-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WY/PRJu2+bXy2ruSC+49Gjwk2TDhn2gm2vHbEwD+3MwDUaCYRtxNOwTHF/1ACpcx x3Hagf5u+O41UxOLPSmd+Q== 0000950144-98-011403.txt : 19981014 0000950144-98-011403.hdr.sgml : 19981014 ACCESSION NUMBER: 0000950144-98-011403 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19981013 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CREDIT DEPOT CORP CENTRAL INDEX KEY: 0000869276 STANDARD INDUSTRIAL CLASSIFICATION: MORTGAGE BANKERS & LOAN CORRESPONDENTS [6162] IRS NUMBER: 581909265 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 000-19420 FILM NUMBER: 98724993 BUSINESS ADDRESS: STREET 1: 700 WACHOVIA CENTER CITY: GAINESVILLE STATE: GA ZIP: 30501 BUSINESS PHONE: 7705319927 MAIL ADDRESS: STREET 1: 700 WACHOVIA CENTER CITY: GAINESVILLE STATE: GA ZIP: 30501 10KSB 1 CREDIT DEPOT CORPORATION 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM 10-KSB (MARK ONE) [X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 1998 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO ____________
COMMISSION FILE NO. 0-19420 --------------------- CREDIT DEPOT CORPORATION (Name of small business issuer in its charter) DELAWARE 58-1909265 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 700 WACHOVIA CENTER, GAINESVILLE, GEORGIA 30501 (Address of principal executive offices) (Zip Code)
Issuer's Telephone Number, including Area Code (770) 531-9927 SECURITIES REGISTERED UNDER SECTION 12(B) OF THE EXCHANGE ACT: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED N/A N/A
SECURITIES REGISTERED UNDER SECTION 12(G) OF THE EXCHANGE ACT: COMMON STOCK, $.001 PAR VALUE (TITLE OF CLASS) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant required was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Check if there is no disclosure of delinquent filers pursuant to Item 405 of Regulation S-B contained in this form, and no disclosure will 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-KSB or any amendment to this Form 10-KSB. [ ] Issuer's revenues for its most recent fiscal year: $4,722,159 The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold or the average bid and asked price of such common equity as of September 14, 1998 was approximately $957,000. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's definitive Proxy Statement, to be filed within 120 days after the end of the Registrant's fiscal year, are incorporated by reference into Part III of this Annual Report. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 PART I ITEM 1. DESCRIPTION OF BUSINESS GENERAL Credit Depot Corporation (the "Company") is a mortgage finance company engaged in originating, purchasing, and selling first and second mortgage loans secured by single family (one to four family) residences made to credit-impaired individuals who are generally unable to obtain financing from conventional lending sources. The Company's customers borrow funds generally for debt consolidation or to refinance first mortgages on the customer's primary residence. The Company's mortgage loans are at higher interest rates than conventional mortgage loans, which the Company's customers are willing to incur because of their inability to obtain financing from conventional sources. While the typical borrowers from the Company may not have attractive credit histories due to a pattern of credit weakness, unverifiable income, insufficient credit history or a previous bankruptcy or insolvency, it is the Company's experience that these borrowers nevertheless have generally demonstrated an ability to make payments due under their loans because the loans are generally secured by first mortgages on their primary residences, and the Company generally requires that such borrowers have significant equity in their residences. The Company believes its underwriting procedures generally enable it to determine which borrowers with substandard credit histories are likely to meet their mortgage obligations. The Company believes that the lending practices of conventional financing sources (such as commercial banks and savings and loan associations) have made access to credit more difficult for the Company's target customer base. In addition, the emergence of secondary mortgage markets has resulted in a reduced willingness on the part of traditional financing sources to offer mortgages that depart from the strict underwriting and documentation standards required by government sponsored enterprises such as the Government National Mortgage Association ("GNMA") and the Federal National Mortgage Association ("FNMA"). The Company believes that the tightening of underwriting guidelines from traditional financing sources has resulted in a large population of creditworthy borrowers seeking alternative sources of financing. Generally, mortgage lenders evaluate a borrower according to four primary criteria: (i) the ratio of the borrower's debt to his gross income; (ii) the loan-to-value ratio of the property securing the loan; (iii) the borrower's credit history; and (iv) the responses to requests for third-party documentation (such as employment and other verifications and credit references). Based on these criteria, the Company will evaluate a loan application or loan (if purchasing a loan from another source) and determine if the criteria fall within the guidelines of the Company's current loan programs, also known as an "underwriting matrix." The Company's target customer base traditionally consisted of homeowners with at least 20% equity in their homes (typically with values ranging from $35,000 to $200,000), a debt-to-gross-income ratio not exceeding 50% (as compared to approximately 36% for conventional lenders), and stable employment. During the years ended June 30, 1996, 1997 and 1998 (referred to as "Fiscal 1996", "Fiscal 1997", and "Fiscal 1998") the Company originated $37,035,000, $79,323,000, and $95,921,000 of loans, respectively. The average original principal balance of the loans originated by the Company during Fiscal 1996, 1997, and 1998 was $49,000, $50,000, and $57,000, respectively, with an average annual interest rate to the Company of approximately 11.5%, 12.1%, and 10.8%, respectively. During Fiscal 1996, 1997, and 1998, approximately 91%, 90%, and 88%, respectively, of the Company's loans originated for each period had an original principal balance of between approximately $10,000 and $130,000. During Fiscal 1996, 1997, and 1998, the weighted average loan-to-value ratio at the time of origination of the Company's loans originated during those periods was approximately 74%, 70%, and 76%, respectively, and the weighted average debt-to-gross-income ratio for the Company's borrowers was approximately 36%, 35%, and 35%, respectively. Prior to October 1994, substantially all of the mortgage loans originated by the Company were balloon loans, with periodic payments based generally on a 15-year amortization schedule and a single payment of the remaining balance of the balloon loan due five years after origination. At June 30, 1998, the Company was servicing approximately $1,695,000 of balloon loans, either in the Company's own portfolio or for other entities. In October 1994, the Company changed its mortgage product line from balloon to primarily self- 1 3 amortizing mortgages, and also began to originate somewhat higher quality loans (although the target customers remained credit-impaired borrowers who are unable to obtain loans from conventional lenders), which resulted in slightly lower average annual interest rates and slightly higher loan-to-value ratios. Currently, the loans originated by the Company are generally for 15- 20- or 30- year terms. Since 1993, the Company has expanded the geographic scope of its mortgage activities from a single office in Gainesville, Georgia, and currently employs personnel in ten additional states (Florida, Indiana, Louisiana, Maryland, Michigan, Mississippi, North Carolina, Ohio, South Carolina, and Tennessee) from which mortgage loans are originated. The Company is also licensed to originate loans in several other states where it is not required to maintain a physical presence. The Company originates and processes its loans utilizing a "spoke and hub" system, wherein sales representatives forward loan applications to one of three designated regional processing offices for initial processing. The underwriting department at the corporate headquarters in Gainesville, Georgia issues final approval and funding of each loan. The Company was incorporated in Delaware in 1990 and is the successor by merger to a corporation organized in 1986. Unless the context otherwise requires, reference to the "Company" includes the operations of the Company, its predecessor and its wholly-owned subsidiaries. Also unless otherwise noted, all dollar figures presented are rounded to the nearest $1,000 and are approximate. The Company's executive offices are located at Wachovia Center, Suite 700, Gainesville, Georgia 30501, telephone (770) 531-9927. LOAN FINANCING General. Although the Company's principal product is a non-conforming residential first mortgage loan with a fixed interest rate and term to maturity, it does offer a limited variable rate and second mortgage product and other programs, all of which the Company believes keeps its product line competitive in the marketplace without sacrificing underwriting guidelines. These loans are distinct from residential mortgage revolving lines of credit, not offered by the Company, which are generally secured by a second mortgage and typically carry a floating interest rate. The proceeds of the loan will usually be used by the borrower for debt consolidation or to refinance a first mortgage on his property. Costs incurred by the borrower for loan origination, including origination points and appraisal, legal and title fees, are often included in the amount financed. The following table summarizes the Company's lending activities during each of the periods indicated:
FISCAL YEAR ENDED JUNE 30, ----------------------------------------- 1998 1997 1996 ----------- ----------- ----------- Principal amount of loans originated........ $95,921,000 $79,323,000 $37,035,000 Number of loans originated.................. 1,752 1,601 757 Servicing portfolio: Serviced for the Company.................. $ 9,171,000 $ 5,205,000 $ 6,617,000 Serviced for purchasers of loans.......... 432,000 2,027,000 3,575,000 ----------- ----------- ----------- Total servicing portfolio......... 9,603,000 7,232,000 10,192,000 Loan sale proceeds: Loans sold servicing released -- whole.... $80,907,000 $ 5,244,000 $13,506,000 Loans sold servicing released -- retained interest............................... 12,225,000 77,020,000 19,321,000 ----------- ----------- ----------- Total loan sale proceeds.......... 93,132,000 82,264,000 32,827,000 Gain on sales of loans(1)................. $ 4,402,000 $ 5,181,000 $ 1,697,000 Overall gain on sale percentage(1)........ 4.73% 6.30% 5.17% Interest rate differential on loans sold with a retained interest(2)............ 2.66% 2.70% 2.01% Premium received on Whole loan sales(3)..... 4.02% 0.00% 2.27%
- --------------- (1) This is a gross gain on sale from all types of loan sales, and excludes any write-down of any asset with a retained interest (see "Sale of Mortgage Loan Pools"), which is netted against the gain on sale of loans in the financial statements. 2 4 (2) This represents the difference between the mortgage loan interest rate and the contractual rate paid by the purchaser of loans sold on an Interest-Only basis. This type of sale involves a cash premium or discount to the Company at the time of sale. (3) This represents the net cash premium received on loans sold Whole. This percentage is calculated on the net proceeds (after premiums paid) divided by the principal amount of the loan. Origination. Loan applications are brought to the Company's attention in its branch offices by referral sources such as mortgage loan brokers, prospective borrowers, or mortgage companies. Completed loan applications are transferred to the Company's loan processors who verify certain information contained in the applications such as employment information and credit history. The loan processor also makes the arrangements necessary to have the applicant's real property, offered as security for the loan, appraised by an independent appraiser. Reference is made to the responses to Items 3 and 6 of this Annual Report with respect to the payment of yield spread premiums and certain warehouse lines of credit, respectively, as they relate to the Company's ability to originate loans. The Company's loan processor then reviews the application, the applicant's credit history (including verifying any senior mortgages on the applicant's property) and the appraisal, and uses this information to categorize the application, a process which consists of determining the preliminary loan-to-value ratio as well as ascertaining the applicant's other obligations. The loan-to-value ratio is determined by dividing the requested loan amount by the appraised value of the borrower's property. The Company requires that the loan-to-value ratio of a property offered as collateral generally not exceed 85%, and, historically, such rate has averaged approximately 71%. The Company requires that a loan applicant's total monthly debt payments to gross monthly income generally not exceed 50%, and, historically, such rate has averaged approximately 36%. If the loan processor concludes that the applicant may be a suitable candidate for a loan, the loan processor prepares an "in-file" credit report which provides a computer analysis of the applicant's credit history, including outstanding indebtedness. Based upon the loan-to-value ratio, debt-to-gross-income ratio, an analysis of the applicant's creditworthiness and the appraisal of the applicant's property offered as security for the loan, a loan committee, consisting of senior credit officers at the Corporate office, determines whether or not to approve the application. In all instances in which borrowers have advised the Company that all or a portion of the loan will be used to repay outstanding debt, the Company's closing agent will disburse such funds directly to the borrower's creditors. Borrowers have a right under federal truth-in-lending laws to rescind their loans for a period of three days after entering into the loan agreement and prior to the disbursement of the funds. After the disbursement of loan proceeds, the Company's closing attorney records the mortgage security interest in the county in which the property securing the loan is located, thus perfecting the Company's interest. The closing attorney obtains, on behalf of the Company, a title insurance policy insuring perfection of the Company's lien position. Delinquency Information. Typically, promptly after failure to receive timely payment, the Company commences collection efforts, and for loans which become 60 days past due the borrower is verbally notified that the Company may initiate the foreclosure process. The Company then notifies the borrower via a letter from an attorney of the serious nature of the delinquency but also affords the borrower an opportunity (generally the minimum amount of time prescribed by state statute) to bring the loan current. However, if the loan continues to remain delinquent, the Company engages an attorney to complete the foreclosure proceedings. The Company arranges for sale at public auction of all collateral in order to satisfy the unpaid indebtedness to the Company. Delinquency information herein gives effect to all mortgage loans originated by the Company which are either retained in the Company's portfolio or which have been sold to third parties servicing retained. As of June 30, 1998, 15 borrowers had filed for protection under the federal bankruptcy laws, representing $458,000, or approximately 6.1% of the principal amount of all loans being serviced. Of the 15 borrowers who have filed for bankruptcy, 14 have made their scheduled payments on a timely basis. 3 5 The following is a table setting forth certain information with respect to the aggregate delinquency rates for loans in the Company's loan portfolio and serviced loan portfolio:
FISCAL YEAR ENDED JUNE 30, --------------------------------------- 1998 1997 1996 ---------- ---------- ----------- Number of loans............................... 164 199 296 Amount of loans............................... $7,545,000 $7,232,000 $10,192,000 Delinquency period(1)(3): 30-59 days.................................. 1.36% 3.12% 3.50% 60-89 days.................................. 0.51% 2.79% 2.13% 90-119 days................................. 0.60% 0.64% 0.83% 120 days and over........................... 2.97% 7.45% 5.59% Foreclosed properties(2)...................... 1.01% 1.21% .04% Amount of loans owned by the Company.......... $7,113,000 $5,205,000 $ 6,617,000 Amount of loans serviced for third parties.... 432,000 2,027,000 3,575,000
- --------------- (1) Represents the dollar amount of delinquent loans as a percentage of the total "Amount of loans" as of the date indicated. (2) Foreclosed property as a percentage of loans serviced and foreclosed properties. These amounts reflect foreclosures during the applicable period on mortgage loans originated since 1988. (3) From time to time, the Company grants payment extensions or revises repayment schedules. The above information does not list as delinquent those payments for which extensions have been granted. In Fiscal 1996, 1997, and 1998, the Company experienced defaults which led to the foreclosure of the mortgaged property on 11, 19, and 12 loans, respectively. As a result of such foreclosures, the Company experienced an aggregate net loss on those related mortgage loans of $130,000, $195,000, and $242,000 during Fiscal 1996, 1997, and 1998, respectively. In a continuing period of economic decline, the rates of delinquencies, foreclosures and losses on the mortgage loans could be higher than those previously experienced in the mortgage lending industry in general. In addition, adverse economic conditions (which may or may not affect real estate property values) may affect the timely payment by borrowers of scheduled payments of principal and interest on the mortgage loans and, accordingly, the actual rates of delinquencies, foreclosures and losses with respect to the Company's portfolio of mortgage loans. SALE OF MORTGAGE LOANS As a fundamental part of its business and financing strategy, the Company intends to sell all of the loans it originates in the secondary mortgage market rather than holding such mortgage loans for its own account. Generally, the Company has sold its loans using one of three sales methods. The first method involves selling loans to third parties service-released (the Company no longer services the loan after the sale) with no further obligations or interest in the loan after the sale. The premium (or discount) on the loan is received (or deducted) in cash at the time of the sale. This method of loan sale is referred to as selling loans "Whole". In the second sales method, loans are sold service-retained (the Company continues to service the loan after the sale), with a residual interest and obligation. The interest the Company receives is a percentage of the interest portion of a borrower's loan payment, and the obligation owed in this case is a commitment by the Company to repurchase the loan, at the option of the investor who purchased the loan, if it should become over 90 days past due. The gain on sale recorded using the second sales method is calculated as the present value of the difference between the interest rate charged by the Company to a borrower and the interest rate paid to the investor who purchased the loan less contractual servicing costs, referred to as a "Service" sale. The third sales method involves selling loans service-released with a residual interest and obligation. The interest due the Company is the same as with a Service sale except that there is no deduction to the investor for servicing costs. The Company is also subject to a "first loss" provision, wherein if the loan is ever foreclosed upon by the investor and the investor should incur a loss upon the sale of the property, then the Company is obligated to reimburse the investor for the amount of loss. This third type of sale is referred to as an "Interest-Only" sale. 4 6 An important distinction between the sales methods is that in a Whole loan sale, the cash premium is received at the time of sale, whereas in the other two methods the cash premium is received over the life of the loan as it is collected. Reference is made to "Certain Accounting Considerations" in the response to Item 6 of this Annual Report for a more complete discussion of how the Service and Interest-Only sales are recorded. Prior to Fiscal 1994, the Company sold most of its mortgage loans in groups or "pools" of loans totaling anywhere from $500,000 to $2,000,000 a pool on a Service basis to banks, life insurance companies, and other entities. At June 30, 1998, the aggregate balance of loans outstanding subject to the residual repurchase obligation of the Service sale was $432,000, none of which was past due by over 90 days and subject to repurchase at the option of the investor. From March 1996 to October 1997, the Company sold most of its mortgage loans to a major financial institution on an Interest-Only basis, who in turn placed the Company's loans (along with loans from other companies) into the asset-backed securitization market. The agreement with the major financial institution (referred to as the "Securitizer") allowed the Company to sell loans into the asset-backed securitization market without having to accumulate the relatively large pools of loans necessary to participate in this market on an individual basis. Additionally, the agreement with Securitizer allowed the Company to sell loans in small pools or on a one-by-one basis (known as selling loans on a "Flow" basis). This was important as the Company did not have a warehouse line of credit with which it could retain a substantial number of loans pending sale. The Company sold $108,626,000 of loans to the Securitizer pursuant to this agreement. At June 30, 1998, $64,665,000 of these loans were still being serviced by the Securitizer. Through Fiscal 1998, the Company recorded losses of $44,000 pursuant to the first loss provision of the agreement with the Securitizer. The Company maintains an allowance for credit losses estimated to cover losses both from loans held by the Company for its own portfolio and for loans sold with a residual obligation. Because the gain recognized in the year of sale of loans on an Interest-Only basis is equal to the present value of the certain estimated future cash flows, the amount of cash which the Company is entitled to receive over the lives of the loans can exceed the gain recognized at the time the loans were sold. In the subsequent years, the Company would recognize additional income and fees to the extent actual cash flows from such loans exceed the amortization. If actual prepayments with respect to sold loans occur faster than they were projected at the time such loans were sold or loans go into foreclosure, the carrying value of the Company's Servicing Asset or Interest-Only strips receivable is written down through a charge to earnings in the period of adjustment. During the year ended June 30, 1998, the actual prepayments exceeded those previously anticipated at the time of the sale of the loans and the Company reduced the value of the Servicing Asset and Interest-Only strips receivable previously recorded by $19,000 and $2,233,000, respectively, to reflect the actual prepayments. There can be no assurance that a change in the prepayment speed of the loans or other changes in the assumptions used to calculate the original value of the Servicing Asset or Interest-Only Strips Receivable will not necessitate a significant write-down in their carrying values in the future. In June 1997, the Company was able to obtain a substantial warehouse line of credit and therefore the capability to accumulate pools of mortgages. Loans sold Whole in pools yield a higher premium than loans sold Whole on a flow basis. Even though the loans sold on an Interest-Only basis to the Securitizer yielded a higher premium than Whole loan sales, the Company decided in September 1997 to begin selling loans on a Whole basis because of the improved current cash flow. See "Liquidity and Capital Resources" under Item 6 herein for a more complete discussion of liquidity issues. In addition to improving cash flow, selling loans Whole to a variety of third party purchasers ("Purchasers") allowed the Company to expand its product line and offer certain types of mortgages that were not part of the Securitizer's product line. However, the Company does not have a sales contract with any of these Purchasers, and therefore the Company has no guarantee that its mortgage loans will be purchased at a given rate as the premium received on each sale of a pool of loans is negotiated at the time of sale. Also, the loan products that these Purchasers are willing to buy can change from time to time, and, without a sales contract, the Company could fund loans that it may be unable to sell, or unable to sell without a substantial discount. These Purchasers can also exit the non- conventional market altogether, thereby decreasing the number of outlets for the Company's loan sales. Purchasers remaining in the non-conventional market could offer lower premiums for the Company's loans as a result of fewer competitors for the purchase of non-conventional loans. The Company does not currently 5 7 hedge its sales against changes in interest rates, and does not believe the costs associated with hedging offset the risk taken by not hedging at this point in time. However, there can be no assurance that changes in interest rates in the future will not adversely affect the Company. BRANCH OFFICES The Company intends to continue to expand its "spoke and hub" network as resources permit. Given its limited resources, the Company has consolidated its processing hubs down to three offices in Georgia, North Carolina, and Ohio, and has focused on developing the sales personnel who supply loan applications to those hub offices. These sales personnel require much less overhead expense than a processing office. The Company currently maintains sales personnel in Florida, Georgia, Indiana, Maryland, Michigan, Mississippi, North Carolina, Ohio, South Carolina, and Tennessee, and is licensed to do business in several other states where it does not maintain a salesperson. The states in which the Company operates have been divided into three regions. The sales for each region are overseen by a regional manager. The Company has completed an internal reorganization begun in 1997 and does not anticipate consolidating any more offices. MARKETING The Company provides promotional materials and other support for the sales personnel in the various states to enable them to target the mortgage brokerage community at the local level. The Company also provides some training, although its recruiting efforts tend to focus on those individuals with some previous industry experience. CUSTOMERS The most likely market for loans financed by the Company has been and will continue to be credit-impaired homeowners who are unable to obtain loans from conventional sources. Typical borrowers approved by the Company for loans are individuals who are generally unable or unwilling to obtain financing from conventional lending sources due to an established pattern of credit weakness, unverifiable income, insufficient credit history, or a previous bankruptcy or insolvency. The inability of these borrowers to obtain conventional financing makes them willing to pay the higher rates charged by the Company. While the typical borrowers from the Company may not present attractive credit histories, the Company has found and believes that these types of individuals nevertheless demonstrate an ability and desire to preserve their loans in good standing because the loans are secured by first mortgages on their primary residences. The Company obtains most of its mortgage applications from mortgage brokers (as opposed to soliciting the borrowers directly), and the Company anticipates that mortgage brokers will remain its most significant source of loan applications. COMPETITION The Company faces intense competition in connection with the origination, purchase, and sale of mortgage loans from numerous providers of financial services. Traditional competitors in the financial services business include independent mortgage companies, credit unions, thrift institutions, credit card issuers and finance companies. Many of these companies are substantially larger and have more capital and other resources than the Company. Competition among lenders can take many forms including convenience in obtaining a loan, customer service, size of loans, interest rates and other types of finance or service charges, duration of loans, the nature of the risks which the lender is willing to assume and the type of security, if any, required by the lender. The Company competes, among other ways, through efficient underwriting and the timely response to applicants. GOVERNMENT REGULATION The Company's operations are subject to extensive regulation, supervision and licensing by federal, state and local government authorities. Regulated matters include, without limitation, loan origination, credit activities, maximum interest rates and finance and other charges (including state usury laws), disclosure to customers and requirements of the federal "truth-in-lending" laws, the terms of secured transactions, the 6 8 collection, repossession and claims handling procedures utilized by the Company, multiple qualification and licensing requirements for doing business in various jurisdictions as mortgage lenders and brokers and other trade practices. The Company's operations are subject to regulation by state statutes governing loan interest rates and terms (i.e., usury statutes) and federal "truth-in-lending" laws governing disclosure requirements applicable to lenders. The Company's operations are also subject to RESPA and the Rules and Regulations. The Company believes it has complied in all material respects in the states in which it operates with state laws regarding the licensing of mortgage lenders and mortgage brokers. In order to conduct its business in the State of Georgia, the Company must be licensed by the Georgia Department of Banking and Finance (the "Department"). The Company's license expired on September 2, 1998 and was reinstated on September 30, 1998, pursuant to a Memorandum of Understanding between the Company and the Department (the "Memorandum of Understanding"). Pursuant to the Memorandum of Understanding, the Company has agreed to comply with the requirements of the Memorandum of Understanding. In addition to complying with certain minimum financial requirements, the Department has imposed certain additional conditions upon the Company relating to, among other things, the timely delivery of financial information to the Department, the Company's net worth, a delisting of the Common Stock by the NASDAQ SmallCap Market, and the Company's business plan resulting in a cumulative profit for the fiscal year ended June 30, 1999 ("Fiscal 1999"). If the Department is not satisfied with the Company's compliance with such conditions, the Department may summarily suspend or revoke the Company's license. As is the case with all licensed mortgage lenders in Georgia, the Company's present license expires on December 31, 1998. While the Company has applied for renewal of the license for Fiscal 1999, there can be no assurance that the Department will renew the Company's license or not suspend or revoke the license during the remainder of 1998 or, if renewed, thereafter. Furthermore, there can be no assurance that similar or harsher action will be taken against the Company by other governmental agencies. Any loss or suspension of the Company's license in any jurisdiction in which it originates loans could have a material adverse effect on the Company . There can be no assurance that restrictive laws, rules and regulations will not be adopted in the future which could make compliance by the Company more difficult and expensive and which could further limit or restrict the amount of interest and charges assessed under loans originated by the Company or otherwise adversely affect the business and prospects of the Company. The Company's loan financing activities are subject to the provisions of Title 1 of the Federal Consumer Credit Protection Act, commonly known as the Truth-In-Lending Act ("TILA") and Regulation Z promulgated pursuant thereto. TILA contains disclosure requirements designed to provide consumers with simple understandable information with respect to the terms and conditions of loans and credit transactions in order to give them the ability to "shop" credit. TILA also guarantees consumers a three-day right to cancel certain credit transactions, including any refinanced mortgage or junior mortgage on a consumer's primary residence. In September 1994, the Riegle Community Development and Regulatory Improvement Act of 1994 (the "Riegle Act") was enacted. Among other things, the Riegle Act makes certain amendments to TILA. The TILA amendments, which became effective in October 1995, generally apply to mortgage loans with (i) total points and fees upon origination in excess of eight percent of the loan amount or (ii) an annual percentage rate of more than ten percentage points higher than United States Treasury securities of comparable maturity ("Covered Loans"). A substantial majority of the loans originated or purchased by the Company are not Covered Loans. The TILA amendments impose additional disclosure requirements on lenders originating Covered Loans and prohibit lenders from originating Covered Loans that are underwritten solely on the basis of the borrower's home equity without regard to the borrower's ability to repay the loan. The Company believes that only a small portion of loans it originated are of the type that, unless modified, would be prohibited by the TILA amendments. The Company's underwriting criteria have always taken into consideration the borrower's ability to repay. 7 9 The TILA amendments also prohibit lenders from including prepayment fee clauses in Covered Loans to borrowers with a debt-to-income ratio in excess of 50% or Covered Loans used to refinance existing loans originated by the same lender. The TILA amendments impose other restrictions on Covered Loans, including restrictions on balloon payments and negative amortization features, which the Company believes does not have a material impact on its operations. The Company is also required to comply with the Equal Credit Opportunity Act ("ECOA") which prohibits creditors from discriminating against applicants on the basis of race, color, sex, age or marital status. Regulation B promulgated under ECOA restricts creditors from obtaining certain types of information from loan applicants. It also requires certain disclosures by the lender regarding consumer rights and requires lenders to advise applicants who are turned down for credit for the reasons therefore. The Fair Credit Reporting Act requires a lender to provide an individual, whose application for credit was denied as a result of information obtained from a consumer credit agency, with the name and address of the reporting agency. In certain circumstances the Company may acquire properties securing loans on foreclosure. There is a risk that hazardous wastes may be found on such properties. In such event, it is possible that the Company could be held liable for clean-up costs under the Comprehensive Environmental Response Compensation and Liability Act ("CERCLA") or similar state statutes. EMPLOYEES As of June 30, 1998, the Company had 68 full-time employees in its Credit Depot offices, and approximately 30 full and part-time employees in its Cash Back Mortgage subsidiary. The Company considers its relations with its employees to be satisfactory. SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Certain statements contained in the responses to Items 1, 6, and 7 of this Annual Report such as statements concerning the Company's future cash and financing requirements, the Company's ability to originate and/or acquire mortgage loans, including, but limited to the Company's continuing ability to pay yield spread premiums, the Company's ability to enter into securitization transactions and/or otherwise sell mortgage loans to the third parties and the returns therefrom and other statements contained herein regarding matters that are not historical facts are forward looking statements; actual results may differ materially from those projected in the forward looking statements, which statements involve risks and uncertainties, including but not limited to, the following: the outcome of certain litigation, the Company's ability to obtain future financing; the uncertainties relating to the Company's ability to participate in securitizations; and market conditions and other factors relating to the mortgage lending business. Investors are also directed to the other risks discussed herein and in other documents filed by the Company with the SEC. ITEM 2. DESCRIPTION OF PROPERTIES The Company's principal executive offices and a regional processing office are located at 700 Wachovia Center, Gainesville, Georgia 30501, where it leases approximately 12,650 square feet of space at a monthly rental of $22,000. The lease for this office expires in October 1999. The Company also leases office space for its other two processing offices and maintains executive suites in certain additional states as required by state mortgage licensing regulations. The processing offices have 2,000 to 3,000 square feet and rent for $3,000 to $4,000 per month. The executive suites generally have about 120 square feet and rent from $200 to $700 per month. The Company believes that its corporate facilities are adequate for the Company's present and anticipated needs for at least the next 12 months. ITEM 3. LEGAL PROCEEDINGS On February 27, 1998, Terry Lee Flowers and Rosemary Flowers, (the "Plaintiffs") on behalf of themselves and a purported class of others brought an action against a wholly-owned subsidiary of the Company in the United States District Court for the Northern District of Mississippi. The Plaintiffs alleged that the subsidiary made payments to mortgage brokers which constituted referral fees, kickbacks and 8 10 duplicative payments in violation of RESPA and the Rules and Regulations and, as a result, the Plaintiffs and others were charged higher rates of interest by the subsidiary than would have otherwise been the case. The Court has not ruled on whether the action will proceed as a class action. The Plaintiffs are seeking a non-specified amount of compensatory damages. In the event of a finding against the subsidiary in the action, in addition to a material amount of monetary damages which may be assessed against the subsidiary, the Company's ability to continue to obtain referrals from mortgage brokers could be significantly impaired. Substantially all of the Company's business is presently derived from referrals from mortgage brokers. The Company has become aware that the United States Court of Appeals for the Eleventh Circuit (the "Eleventh Circuit"), in an action in which the Company was not a party, held that certain fees paid to mortgage brokers represent "yield spread premiums" which constitute referral fees in violation of RESPA. Certain Federal District Courts have reached similar conclusions. The Company believes that the defendant will seek to have the Eleventh Circuit reconsider its holding and, if necessary, ultimately appeal the holding to the United States Supreme Court. The Eleventh Circuit is the federal appellate court for cases arising in the Federal District Courts in Alabama, Florida and Georgia. The Company originates a significant amount of loans in Georgia and Florida and pays yield spread premium on a portion of those originations. In addition to possible criminal violations for unlawful payments in violation of RESPA, a payor can be held liable for damages in the amount of 300% of the unlawful payments. If the Company is ever found to be liable to such extent, the Company would not have sufficient resources with which to pay such damages and could be expected to file for bankruptcy protection. The subsidiary intends to vigorously defend the action. On February 9, 1998, the Company and another of its wholly-owned subsidiaries were named as defendants in an action filed in the Court of Common Pleas of Cuyahoga County, Ohio (the "State Court") by Alan Schiff, a former employee of the subsidiary (the "Plaintiff"). The case was removed to the United States District Court for the Northern District of Ohio. In connection with the purchase by the subsidiary of an enterprise in which the Plaintiff was a principal, the Plaintiff signed an employment contract and a non- competition/non-solicitation agreement. The Plaintiff asserted claims for (1) breach of the purchase and employment agreements; (2) rescission of the purchase agreement and all other agreements; (3) a declaration of his rights under the agreements; and (4) an injunction enjoining the Company and the subsidiary from enforcing restrictive covenants in the agreements which, pursuant to their terms, would prohibit the Plaintiff from competing against the Subsidiary in the mortgage business, and from any further alleged breaches of the agreements. The Plaintiff sought compensatory damages of $1,000,000 and punitive damages of $2,000,000. The Company and the subsidiary denied the Plaintiff's substantive claims and asserted counterclaims against the Plaintiff for (a) unspecified damages for (1) breach of the purchase agreement; (2) breach of his employment agreement; (3) breach of fiduciary duty; and (b) a declaratory judgment to the effect that the Company and the subsidiary did not breach any agreement with the Plaintiff. The action was settled on September 4, 1998, with neither party receiving any damage award. All claims by both parties were dismissed with prejudice. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS Not applicable. 9 11 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The principal market where the Company's common stock (the "Common Stock") is traded is the Nasdaq SmallCap Market. The following table sets forth the high and low bid prices for the Common Stock as reported by the Nasdaq SmallCap Market for the periods indicated. A one-for-five reverse stock was effected on November 3, 1997. For prices quoted below prior to that date, the actual prices originally reported have been adjusted to give effect to the reverse stock split. The prices set forth below represent inter-dealer prices without retail mark-up, mark-down or omission and may not necessarily represent actual transactions.
COMMON STOCK ----------------- HIGH LOW ------- ------- FISCAL 1997 Quarter ended September 30, 1996............................ $23.125 $12.500 Quarter ended December 31, 1996............................. 21.250 14.688 Quarter ended March 31, 1997................................ 20.313 16.875 Quarter ended June 30, 1997................................. 18.750 6.250 FISCAL 1998 Quarter ended September 30, 1997............................ 7.815 2.190 Quarter ended December 31, 1997............................. 4.000 1.000 Quarter ended March 31, 1998................................ 1.500 0.563 Quarter ended June 30, 1998................................. 1.500 0.750
As of September 2, 1998, the Company had 111 holders of record of the Common Stock. The Company believes there are in excess of 300 beneficial holders of the Common Stock. The Company has not declared any cash dividends on its Common Stock during the past two fiscal years. The terms of the Company's outstanding Convertible Secured Notes and Convertible Preferred Stock effectively eliminate its ability to pay cash dividends on its Common Stock. From November 12, 1997 to December 23, 1997, the Company issued an aggregate of 4,914,000 shares of Common Stock in exchange for the Company's 10% Secured Convertible Promissory Notes in the aggregate principal amount of $6,970,000 and 315,000 shares of the Company's Series A Convertible Preferred Stock. The Company claimed exemption from registration under the Securities Act of 1933 (the "Securities Act") pursuant to the provisions of Section 3(a)(9) thereof because the transaction constituted an exchange by the Company with its existing securityholders exclusively where no commission or other remuneration was paid or given directly or indirectly for soliciting such exchange. On November 12, 1997, the Company issued an aggregate of 20,000 shares of its Common Stock to two consultants in consideration for consulting services rendered by them. The Company claimed exemption from registration under the Securities Act pursuant to the provisions of Section 4(2) thereof inasmuch as no public offering was involved. From July 30, 1997 to March 12, 1998, the Company borrowed an aggregate of $2,200,000 from five lenders. In connection with such loans, the Company issued 10% Secured Convertible Promissory Notes in the aggregate principal amount of $2,200,000 and warrants to purchase an aggregate of 1,100,000 shares for the Company's Common Stock. Reference is made to Note 8 in the "Notes to the Consolidated Financial Statements" in Item 7. The Company claimed exemption from registration under the Securities Act pursuant to the provisions of Section 4(2) thereof inasmuch as no public offering was involved. From November 19, 1997 to December 31, 1997 the Company issued warrants to purchase an aggregate of 144,000 shares of its Common Stock to certain members of its then Board of Directors. Reference is made to Note 8 in the Notes to the Consolidated Financial Statements 3 and 12 of Notes to Consolidated Financial 10 12 Statements. The Company claimed exemption from registration under the Securities Act pursuant to the provisions of Section 4(2) thereof inasmuch as no public offering was involved. On January 31, 1998, the Company issued warrants to purchase 333,334 shares of the Company's Common Stock to Heiko H. Thieme in consideration for services rendered to the Company by Mr. Thieme. The warrants are exercisable at $1.24 per share, subject to adjustment, and expire on January 31, 2008. The Company claimed exemption from registration under the Securities Act pursuant to the provisions of Section 4(2) thereof inasmuch as no public offering was involved. On June 12, 1998, the Company issued 21,000 shares of Series C Convertible Redeemable Preferred Stock and a warrant for the purchase of 2,800,000 shares of its Common Stock to The Global Opportunity Fund, Inc. (the "Global"). Reference is made to Notes 3 and 8 of Notes to Consolidated Financial Statements. Global has agreed not to convert such shares or exercise such warrants until the earlier of ratification of the transaction by the Company's shareholders or December 31, 1998. The Company claimed exemption from the registration provisions of the Securities Act pursuant to the provisions of Section 3(a)(9) thereof because the transaction constituted an exchange by the Company with an existing securityholder exclusively where no commission or other remuneration was paid or given directly or indirectly for soliciting such exchange. In connection with the issuance of certain of the securities described above, the Company has agreed to register such securities or securities underlying such securities under the Securities Act. In August 1998 a hearing was held by the Nasdaq Stock Market ("Nasdaq") to determine if the Company's Common Stock would be delisted from Nasdaq. At the hearing, the Company submitted a plan to achieve and maintain compliance with several requirements mandated by Nasdaq for continued listing. Specifically, the Company has from time to time failed to meet minimum tangible net worth and stock price requirements and requirements for shareholder approval for the issuance of certain securities. A special meeting of the shareholders has been called for October 15, 1998 to vote on several proposals that are intended to rectify these various deficiencies. In the event these proposals are not approved, or if Nasdaq, in its discretion, determines that the Company will be unable to maintain compliance with all listing requirements, the Company's Common Stock will be delisted. If the Common Stock is delisted, the Common Stock would trade on the Over-The-Counter Bulletin Board, and could become subject to Rule 15g-9 under the Securities Exchange Act of 1934 (the "Exchange Act"), which imposes additional sales practice requirements on broker-dealers which sell such securities to certain persons. For transactions covered by that rule, a broker- dealer must make a special suitability determination for the purchaser and have received the purchaser's written consent to the transaction prior to sale. Consequently, such rule may adversely affect the ability of broker-dealers to sell the Company's common stock. Additionally, the Securities and Exchange Commission (the "SEC") imposes regulations on trades of "penny stocks", generally defined as any non-Nasdaq equity security that has a market price (as therein defined) of less than $5.00 per share subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require delivery, prior to any transaction in a penny stock, of a disclosure schedule prepared by the SEC relating to the penny stock market. Disclosure is also required to be made about commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Finally, monthly statements are required to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. If the Company's Common Stock were subject to rules relating to penny stocks, the market liquidity for the Company's securities could be severely adversely affected. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION This section presents management's discussion and analysis of the consolidated financial condition and results of operations of the Company for the fiscal years ended June 30, 1998 and 1997. The discussion should be read in conjunction with the Company's consolidated financial statements and accompanying notes to the consolidated financial statements (see Item 7). Also see "Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995" under "Item 1." 11 13 CERTAIN ACCOUNTING CONSIDERATIONS A portion of the Company's revenues consists of gain on loans sold by the Company servicing retained ("Service") or with servicing released but retaining an interest in the mortgage loan ("Interest-Only"). The gross gain on a Service sale principally represents the present value of the difference between the interest rate paid by the borrower and the interest rate received by the investor who purchased the loans, reduced by a contractual loan servicing fee. The corresponding asset established to record this gain is the Servicing Asset. A separate reserve for prepayments is calculated and also concurrently recorded, which reduces the gross gain on sale. The Company has not sold loans on a Service basis since March 1995. The corresponding asset established in connection with the gain on an Interest-Only sale is known as an Interest-Only Strip Receivable. In this type of sale, prepayment assumptions, including credit losses, are included in and effectively reduce the gross gain on sale, so no separate reserve is recorded for prepayment. The Company has not sold loans on an Interest-Only basis since October 1997. In both types of sales, the Company recognizes the gain on sale of loans in the fiscal year in which such loans are sold, although cash is received by the Company over the lives of the loans. Both types of assets are computed in part based upon, and amortized over, the estimated lives of the loans. Because the gain recognized in the year of sale is equal to the present value of the estimated future cash flows in both types of sales, the amount of cash actually received over the lives of the loans may exceed the gain previously recognized at the time the loans were sold. In subsequent years where such cash exceeds the previously recorded gain, the Company recognizes additional income and fees to the extent actual cash flows from such loans exceed the amortization of either type of asset. If actual prepayments with respect to sold loans occur faster than were projected at the time such loans were sold, the carrying value of the Servicing Asset or Interest-Only Strip Receivable is reduced through a charge to earnings in the period of adjustment. See "Sale of Mortgage Loans" in Item 1 for adjustments made due to a change in the rate of prepayments. In addition, provisions for credit losses are charged to income in amounts sufficient to maintain the allowance for credit losses at a level considered by the Company to be adequate to absorb possible losses of principal in both the existing portfolio and the remaining loans sold with a residual obligation, based upon calculations of the collectibility of loans receivable and on prior credit loss experience. The Company charges write-off's of loans receivable against the allowance for credit losses when it believes, based upon a loan-by- loan review, that the collectibility of principal is unlikely. The Company's exposure to credit loss in the event of nonperformance by the borrower is represented as the outstanding principal balance of the respective loans less the value of the collateral obtained, which value is based upon the Company's current review of the appraisal. While the Company uses available information to recognize losses on loans, future additions to the allowance for credit losses may be necessary based upon a number of factors including changes in economic conditions. RESULTS OF OPERATIONS Three items accounted for 90% of the $12,881,000 loss for Fiscal 1998. Specifically, debt conversion expense of $5,576,000, amortization and write-down of the Interest-Only Strip Receivable and Servicing Asset of $4,310,000, and financing and goodwill amortization of $1,731,000 comprised $11,617,000 of the $12,881,000 loss. None of these three items represented cash outlays by the Company in Fiscal 1998. In their audit report, the Company's independent auditors included an explanatory paragraph discussing conditions that, in their opinion, raise substantial doubt about the Company's ability to continue as a going concern. Note 13 in the "Notes to the Consolidated Financial Statements" in Item 7 details Management's plans to address each of the conditions cited by the independent auditors. Note 13 should be read in conjunction with Item 6 herein. FISCAL YEAR ENDED JUNE 30, 1998 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1997 The Company's net loss was $12,881,000 in Fiscal 1998 as compared to a net loss of $3,363,000 in Fiscal 1997, an increase in net loss of 283%. The single largest item contributing to this increase was the recording of $5,576,000 of debt conversion expense in October 1997, which did not involve any cash expenditures. 12 14 Following are line item comparisons in order of presentation in the "Consolidated Statements of Operations" in Item 7. Net revenues decreased from $5,918,000 in Fiscal 1997 to $4,722,000 in Fiscal 1998, or 20%. The single largest decrease among the components of net revenue was gain on sale of receivables, which decreased from $5,142,000 in Fiscal 1997 to $4,402,000 in Fiscal 1998, or 14%. The primary reason for the decrease in this line item was the change in sales methods which occurred during the year as described under "Sale of Mortgage Loans" in Item 1. The Company actually sold more loans in Fiscal 1998 than in Fiscal 1997 ($93,132,000 in Fiscal 1998 compared to $82,264,000 in Fiscal 1997), but the method of sale changed. The Company sold $77,020,000 of loans on an Interest-Only basis in Fiscal 1997, compared to $12,225,000 in Fiscal 1998. Loans sold on an Interest-Only basis yield a greater gain on sale margin than loans sold Whole, but the gain is accrued as opposed to a Whole loan sale wherein the entire premium is received in cash at the time of sale. See "Certain Accounting Considerations" above for a discussion on how the two different types of sales are recorded. Another component of net revenue, finance income and fees earned, decreased from $757,000 in Fiscal 1997 to $153,000 in Fiscal 1998. Gross finance income actually increased from $2,051,000 in Fiscal 1997 to $4,489,000 in Fiscal 1998. However, amortization of the Interest-Only Strip Receivable and Servicing Asset is netted against gross finance income. The amortization from these two assets was $1,294,000 in Fiscal 1997 and $4,310,000 in Fiscal 1998. See Note 5 to the Financial Statements in Item 7 for more discussion regarding these assets and their respective amortization. The third item comprising net revenues, other income, increased from $20,000 in Fiscal 1997 to $167,000 in Fiscal 1998. Most of this increase was the result of how processing fees are reflected on the financial statements as opposed to significant increases in other income. Salaries and employee benefits increased from $4,194,000 in Fiscal 1997 to $4,797,000 in Fiscal 1998, or 14%. This increase was due to $1,174,000 of payroll expense from the Company's Cash Back telemarketing subsidiary acquired in April 1997. Excluding this acquisition, the Company's salary expense decreased from $3,776,000 in Fiscal 1997 to $3,503,000 in Fiscal 1998. The Company expanded rapidly during the first half of 1997. The number of full-time employees was 57 at June 30, 1996, and 80 at June 30, 1997. After the change in management was made later in 1997, full-time employees were reduced to 54 persons at December 31, 1997. This reduction included nearly all of the Company's sales personnel, three processing centers, and several corporate office staff and officers. The Company subsequently re-established its sales department with new employees without increasing its corporate office personnel, and had 68 full-time employees at June 30, 1998. Legal and professional fees increased from $525,000 in Fiscal 1997 to $675,000 in Fiscal 1998, or 29%. While the Company was able to decrease its consulting expenses during Fiscal 1998, legal expenses associated with the two lawsuits mentioned in Item 3 significantly increased legal fees during the year. Additionally, fees from the Company's independent auditors increased significantly for the annual audit and other accounting services. Other operating expenses decreased from $2,893,000 in Fiscal 1997 to $2,838,000 in Fiscal 1998, or 2%. In general, the decrease resulted from the closing of three processing offices and the implementation of several cost reduction measures mandated by new management during Fiscal 1998. The single largest line item decrease in this category was in Travel and Entertainment. The provision for credit losses increased from $225,000 in Fiscal 1997 to $301,000 in Fiscal 1998. See Note 4 in the "Notes to the Consolidated Financial Statements" in Item 7 for a more detailed breakdown of the allowance for credit losses. While the Company did experience a greater amount of charge-offs in Fiscal 1998 than in Fiscal 1997, the pools of loans from which most of these charge-offs originate (loans originated prior to 1994) decreased significantly during the year. Management believes the provision for credit losses at June 30, 1998 of $267,000 is adequate. Goodwill of $911,000 was recorded upon the acquisition of a telemarketing mortgage broker in April 1997 and is being amortized on a straight line basis over 15 years. The goodwill was written down to $607,000 at June 30, 1998, based on an evaluation of the value of the asset at that time. 13 15 Interest expense and amortization of deferred financing costs increased from $1,444,000 in Fiscal 1997 to $3,113,000 in Fiscal 1998, or 115%. Financing cost amortization comprised $1,427,000 of this line item. Most of the amortization was the result of the complete write-off of certain deferred costs associated with debt that matured or was converted to equity in Fiscal 1998. At June 30, 1998, the balance of deferred financing charges to be amortized was $131,000. Interest expense increased from $1,224,000 in Fiscal 1997 to $1,686,000 in Fiscal 1998. While interest expense on convertible debt decreased a the result of conversion to equity or payment of the debt, interest expense on the warehouse lines of credit increased significantly as the balance in these lines increased from $3,356,000 at June 30, 1997 to $8,149,000 at June 30, 1998. The increase in warehouse line balances reflected an increase in loan originations and the Company's cessation of using significant amounts of working capital to fund new loan originations. FISCAL YEAR ENDED JUNE 30, 1997 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1996 The Company's net loss was $3,363,000 in Fiscal 1997 as compared to a net loss of $4,115,000 in Fiscal 1996, representing an improvement in operating results of 18%. This decrease in net loss was primarily the result of increased gain on sale, as revenues increased 159% to $3,640,000 and expenses increased 45% to $2,888,000 in Fiscal 1997 from Fiscal 1996. This improvement was not sufficient, however, to offset the costs of maintaining the Company's loan production and support operations and the costs of raising capital. Finance income and fees for Fiscal 1997 increased 15% to $757,000 in Fiscal 1997 from Fiscal 1996 as both the amount of Company's average loan portfolio and interest rate on that portfolio increased. The increase in the average size of the Company's loan portfolio balance was a result of the increased loan volume in Fiscal 1997. The average interest rate yield on mortgage loans originated in Fiscal 1997 increased by 0.52% to 12.05%, compared to an average of 11.53% in Fiscal 1996, a 4.5% increase. This increase was primarily a result of the Company purchasing more loans in the "C" and "D" credit grade as compared to loans originated in Fiscal 1996. Gains on sales of mortgage loans increased to $5,142,000 for Fiscal 1997 from $1,578,000 during Fiscal 1996 due to the increased volume of loan sales and the higher margins received on those sales. The Company sold $82,264,000 of loans in Fiscal 1997 as compared to $37,035,000 in Fiscal 1996. The gain on sale margin on the loans sold also improved as the average gain on sale percentage increased from 5.17% to 6.30%, or a 22% improvement in Fiscal 1997 from Fiscal 1996, reflecting the change in sales methods. For most of the first three quarters of Fiscal 1996, loans were sold on a Whole basis, whereas for all of Fiscal 1997 loans were sold on an Interest-Only basis. Salaries and employee benefits increased 53% to $4,194,000 in Fiscal 1997 from $2,734,000 in Fiscal 1996, reflecting the Company's expansion effort. The number of Company employees increased from 57 to 80 full-time employees, or 40%, from June 30, 1996 to June 30, 1997, exclusive of the 30 full and part-time personnel employed by Cash Back Mortgage Corporation acquired in April 1997. Legal and professional fees increased 82% to $525,000 in Fiscal 1997 from Fiscal 1996, with most of the increase in the form of consulting fees. Consultants were paid primarily in connection with assisting the Company locate additional financing or warehouse lines. Other operating expenses increased by 50% to $2,893,000 in Fiscal 1997 from Fiscal 1996. A substantial portion of the expenses in this category increased as a result of the 40% increase in number of employees between the comparable periods. However, increases in certain expenses were incurred in connection with the loan origination expansion effort undertaken in Fiscal 1997 and not directly attributable to just an increase in the number of employees. The largest of these types of increases was in Advertising & Promotion expense, which increased $109,000 from Fiscal 1996 to Fiscal 1997. Interest expense and amortization of deferred financing costs increased 20% to $1,444,000 in Fiscal 1997 from Fiscal 1996 as the Company had most of the $9,000,000 in convertible debt raised during the summer of 1996 outstanding for Fiscal 1997. In addition, costs incurred with raising this debt also began amortizing in Fiscal 1997 and increased the expense for this category. 14 16 LIQUIDITY AND CAPITAL RESOURCES The business strategy employed by the Company in previous years required continual access to short-term and long-term sources of debt and equity capital. By selling loans on an Interest-Only or Service basis, the Company would have to amass a very large pool of loans wherein the amount of interest collected and remitted on a monthly basis was greater than the cash expenditures incurred during the month in order to generate a positive cash flow. Since this did not occur, the shortfall in working capital was provided by placements of debt and equity. The Company will always require access to short-term sources of debt, specifically warehouse lines of credit. The Company will likely require cash infusions from external sources to provide working capital to expand operations, and possibly to maintain operations. However, the strategy of exclusively selling loans Whole for a cash premium at time of sale during Fiscal 1998 has made a significant improvement in the negative cash flow that was being incurred under the previous strategy. The last cash infusion received by the Company from the sale of debt or equity was in March 1998. The Company's capital requirements arise principally from loan originations and loan repurchases, payments of operating and interest expenses, capital expenditures, and start-up expenses for expansion into new geographic markets. While the Company has generated enough cash from sales of loans since March 1998 to pay its operating expenses, the Company has been unable to create a cash reserve. Additionally, the Company has little capacity to repurchase loans, either from its pool of serviced loans that contain a buyback provision or from the warehouse lines which generally have a limit of 90 days that a loan can remain in the line. The Company currently does not have enough resources available should a significant amount of loans need to be repurchased. During Fiscal 1998, the Company used a net of $5,718,000 in its loan operations, of which $4,792,000 was provided by an increase in the warehouse lines of credit. The Company did place an additional $2,200,000 of convertible debt during Fiscal 1998, which provided capital for the balance of operational needs. To date, in addition to the Company's capital raising efforts, the sources of cash have been (1) sales into secondary markets of the loans the Company originates and purchases, (2) borrowings under a mortgage warehouse line of credit secured by its loans, (3) finance income earned on Company owned loans and servicing fees generated on the loan servicing portfolio, (4) borrowings under a repurchase line of credit (5) other borrowings (discussed below), and (6) the conversion of the Servicing Asset and Interest-Only Strip Receivable into cash over the lives of the loans in the servicing portfolio, including an advance against that conversion described more fully below. Additional information regarding the following narrative on the financing activities of the Company is set forth in Note 3 in the "Notes to the Consolidated Financial Statements" in Item 7. In July 1994, the Company completed the placement of $5,550,000 of 8% Senior Subordinated Convertible Notes due 2004 (the "8% Notes"). In October 1995, the Company agreed to certain conditions as a prerequisite for obtaining a waiver for technical covenant violations contained in the indenture relating to the 8% Notes. When these conditions were not met at December 31, 1995, the maturity date of 8% Notes was accelerated to March 30, 1996. The Company repaid $3,250,000 of the 8% Notes in June 1996 ($2,250,000 of which was paid out of the proceeds of the sale of the 8% Notes described below) and the remaining $2,300,000 of 8% Notes was exchanged for loans under a secured warehouse lending facility. During Fiscal 1998, the balance of this secured lending facility was reduced from $2,300,000 to $800,000. The Company has signed an agreement with this lender to continue to reduce the balance of this facility at the rate of $100,000 per quarter. The funds necessary to reduce the balance of this facility are anticipated to come from the proceeds of the sale or payout of the loans securing the facility. In 1995, the Company completed an offering of $3,000,000 of convertible mortgage participations and warrants to purchase common stock to be used solely for the purpose of originating and acquiring mortgage loans. The borrowings bore an interest rate of 10% per annum, payable monthly, secured by underlying mortgage loans. The proceeds from the sale of any assigned mortgage loans were used to originate new mortgage loans in which the lenders will have participations. In October 1995, $2,500,000 of the borrowings were converted by the lenders of these participations into Preferred Stock and warrants as part of a placement of $6,400,000 of 9% Convertible Preferred Stock (the "Series A Preferred Stock") and warrants to purchase Common Stock. Of the remaining $500,000 of participations, $400,000 was converted to Common Stock and $100,000 was repaid during Fiscal 1997. Of the original holders of 315,000 shares of Series A Preferred Stock, one holder converted 5,000 shares into Common Stock during Fiscal 1997. The balance of the Series A 15 17 Preferred Stockholders converted their stock and unpaid dividends into Common Stock as part of the Company's conversion offer in October 1997, and none of the Series A Preferred Stock was outstanding at June 30, 1998. In January 1996, the Company obtained a $1,050,000 term loan at a 10% interest rate secured by certain mortgage loans of the Company. The loan was scheduled to mature in February 1997, and had an outstanding $925,000 principal balance at June 30, 1996. This loan was repaid in August 1996. In February 1996, the Company sold $500,000 of convertible mortgage participations on similar terms to the $3,000,000 of participations sold in June 1995 described above. These participations matured in February 1998, and per an agreement with the lender $250,000 was repaid by June 30, 1998, and $250,000 remains as debt in the form of restricted cash securing a letter of credit for the Company which matures on December 31, 1998. It is anticipated this debt will be repaid with the restricted cash upon expiration of the letter of credit. The Company completed the sale of $9,000,000 of 10% Convertible Secured Notes (the "10% Notes") in August 1996, resulting in net proceeds to the Company after expenses of approximately $8,000,000. $3,250,000 of the proceeds were used to repay the 8% Notes described above. The 10% Notes are partially secured by essentially all otherwise unpledged assets of the Company and are convertible into Common Stock. During Fiscal 1997, holders of $860,000 of the 10% Notes converted their notes into Common Stock. In October 1997, holders of $6,970,000 of the 10% Notes converted their notes into Common Stock in response to the Company's conversion offer. In June 1998, a holder of $1,000,000 of the 10% Notes exchanged its note for shares of Series C Preferred Stock as more fully described below. The balance of 10% Notes at June 30, 1998 was $170,000. These notes mature in June 2001. In November 1996, the Company entered into an agreement with the Securitizer wherein the Company received advances on the Company's portion of the interest-only strip collected from the borrower over the life of the loan. The advance was originally being repaid over 36 months, although this term was accelerated to 30 months by the Securitizer during Fiscal 1998 as permitted by certain provisions in the advance agreement. Each advance bears an interest rate set at the time the loans underlying the interest-only strip receivable were sold to the Securitizer. The advance and the interest charge associated with it are deducted from the monthly collections of interest due to the Company by the Securitizer. At June 30, 1998, the Company had been advanced $1,620,000 net of repayments under this agreement. In March 1997, the Company obtained a total of $550,000 in warehouse lines of credit bearing an interest rate of 12%. These lines became unnecessary and were terminated by the Company in August 1997 with the addition of more substantial warehouse lines described below. In April 1997, the Company sold 16,740 shares of Series B 11% Redeemable Convertible Preferred Stock (the "Series B Preferred Stock") for $1,674,000, resulting in net proceeds to the Company of approximately $1,498,000. Purchasers of the Series B Preferred Stock received warrants to purchase 669,000 shares of Common Stock at $2.50 per share. The conversion and exercise prices, respectively, of the Series B Preferred Stock and associated warrants were changed to $1.80 per share during Fiscal 1998 as a result of anti-dilution and other provisions. Dividends are payable quarterly in cash or in additional Series B Preferred Stock. The Company has paid all dividends to- date in additional stock. Payment of the dividend for the quarter ended June 30, 1998 in additional stock triggered voting rights for the Series B Preferred Stockholders, and payments of dividends in additional stock after this date will be calculated at a 20% discount to the market price of the Common Stock. In June 1997, the Company obtained a revolving warehouse line of credit for $3,000,000 from Pinnacle Mortgage Acceptance Corporation ("Pinnacle"). In October 1997, this agreement was terminated and a new agreement with Pinnacle was executed. At June 30, 1998, the balance in this warehouse line was $450,000. In August 1998, the Company executed an agreement directly with the financial institution providing financing for Pinnacle, Sterling Bank & Trust ("Sterling"). This action was taken when Sterling ceased to provide financing to Pinnacle due to a legal dispute not involving the Company. The agreement with Sterling provided a warehouse line under the same terms as the agreement with Pinnacle, except that the Sterling agreement expires on November 12, 1998. The Company is in the process of reapplying for a warehouse line of credit directly with Sterling with the intention of having a new one-year agreement in place before the current 16 18 agreement expires. The Company has ceased adding loans to this line and is reducing the outstanding balance until a new agreement, if any, is executed. While Management believes the remaining loans in this line will be sold prior to the expiration of this agreement, no assurance can be given that the Company will do so or that the agreement with Sterling will be renewed on terms not unfavorable to the Company, if at all. In February 1998, another warehouse line of credit agreement was executed with First Bankshares Mortgage. First Bankshares Mortgage was subsequently purchased by Regions Bank ("Regions"), but this acquisition did not change the terms of the agreement with the Company. This warehouse line has a $15,000,000 credit limit and may be canceled at the discretion of the lender with 45 days notice to the Company. At June 30, 1998, the balance in this line was $7,699,000. Each of the Company's warehouse lenders requires that each mortgage loan in a pool complies with all applicable provisions of federal and state laws and regulations, which include RESPA and the Rules and Regulations. Both the Sterling and Regions agreements allow the respective lenders to demand withdrawal of any loan from the line after 90 days, with full payment of principal and interest due at the time of withdrawal. No loans had been in either line more than 90 days at June 30, 1998. However, the Company has occasionally had loans in the line more than 90 days, and no assurance can be given that the Company will be able to sell all loans within 90 days. In the event the Company is unable to sell a substantial amount of loans within 90 days and the respective lenders should exercise their right to demand repayment, the Company may not have sufficient cash to comply with the repayment demand. The Company is substantially dependent upon its warehouse lines to fund loan originations. Management believes that in the event the agreement with Sterling is not renewed that the $15,000,000 credit limit with Regions would be adequate to fund the Company's currently level of loan production. However, failure to obtain another warehouse line or increase the credit limit of the Regions line could impair the ability of the Company to increase its loan production beyond certain levels in the future. During Fiscal 1998, the Company received a total of $2,200,000 in a private placement of 10% convertible debt, referred to as the "Bridge Loan". The holders were issued warrants to purchase 1,100,000 shares of Common Stock at an exercise price of $2.00 per share, subject to certain anti-dilution adjustments. In June 1998, the holder of $1,100,000 of the Bridge Loan exchanged its debt for shares of Series C Preferred Stock as described below. The maturity date of the outstanding Bridge Loan has been extended several times, and the balance of $1,100,000 is due on October 31, 1998. The Company is in the process of negotiating a settlement of this debt which may involve a portion of the Bridge Loan being paid out over an extended period of time and a portion being converted to preferred stock. In June 1998, the Company issued 21,000 shares of 11% Series C Convertible Redeemable Preferred Stock (the "Series C Preferred Stock") in exchange for the conversion of $1,000,000 of 10% Notes (described above) and $1,100,000 of the Bridge Loan (described above). Both debt issuances were held by a single investor. The Series C Preferred Stock was originally convertible into Common Stock at the rate of $0.75 per share, but was subsequently adjusted to $0.50 per share pursuant to a provision related to a decrease in the market price of the Common Stock. Additionally, the holder of the stock received a warrant to purchase 2,800,000 shares of Common Stock at an exercise price of $1.25 per share. The holder of this stock has signed an agreement with the Company not to convert any of the Series C Preferred Stock until the earlier of a) December 31, 1998, or b) shareholder approval for the issuance of stock and the associated warrant. A proposal to obtain shareholder approval will be considered at the special shareholders meeting scheduled to be held on October 15, 1998. During Fiscal 1998, loans receivable increased from $5,517,000 to $9,171,000. Such increase was financed primarily by an increase in the warehouse lines of credit. The Company ceased selling loans by the Interest-Only method in October 1997, and the Interest-Only Strip Receivable decreased from $7,269,000 at June 30, 1997, to $4,118,000 at June 30, 1998 from a combination of scheduled amortization and valuation adjustments. Convertible notes decreased from $10,440,000 to $2,070,000 during Fiscal 1998 primarily as a result of conversions to equity. Net worth increased from $377,000 to $2,458,000 from June 30, 1997 to June 30, 1998, although goodwill is excluded from net worth calculations by Nasdaq and state mortgage licensing agencies which monitor the Company's net worth. 17 19 While the Company has improved its debt to equity ratio and reduced its negative cash flow, it is still possible that the Company will require additional capital for operations and probable that it will require additional capital for expansion, establishing a cash reserve, and payment of preferred stock dividends in cash. Even if the Company does not need cash to pay operating expenses, the Company will still require additional tangible net worth to maintain its Nasdaq listing. While some or all of this net worth may be obtained from the conversion of the Bridge Loan as described above, net worth derived from the conversion of the remainder of existing debt would probably not be possible, requiring the issuance of new equity securities to obtain more net worth. While the minimum amount of tangible net worth required by the various state mortgage licensing agencies is much less than the $2,000,000 required by Nasdaq, a significant negative adjustment to the value of the Interest-Only Strip Receivable as a result of an increase in the prepayment rate of the loans underlying that asset could result in a large enough reduction in net worth to jeopardize the ability of the Company to maintain a lending license in some of the states in which it currently operates. Involuntary suspension of a lending license in one state could trigger license renewal problems in other states and effectively reduce the ability of the Company to originate enough loans to remain viable. Management also considers a lending facility for loans that cannot be sold within the 90 days permitted by the warehouse lenders to be an important component in expanding its loan production and preventing unplanned uses of working capital. Finally, the payout terms on the Bridge Loan described above must be negotiated such that the projected cash flow of the Company could accommodate the payout. Cash flow and payment of debt have been listed as reasons for going concern by the independent auditors. See "Going Concern" below and Note 13 in the "Notes to the Consolidated Financial Statements" in Item 7 for more discussion on liquidity and capital resource issues as they relate to the viability of the Company. FLUCTUATIONS IN INTEREST RATES AND OTHER FACTORS Although the Company's customers are generally not interest rate sensitive in determining to utilize the mortgage loan programs offered by the Company, the primary assets and liabilities of the Company are interest rate sensitive. Potential profitability is directly affected by the level of and fluctuations in interest rates and is dependent upon the Company's ability to earn a spread between the earnings on its assets and the costs associated with its liabilities. Additionally, the value and potential maturity of the Company's assets and the cost and duration of its liabilities are affected by changes in interest rates. While the Company monitors the interest rate environment, there can be no assurance that any potential profitability and/or liquidity of the Company would not be adversely affected during any period of unexpected volatility in the interest rate environment. A significant reduction in interest rates also could decrease the size of the loan servicing portfolio by increasing the level of loan prepayments. The collateral for the mortgage loans originated and owned by the Company are secured by residential real estate. An overall decline in the residential real estate market or the condition of particular properties, together with other related factors, could adversely affect the values of the properties securing the Company's mortgage loans. Therefore, in a continuing period of economic decline, the rates of delinquencies, foreclosures and losses on mortgage loans could be higher than those heretofore experienced by the Company and in the mortgage lending industry in general. In addition, adverse economic conditions (which may or may not affect real property values) may affect the timely payment by borrowers of scheduled payments of principal and interest on mortgage loans. GOING CONCERN In its report on the Company's financial statements for Fiscal 1998 and Fiscal 1997, the Company's independent auditors included an explanatory paragraph noting that the financial statements had been prepared assuming the Company would continue as a going concern. The independent auditors noted several factors that, in their opinion, formed a basis for raising substantial doubt regarding the Company's ability to continue as a going concern. The reasons for this doubt were significant recurring losses, significant negative operating cash flow, significant debt maturing within the next fiscal year, and significant accumulated deficit. The potential delisting of the Common Stock from Nasdaq was also given as another reason for including the explanatory paragraph. 18 20 Management's Plans Following are Management's plans in regards to those specific issues cited by the independent auditors as a reason for including the explanatory paragraph. Nasdaq listing. Management recognizes that listing on the Nasdaq Small Cap Market is important to many shareholders and enhances the Company's ability to raise capital. At the same time, Management believes that failure to maintain the listing would have no direct bearing on the loan operations of the Company, nor eliminate all sources of potential capital. Management does not believe that having its Common Stock trade in the over-the-counter market constitutes a viability issue. Nevertheless, Management and the Board of Directors would like to maintain the listing, and to that end officers of the Company met with officials from Nasdaq in August 1998. In order to maintain its listing, the Company must (a) obtain approval from the shareholders for the issuance of the Series "C" Preferred Stock and anticipated issuance of a new series of preferred stock in connection with the retirement of the Bridge Loan, (b) maintain a minimum $2,000,000 tangible net worth, and (c) maintain a minimum $1 bid price on the Common Stock. A special meeting of the shareholders has been called for October 15, 1998, to obtain approval for the issuance of the two series of preferred stock and warrants and to approve a one-for-five reverse stock split. The reverse stock split is intended to cause the bid price of the Common Stock to be at least $1. The conversion of a portion of the Bridge Loan is expected to result in a tangible net worth in excess of $2,000,000. Failure of the shareholders to approve any proposal for the special meeting, or failure of the Common Stock to maintain a bid price of at least $1 after the reverse split, or failure to convert a portion of the Bridge Loan to preferred stock would almost certainly result in immediate delisting of the Common Stock from Nasdaq. Even if all actions are successful, Nasdaq retains discretionary authority to delist the Common Stock if it believes these actions will not result in continued compliance with its regulations. Accumulated deficit. Management cannot take any action that will directly effect the accumulated deficit except attempt to improve operations to the point where positive net income is achieved. Maturing debt. The Company has approximately $3,059,000 of debt maturing in Fiscal 1999. This figure is comprised primarily of four items: (a) $1,100,000 Bridge Loan maturing on October 31, 1998. Plans regarding this debt have been discussed above. Holders of this debt, although not legally bound to do so, have agreed in principle to either convert their notes to preferred stock or accept an extended payout under terms the Company projects it could accommodate. However, there can be no assurance that any of the holders of the outstanding Bridge Loan will enter into any agreement with the Company on terms not unfavorable to the Company, if at all, (b) $1,226,000 of the advance obtained on the Interest-Only Strip Receivable is due to be repaid during Fiscal 1999. It is anticipated that cash due to the Company from the interest-only strip will be used to repay this obligation. In the event that cash due to the Company from the Interest-Only Strip Receivable is less than the outstanding principal balance of the advance, the Securitizer could seek the difference from the Company, (c) $400,000 is due in Fiscal 1999 in connection with a reduction in a secured lending facility described above. It is anticipated the proceeds from the sale or payout of mortgage loans securing this facility will provide the funds to reduce this debt, (d) $250,000 is due on December 31, 1998 in connection with a modified mortgage participation agreement. It is anticipated that $250,000 of restricted cash underlying this obligation will be used to repay this debt. The remaining $83,000 of debt due in Fiscal 1999 is scheduled to be repaid from working capital. Negative operating cash flow. Since April 1998, the Company has realized a small positive operating cash flow. Prior to that time, the Company had never realized a positive operating cash flow. The Company has not been able to retain any amount of cash reserves to pay expenses during periods where its loan sales are significantly less than projected. And while the Company will probably not generate enough cash to pay preferred stock dividends in cash or retire significant debt obligations for some time, it has been able to maintain its operations from cash generated by its operations since April 1998. Management continues to maintain austerity measures implemented shortly after the new President was named in November 1997 to keep cash expenditures at a minimum. Hiring of additional staff has been restricted to coincide with an increase in loan production as opposed to hiring staff in anticipation of additional production. Sales personnel have been added at a measured rate to avoid a surge in payroll which is not offset by increased loan sales. 19 21 Expansion plans involving the addition of processing offices have been curtailed until sufficient cash is available to sustain the opening of a new office until it can create enough loan sales to offset its start-up costs. Two months or more of less than projected loan sales could result in negative cash flow which the Company does not have the resources to fund. A relatively small amount of unprojected cash requirements as described in "Liquidity and Capital Resources" could also create negative cash flow which the Company cannot fund. However, the Company could continue to increase its cash flow with increased loan sales. Operating losses. Many of the austerity measures implemented by Management to address cash flow have also positively impacted operating losses. The closure of three processing offices in less productive regions and reduction in corporate office staff have significantly reduced the minimum amount of expenses necessary to maintain operations. However, several items pertaining to the previous business strategy continue to keep the minimum amount of revenue necessary to offset all expenses at a higher level than would otherwise be required if these items did not exist. Specifically, the amortization of the Interest-Only Strip Receivable exceeds the actual income being received from this asset, creating a negative revenue amount. The Company still incurs some rent expense in excess of the minimum amount necessary to maintain its operations. While Management believes that some of this excess physical space could be addressed in Fiscal 1999, the "negative revenue" will probably continue to be an issue during all of Fiscal 1999. Only continued increases in loan production and sales will allow the Company to offset all expenses and "negative revenue" to the point where net income could be recorded. While Management has projected that net income can be achieved in Fiscal 1999, this projection is based on the assumption that loan production can be increased approximately 25% from current levels without a significant increase in overhead expenses. There can be no assurance that this increase can be obtained, or even if it is obtained, that gain on sale margins will not diminish to the point where the estimated increase in loan volume would be insufficient to generate enough revenue from loan sales to accomplish the targeted increase in revenues. In summary, Management has taken definitive actions where possible to address both the specific concerns cited by the independent auditors in their report as well as various other business issues. If all the actions taken prove successful, the Company would likely continue operations in Fiscal 1999, and possibly obtain profitability. However, if one or more of the initiatives taken by Management should fail, or if market conditions (particularly a deterioration of the margin on the gain on sale of loans) become worse, the Company could be forced to curtail its lending activities until an alternative action, if any, could be implemented. ITEM 7. FINANCIAL STATEMENTS The following consolidated financial statements of Credit Depot Corporation are included in Item 7 (See page F-1): Report of Independent Auditors Consolidated Balance Sheets -- June 30, 1998 and 1997. Consolidated Statements of Operations -- Years ended June 30, 1998, 1997 and 1996. Consolidated Statements of Stockholders' Equity -- Years ended June 30, 1998, 1997, 1996, and 1995. Consolidated Statements of Cash Flows -- Years ended June 30, 1998, 1997 and 1996. Notes to Consolidated Financial Statements. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES Not applicable. 20 22 PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT The information required under this item will be set forth in the Company's proxy statement to be filed with the SEC on or before October 28, 1998 and is incorporated herein by reference. ITEM 10. EXECUTIVE COMPENSATION The information required under this item will be set forth in the Company's proxy statement to be filed with the SEC on or before October 28, 1998 and is incorporated herein by reference. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required under this item will be set forth in the Company's proxy statement to be filed with the SEC on or before October 28, 1998 and is incorporated herein by reference. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required under this item will be set forth in the Company's proxy statement to be filed with the SEC on or before October 28, 1998 and is incorporated herein by reference. ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K (a) 1. Financial Statements. An index to the Consolidated Financial Statements appears on page F1. 2. Schedules. All financial statement schedules are omitted because they are not applicable, not required under the instructions or all the information is set forth in the financial statements or notes thereto. 3. Exhibits. 3.1 -- Certificate of Incorporation of the Registrant, as amended(1) 3.2 -- Certificate of Merger of Equithrift, Inc., a Georgia corporation, with and into the Registrant(1) 3.3 -- By-Laws of the Registrant(1) 3.4 -- Certificate of Designation of Series A Convertible Preferred Stock(8) 3.5 -- Certificate of Amendment of the Certificate of Incorporation(9) 3.6 -- Certificate of Designation for Series B Convertible Preferred Stock(10) 3.7 -- Certificate of Designation for Series C Convertible Preferred Stock(11) 4.1 -- 1993 Stock Option Plan(4) 4.2 -- 1993 Stock Option Plan, as amended(5) 4.3 -- 1993 Stock Option Plan, as amended(6) 4.4 -- Registration Rights Agreement between the Company and The Robinson-Humphrey Company, Inc., dated as of July 27, 1994(2) 4.5 -- Redeemable Warrant to Purchase Common Stock issued to Robinson-Humphrey dated January 25, 1995(7) 4.6 -- Form of Warrant issued to purchasers of Convertible Mortgage Participations(7) 4.7 -- Specimen Common Stock certificate(1) 4.8 -- Form of Warrant issued to placement agent in connection with Series A Preferred Stock offering(8) 4.9 -- Loan Agreement for 10% Convertible Secured Notes due 2001(8)
21 23 4.10 -- Form of Warrant issued to placement agent in connection with 10% Convertible Notes Offering(8) 4.11 -- Form of Warrant issued to purchasers of Series B Preferred Stock(10) 4.12 -- Form of Warrant issued to Placement Agent in connection with Series B Preferred Stock Offering(10) 4.13 -- Form of Purchase Agreement between the Registrant and certain lenders, and accompanying exhibits(11) 4.14 -- Form of Warrant issued to certain lenders(11) 4.15 -- Form of Warrant issued to certain members of the Board of Directors. 4.16 -- Warrant issued to Heiko Thieme dated January 31, 1998. 4.17 -- Warrant issued to The Global Opportunity Fund dated June 12, 1998. 10.1 -- Lease Agreement between the Registrant and Lessor for the Registrant's corporate office space(3) 10.2 -- Amendment to Lease Agreement between the Registrant and Lessor(7) 10.3 -- Purchase and Sale Agreement between the Registrant and Access Financial Lending Corp.(8) 10.4 -- Warehouse Lending Agreement and Promissory Note between the Registrant and NewSouth Equities and associated parties(8) 10.5 -- Addendum to Warehouse Lending Agreement between the Registrant and NewSouth Equities and associated parties(8) 10.6 -- Forward Commitment and Offset Agreement between the Registrant and Access Financial Lending Corporation(9) 10.7 -- Acquisition Agreement between the Registrant and Cash Back Mortgage Corporation(11) 10.8 -- Participation Agreement between the Registrant and Pinnacle Mortgage Acceptance Corporation 10.9 -- Whole Sale Loan Agreement between the Registrant and First Bankshares Mortgage and Investments, Inc. 10.10 -- Amended and Restated Promissory Note between the Registrant and NewSouth Special Equities and associated parties. 10.11 -- Participation Agreement between the Registrant and Sterling Bank and Trust, FSB. 21.1 -- List of Subsidiaries 23.1 -- Consent of Independent Auditors 27.0 -- Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K. The Company filed 2 reports on Form 8-K during the three month period ended June 30, 1998. The first report, filed on April 1, 1998, for an event date of February 9, 1998, provided information regarding the two lawsuits described in Item 6 herein, information about the new warehouse line, information about the modification of a mortgage participation, and information about the effect of a negative adjustment to the valuation of the Interest-Only Strip Receivable. The second report, filed on June 11, 1998, for an event date of May 22, 1998, provided information regarding the status of the Company's Nasdaq listing and pending lawsuits and details regarding the issuance of the Series C Preferred Stock. A pro forma balance sheet and income statement were included with this report to show the effect of the issuance of the Series C Preferred Stock on these statements as if the preferred stock had been issued on March 31, 1998. - --------------- (1) These exhibits were filed as exhibits to the Company's Registration Statement on Form S-1 (File No. 33-37416) and are incorporated herein. (2) These exhibits were filed as exhibits to the Company's report on Form 8-K, filed with respect to a reported event dated July 27, 1994 and are incorporated herein. 22 24 (3) These exhibits were filed as exhibits to the Company's report on Form 10-KSB for the fiscal year ended June 30, 1993 and are incorporated herein. (4) This exhibit was filed as an exhibit to the Company's proxy statement dated February 22, 1993, filed on February 23, 1993, and is incorporated herein by reference. (5) This exhibit was filed as an exhibit to the Company's proxy statement dated December 7, 1993 filed and is incorporated herein by reference. (6) This exhibit was filed as an exhibit to the Company's proxy statement dated March 21, 1995 and is incorporated herein by reference. (7) This agreement was filed as an exhibit to the Company's report on Form 10-KSB for the fiscal year ended June 30, 1995, and is incorporated herein by reference. (8) This exhibit was filed as an exhibit to the Company's report on Form 10-KSB for the fiscal year ended June 30, 1996, and is incorporated herein by reference. (9) This exhibit was filed as an exhibit to the Company's report on Form 10-Q for the quarterly period ended December 31, 1996 and is incorporated herein by reference. (10) This exhibit was filed as an exhibit to the Company's report on Form 10-Q for the quarterly period ended March 31, 1997 and is incorporated herein by reference. (11) This exhibit was filed as an exhibit to the Company's report on Form 10-KSB for the fiscal year ended June 30, 1997, and is incorporated herein by reference. 23 25 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CREDIT DEPOT CORPORATION By: /s/ RALPH J. DEBEE ------------------------------------ Ralph J. DeBee President October 12, 1998 In accordance with the Exchange Act, this report has been signed below by the following on behalf of the registrant and in capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ RALPH J. DEBEE President October 12, 1998 - ----------------------------------------------------- Ralph J. DeBee /s/ HEIKO H. THIEME Chairman of the Board October 12, 1998 - ----------------------------------------------------- Heiko H. Thieme /s/ CHARLES D. FARRAHAR Chief Financial Officer October 12, 1998 - ----------------------------------------------------- Charles D. Farrahar /s/ JOHN C. THOMAS, JR. Director October 12, 1998 - ----------------------------------------------------- John C. Thomas, Jr. /s/ MARVIN V. BOLT Director October 12, 1998 - ----------------------------------------------------- Marvin V. Bolt /s/ JOHN R. MARSHALL Director October 12, 1998 - ----------------------------------------------------- John R. Marshall /s/ CARLOS MUNOZ Director October 12, 1998 - ----------------------------------------------------- Carlos Munoz
24 26 CREDIT DEPOT CORPORATION CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JUNE 30, 1998, 1997 AND 1996 CONTENTS
PAGE ---- Report of Independent Auditors.............................. F-2 Consolidated Balance Sheets................................. F-3 Consolidated Statements of Operations....................... F-4 Consolidated Statements of Stockholders' Equity............. F-5 Consolidated Statements of Cash Flows....................... F-6 Notes to Consolidated Financial Statements.................. F-7
F-1 27 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Stockholders Credit Depot Corporation We have audited the accompanying consolidated balance sheets of Credit Depot Corporation and subsidiaries (the "Company") as of June 30, 1998 and 1997 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended June 30, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Credit Depot Corporation and subsidiaries at June 30, 1998 and 1997 and the consolidated results of their operations and their cash flows for each of the three years in the period ended June 30, 1998, in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 13, the Company has incurred significant recurring operating losses and significant operating cash flow deficiencies, has significant amounts of debt maturing within the next fiscal year, and has a significant accumulated deficit. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are described in Note 13. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. /s/ ERNST & YOUNG LLP Atlanta, Georgia September 30, 1998 F-2 28 CREDIT DEPOT CORPORATION CONSOLIDATED BALANCE SHEETS
JUNE 30 ------------------------- 1998 1997 ----------- ----------- ASSETS Loans receivable: Consumer, collateralized by real estate................... $ 9,171,205 $ 5,517,002 Allowance for credit losses............................... (267,252) (260,484) ----------- ----------- Net loans receivable........................................ 8,903,953 5,256,518 Cash........................................................ 304,002 1,332,934 Cash subject to withdrawal restrictions..................... 498,668 203,318 Property and equipment...................................... 281,046 524,695 Real estate held for sale................................... 76,101 89,021 Other assets: Receivable due from related parties, net.................. 15,848 17,398 Prepaid expenses and other assets......................... 415,171 269,750 Servicing asset........................................... 22,290 77,007 Interest-only strips receivable........................... 4,118,284 7,268,930 Accrued interest receivable............................... 83,348 35,503 Deferred financing costs.................................. 131,131 1,338,822 Goodwill.................................................. 607,000 910,825 ----------- ----------- Total assets...................................... $15,456,842 $17,324,721 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Convertible notes........................................... $ 2,070,000 $10,440,000 Warehouse lines-of-credit................................... 8,148,924 3,356,386 Advance on interest-only strips receivable.................. 1,619,553 2,100,651 Other borrowings............................................ 450,154 500,000 Accounts payable............................................ 310,380 291,235 Accrued liabilities......................................... 341,225 85,340 Dividends payable........................................... 58,227 174,271 ----------- ----------- Total liabilities................................. 12,998,463 16,947,883 Stockholders' equity: Series "A" Preferred stock, $.001 par value; 1,080,000 shares authorized, 315,000 shares issued at June 30, 1997................................................... -- 315 Series "B" Preferred Stock, $.001 par value; 60,000 shares authorized, 17,875 and 16,740 shares issued at June 30, 1998 and 1997.......................................... 18 17 Series "C" Preferred Stock, $.001 par value; 34,000 shares authorized, 21,000 shares issued at June 30, 1998...... 21 -- Common stock, $.001 par value; 35,000,000 shares authorized, 5,748,555 and 4,072,761 shares issued and outstanding at June 30, 1998 and 1997.................. 5,749 4,073 Additional paid-in capital................................ 31,775,980 16,435,808 Accumulated deficit....................................... (29,323,389) (16,063,375) ----------- ----------- Total stockholders' equity........................ 2,458,379 376,838 ----------- ----------- Total liabilities and stockholders' equity........ $15,456,842 $17,324,721 =========== ===========
See accompanying notes. F-3 29 CREDIT DEPOT CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED JUNE 30, ---------------------------------------- 1998 1997 1996 ------------ ----------- ----------- Revenues: Finance income and fees earned....................... $ 152,544 $ 756,847 $ 640,390 Gain on sale of receivables.......................... 4,402,393 5,141,695 1,578,088 Other................................................ 167,222 19,918 60,421 ------------ ----------- ----------- 4,722,159 5,918,460 2,278,899 Expenses: Salaries and employee benefits....................... 4,797,177 4,194,149 2,733,814 Legal and professional fees.......................... 675,366 525,333 288,012 Other operating expenses............................. 2,837,707 2,893,121 1,980,443 Provision for credit losses.......................... 300,625 225,231 185,000 Debt conversion costs................................ 5,576,000 -- -- Goodwill amortization................................ 303,825 -- -- Interest expense and amortization of financing costs............................................. 3,112,958 1,443,625 1,206,450 ------------ ----------- ----------- 17,603,658 9,281,459 6,393,719 ------------ ----------- ----------- Loss before provision for income taxes................. (12,881,499) (3,362,999) (4,114,820) Provision for income taxes............................. -- -- -- Net loss............................................... $(12,881,499) $(3,362,999) $(4,114,820) ------------ ----------- ----------- Induced conversion of preferred stock.................. 3,584,700 -- -- Preferred dividends.................................... 378,515 601,772 415,677 ------------ ----------- ----------- Net loss attributable to common stockholders........... $(16,844,714) $(3,964,771) $(4,530,497) ============ =========== =========== Basic and diluted loss per share....................... $ (3.74) $ (5.36) $ (6.70) ============ =========== =========== Weighted average shares outstanding.................... 4,506,605 740,314 675,752 ============ =========== ===========
See accompanying notes. F-4 30 CREDIT DEPOT CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
PREFERRED STOCK ADDITIONAL ----------------------------------------------------- ---------------------------------- SERIES "A" SERIES "B" SERIES "C" COMMON STOCK ----------------- --------------- --------------- -------------------- PAID-IN SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL -------- ------ ------ ------ ------ ------ ---------- ------- ----------- Balance at June 30, 1995... -- $ -- -- $-- -- $-- 3,378,761 $ 3,379 $ 7,788,382 Issuance of preferred stock................... 320,000 320 -- -- -- -- -- -- 5,453,849 Dividends declared on preferred stock......... -- -- -- -- -- -- -- -- -- Net loss.................. -- -- -- -- -- -- -- -- -- -------- ----- ------ --- ------ --- ---------- ------- ----------- Balance at June 30, 1996... 320,000 320 -- -- -- -- 3,378,761 3,379 13,242,231 Issuance of preferred stock................... -- -- 16,740 17 -- -- -- -- 1,412,266 Dividends declared on preferred stock......... -- -- -- -- -- -- -- -- -- Conversion of preferred stock................... (5,000) (5) -- -- -- -- 40,000 40 (35) Conversion of convertible loan participation...... -- -- -- -- -- -- 160,000 160 399,840 Conversion of convertible debt.................... -- -- -- -- -- -- 344,000 344 838,656 Issuance of common stock.. -- -- -- -- -- -- 150,000 150 542,850 Net loss.................. -- -- -- -- -- -- -- -- -- -------- ----- ------ --- ------ --- ---------- ------- ----------- Balance at June 30, 1997... 315,000 315 16,740 17 -- -- 4,072,761 4,073 16,435,808 Interest on convertible debt paid in common stock................... -- -- -- -- -- -- 88,607 89 221,411 Dividends declared on preferred stock (in kind)................... -- -- 1,135 1 -- -- -- -- 172,915 Conversion of preferred stock................... (315,000) (315) -- -- -- -- 1,938,459 1,938 (1,623) Reverse stock split....... -- -- -- -- -- -- (3,258,209) (3,258) 3,258 Conversions of convertible debt.................... -- -- -- -- 21,000 21 2,788,000 2,788 14,595,186 Issuance of common stock.. -- -- -- -- -- -- 20,000 20 27,480 Dividends on preferred stock paid in common stock................... -- -- -- -- -- -- 98,937 99 321,545 Net loss.................. -- -- -- -- -- -- -- -- -- -------- ----- ------ --- ------ --- ---------- ------- ----------- Balance at June 30, 1998... -- $ -- 17,875 $18 21,000 $21 5,748,555 $ 5,749 $31,775,980 ======== ===== ====== === ====== === ========== ======= =========== ADDITIONAL ------------ ACCUMULATED DEFICIT ------------ Balance at June 30, 1995... $ (7,568,107) Issuance of preferred stock................... -- Dividends declared on preferred stock......... (415,677) Net loss.................. (4,114,820) ------------ Balance at June 30, 1996... (12,098,604) Issuance of preferred stock................... -- Dividends declared on preferred stock......... (601,772) Conversion of preferred stock................... -- Conversion of convertible loan participation...... -- Conversion of convertible debt.................... -- Issuance of common stock.. -- Net loss.................. (3,362,999) ------------ Balance at June 30, 1997... (16,063,375) Interest on convertible debt paid in common stock................... -- Dividends declared on preferred stock (in kind)................... (198,621) Conversion of preferred stock................... -- Reverse stock split....... -- Conversions of convertible debt.................... -- Issuance of common stock.. -- Dividends on preferred stock paid in common stock................... (179,894) Net loss.................. (12,881,499) ------------ Balance at June 30, 1998... $(29,323,389) ============
See accompanying notes. F-5 31 CREDIT DEPOT CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED JUNE 30, ------------------------------------------- 1998 1997 1996 ------------- ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES Net loss............................................ $ (12,881,499) $ (3,362,999) $ (4,114,820) Adjustments to reconcile net loss to cash used in operating activities: Provision for credit losses....................... 300,625 225,231 185,000 Depreciation and amortization..................... 1,915,647 393,983 672,673 Debt conversion costs............................. 5,576,000 -- -- Changes in operating assets and liabilities: Cash subject to withdrawal restrictions........... (295,350) (177,431) (25,887) Due from related parties.......................... 1,550 204,811 (22,515) Prepaid expenses and other........................ (145,421) 95,148 12,558 Deferred financing costs.......................... (219,425) (600,964) 191,004 Loans originated.................................. (95,921,421) (79,322,866) (37,035,070) Loans repurchased................................. (1,855,639) (3,115,846) (1,061,976) Deferred fee income............................... -- -- (8,672) Servicing asset................................... 54,717 116,031 218,864 Interest-only strips receivable................... 3,150,646 (5,951,855) (1,317,075) Proceeds from loans sold servicing released....... 93,132,476 82,263,716 32,827,220 Principal collections on loans not sold........... 1,194,190 1,401,890 1,801,102 Accounts payable and accrued liabilities.......... 275,030 (530,725) (25,571) ------------- ------------ ------------ Net cash used in operating activities............. (5,717,874) (8,361,876) (7,703,165) CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property and equipment.................. (26,578) (177,538) (94,933) Disposal of property and equipment.................. 43,516 -- 37,599 Purchase of assets and liabilities, net of cash received.......................................... -- (25,905) -- ------------- ------------ ------------ Net cash provided by (used in) investing activities........................................ 16,938 (203,443) (57,334) CASH FLOWS FROM FINANCING ACTIVITIES Net proceeds from preferred stock issuance.......... -- 1,412,283 2,954,169 Cash dividends on preferred stock................... -- (427,500) (415,677) Proceeds from warehouse lines of credit............. 107,869,457 3,356,386 -- Payment on warehouse lines of credit................ (103,076,919) -- -- Proceeds from issuance of convertible notes......... 2,200,000 2,800,000 7,570,000 Payment on issuance of convertible notes............ (1,500,000) -- (5,550,000) Proceeds from other borrowings...................... 729,989 2,100,651 3,250,000 Payment on other borrowings......................... (1,550,523) (1,025,000) (125,000) ------------- ------------ ------------ Net cash provided by financing activities........... 4,672,004 8,216,820 7,683,492 ------------- ------------ ------------ Net decrease in cash................................ (1,028,932) (348,499) (77,007) Cash at beginning of period......................... 1,332,934 1,681,433 1,758,440 ------------- ------------ ------------ Cash at end of period............................... $ 304,002 $ 1,332,934 $ 1,681,433 ============= ============ ============ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for interest............ $ 1,497,652 $ 1,194,232 $ 654,877 ============= ============ ============ Conversion of loans receivable to real estate held for sale....................................... $ 650,758 $ 645,202 $ 491,667 ============= ============ ============
See accompanying notes. F-6 32 CREDIT DEPOT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998 1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS Credit Depot Corporation ("CDC" or the "Company") was organized in August 1990 under the name of NBL Corporation. Concurrent with its formation, NBL was merged with the business of Equithrift, Inc. (the "Predecessor Company") and its name changed to Credit Depot Corporation. Since 1993, the Company has expanded operations into various states through the creation of wholly owned subsidiaries. At June 30, 1998, the Company has lending operations in the states of Georgia, South Carolina, North Carolina, Tennessee, Florida, Ohio, Illinois, Michigan, Mississippi, Louisiana, Maryland and Kentucky. Reference herein to the "Company" includes CDC and its wholly owned subsidiaries. The Company is regulated in several of these states. CDC is a mortgage finance company which provides residential first and second mortgage loans through its branch network. The Company's borrowers are generally unable or unwilling to obtain financing from conventional lending sources due to an established pattern of credit weakness, unverifiable income, insufficient credit history, or a previous bankruptcy or insolvency. The Company is subject to competition from other financial institutions. On April 1, 1997, the Company acquired Cash Back Mortgage Corporation ("Cash Back") through a newly-organized wholly owned subsidiary of the Company, Cash Back Acquisition Corporation. Cash Back is a mortgage finance company which provides residential first and second mortgage loans generally to individuals in Ohio. The Company acquired substantially all of the assets and liabilities of Cash Back in exchange for 150,000 shares of common stock in the Company at the date of acquisition. An additional 600,000 shares of common stock in the Company are currently held in escrow for future distribution in accordance with the purchase agreement to the shareholders of Cash Back. Additional consideration is based solely on the achievement of various performance targets by Cash Back. The acquisition of Cash Back was accounted for as a purchase. The results of operations of Cash Back are included in the consolidated financial statements from the date of acquisition for the fiscal year ended June 30, 1997. In conjunction with this transaction, goodwill of $910,825 was recorded. This amount is being amortized on a straight-line basis over 15 years. Goodwill is measured periodically for impairment and any impairment is recognized as a charge to current period earnings. During the year ended June 30, 1998, the Company reduced the carrying value of the goodwill by $227,925 based on management's estimate of impairment. During fiscal year 1997 and part of fiscal year 1998, the Company sold the majority of its loan production to a major loan securitizer for inclusion in asset securitizations. All loan production for the remainder of fiscal 1998 was sold as whole loan sales, with servicing released to third parties, for a cash premium at the time of sale. The consolidated financial statements have been prepared in accordance with generally accepted accounting principles. All significant intercompany balances and transactions have been eliminated in consolidation. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Material estimates that are particularly susceptible to significant change in the near future relate to the determination of the allowance for credit losses, evaluation of goodwill impairment, and valuation of the interest-only strips receivable. In connection with the determination of the allowance for credit losses, management considers independent appraisals previously obtained for all properties. Goodwill impairment is calculated based on consideration of the ongoing contribution of the acquired company to the consolidated results. Prepayment experience, both Company and industry, is used as the basis for estimating future prepayment rates in valuing the interest-only strips receivable. Additionally, the ultimate collectibility of the Company's loans receivable is susceptible to changes in market conditions. F-7 33 CREDIT DEPOT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES REVENUE RECOGNITION Interest income on loans receivable is recognized over the term of the loans using methods which generally result in level rates of return on principal amounts outstanding. Loans receivable are generally placed on nonaccrual status when full payment of principal or interest is in doubt. Gain on sale of receivables sold into asset securitizations principally represents the present value of the differential between the interest rates charged by the Company and the interest rates passed on to the purchaser of the receivables, after considering the effects of estimated prepayments and in the case of loans sold with servicing retained, contractually specified servicing fees. Gains on the sale of loans receivable are recorded on the settlement date generally using the specific identification method. Gains on the sale of a portion of a loan are based on the relative fair market value of the loan portion sold as compared to that portion retained. Gains on sales of receivables to third parties for a cash premium represent the difference between the amount paid by the third party and the principal balance of the loan, net of any related deferred costs, at the time of sale. Finance income includes servicing fees and interest income on loans retained by the Company. The servicing asset is carried at the lower of amortized cost or fair value. Interest-only strips receivable are carried at fair value. The fair value of the interest-only strip receivable is analyzed quarterly by the Company on a disaggregated basis to determine whether prepayment and default experience has an impact on this fair value. Expected cash flows of the underlying loans sold are reviewed based upon current economic conditions and are revised as necessary using the original discount rate used in calculating the gain on sale. The interest-only strip receivable is classified as a trading security. Accordingly, unrealized gains and losses are recorded in income. LOAN RECEIVABLES All loans receivable are considered to be held for sale and are carried at the lower of aggregate cost or market values. Market value is determined by outstanding commitments from investors or current investor yield requirements. There was no allowance for market losses on loans receivable held for sale at June 30, 1998 and 1997. CREDIT LOSSES Provisions for credit losses are charged to income in amounts sufficient to maintain the allowance at a level considered adequate by management to absorb possible losses of principal and interest in the existing portfolio, based on calculations of the collectibility of loans receivable and prior credit loss experience. Loans receivable are charged against the allowance for credit losses, based on a loan-by-loan review, when management believes that the collectibility of the principal is unlikely. The Company's exposure to credit loss in the event of nonperformance by the borrower is represented by the outstanding principal balance of the respective loans less the value of collateral obtained. The amount of collateral obtained is based on management's credit evaluation pursuant to the Company's lending and underwriting policies. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. F-8 34 CREDIT DEPOT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) FAIR VALUE OF FINANCIAL INSTRUMENTS Loans receivable are recorded on the balance sheet at an amount that approximates fair market value. The servicing asset is periodically evaluated for impairment and, as such, are recorded at values that approximate fair market value. Interest-only strips receivable are recorded at fair value. The carrying value of fixed rate debt is a reasonable estimate of fair value due to the relatively stable rate environment during the fiscal year and the time period in which the debt was originated. PROPERTY AND EQUIPMENT Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are provided on a straight-line basis over the estimated usefu1 lives of furniture and equipment (five years) or the term of the related lease. INCOME TAXES The Company accounts for income taxes using the liability method. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. LOSS PER COMMON SHARE The Company has adopted Statement of Financial Accounting Standards (SFAS) No. 128 "Earnings Per Share." SFAS 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share exclude any dilutive effects of options, warrants and convertible securities. In computing diluted earnings per share, only potential common shares that are dilutive, those that reduce earnings per share, are included. The exercise of options and warrants or conversion of convertible securities is not assumed if the result would be antidilutive, such as when a loss from continuing operations is reported or if options are "out-of-the-money." All loss per share amounts for all periods presented have been restated to conform to the requirements of SFAS 128. RECLASSIFICATIONS Certain reclassifications of prior years amounts have been made to conform to the current year presentation. STOCK OPTIONS The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related interpretations in accounting for its employee stock options. Under APB 25, because the exercise price of the Company's stock options equals or exceeds the market price of the underlying stock on the date of grant, no compensation expense is recognized. SECTION 401(K) RETIREMENT SAVINGS PLAN The Company sponsors a Section 401(k) retirement savings plan. Substantially all employees are eligible to participate in the plan after meeting certain length of service conditions. The Company does not make any contributions to the plan. The Company uses a third party servicer/trustee for the plan. F-9 35 CREDIT DEPOT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) RECENT ACCOUNTING PRONOUNCEMENTS Beginning January 1, 1998, the Company adopted Statement of Financial Accounting Standard (SFAS) No. 130 "Reporting Comprehensive Income," which is effective for annual and interim periods beginning after December 15, 1997. SFAS 130 requires that all items that are required to be recognized under accounting standards as comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. The adoption of SFAS No. 130 had no impact on the Company's consolidated financial statements. Beginning January 1, 1998, the Company adopted SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information," which is effective for annual and interim periods beginning after December 15, 1997. This statement establishes standards for the method that public entities use to report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographical areas and major customers. The adoption of SFAS No. 131 had no impact on the Company's consolidated financial statements. 3. COMMON STOCK TRANSACTIONS At a special meeting of the shareholders of the Company held on October 24, 1997, a majority of the holders of the Company's common stock approved a reverse stock split in which each five shares of issued and outstanding common stock of the Company was reclassified and changed into one share of common stock. The reverse stock split was effected on October 29, 1997. All loss per share data has been restated to reflect this reverse split as if it occurred on the earliest date presented in the financial statements. In November 1997, 20,000 shares of common stock were issued to two individuals as compensation for consulting services performed for the Company. In conjunction with obtaining a $6,000,000 warehouse line of credit, the Company granted warrants to purchase 200,000 shares of common stock exercisable through May 31, 2003 at $9.00 per share ($45 per share for the purchase of 40,000 shares, split adjusted) to certain intermediaries. The underlying shares are no longer registered. This warehouse line of credit matured on June 16, 1995 and was not renewed. In conjunction with obtaining a $3,000,000 financing arrangement, as discussed in Note 8, the Company granted warrants to purchase 201,389 shares of common stock exercisable through August 12, 2000 at $2.50 per share ($12.50 per share for the purchase of 40,278 shares, split adjusted) to a placement agent. In connection with this agreement, warrants to purchase 27,779 shares of common stock at $2.50 per share ($12.50 per share for the purchase of 5,556 shares, split adjusted) were issued to the lender which are exercisable at the option of the lender at any time on or prior to June 16, 1999. In conjunction with obtaining a $500,000 financing arrangement, as discussed in Note 8, the Company granted warrants to purchase 100,000 shares of common stock at $2.50 per share ($12.50 per share for the purchase of 20,000 shares, split adjusted) to the lender, exercisable at the option of the lender at any time on or prior to February 22, 2000. In conjunction with obtaining $5,550,000 in convertible notes, as discussed in Note 8, the Company granted warrants to purchase 92,500 shares of common stock exercisable through January 25, 2000 at $7.25 per share ($36.25 per share for the purchase of 18,500 shares, split adjusted) to an investment banker. The underlying shares are no longer registered. In conjunction with obtaining a $2,300,000 warehouse lending agreement, as discussed in Note 8, the Company granted warrants to purchase 920,000 shares of common stock exercisable through June 30, 2001 at F-10 36 CREDIT DEPOT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) $2.50 per share ($12.50 per share for the purchase of 184,000 shares, split adjusted) to the lender, subject to certain anti-dilution adjustments. The underlying shares are no longer registered. In conjunction with obtaining a financing agreement with a lender, the Company granted warrants to purchase 300,000 shares of common stock at a price of $5.25 per share ($26.25 per share for the purchase of 60,000 shares, split adjusted) to the lender, exercisable at the option of the lender at any time on or prior to November 8, 2000. The underlying shares are no longer registered. The Company repaid and terminated this financing agreement in March 1996. In conjunction with obtaining $6,400,000 in Series "A" Convertible Preferred Stock as discussed in Note 8, the Company granted warrants to the stock purchasers for the purchase of 800,000 shares of the Company's common stock at an exercise price of $4 per share expiring on October 10, 1999. Also, the placement agent was granted warrants to purchase 146,250 shares of the Company's common stock under terms similar to those received by the purchasers of the Series "A" Convertible Preferred Stock. In April 1996, by agreement with the placement agent, the exercise price on the warrants issued to both the placement agent and the Preferred Stock holders was adjusted to $2.50. In October 1997, as a result of the 5-to-1 reverse common stock split and conversion offer accepted by all holders of the Series "A" Preferred Stock, the exercise price of the warrants issued to the Preferred Stock holders was adjusted to $4.50 and the number of shares of the Company's common stock that they could purchase was adjusted to 160,000. For the aforementioned reasons, the exercise price of the warrants issued to the placement agent was adjusted to $2.50 per share and the number of shares of the Company's common stock that they could purchase was adjusted to 29,250. In conjunction with obtaining $9,000,000 in 10% convertible secured notes, as discussed in Note 8, the Company granted warrants to the placement agent to purchase 540,000 shares of common stock exercisable through August 12, 2000, at a price of $2.50 per share, subject to certain anti-dilution adjustments. Subsequently, the number of shares changed to 108,000 as a result of the 5-to-1 reverse common stock split, and the price changed to $2.50 as a result of certain anti-dilution adjustments related to the placement of additional convertible securities. See Note 11. Purchasers of the 11% Series "B" Convertible Redeemable Preferred Stock, as discussed in Note 8, received warrants to purchase 669,600 shares of the Company's common stock exercisable at $2.50 per share, subject to certain adjustments, exercisable at the option of the Series "B" Preferred Stockholders at any time on or prior to April 12, 2000. Subsequently, the number of shares changed to 133,920 as a result of the 5-to-1 reverse common stock split and the price changed to $1.80 as a result of certain anti-dilution adjustments related to the placement of additional convertible securities and delays in registering the underlying common stock of the Series "B" Convertible Redeemable Preferred Stock issuance. In conjunction with obtaining $1,674,000 in Series "B" Convertible Redeemable Preferred Stock, as discussed in Note 8, the Company granted warrants to the placement agent to purchase 69,600 shares of common stock exercisable through April 21, 2002 at a price of $2.50 per share, subject to certain anti-dilution adjustments. Subsequently, the number of shares changed to 13,920 as a result of the 5-to-1 reverse common stock split, and the price changed to $2.50 as a result of certain anti-dilution adjustments related to the placement of additional convertible securities. In conjunction with obtaining two warehouse lines-of-credit totaling $550,000, as discussed in Note 7, the Company granted warrants to purchase 18,000 shares of common stock exercisable through March 25, 1999 at $3.25 per share ($16.25 per share for the purchase of 3,600 shares, split adjusted) to an agent. In addition, the Company issued warrants to purchase 15,000 shares of common stock at $3.25 per share ($16.25 per share for the purchase of 3,000 shares, split adjusted) exercisable at the option of the lenders at any time on or prior to March 25, 1999. F-11 37 CREDIT DEPOT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) As additional nominal consideration for services in connection with investor relations, the Company granted warrants to purchase 150,000 shares of common stock exercisable through November 1, 2001 at $2.50 per share ($12.50 per share for the purchase of 30,000 shares, split adjusted). The underling shares are no longer registered. As additional nominal consideration for consulting services, the Company granted warrants to purchase 35,000 shares of common stock exercisable through January 15, 2001 at $4.00 per share ($20.00 per share for the purchase of 7,000 shares, split adjusted). The underlying shares are no longer registered. During fiscal 1998, warrants to purchase 1,100,000 shares of the Company's common stock at an exercise price of $2.00 per share, subject to certain anti-dilution adjustments, were granted to investors in the Bridge Loan as discussed in Note 8. See Note 11. In June 1998, the holder of 21,000 shares of Series "C" Convertible Redeemable Preferred Stock was granted a warrant for the purchase of 2,800,000 shares of common stock at a current exercise price of $1.25, expiring June 12, 2003. See Note 8. The new Chairman of the Board, elected in December 1997, was granted warrants for the purchase of 333,334 shares of the Company's common stock at an exercise price of $1.24 per share. These warrants expire on January 31, 2008. With the exception of one Director, all Directors on the Board at November 16, 1997 had all of their stock options canceled. In return, warrants to purchase a total of 144,000 shares of the Company's common stock were issued with an exercise price of $1.24 per share expiring on December 31, 2000. See Note 12. Warrants at June 30, 1998 were outstanding for 5,234,358 shares of the Company's common stock, with exercise prices ranging from $1.24 to $45.00 and expiration dates extending to May 31, 2003. Convertible preferred stock and convertible debt at June 30, 1998 could potentially convert into 5,828,682 shares of the Company's common stock with exercise prices ranging from $.50 to $12.50. See Note 14. Unless full cumulative dividends on the Company's outstanding Preferred Stock have been declared and paid (or declared and cash set aside for subsequent payment), no dividends can be declared or paid on the Company's common stock. 4. LOANS RECEIVABLE Prior to June 30, 1994, sales of loans were generally made with the provision that the Company would repurchase at the request of the investor any loan that becomes past due by over 90 days or in accordance with those circumstances which may occur from time to time as outlined in the respective sale agreements. Investors may not request or demand repurchase without cause as defined in the respective sale agreement. The balance subject to repurchase under these agreements included in the Company's servicing portfolio is approximately $425,000 at June 30, 1998. Loans sold during 1996 and 1997 to a major loan securitizer are subject to limited recourse provisions. At June 30, 1997, the aggregate balance of loans originated by the Company subject to limited repurchase provisions was approximately $82,483,000, of which none was past due over 90 days and subject to repurchase at the option of the investor. These recourse provisions expired 150 days after the last loan sale. At June 30, l998, the repurchase provisions had expired. These loans were sold servicing released with an interest-only strip retained on the loans. At June 30, 1998 the Company's servicing portfolio totaled approximately $7,545,000 including approximately $7,113,000 of Company-owned loans receivable. F-12 38 CREDIT DEPOT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) It is the Company's experience that a substantial portion of the Company's loan portfolio generally is sold, repaid or foreclosed upon before contractual maturity dates. Additionally, the Company may extend the maturity of a loan receivable for past-due payments. At June 30, 1998, there were loans receivable with an aggregate principal balance of approximately $80,000 for which the accrual of interest had been suspended. Borrowers with loans totaling approximately $458,000 were paying under a court-approved bankruptcy plan at June 30, 1998. Of this amount, borrowers representing $27,000 aggregate principal balance were delinquent per the terms of the bankruptcy plan. Changes in the allowance for credit losses were as follows: Balance as of June 30, 1996................................. $ 250,260 Provision for credit losses............................... 225,231 Charge-offs............................................... (235,657) Recoveries................................................ 20,650 --------- Balance as of June 30, 1997................................. 260,484 Provision for credit losses............................... 300,625 Charge-offs............................................... (335,932) Recoveries................................................ 42,075 --------- Balance as of June 30, 1998................................. $ 267,252 =========
The allowance for credit losses includes a provision for credit losses that may be incurred as a result of the obligation to repurchase certain loans sold. This reserve is included in the allowance for credit losses since it has been the Company's practice to repurchase loans sold to investors under continuing servicing agreements prior to foreclosure. The resulting gain or loss on the foreclosed property is recognized on the books of the Company. 5. SERVICING ASSET AND INTEREST-ONLY STRIPS RECEIVABLE The servicing asset represents the unamortized balance of previously recognized servicing rights and excess servicing receivables. This amount is amortized over the estimated lives of the underlying receivables sold. The carrying value of the servicing asset at June 30, 1998 and 1997 approximates fair value. The activity in the servicing asset is summarized as follows:
YEAR ENDED JUNE 30, -------------------------------- 1998 1997 1996 --------- -------- --------- Balance, beginning of year........................... $ 191,038 $ 77,007 $ 411,902 Unscheduled amortization............................. (19,446) (81,421) (118,765) Scheduled amortization............................... (35,271) (34,610) (100,099) --------- -------- --------- Balance, end of year................................. $ 22,290 $ 77,007 $ 193,038 ========= ======== =========
The interest-only strips receivable represents the unamortized balance of the present value of the interest rate differential between the rate charged to the borrower and the contractual rate paid by the Company to the investor for the pool of loans after taking into consideration the Company's estimate for any early prepayments and bad debt expense resulting from the sale of loans servicing released. This amount is amortized in relation to the related cash flows over the estimated lives of the underlying receivables sold. Discount rates of 12% were used to compute the interest-only strips receivable at June 30, 1998 and 1997. The carrying value of the interest-only strips receivable at year-end approximates fair value. F-13 39 CREDIT DEPOT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The activity in the interest-only strips receivable account is summarized as follows:
YEAR ENDED JUNE 30, ------------------------- 1998 1997 ----------- ----------- Balance, beginning of year.................................. $ 7,268,930 $ 1,317,075 Additions from sales of loans receivable.................... 1,150,857 7,162,973 Unscheduled amortization.................................... (2,233,233) (40,000) Scheduled amortization...................................... (2,068,270) (1,171,118) ----------- ----------- Balance, end of year........................................ $ 4,118,284 $ 7,268,930 =========== ===========
In fiscal 1998 and 1997, the Company recognized expenses related to the write down of the servicing asset resulting from unanticipated prepayments. These prepayments are primarily a result of certain competitors targeting the higher interest rate loans serviced by the Company and refinancing such loans at lower interest rates. The expenses are recorded in finance income and fees earned on the Consolidated Statement of Operations. 6. PROPERTY AND EQUIPMENT Property and equipment are as follows:
JUNE 30, --------------------- 1998 1997 -------- ---------- Furniture and equipment..................................... $922,129 $1,138,407 Leasehold improvements...................................... 53,585 64,679 -------- ---------- 975,714 1,203,086 Less accumulated depreciation and amortization.............. 694,668 678,391 -------- ---------- $281,046 $ 524,695 ======== ==========
Depreciation expense for 1998 and 1997 totaled $184,706 and $171,348, respectively. 7. MORTGAGE WAREHOUSE LINES-OF-CREDIT On June 11, 1997, the Company obtained a $3,000,000 mortgage warehouse line-of-credit from a mortgage warehouse lender. The Company utilizes this line-of-credit for the purpose of financing the origination of single family residential mortgage loans. This line bears interest at prime plus 2% payable monthly and the Company generally has an available borrowing base equivalent to the lesser of $3,000,000 or 95% of the original mortgage amount or the commitment price from an investor for eligible mortgage loans as defined under the agreement. The maturity date of the line is the earlier of the 90th day after funding of each note or the date on which funds are received from the take-out investor for purchase of the eligible mortgage loan securing such note. As of June 30, 1998 and 1997, the outstanding balance was $450,016 and $2,806,386, respectively. In January 1998, the Company obtained a warehouse line-of-credit from another lender under similar terms as the aforementioned warehouse line-of-credit, except that the borrowing base is $15,000,000, advance rate is 100% and the interest rate is 1.75% over prime. At June 30, 1998, the outstanding balance on this warehouse line-of-credit was $7,698,908. On March 25, 1997 and March 31, 1997, the Company obtained warehouse lines-of-credit in the amounts of $450,000 and $100,000, respectively, from individuals. The Company utilizes the lines-of-credit for the purpose of financing the origination of single family residential mortgage loans. The lines bear an interest rate of 12% and mature one year from the date of origination. In connection with this agreement, the Company issued warrants to purchase shares of the Company's common stock (see Note 3). The outstanding F-14 40 CREDIT DEPOT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) balances on these warehouse lines of credit totaled $550,000 at June 30, 1997. During fiscal 1998, both of the lines were repaid and terminated. In July 1997, the Company obtained a $7,000,000 mortgage warehouse line-of credit. The Company utilized this line-of credit for the purpose of originating residential mortgage loans. The line had an advance rate of 100% and an interest rate of two percent over prime. During February 1998, this line of credit was paid and terminated. Acquired in April 1997 (see Note 1), Cash Back Mortgage utilized a mortgage warehouse line-of-credit for financing a portion of its loan originations. This line contained a 100% advance rate and an interest rate of 1.75% over prime. In June 1998, this subsidiary was incorporated into the Company's $15,000,000 warehouse lending agreement. Mortgage warehouse lines-of-credit are considered short-term borrowings of the Company. Their weighted-average interest rate based on outstanding balances was 10.03% and 10.75% at June 30, 1998 and 1997, respectively. 8. CONVERTIBLE PREFERRED STOCK, CONVERTIBLE NOTES AND OTHER BORROWINGS The Company is authorized to issue up to 2,000,000 shares of Preferred Stock covering all series. On July 27, 1994 the Company completed a private placement offering of 8% notes due 2004, convertible into common shares of the Company at $5 per share. The gross proceeds of the offering totaled $5,550,000. The private placement resulted in net proceeds to the Company of approximately $5,005,000. The notes were subordinate to any warehouse lines-of-credit up to $50 million and the Company was required to comply with various restrictive covenants. During fiscal year 1996, all outstanding principal and interest due per the agreement was paid in full. One lender accepted a warehouse lending agreement in lieu of cash in the amount of $2,300,000. The borrowings, which accrue interest at the rate of 10% per annum payable quarterly, are secured by the underlying mortgage loans. The Company must provide loans to secure the promissory note in an amount equivalent to 110% of the principal amount of the note. In the event of a shortfall in collateral, the Company is required to pledge cash in a segregated account. At June 30, 1998 and 1997, the Company had pledged $93,682 and $203,318, respectively, in cash to secure the note. At June 30, 1998, the outstanding balance on this note was $800,000 and is included in "Convertible Notes" on the Company's Consolidated Balance Sheet. Repayment terms were modified during April, 1998 and now require quarterly $100,000 principal payments, plus accrued interest, through April, 2000. In addition, as discussed in Note 3, the Company has issued warrants to the lender for the purchase of shares of the Company's common stock. On June 16, 1995, the Company entered into an agreement for the placement of up to $3,000,000 in available borrowings to be used expressly for the purpose of originating and acquiring mortgage loans. In connection with this agreement, warrants to purchase shares of the Company's common stock were issued to the lenders (see Note 3). This agreement expired on June 16, 1997. During fiscal year 1996, $2,500,000 of the borrowings were converted into Series "A" 9% Non-voting Convertible Preferred Stock. At June 30, 1998 and 1997, no balance was outstanding under this agreement. An additional $500,000 in borrowings was obtained through a similar agreement. Any outstanding borrowings are convertible into Series "A" Preferred Stock at $2.50 per share ($12.50 per share, split adjusted). In connection with this agreement, as discussed in Note 3, warrants to purchase shares of the Company's common stock were issued to the lender. The borrowings, which accrue interest at the rate of 10% per annum payable monthly, are secured by the underlying mortgage loans. The Company has pledged loans receivable as collateral related to these borrowings. The agreement contains a default interest rate of 16% which accrues to the extent such borrowings are not repaid on or prior to the maturity date. Such agreement matured on February 22, 1998. At maturity, the noteholder agreed to modify the note such that $250,000 was repaid and $250,000 was deposited with a bank as collateral for a letter of credit used in the Company's lending operations. The $250,000 remaining balance, included in "Other F-15 41 CREDIT DEPOT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Borrowings" on the Company's Consolidated Balance Sheet, is due December 31, 1998, or earlier if the letter of credit arrangement is no longer needed. On October 10, 1995, the Company issued 250 units at an offering price of $20,000 per unit, each unit consisting of 1,000 shares of Series "A" 9% Non-voting Convertible Preferred Stock and warrants to purchase shares of the Company's common stock (see Note 3), subject to certain adjustments, in exchange for the conversion of $2,500,000 of other borrowings and $2,500,000 in cash. An additional 70 units of the preferred stock were issued for cash in the amount of $1,400,000. Dividends on the 9% Convertible Preferred Stock are cumulative from the date of issuance and payable on a quarterly basis commencing on December 31, 1995. Shares of the preferred stock, totaling an initial investment of $100,000 (five units) in preferred stock, were converted during the year ended June 30, 1997 into 40,000 shares of common stock at $2.50 per share. In October 1997, all remaining holders representing the $6,300,000 or 315,000 shares of the Series "A" Convertible Preferred Stock accepted the Company's offer to convert their shares to 1,938,459 shares (after the 5-to-1 reverse split) of the Company's common stock at a conversion rate of $.65 per share. Unpaid dividends of $321,545 were paid by the issuance of 98,937 shares (after the 5-to-l reverse split) of the Company's common stock at the rate of one share for every $3.25 of accrued dividends. Related to this conversion, $3,584,700 was added to the "loss attributable to common shareholders" for disclosure and earnings per share calculation purposes in accordance with Emerging Issues Task Force Topic No. D-2 "Effect of the Calculation of Earnings per Share for the Redemption or Induced Conversion of Preferred Stock." On May 24, 1996, the Company commenced a $9,000,000 10% Convertible Secured Note offering. The notes are partially secured by essentially all otherwise unpledged assets of the Company. The original notes were convertible into 3,600,000 shares of common stock at an exercise price of $2.50 per share and impose limitations on the payments of dividends to common stockholders. After the conversions noted below and the 5-to-1 reverse split of the Company's common stock, the outstanding notes remaining at June 30, 1998 are convertible into 13,600 shares of the Company's common stock at an exercise price of $12.50. In August 1996, the Company became fully subscribed to the maximum offering amount of $9,000,000. The notes mature on June 30, 2001. During fiscal 1997, $860,000 of the notes were converted by the debt holders into 344,000 shares of common stock of the Company at $2.50 per share. In October 1997, certain holders of these notes accepted a conversion offer tendered by the Company. Of the $8,140,000 outstanding on the notes, holders representing $6,970,000 elected to convert their notes into 2,788,000 shares (after the 5-to-1 reverse split) of the Company's common stock at a conversion rate of $.50 per share. Unpaid accrued interest of $221,500 on these converted notes was also paid by issuance of 88,607 shares (after the 5-to-1 reverse split) of the Company's common stock at the rate of one share for every $.50 of interest. Related to this conversion, a non-cash charge of $5,576,000 was recorded pursuant to FASB No. 84 "Induced Conversions of Convertible Debt." The calculation of this expense utilized a market price of the Company's common stock of $.50 per share. In June 1998, one of the remaining holders of the outstanding notes accepted a conversion offer from the Company (see Note 11). Of the $1,170,000 outstanding principal balance on the remaining notes, a holder representing $1,000,000 elected to convert notes into 10,000 shares of the Company's newly authorized Series "C" Convertible Redeemable Preferred Stock (see below). Unpaid accrued interest on the converted notes was paid in cash. Approximately $934,000 of previously deferred financing costs related to these notes were expensed as a result of these conversions. The outstanding balance on these notes at June 30, 1998 and 1997 was $170,000 and $8,140,000, respectively. On November 12, 1996, the Company entered into an agreement with a major loan securitizer whereby the Company receives advances on the interest-only strips receivable on the loans sold to be placed in securitizations, as discussed in Note 5. The lender has the right to offset all sums owed to them by the Company against the amounts owed by the Company under the loan sales agreement. The interest rate on the advances is the 30-day LIBOR plus 400 basis points. In the event of a default, the interest rate increases to the 30-day LIBOR plus 700 basis points. The 30-day LIBOR rate at June 30, 1998 was 5.66%. Each advance is F-16 42 CREDIT DEPOT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) repaid over a 30-month period from the day the loan sale commitment that it pertains to is filled. During October 1997, the Company received its last advance under this agreement. As of June 30, 1998 and 1997, $1,619,553 and $2,100,651 was outstanding under this agreement, respectively. On March 24, 1997, the Company issued 16,740 shares of Series "B" 11% Non-voting Convertible Redeemable Preferred Stock at an offering price of $100 per share and warrants to purchase 669,600 shares of common stock at $2.50 per share, subject to certain adjustments exercisable at the option of the stockholders at any time on or prior to April 12, 2000. As discussed in Note 3, subsequently the number of common shares changed to 133,920 as a result of the 5-to-1 reverse common stock split, and the price changed to $1.80 as a result of certain anti-dilution adjustments related to the placement of additional convertible securities and delays in registering the underlying common stock of the Series "B" Convertible Redeemable Preferred Stock issuance. The shares of Series "B" Preferred Stock were convertible into 669,600 shares of the Company's common stock at $2.50 per share, subject to certain adjustments. Subsequently, the number of common shares changed to 930,000 and the price changed to $1.80 per share as a result of the 5-to-1 reverse common stock split and certain anti-dilution adjustments related to the placement of additional convertible securities and delays in registering the underlying common stock of the Series "B" Preferred stock issuance. Dividends on the Series "B" Preferred Stock are cumulative from the date of issuance and payable on a quarterly basis commencing on July 1, 1997. Through July 1, 1998, (for dividends accrued for the fourth fiscal quarter in the fiscal year ending June 30, 1998) dividends are payable in cash or in shares of additional Series "B" Preferred Stock (payable "in kind"). If the dividend is paid in kind, the shares are valued at the lessor of the conversion price or the average closing bid price of the Company's common stock as reported by NASDAQ for the twenty consecutive trading days ending five days prior to the dividend record date, such record date being the 15th day of the last month of each quarter. If the dividend is paid in kind on July 1, 1998 or any payment thereafter, the Series "B" Preferred Stock holders are given voting rights equivalent to the number of shares of the Company's common stock underlying their Preferred Stock at the applicable record date for a meeting of the shareholders of the Company. Additionally, if dividends are paid in kind on October 1, 1998 or any payment date thereafter, the value of the Series "B" Preferred Stock is computed as described above, then reduced by 20%. For the year ended June 30, 1998, dividends totaling $184,140 were recorded. Payment for dividends totaling $138,105 were paid in kind by the issuance of 905 shares of the Series "B" Preferred Stock. These 905 shares are convertible into 135,082 shares of the Company's common stock at $1.80 per share. At June 30, 1998, dividends of $46,035 for fiscal fourth quarter were accrued but unpaid for the Series "B" Preferred Stock. See Note 14. The Series "B" Preferred Stock is redeemable in cash at the option of the Company anytime after October 21, 1999 at par plus accrued and unpaid dividends. It is redeemable in cash at par plus accrued and unpaid dividends anytime prior to October 21, 1999 with a 30-day notice provided that the underlying common stock of the Company has been registered and the average closing bid price of the Company's common stock, as reported by NASDAQ for twenty out of thirty consecutive trading days ten days prior to the notice date, is at or above 200% of the then current conversion price. As noted above, during June 1998 a single investor converted $1,000,000 of the 10% Convertible Notes and $1,100,000 of the Bridge Loan (see below) into 21,000 shares of the Company's Series "C" Convertible Redeemable Preferred Stock. See Note 11. Dividends of the Series "C" Preferred Stock are cumulative from the date of issuance and payable on a quarterly basis. Through July 1, 1999, the dividends are payable in cash or in shares of Series "C" Preferred Stock (payable "in kind"). If the dividend is paid in kind, the shares are valued at the lessor of the conversion price or the average closing bid price of the Company's common stock as reported by NASDAQ for the twenty consecutive trading days ending five days prior to the dividend record date, such record date being the 15th day of the last month of each quarter. If dividends are paid in kind on October 1, 1999 or on any payment date thereafter, the value of the Series "C" Preferred Stock is computed as described above, then reduced by 25%. The Series "C" Preferred Stock is redeemable, at the Company's option, in cash at par plus accrued and unpaid dividends at anytime with a 30 day notice provided that the underlying common stock of the Company has been registered and the average closing bid price of the F-17 43 CREDIT DEPOT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Company's common stock, as reported by NASDAQ for twenty out of thirty consecutive trading days ten days prior to the notice date, is at or above 200% of the then current conversion price. Each share of the Series "C" Preferred Stock is convertible into one share of the Company's common stock at $.75 per share. The conversion price will adjust to $.50 per share if the market price of the Company's common stock closes at or below $.75 per share for twenty consecutive trading days. The convertible feature of the Series "C" Preferred Stock has not yet been ratified by the Company's common stockholders in accordance with NASDAQ regulations. The holder of the Series "C" Preferred Stock has agreed not to convert until such ratification is obtained. See Note 13. As discussed in Note 3, the holder of the Series "C" Preferred Stock received warrants to purchase shares of the Company's common stock. From July 1997 through March 1998, the Company issued $2,200,000 of 10% Convertible Notes intended as interim financing for an equity placement. Such notes are referred to by the Company as the "Bridge Loan" and are secured by the portion of the interest-only strips receivable not securing the debt outstanding on a separate agreement between the Company and a loan securitizer (see above). These loans were due October 31, 1997, but were extended on several occasions with the due date now extended to October 31, 1998. The Bridge Loan is convertible into shares of the Company's common stock at $2 per share for every one dollar outstanding debt (convertible into 550,000 shares at June 30, 1998). As discussed in Note 3, the lenders of this loan were issued warrants to purchase 1,100,000 shares of the Company's common stock at $2 per share. In June 1998, a holder of $1,100,000 of the Bridge Loan converted its note into 11,000 shares of the Company's Series "C" Convertible Redeemable Preferred Stock (see above). See Note 11. The remaining outstanding balance on the Bridge Loan at June 30, 1998 is $1,100,000. Convertible preferred stock and convertible debt at June 30, 1998 could potentially convert into 5,828,682 shares of the Company's common stock with exercise prices ranging from $.50 to $12.50. See Note 14. The aggregate maturities for long-term debt are as follows: 1999........................................................ $3,059,441 2000........................................................ 885,749 2001........................................................ 194,517 2002 and thereafter......................................... -- ---------- $4,139,707 ==========
9. INCOME TAXES Income tax expense (benefit) differs from the amount computed by applying the graduated statutory federal income tax rates for the following reasons:
YEAR ENDED JUNE 30, --------------------------------------- 1998 1997 1996 ----------- ----------- ----------- Income tax expense (benefit) at statutory federal income tax rate applied to income (loss) before income taxes.................... $(4,379,710) $(1,143,420) $(1,540,369) State income tax, net of federal income tax benefit....................................... (425,098) (110,979) (149,506) Tax benefit not currently recognizable.......... 4,804,808 1,254,399 1,689,875 ----------- ----------- ----------- $ -- $ -- $ -- =========== =========== ===========
F-18 44 CREDIT DEPOT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Deferred income taxes reflect the impact of temporary differences between the amount of assets and liabilities recognized for financial reporting purposes and such amounts recognized for income tax purposes. The primary sources of these differences are the differing methods utilized for recognition of gains associated with loan sales, accelerated tax depreciation, and the allowance for credit losses. Significant components of the Company's deferred tax liabilities and assets are as follows:
JUNE 30, ------------------------- 1998 1997 ----------- ----------- Deferred tax liabilities: Interest-only strips receivable basis differences......... $(1,555,000) $(2,711,000) Other, net................................................ (23,000) (39,000) ----------- ----------- Total deferred tax liabilities.............................. (1,578,000) (2,750,000) Deferred tax assets: Allowance for credit losses............................... 100,000 97,000 Other reserves............................................ 2,000 15,000 Other, net................................................ 100,000 71,000 Net operating loss carryforwards -- State................. 1,651,000 876,000 Net operating loss carryforwards -- Federal............... 9,358,000 5,475,000 ----------- ----------- Total deferred tax assets................................... 11,211,000 6,534,000 Valuation allowance for deferred tax assets................. (9,633,000) (3,784,000) ----------- ----------- Net deferred tax assets..................................... 1,578,000 2,750,000 =========== =========== Net deferred tax assets (liabilities)....................... $ -- $ -- =========== ===========
At June 30, 1998, the Company had net operating loss carryforwards for Federal and state income tax purposes available to offset future taxable income of approximately $29,000,000 expiring from 2009 through 2013. 10. COMMITMENTS The Company leases space for its corporate and branch offices in Georgia, Ohio, North Carolina, Florida, Tennessee and Illinois. Future lease payments under all such operating lease agreements are as follows (fiscal years): 1999........................................................ $456,015 2000........................................................ 255,099 2001........................................................ 13,881 2002 and thereafter......................................... -- -------- $724,995 ========
Rental expense totaled $581,449, $516,435 and $480,779 for the years ended June 30, 1998, 1997 and 1996, respectively. 11. RELATED PARTY TRANSACTIONS As discussed in Note 8, $1,000,000 of the 10% Convertible Notes were converted into 10,000 shares of the Company's Series "C" Convertible Redeemable Preferred Stock during the current fiscal year. As discussed in Note 3, holders of these 10% Convertible Notes were also granted warrants to purchase shares of the Company's common stock. This $1,000,000 portion of the notes that converted into Series "C" Preferred Stock was held by an entity in which the Company's current Chairman of the Board of Directors is an F-19 45 CREDIT DEPOT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) executive officer. The Company's current Chairman of the Board was elected to the Company's Board of Directors and elected Chairman on December 23, 1997. As discussed in Note 8, during the current fiscal year the Company borrowed a total of $2,200,000 under a Bridge Loan. As discussed in Note 3, warrants to purchase 1,100,000 shares of the Company's common stock were granted to these lenders. Of this original $2,200,000 Bridge Loan, $1,100,000 was loaned to the Company by an entity in which the Company's current Chairman of the Board is an executive officer. As discussed in Note 8, subsequently $1,100,000 of the Bridge Loan was converted into 11,000 shares of the Company's Series "C" Convertible Redeemable Preferred Stock. This $1,100,000 of the Bridge Loan that was converted represents the portion that was originally loaned to the Company by the entity in which the Company's current Chairman of the Board of Directors is an executive officer. The Company had a management consulting agreement with an entity in which the Company's current Chairman of the Board of Directors is an executive officer. Under this agreement, the Company was charged $10,000 per month for services. This agreement became effective June 1995 and expired June 1996, but was continued on a month-to-month basis until July 1997. Under this agreement, the Company paid $120,000 in fiscal years 1996 and 1997 and $10,000 in fiscal 1998. During the year ended June 30, 1996, the Company advanced $100,000 to a stockholder and director, originally due on September 15, 1996. On August 11, 1997, the maturity date was extended to August 20, 1998. The note bears interest at 8% and is payable at maturity. The borrower was not a director of the Company as of June 30, 1997. See Note 14. During the year ended June 30, 1995, the board approved an advance in the amount of $100,000 to a director. This loan bears interest at 11% and all interest and principal was due and payable on May 20, 1996. During the year ended June 30, 1996, the maturity date was extended to May 20, 1997. The borrower was no longer a director of the Company at June 30, 1998. In October 1997, the former director entered into a two year consulting agreement with the Company. In lieu of cash compensation under the consulting agreement, the former director agreed to apply the value of any services provided to the Company toward repayment of the note. A reserve has been recorded for the advance in the full amount of the outstanding balance. 12. STOCK OPTION PLAN In October 1990, the Company adopted the 1990 Stock Option Plan (the "1990 Plan") under which 250,000 shares of the Company's common stock are reserved for issuance, pursuant to which officers, directors and key employees are eligible to receive incentive and/or nonqualified stock options. In March 1992, the Company amended the 1990 Plan and increased the number of shares reserved from 250,000 to 400,000 shares. In January 1993, subject to stockholder approval which was obtained in May 1993, the Company adopted the 1993 Stock Option Plan (the "1993 Plan") under which 250,000 shares of the Company's common stock are reserved for issuance similar to the 1990 Plan. Subsequently, the Company has amended the 1993 Plan and increased the number of shares reserved to 1,200,000 shares. The 1990 Plan and the 1993 Plan (collectively, the "Plans") are administered by a committee of the Board of Directors. The option prices underlying all such agreements are based upon the fair value of the stock on the date of grant. On October 29, 1997, the Company effected a one-for-five reverse stock split, as discussed in Note 3. The total number of shares reserved in the 1990 Plan was reduced to 80,000 shares. The total number of shares reserved in the 1993 Plan was reduced to 240,000 shares. The exercise price of all options granted at that time was increased by a factor of five, while the number of shares in each grant was reduced by a factor of five. The Company then amended the 1993 Plan, subject to stockholder approval which was obtained in December 1997, to increase the number of shares reserved to 825,000 shares. F-20 46 CREDIT DEPOT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) On November 3, 1997, each option outstanding under the Plans, including options held by directors and executive officers of the Company, was canceled and reissued with an exercise price equal to $2.00 per share, equal to the then current market price. Options to purchase 127,400 shares of common stock at exercise prices ranging from $10.00 to $20.00 per share, with a weighted average exercise price of $17.80 were repriced. All other terms and conditions of these options remained the same. In fiscal 1998, options for the purchase of 239,300 shares were granted to employees and directors of the Company at a per share price ranging from $1.00 to $2.00, with a weighted-average exercise price of $1.81. In fiscal 1997, options for the purchase of 265,500 shares were granted to employees and directors of the Company at a per share price ranging from $2.75 to $4.00, with a weighted-average exercise price of $3.10. At June 30, 1998, there were a total of 344,500 options outstanding with exercise prices ranging from $1.00 to $2.00, with a weighted-average exercise price of $1.71. These options had a weighted-average remaining contractual life of seven years. No options were exercised during 1998 or 1997; however, 181,126 options outstanding, with a weighted-average exercise price of $1.45, are vested and exercisable at June 30, 1998. Pro forma information regarding net income and earnings per share is required by FASB Statement No. 123, "Accounting for Stock-Based Compensation," and has been determined as if the Company had accounted for its stock options under the fair value method of that Statement. The fair value in these options was estimated at the date of grant using the "minimum value" method allowed by the Statement. Pro forma net loss and net loss per share were ($17,196,131) and ($3.82) and ($4,451,061) and ($6.01) for the years ended June 30, 1998 and 1997, respectively. The weighted-average fair value of options granted during the years ended June 30, 1998 and 1997 was $351,417 and $486,290, respectively. The following table reflects changes in the stock options issued under the Plans:
APPROXIMATE PRICE SHARES RANGE PER SHARE ---------- ----------------- Options outstanding at June 30, 1995...................... 1,209,500 $4-10 Granted................................................. 194,000 4-6 Exercised............................................... -- -- Canceled................................................ (88,500) 5-7 ---------- ----------------- Options outstanding at June 30, 1996...................... 1,315,000 4-8 Granted................................................. 265,500 2-4 Exercised............................................... -- -- Canceled................................................ (223,500) 2-4 ---------- ----------------- Options outstanding at June 30, 1997...................... 1,357,000 2-4 Reverse Common Stock split.............................. (1,085,600) -- Granted................................................. 239,300 1-2 Exercised............................................... -- -- Canceled................................................ (166,200) 2-4 ---------- ----------------- Options outstanding at June 30, 1998...................... 344,500 $1-2 ========== =================
13. GOING CONCERN During the fiscal year ended June 30, 1998, the Company incurred losses of $12,881,499 compared to losses of $3,362,999 for the fiscal year ended June 30, 1997. In addition, as of June 30, 1998, the Company had an accumulated deficit of $29,323,389. Although the Company had modest earnings for its 1992 fiscal year, it has incurred losses during all of its other years since 1991. In view of its geographic expansion and the increased size of its corporate infrastructure in connection therewith, the Company has been unable to generate sufficient gain on sales of its mortgage loans in either individual sales, bulk sales or through securitization to provide sufficient revenues to achieve appropriate returns. F-21 47 CREDIT DEPOT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company has experienced significant cash flow deficiencies over the past years. By its nature, the Company's business requires continual access to short-term and long-term sources of debt and equity capital. The Company's capital requirements arise principally from loan originations and loan repurchases, payments of operating and interest expenses, capital expenditures, and start-up expenses for new geographic markets. To date, in addition to the Company's capital raising efforts, the sources of liquidity have been (1) sales of the loans it originates and purchases in secondary markets, (2) borrowings under its mortgage warehouse lines-of-credit secured by its loans, in most cases until such loans are sold and the lender can be repaid, (3) finance income and fees generated by the loan servicing portfolio, and (4) the conversion of the servicing asset and interest-only strips receivable into cash over the lives of the loans sold. The Company has approximately $3,059,000 in debt that will be due within the next twelve months and does not yet have other permanent financing plans in place. The Company has received notification from NASDAQ stating that the Company has failed to maintain a $1.00 minimum bid price on its common stock and has not consistently met the $2,000,000 minimum in net tangible assets necessary for continued listing on the NASDAQ Small Cap Market. The Company's net worth as of June 30, 1998 was $2,458,379. NASDAQ has informed the Company that consistent compliance with these requirements is necessary. It not certain if the Company will be able to maintain continued listing on the NASDAQ Small Cap Market. There can be no assurance that the Company will be able to obtain necessary financing or additional capital in the future or that the Company will continue to be listed on the NASDAQ Small Cap Market. There can be no assurance that the Company will be able to obtain, on acceptable terms, additional funds under lines-of-credit, or otherwise, when needed, in which event the Company would be required to curtail its lending activities and could be unable to comply with the terms of covenants contained in the agreements relating to its outstanding indebtedness. MANAGEMENT'S PLANS Operating cash flows for the Company have shown improvement. The Company ceased selling loans for an accrued profit in November 1997, and has since sold all loans for a cash premium at time of sale. While this change in sales methods has resulted in a lower gain on sale margin, the improved cash flow has allowed the Company to operate without a cash infusion since March 1998. While no assurance can be given that the Company will be able to generate a consistent positive operational cash flow, management believes that the significant infusions of additional cash required by previous business strategy are no longer necessary for the Company to pay its operational expenses. Although a net loss of $12,881,499 was reported for the fiscal year ended June 30, 1998, several items which contributed to the loss were non-cash charges. For instance, the Company recorded debt conversion costs of $5,576,000, writeoffs of $2,233,000 of the interest-only strip receivable resulting from earlier than anticipated prepayments of the underlying loans, and $1,731,000 of financing and goodwill amortization. Management is developing a plan to address the $3,059,000 of debt due in the upcoming fiscal year. The Company is in the process of restructuring the remaining $1,100,000 of the Bridge Loan due on the extended due date of October 31, 1998. Preliminary discussions have been held with the holders of this remaining debt to consider either converting their notes to equity or accepting repayment over an extended time frame that the Company projects could be accommodated by future cash flows. An additional $1,226,000 is due in the upcoming fiscal year under an agreement whereby the Company received advances against interest-only strips receivable. Repayment of this agreement is expected to be offset against amounts owed to the Company from the interest-only strips receivable. An additional $400,000 is due in the upcoming fiscal year for the 8% Convertible Notes. Repayment of this debt is expected to come from the sale of the underlying mortgages securing this debt. An additional $250,000 is due in the upcoming fiscal year to pay the remaining balance under a placement agreement used to originate and acquire mortgage loans. The Company plans to repay this F-22 48 CREDIT DEPOT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) debt from amounts currently held in restricted cash. The remaining $83,000 of debt due in the upcoming fiscal year is expected to be paid from operating cash. While management does not believe having its common stock trade on the Over-the-Counter (OTC) market as opposed to the Nasdaq SmallCap market will have negative effect on its operations directly, management recognizes that continued listing on the NASDAQ market is important to many stockholders, and that future capital investment could be more difficult if the Company's common stock were trading on the OTC market. Therefore, management has met with NASDAQ officials to discuss the Company's continued listing on the exchange. To maintain its listing, the Company must (a) obtain stockholders' ratification of the conversion features of the Company's Series "C" Preferred Stock, (b) obtain prior approval from stockholders for any potential equity placement from the holders of the remaining Bridge Loan maturing on October 31, 1998, (c) maintain tangible net assets of at least $2,000,000, and (d) maintain a minimum bid price on the Company's common stock of $1.00 per share. The Company has called a special meeting of the shareholders for October 15, 1998 to obtain the requisite votes for (a) and (b) above, and to also seek approval for a reverse common stock split intended to address (d) above. The Company will need at least $200,000 of the $1,100,000 of Bridge Loan debt that will potentially convert to equity to comply with (c) above as of June 30, 1998, plus an additional amount at least equivalent to the expected loss for the quarter ending September 30, 1998. It is management's understanding from Nasdaq that failure to comply with any of these requirements will result in immediate delisting of the Company's common stock from the exchange. Management believes that compliance with all the requirements is possible, although no assurance can be given that the Company's common stock will not be delisted in the future. During November and December 1997, four out of seven Directors on the Company's Board were not renominated for another term, and a new President was named. The Company consolidated regional processing centers, reduced corporate and branch support staff, and increased loan originations. These actions are expected to have a positive impact on operating results ofthe Company. In addition, management continues to analyze cost structures, delivery channels, and loan origination volume. 14. SUBSEQUENT EVENTS As discussed in Note 8, the Company's Series "B" Convertible Redeemable Preferred Stock contains a provision wherein if the Company pays the July 1, 1998 (accrued for fiscal fourth quarter for the fiscal year ended June 30, 1998) dividends in kind, then the holders of the Series "B" Preferred Stock will acquire rights to vote on any issues presented to the Company's common shareholders. On July 1, 1998, the Company paid accrued dividends of $46,035 to the holders of the Company's Series "B" Preferred Stock by issuing 399 shares of Series "B" Preferred Stock (paid in kind). These 399 shares are convertible into 39,940 shares of the Company's common stock. The Series "B" shareholders as a group have the equivalent of 931,537 shares of common stock for voting purposes. As discussed in Note 8, the Company's Series "C" Convertible Redeemable Preferred Stock contains a conversion price adjustment (for the right to convert into shares of the Company's common stock) if the market price of the Company's common stock closes at or below $.75 for twenty consecutive trading days on the NASDAQ exchange. In August 1998, the Company's common stock traded below $.75 for twenty consecutive trading days on the NASDAQ exchange, and the conversion price related to the conversion rights was adjusted from $.75 to $.50. As a result, the shares of Series "C" Preferred Stock are now convertible into 4,200,000 shares of the Company's common stock at $.50 per share. As discussed in Note 11, the Company has a $100,000 note receivable due from a former member of the Company's Board of Directors. The note matured on August 20, 1998 (extended due date) and was not paid F-23 49 CREDIT DEPOT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) or extended. The Company's efforts to collect this receivable have not been successful. The Company continues to carry a reserve for the full outstanding amount of this note receivable. On August 28, 1998, the Company's Board of Directors approved, subject to subsequent stockholder approval, a proposal to amend the Company's Certificate of Incorporation to effect a reverse common stock split. The Company's Board of Directors has stated that it may abandon this proposed reverse stock split at any time before stockholder approval. In addition, depending on prevailing market conditions, the Company's Board of Directors has stated that it may deem it advisable to implement the reverse common stock split and concurrently declare a stock-for-stock dividend in a ratio to be determined by the Company's Board of Directors. F-24 EX-4.15 2 FORM OF WARRANT/CERTAIN BOARD OF DIRECTORS 1 EXHIBIT 4.15 THIS WARRANT AND THE COMMON STOCK ISSUABLE ON EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OF THE UNITED STATES OF AMERICA (THE "ACT"), AND MAY NOT BE OFFERED OR SOLD UNLESS THE SECURITIES ARE REGISTERED UNDER THE ACT OR AN EXEMPTION FROM REGISTRATION UNDER THE ACT IS AVAILABLE. Void after 5:00 p.m. Atlanta time, on December 31, 2000. Warrant to Purchase ______ Shares of Common Stock. REDEEMABLE WARRANT TO PURCHASE COMMON STOCK OF CREDIT DEPOT CORPORATION This is to Certify That, FOR VALUE RECEIVED, ___________________ ("Holder"), is entitled to purchase, subject to the provisions of this Warrant, from Credit Depot Corporation, a Delaware corporation (the "Company"), ___________ (x,xxx) fully paid, validly issued, nonassessable shares of Common Stock, par value $ .001 per share, of the Company ("Common Stock") at a price of $2.50 per share at any time or from time to time during the period from January 1, 1998, until 5:00 p.m., Atlanta time on December 31, 2000. SECTION 1. EXERCISE OF WARRANT. (a) This Warrant may be exercised in whole or in part at any time or from time to time on or after January 1, 1998 and until December 31, 2000, (the "Exercise Period") provided, however, that if either such day is a day on which banking institutions in the State of Georgia are authorized by law to close, then on the next succeeding day which shall not be such a day. This Warrant may be exercised by presentation and surrender hereof to the Company at its principal office, or at the office of its stock transfer agent, if any, with the Purchase Form annexed hereto duly executed and accompanied by payment of the Exercise Price for the number of Warrant Shares specified in such form. As soon as practicable after each such exercise of the warrants, but not later than seven (7) days from the date of such exercise, the Company shall issue and deliver to the Holder a certificate or certificate for the Warrant Shares issuable upon such exercise, registered in the name of the Holder or its designee. If this Warrant should be exercised in part only, the Company shall, upon 2 surrender of this Warrant for cancellation, execute and deliver a new Warrant evidencing the rights of the Holder thereof to purchase the balance of the Warrant Shares purchasable thereunder. Upon receipt by the Company of this Warrant at its office, or by the stock transfer agent of the Company at its office, in proper form for exercise, the Holder shall be deemed to be the holder of record of the shares of Common Stock issuable upon such exercise, notwithstanding that the stock transfer books of the Company shall then be closed or that certificates representing such shares of Common Stock shall not then be physically delivered to the Holder. (b) At any time during the exercise period, the Holder may, at its option, exchange this Warrant, in whole or in part (a "Warrant Exchange"), into the number of Warrant Shares determined in accordance with this Section 1(a), by surrendering this warrant at the principal office of the Company, accompanied by a notice stating such Holder's intent to effect such exchange, the number of Warrant Shares to be exchanged and the date on which the Holder requests that such Warrant Exchange occur (the "Notice of Exchange") The Warrant Exchange shall take place on the date specified in the Notice of Exchange or, if later, the date the Notice of Exchange is received by the Company (the "Exchange Date"). Certificates for the shares issuable upon such Warrant Exchange and, if applicable, a new warrant of like tenor evidencing the balance of the shares remaining subject to this Warrant, shall be issued as of the Exchange Date and delivered to the Holder within ten (10) business days following the Exchange Date. In connection with any Warrant Exchange, this Warrant shall represent the right to subscribe for and acquire the Number of Warrant Shares (rounded to the next highest integer) equal to (i) the number of Warrant Shares specified by the Holder in its notice of Exchange (the "Total Number") less (ii) the number of Warrant Shares equal to the quotient obtained by dividing (A) the product of the Total Number and the existing Exercise Price by (B) the current market value of a share of Common Stock. Current market value shall have the meaning set forth in Section 3 below, except that for the purposes hereof, the date of exercise, as used in such Section 3, shall mean the Exchange Date. SECTION 2. RESERVATION OF SHARES. The Company shall at all times reserve for issuance and/or delivery upon exercise of this Warrant such number of shares of its Common Stock as shall be required for issuance and delivery upon exercise of the Warrants. SECTION 3. FRACTIONAL SHARES. (a) No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant. With respect to any fraction of a share called for upon any exercise hereof, the Company shall pay to the Holder an amount in cash equal to such fraction multiplied by the current market value of a share, determined as follows: (b) If the Common Stock is listed on a national securities exchange or admitted to unlisted trading privileges on such exchange or listed for trading on the Nasdaq Stock Market system, the current market value shall be the last reported sale price of the Common Stock on such 2 3 exchange or system on the last business day prior to the date of exercise of this Warrant or if no such sale is made on such day, the average closing bid and asked prices for such day on such exchange or system; or (c) If the Common Stock is not so listed or admitted to unlisted trading privileges, but is traded on the Nasdaq SmallCap Market, the Current Market Value shall be the average of the closing bid and asked prices for such day on such market and, if the Common Stock is not so traded, then the Current Market Value shall be the mean of the last reported bid and asked prices reported by the National Quotation Bureau, Inc. on the last business day prior to the date of the exercise of this Warrant; or (d) If the Common Stock is not so listed or admitted to unlisted trading privileges and bid and asked prices are not so reported, the current market value shall be an amount, not less than book value thereof as at the end of the most recent fiscal year of the Company ending prior to the date of the exercise of the Warrant, determined in such reasonable manner as may be prescribed by the Board of Directors of the Company. SECTION 4. EXCHANGE, TRANSFER, ASSIGNMENT OR LOSS OF WARRANT. This Warrant is exchangeable, without expense, at the option of the Holder, upon presentation and surrender hereof to the Company or at the office of its stock transfer agent, if any, for other warrants of different denominations entitling the holder thereof to purchase in the aggregate the same number of shares of Common Stock purchasable hereunder. Upon surrender of this Warrant to the Company at its principal office with the Assignment Form annexed hereto duly executed and funds sufficient to pay any transfer tax, the Company shall, without charge, execute and deliver a new Warrant in the name of the assignee named in such instrument of assignment and this Warrant shall promptly be canceled. The term "Warrant" as used herein includes any Warrants into which this Warrant may be divided or exchanged. Upon receipt by the Company of evidence satisfactory to it of the loss, theft, destruction or mutilation of this Warrant, and (in the case of loss, theft or destruction) of reasonably satisfactory indemnification, and upon surrender and cancellation of this Warrant, if mutilated, the Company will execute and deliver a new Warrant of like tenor and date. Any such new Warrant executed and delivered shall constitute an additional contractual obligation on the part of the Company, whether or not this Warrant so lost, stolen, destroyed, or mutilated shall be at any time enforceable by anyone. 3 4 SECTION 5. RIGHTS AND LIABILITIES OF THE HOLDER. The Holder shall not, by virtue hereof, be entitled to any rights of a shareholder in the Company, either at law or equity, and the rights of the Holder are limited to those expressed in the Warrant and are not enforceable against the Company except to the extent set forth herein. No provision of this Warrant, in the absence of affirmative action by the Holder to purchase the Warrant Shares, and no mere enumeration herein of the rights or privileges of the Holder, shall give rise to any liability of the Holder for the Exercise Price or as a shareholder of the Company, whether such liability is asserted by the Company or by creditors of the Company. SECTION 6. REGISTRATION RIGHTS. The Holder shall have the right to have the Warrant Shares registered under the Act, subject to customary terms and conditions. The Company agrees to use its best efforts to include the Warrant Shares in the first registration statement filed by the Company after January 1, 1998. SECTION 7. GOVERNING LAW. This Warrant shall be governed by and construed and enforced in accordance with the laws of the State of Georgia. CREDIT DEPOT CORPORATION By: ----------------------------- Ralph J DeBee, Jr., President [SEAL] Dated: As of December 31, 1997 Attest: - -------------------- Secretary 4 EX-4.16 3 WARRANT ISSUED TO HEIKO THIEME 1 EXHIBIT 4.16 THIS WARRANT AND THE COMMON STOCK ISSUABLE ON EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OF THE UNITED STATES OF AMERICA (THE "ACT"), AND MAY NOT BE OFFERED OR SOLD UNLESS THE SECURITIES ARE REGISTERED UNDER THE ACT OR AN EXEMPTION FROM REGISTRATION UNDER THE ACT IS AVAILABLE. Void after 5:00 p.m. Atlanta time, on January 31, 2008. Warrant to Purchase 333,334 Shares of Common Stock. REDEEMABLE WARRANT TO PURCHASE COMMON STOCK OF CREDIT DEPOT CORPORATION This is to Certify That, FOR VALUE RECEIVED, Heiko H. Thieme ("Holder"), is entitled to purchase, subject to the provisions of this Warrant, from Credit Depot Corporation, a Delaware corporation (the "Company"), THREE HUNDRED THIRTY-THREE THOUSAND THREE HUNDRED THIRTY-FOUR (333,334) fully paid, validly issued, nonassessable shares of Common Stock, par value $ .001 per share, of the Company ("Common Stock") at a price of $1.24 per share at any time or from time to time during the period from February 1, 1998, until 5:00 p.m., Atlanta time on Jnaury 31, 2008. SECTION 1. EXERCISE OF WARRANT. (a) This Warrant may be exercised in whole or in part at any time or from time to time on or after February 1, 1998 and until January 31, 2008, (the "Exercise Period") provided, however, that if either such day is a day on which banking institutions in the State of Georgia are authorized by law to close, then on the next succeeding day which shall not be such a day. This Warrant may be exercised by presentation and surrender hereof to the Company at its principal office, or at the office of its stock transfer agent, if any, with the Purchase Form annexed hereto duly executed and accompanied by payment of the Exercise Price for the number of Warrant Shares specified in such form. As soon as practicable after each such exercise of the warrants, but not later than seven (7) days from the date of such exercise, the Company shall issue and deliver to the Holder a certificate or certificate for the Warrant Shares issuable upon such exercise, registered in the name of the 2 Holder or its designee. If this Warrant should be exercised in part only, the Company shall, upon surrender of this Warrant for cancellation, execute and deliver a new Warrant evidencing the rights of the Holder thereof to purchase the balance of the Warrant Shares purchasable thereunder. Upon receipt by the Company of this Warrant at its office, or by the stock transfer agent of the Company at its office, in proper form for exercise, the Holder shall be deemed to be the holder of record of the shares of Common Stock issuable upon such exercise, notwithstanding that the stock transfer books of the Company shall then be closed or that certificates representing such shares of Common Stock shall not then be physically delivered to the Holder. (b) At any time during the exercise period, the Holder may, at its option, exchange this Warrant, in whole or in part (a "Warrant Exchange"), into the number of Warrant Shares determined in accordance with this Section 1(a), by surrendering this warrant at the principal office of the Company, accompanied by a notice stating such Holder's intent to effect such exchange, the number of Warrant Shares to be exchanged and the date on which the Holder requests that such Warrant Exchange occur (the "Notice of Exchange") The Warrant Exchange shall take place on the date specified in the Notice of Exchange or, if later, the date the Notice of Exchange is received by the Company (the "Exchange Date"). Certificates for the shares issuable upon such Warrant Exchange and, if applicable, a new warrant of like tenor evidencing the balance of the shares remaining subject to this Warrant, shall be issued as of the Exchange Date and delivered to the Holder within ten (10) business days following the Exchange Date. In connection with any Warrant Exchange, this Warrant shall represent the right to subscribe for and acquire the Number of Warrant Shares (rounded to the next highest integer) equal to (i) the number of Warrant Shares specified by the Holder in its notice of Exchange (the "Total Number") less (ii) the number of Warrant Shares equal to the quotient obtained by dividing (A) the product of the Total Number and the existing Exercise Price by (B) the current market value of a share of Common Stock. Current market value shall have the meaning set forth in Section 3 below, except that for the purposes hereof, the date of exercise, as used in such Section 3, shall mean the Exchange Date. SECTION 2. RESERVATION OF SHARES. The Company shall at all times reserve for issuance and/or delivery upon exercise of this Warrant such number of shares of its Common Stock as shall be required for issuance and delivery upon exercise of the Warrants. SECTION 3. FRACTIONAL SHARES. (a) No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant. With respect to any fraction of a share called for upon any exercise hereof, the Company shall pay to the Holder an amount in cash equal to such fraction multiplied by the current market value of a share, determined as follows: (b) If the Common Stock is listed on a national securities exchange or admitted to unlisted trading privileges on such exchange or listed for trading on the Nasdaq Stock Market 2 3 system, the current market value shall be the last reported sale price of the Common Stock on such exchange or system on the last business day prior to the date of exercise of this Warrant or if no such sale is made on such day, the average closing bid and asked prices for such day on such exchange or system; or (c) If the Common Stock is not so listed or admitted to unlisted trading privileges, but is traded on the Nasdaq SmallCap Market, the Current Market Value shall be the average of the closing bid and asked prices for such day on such market and, if the Common Stock is not so traded, then the Current Market Value shall be the mean of the last reported bid and asked prices reported by the National Quotation Bureau, Inc. on the last business day prior to the date of the exercise of this Warrant; or (d) If the Common Stock is not so listed or admitted to unlisted trading privileges and bid and asked prices are not so reported, the current market value shall be an amount, not less than book value thereof as at the end of the most recent fiscal year of the Company ending prior to the date of the exercise of the Warrant, determined in such reasonable manner as may be prescribed by the Board of Directors of the Company. SECTION 4. EXCHANGE, TRANSFER, ASSIGNMENT OR LOSS OF WARRANT. This Warrant is exchangeable, without expense, at the option of the Holder, upon presentation and surrender hereof to the Company or at the office of its stock transfer agent, if any, for other warrants of different denominations entitling the holder thereof to purchase in the aggregate the same number of shares of Common Stock purchasable hereunder. Upon surrender of this Warrant to the Company at its principal office with the Assignment Form annexed hereto duly executed and funds sufficient to pay any transfer tax, the Company shall, without charge, execute and deliver a new Warrant in the name of the assignee named in such instrument of assignment and this Warrant shall promptly be canceled. The term "Warrant" as used herein includes any Warrants into which this Warrant may be divided or exchanged. Upon receipt by the Company of evidence satisfactory to it of the loss, theft, destruction or mutilation of this Warrant, and (in the case of loss, theft or destruction) of reasonably satisfactory indemnification, and upon surrender and cancellation of this Warrant, if mutilated, the Company will execute and deliver a new Warrant of like tenor and date. Any such new Warrant executed and delivered shall constitute an additional contractual obligation on the part of the Company, whether or not this Warrant so lost, stolen, destroyed, or mutilated shall be at any time enforceable by anyone. 3 4 SECTION 5. RIGHTS AND LIABILITIES OF THE HOLDER. The Holder shall not, by virtue hereof, be entitled to any rights of a shareholder in the Company, either at law or equity, and the rights of the Holder are limited to those expressed in the Warrant and are not enforceable against the Company except to the extent set forth herein. No provision of this Warrant, in the absence of affirmative action by the Holder to purchase the Warrant Shares, and no mere enumeration herein of the rights or privileges of the Holder, shall give rise to any liability of the Holder for the Exercise Price or as a shareholder of the Company, whether such liability is asserted by the Company or by creditors of the Company. SECTION 6. REGISTRATION RIGHTS. The Holder shall have the right to have the Warrant Shares registered under the Act, subject to customary terms and conditions. The Company agrees to use its best efforts to include the Warrant Shares in the first registration statement filed by the Company after January 1, 1998. SECTION 7. GOVERNING LAW. This Warrant shall be governed by and construed and enforced in accordance with the laws of the State of Georgia. CREDIT DEPOT CORPORATION By: /s/ Ralph J. DeBee ----------------------- Ralph J DeBee, President [SEAL] Dated: As of January 31, 1998 Attest: - -------------------- Secretary 4 EX-4.17 4 WARRANT ISSUED TO THE GLOBAL OPPORTUNITY FUND 1 EXHIBIT 4.17 THIS WARRANT AS WELL AS THE COMMON STOCK ISSUABLE UPON THE EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED(THE "ACT"), AND MAY NOT BE OFFERED OR SOLD UNLESS REGISTERED UNDER THE ACT OR AN EXEMPTION FROM REGISTRATION UNDER THE ACT IS AVAILABLE. Void after 5:00 P.M., New York City Time, on June 12, 2003 (the "Termination Date") WARRANT TO PURCHASE 2,800,000 SHARES OF THE COMMON STOCK OF CREDIT DEPOT CORPORATION This is to Certify That, FOR VALUE RECEIVED, The Global Opportunity Fund Limited (the "Holder"), is entitled to purchase, subject to the provisions of this Warrant, from Credit Depot Corporation, a Delaware corporation (the "Company"), 2,800,000 shares of the Common Stock of the Company, $.001 par value (the "Common Stock"), at a price of $1.25 per share at any time or from time to time until 5:00 P.M., New York City Time on the Termination Date. The number of shares to be received upon the exercise of this Warrant and the price to be paid for each such share may be adjusted from time to time as hereinafter set forth. The shares deliverable upon such exercise, and as adjusted from time to time, are hereinafter sometimes referred to as "Warrant Shares" and the exercise price of this Warrant as in effect at any time as adjusted from time to time is hereinafter sometimes referred to as the "Exercise Price." SECTION 1. EXERCISE OF WARRANT. (a) This Warrant may be exercised in whole or in part at any time or from time to time until 5:00 P.M., New York City Time, on the Termination Date (the "Exercise Period") provided, however, that if such day is a day on which banking institutions in the State of New York are authorized by law to close, then on the next succeeding day which shall not be such a day. (b) In the event of any merger, consolidation or sale of substantially all the assets of the Company as an entirety resulting in any distribution to the Company's stockholders, on or before the Termination Date, the Holder shall have the right to exercise this Warrant commencing at such time through the Termination Date which shall entitle the Holder to receive, in lieu of Warrant Shares, the kind and amount of securities and property (including cash) receivable by a holder of the number of shares of Warrant Shares into which this Warrant might have been exercisable immediately prior thereto. For purposes of this Warrant, the term "Warrant Shares" shall include such securities and property. This Warrant may be exercised by presentation and surrender hereof to the Company at 2 its principal office, or at the office of its stock transfer agent, if any, with the Purchase Form annexed hereto duly executed and accompanied by payment of the Exercise Price for the number of Warrant Shares specified in such form. Such payment may be made, at the option of the Holder, by check or wire transfer As soon as practicable after each such exercise of the Warrant, but not later than two business days from the date of such exercise, the Company shall issue and deliver to the Holder a certificate or certificates representing the Warrant Shares issuable upon such exercise, registered in the name of the Holder or the Holder's designee. If this Warrant should be exercised in part only, the Company shall, upon surrender of this Warrant for cancellation, execute and deliver a new Warrant evidencing the rights of the Holder thereof to purchase the balance of the Warrant Shares purchasable thereunder. Upon receipt by the Company of this Warrant at its office, or by the stock transfer agent of the Company at its office, in proper form for exercise, the Holder shall be deemed to be the holder of record of the Warrant Shares issuable upon such exercise, notwithstanding that the stock transfer books of the Company shall then be closed or that certificates representing such shares shall not then be physically delivered to the Holder. SECTION 2. RESERVATION OF SHARES. The Company shall at all times reserve for issuance and/or delivery upon exercise of this Warrant such number of Warrant Shares as shall be required for issuance and delivery upon exercise of this Warrant. SECTION 3. FRACTIONAL SHARES. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant. With respect to any fraction of a share called for upon any exercise hereof, the Company shall pay to the Holder an amount in cash equal to such fraction multiplied by the current market value of a share, determined as follows: (a) If the Common Stock is listed on a national securities exchange or admitted to unlisted trading privileges on such exchange or listed for trading on NASDAQ, the current market value shall be the last reported sale price of the Common Stock on such exchange or system on the last business day prior to the date of exercise of this Warrant or if no such sale is made on such day, the average of the closing high bid and low asked prices for such day on such exchange or system; or (b) If the Common Stock is not so listed or admitted to unlisted trading privileges but bid and asked prices are reported by the National Quotation Bureau, Inc., the current market value shall be the average of last reported high bid and low asked prices reported by the National Quotation Bureau, Inc. on the last business day prior to the date of the exercise of this Warrant; or (c) If the Common Stock is not so listed or admitted to unlisted trading privileges and bid and asked prices are not so reported, the current market value shall be an amount, the book value -2- 3 of a share thereof as at the end of the fiscal quarter of the Company ending immediately prior to the date of the exercise of the Warrant. SECTION 4. EXCHANGE, TRANSFER, ASSIGNMENT OR LOSS OF WARRANT. This Warrant is exchangeable, without expense, at the option of the Holder, upon presentation and surrender hereof to the Company or at the office of its stock transfer agent, if any, for other warrants of different denominations entitling the holder thereof to purchase in the aggregate the same number of shares of Common Stock purchasable hereunder. The term "Warrant" as used herein includes any Warrants into which this Warrant may be divided or exchanged. Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant, and (in the case of loss, theft or destruction) of reasonably satisfactory indemnification, and upon surrender and cancellation of this Warrant, if mutilated, the Company will execute and deliver a new Warrant of like tenor and date. Any such new Warrant executed and delivered shall constitute an additional contractual obligation on the part of the Company, whether or not this Warrant so lost, stolen, destroyed, or mutilated shall be at any time enforceable by anyone. SECTION 5. RIGHTS AND LIABILITIES OF THE HOLDER. The Holder shall not, by virtue hereof, be entitled to any rights of a shareholder in the Company, either at law or equity, and the rights of the Holder are limited to those expressed in the Warrant and are not enforceable against the Company except to the extent set forth herein. No provision of this Warrant, in the absence of affirmative action by the Holder to purchase the Warrant Shares, and no mere enumeration herein of the rights or privileges of the Holder, shall give rise to any liability of the Holder for the Exercise Price or as a shareholder of the Company, whether such liability is asserted by the Company or by creditors of the Company. SECTION 6. ADJUSTMENTS, NOTICE PROVISIONS AND RESTRICTIONS ON ISSUANCE OF ADDITIONAL SECURITIES. SECTION 6.1 Adjustment of Exercise Price. The Exercise Price in effect from time to time shall be subject to adjustment, as follows: (a) In case the Company shall (i) declare a dividend or make a distribution on the outstanding shares of its capital stock that is payable in shares of its Common Stock, (ii) subdivide, split or reclassify the outstanding shares of its Common Stock into a greater number of shares, or (iii) combine or reclassify the outstanding shares of its Common Stock into a smaller number of shares, the Exercise Price in effect immediately after the record date for such dividend or distribution or the effective date of such subdivision, combination or reclassification shall be adjusted so that it shall equal the price determined by multiplying the Exercise Price in effect immediately prior thereto -3- 4 by a fraction, of which the numerator shall be the number of shares of Common Stock outstanding immediately before such dividend, distribution, split, subdivision, combination or reclassification, and of which the denominator shall be the number of shares of Common Stock outstanding immediately after such dividend, distribution, split, subdivision, combination or reclassification. Any shares of Common Stock issuable in payment of a dividend shall be deemed to have been issued immediately prior to the record date for such dividend for purposes of calculating the number of outstanding shares of Common Stock of the Company under this Section 6. Such adjustment shall be made successively upon the occurrence of each event specified above. (b) In case the Company fixes a record date for the issuance to holders of its Common Stock of rights, options, warrants or convertible or exchangeable securities generally entitling such holders to subscribe for or purchase shares of Common Stock at a price per share less than the Current Market Price (as such term is defined in Subsection 6.1(d) hereof) per share of Common Stock on such record date, the Exercise Price shall be adjusted immediately thereafter so that it shall equal the price determined by multiplying the Exercise Price in effect immediately prior thereto by a fraction, of which the numerator shall be the number of shares of Common Stock outstanding on such record date plus the number of shares of Common Stock which the aggregate offering price of the total number of shares of Common Stock so offered would purchase at the Current Market Price per share, and of which the denominator shall be the number of shares of Common Stock outstanding on such Record Date plus the number of additional shares of Common Stock offered for subscription or purchase. Such adjustment shall be made successively on each date whenever a record date is fixed. (c) In case the Company fixes a record date for the making of a distribution to all holders of shares of its Common Stock (i) of shares of any class of capital stock other than its Common Stock or (ii) of evidences of its indebtedness or (iii) of assets (other than dividends or distributions referred to in Subsection 6.1(a) hereof) or (iv) of rights, options, warrant or convertible or exchangeable securities (excluding those rights, options, warrants or convertible or exchangeable securities referred to in Subsection 6.1(b) hereof), then in each such case the Exercise Price in effect immediately thereafter shall be determined by multiplying the Exercise Price in effect immediately prior thereto by a fraction, of which the numerator shall be the total number of shares of Common Stock outstanding on such record date multiplied by the Current Market Price (as such term is defined in Subsection 6.1(d) hereof) per share on such record date, less the aggregate fair value as determined in good faith by the Board of Directors of the Company of said shares or evidences of indebtedness or assets or rights, options, warrants or convertible or exchangeable securities so distributed, and of which the denominator shall be the total number of shares of Common Stock outstanding on such record date multiplied by such Current market Price per share. Such adjustment shall be made successively each time such a record date is fixed. In the event that such distribution is not so made, the Exercise Price then in effect shall be readjusted to the Exercise Price which would then be in effect if such record date had not been fixed. (d) For the purpose of any computation under Subsection 6.1(a), 6.1(b) or 6.1(c) hereof, the "Current Market Price" per share at any date (the "Computation Date") shall be deemed to be the -4- 5 average of the daily current market value of the Common Stock as determined in accordance with the provisions of Section 3 hereof over twenty consecutive trading days ending the trading day before such date; provided, however, upon the occurrence, prior to the Computation Date, of any event described in Subsections 6.1(a), 6.1(b) or 6.1(c) which shall have become effective with respect to market transactions at any time (the "Market-Effect Date") on or after the beginning of such 20-day period, the current market value, as determined in accordance with the provisions of Section 3 hereof for each trading day preceding the Market-Effect Date shall be adjusted, for purposes of calculating such average, by multiplying such Closing Price by a fraction the numerator of which is the Exercise Price as in effect immediately after the Market-Effect Date and the denominator of which is the Exercise Price immediately prior to the Market-Effect Date, it being understood that the purpose of this proviso is to ensure that the effect of such event on the market price of the Common Stock shall, as nearly as possible, be eliminated in order that the distortion in the calculation of the Current Market Price may be minimized. (f) All calculations under this Section 6.1 shall be made to the nearest cent. SECTION 6.2 Adjustment of Number of Shares. Upon each adjustment of the Exercise Price pursuant to Subsection 6.1 hereof, this Warrant shall thereupon evidence the right to purchase, in addition to any other securities to which the Holder is entitled to purchase, that number of Warrant Shares (calculated to the nearest one-hundred thousandth of a share) obtained by multiplying the number of shares of Common Stock purchasable upon exercise of the Warrant immediately prior to such adjustment by the Exercise Price in effect immediately prior to such adjustment and dividing the product so obtained by the Exercise Price in effect immediately after such adjustment. SECTION 6.3 Verification of Computations. The Company shall select a firm of independent public accountants, which may be the Company's independent auditors, and which selection may be changed from time to time, to verify the computations made in accordance with this Section 6. The certificate, report of other written statement of any such firm shall be conclusive evidence of the correctness of any computation made under this Section 6. Promptly upon its receipt of such certificate, report or statement from such firm of independent public accountants, the Company shall deliver a copy thereof to the Holder. SECTION 6.4 Warrant Certificate Amendments. Irrespective of any adjustments pursuant to this Section 6, Warrant Certificates theretofore or thereafter issued need not be amended or replaced, but Warrant Certificates thereafter issued shall bear an appropriate legend or other notice of any adjustments and which legend and/or notice has been provided by the Company to the Holder, provided the Company may, at its option, issue new Warrant Certificates evidencing Warrants in the form attached hereto to reflect any adjustment in the Exercise Price and the number of Warrant Shares evidenced by such Warrant Certificates and deliver the same to the Holder in substitution for existing Warrant Certificates. -5- 6 SECTION 7. OFFICER'S CERTIFICATE. Whenever the Exercise Price, the number of Warrant Shares underlying this Warrant or either of them shall be adjusted as required by the provisions of the foregoing Section, the Company shall forthwith file in the custody of its Secretary or an Assistant Secretary at its principal office and with its stock transfer agent, if any, an officer's certificate showing the adjusted Exercise Price and number of Warrant shares determined as herein provided, setting forth in reasonable detail the facts requiring such adjustment, including a statement of the number of additional shares of Common Stock, if any, and such other facts as shall be necessary to show the reason for and the manner of computing such adjustment. Each such officer's certificate shall be made available at all reasonable times for inspection by the Holder or any holder of a Warrant executed and delivered pursuant to Section 1 hereof and the Company shall, forthwith after each such adjustment, mail a copy by certified mail of such certificate to the Holder or any such holder. SECTION 8. NOTICES TO WARRANT HOLDERS. So long as this Warrant shall be outstanding, (i) if the Company shall pay any dividend or make any distribution upon the Common Stock, (ii) if the Company shall offer to the holders of its Common Stock rights to subscribe for, purchase, or exchange property for any shares of any class of stock, or any other rights or options or (iii) if any capital reorganization of the Company, reclassification of the capital stock of the Company, consolidation or merger of the Company with or into another corporation, sale, lease or transfer of all or substantially all of the property and assets of the Company to another corporation, or voluntary or involuntary dissolution, liquidation or winding up of the Company shall be effected, then in any such case, the Company shall cause to be sent by overnight mail or courier service to the Holder, at least fifteen days prior to the date specified in (x) or (y) below, as the case may be, a notice containing a brief description of the proposed action and stating the date on which (x) a record is to be taken for the purpose of such dividend, distribution or subscription rights, or (y) such reclassification, reorganization, consolidation, merger, conveyance, lease, dissolution, liquidation or winding up is to take place and the date, if any is to be fixed, as of which the holders of Common Stock or other securities shall receive cash or other property deliverable upon such reclassification, reorganization, consolidation, merger, conveyance, dissolution, liquidation or winding up. SECTION 9. RECLASSIFICATION, REORGANIZATION OR MERGER. In case of any reclassification, capital reorganization or other change of outstanding shares of Common Stock of the Company, or in case of any consolidation or merger of the Company with or into another corporation (other than a merger with a subsidiary in which merger the Company is the continuing corporation and which does not result in any reclassification, capital reorganization or other change of outstanding shares of Common Stock of the class issuable upon exercise of this Warrant) or in case of any sale, lease or conveyance to another corporation of the property of the -6- 7 Company as an entirety (collectively such actions being hereinafter referred to as "Reorganizations"), the Company shall, as a condition precedent to such Reorganization transaction, cause effective provisions to be made so that the Holder shall have the right thereafter by exercising this Warrant at any time prior to the expiration of the Warrant, to receive in lieu of the amount of securities otherwise deliverable, the kind and amount of shares of stock and other securities and property receivable upon such Reorganization by a holder of the number of shares of Common Stock which might have been purchased upon exercise of this Warrant and the warrants included in the Shares immediately prior to such Reorganization. Any such provision shall include provision for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Warrant. The foregoing provisions of this Section 9 shall similarly apply to successive Reorganizations. SECTION 10. ISSUE TAX. The issuance of certificates representing the Warrant Shares upon the exercise of this Warrant as well as securities underlying the Share Warrants shall be made without charge to the Holder for any issuance tax in respect thereof. SECTION 11. EXCHANGE PROVISIONS At any time during which this Warrant is exercisable in accordance with its terms, the Holder may, at its option, exchange this Warrant, in whole or in part (a "Warrant Exchange"), into the number of Warrant Shares determined in accordance with this Section 11, by surrendering this Warrant at the principal office of the Company or at the office of its stock transfer agent, accompanied by a notice stating such Holder's intent to effect such exchange, the number of Warrant Shares to be exchanged and the date on which the Holder requests that such Warrant Exchange occur (the "Notice of Exchange"). The Warrant Exchange shall take place on the date specified in the Notice of Exchange or, if later, the date the Notice of Exchange is received by the Company (the "Exchange Date"). Certificates for the shares issuable upon such Warrant Exchange and, if applicable, a new warrant of like tenor evidencing the balance of the shares remaining subject to this Warrant, shall be issued as of the Exchange Date and delivered to the Holder within seven (7) days following the Exchange Date. In connection with any Warrant Exchange, this Warrant shall represent the right to subscribe for and acquire the number of Warrant Shares (rounded to the next highest integer) equal to (i) the number of Warrant Shares specified by the Holder in its Notice of Exchange (the "Total Number") less (ii) the number of Warrant Shares equal to the quotient obtained by dividing (A) the product of the Total Number and the existing Exercise Price by (B) the Fair Market Value. "Fair Market Value" "Fair Market Value" shall mean: (1) if the Common Stock is listed on a National Securities Exchange or admitted to unlisted trading privileges on such exchange or listed for trading on the NASDAQ system, Fair Market Value shall be the average of the last reported sale prices of the Common Stock on such exchange or system for the twenty (20) business days ending on the last business day prior to the date for which the determination is being made; or -7- 8 (2) if the Common Stock is not so listed or admitted to unlisted trading privileges, Fair Market Value shall be the average of the means of the last reported bid and asked prices reported by the National Quotation Bureau, Inc. for the twenty (20) business days ending on the last business day prior to the date for which the determination is being made; or (3) if the Common Stock is not so listed or admitted to unlisted trading privileges and bid and asked prices are not so reported, the Fair Market Value shall be the book value thereof as at the end of the most recent fiscal year of the Company ending prior to the Exchange Date, determined in accordance with generally accepted accounting principles. SECTION 12 REDEMPTION (a) The Company may, at the option of the Board of Directors, at any time or from time to time, redeem the whole or any part of the this Warrant upon not less than thirty (30) and not more than forty-five (45) days prior written notice (the "Redemption Notice"), at a redemption price of $.01 per Warrant Share then purchasable hereunder, payable in cash, subject to appropriate adjustment in the event of a stock split or subdivision or a stock combination of the Common Stock (collectively, the "Redemption Price"), except to the extent restricted by applicable law, provided that (i) the Warrant Shares shall have been registered under the Securities Act of 1933, and such registration shall then be current and effective, and (ii) the average of the closing sales price of the Company's Common Stock as reported by Nasdaq shall, for twenty (20) consecutive trading days ending within ten (10) days of the date of the Redemption Notice, equals or exceeds 200% of the then current Exercise Price. (b) The Redemption Notice shall be mailed by overnight courier to the Holder (at the close of business on the business day next preceding the day on which notice is given) at the address for such holder shown on the Company's records, at least 30 days but not more than 45 days prior to the date fixed for redemption (the "Redemption Date"). The Redemption Notice shall notify the Holder of the redemption to be effected, specifying the Redemption Date, the amount which is to be redeemed, the Redemption Price, the place at which payment may be obtained and the date on which such holder's Conversion Rights (as described below) as to such shares terminate and calling upon such holder to surrender to the Company, in the manner and at the place designated, such holder's certificate or certificates so redeemed. Upon sending the Redemption Notice, the Company shall become obligated to redeem at the time of redemption specified therein all or parts of this Warrant as specified therein. In case less than all of this Warrant is to be redeemed pursuant to this Section 12, a new certificate shall be issued representing the unredeemed portion of this Warrant shall be issued by the Company without cost to the Holder. (c) From and after the close of business on the Redemption Date, the all or a portion of this Warrant, as the case may be, shall no longer be considered to be outstanding, the right to exercise this Warrant or portion thereof, as the case may be, shall cease and all rights of Holder s with respect all or the portion of this warrant redeemed shall forthwith, after such Redemption Date, cease and terminate, excepting only the right of the Holders to receive the Redemption Price therefor, without interest. Not less than three days prior to any Redemption Date, the Company shall -8- 9 deposit the Redemption Price of all or a portion of the Warrant designated for redemption in the Redemption Notice and not yet redeemed or exercised with the transfer agent for the Common Stock or if no transfer agent shall have been appointed or shall be in existence, with a bank or trust corporation (the "Paying Agent") as a trust fund for the benefit of the Holder, with irrevocable instructions and authority to the Paying Agent to pay the Redemption Price to the Holder on or after the Redemption Date, upon surrender of this Warrant. Any monies deposited by the Company pursuant to this paragraph for the redemption of all or a portion of this Warrant which is exercised no later than the close of business on the day preceding the Redemption Date shall be returned to the Company forthwith upon such exercise. Any moneys set aside by the Company for a redemption and unclaimed at the end of six years from such Redemption Date shall revert to the general funds of the Company, provided that a person to which such monies would be payable hereunder shall be entitled upon proof of its ownership of this Warrant to receive the Redemption Price (without interest). Any interest accrued on funds so deposited shall be paid to the Company from time to time. SECTION 12. GOVERNING LAW, JURISDICTION AND VENUE. This Warrant shall be governed by and construed and enforced in accordance with the laws of the State of New York. The Company hereby consents to the exclusive jurisdiction and venue of the courts of the State of New York located in New York County, New York with respect to any matter relating to this Warrant and the performance of the Company's obligations hereunder and the Company hereto hereby further consents to the personal jurisdiction of such courts. Any action suit or proceeding brought by or on behalf of the Company relating to such matters shall be commenced, pursued, defended and resolved only in such courts and any appropriate appellate court having jurisdiction to hear an appeal from any judgment entered in such courts. CREDIT DEPOT CORPORATION By: --------------------------- Ralph DeBee, President [SEAL] Dated: June 12, 1998 Attest: - -------------------------- Secretary -9- EX-10.8 5 PARTICIPATION AGREEMENT/PINNACLE MORTGAGE 1 EXHIBIT 10.8 PARTICIPATION AGREEMENT THIS PARTICIPATION AGREEMENT (the "Agreement") is hereby made as of the 23rd day of October, 1997, by and between Credit Depot Corporation (the "Mortgage Originator"), with an address of 700 Wachovia Center, Gainesville, GA, 30501 and PINNACLE MORTGAGE ACCEPTANCE CORPORATION (the "Participant"), with an address of 9333 North 90th Street, Suite 200, Scottsdale, Arizona 85258. WITNESSETH The Mortgage Originator is the holder from time to time of various mortgage loans evidenced by notes and secured by conventional, FHA-insured or VA-guaranteed first or second mortgages, as the case may be, on improved one- to four-family residential real properties (the "Mortgage Loans"). The Mortgage Loans will be eligible for purchase in the secondary market by FNMA or FHLMC or other investors, or are eligible to serve as collateral for mortgage backed securities issued by GNMA. The Mortgage Originator desires to sell a senior participation interest (each a "Participation") in each of one or more pools (the "Mortgage Pools") containing certain of the Mortgage Loans from time to time to the Participant, and the Participant is willing to purchase such Participations under the terms and conditions hereof. NOW, THEREFORE, in consideration of the premises and the mutual promises herein contained, it is agreed: 1. Purchase of Participations. The Participant agrees to purchase from time to time from the Mortgage Originator, but only in accordance with the terms and conditions hereof, one or more loan participation certificates (the "Participation Certificates"), substantially in the form of Exhibit B hereto, each of which represents the Participant's Participation in a Mortgage Pool created by the Mortgage Originator. The principal balance of each Participation (the "Participation Principal Balance") shall be set out in the related Participation Certificate and may be increased or decreased from time to time as Mortgage Loans are added to or removed from the related Mortgage Pool or transferred between Mortgage Pools and as any portion of the principal collections with respect to the Mortgage Loans are paid to the Participant. The principal terms relating to the purchase of each Participation, including but not limited to the maximum participation percentage, the purchase price and the interest rate on the Participation Principal Balance may be set out in the terms addendum attached hereto as Exhibit B, as the same may be amended from time to time (the "Terms Addendum"). Each Participation shall bear interest on the related Participation Principal Balance at the rate specified as the "Interest Rate" on the Terms Addendum; provided, however, that from the date on which any Event of Default (defined below) shall be deemed to have occurred until the date on which the Participation is paid in full, the Participation shall bear interest at the Default Rate set forth on the Terms Addendum. The aggregate outstanding principal balance of all Participations on any day shall not exceed the amount specified as the "Maximum Participation Amount" on the Terms Addendum. 2 2. The Mortgage Pools. The Mortgage Loans in a given Mortgage Pool from time to time shall be listed on Schedule I to the related Participation Certificate (the "Mortgage Loan Schedule"). The Mortgage Originator shall be responsible for delivering a new Mortgage Loan Schedule upon each addition to or withdrawal from each Mortgage Pool. Mortgage Loans may be added to or withdrawn from any Mortgage Pool as described below: (a) From time to time prior to the termination of this Agreement, the Mortgage Originator may add one or more Mortgage Loans to a Mortgage Pool by delivering a mortgage pool addition certificate, substantially in the form of Exhibit C hereto (each, a"Mortgage Pool Addition Certificate"), to the Participant for acknowledgment. If no Event of Default exists or no event that with the passage of time would become an Eventof Default, the Participant, in its sole discretion, may accept the related Mortgage Loans by executing the acknowledgment on the related Mortgage Pool Addition Certificate. Ifthere is more than one Participation outstanding at any time, the Participant shall informthe Mortgage Originator as to which Mortgage Pool the addition of a Mortgage Loanshould be made. Upon the acceptance of a Mortgage Loan for inclusion in a MortgagePool in accordance with this Paragraph 2, the Participation Principal Balance for the related Participation shall be increased by the amount specified in the related Mortgage Pool Addition Certificate and the Participant shall pay the Mortgage Originator or, on behalf of the Mortgage Originator, a settlement agent, in the Participant's sole discretion,an amount equal to such increase. (b) From time to time prior to the termination of this Agreement, the Mortgage Originator may request removal of any of the Mortgage Loans from a Mortgage Pool by (i) delivering a mortgage pool withdrawal certificate, substantially in the form of Exhibit D hereto (each, a "Mortgage Pool Withdrawal Certificate"), to the Participant for acknowledgment and (ii) tendering to the Participant the related "Withdrawal Amount" for each such Mortgage Loan (as such term is defined in the Mortgage Pool Withdrawal Certificate). The Mortgage Pool Withdrawal Certificate shall specify that a Mortgage Loan is being removed for one of the following reasons: (A) the Mortgage Loan has been paid in full; (B) the Mortgage Loan is being sold to a takeout investor; (C) the Mortgage Loan has been in the Mortgage Pool for more than 90 days; (D) a representation or warranty contained in Paragraph 9 of this Agreement has been breached; (E) the Mortgage Loan has become more than 30 days delinquent; or (F) foreclosure proceedings are being started with respect to the Mortgage Loan. If the Participant permits such withdrawal, upon receipt of the Withdrawal Amount, (1) the Participant shall return to the Mortgage Originator (or such other party as the Mortgage Originator may direct) the related note, mortgage and assignment of mortgage, to the extent such documents were delivered to the Participant and have not previously been returned to the Mortgage Originator, and (R) the Participation Principal Balance for the related Participation shall be reduced by an amount equal to the Withdrawal Amount. 2 3 (c) From time to time the Participant in its sole discretion may require the Mortgage Originator to transfer any Mortgage Loan from one Mortgage Pool to another Mortgage Pool. 3. Restrictions on Transfer by Mortgage Originator. The Mortgage Originator shall not sell, transfer or assign its retained interest in the Mortgage Loans or any Mortgage Pool without the prior written consent of the Participant. 4. Required Withdrawals from the Mortgage Pool. The Participant, in its sole discretion, may require the Mortgage Originator to withdraw from the Mortgage Pool, in accordance with Paragraph 2(b) above, (i) any Mortgage Loan that becomes more than 30 days delinquent or which has been in the Mortgage Pool for a period of more than 90 days and (ii) any other Mortgage Loan. 5. Applications of Unscheduled Payments and Takeout Proceeds. If a Mortgage Loan is foreclosed upon or is otherwise liquidated or if the Mortgage Loan is withdrawn from a Mortgage Pool to be sold to a takeout investor, the related Participation shall be repaid in full, together with any accrued interest thereon, from the proceeds of such liquidation, foreclosure or takeout sale prior to the payment of any amount to the Mortgage Originator with respect to such Mortgage Loan. 6. Servicing. In consideration of the Participant's agreement to purchase Participations from the Mortgage Originator, the Mortgage Originator hereby agrees to act as the servicer of the Mortgage Loans in each Mortgage Pool. So long as any indebtedness remains outstanding on any of the Mortgage Loans, the Mortgage Originator shall service such Mortgage Loans until all payments due with respect to the related Participation are paid in full, and to that end will, by way of illustration only and without limitation: (a) Proceed with reasonable diligence to collect all payments on the Mortgage Loam as and when they shall become due and payable, exercising the same standard of care and using the same methods that the Mortgage Originator would use in servicing mortgage loans held in its portfolio or, if higher, the standard of care and methods used in the mortgage loan servicing industry for the servicing of loans held by others; (b) At the direction of the Participant, remit to the Participant on or before the tenth day of each month (i) the Participant's pro rata share of the amount of principal collected on each of the outstanding Mortgage Loans during the previous month and (ii) accrued interest on the outstanding Participation Principal Balance for each Participation as set forth in Paragraph 1 above; provided, however, that if any collections on a Mortgage Loan are due to foreclosure or other liquidation of the Mortgage Loan, then such collections shall be applied in accordance with Paragraph 5 above; 3 4 (c) Cause the related mortgagor to maintain hazard insurance policies, including but not limited to policies of flood insurance if required, covering the mortgaged premises in an amount at least equal to the outstanding mortgage balance; (d) Keep records pertaining to each mortgage note and the collections thereon and permit the Participant to examine these and other records pertaining to each of the Mortgage Loans at such times as the Participant may elect during the Mortgage Originator's business hours; and (e) Cause the taxes on the mortgaged premises securing each Mortgage Loan to be examined annually and report any delinquent taxes to the Participant. 7. Servicing Compensation. The Mortgage Originator shall be entitled to retain, as its sole compensation for servicing the Mortgage Loans subject to Participations hereunder, all late charges payable and collected under the terms of the Mortgage Loans. The Mortgage Originator shall not be entitled to any additional fees for the performance of its duties as servicer of any Mortgage Loan. 8. Representations and Warranties with Respect to Mortgage Loans. The Mortgage Originator represents and warrants to the Participant as to each Mortgage Loan as of the date of addition of such Mortgage Loan to a Mortgage Pool that: (a) proceeds equal to the note amount have been disbursed to or for the account of the mortgagor; (b) it holds a mortgagee title insurance policy or a valid first or second lien letter, as the case may be, from a title insurance company acceptable to Participants with an insured closing letter from the underwriter, showing the related mortgage to be a first or second mortgage lien, as the case may be, on the mortgaged premises subject only to such easements, restrictions, title irregularities and similar matters which do not have any adverse effect on the ownership, appraised value or use of the mortgaged premises; (c) the note and mortgage are genuine instruments binding and enforceable against the mortgagor and subject to no defenses of any kind or nature; (d) there are no defaults existing under the note or mortgage; (e) the mortgage has been duly recorded or has been forwarded to the proper governmental office (and is in the proper form and accompanied by appropriate fees) for recording; (f) the principal balance remaining unpaid is the amount shown on the Mortgage Loan Schedule attached to the related Participation Certificate; 4 5 (g) it holds a policy of insurance covering the mortgaged premises insuring against loss or damage by fire and other hazards not less extensive than extended coverage insurance, with an appropriate mortgagee loss payable endorsement in favor of the Mortgage Originator and its assigns as mortgagee; (h) at the time of closing each Mortgage Loan there was compliance by the relevant parties with all of the applicable provisions of applicable federal and state law and regulations; (i) all information provided to the Participant with respect to each Mortgage Loan is true, complete and accurate in all material respects and no person or entity involved in the origination or servicing of the Mortgage Loan has made any false representation or has failed to provide information that is true, complete and accurate in connection with such transaction; j) the mortgage or deed of trust securing the Mortgage Loan is a valid, existing and enforceable first or second lien on the mortgaged property, as the case may be; (k) the Mortgage Originator has no knowledge of any circumstances or condition with respect to the Mortgage Loan or the related mortgagor's credit standing that can reasonably be expected to cause the Mortgage Loan to become an unacceptable investment or delinquent or to adversely affect the value of any Participation; (l) the Mortgage Originator is the sole owner and holder of the Mortgage Loan, the Mortgage Originator has not assigned or pledged the Mortgage Loan to secure any obligation other than the related Participation and the Mortgage Originator has good and marketable title to the Mortgage Loan; (m) the Mortgage Loan is subject to a contractual arrangement between the Mortgage Originator and a takeout investor, the arrangement and takeout investor both being acceptable to the Participant (including an agency of the United States government, a seller-servicer approved by an agency of the United States government or any other institutional investor) pursuant to which such purchaser agrees to purchase such Mortgage Loan or guarantee another party's purchase of the Mortgage Loan (a "Takeout Commitment"). (n) the Mortgage Loan has been underwritten in accordance with standard underwriting requirements as specified by the Participant or the related takeout investor, whichever are more stringent; and (o) the Mortgage Loan complies with all requirements set forth in the Participant's seller-servicer guide as amended from time to time. 5 6 9. Further Assurances. The Mortgage Originator agrees to make such further representations and warranties with respect to each Mortgage Loan and to take such actions in connection with each Mortgage Loan (including the reaffirmation of the representations and warranties contained herein) as the Participant may require from time to time in connection with the financing of the Participations. 10. Delivery of Documents. Simultaneously with the purchase of any Participation or the delivery of any Mortgage Pool Addition Certificate, the Mortgage Originator shall deliver to the Participant, with respect to each Mortgage Loan which is to become a part of or be added to the related Mortgage Pool, the following documents: (a) The original, fully executed mortgage note for such Mortgage Loan, endorsed in blank without recourse, which note is hereby pledged to the Participant to secure the performance of all of the Mortgage Originator's obligations to the Participant incurred hereunder. The Participant will from time to time, at the request of the Mortgage Originator and in accordance with Paragraph 2(b), return to the Mortgage Originator such notes as have been paid by the mortgagor or are otherwise needed by the Mortgage Originator to facilitate the servicing of the Mortgage Loans. (b) The mortgage or deed of trust with respect to such Mortgage Loan, with evidence of recording thereon, or, if such document has not been returned by the applicable recording office, a certified true and complete copy of such document. (c) An assignment of mortgage in recordable form of the individual mortgage or deed of trust which secures the Mortgage Loan. Assignments delivered under this Agreement may be recorded by the Participant at any time in the sole discretion of the Participant. (d) A copy of the Takeout Commitment relating to such Mortgage Loan, which Takeout commitment is hereby assigned to the Participant. 11. Events The Mortgage Originator shall be in default upon the occurrence of any one or more of the following events (each, an "Event of Default"): (a) The Mortgage Originator shall fail to remit to the Participant any principal or interest on a Participation as such amounts become due and payable under the terms of this Agreement; (b) The Mortgage Originator shall default in the performance of any other agreement herein contained and such default continues for thirty (30) days after written notice thereof shall be given the Mortgage Originator by the Participant; or 6 7 (c) The Mortgage Originator shall become insolvent, bankrupt or make an assignment for the benefit of its creditors, or a receiver or trustee is appointed for the Mortgage Originator, or if bankruptcy, reorganization or liquidation proceedings are instituted by or against the Mortgage Originator. 12. Remedies. Upon the occurrence of an Event of Default by the Mortgage Originator: (a) The Participant's commitment to increase the Participation Principal Balance for any Participation in connection with the addition of a Mortgage Loan to the related Mortgage Pool under this Agreement shall cease to be in effect. (b) The Participant shall take record title to each Mortgage Loan, may endorse the notes in its favor, may record the assignments of mortgage and shall have the right to service each of the Mortgage Loans. For such purposes, the Mortgage Originator agrees that upon demand by the Participant, it will turn over to the Participant all of its records pertaining to the Mortgage Loans and all documents pertaining thereto, including, but not limited to, title insurance policies, hazard insurance policies, mortgages, surveys and related papers. In addition, the Mortgage Originator hereby grants full power and authority to the Participant, acting in its name alone, or in its name as attorney-in-fact for the Mortgage Originator, to do and perform any and all of the undertakings of the Mortgage Originator hereunder, and in addition hereto, the power and authority to demand, collect, sue for all monies due or to become due on any of the Mortgage Loans, to foreclose any of the Mortgage Loans by exercise of the power of sale or by court action, and to exercise any and all other powers and rights that the Mortgage Originator may now have or hereafter acquire with respect to any of the Mortgage Loans. This power is declared to be coupled with an interest and is irrevocable so long as the Participant shall have any interest in a Participation hereunder. (c) The Participant shall be entitled, at the Participant's option, to require the Mortgage Originator to repurchase the Participation Certificate relating to any Participation at an amount equal to the related Participation Principal Balance as of the date of repurchase plus (i) any accrued and unpaid interest on such Participation Principal Balance, (ii) any accrued and unpaid fees owed to the Participant and (iii) any out-of-pocket expenses paid by the Participant for which the Participant is entitled to be reimbursed under the terms of this Agreement. 13. Guaranty and Security. The Mortgage Originator's obligations hereunder shall be guarantied and secured in a manner satisfactory to the Participant. 14. Servicing by Participant . When the Participant is servicing the Mortgage Loans or exercising the power and authority granted by Paragraph 13 above, it shall be entitled to receive the late charges referred to in Paragraph 7 above. 7 8 15. Fees and Expenses. Upon the addition of a Mortgage Loan to, or the removal of a Mortgage Loan from, any Mortgage Pool, the Mortgage Originator shall pay to the Participant the fees and expenses set forth in the Terms Addendum. 16. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO THE CONFLICT OF LAW PRINCIPLES THEREOF. 17. Entire Agreement Severability. This Agreement shall supersede any existing agreement and shall constitute the entire agreement between the parties relating to the subject matter hereof Each provision and agreement herein shall be treated as separate and independent from any other provision or agreement herein and shall be enforceable notwithstanding the unenforceability of any such other provision or agreement. 18. Notices and Other Communications. Any and all notices, statements, demands or other communications hereunder may be given by a party to the other by mail, facsimile, telegraph, messenger or otherwise to the address listed below, or such other address as may be specified in a notice of change of address hereafter received by the other: MORTGAGE ORIGINATOR: Credit Depot Corporation 700 Wachovia Center Gainesville, GA 30501 Attention: Gerald F. Sullivan Telephone: (770) 531-9927 Facsimile: (770) 531-0228 PARTICIPANT: PINNACLE MORTGAGE ACCEPTANCE CORPORATION 9333 North 90th Street, Suite 200 Scottsdale, Arizona 85258 Attention: John M. Cornely Telephone: (602) 614-9410 Facsimile: (602) 614-9925: All notices, demands and requests hereunder may be made orally, to be confirmed promptly in writing, or by other communication as specified in the preceding sentence. 19. Waiver Amendment. No express or implied waiver of any Event of Default by either party shall constitute a waiver of any other Event of Default and no exercise of any remedy hereunder by any party shall constitute a waiver of its right to exercise any other remedy hereunder. No modification or waiver of any provision of this Agreement and no consent by any 8 9 party to a departure herefrom shall be effective unless in writing and duly executed by both of the parties hereto. 20. Termination of Agreement. If this Agreement has not otherwise terminated pursuant to its terms prior to the date which is one year from the date hereof,. or any anniversary of such date, then this Agreement shall automatically be renewed for an additional year unless the Mortgage Originator or the Participant has delivered notice to the contrary to the other party at least 60 days prior to such date; provided, however, that the Agreement shall not be terminated until the Participant has received all amounts due with respect to all Participations. Notwithstanding the foregoing, if the Mortgage Originator delivers notice of termination of this Agreement to the Participant, the Mortgage Originator shall not be entitled to add any Mortgage Loans to a Mortgage Pool after the date of termination specified in such notice. IN WITNESS WHEREOF, the parties hereto have caused this Participation Agreement to be duly executed by their authorized officers the day and year first above written. CREDIT DEPOT CORPORATION, as Mortgage Originator By: /s/ Gerald F. Sullivan -------------------------------------- Its: President -------------------------------------- PINNACLE MORTGAGE ACCEPTANCE CORPORATION as Participant By: /s/ John Cornely -------------------------------------- Its: EVP -------------------------------------- 9 EX-10.9 6 WHOLE SALE LOAN AGREEMENT 1 EXHIBIT 10.9 WHOLE SALE LOAN AGREEMENT I. THIS AGREEMENT ("This Agreement") is made and entered into in the State of Georgia by and between Credit Depot Corporation a corporation organized and existing under the laws of the State of Delaware (herein called "Seller"), and First Bankshares Mortgage and Investments, Inc. (herein called "Buyer"), for and in consideration of TEN DOLLARS ($10.00) and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged. II. This Agreement, under which from time to time Seller may offer to sell and Buyer may agree to buy from Seller certain loans evidenced by promissory notes and secured by deeds to secure debt conveying interests in real estate (collectively, "Mortgages" and, individually, "Mortgage") shall be subject to the warranties, representations and agreements set forth herein. Provided, however, Buyer shall be under no obligation to purchase any mortgage unless Buyer notifies Seller, in writing, of its intent to purchase an individual mortgage. III. Seller represents and warrants to buyer as follows: A. Seller is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and it possesses the requisite corporate authority to enter into this Agreement and to consummate all the transactions contemplated hereby. B. The execution, delivery and performance of this Agreement has been duly authorized by Seller and all corporate proceedings necessary to consummate all the transactions contemplated by this Agreement have been taken by Seller. C. Seller is fully licensed, qualified to do business, and in good standing in each state in which it does business and in which is located the real property securing and Mortgage offered by Seller to Buyer hereunder. D. The execution and delivery of this Agreement and sale of any and all Mortgages hereunder are not and will not be a breach, violation or event of default (or an event which would become an event of default with the lapse of time or notice or both) under any judgment, decree, note, agreement, indenture or other instrument to which Seller is a party or otherwise subject. E. Neither the making of a Mortgage nor the consummation of the transactions contemplated by this Agreement will result in a violation or infraction by Seller of any applicable federal, state or local law, 'rule or regulation. F. Upon execution and delivery of this Agreement, it shall be a valid and binding obligation of Seller, enforceable in accordance with its terms. 1 2 G. As of the date of this Agreement, there is no pending or threatened litigation, adverse claim or action, of any kind or nature against Seller. Seller agrees to promptly notify Buyer of the subsequent existence of any such pending or threatened litigation, adverse claim or action. H. Each Mortgage sold to Buyer hereunder shall constitute a valid, genuine and enforceable first or second lien against the real property conveyed thereunder, will have been duly executed, acknowledged and filed for recording or recorded prior to the date of sale to Buyer, and is and will continue to be free from claims, defenses, setoffs, and counterclaims. I. Seller has the sole, full and complete title to each Mortgage and each instrument and document relating thereto, which Mortgage and any other interest conveyed by Seller to Buyer shall be free and clear of all claims of any other person or entity, and Seller has full power and authority to sell, transfer and assign the same on the terms herein set forth; and there has been no assignment, sale or hypothecation thereof by Seller. J. The full principal amount, less discount points, of the Mortgages has been advanced to the mortgagor, either by payment made directly to the mortgagor or by payment made on mortgagor's request or approval; the original unpaid principal balance outstanding under the Mortgage is as stated in the applicable loan documents; all costs, fees, and expenses incurred in making, closing and recording the Mortgage have been paid; neither the mortgaged property, nor any portion thereof, has been released from the Mortgage; the terms of the Mortgage have in no way been changed, amended or modified; and the Mortgage is current and not in default. K. All signatures, names and addresses, amount and other statements of the fact, including descriptions of the property, appearing on the credit application and other related documents relating to each Mortgage are true and correct and the mortgagors named thereon were, as of the date of each such document upon which signatures appear, of majority age, and had the legal capacity to enter into the Mortgage. L. Seller will have paid or caused to be paid when due any and all applicable taxes or fees to any governmental entity arising out of the making, acquisition, collection, holding or assignment of such Mortgage or the underlying property (except taxes measured by Buyer's net income). M. Each Mortgage which Seller wan-ants is insured by a private mortgage insurance company shall be so insured. N. Seller shall provide evidence satisfactory to Buyer that each Mortgage has been preapproved by a third party investor (each such investor shall herein be called a "Third Party Investor") and that all such terms and conditions required by any such Third 2 3 Party Investor to be performed or met by Seller or any other party have been met prior to the closing of each such Mortgage. O. All loan applications shall comply with all applicable federal and state laws and regulations including, but not limited to, the Equal Credit Opportunity Act, Real Estate Settlement Procedures Act, Truth-In-Lending Act and Fair Credit Reporting Act. P. Each Mortgage sold hereunder shall be accompanied by all documentation required under all applicable federal and state laws and regulations regarding loans purchased by insured financial institutions. Q. Each Mortgage and note conveyed shall have been closed by an attorney who is an approved attorney of an American Land Title Association Company ("ALTA"). R. Seller has previously furnished Buyer with copies of its respective financial statements (the "Financial Statements"). Seller represents and warrants that the Financial Statements were prepared in accordance with generally accepted accounting principals and accurately portray its financial condition as of the date of this Agreement. Seller will within thirty (30) days of the conclusion of each of its fiscal quarters furnish Buyer with a copy of its quarterly financial statements. Seller will within seventy-five (75) days of the conclusion of its fiscal year furnish Buyer with a copy of its annual financial statements. Such financial statements will be audited by independent public accountants, will conform to generally accepted auditing standards and will be furnished directly to Buyer by Seller's independent public accountants. All such warranties and representations shall continue throughout the term of this Agreement and shall survive this Agreement. IV. Seller agrees to do all acts necessary to perfect title to the Mortgages, and shall sell, assign, and deliver to Buyer with respect to the purchase of each Mortgage the following documents, all subject to the approval of Buyer as to proper form and execution: A. The original Mortgage note properly endorsed by Seller to Buyer. B. A conformed copy of the original Deed to Secure Debt accompanied by those documents and instruments necessary to record and perfect ownership. C. Mortgagee title insurance commitment policy (if applicable), with any and all exceptions set forth therein being subject to the approval of Buyer, and a proper assignment of such commitment or policy in the event a Mortgage assignment is being placed on record. 3 4 D. Copy of Survey of the real property securing each such Mortgage note, identifying such property by address and legal description (if applicable). E. Copies of Hazard insurance policies meeting standard specifications. F. A copy of the loan application package for each Mortgage meeting normal current market/investor conditions as required by the commitment letter described in Section K below. G. Copy of Appraisal of the real estate securing each Mortgage note, which appraisal shall meet requirements established by the Federal Deposit Insurance Corporation, the Department of Banking and Finance of the State of Georgia, and the Buyer. H. Insured closing letter issued by an ALTA company insuring the attorney(s) selected and approved in accordance with section III.Q. hereof. I. Transfer and Assignment with respect to each Mortgage executed by Seller in favor of Buyer and in recordable form. J. Transfer and Assignment of Mortgage from Buyer to Third Party Investor. K. Copy of Third Party Investor commitment letter or letter of predelegated authority acceptable to Buyer. L. Copy of closing instructions from Seller and/or Third Party Investor on behalf of Seller, as applicable. M. Copy of Mortgage payment notification or transfer of servicing. V. The procedures for the handling and funding of each Mortgage are as follows: A. Upon the funding of each Mortgage by Buyer, as described in Section V.B. below, Seller shall pay to Buyer a handling fee on each Mortgage funded by Buyer as set forth on the Cost and Fee Schedule, attached hereto as Schedule A (the "Handling Fee"). From and after the date of such funding through the date the respective Third Party Investor delivers all funds to Buyer, on behalf of Seller, required to purchase such Mortgage, Seller shall pay interest on the amount funded by Buyer at a per annum rate as set forth on Schedule A and adjusted for product type, as shown in The Wall Street Journal, adjusted daily. Unless otherwise agreed in writing by and between the parties hereto, Seller shall pay all accrued interest on the amount so funded on those dates which the respective mortgagor is required, under said mortgagor's loan documents to pay interest on such Mortgage to the holder thereof. B. After approval by Buyer and the respective Third Party Investor of each Mortgage submitted to Buyer for funding, each such Mortgage shall be closed by an attorney or 4 5 attorneys at law selected by Seller and approved by Buyer, which approval shall not be unreasonably withheld or denied, in the name of Seller. Subsequent to such approvals being obtained by Seller, and after Seller provides notice of such closing to Buyer, which notice shall be given not less than twenty-four (24) hours prior to closing, Buyer shall provide closing funds (the "Closing Funds") as provided below: a. Buyer shall deposit the Closing Funds in a trust account with First Bank of Georgia or an attorneys trust account at a bank other than First Bank of Georgia (upon payment of a processing fee subject to increase as set forth in Schedule A) in the name of the closing attorney upon receiving notice from the closing attorney that all closing documents, as required herein, have been prepared and the Mortgage will be closed within one business day; and b. the Closing Funds shall equal the face amount of the promissory note executed by such mortgagor, less any discount points paid by or for the account of such mortgagor. C. At closing and contemporaneously with the funding of each Mortgage hereunder, Seller shall endorse the note to Buyer and execute the transfers and assignments described in Section IV hereof. Buyer, upon receipt of notice from Seller, Seller's satisfaction of its obligations under this Agreement, and provided that Seller is not in default under the terms of this Agreement or under the terms of any other agreement with the Buyer, shall endorse said note to the appropriate Third Party Investor. Seller hereby agrees to deliver such original note, along with the assignment described in Section IV.J. hereof, to the Third Party Investor with instructions to such investor as to hold such note and assignment in trust for Buyer until full payment for such Mortgage has been received by Buyer. Buyer reserves the option, at its sole and absolute discretion, to require a master trust agreement from each Third Party Investor whereby such investors agree to hold all notes, assignments and Mortgage documents presented thereto in trust for Buyer until full payment is made therefor, and Seller hereby agrees to assist Buyer in obtaining such trust agreements from such Third Party Investor. Funding by the Third Party Investor which has pre-approved each such Mortgage will be made to Buyer by wire transfer or delivery of a certified check to Buyer at the time that such investor purchases each such Mortgage. Upon receipt of funds, and the satisfaction of all Seller's obligations to Buyer, Buyer shall remit any surplus to Seller. VI. Promptly upon demand of Buyer, Seller shall repurchase at the Repurchase Price (as hereinafter defined), without recourse, and Mortgage with respect to which, either: A. Any representation or warranty of Seller contained in this Agreement shall prove at any time to be incorrect in any material respect; or 5 6 B. Any contention shall have been raised by mortgagor, or on behalf of mortgagor or a Third Party Investor, that there has been a violation of, or failure to comply with, any federal or state law or regulation which would give rise to a right of a mortgagor to refuse further payment of a Mortgage and/or seek a refund of amounts previously paid and/or claim a penalty of any kind or nature; or provided however, that Seller's repurchase obligation shall not be triggered by a contention of a mortgagor regarding a violation of or a failure to comply with a federal or state law or regulation which resulted from an act or omission of an agent or employee of Buyer; or C. The respective Third Party Investor has not purchased the Mortgage in accordance with its commitment letter, as provided in section IV.K. hereof, within the number of days (as set forth on Schedule A for the applicable product type) after Buyer has funded such Mortgage. VII. Seller agrees to fulfill its obligation to repurchase any loan described above in Section VI hereof by paying to Buyer the Repurchase Price, which shall equal the total unpaid balance thereof, including principal, earned interest, and accrued charges, fees and penalties plus all costs and expenses, including without limitation, reasonable attorney's fees and expenses, collection, Mortgage foreclosures, and sales expenses, if any, theretofore incurred by Buyer in enforcing its rights in such Mortgage or in enforcing its rights pursuant to this Agreement. Buyer's prior knowledge of any breach by Seller of any of the foregoing prior to or at the time of purchase, or any time thereafter, of the Mortgage, or any delay by Buyer in making demand hereunder, shall neither impair Seller's rights nor constitute waiver of Buyer's rights hereunder. VIII. Upon receipt of such repurchase payment from seller pursuant to Section VII hereof, Buyer shall transfer to Seller the Mortgage and Buyer's right, title and interest in the Mortgage property described therein by separate written endorsements and assignments which shall be without recourse to Buyer and without any warranties , expressed or implied. Until such time as Buyer has received such payment in full, Buyer may continue to liquidate the Mortgage, and Seller shall remain liable for any deficiency, including all of Buyer's expenses. IX. Buyer may, by notice to Seller, terminate this Agreement as to Mortgages being purchased if: A. Seller, in the sole option of the Buyer and after fifteen (15) days' prior notice, fails to perform its obligations hereunder; or B. Seller becomes insolvent or bankrupt or is placed under conservatorship or receivership; or C. Seller assigns or attempts to assign its rights and obligations hereunder, without written consent of Buyer; or 6 7 D. Buyer, in its sole opinion, determines that regulatory considerations, business practices of Seller, or otherwise determines that it is in the Buyer's best interest to terminate this Agreement. X. Seller agrees to indemnify and hold Buyer harmless from, and on demand by Buyer, pay Buyer for, any damages, losses, costs and expenses resulting from any and all actions, suits, proceedings, demands, assessments, judgments, or claims, including reasonable legal and other expenses actually incurred and paid incident to any claim (other than a claim based exclusively on Buyer's conduct), by any third party or parties in connection with Mortgages purchased by the Buyer hereunder, including, without limitation, any claim for taxes (other than income taxes payable by Buyer), by any state of the United States, territory or political subdivision thereof. The indemnification contained herein shall survive the termination of this Agreement. XI. Buyer agrees to indemnify and hold Seller harmless from, and on demand by Seller, pay Seller for, any damages, losses, costs and expenses resulting from any and all actions, suits, proceedings, demands, assessments, judgments, or claims, including reasonable legal and other expenses actually incurred and paid incident to any claims based exclusively on Buyer's conduct or the sufficiency or legality of any form or document supplied by Buyer to Seller, by any third party or parties in connection with Mortgages purchased by Buyer and Seller hereunder. The indemnification contained herein shall survive the termination of this Agreement. XII. This Agreement may be terminated as to the future acceptance of Mortgages by either party at any time upon giving forty-five (45) days written notice of termination to the other party, and except as provided in Section IX.D., such termination shall not in any respect change or modify the obligation of Seller with respect to the Mortgages already accepted. XIII. This Agreement shall be constructed in accordance with the laws of the State of Georgia except that the provisions of this Agreement with respect to remedies regarding the Mortgages are intended to comply with the laws of the jurisdiction where such Mortgages are recorded, and any provisions hereof, or of the Mortgages, not so complying shall be deemed to be modified accordingly in the manner and to the extent which shall best effect the intentions and purposes reflected in and contemplated by this Agreement. The invalidity or unenforceability of any provision or provisions of the Mortgages or this Agreement shall not affect the validity or enforceability of any other provisions thereof and hereof. XIV. In the event of a dispute between parties hereto or their successors, arising out of this Agreement, the prevailing party shall be entitled to recover costs, including reasonable attorney's fees actually incurred in connection therewith. XV. This Agreement shall bind and benefit the respective successors and assigns of Seller and Buyer. No other person or entity is intended to be benefited hereby. Notwithstanding the foregoing, Seller shall have no power or right to assign this Agreement or any of its rights 7 8 or obligations hereunder and any attempt to do so, without prior written consent of Buyer, shall be voidable by Buyer at its option. XVI. Buyer's omission or delay to exercise any of its optional or absolute rights to remedy under this Agreement shall not constitute a waiver by Buyer, nor operate to bar Buyer from the exercise of any such rights. Any waiver by Buyer and any default shall not operate as a waiver of any other subsequent default. All rights and remedies provided to Buyer herein are not exclusive of any other remedies at law or equity, are cumulative and not alternative, and may be exercised by Buyer simultaneously or in such order as Buyer deems to be in its interest. XVII. This document contains the entire agreement between the parties hereto and cannot be modified in any respect except by an amendment in writing signed by both parties. 8 9 IN WITNESS WHEREOF, each party has caused its corporate seal to be affixed hereto and this instrument to be signed in its corporate name on its behalf by its proper officials duly authorized. This 14th day of December, 1997. SELLER Credit Depot Corporation ---------------------------------- ---------------------------------- Attest: /s/ Jacqueline L. Flynn By: /s/ Ralph DeBee -------------------------- ------------------------------ Name: Jacqueline L. Flynn Name: Ralph DeBee ----------------------------- --------------------------- Title: Vice-President & Secretary Title: President ----------------------------- --------------------------- (CORPORATE SEAL) BUYER: First Bankshares Mortgage and Investment, Inc. ---------------------------------- ---------------------------------- Attest: By: /s/ Ronald G. Walton ----------------------------- --------------------------- Name: Name: Ronald G. Walton ----------------------------- --------------------------- Title: Vice President --------------------------- (CORPORATE SEAL) 9 EX-10.10 7 AMENDED & RESTATED PROMISSORY NOTE/NEWSOUTH 1 EXHIBIT 10.10 AMENDED AND RESTATED PROMISSORY NOTE $ 2,300,000.00 Gainesville, Georgia April 10, 1998 For value received, the undersigned, Credit Depot Corporation, a Delaware corporation whose address is 700 Wachovia Center, Gainesville, Georgia 30501, hereinafter referred to as the "Maker," promises to pay to the order of NewSouth Special Equities, L.P., Midland Financial Group, Inc., James A. Haslam, 111, William E. Haslam, D. Stephen Morrow, Charles K. Slatery, Kenneth Slutsky, NFC Corp., Kylher Investments 85-1, L.P., Kylher Investments, L. P.-1994, and NewSouth Capital Management, Inc, Profit Sharing Plan, as their interests may appear, hereinafter collectively referred to as the "Payee" in amounts based upon the agreement between the respective payees c/o NewSouth Special Equities, L.P. located at 1000 Ridgeway Loop Road, Suite 233, Memphis, Tennessee 38120-4023 or such other place as the holder hereof may designate in writing, the principal sum of Two Million Three Hundred Thousand and No/100 Dollars ($2,300,000.00) or so much thereof as may be outstanding and unpaid, whichever is less, together with interest from the date hereof at the rates set forth below. Principal and accrued interest thereon shall be due and payable as follows: Beginning on July 10, 1996, and continuing quarterly on the 10th day of each month following the beginning of the next successive quarter thereafter until the entire balance due hereunder is paid in full, Maker shall pay to Lender payments calculated according to the following formula: i) Interest. (A) Interest shall accrue at 10% per annum on the principal amount represented by Subject Loans that are current or delinquent for a period of 90 days or less ("Pro Rata Amount-Current) and 15% per annum on the principal amount represented by Subject Loans that are delinquent for more than 90 days ("Pro Rata Amount-Delinquent). Loans that are Delinquent for more than 90 days shall be referred to herein as "Delinquent Loans. " The determination of whether a loan is a Delinquent Loan shall be made as of each April 1, July 1, October 1, and January 1, commencing as of April 1, 1998. Interest shall be due and payable quarterly on the dates set forth above. For example, the Pro-Rata Amount-Delinquent shall be determined as of July 1 based upon the amount of Delinquent Loans existing on July 1, and will accrue interest at 15% per annum for the period from (and including) July 1 through (and including) the next September 30th. The interest will accrue at the 15% per annum rate for the entire quarter, notwithstanding the fact that one or more Delinquent Loans may cease to be delinquent for more than 90 days because one or more payments are made during the quarter from July 1 through September 30. ii) The Pro Rata Amount-Current means the product obtained by multiplying the outstanding principal balance under this Note as of the beginning of a particular 2 quarter by the percentage determined by dividing (A) the aggregate principal balance of all Subject Loans that are not Delinquent Loans as of such date by (B) the aggregate principal balance of all Subject Loans as of such date. iii) The Pro Rata Amount-Delinquent means the product obtained by multiplying the outstanding principal balance under this Note as of the beginning of a particular quarter by the percentage determined by dividing (A) the principal balance of Delinquent Loans as of such date by (B) the aggregate principal balance of all Subject Loans as of such date. "Subject Loans" shall have the meaning assigned to it in the Warehouse Lending Agreement. iv) Principal. In addition, Maker shall make quarterly payments of principal equal to $100,000.00 each to Payee, commencing July 10, 1998, and continuing on each October 10, January 10, April 10, and July 10 thereafter. iii) Final Payment', Maturity. Maker shall pay the entire remaining unpaid principal balance, together with any and all outstanding interest and charges associated therewith, on April 10, 2000. This Note and all Obligations, as defined below, are secured by that certain CUSTODIAL AGREEMENT BY AND between Maker and Payee and the Custodian named therein, as amended, hereinafter referred to as the "AGREEMENT." "Obligations" as used herein shall include all obligations, liabilities or indebtedness of every kind or nature of Maker hereunder. All documents relating to the Obligations, including, but not limited to this Note and the Agreement and the Notes, Mortgages and other documents assigned, from time to time, to Payee thereunder, now or hereafter relating to this Note and the Obligations, are referred to hereinafter as the "Loan Documents. " The holder of this Note is entitled to all of the rights and remedies available under the Loan Documents. All payments made hereunder shall be applied first to costs and expenses incurred by the Payee in enforcing or attempting to enforce the Loan Documents or in protecting, insuring and otherwise preserving the collateral for the Obligations, then to the accrued interest and with the balance being applied to reduce the principal balance. If any payment of principal or interest provided for herein is not paid within fifteen (15) days of its due date hereunder, each such delinquent payment, including the entire principal balance and accrued interest in the event of an acceleration of this Note as provided below, shall bear interest, to the extent permitted by law at an interest rate equal to eighteen percent (18%) per annum from its due date until date of payment, which interest shall be immediately due and payable. 2 3 This Note is hereby expressly limited so that in no contingency or event whatsoever, whether by acceleration or maturity of the indebtedness evidenced hereby or otherwise, shall the amount paid or agreed to be paid to Payee for the use, forbearance or detention of the money advanced hereunder exceed the highest lawful rate permitted under the laws of the State of Georgia. If, from any circumstances whatsoever, fulfillment of any provision hereof or of any other agreement evidencing or securing the indebtedness, at the time performance of such provision occurs, shall involve the payment of interest in excess of that authorized by law, the obligation to be fulfilled shall be reduced to the limit so authorized by law, and if, from any circumstances, Payee shall ever receive as interest an amount which would exceed the highest lawful rate applicable to Maker, such amount which would be excessive interest shall be applied to reduce the unpaid principal balance of the indebtedness evidenced hereby and not to the payment of interest. Prior to demand, this Note may be prepaid in whole or in part at any time or from time to time without payment of any premium or penalty whatsoever. Maker: (a) waives presentment, demand, notice of demand, protest, notice of protest and notice of nonpayment, notice of dishonor, and any other notices required to be given under the law to Maker, except as specifically set forth herein, in connection with the delivery, acceptance, performance, default or enforcement of this Note, of any endorsement or guaranty of this Note or of any of the Loan Documents; (b) consents to any and all delays, extensions, renewals or other modifications of this Note or the Loan Documents or waivers of any terms hereof or of the Loan Documents or release, substitution or exchange of any security for the payment hereof or the failure to act on the part of Payee, release of any collateral on the part of Payee, or any indulgence shown by Payee, from time to time and in one or more instances (without notice to or further assent from Maker) and agrees that no such actions, failure to act or failure to exercise any right or remedy on the part of the Payee shall in any way affect or impair the Obligations or be construed as a waiver by Payee of, or otherwise affect any of Payee's rights under this Note, under any endorsement or guaranty of this Note, or under any of the Loan Documents; and (c) agrees to pay, on demand, all costs and expenses of collection of this Note or of any endorsement or guaranty hereof and the enforcement of Payee's rights with respect to, or the administration, supervision, preservation and protection of, or realization upon, any property securing payment hereof, including, without limitation, reasonable attorney's fees in the amount of not less than 15 % of the obligation. This Note is delivered in and shall be construed under the internal laws and judicial decisions of the State of Georgia, and the laws of the United States of America as the same might be applicable. In any litigation in connection with or to enforce this Note or any endorsement or guaranty of this Note or any of the Loan Documents, Maker irrevocably consents to and confers personal jurisdiction on the Courts of the State of Georgia, or the United States Courts located within the State of Georgia, and expressly waives any objections as to venue in any such courts, and agrees that service of process may be made on Maker by mailing a copy of the summons and complaint by registered or certified mail, return receipt requested, to its address as set forth herein. 3 4 The occurrence of any one or more of the following events shall, subject to the right to cure contained herein, constitute an event of default under this Note: (a) the failure to pay any liability or indebtedness of Maker to Payee under this Note or the Loan Documents on or before the due date or within fifteen (15) days after the due date; (b) insolvency of, business failure of, the appointment of a custodian, trustee, liquidator or receiver for or for any of the property of, or an assignment for the benefit of creditors by, or the filing of a petition under bankruptcy, insolvency or other debtor relief law or for any adjustment of indebtedness, composition or extension, by or against Maker; (c) Payee determining that any representation or warranty made or information furnished by Maker to the Payee relating to the Loan Documents is, or was untrue or materially misleading; or (d) any default or event of default under the Loan Documents. In conjunction with or in addition to the rights and remedies of Payee set forth herein, upon an event of default as set forth above, after any applicable grace period, if any, or the failure of Maker to promptly pay any principal, interest or other charges when due hereunder or under this Note or any of the Loan Documents, Payee may declare all obligations of Maker to Payee, including all principal, accrued interest and other charges, owing under this Note or any of the Loan Documents, although otherwise unmatured and contingent, to be due and payable, without notice or demand to Maker which rights are hereby expressly waived. Failure at any time to exercise any of the aforesaid options or any other rights of the Payee shall not constitute a waiver thereof, nor shall it be a bar to the exercise of any of the aforesaid options or rights at a later date. All rights and remedies of the Payee shall be cumulative and may be pursued singly, successively, or together, at the option of the Payee. Time is of the essence to the terms of this Note. In the event that any provision or clause of this Promissory Note conflicts with applicable law, such conflict shall not effect other provisions of this Promissory Note which can be given effect without the conflicting provision or clause. To this end, the provisions of this Promissory Note are declared to be severable. Upon receipt by Maker, from the holder of this Note of evidence reasonably indicative of the loss, theft, destruction or mutilation of this Note, and of indemnity or security reasonably satisfactory, and upon surrender and cancellation of this Note, if mutilated, Maker will make 4 5 and deliver a new Note of like tenor and unpaid principal amount in lieu of this Note. IN WITNESS WHEREOF, Maker has set its hand and affixed its seal to this instrument effective as of the day and year first above written. MAKER: CREDIT DEPOT CORPORATION A DELAWARE CORPORATION BY: /S/ GERALD F. SULLIVAN (Seal) ---------------------------------- GERALD F. SULLIVAN, VICE-CHAIRMAN AFFIX CORPORATE SEAL [SEAL] 5 EX-10.11 8 PARTICIPATION AGREEMENT 1 EXHIBIT 10.11 PARTICIPATION AGREEMENT THIS PARTICIPATION AGREEMENT (the "Agreement") is hereby made as of the 11th day of August, 1998, by and between CREDIT DEPOT CORPORATION (the "Mortgage Originator"), with an address of 700 WACHOVIA CENTER GAINESVILLE, GA 30501, and STERLING BANK AND TRUST, FSB (the "Participant"), with an address of One Towne Square, 17th Floor, Southfield, Michigan 48076. WITNESSETH The Mortgage Originator is the holder from time to time of various mortgage loans evidenced by notes and secured by conventional, FHA-insured or VA-guaranteed first or second mortgages, as the case may be, on improved one- to four-family residential real properties (the "Mortgage Loans"). The Mortgage Loans will be eligible for purchase in the secondary market by FNMA or FHLMC or other investors, or are eligible to serve as collateral for mortgage-backed securities issued by GNMA. The Mortgage Originator desires to sell a senior participation interest (each a "Participation") in each of one or more pools (the "Mortgage Pools") containing certain of the Mortgage Loans from time to time to the Participant, and the Participant is willing to purchase such Participations under the terms and conditions hereof NOW, THEREFORE, in consideration of the premises and the mutual promises herein contained, it is agreed: 1. Purchase of Participations. The Participant agrees to purchase from time to time from the Mortgage Originator, but only in accordance with the terms and conditions hereof, one or more loan participation certificates (the "Participation Certificates"), substantially in the form of Exhibit A hereto, each of which represents the Participant's Participation in a Mortgage Pool created by the Mortgage Originator. The principal balance of each Participation (the "Participation Principal Balance") shall be set out in the related Participation Certificate and may be increased or decreased from time to time as Mortgage Loans are added to or removed from the related Mortgage Pool or transferred between Mortgage Pools and as any portion of the principal collections with respect to the Mortgage Loans are paid to the Participant. The principal terms relating to the purchase of each Participation, including but not limited to the maximum participation percentage, the purchase price and the interest rate on the Participation Principal Balance may be set out in the terms addendum attached hereto as Exhibit B, as the same may be amended from time to time (the "Terms Addendum"). Each Participation shall bear interest on the related Participation Principal Balance at the rate specified as the "Interest Rate" on the Terms Addendum; provided, however, that from the date on which any Event of Default (defined below) shall be deemed to have occurred until the date on which the Participation is paid in full, the Participation shall bear interest at the Default Rate set forth on the Terms Addendum. The aggregate outstanding principal balance of all Participations on any day shall not exceed the amount specified as the "Maximum Participation Amount" on the Terms Addendum, 2. The Mortgage Pools. The Mortgage Loans in a given Mortgage Pool from time to time shall be listed on Schedule I to the related Participation Certificate (the "Mortgage Loan Schedule"). The Mortgage Originator shall be responsible for delivering a new Mortgage Loan Schedule upon each addition to or withdrawal from each Mortgage Pool. Mortgage Loans may be added to or withdrawn from any Mortgage Pool as described below: (a) From time to time prior to the termination of this Agreement, the Mortgage Originator may add one or more Mortgage Loans to a Mortgage Pool by delivering a mortgage pool addition certificate, substantially in the form of Exhibit C hereto (each, a "Mortgage Pool Addition Certificate"), to the Participant for acknowledgment. If no Event of Default exists or no event that with the passage of time would become an Event of Default, the Participant, in its sole discretion, may accept the related Mortgage Loans by executing the acknowledgment on the related Mortgage Pool Addition Certificate. If there is more than one Participation outstanding at any time, the Participant shall inform the 1 2 Mortgage Originator as to which Mortgage Pool the addition of a Mortgage Loan should be made. Upon the acceptance of a Mortgage Loan for inclusion in a Mortgage Pool in accordance with this Paragraph 2, the Participation Principal Balance for the related Participation shall be increased by the amount specified in the related Mortgage Pool Addition Certificate and the Participant shall pay the Mortgage Originator or, on behalf of the Mortgage Originator, a settlement agent, in the Participant's sole discretion, an amount equal to such increase. (b) From time to time prior to the termination of this Agreement, the Mortgage Originator may request removal of any of the Mortgage Loans from a Mortgage Pool by (i) delivering a mortgage pool withdrawal certificate, substantially in the form of EXHIBIT D hereto (each, a "Mortgage Pool Withdrawal Certificate"), to the Participant for acknowledgment and (ii) tendering to the Participant the related "Withdrawal Amount" for each such Mortgage Loan (as such term is defined in the Mortgage Pool Withdrawal Certificate). The Mortgage Pool Withdrawal Certificate shall specify that a Mortgage Loan is being removed for one of the following reasons: (A) the Mortgage Loan has been paid in full; (B) the Mortgage Loan is being sold pursuant to a Takeout Commitment; (C) the Mortgage Loan has been in the Mortgage Pool for more than la days; (D) a representation or warranty contained in Paragraph 9 of this Agreement has been breached; (E) the Mortgage Loan has become more than 30 days delinquent; or (F) foreclosure proceedings are being started with respect to the Mortgage Loan. If the Participant permits such withdrawal, upon receipt of the Withdrawal Amount, (1) the Participant shall return to the Mortgage Originator (or such other party as the Mortgage Originator may direct) the related note, mortgage and assignment of mortgage, to the extent such documents were delivered to the Participant and have not previously been resumed to the Mortgage Originator, and (11) the Participation Principal Balance for the related Participation shall be reduced by an amount equal to the Withdrawal Amount. (c) From time to time the Participant in its sole discretion may require the Mortgage Originator to transfer any Mortgage Loan from one Mortgage Pool to another Mortgage Pool. 3. Restrictions on Transfer by Mortgage Originator. The Mortgage Originator shall not sell, transfer or assign its retained interest in the Mortgage Loans or any Mortgage Pool without the prior written consent of the Participant. 4. Required Withdrawals from the Mortgage Pool. The Participant, in its sole discretion, may require the Mortgage Originator to withdraw from the Mortgage Pool, in accordance with Paragraph 2(b) above, (i) any Mortgage Loan that becomes more than 30 days delinquent or which has been in the Mortgage Pool for a period of more than 90 days and (ii) any other Mortgage Loan. 5. Applications of Unscheduled Payments and Takeout Proceeds. If a Mortgage Loan is foreclosed upon or is otherwise liquidated or if the Mortgage Loan is withdrawn from a Mortgage Pool to be sold to a takeout investor, the related Participation shall be repaid in full, together with any accrued interest thereon, from the proceeds of such liquidation, foreclosure or takeout sale prior to the payment of any amount to the Mortgage Originator with respect to such Mortgage Loan. 6. Servicing. In consideration of the Participant! s agreement to purchase Participations from the Mortgage Originator, the Mortgage Originator hereby agrees to act as the servicer of the Mortgage Loans in each Mortgage Pool. So long as any indebtedness remains outstanding on any of the Mortgage Loans, the Mortgage Originator shall service such Mortgage Loans until all payments due with respect to the related Participation are paid in full, and to that end will, by way of illustration only and without limitation: (a) Proceed with reasonable diligence to collect all payments on the Mortgage Loans as and when they shall become due and payable, exercising the same standard of care and using the same methods that the Mortgage 2 3 Originator would use in servicing mortgage loans held in its portfolio or, if higher, the standard of care and methods used in the mortgage loan servicing industry for the servicing of loans held by others; (b) At the direction of the Participant, remit to the Participant on or before the tenth day of each month (i) the Participant's pro rata. share of the amount of principal collected on each of the outstanding Mortgage Loans during the previous month and (ii) accrued interest on the outstanding Participation Principal Balance for each Participation as set forth in Paragraph I above; provided, however that if any collections on a Mortgage Loan are due to foreclosure or other liquidation of the Mortgage Loan, then such collections shall be applied in accordance with Paragraph 5 above; (c) Cause the related mortgagor to maintain hazard insurance policies, including but not limited to policies of flood insurance if required, covering the mortgaged premises in an amount at least equal to the outstanding mortgage balance; (d) Keep records pertaining to each mortgage note and the collections thereon and permit the Participant to examine these and other records pertaining to each of the Mortgage Loans at such times as the Participant may elect during the Mortgage Originator's business hours; and (e) Cause the taxes on the mortgaged premises securing each Mortgage Loan to be examined annually and report any delinquent taxes to the Participant. 7. Servicing Compensation. The Mortgage Originator shall be entitled to retain, as its sole compensation for servicing the Mortgage Loans subject to Participations hereunder, all late charges payable and collected under the terms of the Mortgage Loans. The Mortgage Originator shall not be entitled to any additional fees for the performance of its duties as servicer of any Mortgage Loan. 8. Representations and Warranties with Respect to Mortgage Loans. The Mortgage Originator represents and warrants to the Participant as to each Mortgage Loan as of the date of addition of such Mortgage Loan to a Mortgage Pool that: (a) proceeds equal to the note amount have been disbursed to or for the account of the mortgagor; (b) it holds a mortgagee title insurance policy or a valid first or second lien letter, as the case may be, from a title insurance company acceptable to Participant with an insured closing letter from the underwriter, showing the related mortgage to be a first or second mortgage lien, as the case may be, on the mortgaged premises subject only to such easements, restrictions, title irregularities and similar matters which do not have any adverse effect on the ownership, appraised value or use of the mortgaged premises; (c) the note and mortgage are genuine instruments binding and enforceable against the mortgagor and subject to no defenses of any kind or nature; (d) there are no defaults existing under the note or mortgage; (e) the mortgage has been duly recorded or has been forwarded to the proper governmental office (and is in the proper form and accompanied by appropriate fees) for recording; (f) the principal balance remaining unpaid is the amount shown on the Mortgage Loan Schedule the related Participation Certificate; 3 4 (g) it holds a policy of insurance covering the mortgaged premises insuring against loss or damage by fire and other hazards not less extensive than extended coverage insurance, with an appropriate mortgagee loss payable endorsement in favor of the Mortgage Originator and its assigns as mortgagee; (h) at the time of closing each Mortgage Loan there was compliance by the relevant parties with all of the applicable provisions of applicable federal and state law and regulations; (i) all information provided to the Participant with respect to each Mortgage Loan is true, complete and accurate in all material respects and no person or entity involved in the origination or servicing of the Mortgage Loan has made any false representation or has failed to provide information that is true, complete and accurate in connection with such transaction; (j) the mortgage or deed of trust securing the Mortgage Loan is a valid, existing and enforceable first or second lien on the mortgaged property, as the case may be; (k) the Mortgage Originator has no knowledge of any circumstances or condition with respect to the Mortgage Loan or the related mortgagor's credit standing that can reasonably be expected to cause the Mortgage Loan to become an unacceptable investment or delinquent or to adversely affect the value of any Participation; (1) the Mortgage Originator is the sole owner and holder of the Mortgage Loan, the Mortgage Originator has not assigned or pledged the Mortgage Loan to secure any obligation other than the related Participation and the Mortgage Originator has good and marketable title to the Mortgage Loan; (m) the Mortgage Loan is subject to a contractual arrangement between the Mortgage Originator and a takeout investor, the arrangement and takeout investor both being acceptable to the Participant (including an agency of the United States government, a seller-servicer approved by an agency of the United States government or any other institutional investor) pursuant to which such purchaser agrees to purchase such Mortgage Loan or guarantee another party's purchase of the Mortgage Loan (a "Takeout Commitment"); (n) the Mortgage Loan has been underwritten in accordance with standard underwriting requirements as specified by the Participant or the related takeout investor, whichever are more stringent; (o) the Mortgage Loan complies with all requirements set forth in the Participant's seller-servicer guide as amended from time to time; and (p) the Mortgage Loan is not subject to any right of rescission, setoff, recoupment, abatement, counterclaim or defense (including the defense of usury), other than any such rights provided under applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws, now or hereafter in effect, affecting the enforcement of creditors rights in general and general principles of equity, and none of the Homebuyer or takeout investor has asserted or manifested an intention to assert any right of rescission, setoff, recoupment, counterclaim or defense, affecting any Mortgage Loan or Takeout Commitment which is related to the Participation. The Mortgage Originator covenants that it shall notify the Participant if it receives notice that any Homebuyer or takeout investor asserts or manifests any intention to assert any such right. 9. Further Assurances. The Mortgage Originator agrees to make such further representations and warranties with respect to each Mortgage Loan and to take such actions in connection with each Mortgage Loan (including the reaffirmation of the representations and warranties contained herein) as the Participant may require from time to time in connection with the financing of the Participations. 4 5 10. Delivery of Documents. Simultaneously with the purchase of any Participation or the delivery of any Mortgage Pool Addition Certificate, the Mortgage Originator shall deliver to the Participant, with respect to each Mortgage Loan which is to become a part of or be added to the related Mortgage Pool, the following documents: (a) The original, fully executed mortgage note for such Mortgage Loan, endorsed in blank without recourse, which note is hereby pledged to the Participant to secure the performance of all of the Mortgage Originator's obligations to the Participant incurred hereunder. The Participant will from time to time, at the request of the Mortgage Originator and in accordance with Paragraph 2(b), return to the Mortgage Originator such notes as have been paid by the mortgagor or are otherwise needed by the Mort-age Originator to facilitate the servicing of the Mortgage Loans. (b) The mortgage or deed of trust with respect to such Mortgage Loan, with evidence of recording thereon, or, if such document has not been returned by the applicable recording office, a certified true and complete copy of such document. (c) an assignment of mortgage in recordable form of the individual mortgage or deed of trust which secures the Mortgage Loan. Assignments delivered under this Agreement may be recorded by the Participant at any time in the sole discretion of the Participant. (d) A copy of the Takeout Commitment relating to such Mortgage Loan, which Takeout Commitment is hereby assigned to the Participant. 11. Events of Default. The Mortgage Originator shall be in default upon the occurrence of any one or more of the following events (each, an "Event of Default"): (a) The Mortgage Originator shall fail to remit to the Participant any principal or interest on a Participation as such amounts become due and payable under the terms of this Agreement; (b) The Mortgage Originator shall default in the performance of any other agreement herein contained and such default continues for thirty (30) days after written notice thereof shall be given the Mortgage Originator by the Participant; or (c) The Mortgage Originator shall become insolvent, bankrupt or make an assignment for the benefit of its creditors, or a receiver or trustee is appointed for the Mortgage Originator, or if bankruptcy, reorganization or liquidation proceedings are instituted by or against the Mortgage Originator. 12. Remedies. Upon the occurrence of an Event of Default by the Mortgage Originator: (a) The Participant's commitment to increase the Participation Principal Balance for any Participation in connection with the addition of a Mortgage Loan to the related Mortgage Pool under this Agreement shall cease to be in effect. (b) The Participant shall take record title to each Mortgage Loan, may endorse the notes in its favor, may record the assignments of mortgage and shall have the right to service each of the Mortgage Loans. For such purposes, the Mortgage Originator agrees that upon demand by the Participant, it will turn over to the Participant all of its records pertaining to the Mortgage Loans and all documents pertaining thereto, including, but not limited to, title insurance policies, hazard insurance policies, mortgages, surveys and related papers. In addition, the Mortgage Originator hereby grants full power and authority to the Participant, acting in its name alone, or in its name as attorney-in-fact for the 5 6 Mortgage Originator, to do and perform any and all of the undertakings of the Mortgage Originator hereunder, and in addition hereto, the power and authority to demand, collect, sue for all monies due or to become due on any of the Mortgage Loans, to foreclose any of the Mortgage Loans by exercise of the power of sale or by court action, and to exercise any and all other powers and rights that the Mortgage Originator may now have or hereafter acquire with respect to any of the Mortgage Loans. This power is declared to be coupled with an interest and is irrevocable so long as the Participant shall have any interest in a Participation hereunder. (c) The Participant shall be entitled, at the Participant's option, to require the Mortgage Originator to repurchase the Participation Certificate relating to any Participation at an amount equal to the related Participation Principal Balance as of the date of repurchase plus (i) any accrued and unpaid interest on such Participation Principal Balance, (ii) any accrued and unpaid fees owed to the Participant, and (iii) any out-of-pocket expenses paid by the Participant for which the Participant is entitled to be reimbursed under the terms of this Agreement. 13. Guaranty and Security. The Mortgage Originator's obligations hereunder shall be guarantied and secured in a manner satisfactory to the Participant; provided that any guaranty shall be deemed satisfactory if substantially in the form of EXHIBIT E. 14. Servicing by Participant. When the Participant is servicing the Mortgage Loans or exercising the power and authority granted by Paragraph 12 above, it shall be entitled to receive the late charges referred to in Paragraph 7 above. 15. Fees and Expenses. Upon the addition of a Mortgage Loan to, or the removal of a Mortgage Loan from, any Mortgage Pool, the Mortgage Originator shall pay to the Participant the fees and expenses set forth in the Terms Addendum. 16. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF MICHIGAN WITHOUT GIVING EFFECT TO THE CONFLICT OF LAW PRINCIPLES THEREOF. 17. Entire Agreement: Severability. This Agreement shall supersede any existing agreement and shall constitute the entire agreement between the parties relating to the subject matter hereof Each provision and agreement herein shall be treated as separate and independent from any other provision or agreement herein and shall be enforceable notwithstanding the unenforceability of any such other provision or agreement. 6 7 18. Notices and Other Communications. Any and all notices, statements, demands or other communications hereunder may be given by a party to the other by mail, facsimile, telegraph, messenger or otherwise to the address listed below, or such other address as may be specified in a notice of change of address hereafter received by the other: MORTGAGE ORIGINATOR: Credit Depot Corporation 700 Wachovia Center Gainesville, GA 30501 Attention: Charles Farrahar Telephone: 770-531-9927 Facsimile: 770-531-0228 PARTICIPANT: Sterling Bank and Trust, FSB One Towne Square, 17th Floor Southfield, Michigan 48076 Attention: Karen S. Watson Telephone: 248-948-8761 Facsimile: 248-351-3317 All notices, demands and requests hereunder may be made orally, to be confirmed promptly in writing, or by other communication as specified in the preceding sentence. 7 8 19. Waiver: Amendment. No express or implied waiver of any Event of Default by either party shall constitute a waiver of any other Event of Default and no exercise of any remedy hereunder by any party shall constitute a waiver of its right to exercise any other remedy hereunder. No modification or waiver of any provision of this Agreement and no consent by any party to a departure herefrom shall be effective unless in writing and duly executed by both of the parties hereto. 20. Termination of Agreement. This Agreement shall terminate 90 days from the date hereof, provided, however, that the Mortgage Originator's obligations shall not be terminated until the Participant has received all amounts due with respect to all Participations. Notwithstanding the foregoing, if the Mortgage Originator shall not be entitled to add any Mortgage Loans to a Mortgage Pool after the date f termination specified in such notice. IN WITNESS WHEREOF, the parties hereto have caused this Participation Agreement to be duly executed by their authorized officers the day and year first above written. Credit Depot Corporation - ------------------------------------------- as "Mortgage Originator" by: /s/ Charles Farrahar --------------------------------------- its: Vice-President --------------------------------------- Sterling Bank and Trust, FSB as "Participant" by: /s/ Karen S. Watson --------------------------------------- Karen S. Watson its: Executive Director of Mortgage Banking 8 EX-21.1 9 LIST OF SUBSIDIARIES 1 CREDIT DEPOT CORPORATION LIST OF SUBSIDIARIES EXHIBIT 21.1 Credit Depot Corporation of Georgia Delaware Credit Depot Corporation of North Carolina Delaware Credit Depot Corporation of Ohio Delaware Credit Depot Corporation of South Carolina Delaware Credit Depot Corporation of Tennessee Delaware Credit Depot Corporation of Florida Delaware Credit Depot Corporation of Illinois Delaware Credit Depot Corporation of Missouri Delaware Credit Depot Corporation of Michigan Michigan Credit Depot Corporation of Virginia Delaware Credit Depot Corporation of Indiana Delaware Cash Back Mortgage Corporation Delaware
Each subsidiary does business under its corporate name. EX-23.1 10 CONSENT OF INDEPENDENT AUDITORS 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement on Form S-8 pertaining to the Credit Depot Corporation 1993 Stock Option Plan, in the Registration Statement (Form S-3 No. 33-310125) and related Prospectus of Credit Depot Corporation, and in the Registration Statement (Form S-3 No. 333-52113) and related Prospectus of Credit Depot Corporation of our report dated September 30, 1998, with respect to the consolidated financial statements of Credit Depot Corporation included in this Annual Report (Form 10-KSB) for the year ended June 30, 1998. /s/ Ernst & Young, LLP - --------------------------------------- Atlanta, Georgia October 13, 1998 EX-27.0 11 FINANCIAL DATA SCHEDULE
5 YEAR JUN-30-1998 JUL-01-1997 JUN-30-1998 772,670 0 9,171,205 267,252 0 10,319,381 281,046 0 15,456,842 8,858,756 2,520,154 0 39 5,749 2,452,591 2,458,379 0 4,722,159 0 8,614,075 5,576,000 300,625 3,112,958 (12,881,499) 0 (12,881,499) 0 0 0 (12,881,499) (3.74) (3.74)
-----END PRIVACY-ENHANCED MESSAGE-----