrant,
based upon the last sale price of the Common Stock reported on the American
Stock Exchange on September 30, 2001 was $45,306,904. Common stock outstanding
at September 30, 2001: 34,851,465 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive proxy statement filed with the
Securities and Exchange Commission in connection with the solicitation of
proxies for the Registrant's 2001 Annual Meeting of Shareholders are
incorporated by reference in Part III, Items 10, 11, 12 and 13, of this Form
10-K/A.
INTRODUCTORY NOTE
This amendment to Form 10-K is being filed to restate the financial statements
for the year ended June 30, 2001 to correct an error in the calculation of the
fair market value of the Company's retained interests in two securitization
transactions. This restatement results in total assets being reduced $4.1
million, unrealized gain from retained interests in securitized credit card
receivables which is recorded within other comprehensive income being reduced
$2.7 million and income tax benefit being reduced $1.4 million. The restatement
does not impact operating loss or cash flows for fiscal 2001.
This amended Annual Report on Form 10-K for the year ended June 30, 2001
includes changes to (i) Selected Financial Data (Item 6); (ii) Management's
Discussion and Analysis of the Financial Condition and Results (Item 7); (iii)
Financial Statements and Supplementary Data (Item 8), and (iv) Financial
Statements and Exhibits (Item 14).
For purposes of this amended Form 10-K, and in accordance with rule 12b-15
promulgated under the Securities and Exchange Act of 1934, the Company has
amended and restated in its entirety each item of the Company's 10-K for the
year ended June 30, 2001, which has been affected by the restatement. This
amended Form 10-K does not reflect events occurring after the filing of the
original Form 10-K, or modify or update those disclosures in any way, except as
required to reflect the effects of this restatement
2
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below should be read together with our
consolidated financial statements and the notes thereto. The consolidated
statement of operations data with respect to the fiscal years ended May 31,
1997, 1998, 1999, and 2000, and the fiscal year ended June 30, 2001, and the
consolidated balance sheet data at May 31, 1997, 1998, 1999, and 2000, and June
30, 2001 are derived from, and are qualified by reference to, our audited
consolidated financial statements. The consolidated financial statements as of
and for the fiscal years ended May 31, 1998, 1999 and 2000, and the fiscal year
ended June 30, 2001 were audited by Grant Thornton LLP, independent auditors.
The consolidated financial statements as of May 31, 1997 and for the fiscal year
ended May 31, 1997, which fiscal year covered the period from October 8, 1996
through May 31, 1997, were audited by Tanner & Co., independent auditors. The
following financial information should be read together with "Management's
Discussion and Analysis of Financial Condition -- Results of Operations" below.
FISCAL YEAR FISCAL YEAR
ENDED MAY 31, ENDED
JUNE 30,
------------------------------------------------ ------------ ------------
1997 ** 1998 1999 2000 2001
------------ ------------ ------------ ------------ ------------
Restated
--------
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Income from investment in $ 975,108 $ 12,089,724 $ 28,483,745 $ 30,435,832 $ 38,714,160
receivable portfolios
Securitization income and asset -- -- 12,114,703 13,266,241 3,304,331
sales
Servicing fees and other income 1,601,228 1,292,596 1,564,356 2,684,554 5,034,187
------------ ------------ ------------ ------------ ------------
Total revenue 2,576,336 13,382,320 42,162,804 46,386,627 47,052,678
Provision for losses 1,494,001 6,483,736 4,607,081 5,680,975 9,305,969
------------ ------------ ------------ ------------ ------------
Net revenue 1,082,335 6,898,584 37,555,723 40,705,652 37,746,709
Income (loss) before income (14,405,555) (29,445,031) 1,889,271 2,029,820 (6,925,067)
taxes
Income tax benefit -- -- 1,986,409 1,402,375 436,544
------------ ------------ ------------ ------------ ------------
Net income (loss) (14,405,555) (29,445,031) 3,875,680 3,072,195 (6,488,523)
Dividends on preferred stock* (7,397) (399,996) (1,799,999) (2,000,000) (2,000,000)
------------ ------------ ------------ ------------ ------------
Net income (loss) applicable to
common stockholders
$(14,412,952) $(29,845,027) $ 2,075,681 $ 1,072,195 $ (8,488,523)
============ ============ ============ ============ ============
Net income (loss) per share, $ (0.56) $ (0.90) $ 0.06 $ 0.03 $ (0.24)
============ ============ ============ ============ ============
Net income (loss) per share, $ (0.56) $ (0.90) $ 0.06 $ 0.03 $ (0.24)
============ ============ ============ ============ ============
* We have not paid dividends on our capital stock during the periods presented.
** Fiscal 1997 represents activity from October 8, 1996 through May 31, 1997.
3
AS OF MAY 31, AS OF JUNE 30,
------------------------------------------------------------------- ------------
1997 1998 1999 2000 2001
------------ ------------ ------------ ------------ ------------
Restated
--------
CONSOLIDATED BALANCE SHEET
DATA:
Cash and cash equivalents and
restricted cash $ 2,685,581 $ 8,205,071 $ 4,283,930 $ 2,448,879 $ 3,103,454
Investments in
receivable portfolios, net 10,760,362 18,592,485 21,648,100 33,892,290 32,948,042
Total assets 24,743,871 39,723,418 45,780,956 64,388,192 62,707,657
Notes payable 428,973 5,902,041 6,086,766 23,609,326 23,186,134
Subordinated notes and
accrued interest payable-
related party 10,446,043 31,807,322 19,246,595 19,139,028 19,970,834
Total liabilities 18,118,396 47,366,528 33,692,311 50,013,724 54,941,956
Total stockholders'
equity (deficit) 6,625,475 (7,643,112) 12,088,645 14,374,468 7,765,701
Credit card receivables owned
and managed 35,709,395 84,830,552 89,149,715 96,128,627 117,142,582
Number of credit card accounts
owned and managed 26,803 84,351 94,278 76,732 86,384
Total employees, end
of period 233 292 305 305 288
- ------------
ITEM 7. 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 in this report. The following discussion
contains forward-looking statements that involve risks and uncertainties. For a
discussion of such risks and uncertainties, see "Risk Factors" below.
OVERVIEW
On May 24, 2001, we changed our fiscal year end to June 30 from May 31.
Reference in this Form 10-K to fiscal 2001 represents the twelve months ended
June 30, 2001. Reference in this Form 10-K to fiscal years 2000 and 1999
represent the twelve months ended May 31, 2000 and 1999. We have not included
financial information for the twelve months ended June 30, 2000 and 1999 in this
Form 10-K because it is not practical or cost beneficial to prepare the
information. We believe that the twelve months ended May 31, 2000 and 1999
provide a meaningful comparison to the twelve months ended June 30, 2001. We are
aware of no facts that would impact the comparability of information or trends
if the results for the twelve months ended June 30, 2000 and 1999 were presented
in lieu of results for the twelve months ended May 31, 2000 and 1999, except for
the change in the method of recording revenues relating to investments in
receivable portfolios which we disclose at page 19.
4
We are a technology and information based, financial services company that
provides credit card products to consumers who may otherwise fail to qualify for
a traditional unsecured bank credit card. Unlike traditional credit card
companies, we focus on consumers who have previously defaulted on debt. We reach
these consumers by acquiring their defaulted debt. We purchase 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 seller an agreed on 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, these consumers are
offered an opportunity to:
o settle their debt, typically at a discount;
o transfer the agreed settlement amount to a newly issued unsecured
MasterCard(R)or Visa(R)credit card; and
o establish a positive credit history on their newly issued card by
making timely and consistent payments.
We accept lump sum settlements or installment payment plans from those consumers
who do not accept the credit card offer.
After the consumers have made six or more consecutive monthly payments on their
outstanding credit card balance we consider the account seasoned and available
to sell or securitize. Because the focus of our business is to convert defaulted
debt into seasoned credit cards, we periodically sell or securitize portfolios
of these seasoned accounts. We also periodically sell into the secondary market
for non-performing consumer debt portfolios of accounts we acquired but were
unable to convert.
We have five subsidiaries, Credit Store Services, Inc., Credit Store Capital
Corp., American Credit Alliance, TCS Funding IV, Inc., and TCS Funding V, Inc.
All of these subsidiaries are wholly owned by us; however, only Credit Store
Capital Corp. and American Credit Alliance, Inc. are consolidated in our
financial statements. Credit Store Services, Inc., TCS Funding IV, Inc., and TCS
Funding V, Inc. are qualifying special purpose entities that are not required to
be consolidated. See "Business--Business Operations- Receivables Sales and
Securitizations."
Credit Store Services, Inc. and Credit Store Capital Corp. acquire
non-performing consumer receivables and contract with us to offer consumers a
credit card under our program or to accept settlements or payment plans.
American Credit Alliance owns a 50% interest in Dakota Card Fund II, a limited
liability company that contracts with us to service non-performing receivables
and credit card receivables that it owns. TCS Funding IV, Inc. and TCS Funding
V, Inc. were created in connection with securitizations for the purpose of
purchasing performing credit card receivables from us.
ACCOUNTING FOR INVESTMENTS IN RECEIVABLE PORTFOLIOS.
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." Before June 1, 2000, we used the cost recovery method of accounting for
acquired non-performing consumer debt portfolios. Practice Bulletin 6 requires
that the accrual basis of accounting be used at the time the amount and timing
of cash flows from an acquired portfolio can be reasonably estimated and
collection is probable. As of June 1, 2000, we had accumulated statistics in our
data warehouse on the approximately $6 billion of non-performing debt we
acquired since the beginning of fiscal 1997. At that point, we determined that
our models provided us with reliable estimates of the amounts and timing of cash
flows that portfolios of acquired debt would generate in future periods. These
estimates include the key assumptions of credit cards originated, cash flows
from these cards and from unconverted receivables, new funding and retention and
losses. As required by Practice Bulletin 6, we then converted on a prospective
basis to accrual accounting. As part of our ongoing commitment to data analysis
and statistical modeling, we update and evaluate our models on a monthly basis
to facilitate the application of the accrual method of accounting and the
internal valuation of our portfolios.
Under the accrual method and cost recovery method of accounting, static pools
are established for each portfolio acquired. Once a static pool is established,
5
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.
For financial statement purposes, the cost of a portfolio is the purchase price
paid to the seller plus costs directly related to the acquisition of the
portfolio. For financial statement purposes under the accrual method, the
portfolio cost also includes amortization of receivable portfolios discount. All
direct mail and scrubbing costs are expensed as incurred. From the time a
settlement has been reached with a consumer until the cardholder begins to make
new charges on the new credit card account, no incremental asset is recorded in
the financial statements. For other forms of settlement, financial statement
entries are recorded as an account holder makes payments. 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. As a result, the application of cost recovery can
have a material negative impact on revenue and net income during periods of
increasing portfolio acquisitions and a material positive impact during periods
of decreasing portfolio acquisitions and increasing portfolios dispositions.
We monitor impairment of non-performing receivable portfolios based on the
current market environment and discounted projected future cash flows of each
portfolio compared to each portfolio's carrying amount. Provisions for losses
are charged to earnings when it is determined that the investment in a
non-performing receivable portfolio is greater than the present value of
expected future net cash flows. No provision for losses on non-performing
receivable portfolios was recorded in the year ended June 30, 2001, or the
one-month period ending June 30, 2000.
Our provision for credit card losses resulting from the funding of new purchases
and the accrued interest and fees on credit card balances includes current
period losses and an amount which, in our judgment, is necessary to maintain the
allowance for 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, we consider several factors, including: historical
trends of charge-off activity for each credit card portfolio, current economic
conditions and the impact current economic 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 180 days past due. Bankrupt accounts and
accounts of deceased cardholders without a surviving, contractually liable
individual, are charged off immediately on receipt of formal notification of
bankruptcy or death, as the case may be.
RESULTS OF OPERATIONS
REVENUES. Total revenue for the fiscal year ended June 30, 2001 was $47.1
million, a 1.4% increase from the $46.4 million recorded during the fiscal year
ended May 31, 2000 which was a 10% increase from the $42.2 million in the fiscal
year ended May 31, 1999. Total revenue for the one month ended June 2000
increased 36.8% from $2.6 million in June 1999 to $3.6 million in June 2000.
Core revenues (income from all activities other than portfolio sales or interest
in affiliate revenues) increased 34.7% and 11.5% in fiscal 2001 and 2000, and
are reported as $45.4 million, $33.8 million, and $30.3 million in fiscal 2001,
2000 and 1999, respectively. Core revenue in the one month ended June 2000 was
$3.6 million which is an increase of 36.8% from the one month ended June 1999.
Increasing revenues reflect our growing base of owned and managed accounts,
increases of income resulting from retained interests in securitized credit card
receivables, and adoption of the accrual method of accounting effective June 1,
2000 (see next paragraph). Gains on sales of portfolios have decreased from
$11.9 million in fiscal 1999 to $6.1 million in fiscal 2000 to $1.5 million in
fiscal 2001. This decline is reflective of the difference in the volume of sale
activity between fiscal 1999, 2000, and 2001, and the effects of the adoption of
the accrual methodology of accounting between fiscal 2000 and 2001. In fiscal
2000, we recognized a $6.5 million gain on the sale of our interest in three
6
special purpose entities; no such sale occurred in fiscal 2001 or fiscal 1999.
With the adoption of the accrual method of accounting effective June 1, 2000,
sales of portfolios in fiscal 2001 result in an increase in the rate of return
over the remaining life of a portfolio instead of a one time gain. We completed
three securitizations in fiscal 1999, one securitization in fiscal 2000, and one
securitization in fiscal 2001. Servicing fees and other income has increased
from $1.6 million in fiscal 1999 to $2.7 million in fiscal 2000 and to $5.0
million in fiscal 2001. This continued increase reflects the increasing number
of accounts serviced by the Company for third parties and unconsolidated
subsidiaries formed in connection with securitizations. The provision for losses
reported for fiscal 2001, 2000 and 1999 was $9.3 million, $5.7 million, and $4.6
million. These provision amounts are 20.4%, 16.8%, and 15.2% of core revenues
for the fiscal years 2001, 2000 and 1999. The provision for losses for the one
month ended June 2000 increased 128.5% from $0.5 million in June 1999 to $1.2
million in June 2000. These increases are the result of the adoption of the
accrual method of accounting effective June 1, 2000. Irrespective of the unique
events and sales each year, net revenue has remained fairly constant at $37.7
million, $40.7 million and $37.6 million in fiscal 2001, 2000 and 1999,
respectively.
On June 1, 2000, 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 non-performing consumer debt are applied first to
recover the cost of the portfolios, prior to recognizing any revenue. The
accrual method recognizes the discount on acquired portfolios over the period in
which the payments are reasonably estimable and probable of collection. The
recognition of this discount is based on the effective interest rate of each
portfolio. The accrual method accelerates the recognition of revenue as compared
to the cost recovery method. For fiscal 2001, the adoption of the accrual method
of accounting resulted in an increase of $7.7 million in income from credit card
receivables.
One Month Ended One Month Ended
Revenues Fiscal 1999 June 30, 1999 Fiscal 2000 June 30, 2000 Fiscal 2001
-------- ----------- ----------- ----------- ----------- -----------
Income from investment $28,483,745 $ 2,376,962 $30,435,832 $ 3,312,545 $38,714,160
in receivable portfolios
Securitization income 263,624 75,548 666,976 44,488 1,777,826
Servicing fees and 1,564,356 174,052 2,684,554 237,176 5,034,187
other income ----------- ----------- ----------- ----------- -----------
Core Revenue 30,311,725 2,626,562 33,787,362 3,594,209 45,526,173
----------- ----------- ----------- ----------- -----------
Gains on Sales 11,851,079 -- 12,599,265 -- 1,526,505
----------- ----------- ----------- ----------- -----------
Total Revenue 42,162,804 2,626,562 46,386,627 3,594,209 47,052,678
----------- ----------- ----------- ----------- -----------
Provision for Losses 4,607,081 542,010 5,680,975 1,238,291 9,305,969
----------- ----------- ----------- ----------- -----------
Net Revenue $37,555,723 $ 2,084,552 $40,705,652 $ 2,355,918 $37,746,709
=========== =========== =========== =========== ===========
EXPENSES. Total operating expenses for fiscal 2001 were $38.9 million, a 15.5%
increase from $33.7 million in fiscal 2000 which was a 6.5% increase from $31.6
million in fiscal 1999. The fiscal 2001 operating expenses include $3.8 million
of nonrecurring expenses. These nonrecurring expenses represent estimated costs
of settlement of certain contract claims, one of which is currently in
litigation. Also, the nonrecurring expenses consist of a reserve of $1.3 million
for notes receivable from an unrelated party, and a reserve of $0.5 million for
a note receivable from a former executive. Excluding these nonrecurring
expenses, operating expenses in fiscal 2001 would have been $35.1 million, a
4.3% increase from fiscal 2000. Operating expenses net of nonrecurring expenses
were 77.2%, 99.7%, and 104.4% of core revenues in fiscal 2001, 2000, and 1999,
respectively. This continued decrease in operating expenses net of nonrecurring
expenses as a percent of core revenues reflects our ability to increase the
number of accounts owned and managed while maintaining a relatively constant
expense base. We experienced a 7.9% and a 21.9% increase in the aggregate
balance of credit card receivables we owned and managed from $89.1 million as of
May 31, 1999 to $96.1 million as of May 31, 2000 to $117.1 million as of June
30, 2001. Total operating expenses increased 8.9% to $3.3 million for the one
month ended June 2000 from $3.0 million for one month ended June 1999 but
decreased as a percentage of core revenues from 114% to 91% which reflects our
ability to increase revenues faster than our growth in expenses.
7
Salaries and employee benefits increased 6.2% in fiscal 2001 as compared to
fiscal 2000 which was an increase of 8.1% over fiscal 1999, but decreased as a
percentage of core revenue from 41.2% in 1999 to 40.0% in 2000 to 31.5% in 2001.
Incremental expenses between years is due to increased commissions as a result
of increased acquisitions and originations.
Third party services expenses, consisting of credit card services and scrubbing
fees, decreased 3.1% and 11.1% in fiscal 2001 and fiscal 2000 respectively. As a
percentage of core revenue, third party services expenses were 8.5%, 11.8%, and
14.7% in fiscal 2001, 2000 and 1999. These costs continue to decline as we
increase our processing efficiencies to lower the costs per account.
Marketing and customer communications expense increased 47.9% and 26.4% in
fiscal 2001 and 2000 but remained fairly constant as a percentage of core
revenue at 11.0%, 10.0%, and 8.9% in fiscal 2001, 2000 and 1999, respectively.
Marketing and consumer communications expenses includes direct mail cost and
scrubbing costs, which increase with the volume of accounts acquired,
originated, and serviced. Marketing and communication expenses increased 149.4%
to $0.4 million for the one month ended June 30, 2000 from $0.2 million for the
one month ended June 30, 1999 due to increased volumes of portfolio
acquisitions.
Royalty expense, pursuant to two mutual business development agreements,
increased 12.4% from $1.5 million in fiscal 1999 to $1.7 million in fiscal 2000
and decreased 38.4% to $1.1 million in fiscal 2001. Royalty expense increased to
$0.2 million in the one month ended June 30, 2000 from the $0.04 million for the
one month ended June 30, 1999 due to increased activity in June 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. The decrease in royalty expense in fiscal 2001
is the result of the Company's decision to discontinue accrual of the royalty
expense after November 2000. The mutual business development agreements are
currently in dispute. See "Legal Proceedings". In fiscal 2001, we recorded a
$2.0 million accrual which is our estimate of the amount required to settle the
contract disputes and to terminate the agreements.
Financing fees increased 12.7% from $1.1 million in fiscal 2000 to $1.2 million
in fiscal 2001 and decreased as a percentage of core revenue from 3.2% in fiscal
2000 to 2.7% in fiscal 2001. Financing fees increased 416% from $0.2 million in
fiscal 1999 to $1.1 million in fiscal 2000 and increased as a percentage of core
revenues to 3.2% in fiscal 2000 from 0.7% in fiscal 1999. The increase from
fiscal 1999 to fiscal 2000 and 2001 resulted from our ability to obtain
additional financing sources in fiscal 2000.
Expenses One Month Ended One Month Ended
June 30, June 30,
Fiscal 1999 1999 Fiscal 2000 2000 Fiscal 2001
----------- ---------- ----------- ---------- -----------
Salaries and employee benefits $12,484,582 $1,057,276 $13,502,074 $1,130,262 $14,334,712
Professional fees 2,701,016 198,304 2,604,992 353,592 3,048,027
Depreciation and amortization 2,614,216 228,229 2,494,489 166,133 1,990,390
Third-party credit card services 4,468,992 390,323 3,972,785 338,482 3,850,903
Marketing and customer 2,683,270 150,596 3,391,962 375,528 5,016,901
communications
Occupancy and equipment rental 1,614,513 63,258 1,727,884 143,982 2,032,742
Royalty expense 1,541,944 37,363 1,733,412 211,069 1,067,363
Financing fees 211,864 475,899 1,092,286 277,661 1,231,161
Other 3,316,564 328,572 3,173,999 261,259 2,567,078
Non recurring events -- -- -- -- 3,787,061
----------- ---------- ----------- ---------- -----------
Total expenses $31,636,961 $2,993,015 $33,693,883 $3,257,968 $38,926,338
8
INTEREST EXPENSE. Interest expense increased to $5.7 million in fiscal 2001, a
15.3% increase from $5.0 million in fiscal 2000 which was a 23.6% increase from
$4.0 million in fiscal 1999. These increases were due to a higher average amount
of debt outstanding of $23.7 million, $17.0 million and $5.9 million in fiscal
2001, 2000 and 1999. As a result of higher core revenue in fiscal 2000 and
fiscal 2001, interest expense, as a percentage of core revenue, was 13.3% in
fiscal 1999, but decreased from 14.7% in fiscal 2000 to 12.6% in fiscal 2001.
Interest expense increased 66.0% for the one month ended June 30, 2000 as
compared to the one month ended June 30, 1999. This increase was due to a higher
outstanding balance in June 2000.
One Month Ended One Month Ended
Fiscal 1999 June 30, 1999 Fiscal 2000 June 30, 2000 Fiscal 2001
----------- ------------- ----------- ------------- -----------
Interest Expense $4,029,491 $286,723 $4,981,949 $476,023 $5,745,438
INCOME TAX BENEFIT. We recognized a tax benefit of $0.4 million in fiscal 2001,
$1.0 million in fiscal 2000, and $2.0 million in fiscal 1999. The tax benefit in
each year represents the recognition of a tax benefit that offsets the tax
expense recorded in other comprehensive income. Fiscal 2000 and 1999 also
included a $2.0 million and $0.7 million reduction of a valuation allowance
related to net operating loss carryforwards. We have recorded a valuation
allowance of $12.7 million at June 30, 2001. We continue to review the adequacy
of our valuation allowance and have determined that based on historical results
and forecasted future earnings it was more likely than not that a portion of our
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 additional future tax benefits
will be realized.
One Month Ended One Month Ended
Fiscal 1999 June 30, 1999 Fiscal 2000 June 30, 2000 Fiscal 2001
----------- ------------- ----------- ------------- -----------
Income tax benefit $1,986,409 $ -- $1,042,375 $ 63,456 $ 436,544
NET INCOME (LOSS). Net income was $3.9 million in fiscal 1999 and $3.1 million
in fiscal 2000 compared to a net loss of $6.5 million in fiscal 2001. Included
in net income for fiscal 2000 and 1999 are $2.0 million and $0.7 million of tax
benefits recognized as a result of the reduction of a portion of our valuation
allowance account. Dividends on preferred stock have accumulated but have not
been declared and are not yet payable. However, we treat the dividends as
declared and payable for the purpose of calculating net income (loss) applicable
to common shareholders. After the effect of preferred dividends of $2.0 million
in fiscal 2001 and 2000 and $1.8 million in 1999, the net income (loss)
applicable to common shareholders was $2.1 million, or $0.06 per basic and
diluted common share, in fiscal 1999; and $1.1 million, or $.03 per basic and
diluted common share, in fiscal 2000; compared to a net loss applicable to
common stockholders of $(8.5) million, or $(0.24) per basic and diluted common
share in fiscal 2001. Net loss for the one month ended June 30, 2000 was $(1.5)
million compared to $(1.4) million for the one month ended June 30, 1999.
One Month Ended One Month Ended
Fiscal 1999 June 30, 1999 Fiscal 2000 June 30, 2000 Fiscal 2001
----------- ------------- ----------- ------------- -----------
Net income (loss) $3,875,680 $(1,195,186) $3,072,195 $(1,314,617) $(6,488,523)
Dividends on
preferred stock (1,799,999) (166,667) (2,000,000) (166,667) (2,000,000)
Net income (loss),
applicable to
common shareholders $2,075,681 $(1,361,853) $1,072,195 $(1,481,284) $(8,488,523)
9
INVESTMENTS IN RECEIVABLES
Our business is highly dependent on the amount of non-performing consumer debt
we acquire, the cost to acquire these accounts, and the cash flows we generate
from these accounts through the conversion to our credit card or through
collection efforts. We refer to the non-performing consumer debt accounts
acquired as unconverted receivables from the time of acquisition to the date we
convert them to a credit card. At time of conversion, we begin referring to the
agreed settlement amount as a credit card receivable. The marketing cycle for
and useful life of a new credit card account extends over several years.
Therefore, we measure our operating results on both a traditional fiscal period
basis and on a "vintage basis." When analyzing our performance on a vintage
basis, we track each acquired portfolio over the entire period we own the
accounts. We store statistics for each portfolio of accounts in our data
warehouse and use these statistics to develop our portfolio acquisition models,
marketing models, account servicing models, and accounting methodology. Since
1996, we have acquired approximately $6.5 billion in non-performing consumer
debt through approximately 115 separate portfolio acquisitions.
The charts below summarize the performance of the portfolios we acquired in each
of the past four fiscal periods on a vintage basis analysis, that is, from the
date of acquisition of the portfolio through June 30, 2001. For fiscal 2001, the
charts include portfolios of receivables owned by The Credit Store ("CDS") and
by Credit Store Services, Inc. ("CSSI") an unconsolidated qualified special
purpose entity established in July 2000. We analyze our performance on a
"managed portfolio" basis, as if the portfolios acquired through CSSI were still
on our balance sheet, because the performance of these portfolios will affect
the future cash flows we receive from CSSI.
Vintage Basis Analysis of Non-Performing Debt Acquired
Unconverted
Unconverted Receivables Unconverted
Receivables Total Unconverted Net Settled Receivables
Purchased Acquired Unconverted Receivables Unconverted through Resold into Remaining
Unconverted through Receivables Returned Receivables Credit Card Secondary Uncoverted
Fiscal Year Ended Receivables CFC's Acquired to Seller* Acquired or Cash Market Receivables
------------- ----------- ------------- ----------- ------------- ---------- ---------- -------------
CDS - June 30, 2001 $ 358,429,591 $419,567,849 $ 777,997,440 $382,547,335 $ 395,450,105 $35,152,390 $ 14,805,403 $ 345,492,312
CSSI - June 30, 2001 785,269,895 0 785,269,895 16,124,794 769,145,101 32,077,040 0 737,068,061
------------- ----------- ------------- ----------- ------------- ---------- ---------- -------------
Total - June 30, 2001 1,143,699,486 419,567,849 1,563,267,335 398,672,129 1,164,595,206 67,229,430 14,805,403 1,082,560,373
May 31, 2000 1,490,243,243 328,797,101 1,819,040,344 390,226,996 1,428,813,348 73,987,019 291,562,195 1,063,264,134
May 31, 1999 956,043,213 0 956,043,213 21,047,575 934,995,638 60,493,888 685,813,875 188,687,875
May 31, 1998 899,367,399 0 899,367,399 25,551,327 873,816,072 130,866,306 513,411,743 229,538,023
*Returned to seller includes non-qualifying accounts and accounts returned
at termination of CFC contracts.
We have developed new methods to acquire portfolios over the past two fiscal
years which make better use of our available capital. We invested $8.3 million
in fiscal 1999, $14.3 million in fiscal 2000, and $4.4 million in fiscal 2001 to
acquire portfolios. Additionally in fiscal 2001, we invested $0.5 million and
The Varde Fund IV-A, L.P. invested $8.5 million in CSSI to allow CSSI to
purchase non-performing consumer debt portfolios from third parties through us.
The significant decline in amounts invested to acquire portfolios in fiscal 2001
is due to the success of our CFC program and the use of CSSI as a portfolio
acquisition vehicle. While our goal is to continue acquiring a significant
portion of our portfolios in this manner, we cannot guaranty that sellers will
continue to find CFCs an attractive alternative to traditional cash sales or
that investment capital for vehicles such as CSSI will continue to be available.
See "Management Discussion and Analysis - Liquidity and Capital Resources."
10
The chart below summarizes our history of converting non-performing accounts we
acquire to our credit card product. This chart is also on a vintage basis, that
is, from the date of acquisition through June 30, 2001:
Vintage Basis Analysis of Settled Balances Transferred to Credit Cards
New Charges,
Amounts Closed Interest Payments Credit Card
Transferred to Credit Net and Fees Received on Credit Card Receivables Remaining
Credit Card Card Amounts on Credit Credit Card Reivables Sold or Credit Card
Fiscal Year Ended Accounts* Accounts** Transferred Cards Receivables Charged Off Securitized Receivables
- ------------------ ----------- ----------- ----------- ---------- ---------- ---------- --------- -----------
CDS - June 30, 2001 $33,757,100 $11,127,818 $22,629,282 $5,679,093 $5,693,975 $4,359,604 $ 786,186 $18,254,796
CSSI - June 30, 2001 28,861,770 3,921,500 24,940,270 1,901,310 2,400,843 236,904 - 24,203,833
----------- ----------- ----------- ---------- ---------- ---------- --------- -----------
Total - June 30, 2001 62,618,870 15,049,318 47,569,552 7,580,403 8,094,818 4,596,508 786,186 42,458,629
May 31, 2000 69,110,157 20,491,610 48,618,547 23,071,495 23,711,465 17,903,287 3,714,433 29,822,904
May 31, 1999 50,256,711 11,313,794 38,942,917 28,439,186 30,619,128 19,207,402 11,569,953 8,969,207
May 31, 1998 85,093,935 14,624,423 70,469,512 44,854,159 46,908,823 45,523,830 19,789,327 5,477,817
* Amounts represent balances agreed to by customer and transferred to new
credit card, and includes original debt plus imputed interest from original
default date net of agreed discount.
** Accounts on which the first required payment was never made and accounts
closed at the request of customers before any significant activity occurred.
Vintage Basis Analysis of
Receivables Compared to Balance Sheet Amount Recorded
Unconverted Credit Card Balance Sheet
Receivables Receivables Amount
------------- ---------- ----------
Fiscal Year Ended
CDS - June 30, 2001 $345,492,312 $ 18,254,796 $ 5,711,185
CSSI - June 30, 2001 737,068,061 24,203,833 11,025,842*
Total - June 30, 2001 1,082,560,373 42,458,629 16,737,026
------------- ---------- ----------
May 31, 2000 1,063,264,134 29,822,904 14,745,511
May 31, 1999 188,687,875 8,969,207 5,436,477
May 31, 1998 229,538,023 5,477,817 4,158,254
* Represents amount on balance sheets of CSSI which is not consolidated on
our balance sheet.
The above chart presents, on a vintage basis, the remaining inventory of
unconverted receivables and the outstanding balance of performing credit card
receivables compared to the amounts actually recorded on our balance sheet. Upon
settlement of the debt, a credit card is issued to the customer with the opening
balance and credit line equal to the settlement amount. From the time a
settlement has been reached with the customer, until after the customer begins
to make principal payments on the credit card receivable, no incremental asset
is recorded except for the amortization of receivable portfolios discount. After
making principal payments on the settlement amount, the customer may use the
credit card for new purchases and cash advances up to its available credit
limit, which may be increased from time to time based on their payment history.
The customers' purchasing activities are recorded on our balance sheet net of
customer payments.
11
Vintage Basis Analysis of Unconverted Receivables Settled for Cash
Original
Unconverted Cash
Receivables Cash Collection
Acquired Collected Percentage
---------- ----------- ----------
Fiscal Year Ended
CDS - June 30, 2001 $2,206,614 $ 1,062,863 48.2%
CSSI -June 30, 2001 3,527,630 1,014,435 28.8%
---------- ----------- ----
Total -June 30, 2001 5,734,244 2,077,298 36.2%
May 31, 2000 7,167,545 3,870,063 54.0%
May 31, 1999 4,460,116 3,666,440 82.2%
May 31, 1998 10,813,555 6,208,659 57.4%
The chart above summarizes, on a vintage basis, our experience with collections
on accounts settled for cash and/or installment payments. The cash collected
represents lump sum settlements and periodic payments received from customers on
an installment basis. As the portfolios age, the overall collection percentage
will tend to increase as additional installment payments are received from the
debtor. We do not record the amount of installment arrangements as an asset on
our balance sheet.
Credit Card Receivable Quality
Once an acquired non-performing receivable is settled and the settlement amount
is transferred to a credit card, we employ traditional credit card measurements
to track delinquencies and charge-offs in our portfolio of performing credit
cards. We experience the majority of defaults and delinquencies during the first
few months after the settlement amount is transferred to a new credit card. In
general, if a customer does not make the first required payment on an account,
we close the credit card account and return the original purchased receivable
amount to unconverted receivables. We follow the same policy if the customer
closes the account voluntarily before making the first required payment. As
previously noted, the initial amount transferred to a credit card is not
recorded in our financial statements. Therefore any account restored to an
unconverted status has no impact in our financial statements. We consider these
returns to unconverted status in the determination of our effective interest
rate for each portfolio.
The delinquency chart below includes all our owned and managed credit card
receivables but does not include receivables in accounts that have not yet made
a first payment. Because these accounts are not yet performing and may be
closed, including them would distort the reporting of actual delinquencies on
our performing portfolio of accounts.
Delinquencies as a Percentage of Owned and Managed Credit Card Receivables
For the Three Months Ended
May 31, Aug. 31, Nov. 30, Feb. 29, May 31, Sept. 30, Dec. 31, Mar. 31, June 30,
1999 1999 1999 2000 2000 2000 2000 2001 2001
----------- ----------- ----------- ----------- ----------- ----------- ------------ ------------ ------------
Owned
Receivables
Amount $58,925,411 $63,532,090 $63,899,508 $72,059,180 $72,130,353 $82,932,303 $ 80,674,251 $ 72,775,407 $ 54,936,629
Managed
Receivables
Amount $27,616,423 $22,716,512 $21,906,243 $20,890,662 $18,252,815 $16,919,113 $ 19,401,550 $ 31,671,150 $ 49,843,613
Total
Receivables
Amount $86,541,834 $86,248,602 $85,805,751 $92,949,842 $90,383,168 $99,851,416 $100,075,801 $104,446,557 $104,780,242
----------- ----------- ----------- ----------- ----------- ----------- ------------ ------------ ------------
(percent to total)
Loans
Delinquent:
30 to 59 days 10.9% 9.6% 9.3% 8.2% 9.6% 11.6% 13.5% 10.1% 11.4%
60 to 89 days 5.0% 5.5% 4.4% 3.6% 4.7% 6.6% 6.0% 4.6% 6.3%
90 to 119 days 3.3% 4.0% 3.4% 3.0% 3.2% 4.7% 4.8% 4.2% 5.0%
Total 60 to
119 days 8.2% 9.4% 7.9% 6.6% 7.9% 11.2% 10.9% 8.8% 11.3%
12
The trend in delinquent accounts correlates to the age of accounts owned and
managed and the timing of sales of credit card receivables. Delinquency during
the quarter ended September 30, 2000, increased due to the transfer of the
servicing of approximately $20.0 million credit card receivables to the third
party who purchased them in May 2000. The credit cards transferred were some of
our most seasoned, current accounts, which had the effect of increasing the
delinquency percent of the remaining portfolio. As we sell receivables to other
credit card companies and transfer the servicing, our delinquencies tend to
increase, since we are typically selling more seasoned receivables. Also, in
periods of receivable growth, our delinquencies increase, which is contrary to a
typical credit card portfolio, because the majority of our defaults occur within
the first six months of a customer receiving their new credit card. The increase
in delinquencies during fiscal 2001 reflects a 32% increase in the volume of new
credit cards originated on an owned and managed basis over the previous fiscal
year from $66.9 million in fiscal 2000 to $88.3 million in fiscal 2001. There is
also a seasonal factor in that our delinquencies typically decline during the
first calendar quarter when our cardholders tend to repay card balances at a
faster rate to pay for purchases made during the holiday season.
Under our program, when a new credit card is issued to the consumer, the opening
balance and credit line equal the agreed settlement amount of the debt
obligation we purchased.
However, for financial statement purposes, we record as our investment in
receivables only:
o the original cost of the receivables portfolio;
o amortization of receivables portfolio discount;
o amounts funded as a result of cash advances and new cardholder
purchases made after the cardholder makes the first payment on the
credit card account;
o the accrued interest on these cash advances and new purchases; and
o the accrued fees on the account.
We do not record any credit card asset until after the cardholder makes payments
and begins to make new charges on the account. As a result, historically, the
amount owed by our cardholders exceeds the amount of receivables recorded on our
balance sheet as summarized in the following chart.
Actual Cardholder Balances Compared to Credit Card Receivables Recorded on Balance Sheet
As of May 31 As of June 30,
------------ --------------
1998 1999 2000 2001
---- ---- ---- ----
Owned credit card receivables $74,096,668 $55,184,540 $77,832,562 $66,184,418
Unused credit $ 6,093,820 $ 4,296,364 $ 7,837,918 $ 9,355,862
Utilization rate 92% 93% 91% 86%
Amounts funded, interest and fees $16,824,782 $21,879,209 $27,386,165 $28,172,826
Amounts funded, interest and fees as a
percentage of owned credit card receivables 23% 40% 35% 43%
13
We reserve for credit card losses on our balance sheet and charge against the
reserve based on the amounts funded as a result of cash advances and new
cardholder purchases made after the cardholder makes the first payment on the
credit card account, the accrued interest on these cash advances and new
purchases, and the accrued fees on the account. The following table presents our
charge-offs for the periods indicated and our provision for losses on our owned
credit card receivables:
Charge Offs and Provision for Losses on Average Investment in Receivable Portfolios Recorded on Balance Sheet
As of May 31 As of June 30
------------ -------------
1998 1999 2000 2001
---- ---- ---- ----
Average Investment in Receivable Portfolios $10,043,983 $19,906,367 $34,476,497 $ 46,466,649
Charge-offs* $ 4,721,858 $5,448,783 $ 6,051,670 $ 9,042,996
Charge-offs as a percentage of average credit 47.0% 27.4% 17.6% 19.5%
card receivables on balance sheet
Provision for credit card losses $ 6,483,737 $ 4,607,081 $ 5,680,975 $ 9,305,969
Provision as a percentage of charge-offs 137.3% 84.6% 93.9% 102.9%
* Does not give effect to any amounts recovered after the charge off.
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.
At June 30, 2001, we had $3.1 million of cash and cash equivalents and
restricted cash, compared to $2.4 million at May 31, 2000 and $4.2 million at
May 31, 1999. 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 $1.3 million at June 30, 2001, and $1.0 million at May
31, 2000, and $0.8 million at May 31, 1999. We rely on cash flow from our
receivables portfolio, receivable sales and securitizations, and credit lines to
operate our business.
We maintain a senior secured revolving credit line with Coast Business Credit
("Coast"), a division of Southern Pacific Bank. The maximum amount available
under the credit line was $13.0 million at July 2, 2001. The credit line is
secured by substantially all of our assets. Borrowings under the credit line are
based on a formula, which is dependent primarily on the performance and maturity
of our credit card receivables. The credit facility currently has an expiration
date of, and the outstanding balance matures on, July 31, 2002. As of October
31, 2001, the maximum amount available under the credit line will be reduced to
the lesser of $11.5 million or $13.0 million minus 60% of net cash proceeds
derived by us from sales or securitizations of credit card portfolios between
September 28, 2001, and October 31, 2001 and thereafter will be further reduced
by 60% of the net cash proceeds derived by us from the sales or securitization
of credit card portfolios concluded after October 31, 2001. There was $13.4
million outstanding under the credit line at June 30, 2001 and May 31, 2000.
We have also received secured financing from a related party, J.L.B. of Nevada.
The notes are payable on demand but are subordinated to the senior secured
revolving credit line. The holder of the notes cannot demand repayment prior to
repayment of the senior secured revolving credit. The remaining principal amount
outstanding on these notes totaled $17.3 million at June 30, 2001 and May 31,
2000. Accrued interest under the facility totaled $2.7 million at June 30, 2001.
No payments of interest are required until at least May 4, 2002.
14
On September 20, 1999, we entered into a repurchase agreement with Plains
Commerce Bank (fka 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. On November 30,
2000, we entered into a new repurchase agreement with the bank, replacing the
original repurchase agreement. The new repurchase agreement is for $8.0 million
and has an expiration date of January 4, 2002. For accounting purposes, the
repurchase agreement is treated as a financing transaction.
A significant source of liquidity for us has been the sale and securitization of
credit card receivables. We intend to continue to securitize receivables in the
capital markets and sell receivables to unaffiliated credit card banks in the
ordinary course of business. During the fiscal year ended May 31, 2000, we sold
our retained interest in three qualified 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. 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 received cash of approximately $13.0
million from three securitizations of credit card receivables totaling $20.4
million.
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 $1.7 million and
$1.8 million outstanding under the credit line at June 30, 2001 and May 31,
2000, with $0.30 million available under the borrowing base formula for
additional borrowing at June 30, 2001. The transfer of receivables to this
special purpose entity by us does not qualify for sale treatment under SFAS No.
125 or No. 140. The special purpose entity is consolidated in our financial
results.
During the fiscal year ended May 31, 2000, we established a new wholly-owned
qualified special purpose entity, TCS Funding IV, Inc. for the purpose of
purchasing performing credit card receivables from us. TCS Funding IV, Inc.
entered into a $40.0 million credit facility with Miller & Schroeder Investments
Corporation to finance the purchase of credit card receivables. The initial
$12.1 million sale of credit card receivables to the qualified special purpose
entity included receivables with a principal balance of approximately $14.2
million. TCS Funding IV, Inc. provided $10.0 million for the purchase and the
remaining $2.1 million was recorded by us as retained interest. We recognized a
pretax gain of approximately $3.8 million. Future borrowings under the facility
are subject to the lender's discretion and a number of other conditions.
The TCS Funding IV, Inc. credit facility requires payments of interest only
until December 31, 2001 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 specified conditions, including the
senior beneficial interests receiving a minimum BBB- rating from a nationally
recognized rating agency. We do not anticipate drawing additional funds from
this credit facility prior to December 31, 2001. The credit facility advances
70% of the receivables balance, of which 5% must be deposited into a reserve
account. The terms of the credit facility require that all credit card
receivables purchased by TCS Funding IV, Inc. must be current with a minimum of
eight payments made on each account and must meet other specified eligibility
requirements.
Until December 1, 2001, after new charges are funded and fees and interest are
paid, excess cash collections can be used by the qualified special purpose
entity to purchase additional accounts from us or pay down the senior beneficial
interest. During fiscal 2001, TCS Funding IV, Inc. used approximately $2.4
million of its excess cash collections to purchase credit card receivables
aggregating $3.6 million in principal balance from us. We recognized a pre-tax
gain of approximately $0.4 million on the sale of these receivables and had a
retained interest of approximately $4.3 million at June 30, 2001.
After December 1, 2001, the TCS Funding IV Inc. credit facility requires that
all cash collections received relating to the senior debt interest in the
receivables be used to repay principal, after payment-related servicing fees and
interest are paid. 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. Accordingly, if we do not
refinance the receivables, extend the revolving period, or sell the receivables
in a portfolio sale, our funding requirements for new receivables will increase.
Early repayment of the credit facility can be triggered if the annualized net
loss rate exceeds 21% over a consecutive three month period or if the monthly
credit card payments are less than 5.75% of the previous month end receivables
balance over a consecutive three month period. While the senior debt interest is
in place, there are restrictions on our ability to pay dividends and to pay
interest on or the principal of the notes held by our controlling stockholder.
15
During July 2000, we established Credit Store Services, Inc ("CSSI"), a
wholly-owned qualified special purpose entity. During October 2000, CSSI entered
into a financing relationship with The Varde Fund IV-A, L.P. ("Varde") involving
CSSI's purchase of non-performing consumer debt portfolios from us. We sell the
non-performing debt portfolios to CSSI on the same date and terms that we
purchase them from third parties at a price equal to our book value, which is
the acquisition price of the portfolio. CSSI entered into a $25.0 million credit
facility with Varde to finance a portion of the purchase price of these
portfolios. Under the facility, Varde finances 95% of the acquisition price of
the non-performing consumer debt portfolios and we finance the remaining 5% of
the acquisition price. Each loan from Varde to CSSI is evidenced by a note, the
principal and interest of which are due twenty-four months after the date of the
note. CSSI pays us all applicable servicing fees in connection with the acquired
portfolios, which fees totaled $1.91 million during fiscal 2001. In addition,
CSSI pays interest on the loans advanced by Varde and by us. Varde may receive
additional cash returns based on the performance of the portfolios. The
remainder of the cash flows are shared equally by Varde and us. As of June 30,
2001, we recorded a retained interest of approximately $1.59 million. Future
borrowings under the facility are subject to Varde's discretion and a number of
other conditions.
During fiscal 2001, we established a new wholly-owned qualified special purpose
entity, TCS Funding V, Inc. for the purpose of purchasing performing credit card
receivables from us. TCS Funding V, Inc. entered into a $4.0 million credit
facility with Miller & Schroeder Investments Corporation to finance the purchase
of credit card receivables. The initial $4.86 million sale of credit card
receivables to TCS Funding V, Inc. included receivables with a principal balance
of approximately $5.7 million. We recorded $0.86 million as a retained interest.
We recorded $46,380 in servicing fees from TCS Funding V for the fiscal year
ended June 30, 2001 and had a retained interest of $1.3 million at June 30,
2001.
The TCS Funding V, Inc. credit facility advanced 70% of the principal credit
card receivables balance, of which 5% was deposited into a reserve account. The
terms of the credit facility require that all credit card receivables purchased
by TCS V must be current with a minimum of eight payments made on each account
and must meet other specified eligibility requirements.
Until May 1, 2002, after new charges are funded and fees and interest are paid,
excess cash collections are required to be used by TCS Funding V to repay the
lender's beneficial interest. After May 1, 2002, all cash collections relating
to the senior debt interest in the receivables are required to be used to repay
principal, after payment-related servicing fees and interest are paid, and all
new charges on the sold accounts are required to be purchased by us in exchange
for a residual interest until such time as the senior debt interest is paid
down. Accordingly, if we do not refinance the receivables, extend the revolving
period, or sell the receivables in a portfolio sale, our funding requirements
for new receivables will increase. While the senior debt interest is in place,
there are restrictions on our ability to pay dividends and to pay interest on or
the principal of the notes held by our controlling stockholder.
We typically finance our capital expenditures through equipment leases. We
invested $2.5 million in property and equipment during fiscal 2001 compared to
$0.9 million in fiscal 2000 and $1.1 million in fiscal 1999. During fiscal year
2001, we invested in enhanced system hardware to further accommodate our growth
and developed additional proprietary software for use in our business. We plan
to make continued investments in technology, the amount of which will depend on
the amount of lease financing available for such investments.
During June, 2001, we also sold a portfolio of credit card receivables for
approximately $2.7 million to an unrelated financial institution without
recourse.
Subsequent to year end, in September, we sold a portfolio of credit cards for
approximately $3.5 million to an unrelated financial institution without
recourse.
We are currently exploring alternate means of financing our operations during
fiscal 2002, including replacing our Coast credit facility. We are also
currently in discussions with two financial institutions to sell, on a quarterly
basis during calendar year 2002, up to $20 million of performing credit card
receivables with six or more consecutive payments and a minimum of $20 million
of performing credit card receivables having eight or more consecutive payments.
Proceeds from these sales would be adequate to meet our funding needs through
the next fiscal year. We cannot guaranty that these sales will ultimately take
16
place or if the timing of the sales will allow us to meet our working capital
needs as they arise. However, management believes that cash on hand together
with the proceeds of these or other transactions it expects to consummate will
be sufficient to fund our operations during fiscal 2002.
While we have not seen a significant impact on credit quality or credit card
repayment rates as a result of the current economic climate or the September
11th terrorist attacks in New York City and Washington, D.C., we cannot guaranty
that our customer base will continue to perform at the same levels of
delinquencies and defaults as in the past or that the market for sales and
securitizations of our credit card receivables will not be negatively affected.
We can give no assurance that amounts available under our credit facility,
portfolio sales, securitizations, cash flow from future operations and cash on
hand will be sufficient to cover our portfolio acquisitions and our continuing
operations. If we were to consummate any strategic transactions or undertake any
other projects requiring significant capital resources, we would be required to
seek additional financing. If circumstances were to require us to incur
additional indebtedness, we can give no assurance that its terms would be
favorable to us.
INFLATION
We believe that inflation has not had a material impact on our results of
operations during the past three fiscal years.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and the report thereon of Grant Thornton
LLP, independent certified public accountants, dated August 22, 2001, except for
Note G, as to which date is September 28, 2001, and Note B, as to which the date
is February 14, 2002, are filed as part of this amended Form 10-K. See Item 14.
17
ITEM 14. FINANCIAL STATEMENTS AND EXHIBITS
(a) Index to Consolidated Financial Statements (restated)
The Consolidated 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 F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Stockholders' Equity F-5
Consolidated Statements of Cash Flows F-7
Notes to Consolidated Financial Statements F-9
(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 (6) Agreement, dated May 4, 2001, between the Company and J.L.B. of Nevada, Inc.
4.3 (6) Agreement, dated May 4, 2001, between the Company and J.L.B. of Nevada, Inc.
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.
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
18
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.
10.10.1 (7) Amendment to the Strategic Modeling Agreement dated March 16, 2001, between the
Company and Business Transactions Express, Inc.
10.10.2 (7) Second Amendment to the Strategic Modeling Agreement dated May 29, 2001,
between the Company and Business Transactions Express, Inc.
10.10.3 (7) Third Amendment to the Strategic Modeling Agreement dated August 16, 2001,
between the Company and Business Transactions Express, Inc.
10.10.4 (7) Fourth Amendment to the Strategic Modeling Agreement dated September 13, 2001,
between the Company and Business Transactions Express, Inc.
10.10.5 (7) Fifth Amendment to the Strategic Modeling Agreement dated October 12, 2001,
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 (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
10.18.2 (6) Seventh Amendment to Loan and Security Agreement, dated as of May 31, 2000,
between the Company and Coast Business Credit, a division of
Southern Pacific Bank
19
10.18.3 (6) Eighth Amendment to Loan and Security Agreement, dated as of October 31, 2000,
between the Company and Coast Business Credit, a division
of Southern Pacific Bank
10.18.4 (4) Amendment Number Nine to Loan and Security Agreement, dated as of April 16, 2001,
between the Company and Coast Business Credit, a division of
Southern Pacific Bank
10.18.5 (6) Tenth Amendment to Loan and Security Agreement dated as of May 1, 2001
between the Company and Coast Business Credit, a division of Southern
Pacific Bank
10.18.6 (7) Eleventh Amendment to Loan and Security Agreement dated as of September 28, 2001,
between the Company and Coast Business Credit, a division of Southern
Pacific Bank
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 the 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 the Company and Richard Angel dated
December 15, 1999
20
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 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
10.35.1 (7) Second Amendment to the Purchase Agreement between First National Bank in
Brookings and The Credit Store, Inc., dated September 21, 2001
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.
10.43.1 (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.
10.43.2 (6) Credit and Security Agreement, dated as of May 1, 2001, by and among TCS Funding
V, Inc., The Credit Store, Inc., and Miller & Schroeder Investments Corporation.
10.43.3 (6) Receivables Purchase Agreement dated May 1, 2001, by and between The Credit
Store, Inc. and TCS Funding V, Inc.
21
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.
10.47.1 (6) Amendment dated February 27, 2001 to the Repurchase Agreement dated November 22, 2000,
by and between Bank of Hoven and The Credit Store,
Inc.
10.47.2 (6) Amendment dated May 31, 2001 to the Repurchase Agreement dated November 22, 2000,
by and between Bank of Hoven and The Credit Store, Inc.
10.48 (5) Separation Agreement and Release by and between The Credit Store, Inc. and
Martin Burke dated December 11, 2000.
10.49 (5) 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.
10.50 (6) Amendment to Subordinated Grid Promissory Notes, dated May 4, 2001, made by The
Credit Store, Inc., to the order of J.L.B. Nevada, Inc. in the respective
original principal amounts of $20,000,000, $5,000,000 and $5,000,000 dated
respectively August 1, 1997, October 23, 1997 and November 21, 1997 and Secured
Promissory Note made by American Credit Alliance, Inc., to the order of J.L.B.
of Nevada, Inc. in the original principal amount of $880,000 dated August 16,
1996.
23.1 Consent of Grant Thornton LLP
- ------------
(1) Filed with the Securities and Exchange Commission as an exhibit to the
issuer's registration statement on Form 10 filed February 24, 2000 (File
No. 000-28709) and incorporated herein by reference.
(2) Filed with the Securities and Exchange Commission as an exhibit to the
issuer's registration statement on Form S-8 filed July 26, 2000 (File No.
333-42278) and incorporated herein by reference.
(3) Intentionally deleted.
(4) Filed with the Securities and Exchange Commission as an exhibit to the
issuer's quarterly report on Form 10-Q for the period ended November 30,
2000 (File No. 001-16083) and incorporated herein by reference.
(5) Filed with the Securities and Exchange Commission as an exhibit to the
issuer's registration statement on Form S-1 filed March 2, 2001 (File No.
333-56456) and incorporated herein by reference.
(6) Filed with the Securities and Exchange Commission as an exhibit to the
issuer's registration statement on Form S-1/A filed June 19, 2001 (File No.
333-56456) and incorporated herein by reference.
(7) Filed with the Securities and Exchange Commission as an exhibit on Form
10-K for the year ended June 30, 2001 (File No. 001-16083) and
incorporated herein by reference.
** 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, as amended.
22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
THE CREDIT STORE, INC.
Dated: March 5, 2002
By /s/ Kevin T. Riordan
-------------------------
Kevin T. Riordan
President
23
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)
PAGE
Report of Independent Certified Public Accountants F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Stockholders' Equity F-5
Consolidated Statements of Cash Flows F-7
Notes to Consolidated Financial Statements F-9
F-1
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 June 30, 2001 and
May 31, 2000, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years ended June 30,
2001, May 31, 2000 and 1999, and the one-month ended June 30, 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 June 30, 2001 and May 31, 2000 and the consolidated
results of their operations and their consolidated cash flows for each of the
three years ended June 30, 2001, May 31, 2000 and 1999, and the one-month ended
June 30, 2000, in conformity with accounting principles generally accepted in
the United States of America.
As discussed in Note B, the accompanying consolidated financial statement for
the year ended June 30, 2001, have been restated. As discussed in Note C to the
financial statements, the Company changed its method of revenue recognition
related to investment in receivable portfolios as of June 1, 2000.
/s/ GRANT THORNTON LLP
Minneapolis, Minnesota
August 22, 2001 (except for Note G, as
to which the date is September 28, 2001,
and Note B as to which the date is
February 14, 2002)
F-2
The Credit Store, Inc.
CONSOLIDATED BALANCE SHEETS
June 30, 2001 and May 31, 2000
June 30, May 31,
ASSETS 2001 2000
------------ ------------
Restated
--------
Cash and cash equivalents $ 1,853,454 $ 1,423,248
Restricted cash 1,250,000 1,025,631
Accounts and notes receivable, net 5,392,845 2,765,882
Prepaid expenses 1,073,283 1,341,516
Amounts due from special purpose entities 617,737 9,332,890
Investments in receivable portfolios, net 32,948,042 33,892,290
Investment in unconsolidated affiliate 1,000,750 1,279,888
Retained interest in securitized credit card receivables 7,249,204 2,142,846
Property and equipment, net 5,512,853 4,790,060
Goodwill, net 2,123,558 2,347,999
Deferred tax asset 2,700,000 2,700,000
Other assets 985,931 1,345,942
------------ ------------
$ 62,707,657 $ 64,388,192
============ ============
LIABILITIES AND STOCKHOLDERS'
EQUITY
LIABILITIES
Accounts payable and accrued expenses $ 7,537,895 $ 4,499,142
Notes payable 23,186,134 23,609,326
Capitalized lease obligations 4,247,093 2,766,228
Subordinated notes and accrued interest payable -
related party 19,970,834 19,139,028
------------ ------------
Total liabilities 54,941,956 50,013,724
------------ ------------
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 June 30, 2001 and May 31, 2000;
34,851,465 shares issued and outstanding at
June 30, 2001 and 34,761,965 shares issued and
outstanding at May 31, 2001 34,851 34,762
Additional paid-in capital 23,972,421 23,743,260
Unrealized gain from retained interest in securitized
credit card receivables, net of tax 1,603,350 638,227
Accumulated deficit (44,844,921) (37,041,781)
------------ ------------
Total stockholders' equity 7,765,701 14,374,468
------------ ------------
Total liabilities and stockholders' equity $ 62,707,657 $ 64,388,192
============ ============
The accompanying notes are an integral part of these statements.
F-3
The Credit Store, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended June 30, 2001, May 31, 2000 and 1999
and the one-month ended June 30, 2000
Year ended One-month ended Year ended May 31
June 30, June 30, ------------------------------
2001 2000 2000 1999
------------ ------------ ------------ ------------
Restated
--------
Revenue
Income from investment in receivable portfolios $ 38,714,160 $ 3,312,545 $ 30,435,832 $ 28,483,745
Securitization income and asset sales 3,304,331 44,488 13,266,241 12,114,703
Servicing fees and other income 5,034,187 237,176 2,684,554 1,564,356
------------ ------------ ------------ ------------
Total revenue 47,052,678 3,594,209 46,386,627 42,162,804
Provision for losses 9,305,969 1,238,291 5,680,975 4,607,081
------------ ------------ ------------ ------------
Net revenue 37,746,709 2,355,918 40,705,652 37,555,723
Expenses
Salaries and employee benefits 14,334,712 1,130,262 13,502,074 12,484,582
Professional fees 3,048,027 353,592 2,604,992 2,701,016
Third-party services 3,850,903 338,482 3,972,785 4,468,992
Depreciation and amortization 1,990,390 166,133 2,494,489 2,614,216
Marketing and customer communications 5,016,901 375,528 3,391,962 2,683,270
Occupancy and equipment expense 2,032,742 143,982 1,727,884 1,614,513
Royalty expense 1,067,363 211,069 1,733,412 1,541,944
Financing fees 1,231,161 277,661 1,092,286 211,864
Nonrecurring events
Provision for contract settlement -
related party 2,000,000 -- -- --
Provision for losses 1,250,000 -- -- --
Provision for losses - related party 537,061 -- -- --
Other 2,567,078 261,259 3,173,999 3,316,564
------------ ------------ ------------ ------------
Total expenses 38,926,338 3,257,968 33,693,883 31,636,961
------------ ------------ ------------ ------------
Operating income (loss) (1,179,629) (902,050) 7,011,769 5,918,762
Interest expense 3,655,415 304,241 2,867,999 1,590,219
Interest expense - related party 2,090,023 171,782 2,113,950 2,439,272
------------ ------------ ------------ ------------
Income (loss) before income taxes (6,925,067) (1,378,073) 2,029,820 1,889,271
Income tax benefit 436,544 63,456 1,042,375 1,986,409
------------ ------------ ------------ ------------
Net income (loss) (6,488,523) (1,314,617) 3,072,195 3,875,680
Dividends on preferred stock (2,000,000) (166,667) (2,000,000) (1,799,999)
------------ ------------ ------------ ------------
Net income (loss), applicable to common stockholders
$ (8,488,523) $ (1,481,284) $ 1,072,195 $ 2,075,681
============ ============ ============ ============
Net income (loss) per share - basic and diluted $ (0.24) $ (0.04) $ 0.03 $ 0.06
Weighted-average common shares outstanding
Basic 34,799,135 34,761,965 34,761,965 34,761,965
============ ============ ============ ============
Diluted 34,799,135 34,761,965 36,924,208 35,091,550
============ ============ ============ ============
The accompanying notes are an integral part of these statements.
F-4
The Credit Store, Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended June 30, 2001, May 31, 2000 and 1999
and the one-month ended June 30, 2000
Common Stock
------------------------ Series A Series B Series C Series D
Shares Amount Preferred Preferred Preferred Preferred
----------- ----------- ----------- ----------- ----------- -----------
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
Net loss -- -- -- -- -- --
Unrealized (loss) and accretion on
retained interest in
securitization, net of tax -- -- -- -- -- --
Comprehensive income -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Balance at June 30, 2000 34,761,965 34,762 1,200,000 800,000 5,000,000 10,000,000
Net loss -- -- -- -- -- --
Unrealized gain and accretion on
retained interest in
securitization, net of tax -- -- -- -- -- --
Comprehensive loss -- -- -- -- -- --
Stock options exercised 89,500 89 -- -- -- --
Issuance of stock options in lieu of
payment for services -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Balance at June 30, 2001 (restated) 34,851,465 $ 34,851 $ 1,200,000 $ 800,000 $ 5,000,000 $10,000,000
=========== =========== =========== =========== =========== ===========
The accompanying notes are an integral part of these statements.
F-5
The Credit Store, Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - CONTINUED
For the years ended June 30, 2001, May 31, 2000 and 1999
and the one-month ended June 30, 2000
Additional Other Total
Series E paid-in Accumulated comprehensive stockholders'
Preferred capital deficit income equity
------------ ------------ ------------ ------------ ------------
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, -- -- -- 2,497,148 2,497,148
------------
net of tax
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 -- 3,358,929 -- -- 3,358,929
------------ ------------ ------------ ------------ ------------
debt
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, -- -- -- 2,062,292 2,062,292
net of tax
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 -- 1,072,549 -- -- 1,072,549
------------ ------------ ------------ ------------ ------------
assets
Balance at May 31, 2000 10,000,000 23,743,260 (37,041,781) 638,227 14,374,468
Net loss -- -- (1,314,617) -- (1,314,617)
Unrealized gain and accretion on
retained interest in securitization, -- -- -- 123,180 123,180
------------
net of tax
Comprehensive income -- -- -- -- (1,191,437)
------------ ------------ ------------ ------------ ------------
Balance at June 30, 2000 10,000,000 23,743,260 (38,356,398) 761,407 13,183,031
Net loss -- -- (6,488,523) -- (6,488,523)
Unrealized gain and accretion on
retained interest in securitization, -- -- -- 841,943 841,943
------------
net of tax
Comprehensive loss -- -- -- -- (5,646,580)
Stock options exercised -- 210,261 -- -- 210,350
Issuance of stock options in lieu of
payment for services -- 18,900 -- -- 18,900
------------ ------------ ------------ ------------ ------------
Balance at June 30, 2001 (restated) $ 10,000,000 $ 23,972,421 $(44,844,921) $ 1,603,350 $ 7,765,701
============ ============ ============ ============ ============
The accompanying notes are an integral part of these statements.
F-6
The Credit Store, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended June 30, 2001, May 31, 2000 and 1999
and the one-month ended June 30, 2000
Year ended One-month ended
June 30, June 30, Years ended May 31,
2001 2000 2000 1999
------------ ------------ ------------ ------------
Restated
--------
Cash flows from operating activities:
Net income (loss) $ (6,488,523) $ (1,314,617) $ 3,072,195 $ 3,875,680
Adjustments to reconcile net income (loss) to net cash
provided (used) in operating activities
Provision for credit card losses 9,305,969 1,238,291 5,680,975 4,607,081
Amortization of receivable portfolios discount (20,551,081) (1,304,350) (1,344,418) --
Amortization of retained interest in securitized
credit cards (1,802,451) (44,488) -- --
Provision for losses on accounts and notes receivable 1,791,567 -- 100,000 768,860
Depreciation and amortization 1,990,390 166,133 2,494,489 2,614,216
Deferred tax benefit (436,544) (63,456) (1,042,375) (1,986,409)
Gain on sale of interest in affiliates -- -- (5,260,358) --
(Gain) loss from unconsolidated affiliates (37,290) (6,733) 332,760 (325,183)
Gain on sale of credit card receivable portfolios (1,526,504) -- (5,771,007) (11,851,080)
Services received for stock options granted 18,900 -- 38,500 --
Changes in operating assets and liabilities:
Restricted cash (146,787) (77,582) (275,631) 250,000
Accounts and notes receivable (3,976,334) 87,606 (1,715,675) (1,426,401)
Receivable from special purpose entities 4,673,377 4,041,776 (8,102,190) (1,230,700)
Prepaid expenses 122,188 147,909 (723,318) (173,362)
Accrued interest on funds advanced on credit cards (440,393) 43,519 (511,096) 82,488
Accrued fees (1,162,586) 4,609 (1,197,790) 291,161
Other assets 360,436 (2,331) 407,121 (177,085)
Unearned fees (12,868) (4,308) 264,855 184,551
Accounts payable and accrued expenses 2,876,976 136,777 185,733 (193,277)
Accrued interest payable on subordinated notes 660,023 171,783 242,433 2,439,273
------------ ------------ ------------ ------------
Net cash provided (used) in operating
activities (14,781,535) 3,220,538 (13,124,797) (2,250,187)
Cash flows from investing activities:
Collection of consumer debt and funds advanced 38,167,265 2,150,036 25,761,161 24,583,838
Retained interest in securitized credit card receivables (1,794,295) -- (1,840,282) (1,346,815)
Proceeds from sale of credit card receivable portfolios 9,257,092 -- 12,244,229 17,129,109
Funds advanced on credit cards (27,997,798) (2,298,314) (30,849,101) (29,460,286)
Purchase of non-performing consumer debt portfolios (4,430,995) -- (13,811,499) (8,622,478)
Proceeds from sale of beneficial interest in affiliates -- -- 8,643,233 --
Purchase of performing consumer debt portfolios -- -- (4,082,114) --
Development of proprietary software (453,047) (61,141) (207,587) (460,497)
Purchase of property and equipment (2,086,373) (52,411) (737,172) (682,539)
------------ ------------ ------------ ------------
Net cash provided (used) in investing
activities 10,661,849 (261,830) (4,879,132) 1,140,332
------------ ------------ ------------ ------------
The accompanying notes are an integral part of these statements.
F-7
The Credit Store, Inc.
CONSOLIDATED STATEMENT OF CASH FLOWS - CONTINUED
For the years ended June 30, 2001, May 31, 2000 and 1999
and the one-month ended June 30, 2000
Year ended One-month ended
June 30, June 30, Years ended May 31,
2001 2000 2000 1999
------------ ------------ ------------ ------------
Restated
------------
Cash flows from financing activities:
Proceeds from debt $ 4,129,628 $ 251,255 $ 19,128,881 $ 576,643
Payments on debt (2,561,301) (2,242,774) (1,956,321) (2,032,989)
Borrowings from capital leases 3,426,266 -- 896,018 559,713
Payments on capital lease obligations (1,791,594) (153,807) (2,175,331) (1,664,653)
Partner distributions from unconsolidated affiliates 323,161 -- -- --
Proceeds from issuance of stock 210,350 -- -- --
------------ ------------ ------------ ------------
Net cash provided (used) in financing
activities 3,736,510 (2,145,326) 15,893,247 (2,561,286)
------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (383,176) 813,382 (2,110,682) (3,671,141)
Cash and cash equivalents at beginning of period 2,236,630 1,423,248 3,533,930 7,205,071
------------ ------------ ------------ ------------
Cash and cash equivalents at end of period $ 1,853,454 $ 2,236,630 $ 1,423,248 $ 3,533,930
============ ============ ============ ============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 4,825,707 $ 265,007 $ 4,178,571 $ 1,592,864
Income taxes -- -- -- --
Noncash investing activities:
Conversion of cardholder account to note receivable 504,801 -- -- --
Change in fair market value of retained interest in
securitized credit cards, net of tax 506,739 1,471,862 2,062,292 2,497,148
Noncash financing activities:
Series D and E preferred stock issued in exchange
for subordinated note -- -- -- 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 18,900 -- 1,072,549 --
The accompanying notes are an integral part of these statements.
F-8
The Credit Store, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2001, May 31, 2000 and 1999
and June 30, 2000
NOTE A - ORGANIZATION
The Credit Store (the "Company") is a technology and information based
financial services company that provides credit card products to consumers
who may otherwise fail to qualify for a traditional unsecured bank credit
card. Unlike traditional credit card companies, the Company focuses on
consumers who have previously defaulted on debt. The Company reaches these
consumers by acquiring their defaulted debt. Through direct mail and
telemarketing operations, these consumers are offered an opportunity to
settle their debt, typically at a discount, transfer the agreed settlement
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. The Company accepts lump sum settlements or
installment payment plans from those consumers who do not accept the credit
card offer.
After the consumers have made six or more consecutive monthly payments on
their outstanding credit card balance the Company considers the account
seasoned and available to sell or securitize. Because the focus of the
Company's business is to convert defaulted debt into seasoned credit cards,
the Company periodically sells or securitizes portfolios of these seasoned
accounts. The Company also periodically sells into the secondary market for
non-performing consumer debt portfolios of accounts it acquired but was
unable to convert.
On May 24, 2001, the Company changed its fiscal year end to June 30, from May
31. The Company believes that the twelve months ended June 30, 2001 provide a
meaningful comparison to the twelve months ended May 31, 2000 and 1999. There
are no factors, of which the Company is aware, seasonal or otherwise, that
would impact the comparability of information or trends, if the results for
the twelve months ended June 30, 2000 and 1999 were presented in lieu of
results for the twelve months ended May 31, 2000 and 1999, except for the
change in revenue recognition related to investments in receivables effective
June 1, 2000.
NOTE B - FINANCIAL RESTATEMENT
Subsequent to June 30, 2001, the Company discovered an error in its
calculation of the fair market value of its retained interests in two
securitization transactions, resulting in an oversatement of assets,
unrealized gain from retained interests in securitized credit card
receivables and the resulting income tax benefit at June 30, 2001, which
resulted in an understatement of accumulated deficit. The adjustments result
in a reduction of the June 30, 2001 fair market valuation of the retained
interests of $4.1 million, a decrease in the unrealized gain from retained
interests in securitized credit card receivables recorded within other
comprehensive income net of income tax of $2.7 million, and a reduction in
income tax benefit of $1.4 million. These adjustments increased accumulated
deficit by $4.1 million. The reduction in income tax benefit is related to
changes in the tax effect of the Company's unrealized gain from retained
interests in securitized credit card receivables, and is offset by an equal
amount of tax benefit which is recorded in other comprehensive income. These
changes resulted in an increase in net loss per share of $(0.04) to $(0.24)
for the fiscal year ended June 30, 2001. The adjustment did not impact
operating earnings or cash flows for fiscal 2001 and had no impact on fiscal
year 2000.
NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
---------------------------
The Company has five subsidiaries, Credit Store Services, Inc., Credit Store
Capital Corp., American Credit Alliance, TCS Funding IV, Inc. , and TCS
Funding V, Inc. All of these subsidiaries are wholly owned by the Company;
however, only Credit Store Capital Corp. and American Credit Alliance are
consolidated in the financial statements. Credit Store Services, Inc., TCS
Funding IV, Inc., and TCS Funding V, Inc. are qualifying special purpose
entities ("QSPE's") that are not required to be consolidated.
F-9
NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Credit Store Services, Inc. and Credit Store Capital Corp. acquire
non-performing consumer receivables and contract with the Company to offer
consumers a credit card or to accept settlements or payment plans. American
Credit Alliance owns a 50% interest in Dakota Card Fund II, a limited
liability company that contracts with the Company to service non-performing
receivables and credit card receivables that it owns. TCS Funding IV, Inc.
and TCS Funding V, Inc. were created in connection with securitizations for
the purpose of purchasing performing credit card receivables from the
Company. For consolidated entities, all significant inter-company
transactions have been eliminated.
Cash and Cash Equivalents
-------------------------
For purposes of the statement 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.
Investment in Unconsolidated Affiliate
--------------------------------------
Investment in unconsolidated affiliate represents the Company's earnings in
Dakota Card Fund II, LLC, an entity involved in substantially the same
business as the Company and is recorded on the equity method of accounting.
Securitization Accounting
-------------------------
Statement of Financial Accounting Standards No. 140 ("SFAS No. 140"),
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," was issued in September 2000 and replaces,
in its entirety, SFAS No. 125. The Company was required to adopt the
provisions of SFAS No. 140 prospectively to transactions beginning after
March 31, 2001. Although SFAS No. 140 has changed many of the rules regarding
securitizations under SFAS No. 125, it continues to require 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. 140 and No. 125 require 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. At
the time of securitization, the retained interest is initially recorded at
the basis allocated in accordance with SFAS No. 140. The original cost basis
is adjusted monthly to fair value which is based on the discounted expected
future net 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 paid. 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 previously accrued
interest and cash payments. The effective interest rate is the internal rate
of return determined based on the timing and amounts of expected future net
cash flows for the underlying pool of securitized credit card receivables.
The Company adopted EITF 99-20, "Recognition of Interest Income and
Impairment on Purchased and Retained Beneficial Interests in Securitized
Financial Assets", during the fourth quarter of fiscal year 2001. The
adoption of EITF 99-20 did not have a material impact on the consolidated
financial statements.
F-10
NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
The retained interest in securitized credit card receivables 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 net cash flows. No such
provision for losses was recorded during the fiscal years ended June 30,
2001, May 31, 2000 and 1999, and the one-month ended June 30, 2000.
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 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 June 30,
2001 and May 31, 2000 accumulated amortization was $984,087 and $759,646.
Revenue Recognition
-------------------
Effective June 1, 2000, the Company accounts for its 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, 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 projected
portfolio 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.
For both the cost recovery and accrued methods of accounting, static pools
are established which include accounts having similar attributes, based on
the specific seller and the timing of the acquisition. 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 consumer receivable balances) is not recorded at the time
of purchase because the Company expects to collect a relatively small
percentage of each static pool's consumer receivable balances. 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.
All direct mail and scrubbing costs are expensed as incurred.
Under the accrual basis of accounting, amortization of receivable portfolios
discount is accrued based on the effective interest rate determined for each
pool applied to each pool's carrying value as of June 1, 2000, adjusted for
previously accrued interest and cash payments, or its cost if purchased after
June 1, 2000. 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 of accrual accounting or since the pool's purchase date, if
purchased after June 1, 2000, and anticipated future cash flow projections
for each pool.
The Company monitors impairment of non-performing receivable portfolios based
on the current market environment and the discounted projected future cash
flow of each portfolio compared to the portfolio's carrying amount.
Provisions for losses are charged to earnings when the Company has determined
that the investment in a non-performing receivable portfolio is greater than
the present value of expected future net cash flows. No such provision for
losses was recorded in the year ended June 30, 2001, May 31, 2000 and 1999,
or the one-month period ended June 30, 2000.
The change to the accrual method resulted in an increase of $7.7 million and
$1.2 million in income from credit card receivables for the year ended June
30, 2001 and one-month period ended June 30, 2000, compared to the amount
that would have been reported under the cost recovery method previously used,
and an increase of $5.0 million and $0.4 million in the provision for losses
on credit card receivables. Prior periods are not required to be restated.
F-11
NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Prior to June 1, 2000, the portfolios of non-performing consumer debt were
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. The cost of the portfolio includes
the purchase price paid to the seller plus costs directly related to the
acquisition of the portfolio.
Servicing revenues are fees related to originating, processing and managing
credit cards for third parties. These revenues are recognized when the
related services are provided.
Fee income and interest on new advances is accrued 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.
Allowance for Credit Card Losses
--------------------------------
The provision for 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 when
the credit card receivable becomes contractually 180 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 year For the year
ended ended
June 30, 2001 May 31, 2000
----------- -----------
Balance at beginning of period $ 3,593,909 $ 2,846,533
Provision for credit card losses 9,305,969 5,680,975
Credit card receivables charged-off (9,042,996) (6,051,670)
----------- -----------
Balance at end of period $ 3,856,882 $ 2,475,838
=========== ===========
Accounts and Notes Receivable
-----------------------------
Accounts and notes receivables represent amounts due to the Company mainly
relating to sales of credit card receivables, a separation agreement with a
former chief executive officer and other nonrelated party transactions.
During the fourth quarter of fiscal 2001, the company recorded a reserve of
$537,061 related to a note receivable from the former chief executive officer
and $1,250,000 related to a note receivable from a third party. As of June
30, 2001 and May 31, 2000, the accounts and notes receivable allowance for
doubtful accounts was $2,366,584 and $584,029.
F-12
NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Stock Based Compensation
------------------------
The Company utilizes the intrinsic value method of accounting for its
stock-based employee compensation plans. Stock based awards granted to
non-employees are expensed over the time the services are rendered based upon
the fair value of the award or services. Proforma information related to the
fair value based method of accounting is contained in Note I.
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 and warrants, 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.
Significant estimates have been made by management with respect to the timing
and amount of collection of future cash flows from non-performing consumer
debt and credit card receivables ("portfolios"). Among other things, the
estimated future cash flows of the portfolios are used to recognize income
from receivable portfolios, impairment in investment in non-performing
consumer debt, provision for losses on credit card receivables and fair value
of retained interest in securitized credit card receivables. On a monthly
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 to the consolidated financial
statements.
F-13
NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
New Accounting Pronouncements
- -----------------------------
On July 20, 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") 141, Business
Combinations, and SFAS 142, Goodwill and Intangible Assets. SFAS 141 is
effective for all business combinations completed after June 30, 2001. SFAS
142 is effective for fiscal years beginning after December 15, 2001; however,
early application is permitted for companies with fiscal years beginning
after March 15, 2001. Certain provisions of SFAS 142 apply to goodwill and
other intangible assets acquired between July 1, 2001 and the effective date
of SFAS 142. Major provisions of these Statements and their effective dates,
assuming early application of SFAS 142 is not elected, for the Company are as
follows:
o all business combinations initiated after June 30, 2001 must use the
purchase method of accounting. The pooling of interest method of
accounting is prohibited except for transactions initiated before July
1, 2001.
o intangible assets acquired in a business combination must be recorded
separately from goodwill if they arise from contractual or other legal
rights or are separable from the acquired entity and can be sold,
transferred, licensed, rented or exchanged, either individually or as
part of a related contract, asset or liability.
o goodwill, as well as intangible assets with indefinite lives, acquired
after June 30, 2001, will not be amortized. Effective for the Company's
fiscal year beginning July 1, 2002, all previously recognized goodwill
and intangible assets with indefinite lives will no longer be subject
to amortization.
o effective for the Company's fiscal year beginning July 1, 2002,
goodwill and intangible assets with indefinite lives will be tested for
impairment annually and whenever there is an impairment indicator.
The Company is currently reviewing early application of SFAS 142 as well as
the affect of these FASB Statements on their financial statements.
NOTE D - INVESTMENTS IN RECEIVABLE PORTFOLIOS
The Company acquires portfolios of non-performing consumer installment debt,
credit card receivables, and automobile deficiency debt that have not been
performing for several years from originating financial institutions. These
debts are acquired at a substantial discount from the actual consumer
outstanding balance. 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. Debts that consumers do not
settle may be sold by the Company to a third party.
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. From the time
a settlement has been reached with the consumer, no incremental asset is
recorded until after the consumer begins to make principal payments except
for amortization of receivable portfolios discount and subsequent consumer
funded activity. For financial statement purposes, the Company records
amortization of receivable portfolios discount and funded credit card
activity in investments in receivable portfolios. Amortization of receivable
portfolios discount represents the present value of future cash flows from
purchased non-performing consumer debt settled to the credit card account.
Funded credit card activity reflects 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. After making
principal payments on the settlement amount, the consumer 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.
F-14
NOTE D - INVESTMENTS IN RECEIVABLE PORTFOLIOS - Continued
Investments in receivable portfolios consist of the following at:
June 30, May 31,
2001 2000
----------- -----------
Cost and amortization of receivable portfolios discount $ 9,281,048 $ 9,648,090
----------- -----------
Principal funded on new advances and purchases $27,456,560 $26,536,055
Accrued interest on principal funded 376,749 420,383
Accrued fees 339,517 429,727
----------- -----------
Credit card receivables 28,172,826 27,386,165
----------- -----------
Less
Allowance for losses on credit card receivables 3,856,882 2,475,838
Unearned fees 648,950 666,127
----------- -----------
4,505,832 3,141,965
----------- -----------
Investments in receivable portfolios $32,948,042 $33,892,290
=========== ===========
Total credit card balances (1) $66,184,418 $77,832,562
=========== ===========
Available credit (2) $ 9,355,862 $ 7,837,918
=========== ===========
(1) Total credit card balances above represent the total amount owed to
the Company by the cardholders through initial settlement, new charges,
interest, fees and payments.
(2) Available credit represents the amount that the Company would be
obligated to fund if the credit cards were fully utilized by the
cardholders.
NOTE E - SECURITIZATION AND GAIN ON SALES OF CREDIT CARD
RECEIVABLE PORTFOLIOS
During the fiscal year ended June 30, 2001, the Company established a new
wholly-owned qualified special purpose entity, TCS Funding V, Inc. ("TCS V"),
for the purpose of purchasing performing credit card receivables from the
Company. TCS V entered into a $4.0 million credit facility with Miller &
Schroeder Investments Corporation to finance the purchase of credit card
receivables. The initial $4.9 million sale of credit card receivables to TCS
V included receivables with a principal balance of approximately $5.7
million. The remaining $0.9 million, was recorded as a retained interest.
The TCS V credit facility advanced 70% of the principal credit card
receivables balance, of which 5% was deposited into a reserve account. The
terms of the credit facility require that all credit card receivables
purchased by TCS V must be current with a minimum of eight payments made on
each account and must meet specified other eligibility requirements.
Until May 1, 2002, after new charges are funded and fees and interest are
paid, excess cash collections received are required to be used by TCS V, the
special purpose entity, to amortize the lender's beneficial interest. After
May 1, 2002, all cash collections received relating to the senior debt
interest in the receivables are required to be used to repay principal, after
payment-related servicing fees and interest are paid. All new charges on the
sold accounts are required to be purchased by the Company 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 the
Company's ability to pay dividends and to pay interest on or the principal of
the notes held by the controlling stockholder.
F-15
NOTE E - SECURITIZATION AND GAIN ON SALES OF CREDIT CARD RECEIVABLE
PORTFOLIOS - Continued
During October 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. The
Company contracts with CSSI to offer consumers credit cards under the
Company's program or to accept settlements or payment plans. Non-performing
consumer debt portfolios are sold to CSSI at a price 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 the purchase price of the acquired
portfolios. The facility expires in October 2003. Through June 30, 2001, the
Company sold approximately $785.0 million face value of consumer debt at a
sales price of $9.0 million to CSSI and recorded a retained interest of $1.6
million in these assets, through June 30, 2001. As of June 30, 2001, the
outstanding balance under CSSI's credit facility was $6.3 million, with $18.7
million available for future borrowings at the lender's discretion.
During the year ended June 30, 2001, the Company also sold various receivable
portfolios totaling $3.7 million for approximately $2.7 million to an
unrelated party without recourse.
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 $40.0 million credit facility with a
lending institution to finance the purchase of credit card receivables. The
initial sale of credit card receivables to the SPE totaling approximately
$12.1 million 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 was recorded by the Company as retained interest. The
transaction closed on May 31, 2000. The Company recognized a pre-tax gain of
approximately $3.8 million. The unrealized gain of approximately $0.6
million, 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 TCS IV for $9.3
million. 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.
During the year ended May 31, 2000, the Company also sold a portfolio of
receivables totaling approximately $1.4 million, with a carrying value of
approximately $0.6 million, for approximately $1.1 million 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 $20.4 million 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 $17.3 million of which approximately $13.0 million was funded
with the sale of senior debt interests. The Company recognized a pre-tax gain
of approximately $8.0 million and recorded a retained interest in securitized
credit card receivables on an allocated basis in the amount of approximately
$1.3 million.
At May 31, 1999, the allocated basis amount was adjusted to a fair value of
approximately $5.1 million, resulting in approximately $3.8 million of
unrealized gain on the retained interest in securitized credit card
receivables. The unrealized gain was recorded net of tax of approximately
$1.3 million, resulting in approximately $2.5 million, as a component of
comprehensive income. During November 1999, the Company sold its retained
interest in the three SPE's to the lender for approximately $8.6 million,
resulting in a pre-tax gain of approximately $6.5 million.
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 $7.0
million and a carrying value of approximately $2.2 million for $5.0 million to
an unrelated party without recourse.
F-16
NOTE E - SECURITIZATION AND GAIN ON SALES OF CREDIT CARD RECEIVABLE
PORTFOLIOS - Continued
The following summarizes the Company's securitization activity:
Year ended Year ended
June 30, 2001 May 31, 2000
------------- ------------
Proceeds from securitizations $4,496,048 $10,461,551
Servicing fees received 2,886,273 508,503
Retained Interests
The Company's retained interests are carried at estimated fair market value
with the changes in fair value included as other comprehensive income. The
estimated fair market value is based on the present value of expected future
net cash flows using management's estimates of key assumptions. The following
summarizes the changes in the balance of the Company's retained interest for
the year ended June 30, 2001:
Estimated
unrealized Fair
Cost gains value
------ ------- -------
Balance at July 1, 2000 $1,220,325 $1,153,647 $ 2,373,972
Retained interests in portfolios sold 1,794,295 -- 1,794,295
Interest accrued 1,802,451 -- 1,802,451
Change in unrealized gain -- 1,278,486 1,278,486
---------- ---------- -----------
Balance at June 30, 2001 (restated) $4,817,071 $2,432,133 $7,249,204
========== ========== ==========
As of June 30, 2001, the gross net unrealized gain has been offset by a
deferred tax expense of approximately $0.8 million. The key economic
assumptions used in measuring the fair value of retained interests at the
time of and subsequent to a securitization are the expected net cash payment
rate and the discount rate. The expected net cash rate is approximately 2.25%
per month and varies by type of cards sold in each securitization. The net
cash rate is the excess consumer payments over new credit card purchases and
advances. The estimated net cash flows have been discounted at 23%.
The following represents the sensitivity of the current fair value of
retained interest in securitizations at June 30, 2001 to changes to key
assumptions:
Expected net cash payment rate (monthly) 2.25%
Impact on fair value of 5% adverse change $461,000
Impact on fair value of 10% adverse change $764,000
Discount rate 23%
Impact on fair value of 5% adverse change $158,000
Impact on fair value of 10% adverse change $276,000
The above sensitivities are hypothetical and should be used with caution. As
the amounts indicate, changes in fair value based on variations in
assumptions generally cannot be extrapolated because the relationship of the
change in assumption to the change in fair value may not be linear. Also, in
this table, the effect of a variation in a particular assumption on the fair
value of the retained interest is calculated without changing any other
assumption. In reality, changes in one factor may result in changes in
another, which might magnify or counteract the sensitivities.
F-17
NOTE E - SECURITIZATION AND GAIN ON SALES OF CREDIT CARD RECEIVABLE
PORTFOLIOS - Continued
The Company's managed credit card receivables consists of retained interest
in credit card receivable securitizations and investor's share of
securitizations sold to unrelated parties without recourse. The Company
records its retained interest in credit card receivable securitizations on
the balance sheet. The following table summarizes the balances included in
the managed credit card receivable portfolios.
June 30, 2001
Restated May 31, 2000
------------- ------------
Retained interest in credit card receivable portfolios
securitized - (sellers interest) $7,249,204 $ 2,142,846
Investor's interests in credit card receivable
portfolios securitized - (not included on balance
sheet) 9,636,810 12,153,228
----------- -----------
Total managed credit card receivable portfolios $16,886,014 $14,296,074
=========== ===========
NOTE F - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
Useful life June 30, May 31,
(in years) 2001 2000
---------- ------ -----
Computer equipment and software 3 - 5 $ 7,374,305 $ 7,289,750
Office equipment 5 - 7 1,768,762 2,280,037
Furniture and fixtures 5 - 7 1,302,527 1,241,458
Proprietary software 5 1,182,271 668,084
Leasehold improvements Life of leases
694,670 669,884
------------ ------------
12,322,535 12,149,213
Less accumulated depreciation and
amortization (6,940,108) (7,489,579)
------------ ------------
5,382,427 4,659,634
Land 130,426 130,426
------------ ------------
$ 5,512,853 $ 4,790,060
=========== ===========
F-18
NOTE G - NOTES PAYABLE
Notes payable consist of the following at:
June 30, May 31,
2001 2000
------ ------
Note payable - bank $13,380,867 $13,442,597
Note payable - other 9,805,267 10,166,729
---------- ----------
$23,186,134 $23,609,326
========== ==========
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, increased to $15,000,000 on December 6, 1999, and decreased
to $13,000,000 on July 2, 2001. On September 28, 2001, this agreement was
amended to change the maturity date from May 31, 2002 to July 31, 2002.
Effective October 31, 2001, the maximum dollar amount available under the
credit limit will be reduced to the lesser of $11,500,000 or an amount equal
to $13,000,000 less sixty percent of net cash proceeds derived from sales or
securitizations of credit card portfolios on or after September 28, 2001 and
prior to October 31, 2001. After October 31, 2001, the maximum amount
available under the credit limit will be further reduced by an amount equal
to sixty percent of all net cash proceeds derived from sales or
securitizations of credit card portfolios. 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. Interest expense for the three years
ended June 30, 2001, May 31, 2000 and 1999, and the one-month ended June 30,
2000 was $1,462,243, $1,501,047, $617,249, and $142,696.
Note Payable - Other
----------------------
The Company has uncollateralized installment notes issued in connection with
purchases of non-performing consumer debt in addition to installment
obligations assumed in connection with the closing of certain affiliated
mortgage companies (see Note M). The notes have various maturity dates
through May 2002, with interest rates ranging up to 23.7% per annum. The
amount outstanding as of June 30, 2001 and May 31, 2000 was $145,644 and
$2,292,920. Interest expense for the three years ended June 30, 2001, May 31,
2000 and 1999, and the one-month ended June 30, 2000 was $118,302, $145,763,
$65,353, and $13,086.
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
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 June 30, 2001 and May 31, 2000 was
$1,659,623 and $1,772,888. Interest expense for the years ended June 30, 2001
and May 31, 2000, and the one-month ended June 30, 2000 was $239,369,
$151,547, and $18,727.
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 which had an initial repurchase date of December 20,
1999. The original agreement was amended in March 2000 to increase the
repurchase amount to $6,000,000. Interest was charged at a rate of 15% per
annum. In November 2000, the Company entered into a new $8,000,000 repurchase
agreement with the same bank and interest charged was reduced to 12% per
annum. The agreement, as amended, has a repurchase date of January 4, 2002.
The balance outstanding at June 30, 2001 and May 31, 2000 was $8,000,000 and
$6,000,000. Interest expense for the years ended June 30, 2001, May 31, 2000,
and the one-month ended June 30, 2000 was $884,083, $378,750, and $62,500.
F-19
At June 30, 2001, future minimum principal payments for all notes payable
were as follows:
Year Amount
---- --------
2002 $8,145,644
2003 15,040,490
----------
$23,186,134
NOTE H - 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 $6,896,895 and $6,953,160, and have accumulated
amortization of $3,998,825 and $5,023,793 at June 30, 2001 and May 31, 2000.
Future minimum lease payments for capitalized leases are as follows at June
30, 2001:
Year Amount
---- --------
2002 $2,573,877
2003 1,625,429
2004 988,402
--------
5,187,708
Less amount representing interest (940,615)
---------
$4,247,093
Amortization expense for assets under capital leases for the three years
ended June 30, 2001, May 31, 2000 and 1999, and the one-month ended June 30,
2000 was $1,685,628, $1,377,479, $1,645,705 and $73,171.
F-20
NOTE I - 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 8,000,000 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 three years ended June 30, 2001, May 31, 2000 and
1999, and the one-month ended June 30, 2000 are summarized as follows:
Number of Weighted
shares under average
option exercise price
-------- --------------
Outstanding at June 1, 1998 3,656,000 $2.93
Granted 690,500 2.35
--------
Outstanding at May 31, 1999 4,346,500 2.84
Granted 942,500 2.90
Cancelled (156,000) 2.08
---------
Outstanding at May 31, 2000 5,133,000 2.88
Granted 4,000 4.44
---------
Outstanding at June 30, 2000 5,137,000 2.88
Granted 2,534,438 3.13
Exercised (89,500) 2.35
Cancelled (108,000) 3.00
---------
Outstanding at June 30, 2001 7,473,938 2.97
=========
At June 30, 2001 options exercisable for 5,481,000 shares of common stock
with a weighted average exercise price of $2.78 were outstanding.
The following table summarizes information about stock options outstanding at
June 30, 2001:
Options outstanding
--------------------------------------------
Weighted
average Weighted
Range of remaining average
exercise Number life exercise
prices outstanding (years) price
------------------ ----------- ------------- --------
$1.56 - $2.40 4,733,238 2.80 $1.94
$2.50 - $3.69 782,700 3.03 2.95
$3.88 - $6.47 1,958,000 2.41 5.45
---------
7,473,938 2.97
=========
F-21
NOTE I - STOCK OPTIONS - continued
Options exercisable
--------------------------------
Number Weighted
Range of exercisable at average
exercise June 30, exercise
prices 2001 price
---------------- ------------------ --------
$1.56 - $2.40 3,743,000 $2.03
$2.50 - $3.69 715,000 2.95
$3.88 - $6.47 1,023,000 5.42
---------
5,481,000 2.78
=========
The Company's pro forma 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:
Year ended One-month ended Years ended May 31,
June 30, June 30, ---------------------------
2001 2000 2000 1999
---------------- --------------- ------------- -------
Restated
--------
Net income (loss) applicable to
common shareholders $(10,020,256) $(1,525,504) $(506,953) $50,109
Net income (loss) per share
Basic and diluted $ (0.29) $(0.04) $(0.01) $0.00
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:
Year ended One-month ended Years ended May 31,
June 30, June 30, ----------------------------
2001 2000 2000 1999
---------------- ----------------- ------------- ----------
Fair value of options granted $1.69 $2.91 $2.12 $1.73
Assumptions:
Dividend yield $0 $0 $0 $0
Volatility 75% 75% 90% 90%
Average term 5 or 10 years 5 or 10 years 5 or 10 years 5 or 10 years
Risk-free rate of return 5.75% 5.75% 6.05% - 6.47% 5.75% - 5.81%
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 G). The fair value of the warrants was $1.01 at the date of grant. For
the years ended June 30, 2001 and May 31, 2000 and the one-month period ended
June 30, 2000, $276,526, $357,182, and $23,044 of amortization was included
in interest expense.
On March 18, 1999, the Company granted a five-year warrant to a vendor to
purchase up to 1,000,000 shares of the Company's common stock at $2.00 per
share. As of June 30, 2001 and May 31, 2000, 500,000 shares were vested under
this agreement. The fair value of warrants was $0.85 and $0.56 at the
respective vesting dates. For the years ended June 30, 2001 and May 31, 2000
and the one-month period ended June 30, 2000, expense was $129,860, $72,262,
and $10,822.
F-22
NOTE J - INCOME TAXES
Deferred income tax assets (liabilities) consist of the following at:
June 30, May 31,
2001 2000
------ ------
Deferred tax assets
Net operating loss carryforward $ 15,664,041 $ 14,291,447
Allowance for doubtful accounts 1,857,782 1,389,759
Other reserves 1,593,600 --
------------ ------------
Total deferred tax assets 19,115,423 15,681,206
Less valuation allowance ( 12,650,528) (10,327,461)
------------ ------------
6,464,895 5,353,745
Deferred tax liabilities
Gain on sales of portfolios - (2,324,961)
Unrealized gain on retained interest in securitization (828,784) (328,784)
Revenue recognition method difference (2,936,111) --
------------ ------------
Total deferred tax liabilities (3,764,895) (2,653,745)
------------ ------------
Net deferred tax asset $ 2,700,000 $ 2,700,000
=========== ===========
The difference between the total income tax benefit and the income tax
expense (benefit) computed using the applicable Federal income tax rate was
as follows for the three years ended June 30, 2001, May 31, 2000 and 1999,
and the one-month ended June 30, 2000:
Year ended One-month ended Years ended May 31,
June 30, June 30, -----------------------
2001 2000 2000 1999
------ ------ ------ -----
Restated
--------
Computed Federal income taxes at 34% $(2,354,523) $(468,545) $ 690,139 $ 642,352
Other (1,153) -- 211,013 (295,708)
(Increase) decrease of deferred tax
asset valuation allowance 1,919,132 404,999 (1,943,527) (2,924,469)
----------- ---------- ----------- -----------
Income tax benefit $ (436,544) $ (63,456) $(1,042,375) $(1,986,409)
=========== ========== =========== ===========
At June 30, 2001, the Company has a net operating loss carryforward available
to offset future taxable income of approximately $45,000,000, 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.
F-23
NOTE K - 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 $10,500, $10,000 and $9,500 for
the calendar years 2000, 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 $211,702, $217,271, $173,479 and $18,183 for
the years ended June 30, 2001, May 30, 2000 and 1999 and for the month ended
June 30, 2000 relating to this plan.
NOTE L - MUTUAL BUSINESS DEVELOPMENT AGREEMENTS
In October 1996, the Company's predecessor entered into two Mutual Business
Development Agreements ("Development Agreements"), one with O. Pappalimberis
Trust and one with Renaissance Trust I.
The Development Agreements call for a royalty equal to 5% of any newly
established receivable originated or acquired by the Company by way of a
converted credit card account held which: (i) is delivered to a
pre-securitization credit facility, (ii) becomes a qualifying receivable, or
(iii) meets 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 5% of all
principal cash collections on specified accounts that are not converted to
credit cards. The total royalty, if earned, payable under each of the two
Development Agreements, after deductions and exclusions, will not exceed $25
million.
The Development Agreement with the O. Pappalimberis Trust was amended on
September 1, 1998 to alter the amount and timing of payments, give the
Company a buyout option, alternate royalty payment options and extend the
term of the agreement to May 31, 2005. The Development Agreement with
Renaissance Trust I expires October 7, 2002 and has not been amended.
Both Development Agreements are currently in dispute. In February 2001 the
Company discontinued payment of royalties under both Development Agreements.
The Company is discussing the rights and obligations of the parties under the
Development Agreement with the O. Pappalimberis Trust.
On April 23, 2001, the Company was sued by Renaissance Trust I in the United
States District Court for the Southern District of New York in an action
titled Renaissance Trust I v. The Credit Store, Inc. The plaintiffs allege
breach of the Mutual Business Development Agreement and conversion and seek
enforcement of the contract, compensatory damages alleged to be in excess of
$5 million, and punitive damages of $25 million. Renaissance Trust I owns
4,000,000 shares of the Company's common stock and 400,000 shares of the
Company's Series B Preferred Stock. On June 29, 2001, the Court dismissed the
conversion claim and dismissed the demand for punitive damages.
At June 30, 2001, the Company has estimated that it is probable that a
settlement of at least $2,000,000 will be required to settle the contract
disputes and terminate the agreements. This amount has been accrued during
the fourth quarter of fiscal 2001.
For the three years ended June 30, 2001, May 31, 2000 and 1999, and the
one-month ended June 30, 2000, $1,067,363, $1,733,412, $1,541,944, and
$211,069 of royalty expenses were incurred with $893,918, $740,487, $702,075,
and $816,556 accrued at June 30, 2001, May 31, 2000 and 1999, and June 30,
2000.
F-24
NOTE M - RELATED PARTY TRANSACTIONS
At June 30, 2001 and May 31, 2000, the Company owed amounts under
subordinated promissory notes to J.L.B. of Nevada, Inc. ("JLB"), an entity
wholly owned by Jay L. Botchman ("Botchman"), majority shareholder and former
director, totaling $16,444,940 payable on demand with interest at 12% per
annum. Interest expense on these notes was $2,000,801, $2,006,283,
$2,307,467, and $164,449 for the three years ended June 30, 2001, May 31,
2000 and 1999, and the one-month ended June 30, 2000. Accrued interest
related to subordinated promissory notes was approximately $2,200,000 and
$1,500,000 at June 30, 2001 and May 31, 2000. The notes are collateralized by
substantially all the Company's assets, but subordinated to the Company's
revolving credit lines.
On May 29, 1999, JLB, forgave $5,000,000 of interest on the subordinated
promissory notes, in exchange for warrants to purchase 4,000,000 shares of
the Company's common stock with an exercise price of $3.25 per share,
expiring on June 30, 2004, and the Company's assumption of equipment and
related lease obligations from a company affiliated with JLB 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 and 1999 was $18,200, and $42,583.
The Company's former Chairman of the Board of Directors and Chief Executive
Officer, Martin J. Burke, III ("Burke"), resigned effective September 21,
2000. On this date, Burke had a personal credit card account with the Company
with a balance due of approximately $500,000. Under the terms of Burke's
separation and release agreement, the credit card balance and another $25,000
for legal fees paid by the Company on Burke's behalf was combined into a note
receivable, which matures on December 1, 2002, with interest at 8% per year
payable monthly. The note receivable is secured by the severance payments
made to Burke through
March 26, 2002 and by Burke's stock options which have a $2.00 exercise price
and terminate in December 2002. As of June 30, 2001, Burke's stock option
exercise price is above market. During the year ended June 30, 2001, the
Company received only the applied severance payments from Burke. Accordingly,
the Company has provided a reserve for the entire principal and interest of
$537,061 due from Burke as of June 30, 2001.
The Company, through its wholly-owned subsidiary, American Credit Alliance,
Inc., has an $880,000 note payable to JLB 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 June 30, 2001, May 31, 2000
and 1999, and the one-month ended June 30, 2000 was $89,222, $89,467, $89,222
and $7,333. Accrued interest related to this note payable was approximately
$424,000 and $327,000 at June 30, 2001 and May 31, 2000.
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. During fiscal year 2001,
400,000 shares of Series B Preferred Shares were transferred to a different
related party. There was no change in the amount or number of outstanding
Series B Preferred Shares. The Series A Preferred Stock, as a class, was
granted 80% of the voting rights in the Company, but the percentage is
subject to adjustment on certain issuances of capital stock. 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 $0.05 per share per annum. At anytime
after December 31, 2001 the Series A and B Preferred Stock will be redeemable
at the option of the Company. The Series B Preferred Stock is 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 shares of Series C Preferred
Stock are non-voting and earn cumulative dividends at 6% of $1,000 per share
per annum. The shares have a liquidation preference of $1,000 per share. The
Series A and B Preferred Stock rank senior to the Series C with respect to
dividend and liquidation rights.
F-25
NOTE M - RELATED PARTY TRANSACTIONS - continued
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 shares of Series D Preferred Stock are
non-voting and earn a dividend of 8% of the stated value of $1,000 per share
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 holders of the Series D Preferred Stock have 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 shares of Series E Preferred Stock are
non-voting and earn a dividend of 8% of the stated value of $1,000 per share
per annum payable annually on December 31. 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 dividend and liquidation rights.
Each share of Series E Preferred Stock is convertible into 285 shares of
common stock. The holders of the Series E Preferred Stock have piggy back
registration rights with respect to the common stock issuable upon conversion
of the shares of Series E Preferred Stock.
As of June 30, 2001 and May 31, 2000, accumulated preferred dividends
undeclared and unpaid on preferred stock amounted to approximately $6,200,000
and $4,100,000.
On May 4, 2001, in consideration of JLB agreeing to amend the payment terms
of several promissory notes, the Company extended the expiration date of the
conversion feature of the Series D Preferred Stock until May 30, 2006 and the
Series E Preferred Stock until August 30, 2006.
During fiscal 2001, the Company appointed a new director who is counsel to a
law firm that provides services to the Company. The Company recorded legal
expense for services from this firm of approximately $543,000 in fiscal 2001.
NOTE N - COMMITMENTS AND CONTINGENCIES
Operating Leases
----------------
The Company leases certain properties, vehicles and equipment under
non-cancelable operating leases. Total lease rentals charged to operations
were approximately $1,154,000, $858,000, $766,000 and $73,000, for the years
ended June 30, 2001, May 31, 2000 and 1999, and the one-month ended June 30,
2000. Future minimum lease payments under the non-cancelable operating leases
are as follows:
Year ending June 30, Amount
-------------------- --------
2002 $ 834,000
2003 691,000
2004 538,000
2005 285,000
2006 285,000
Thereafter 1,734,000
----------
$4,367,000
==========
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) one class
action on behalf of persons purportedly solicited by the Company to
voluntarily repay debt that had been improperly reported as a bad debt on a
credit-reporting bureau, 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, and RICO; (ii) one action on
behalf of plaintiffs seeking class status asserting claims under California
F-26
state statutes seeking damages and injunctive relief barring the Company from
offering its credit card program to debtors whose debt is out of statute
and/or cannot be reported on a credit bureau as bad debts; and (iii) the
contract dispute concerning the Business Development Agreement discussed in
Note L. The Company is defending itself vigorously in these lawsuits. The
Company does not believe that pending litigation and consumer 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 O - FAIR VALUE OF FINANCIAL INSTRUMENTS
The accompanying financial statements include various estimated fair value
information as of June 30, 2001 and May 31, 2000. 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.
Investments in Receivable Portfolios
------------------------------------
The fair value is estimated based on recent acquisitions of similar
receivable portfolios and discounted expected future net cash flows. The
discount rate is based on a rate of return, adjusted for specific risk
factors that would be expected by an unrelated investor in a similar stream
of cash flows.
Retained Interest in Securitized Credit Card Receivables
--------------------------------------------------------
The carrying amount approximates fair value. Fair value is estimated by
discounting expected future net cash flows using a discount rate based on
specific factors. The expected future net cash flows are projected on a "cash
out" basis to reflect the restriction of cash flows until the investors have
been fully paid.
Accounts Payable and Accrued Expenses
-------------------------------------
The carrying amount approximates fair value.
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.
F-27
Subordinated Notes and Accrued Interest Payable
-----------------------------------------------
Due to the related party relationship of these notes, it is not practical to
estimate fair value.
The carrying amounts and estimated fair values of the Company's financial
instruments consisted of the following:
June 30, 2001 May 31, 2000
------------------------------ --------------------------------
Restated
--------
Carrying Estimated Carrying Estimated
value fair value value fair value
------------ ------------ ------------ ------------
Cash, Cash Equivalents and Restricted
Cash $ 3,103,454 $ 3,103,454 $ 2,448,879 $ 2,448,879
Accounts and Notes Receivable $ 5,392,844 $ 5,392,844 $ 2,765,882 $ 2,765,882
Amounts Due from Special Purpose
Entities $ 617,737 $ 617,737 $ 9,332,890 $ 9,332,890
Investments in Receivable Portfolios
$32,948,042 $49,175,646 $33,892,290 $63,900,000
Retained Interest in Securitized Credit
Card Receivables $7,249,204 $7,249,204 $ 2,142,846 $ 2,142,846
Accounts Payable and Accrued Expenses
$ 7,537,895 $ 7,537,895 $ 4,499,142 $ 4,499,142
Notes Payable $23,186,134 $23,186,134 $23,609,326 $23,609,326
NOTE P - NET INCOME (LOSS) PER SHARE
One month
Year ended ended Years ended May 31,
June 30, June 30, --------------------------------
2001 2000 2000 1999
------------ ------------ ------------ -------------
Restated
Basic net income (loss) per share
Net income (loss) applicable to common
stockholders $ (8,488,523) $ (1,481,284) $ 1,072,195 $ 2,075,681
============ ============ ============ ============
Weighted-average shares outstanding
34,799,135 34,761,965 34,761,965 34,761,965
============ ============ ============ ============
Basic net income (loss) per share $ (0.24) $ $(0.04) $ 0.03 $ 0.06
============ ============ ============ ============
Diluted net income (loss) per share
Net income (loss) applicable to common
stockholders $ (8,488,523) $ (1,481,284) $ 1,072,195 $ 2,075,681
============ ============ ============ ============
Weighted-average shares outstanding
34,799,135 34,761,965 34,761,965 34,761,965
Effect of diluted securities options -* -* 2,162,243 329,585
------------ ------------ ------------ -------------
Weighted-average of diluted
shares outstanding 34,799,135 34,761,965 36,924,208 35,091,550
============ ============ ============ ============
Diluted net income (loss) per share $ (0.24) $ (0.04) $ 0.03 $ $0.06
============ ============ ============ ============
*Antidilutive.
F-28
NOTE Q - PREFERRED STOCK
As of June 30, 2001 and May 31, 2000, Preferred Stock consists of the
following:
June 30, May 31,
2001 2000
----------- -----------
Series A Preferred Stock, $.001 par value; 2,000,000 shares
authorized; 1,200,000 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, $.001 par value; 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
----------- -----------
$27,000,000 $27,000,000
=========== ===========
Dividends on preferred stock have accumulated but have not been declared and
are not yet payable. The Company, however, treats the dividends as declared
and payable for the purpose of calculating net income (loss) applicable to
common shareholders.
F-29
NOTE R - COMPARATIVE CONDENSED INFORMATION (UNAUDITED)
The following unaudited condensed financial information presents the
one-month period ended June 30, 1999 and is presented for comparative
purposes to the one-month period ended June 30, 2000, which is included in
the consolidated financial statements.
Consolidated Statement of Operations
Revenue $ 2,626,562
Less provision for losses 542,010
------------
Net revenue 2,084,552
Operating expenses 2,993,015
------------
Operating loss (908,463)
Interest expense 286,723
------------
Loss before income taxes (1,195,186)
Income tax benefit --
------------
NET LOSS (1,195,186)
Dividends on preferred stock (166,667)
------------
Net loss, applicable to common stockholders $ (1,361,853)
============
Basic and Diluted net loss per share $ (0.04)
Basic and Diluted weighted-average common shares outstanding $ 34,761,965
============
Consolidated Statement of Cash Flows
Net cash flows used in operating activities $ (730,626)
Cash flows from investing activities:
Collection of funds advanced on credit cards and consumer debt 1,200,201
Funds advanced on securitized and owned credit card receivables (2,035,372)
Purchase of nonperforming and performing consumer debt portfolios (4,284,877)
Other (34,113)
------------
Net cash used in investing activities (5,154,161)
Cash flows from financing activities:
Proceeds from debt, net 5,121,096
Other (13,708)
------------
Net cash provided in financing activities 5,107,388
------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (777,399)
Cash and cash equivalents at beginning of period 3,533,930
------------
Cash and cash equivalents at end of period $ 2,756,531
============
F-30
NOTE S - SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED)
As described in Note B, the Company has restated its financial statements for
the year ended June 30, 2001. On a quarterly basis, the restatement had no
impact on net income or loss before income taxes. The impact of the restatement
on income tax benefit was to increase the benefit $302,000 for the quarter ended
September 30, 2000 and to decrease the benefit $22,000, $55,000, and $1,625,000
for the quarters ended December 31, 2000, March 31, 2001 and June 30, 2001. Net
loss per share was decreased by $0.02 in the quarter ending September 30, 2000
and increased $0.05 in the quarter ending June 30, 2001. The restatement did not
impact the net income or loss per share for the quarters ending December 31,
2000 and March 31, 2001. These changes are reflected in the table below.
Year ended June 30, 2001
--------------------------------------------------------------------------
Total for
year ended Fourth Third Second First
June 30, 2001 quarter** quarter* quarter* quarter*
------------- -------- -------- -------- --------
Restated Restated Restated Restated Restated
-------- -------- -------- -------- --------
(dollars in thousands, except per share data)
Summary of operations
Revenue $ 47,053 $ 11,355 $ 13,050 $ 11,208 $ 11,439
Provision for losses (9,306) (2,941) (690) (3,412) (2,262)
-------- -------- -------- -------- --------
Net revenue 37,747 8,414 12,360 7,796 9,177
Operating income (loss) (1,180) (4,026) 3,848 (717) (284)
Net income (loss) (6,489) (5,289) 2,344 (2,216) (1,328)
Dividends on preferred stock (2,000) (500) (500) (500) (500)
-------- -------- -------- -------- --------
Net income (loss) applicable to
common stockholders $ (8,489) $ (5,189) $ 1,854 $ (2,716) $ (1,828)
======== ======== ======== ======== ========
Net income (loss) per share
Basic $ (0.24) $ (0.17) $ 0.05 $ (0.08) $ (0.04)
Diluted $ (0.24) $ (0.17) $ 0.05 $ (0.08) $ (0.04)
* The amounts presented for the first, second and third quarters of fiscal
year ended June 30, 2001 vary from amounts presented within previously
filed Form 10Q's due to the Company's change in year end.
** The amounts include non-recurring charges of $3,787 related to allowances
for notes receivable from a related party, and from previous owners and
estimated settlement of a contract dispute.
Year ended May 31, 2000
--------------------------------------------------------------------------
Total for
year ended Fourth Third Second First
May 31, 2000 quarter quarter quarter quarter
------------ -------- -------- -------- --------
(dollars in thousands, except per share data)
Summary of operations
Revenue $ 46,387 $ 14,763 $ 8,770 $ 14,621 $ 8,233
Provision for losses (5,681) (865) (1,078) (1,703) (2,035)
-------- -------- -------- -------- --------
Net revenue 40,706 13,898 7,692 12,918 6,198
Operating income (loss) 7,012 3,729 (669) 5,553 (1,600)
Net income (loss) 3,072 4,382 (1,836) 3,135 (2,608)
Dividends on preferred stock (2,000) (500) (500) (500) (500)
-------- -------- -------- -------- --------
Net income (loss) applicable to
common stockholders $ 1,072 $ 3,882 $ (2,336) $ 2,635 $ (3,108)
======== ======== ======== ======== ========
Net income (loss) per share
Basic $ .03 $ .11 $ (.07) $ .07 $ (.09)
Diluted $ .03 $ .10 $ (.07) $ .07 $ (.09)
F-31