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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
--------------------------------
(Mark One)
|x| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from . . . . . . . . . . to . . . . . . . . . .
Commission File Number 0-14786
AUTOINFO, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-2867481
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1600 Route 208
Fair Lawn, New Jersey 07410
(Address of principal executive offices)
Registrant's telephone number, including area code: (201) 703-0500
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock,
Par value $.01
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
As of March 24, 1997, 8,018,752 shares of the Registrant's common stock were
outstanding. The aggregate market value of the common stock (based upon the
closing price on the Nasdaq National Market System on March 24, 1997 of $2.375)
of the Registrant held by non-affiliates of the Registrant at that date was
approximately $17,050,000.
DOCUMENTS INCORPORATED BY REFERENCE
Part III - Portions of the Registrant's Proxy Statement relating to its 1997
Annual Meeting are incorporated herein by reference.
PART 1
Item 1: BUSINESS
FORWARD-LOOKING STATEMENTS
Certain statements made in this Annual Report on Form 10-K are "forward-looking
statements" (within the meaning of the Private Securities Litigation Reform Act
of 1995) regarding the plans and objectives of management for future operations.
Such statements involve known and unknown risks, uncertainties and other factors
that may cause actual results, performance or achievements of the Company to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. The forward-looking
statements included herein are based on current expectations that involve
numerous risks and uncertainties. The Company's plans and objectives are based,
in part, on assumptions involving the continued expansion of business.
Assumptions relating to the foregoing involve judgments with respect to, among
other things, future economic, competitive and market conditions and future
business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond the control of the Company. Although the
Company believes that its assumptions underlying the forward-looking statements
are reasonable, any of the assumptions could prove inaccurate and, therefore,
there can be no assurance that the forward-looking statements included in this
Report will prove to be accurate. In light of the significant uncertainties
inherent in the forward-looking statements included herein particularly in view
of the Company's early stage operations, the inclusion of such information
should not be regarded as a representation by the Company or any other person
that the objectives and plans of the Company will be achieved.
General
AutoInfo, Inc. (the "Company") is a consumer finance company specializing
in the business of purchasing, selling and servicing retail automobile
installment contracts ("Contracts") originated by dealers ("Dealers") in the
sale of new and used automobiles, light trucks and passenger vans. Through its
purchases, the Company provides financing to borrowers with limited credit
histories, lower than average incomes or past credit problems ("Non-Prime
Borrowers"). The Company serves as an alternative source of financing for
Dealers, allowing sales to customers who otherwise might not be able to obtain
financing from more traditional sources of automobile financing such as banks,
credit unions or finance companies affiliated with major automobile
manufacturers. The Company employs a regional center approach, as compared to
the branch network or centralized approach utilized by a number of other
non-prime finance companies. Management believes that this approach provides a
necessary presence in its markets, thereby maximizing the Company's ability to
service its dealers and monitor its loan portfolio. In February 1997, the
Company unified its operating centers under the name CarLoanCo. All future
operating centers will operate under this banner.
In December 1995, the Company entered the non-prime automobile finance
market (the "Non-Prime Market") through the acquisition, by a wholly-owned
subsidiary, of the operating assets of Falk Finance Company ("FFC"), a Norfolk,
Virginia based non-prime automobile consumer finance company. During 1996, the
Company expanded on the FFC platform in establishing its Mid-Atlantic regional
service center which services dealers in Delaware, Georgia, Maryland, North
Carolina, South Carolina and Virginia, providing a complete range of automobile
consumer finance services including sales and marketing, credit, servicing and
collection.
2
In July 1996, the Company commenced operations of its Northeast Regional
Center in Norwalk, Connecticut to provide its complete range of services to
dealers in the Northeast. This center is presently servicing dealers in
Connecticut, Maine, Massachusetts, New Hampshire, New Jersey, Rhode Island and
Vermont.
The Company's business objective is to maximize the volume of loans it
purchases, securitizes and services, while adhering to its underwriting
guidelines, through the expansion of its regional centers. To achieve this
objective, the Company employs the following strategies:
Emphasis on Dealer Relationships--The Company believes that it is crucial to
identify and meet dealers' financing needs. When presented with a loan
application, the Company attempts to notify the dealer within one hour or less
whether it will approve the automobile loan for purchase from the dealer. The
Company's business hours generally coincide with those of the dealership and, in
some cases, the Company will provide loan processing on the dealer's premises
during dealer promotions. The Company also provides dealers with flexibility in
developing loan structures to accommodate the needs of their customers, such as
extended payment terms or low down-payment requirements when credit quality is
deemed adequate. The Company, through its sales force, maintains frequent
contacts with dealers and recommends service enhancements when warranted. By
employing consistent loan underwriting and purchasing guidelines, the Company
believes that it provides dealers with a reliable and consistent source of
financing.
Expansion of Dealer Network--The Company is constantly undertaking marketing
activities with a view towards expanding its dealer network. These efforts
include offering innovative products and services to its dealer network, such as
CarLoanNet, the interactive internet loan application service recently
introduced by the Company.
Maintenance of Underwriting and Loan Purchasing Guidelines--The Company has
developed a proprietary credit scoring system designed to maintain rigorous
underwriting guidelines for its loan processing operations. The Company's credit
approval system monitors many evaluation criteria, including debt-to-income,
payment-to-income, loan-to-value, bankruptcy score, credit score and stability
factors, and each loan application is reviewed by one of the Company's credit
specialists at a regional center to determine whether the loan should be
approved. To ensure the integrity of the credit approval system, management
tracks on a daily basis the approval rates and delinquency and loss rates.
Funding and Liquidity through Warehousing and Securitizations--The Company funds
the acquisition of automobile loans principally through its warehouse facility.
At December 31, 1996, the Company had a warehouse facility in place with an
aggregate capacity of $100 million, of which approximately $82 million was
available. The Company securitizes the loans purchased by it as asset-backed
securities and uses such securitizations as a cost competitive source of capital
compared to traditional sources of corporate debt financing. Securitization
enables the Company to finance automobile loans on a regular basis, while
retaining the right to receive future servicing fees and excess cash flows, and
to use the proceeds from such securitizations to fund the purchase of additional
automobile loans. The Company securitized $40 million in automobile loans during
1996.
Expansion of Products and Services - The Company is constantly evaluating new
and improved services to offer to its Dealer network to both maximize revenues
and achieve further operating efficiencies.
Expansion of Regional Presence - During 1996, the Company expanded its regional
presence from the Mid-Atlantic region to also include the Northeast region. In
furtherance of its regional approach, the Company will continue to evaluate
further regional expansion. The Company has no currently pending plans for any
additional centers.
3
The Non-Prime Auto Finance Industry
The automobile finance industry was estimated to be in excess of $370
billion in 1995 (1996 data is not yet available). The market is generally
divided by the types of automobiles sold (new versus used) and the credit
worthiness of the borrower. Generally, banks, savings and loan associations,
credit unions, large independent finance companies and captive finance companies
such as Ford Motor Credit, GMAC, Chrysler Credit tend to provide financing for
new automobiles purchased by prime customers.
The non-prime segment of this overall market is believed to be
approximately $95 billion and is comprised of both private and publicly traded
companies providing credit availability to consumers who are higher financial
risks and who have limited access to traditional financing sources. These
independent finance companies tend to provide financing for used automobiles
sold through new and used automobile dealerships at higher interest rates
commensurate with the higher risk associated with the non-prime consumer.
The Non-Prime Market has been fueled by the significant increase in the
sale of used automobiles. In 1995, used car sales exceeded 43 million units on
sustained compound annual growth rates of 12 - 13%. This increase is the results
of a number of factors including (i) the high average price of a new car of
$19,819 compared to $8,530 for a used car, (ii) the increased availability of
newer late model used automobiles related, to some extent, to the trend towards
leasing rather than buying of new vehicles, and (iii) availability of financing
alternatives as provided by the growth in the number of independent finance
companies servicing the non-prime segment of the market.
Operations
Dealer Contract Purchase Programs
As of March 15, 1997, the Company was a party to agreements ("Dealer
Agreements") with approximately 1,100 Dealers in 13 states. Most of these
Dealers regularly submit Contracts to the Company for purchase, although such
Dealers are under no obligation to submit any Contracts to the Company, nor is
the Company obligated to purchase any Contracts. For the twelve months ended
December 31, 1996, substantially all of the Contracts purchased by the Company
consisted of financing for used cars.
When a retail automobile buyer elects to obtain financing from a Dealer, an
application is taken for submission by the Dealer to its financing sources.
Typically, a Dealer will submit the buyer's application to more than one
financing source for review. The Company believes the Dealer's decision to
finance the automobile purchase with the Company, rather than other financing
sources, is based primarily upon an analysis of the discounted purchase price
offered for the Contract, the timeliness of response, the cash resources of the
financing source, and any conditions to purchase.
The Company receives loan applications by fax or through CarLoanNet, a state of
the art internet service developed by the Company. Upon receipt of a loan
application from a Dealer, the Company's credit personnel order a credit bureau
report on the applicant to document the buyer's credit history. If, upon review
by a Company credit officer, it is determined that the application meets the
Company's underwriting criteria, a decision is made to purchase the Contract.
When presented with a loan application, the Company attempts to notify the
Dealer within one hour as to whether it intends to purchase such Contract. The
Company buys Contracts directly from Dealers and does not make loans directly to
purchasers of automobiles.
4
The Company currently purchases Contracts from Dealers at discounts up to 20% of
the total amount financed under the Contracts, depending on the perceived credit
risk of the Contract. Discounts averaged 14.7% for the twelve months ended
December 31, 1996.
The Company attempts to control Dealer misrepresentation by carefully screening
the Contracts it purchases, by establishing and maintaining professional
business relationships with Dealers, and by including certain representations
and warranties by the Dealer in the Dealer Agreement. Pursuant to the Dealer
Agreement, the Company may require the Dealer to repurchase any Contract in the
event that the Dealer breaches its representations or warranties. There can be
no assurance, however, that any Dealer will have the financial resources to
satisfy its repurchase obligations to the Company.
In conjunction with the acquisition of FFC, the Company entered into a ten year
agreement with Charlie Falk Auto Wholesale, Incorporated ("CFAW"). This
agreement provided and established the basis for conducting business and the
criteria under which the Company purchased contracts from CFAW. Effective
December 31, 1996, the Company and CFAW mutually agreed to and entered into a
termination agreement which, among other provisions, provides for the Company to
continue to purchase contracts which meet established underwriting criteria only
through March 31, 1997. In 1996, approximately 38% of all contracts funded by
the Company were purchased from CFAW.
Contract Purchase Criteria
To be eligible for purchase by the Company, a Contract must have been originated
by a Dealer that has entered into a Dealer Agreement to sell Contracts to the
Company. The Contracts must be secured by a first priority lien on a new or used
automobile, light truck or passenger van and must meet the Company's
underwriting criteria. In addition, each Contract requires the borrower to
maintain physical damage insurance covering the financed vehicle and naming the
Company as a loss payee. The Company or any purchaser of the Contract from the
Company may, nonetheless, suffer a loss upon theft or physical damage of any
financed vehicle if the borrower fails to maintain insurance as required by the
Contract or is unable to pay for repairs to or replacement of the vehicle or is
otherwise unable to fulfill its obligations under the Contract.
The Company believes that its objective underwriting criteria enable it to
evaluate effectively the creditworthiness of Non-Prime Borrowers and the
adequacy of the financed vehicle as security for a Contract. These criteria
include standards for price, term, amount of down payment, installment payment
and add-on interest rate, mileage, age and type of vehicle, amount of the loan
in relation to the value of the vehicle, borrower's income level, job and
residence stability, credit history and debt serviceability, and other factors.
These criteria are subject to change from time to time as circumstances may
warrant. Upon receiving this information with the borrower's application, the
Company's credit department will verify the borrower's employment, residency,
insurance and credit information provided by the borrower by contacting various
parties noted on the borrower's application, credit information bureaus and
other sources. Further, the Company conducts a direct telephonic interview with
the prospective borrower. The Company typically completes its credit review and
consummates its purchase of a Contract within 48 hours of a complete financing
package from the Dealer.
All of the Contracts purchased by the Company are self-amortizing and provide
for level payments over the term of the Contract. For Contracts purchased by the
Company in the twelve months ended December 31, 1996, the retail purchase price
of the related automobiles averaged $10,700. Contracts financing such purchases
had annual percentage rates of interest ("APRs") averaging 22%. The average
original principal amount financed under Contracts purchased in the twelve
months ended December 31, 1996, was approximately $9,000, with an average
original term of approximately 44 months and an average down payment of 16%.
5
All Contracts may be prepaid at any time without penalty. In the event a
borrower elects to prepay a Contract in full, the payoff amount is calculated by
deducting the unearned interest (as determined by the "Rule of 78's" method,
where applicable) from the Contract balance.
Each Contract purchased by the Company prohibits the sale or transfer of the
financed vehicle without the secured party's consent and allows for the
acceleration of the maturity of a Contract upon a sale or transfer without such
consent. In most circumstances, the Company will not consent to a sale or
transfer of a financed vehicle unless the related Contract is prepaid in full.
The Company believes that the most important requirements to succeed in the
Non-Prime Market are the ability to control borrower and Dealer
misrepresentation at the point of origination; the development and consistent
implementation of objective underwriting criteria specifically designed to
evaluate the creditworthiness of Non-Prime Borrowers; and the maintenance of an
active program to monitor performance and collect payments.
Collection Procedures
The Company believes that its ability to monitor performance and collect
payments owed from Non-Prime Borrowers is primarily a function of its collection
approach and support systems. The Company believes that if payment problems are
identified early and the Company's collection staff works closely with borrowers
to address these problems, it is possible to correct many of them before they
deteriorate further. To this end, the Company utilizes pro-active collection
procedures, which include making early and frequent contact with delinquent
borrowers; educating borrowers as to the importance of maintaining good credit;
and employing a consultative and customer service approach to assist the
borrower in meeting his or her obligations, which includes attempting to
identify the underlying causes of delinquency and cure them whenever possible.
In support of its collection activities, the Company maintains a computerized
collection system specifically designed to service automobile installment sale
contracts with Non-Prime Borrowers.
The Company typically attempts to make telephonic contact with delinquent
borrowers on the first day after their monthly payment due date. Upon making
contact with the borrower at his home or workplace the collector then inquires
of the borrower the reason for the delinquency and when the Company can expect
to receive the payment. The collector will attempt to get the borrower to make a
promise for the delinquent payment for a time generally not to exceed one week
from the date of the call. If the borrower makes such a promise, the account is
placed on a pending status and is not contacted until the outcome of the promise
is known. If the payment is made by the promise date and the account is no
longer delinquent, the account is routed out of the collection system. If the
payment is not made, or if the payment is made, but the account remains
delinquent, the account is returned to the collector for subsequent contacts.
If a borrower fails to make or keep promises for payments, or if the borrower is
uncooperative or attempts to evade contact or hide the vehicle, a supervisor
will review the collection activity relating to the account to determine if
repossession of the vehicle is warranted. Generally, a decision will occur
between the 45th and 60th day past the borrower's payment due date, but could
occur sooner or later, depending on the specific circumstances. If a decision to
repossess is made by a supervisor, such assignment is given to one of many
licensed, bonded repossession agents used by the Company. When the vehicle is
recovered, the repossession agent delivers it to a wholesale auto auction where
it is kept until it is liquidated, usually within 30 days of the repossession.
Liquidation proceeds are applied to the borrower's outstanding obligation under
the Contract and the borrower is advised of his obligation to pay
6
any deficiency balance that remains. The Company uses all practical means
available to collect deficiency balances, including filing for judgments against
borrowers where applicable.
Management Information Systems
The Company maintains sophisticated data processing support and management
information systems. Finance Manager, the Company's custom designed proprietary
software managment system, is updated and maintained by the Company's MIS
Department based in Norfolk, Virginia.
Financing Activity
Warehouse Facilities. The Company uses warehouse facilities with financial
institutions to finance its purchase of loans on a short-term basis pending
securitization. At December 31, 1996, the Company had an aggregate borrowing
capacity of $100 million under a warehouse facility, of which $82 million was
available. The facility provides for borrowing at the LIBOR rate plus 300 basis
points. Amounts outstanding under the warehouse facility are secured by the
automobile loans pledged to the lender as collateral for borrowings under the
facility.
Securitization of Loans. The Company pursues a strategy of securitizing
loans through the sale of asset-backed securities. Securitization is used by
companies as a cost-competitive source of capital compared to traditional
corporate debt financing alternatives. The Company utilizes the net proceeds
from securitizations to purchase additional automobile loans and to pay down
outstanding warehouse facilities. The Company securitized approximately $40
million in automobile loans during 1996.
In a securitization, the Company (through its special purpose wholly-owned
subsidiary, AutoInfo Receivables Company, a Delaware corporation ("ARC")),
transfers automobile loans to newly-formed securitization trusts, which issue
one or more classes of asset-backed securities. The asset-backed securities are
simultaneously sold to investors (except for certain subordinated classes of
securities which may be retained by the Company). Each month, collections of
principal and interest on the automobile loans are used by the trustee to pay
the holders of the related asset-backed securities, to fund spread accounts as a
source of cash to cover shortfalls in collections, if any, and to pay expenses.
The Company continues to act as the servicer of the automobile loans held by the
trust in return for a monthly fee.
To improve the cost effectiveness of its securitization program, the
Company arranges for credit enhancement to achieve a desired credit rating on
the asset-backed securities issued. The credit enhancement for securitizations
generally take the form of financial guaranty insurance policies issued by MBIA
(the "Credit Enhancer"), which insures payments of principal and interest due on
the asset-backed securities.
The spread account for any securitization is generally funded with the
interest collected on the loans that exceeds the sum of the interest payable to
holders of asset-backed securities, the monthly servicing fee and certain other
amounts. Funds are withdrawn from the spread account to cover any shortfalls in
amounts payable on insured asset-backed securities or to reimburse the Credit
Enhancer for draws on its financial guaranty insurance policy. In addition, the
funds on deposit in any spread account for a securitization may be withdrawn to
cover shortfalls in collections or to reimburse the Credit Enhancer for draws on
policies issued in other securitizations. ARC is entitled to receive amounts
from the spread accounts to the extent the amounts deposited exceed
predetermined required minimum levels. The spread accounts cannot be accessed by
the Company or ARC until such levels have been reached or with the consent of
the Credit Enhancer. After such levels are reached, excess cash is will be
distributed to ARC and then transferred to the Company.
7
Sales and Marketing
The Company markets its dealer financing programs through a staff of 15 trained
field sales representatives. The main duties of a field representative are to
solicit and enroll new dealers into the program, train the dealers regarding the
specific aspect of the Company's loan acquisition program, encourage additional
contract volume and provide a direct hands on customer contact on a regular
basis. Presently, the Company concentrates its marketing efforts in the
MidAtlantic and Northeast regions.
Competition
The non-prime automotive consumer finance market is both highly competitive and
fragmented. As such, the Company encounters competition in both the MidAtlantic
and Northeastern markets from other local, regional and national consumer
finance companies, many of whom have raised significant capital through equity
offerings, securitization of their loan portfolio and warehouse lines of credit
during the past several years. Other more traditional finance sources, such as
banks and captive automobile finance companies, have not generally serviced the
non-prime segment of the market. Within the last year, several large companies,
including Ford Motor Company, have announced their entry into the non-prime
marketplace. The major competitive factors leading to the dealer's choice of
financing source are the consistency of the application of underwriting
guidelines, the competitiveness of financing terms and dealer fees, the
timeliness of application approval and funding and the financial stability of
the source. The Company believes that it competes favorably on these factors.
Regulation
The Company's business is subject to regulations and licensing under various
federal, state and local statutes and regulations. The Company maintains all
licenses necessary for the lawful conduct of its business and operations. The
Company is not licensed to make loans directly to borrowers. Several federal and
state consumer protection laws, including the Federal Truth-In-Lending Act, the
Federal Equal Credit Opportunity Act, the Federal Fair Debt Collection Practices
Act and the Federal Trade Commission Act, regulate the extension of credit in
consumer credit transactions. These laws mandate certain disclosures with
respect to finance charges on Contracts and impose certain other restrictions on
Dealers. In addition, laws in a number of states impose limitations on the
amount of finance charges that may be charged by Dealers on credit sales. The so
called Lemon Laws enacted by the federal government and various states provide
certain rights to purchasers with respect to motor vehicles that fail to satisfy
express warrantees. The application of Lemon Laws or violation of such other
federal and state laws may give rise to a claim or defense of a borrower against
a Dealer and its assignees, including the Company and purchasers of Contracts
from the Company. The Dealer Agreement contains representations by the Dealer
that, as of the date of assignment of Contracts, no such claims or defenses have
been asserted or threatened with respect to the Contracts and that all
requirements of such federal and state laws have been complied with in all
material respects. Although a Dealer would be obligated to repurchase Contracts
that involve a breach of such warranty, there can be no assurance that the
Dealer will have the financial resources to satisfy its repurchase obligations
to the Company. Certain of these laws also regulate the Company's loan servicing
activities, including its methods of collection. Although the Company believes
that it is currently in compliance with applicable statutes and regulations,
there can be no assurance that the Company will be able to maintain such
compliance. The failure to comply with such statutes and regulations could have
a material adverse effect upon the Company. Furthermore, the adoption of
additional statutes and regulations, changes in the interpretation and
enforcement of current statutes and regulations or the expansion of the
Company's business into jurisdictions that have adopted more stringent
regulatory requirements than those in which the Company currently conducts
business could have a material adverse effect upon the Company.
8
Upon the purchase of Contracts by the Company, the original Contracts and
related title documents for the financed vehicles are delivered by the selling
Dealers to the Company.
The Dealer Agreement and related assignment contain representations and
warrantees by the Dealer that an application for state registration of each
financed vehicle, naming the Company as secured party with respect to the
vehicle, was effected at the date of sale of the related Contract to the
Company, and that all necessary steps have been taken to obtain a perfected
first priority security interest in each financed vehicle in favor of the
Company under the laws of the state in which the financed vehicle is registered.
If a Dealer or the Company, because of clerical error or otherwise, has failed
to take such action in a timely manner, or to maintain such interest with
respect to a financed vehicle, neither the Company nor any purchaser of the
related Contract from the Company would have a perfected security interest in
the financed vehicle and its security interest may be subordinate to the
interest of, among others, subsequent purchasers of the financed vehicle,
holders of perfected security interests and a trustee in bankruptcy of the
borrower. The security interest of the Company or the purchaser of a Contract
may also be subordinate to the interests of third parties if the interest is not
perfected due to administrative error by state recording officials. Moreover,
fraud or forgery by the borrower could render a Contract unenforceable against
third parties. In such events, the Company could be required by the purchaser to
repurchase the Contract. In the event the Company is required to repurchase a
Contract, it will generally have recourse against the Dealer from which it
purchased the Contract. This recourse will be unsecured except for a lien on the
vehicle covered by the Contract, and there can be no assurance that any Dealer
will have the financial resources to satisfy its repurchase obligations to the
Company. Subject to any recourse against Dealers, the Company will bear any loss
on repossession and resale of vehicles financed under Contracts repurchased by
it from investors.
Under the laws of many states, liens for storage and repairs performed on a
vehicle and for unpaid taxes take priority over a perfected security interest in
the vehicle. Pursuant to its securitization purchase commitments, the Company
generally warrants that, to the best of the Company's knowledge, no such liens
or claims are pending or threatened with respect to a financed vehicle, which
may be or become prior to or equal with the lien of the related Contracts. In
the event that any of the Company's representations or warranties proves to be
incorrect, the trust or the investor would be entitled to require the Company to
repurchase the Contract relating to such financed vehicle.
The Company, on behalf of purchasers of Contracts, may take action to enforce
the security interest in financed vehicles with respect to any related Contracts
in default by repossession and resale of the financed vehicles. The UCC and
other state laws regulate repossession sales by requiring that the secured party
provide the borrower with reasonable notice of the date, time and place of any
public sale of the collateral, the date after which any private sale of the
collateral may be held and of the borrower's right to redeem the financed
vehicle prior to any such sale and by providing that any such sale be conducted
in a commercially reasonable manner. Financed vehicles repossessed generally are
resold by the Company through unaffiliated wholesale automobile networks or
auctions, which are attended principally by used car dealers.
In the event of a repossession and resale of a financed vehicle, after payment
of outstanding liens for storage, repairs and unpaid taxes, to the extent those
liens take priority over the Company's security interest, and after payment of
the reasonable costs of retaking, holding and selling the vehicle, the secured
party would be entitled to be paid the full outstanding balance of the Contract
out of the sale proceeds before payments are made to the holders of junior
security interests in the financed vehicles, to
9
unsecured creditors of the borrower, or, thereafter, to the borrower. Under the
UCC and other laws applicable in most states, a creditor is entitled to obtain a
deficiency judgment from a borrower for any deficiency on repossession and
resale of the motor vehicle securing the unpaid balance of such borrower's motor
vehicle loan. However, some states impose prohibitions or limitations on
deficiency judgments. If a deficiency judgment were granted, the judgment would
be a personal judgment against the borrower for the shortfall, and a defaulting
borrower may often have very little capital or few sources of income available
following repossession. Therefore, in many cases, it may not be useful to seek a
deficiency judgment against a borrower or, if one is obtained, it may be settled
at a significant discount.
Patents, Trademarks and Copyrights
"AUTOINFO" is a registered trademark and service mark of the Company.
Employees
The Company currently has 125 full-time employees. None of the Company's
employees are represented by a labor union. The Company considers its
relationship with its employees to be good.
Item 2: PROPERTIES
The Company's MidAtlantic Regional Center leases approximately 8,000 square feet
of space at 863 Glenrock Road, Norfolk, Virginia. The lease runs through April
2001 and provides for an annual rent of $96,000. The Company's Northeast
Regional Center leases approximately 10,000 square feet of space at 444 Westport
Avenue, Norwalk, Connecticut. The lease runs through May 2001 and provides for
an annual rental of $107,500. The Company maintains an operational facility of
approximately 800 square feet at 6818 Grover Street, Omaha, Nebraska. The lease
for such facility runs through June 1997 at an annual rent of $10,000. The
Company rents approximately 2,900 square feet of space at 1600 Route 208, Fair
Lawn, New Jersey where it maintains its executive offices. The lease runs
through November 1997 at an annual rental of approximately $44,000, subject to
certain rent escalation provisions. The Company believes that its present
facilities are suitable and adequate for its reasonably foreseeable growth.
Item 3. LEGAL PROCEEDINGS
The Company is not party to any material legal proceedings.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
10
Part II
Item 5. PRICE RANGE OF COMMON STOCK
The Company's Common Stock is traded in the over-the-counter market and is
quoted through the National Association of Securities Dealers Automated
Quotation System ("NASDAQ") on the National Market System under the symbol AUTO.
The following table sets forth, for the periods indicated, the high and low
closing bid quotations per share for the Company's Common Stock as reported by
NASDAQ.
High Low
-------- --------
Year ended December 31, 1995
- --------------------------------------
First quarter 3 59/64 2 3/8
Second quarter 3 13/16 3 1/16
Third quarter 3 1/2 3 1/16
Fourth quarter 3 1/2 3
High Low
-------- --------
Year Ended December 31, 1996
- --------------------------------------
First quarter 3 1/2 3
Second quarter 3 7/16 3 1/16
Third quarter 3 2
Fourth quarter 3 7/8 2 3/4
As of March 24, 1997, the closing bid price per share for the Company's Common
Stock, as reported by NASDAQ was $2.375. As of March 24, 1997, the Company had
approximately 400 stockholders of record.
Dividend Policy
The Company has never declared or paid a cash dividend on its Common Stock. It
has been the policy of the Company's Board of Directors to retain all available
funds to finance the development and growth of the Company's business. The
payment of cash dividends in the future will be dependent upon the earnings and
financial requirements of the Company and other factors deemed relevant by the
Board of Directors.
11
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following is a summary of selected consolidated financial data relating to
the Company. This summary has been restated to present the businesses sold as
discontinued operations.
Seven
months
Year ended ended
December December Year ended
31, 31, May 31,
------------------------------
1996 1995 1995 1994 1993
-------- -------- -------- -------- --------
Statement of Operations Data:
Revenue $ 13,185 $ 2,232 $ 1,599 $ 2,075 $ 1,903
Operating Expenses (12,092) (1,847) (4,009) (2,283) (2,241)
Provision for credit losses (5,251) -- -- -- --
Unusual item - impairment of long-
lived assets and additional credit
losses on acquired automobile
receivables (19,293) -- -- -- -
-------- -------- -------- -------- --------
Income (loss) from continuing
operations before income tax
benefit (23,451) 385 (2,410) (208) (338)
Benefit from income taxes (4,352) (176) (332) (65) (121)
-------- -------- -------- -------- --------
Income (loss) from continuing
operations (19,099) 561 (2,078) (143) (217)
Income (loss) from discontinued
operations -- (28) 1,519 2,164 1,953
Gain on sale of discontinued
operations -- 296 8,885 -- --
-------- -------- -------- -------- --------
Net income (loss) $(19,099) $829 $ 8,326 $ 2,021 $ 1,736
-------- -------- -------- -------- --------
Net income (loss) per share:
From continuing operations $ (2.41) $ .07 $ (.28) $ (.02) $ (.03)
From discontinued operations -- -- .21 .29 .27
From gain on sale of discontinued
operations -- .04 1.19 -- --
-------- -------- -------- -------- --------
Net income (loss) per share $ (2.41) $ .11 $ 1.12 $ .27 $ .24
-------- -------- -------- -------- --------
Balance Sheet Data:
Net automobile receivables after
allowance for credit losses $ 45,814 $ 25,074 $ -- $ -- $ --
Cash and short term investments 9,199 24,871 8,836 7,509 3,473
12
Total assets 74,451 65,795 42,357 26,387 19,975
Total debt 60,405 32,746 4,161 4,784 216
Retained earnings (deficit) (5,071) 14,029 13,199 4,873 2,852
Stockholders' equity 12,327 31,018 30,121 20,857 18,625
13
Item #7: Management's Discussion and Analysis of Financial Condition and Results
of Operations
The Company, since December 1995, is a specialized consumer finance company that
acquires and services automobile receivables from automobile dealers selling new
and used vehicles to non-prime customers.
Results of Operations
On April 1, 1995, the Company consummated the sale of certain assets, net
of certain liabilities, constituting the operating assets of the Orion Network,
Compass Network, Checkmate Computer Systems, and Insurance Parts Locator
businesses. On July 20, 1995, the Company consummated the sale of the operating
assets of its insurance inspection services business. The Results of Operations
of these businesses have been classified as discontinued operations.
On December 6, 1995, the Company, through a wholly owned subsidiary,
acquired the operating assets of FALK Finance Company (FFC), a Norfolk, Virginia
based specialized financial services company. As a result of this acquisition,
the Company's primary business is to purchase non-prime automobile receivables
from new and used automobile dealers. The Company services these dealers by
providing specialized financing programs for buyers who typically have impaired
credit histories and are unable to access traditional sources of available
consumer credit.
On February 28, 1996, the Company made an election to change its fiscal
year-end from May 31 to December 31. The Company believes this change provides
shareholders with information on a basis more comparable to other public
entities in the specialized automobile finance industry.
The Company's continuing operations consist of its non-prime automobile
finance business and its long distance telephone services business. Except as
otherwise noted, the following discussion of the results of operations is with
respect to the Company's continuing operations.
For the Year Ended December 31, 1996
The Company entered the non-prime automobile finance business in December
1995. The results of operations for the short year (seven months) ended December
31, 1995 include the operation of the Company's non-prime business for only one
month. Certain information for the full year ended December 31, 1996 is not
comparable to the prior year.
Revenues
Revenues for the year ended December 31, 1996 were derived from the
non-prime automobile finance business ($11,789,000), the long distance telephone
service business ($512,000) and investment income ($884,000), respectively.
Net Interest Income on Automobile Receivables
The Company's principal revenue source is the net interest income, or net
spread, earned on its automobile receivables. This net spread is the
differential between interest income received on loans receivable and the
interest expense on related loans payable. The following table summarizes the
pertinent data on the Company's automobile receivables portfolio as of and for
the year ended December 31, 1996 and the seven months ended December 31, 1995:
14
1996 1995(2)
----------- -----------
Average loans receivable $45,394,000 $31,618,000
----------- -----------
Average debt 37,629,000 30,906,000
----------- -----------
Interest revenue $11,167,000 $ 741,000
Interest expense 3,839,000 284,000
----------- -----------
Net interest income $ 7,328,000 $ 457,000
----------- -----------
Yield on loans 24.6% 28.1%
Cost of funds 10.2% 11.0%
----------- -----------
Net interest spread 14.4% 17.1%
----------- -----------
Net interest margin (1) 16.3% 17.3%
----------- -----------
(1) Net interest margin is net interest income divided by average loans
outstanding.
(2) Average amounts are for the period from December 6, 1995 through
December 31, 1995.
Costs and Expenses
Interest expense for the year ended December 31, 1996 of $3,990,000 was
related to the non-prime automobile financing business and the debt outstanding
under the Company's senior credit facilities ($18.1 million as of December 31,
1996), securitized notes ($31.6 million as of December 31, 1996) and
subordinated debt ($10.2 million as of December 31, 1996).
Operating expenses for the year ended December 31, 1996 of $6,913,000 were
attributable to the Company's non-prime automobile financing business ($5.5
million), the long distance telephone service business ($.4 million) and
corporate expenses ($1.0 million).
Depreciation and amortization expense for the year ended December 31, 1996
of $1,189,000 was primarily attributable to the amortization of goodwill and
other intangible assets associated with the acquisition of FFC in December 1995.
Approximately $784,000 of this amortization was related to the goodwill and
other intangibles written off as of December 31, 1996.
Provisions for Credit Losses and Impairment of Long-Lived Assets
The acquisition of FFC in December 1995 included a portfolio of non-prime
automobile receivables of approximately $31 million of which approximately 80%
had been acquired by FFC from Charlie Falk's Auto Wholesalers, Incorporated
(CFAW"). In addition to the tangible assets acquired, the Company entered into a
Non-Compete Agreement and a 10 year Purchase Agreement with CFAW which, among
other provisions, provided for the continued purchase of automobile receivables
based upon established underwriting criteria at the sole discretion and option
of the Company. During the year ended December 31, 1996, the quality of the
automobile receivables acquired from CFAW, both prior to the acquisition date
and subsequent thereto, as evidenced by the number of repossessions and the
charge-off losses incurred, came into question. The Company determined to cease
acquiring automobile receivables from CFAW and accordingly, effective December
31, 1996, the Company entered into a Modification and Termination Agreement with
CFAW.
As a result of this action and other factors, the Company has deemed a
significant portion of the goodwill associated with the acquisition of FFC as
well as the Non-Compete and Purchase Agreements are of no
15
continuing value and, accordingly, has taken a charge against operations as of
December 31, 1996 of $11,193,000. Furthermore, the Company recorded additional
credit losses of $8,100,000 on the acquired automobile receivables and has
determined that an additional provision for losses of $5,251,000 is necessary to
provide for the anticipated credit losses associated with automobile receivables
purchased from CFAW and other dealers during 1996, respectively. These are
non-cash charges to income which do not have a direct adverse effect on the
Company's liquidity.
Loss from Continuing Operations and Income Tax Benefit
The loss from continuing operations before income tax benefit of
$23,452,000 is primarily attributable to the write-off of goodwill and other
intangible assets ($11.2 million), the provision for credit losses on the
acquired portfolio ($8.1 million), the current provision for credit losses ($5.3
million) and the costs associated with the start-up of the Company's Northeast
regional center ($.8 million). For the fiscal years ended May 31, 1995, 1994 and
1993, the Company incurred and paid federal tax liabilities of $7,005,000,
$873,000 and $783,000, respectively. As a result of losses incurred, the
Company has recorded an income tax benefit of $4,352,000 related to anticipated
carryback claims for tax years ended December 31, 1996 and prior. No additional
benefit has been recorded for additional carryback available for tax losses
anticipated subsequent to December 31, 1996 for which the provision for credit
losses has been recognized for the year ended December 31, 1996.
Automobile Receivables
The following table provides information regarding the Company's allowance
for credit losses as of December 31, 1996 and 1995:
1996 1995
--------------- ---------------
Allowance for credit losses $ 15,725,000 $ 6,818,000
Percentage of outstanding automobile 25.5% 21.3%
receivables
The following table summarizes the Company's delinquent accounts that were
more than 60 days delinquent as of December 31, 1996 and 1995:
1996 1996 1995 1995
------------- --------- ------------ -------
Amount % Amount %
------------- --------- ------------ -------
60 to 89 days delinquent $3,290,000 4.1% $2,071,000 4.7%
90 days or more delinquent 1,739,000 2.2% 1,387,000 3.1%
Total delinquent loans $5,029,000 6.3% $3,458,000 7.8%
For the Seven Months Ended December 31, 1995
On February 28, 1996, the Company elected to change its fiscal year end to
December 31. This decision is directly related to the acquisition of FFC and the
entry by the Company into the non-prime automobile finance industry. It is the
belief of management that the ability to compare the performance of the Company
against numerous other publicly traded non-prime automobile finance companies
which report the results of operations on a calendar year will provide for more
meaningful dissemination of financial information and is in the best interest of
the public and the Company's shareholders.
16
Operations for the seven months ended December 31, 1995 include the
operating results of the Company's non-prime auto finance business since
December 6, 1995, the acquisition date.
Revenues
Revenues of $2,232,000 for the seven month period ended December 31, 1995
were derived from the non-prime auto finance business for the month of December
($772,000), the Company's long distance telephone services business ($440,000)
and investment income ($1,020,000).
Costs and Expenses
Interest expense for the seven month period ended December 31, 1995 was
$416,000 and relates to the debt assumed relating to the acquisition of FFC in
December 1995 of approximately $34,000,000 and to the $4,000,000 subordinated
notes issued by the Company in January 1994 and notes payable issued in
connection with an acquisition in January 1994. In September, 1995, the Company
elected to prepay $2,000,000 of the subordinated notes.
Operating expenses for the seven month period ended December 31, 1995 were
$1,346,000 and consisted primarily of corporate office costs and the operating
expenses of the non-prime auto finance business acquired in December 1995.
Depreciation and amortization expense for the seven month period ended
December 31, 1995 was $85,000 and consisted primarily of the amortization of
goodwill and other intangible assets associated with the acquisition of FFC in
December 1995.
Income from Continuing Operations and Income Tax Benefit
Income from continuing operations before taxes for the seven month period
ended December 31, 1995 was $385,000. The income tax benefit for the seven month
period ended December 31, 1995 was $176,000. The Company recorded a tax benefit
as a result of a substantial portion of its investment income being derived from
instruments exempt from federal taxation.
Loss from Discontinued Operations
Loss from discontinued operations for the seven month period ended
December 31, 1995 was $28,000 and was related solely to the operations of the
Company's insurance inspection services business sold in July 1995.
Gain on Sale of Discontinued Operations
The gain on sale of discontinued operations for the period ended December
31, 1995 was $297,000 and was related solely to the sale of the Company's
insurance inspection services business in July 1995.
17
For the Year Ended May 31, 1995
Revenue
For the year ended May 31, 1995 the Company's revenues were derived from
the sale of long distance telephone services ($1,030,000) and investment income
($568,000). Total revenues for the year ended May 31, 1995 were $1,599,000, a
decrease of 23% or $477,000 compared with total revenues of $2,076,000 for the
prior year. The Company's telephone reseller division experienced a decline in
revenue of $771,000 due primarily to reduced network usage levels and volume
rebates from A T & T ($200,000) received in the prior fiscal year in connection
with the achievement of certain network usage levels. Investment income
increased by $294,000 as a direct result of the investment of the proceeds in
April 1995 from the sale of the assets of the Orion Network, Compass Network,
Checkmate Computer Systems, and Insurance Parts Locator businesses.
Costs and Expenses
Interest expense was $316,000, an increase of $185,000 over $131,000 for
the prior year. This was directly related to the $4,000,000 subordinated notes
issued by the Company in January 1994 and notes payable in connection with an
acquisition in January 1994.
Operating expenses for the year ended May 31, 1995 decreased by 12% to
$1,864,000 from $2,118,000 for the prior year. The decrease was primarily
related to the reduction in direct costs associated with providing the Company's
long distance telephone services and was directly related to the decline in
revenues.
Depreciation and amortization expense for the year ended May 31, 1995
decreased by 25% to $25,000 from $34,000 for the prior year.
Preferred stock investment write-off for the year ended May 31, 1995 was
$1,804,000. As a result of the sale of the Company's businesses providing
computerization and communication services to the automotive industry, the lack
of synergistic business opportunity and the inability to remit management fees
and preferred stock dividends as they became due, the Company has written off
its preferred stock investment in ComputerLogic, Inc.
(See Note 6 to the Consolidated Financial Statements)
Loss from Continuing Operations and Income Tax Benefit
Loss from continuing operations before taxes for the year ended May 31,
1995 was $2,410,000 compared to $207,000 in the prior year, an increase of
$2,203,000. This increase is attributable to the write-off of the Company's
Preferred Stock investment in ComputerLogic, Inc. ($1,804,000) and the impact of
the decline in revenue in the Company's Telephone Reseller Division.
The income tax benefit for the year ended May 31, 1995 was $332,000, or14%
of the loss before income taxes compared to $64,000 or 31% in the prior year.
The decrease in percentage was the result of the write-off of the company's
Preferred Stock investment with no current tax benefit. The net loss from
continuing operations was $2,078,000 for the year ended May 31, 1995 an increase
of $1,935,000 as compared to $143,000 in the prior year.
18
Income from Discontinued Operations
Income from discontinued operations for the year ended May 31, 1995 was
$1,519,000 as compared to $2,164,000 in the prior year, a decrease of $645,000.
The income for fiscal year 1995 reflects the ten month period up to the date of
sale. In addition, the decrease was caused by lower margins on the sale of
computer systems ($200,000) and the impact of reduced revenues from the sale of
automotive supplies ($60,000).
Gain on Sale of Discontinued Operations
The gain on the sale of discontinued operations for the year ended May 31,
1995 relates solely to the sale of the operating assets of the Company's Orion
Network, Compass Network, Checkmate Computer Systems and Insurance Parts Locator
businesses on April 1, 1995 to ADP Claims Solutions Group, Inc. The gross
proceeds of $30,350,000 in cash resulted in a gain of
$8,886,000 after applicable taxes of $7,659,000.
Trends and Uncertainties
During the year ended May 31, 1995, increased competition had an adverse
impact on the sale of computer systems and the results of operations.
Liquidity and Capital Resources
Since its entry into the Non-Prime Automobile industry in December 1995,
the Company has funded its operations with payments received from automobile
receivables, borrowings under senior credit facilities and the issuance of asset
backed secured notes.
In October 1996, the Company issued $36.3 million of securitized notes
backed by $40.3 million of automobile receivables to a group of institutional
investors in a private placement transaction. These notes were issued in two
classes, $ 34.3 million of 6.53% Class "A" notes rated "AAA" by Standard &
Poor's Rating Group and "Aaa" by Moody's Investors Service and $ 2.0 million of
11.31% Class "B" notes rated "BB" by Standard & Poor's Rating Group. The Class
"A" notes were credit enhanced with an insurance policy issued by MBIA Insurance
Corporation. The proceeds from the securitization were used to fund Cash Reserve
accounts ($5.6 million) and the balance was used to reduce the amount
outstanding under the Company's Senior Credit facility. Among other provisions,
the notes require the maintenance of certain performance standards with respect
to the portfolio of loan contracts securitized and certain overall financial
consideration of the Company as a whole, including not realizing a net loss from
operations in any two consecutive quarters and maintenance of minimum tangible
net worth, as defined, of $7 million. At December 31, 1996, the Company had
approximately $7.7 million of tangible net worth and was in compliance with all
other covenants. The Company expects to maintain compliance with these covenants
through 1997 and beyond.
In December 1996, the Company entered into a financing agreement with a
lender which provides for a $100 million line of credit to be used for the
funding of the acquisition of non-prime automobile receivables. This facility
provides for borrowings at LIBOR plus 300 basis points and replaced the
Company's existing $42 million facility. Among other provisions, this facility
requires the Company to maintain tangible net worth, as defined, of $10 million
and is cancelable in the event of a material adverse change in the Company's
business. At December 31, 1996, the Company had approximately $10.3 million of
tangible net worth and was in compliance with all other covenants. The Company
expects to maintain compliance with these covenants through 1997 and beyond.
The Company has outstanding $10.2 million of subordinated debt. Of this
amount, $8.2 million of 12% notes was included with the liabilities assumed with
the acquisition of Falk Finance Company, Inc. ("FFC") in December 1995 and $2.0
million of 7.55% notes issued by the Company in 1994.
The Company's liquid assets amounted to $9.2 million as of December 31,
1996. In addition, the Company has $6.4 million in Restricted Cash Reserve
accounts established pursuant to the Indenture Agreement executed in conjunction
with the issuance of Securitized Notes issued pursuant to the Private Placement
Memorandum dated October 11, 1996.
19
The total amount of debt outstanding as of December 31, 1996 and 1995 was
$60.4 million and $32.7 million, respectively. This following table presents the
Company's debt instruments and weighted average interest rates on such
instruments as of December 31, 1996 and 1995, respectively:
1996 1995
---- ----
Weighted Weighted
Average Average
Balance Rate Balance Rate
------- ---- ------- ----
Revolving lines of $18.1 8.75% $20.7 9.75%
credit
Automobile receivable $31.6 6.75% - -
backed notes
Subordinated debt $10.2 11.75% $12.0 12.05%
The Company's ability to continue to acquire automobile receivables as
well as plan for future expansion is directly related to its ability to secure
required capital. The Company has demonstrated the ability to secure warehouse
lines of credit, issue receivable secured notes and obtain subordinated debt.
The Company plans to continue to meet its capital needs through the cash flow
generated from the payment of principal and interest on its outstanding
automobile portfolio, the utilization of its senior credit facility, the
issuance of receivable backed notes and the issuance of subordinated debt
instruments. As of December 31, 1996, $81.9 million is available under the
Company's senior credit facility. The Company believes that it has sufficient
liquid assets and available lines of credit to meet its short and long-term
capital requirements.
The Company is primarily engaged in the acquisition of automobile
receivables. It finances this acquisition program through the utilization of
available lines of credit and other forms of debt. Accordingly, an increase in
the cost of borrowing could adversely impact the results of operations by
impacting the spread between interest earned on existing automobile receivables
and the cost of borrowings which, to some degree, are variable. Inflation and
changing prices had no material impact on revenues or the results of operations
for the year ended December 31, 1996.
Item 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted as a separate section of this
Report beginning on page F-1.
Item 9: DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
20
Part III
Item 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Item 11: EXECUTIVE COMPENSATION
Item 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Item 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to General Instruction G, the information required by Part III shall be
incorporated by reference from the Registrant's definitive proxy statement for
the fiscal year ended December 31, 1996 which is to be filed with the Commission
on or before April 30, 1997.
Part IV
Item 14: EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
Financial Statements
The financial statements listed in the accompanying index to financial
statements on Page F-1 are filed as part of this report.
Exhibits
--------
No. 2A Agreement and Plan of Merger between AutoInfo, Inc.
(New York) and AutoInfo, Inc. (Delaware), January 20,
1987 (2)
No. 3A Certificate of Incorporation of the Company. (3)
No. 3B Amended and restated By-Laws of the Company. (11)
No. 4A Specimen Stock Certificate. (4)
No. 4B Rights Agreement, dated as of March 30, 1995 between
AutoInfo, Inc. and American Stock Transfer & Trust
Company, as Rights Agent. (5)
No. 9A Settlement Agreement, dated June 22, 1995, between
AutoInfo, Inc. and Ryback Management Corporation, et
al. (12)
No. 10A 1985 Stock Option Plan. (1)
No. 10B 1986 Stock Option Plan. (3)
No. 10C 1989 Stock Option Plan. (7)
No. 10D 1992 Stock Option Plan. (10)
No. 10E Employment Agreement between AutoInfo, Inc. and Scott
Zecher dated January 1, 1994, as amended by Agreement
dated April 10, 1995. (12)
21
No. 10F Supplemental Employment Agreement between AutoInfo,
Inc. and Scott Zecher dated as of April 10, 1995.
(12)
No. 10G Employment Agreement between AutoInfo, Inc. and
William Wunderlich dated as of April 10, 1995. (12)
No. 10H Supplemental Employment Agreement between AutoInfo,
Inc. and William Wunderlich as of April 10, 1995.
(12)
No. 10I Form of AutoInfo, Inc. Employee Protection Trust
Agreement dated August 17, 1995. (12)
No. 10J Form of Restricted Stock Grant Agreement between
AutoInfo, Inc. and certain officers, directors and
consultants. (4)
No. 10K Note Agreement dated January 10, 1994 between
AutoInfo, Inc. and certain investors with respect to
issuance of 7.55% Subordinated Notes due January 9,
2000 and Common Stock Purchase Warrants. (6)
No. 10L Asset Purchase Agreement dated January 31, 1995
between ADP Claims Solutions Group, Inc. and
AutoInfo, Inc. (9)
No. 10M Promissory Note and Security and Pledge Agreement
dated April 28, 1995 between AutoInfo, Inc. and Scott
Zecher. (12)
No. 10N Asset Purchase Agreement dated December 6, 1995
between AutoInfo, Inc. and Falk Finance Company,
Inc., et. al. (13)
No. 10O Purchase Agreement dated December 6, 1995 between
AutoInfo Finance of Virginia, Inc. and Charlie Falk's
Auto Wholesaler, Incorporated. (13)
No. 10P Loan Sale Agreement dated October 1, 1996 between
AutoInfo Finance of Virginia, Inc. and AutoInfo
Receivables Company. *
No. 10Q Indenture dated October 1, 1996 among AutoInfo
Receivables Company, as Issuer, Crestar Bank, as
Custodian, and Bankers Trust Company, as Indenture
Trustee. *
No. 10R Servicing Agreement dated as of October 1, 1996 by
and among AutoInfo Finance of Virginia, Inc.,
Servicer, AutoInfo Receivables Company, Issuer,
Bankers Trust, Indenture Trustee and Back-Up Servicer
and Crestar Bank, Custodian. *
No. 10S Common Stock Purchase Warrant Agreement and
Registration Rights Agreement, each dated October 11,
1996, between AutoInfo, Inc. and SunAmerica Life
Insurance Company. *
No. 10T Loan Security and Servicing Agreement, dated as of
December 9, 1996, among AutoInfo Finance of Virginia,
Inc., as Borrower and as Servicer, CarLoanCo.,
22
Inc., as Borrower and as Servicer, and CS First
Boston Mortgage Capital Corp., as Lender. *
No. 10U Custody Agreement, dated as of December 9, 1996, by
and among CS First Boston Mortgage Capital Corp.,
Lender, AutoInfo Finance of Virginia, Inc., Borrower
and Servicer, CarLoanCo., Inc., Borrower and
Servicer, and Crestar Bank, Custodian. *
No. 10V Common Stock Purchase Warrant Agreement and
Registration Rights Agreement, each dated as of
December 10, 1996, between AutoInfo, Inc. and CS
First Boston Mortgage Capital Corp. *
No. 11A Calculation of earnings per share. *
No. 21 Subsidiaries of the Registrant. *
No. 24A Consent of Arthur Andersen LLP, independent public
accountants. *
No. 27 Financial Data Schedule. *
-----------------------
*Filed as an Exhibit hereto.
(1) This Exhibit was filed as an Exhibit to the Company's Registration
Statement on Form S-18 (File No. 33-3526-NY) and is incorporated herein by
reference.
(2) This Exhibit was filed as an Exhibit to the Company's Current Report on
Form 8-K dated January 6, 1987 and is incorporated herein by reference.
(3) These Exhibits were filed as Exhibits to the Company's definitive proxy
statement dated October 20, 1986 and incorporated herein by reference.
(4) These Exhibits were filed as Exhibits to the Company's Registration
Statement on Form S-1 (File No. 33-15465) and are incorporated herein by
reference.
(5) This Exhibit was filed as an Exhibit to the Company's Registration
Statement on Form 8-A filed April 13, 1995, and is incorporated herein by
reference.
(6) This Exhibit was filed as an Exhibit to the Company's Annual Report on
Form 10-K for the year ended May 31, 1994 and is incorporated herein by
reference.
(7) This Exhibit was filed as an Exhibit to the Company's definitive proxy
statement dated September 25, 1989 and is incorporated herein by
reference.
(8) These Exhibits were filed as Exhibits to the Company's Current Report on
Form 8-K dated December 19, 1991 and are incorporated herein by reference.
(9) This Exhibit was filed as an Exhibit to the Company's definitive proxy
statement dated March 1, 1995 and is incorporated herein by reference.
(10) This Exhibit was filed as an Exhibit to the Company's definitive proxy
statement dated October 2, 1992 and is incorporated herein by reference.
(11) This Exhibit was filed as an Exhibit to the Company's Current Report on
Form 8-K dated March 30, 1995 and is incorporated herein by reference.
(12) This Exhibit was filed as an Exhibit to the Company's Annual Report on
Form 10-K dated May 31, 1995 and is incorporated herein by reference.
(13) This Exhibit was filed as an Exhibit to the Company's Current Report on
Form 8-K dated December 6, 1995 and is incorporated herein by reference.
23
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d), the Securities Exchange Act
of 1934, the registrant has duly caused this Report to be signed on March 25,
1997 on its behalf by the undersigned, thereunto duly authorized.
AutoInfo, Inc.
By: /s/ Scott Zecher
---------------------------------
Scott Zecher, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this Report has been
signed below by the following persons on behalf of the registrant and in the
capacities indicated.
/s/ Andrew Gaspar
------------------------
Andrew Gaspar Director and Chairman March 25, 1997
/s/ Scott Zecher
------------------------
Scott Zecher Director, President,
Chief Executive Officer March 25, 1997
/s/ William Wunderlich
------------------------
William Wunderlich Chief Financial Officer,
Secretary and Treasurer March 25, 1997
(Principal Financial &
Accounting Officer)
/s/ Jason Bacher
------------------------
Jason Bacher Director March 25, 1997
/s/ Robert Fagenson
------------------------
Robert Fagenson Director March 25, 1997
/s/ Howard Nusbaum
------------------------
Howard Nusbaum Director March 25, 1997
/s/ Jerome Stengel
------------------------
Jerome Stengel Director March 25, 1997
24
AUTOINFO, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Public Accountants F-2
Consolidated Balance Sheets as of December 31,
1996 and 1995 F-3
Consolidated Statements of Operations for the Year
Ended December 31, 1996, the Seven Months Ended
December 31, 1995 and the Year Ended May 31, 1995 F-4
Consolidated Statements of Stockholders' Equity for
the Year Ended December 31, 1996, the Seven Months
Ended December 31, 1995 and the Year Ended May 31,
1995 F-5
Consolidated Statements of Cash Flows for the Year
Ended December 31, 1996, the Seven Months Ended
December 31, 1995 and the Year Ended May 31, 1995 F-6
Notes to Consolidated Financial Statements F-7
Information required by schedules called for under Regulation S-X is either not
applicable or is included in the Consolidated Financial Statements or Notes
thereto.
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To AutoInfo, Inc.:
We have audited the accompanying consolidated balance sheets of AutoInfo, Inc.
(a Delaware corporation) and subsidiaries as of December 31, 1996 and 1995, and
the related consolidated statements of operations, stockholders' equity and cash
flows for the year ended December 31, 1996, the seven month period ended
December 31, 1995 and the year ended May 31, 1995. 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 financial position of AutoInfo, Inc. and subsidiaries
as of December 31, 1996 and 1995, and the results of their operations and their
cash flows for the year ended December 31, 1996, the seven month period ended
December 31, 1995 and the year ended May 31, 1995, in conformity with generally
accepted accounting principles.
New York, New York
March 24, 1997
F-2
AUTOINFO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1995
ASSETS
1996 1995
------------ ------------
Gross automobile receivables $ 81,406,679 $ 44,070,860
Unearned interest (19,867,745) (12,178,807)
------------ ------------
Net automobile receivables 61,538,934 31,892,053
Allowance for credit losses (Note 6) (15,725,390) (6,818,195)
------------ ------------
Net automobile receivables after
allowance for credit losses 45,813,544 25,073,858
Cash 4,307,038 964,842
Restricted cash (Note 8) 6,380,437 --
Short-term investments (Note 5) 4,892,199 23,906,459
Fixed assets, net 1,725,774 256,269
Goodwill and other intangibles, net (Note 12) 2,906,587 14,302,274
Other assets 4,073,502 1,291,674
Income tax refund receivable (Note 9) 4,352,000 --
------------ ------------
$ 74,451,081 $ 65,795,376
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Revolving lines of credit (Note 8) $ 18,082,472 $ 20,679,024
Automobile receivables backed notes (Note 8) 31,611,989 --
Subordinated notes and other debt (Note 8) 10,710,330 12,067,166
Accounts payable and accrued liabilities 1,718,901 2,030,833
------------ ------------
Total liabilities 62,123,692 34,777,023
------------ ------------
Commitments and contingencies (Note 10)
Stockholders' equity
Common Stock - authorized 20,000,000 shares $.01
par value; issued and outstanding 7,954,752 at
December 31, 1996 and 7,777,752 at December 31,1995 79,548 77,778
Additional paid-in capital 18,171,282 17,782,677
Officer note receivable (Note 11) (466,797) (466,797)
Deferred compensation under stock
bonus plan (Note 11) (385,930) (404,092)
Retained earnings (deficit) (5,070,714) 14,028,787
------------ ------------
Total stockholders' equity 12,327,389 31,018,353
------------ ------------
$ 74,451,081 $ 65,795,376
============ ============
See Accompanying Notes to Consolidated Financial Statements
F-3
AUTOINFO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996, THE SEVEN MONTHS ENDED
DECEMBER 31, 1995 AND THE YEAR ENDED MAY 31, 1995.
Seven Months
Year Ended Ended Year Ended
December 31, December 31, May 31,
REVENUES 1996 1995 1995
------------ ----------- -----------
Interest and other finance revenue $ 11,789,130 $ 771,502 $ --
Investment income 884,459 1,020,382 568,267
Long distance telephone services 511,534 439,839 1,030,428
------------ ----------- -----------
Total revenues 13,185,123 2,231,723 1,598,695
------------ ----------- -----------
COSTS AND EXPENSES
Interest expense 3,989,912 415,904 315,908
Operating expenses 6,913,086 1,346,218 1,863,779
Depreciation and amortization 1,189,298 84,889 25,158
Provision for credit losses (Note 6) 5,251,000 -- --
Preferred stock investment write-off -- -- 1,804,256
------------ ----------- -----------
17,343,296 1,847,011 4,009,101
Unusual item - impairment of long-lived assets and additional
credit losses on acquired automobile receivables
(Note 12) 19,293,328 -- --
------------ ----------- -----------
Total costs and expenses 36,636,624 1,847,011 4,009,101
------------ ----------- -----------
Income (loss) from continuing operations before
income tax benefit (23,451,501) 384,712 (2,410,406)
Income tax benefit (4,352,000) (175,960) (332,280)
------------ ----------- -----------
Income (loss) from continuing operations $(19,099,501) 560,672 (2,078,126)
Income (loss) from discontinued operations net of
income tax benefit (Note 4) -- (28,163) 1,518,659
Gain on sale of discontinued operations, net of income
taxes (Note 4) -- 296,839 8,885,688
------------ ----------- -----------
Net income (loss) $(19,099,501) $ 829,348 $ 8,326,221
============ =========== ===========
Per share data:
Income (loss) from continuing operations ($ 2.41) $ .07 ($ .28)
Income from discontinued operations -- -- .21
Gain on sale of discontinued operations -- .04 1.19
------------ ----------- -----------
Net income per share ($ 2.41) $ .11 $ 1.12
============ =========== ===========
Weighted average number of common and
common equivalent shares 7,920,515 7,770,917 7,410,548
------------ ----------- -----------
See Accompanying Notes to Consolidated Financial Statements
F-4
AUTOINFO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1996, THE SEVEN MONTHS ENDED DECEMBER 31,
1995 AND THE YEAR ENDED MAY 31, 1995
Shares of Deferred
Common Additional Officer Compensation
Stock Common Paid - In Note Under Stock Retained
Outstanding Stock Capital Receivable Bonus Plan Earnings
---------- ------- ----------- ---------- ------------ ------------
Balance June 1, 1994 7,253,286 $72,533 $16,344,194 $ -- $(432,847) $ 4,873,218
Exercise of stock options 502,966 5,030 1,234,365 -- -- --
Amortization of deferred
compensation -- -- -- -- 18,161 --
Acceleration of vesting rights
of employee stock options -- -- 146,708 -- -- --
Loan to officer for the
exercise of stock options -- -- -- (466,797) -- --
Net income -- -- -- -- -- 8,326,221
---------- ------- ----------- --------- --------- ------------
Balance May 31, 1995 7,756,252 77,563 17,725,267 (466,797) (414,686) 13,199,439
Exercise of stock options 21,500 215 57,410 -- -- --
Amortization of deferred
compensation -- -- -- -- 10,594 --
Net income -- -- -- -- -- 829,348
---------- ------- ----------- --------- --------- ------------
Balance December 31, 1995 7,777,752 77,778 17,782,677 (466,797) (404,092) 14,028,787
Common shares issued 177,000 1,770 388,605 -- -- --
Amortization of deferred
compensation -- -- -- -- 18,162 --
Net (loss) -- -- -- -- -- (19,099,501)
---------- ------- ----------- --------- --------- ------------
Balance, December 31, 1996 7,954,752 79,548 $18,171,282 $(466,797) $(385,930) $ (5,070,714)
========== ======= =========== ========= ========= ============
See Accompanying Notes to Consolidated Financial Statements
F-5
AUTOINFO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996, THE SEVEN MONTHS ENDED DECEMBER 31,
1995 AND YEAR ENDED MAY 31, 1995
Seven
Year Ended Months Ended Year ended
December 31, December 31, May 31,
1996 1995 1995
------------ ------------- ------------
Cash flows from operating activities:
Net income (loss) $(19,099,501) $ 829,348 $ 8,326,221
Adjustments to reconcile net income to net
cash from operating activities:
Depreciation and amortization expenses 1,189,298 84,889 413,926
Amortization of deferred compensation 18,162 10,594 18,161
Gain on sale of discontinued operations -- (449,756) (16,544,329)
Preferred stock investment write-off -- -- 1,637,199
Provision for credit losses 5,251,000 -- --
Unusual item-impairment of long-lived assets and
additional credit losses on acquired automobile
receivables 19,293,328 -- --
Changes in assets and liabilities:
Automobile receivables, net (34,290,686) (986,632) --
Other assets (3,081,728) (573,645) 194,760
Income tax refund, receivable (4,352,000) -- --
Accounts payable and accrued liabilities (311,933) (6,625,804) 7,329,083
------------ ------------- ------------
Net cash provided by (used for) continuing operations (35,384,060) (7,711,006) 1,375,021
------------ ------------- ------------
Net cash (used for) discontinued operations -- (105,141) (205,480)
------------ ------------- ------------
Cash flows from investing activities:
Sale of discontinued operations -- 3,750,000 30,350,000
Officer note receivable -- -- (466,797)
Acquisitions -- (4,912,333) --
Capital expenditures (1,797,168) (497,661) (341,861)
Redemption of short-term investments 43,941,466 103,294,353 23,644,168
Purchases of short term investments (24,927,206) (88,886,323) (54,894,966)
------------ ------------- ------------
Net cash provided by (used for) investing activities 17,217,092 12,748,036 (1,709,456)
------------ ------------- ------------
Cash Flows from Financing Activities:
Issuance of notes 36,789,873 -- --
Reduction of borrowings (8,900,272) (4,546,540) (623,096)
Increase in restricted cash (6,380,437) -- --
Exercise of stock options -- 57,625 1,239,395
------------ ------------- ------------
Net cash provided by (used for) financing activities 21,509,164 (4,488,915) 616,299
------------ ------------- ------------
Net increase in cash 3,342,196 442,974 76,384
Cash at beginning of year 964,842 521,868 445,484
------------ ------------- ------------
Cash at end of year $ 4,307,038 $ 964,842 $ 521,868
============ ============= ============
See Accompanying Notes to Consolidated Financial Statements
F-6
AUTOINFO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1996, SEVEN MONTHS ENDED
DECEMBER 31, 1995 AND YEAR ENDED MAY 31, 1995
Note 1 - Business and Summary of Significant Accounting Policies
Business
On December 6, 1995, AutoInfo, Inc. (the "Company"), through a newly
formed wholly owned subsidiary, acquired the operating assets of Falk Finance
Company ("FFC"), a Norfolk, Virginia based non-prime automobile consumer finance
company, for $5,125,000 in cash and the assumption of liabilities and debt
approximating $34,000,000. As a result of this acquisition, the Company's
primary business is to purchase non-prime automobile retail installment
contracts from independent and franchised used vehicle dealers. The Company
services these dealers by providing specialized financing programs for buyers
who typically have impaired credit histories and are unable to access
traditional sources of available consumer credit.
In conjunction with the acquisition of FFC, the Company entered into a ten
year agreement with Charlie Falk Auto Wholesale, Incorporated ("CFAW"). This
agreement provided and established the basis for conducting business and the
criteria under which the Company purchased contracts from CFAW. Effective
December 31, 1996, the Company and CFAW mutually agreed to and entered into a
termination agreement which, among other provisions, provides for the Company to
continue to purchase contracts which meet established underwriting criteria only
through March 1997 (see Note 12). In 1996, approximately 38% of all contracts
funded by the Company were purchased from CFAW.
In July 1996, the Company commenced operations of its Northeast Regional
Center in Norwalk, Connecticut to provide its complete range of services to
dealers in the Northeast. This center is presently servicing dealers in
Connecticut, Maine, Massachusetts, New Hampshire, New Jersey, Rhode Island and
Vermont.
Prior to December 1995, the Company operated in different business lines.
During the fiscal year ended May 31, 1995 and on July 20, 1995, the Company
sold substantially all of its operating assets for $34,100,000 in
cash in two separate transactions. As a result, the Company's sole operating
business which remained provides long distance telephone communications
services.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries, all of which are wholly-owned. All significant
intercompany balances and transactions have been eliminated in consolidation.
Automobile Receivables
Automobile receivables represent retail installment sales contracts
purchased from automobile dealers at discounts ranging up to 20%.
Allowance for Credit Losses
The Company established an allowance for credit losses in the FFC acquired
portfolio as of the date of acquisition based upon an evaluation of a number of
factors including prior loss experience, contractual delinquencies, the value of
underlying collateral and other factors. At the time of the purchase of
installment contracts from dealers an allowance for credit losses is established
based on an analysis of similar factors. The allowance is periodically evaluated
for adequacy based upon a review of credit loss experience, delinquency trends,
static pool loss analysis and an estimate of future losses inherent in the
existing finance receivable portfolio. Subsequent to the purchase of loans, a
provision for losses, if any, is charged to income in order to maintain the
allowance at an adequate level. The Company charges the allowance for loss
account at the time a customer receivable is deemed uncollectable. Any reduction
in the required allowance will be amortized to income prospectively as an
adjustment in the yield on the related loans.
The estimate of the allowance for credit losses requires a high degree of
judgement based upon, among other things, the inherent risk associated with the
portfolio of loans being purchased from dealers. Changes in estimates and
additional losses on portfolios could develop in the future based on changes in
economic factors and other circumstances and such changes could be significant.
The Company estimates and records losses as they become apparent, estimatable
and probable.
Concentration of Credit Risks
The Company's primary credit risk relates to lending to individuals who
cannot obtain traditional forms of financing. The Company is currently acquiring
automobile receivables in 13 states and, accordingly, does not believe that its
business is subject to credit risk with respect to geographic concentration.
Repossessed Vehicles Held for Sale
The Company repossesses the collateral when a determination is made that
collection efforts are unlikely to be successful. The value of a repossessed
vehicle is based upon an estimate of the net realizable amount upon liquidation.
As of December 31, 1996, there were 304 repossessed vehicles held for resale
with an aggregate value of approximately $804,000.
F-7
Revenue Recognition
The Company recognizes interest income from automobile receivables on the
interest method. The accrual of interest income is suspended when a loan is
ninety days contractually delinquent. All discounts on the purchase of
installment contracts from dealers are held in reserve and are considered to
cover future anticipated credit losses.
Short-Term Investments
Short-term investments include common stock and bond funds, money market
instruments and municipal bonds. Investments are carried at cost which
approximates market value (See Note 5).
Fixed Assets
Depreciation of fixed assets is provided on the straight-line method over
the estimated useful lives of the related assets which range from three to five
years.
Goodwill and Other Intangibles
The excess of cost over the fair value of net assets acquired is allocated
to goodwill and other intangibles and is being amortized using the straight-line
method over periods of up to twenty years. In March 1995, the Financial
Accounting Standards Board issued SFAS No. 121 "Accounting for the Impairment of
Long-Lived Assets to Be Disposed Of." The pronouncement is effective for fiscal
years beginning after December 16, 1995. This statement requires that long-lived
assets and certain identifiable intangibles to be held and used by an entity be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. The Company
currently uses methods that are consistent with SFAS No.121 to evaluate the
carrying amount of goodwill and other intangibles including comparing estimated
future cash flows identified with each long-lived asset group. For purposes of
such comparison, portions of unallocated excess of cost over net assets acquired
were attributed to related long-lived assets and identifiable intangible assets
based upon the relative fair values of such assets at acquisition. In the fourth
quarter of 1996, the Company determined that certain components of goodwill and
other intangible assets were impaired resulting in a charge to operations (see
Note 12).
Net Income (Loss) Per Share
Net income (loss) per share of common stock is based on the weighted
average number of shares of common stock and common stock equivalents
outstanding during the period. The net income (loss) per share and the weighted
average number of common and common equivalent shares represent primary earnings
per share data. Fully diluted earnings per share is not presented since its
effect is not significant.
Use of Estimates
The preparation of these financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions. These estimates and assumptions affect the reported amounts of
assets, liabilities and contingent liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the periods
presented. Management estimates that are particularly sensitive to change relate
to the determination of the adequacy of the allowance for credit losses on
automobile receivables. The Company believes that all such
F-8
assumptions are reasonable and that all estimates are adequate, however, actual
results could differ from those estimates.
Income Taxes
Deferred income taxes are recorded in accordance with Statement of
Financial Standard No. 109 "Accounting for Income taxes," by applying enacted
statutory tax rates to temporary differences between the financial statement
carrying amounts and the tax basis of existing assets and liabilities. At
December 31, 1996, the Company has net deferred tax assets of approximately $3.2
million, primarily resulting from the differences between financial reporting
and tax bases of goodwill and automobile receivables, which are offset by
valuation allowances due to the uncertainty of their future realizability.
Stock-Based Compensation
The Company accounts for stock-based compensation issued to employees in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees". The Company did not adopt the financial reporting
requirements of Statement of Financial Accounting Standards No. 123 ("SFAS
123"), "Accounting for Stock-Based Compensation," for stock based compensation
granted to employees in accordance with the provisions of SFAS 123 and
accordingly, the Company has disclosed in the notes to the financial statements
the pro forma net loss for the periods presented as if the fair value based
method was used. (See Note 11).
Note 2 - Change in Fiscal Year
On February 28, 1996, the Company changed its fiscal year-end to December
31 from May 31. The Company believes that this change will provide shareholders
with information on a basis more comparable to other public entities in the
specialized automobile finance industry. Accordingly, the accompanying financial
statements reflect the Company's financial position and results of operations as
of and for the seven month period ended December 31, 1995.
Following is selected financial data for the seven month periods ended
December 31, 1995 and 1994:
1994
1995 (Unaudited)
------------- -------------
Revenues $2,231,723 $641,227
------------- -------------
Income (loss) from continuing 560,672 (186,225)
operations
Income (loss) from discontinued (28,163) 1,072,913
operations
Gain on sale of discontinued 296,839 -
operations
------------- -------------
Net income $829,348 $886,688
------------- -------------
Per share data:
From continuing operations $.07 $(.03)
From discontinued operations - .15
From gain on sale .04 -
------------- -------------
Net income $.11 $.12
------------- -------------
F-9
Note 3 - Business Acquisitions
On December 6, 1995, the Company, through a newly formed wholly owned
subsidiary, acquired the operating assets of Falk Finance Company (FFC), a
Norfolk, Virginia based specialized financial services company, for $5,125,000
in cash and the assumption of liabilities and debt approximating $34,000,000.
The results of operations of this business have been consolidated with the
Company since December 6, 1995.
The following unaudited pro-forma results of operations for the seven
month period ended December 31, 1995 and for the year ended May 31, 1995 is
presented as though the Company's business acquisition during the seven month
period ended December 31, 1995 had occurred at the beginning of the prior fiscal
year ended May 31, 1995:
For the seven
months ended For the year
December 31, ended May 31,
1995 1995
---------- ----------
Revenues $5,957,662 $8,141,980
Net income $ 601,400 $6,840,548
Net income per share $ .08 $ .92
Note 4 - Discontinued Operations
On July 20, 1995, the Company sold the assets relating to its Insurance
Inspection Services business for $3,750,000 in cash. The gain on the sale was
$296,839 after applicable taxes of $152,917. On April 1, 1995, the Company sold
the assets relating to its Orion Network, Compass Network, Checkmate Computer
Systems, and Insurance Parts Locator businesses to ADP Claims Solutions Group,
Inc., for $30,350,000 in cash. The gain of the sale was $8,885,688 after
applicable taxes of $7,658,641. Prior years have been restated to present the
businesses sold as discontinued operations.
Summarized results of operations of the discontinued operations were as
follows:
For the seven For the year
months ended ended
December 31, May 31,
1995 1995
------------- -----------
Revenues $ 533,318 $17,490,757
========= ===========
Income (loss) before income taxes (42,685) 2,021,194
Income taxes (benefit) (14,522) 502,535
--------- -----------
Net income (loss) from discontinued
operations $ (28,163) $ 1,518,659
========= ===========
Gain on sale $ 449,756 $16,544,329
Income Taxes 152,917 7,658,641
--------- -----------
Net income from sale of discontinued
operations $ 296,839 $ 8,885,688
========= ===========
F-10
Note 5 - Short-Term Investments
Debt and equity securities used as part of the Company's investment
management that may be sold in response to cash needs, changes in interest
rates, and other factors have been classified as securities available for sale.
Such securities are reported at cost which approximates fair value and have
maturities of less than one year and included:
December 31, December 31,
1996 1995
----------- -----------
Common stock and bond funds $ 2,883,524 $ 3,613,394
Money market instruments 665,619 4,585,558
Municipal bonds 1,343,056 15,707,507
----------- -----------
$ 4,892,199 $23,906,459
----------- -----------
Gains and losses on disposition of securities are recognized on the
specific identification method in the period in which they occur. Unrealized
gains and losses, if material, would be excluded from earnings and reported as a
separate component of stockholders' equity on an after-tax basis. During the
year ended December 31, 1996, the seven month period ended December 31, 1995 and
the fiscal year ended May 31, 1995, gains and losses arising from the
disposition of marketable securities as well as unrealized gains and losses were
not material.
F-11
Note 6 - Credit Losses
A rollforward of allowance for credit losses by significant component is
as follows:
Portfolio
Acquired from Other
FFC Portfolios Total
------------ ------------ ------------
Balance at December 31, 1995 $ 6,122,000 $ 696,000 $ 6,818,000
Purchase discounts -- 11,181,000 11,181,000
Charge offs (10,469,000) (5,156,000) (15,625,000)
Additions to reserve (Note 12) 8,100,000 5,251,000 13,351,000
------------ ------------ ------------
Balance at December 31, 1996 $ 3,753,000 $ 11,972,000 $ 15,725,000
------------ ------------ ------------
Provision For Credit Losses
During 1996, the Company purchased automobile receivables from CFAW
pursuant to a ten-year purchase agreement related to the acquisition of assets
from FFC in December 1995, in addition to purchases from other dealers. In 1996,
the determination was made by the Company to terminate this relationship. Due to
the poor performance of this portfolio, in addition to additional credit losses
provided on the portfolio acquired from FFC, the Company has provided for
additional credit losses relating to automobile receivables purchased from CFAW
during 1996 included in the $5,251,000 noted above.
Note 7 - Investment
In December 1991, the Company acquired a Preferred Stock Investment (3,293
shares of $500 par value, 7% cumulative convertible preferred stock) in
ComputerLogic, Inc., a Georgia corporation ("ComputerLogic"), which offers
computer based products to the automobile parts and repair industries. The
Preferred Stock elects not less than 40% of the ComputerLogic board of
directors. The Company's Preferred Stock Investment is convertible into 38% of
the outstanding capital stock of ComputerLogic. The Company also has the option
to increase its investment for additional consideration as described in the
purchase agreement. The purchase price consisted of cash of $1,250,000 and
101,667 shares of the Company's Common Stock. The investment was being carried
at the lower of cost or net realizable value.
As a result of the sale of the Company's businesses providing
computerization and communications services to the automotive industry and the
resulting lack of synergistic business opportunities, the Company does not plan
to exercise its option to increase its investment in ComputerLogic. The Company
therefore as of May 31, 1995 wrote off its preferred stock investments totaling
$1,804,256 which included unpaid management fees and unpaid preferred stock
dividends of $155,460 as of May 31, 1995 and determined that any future fees and
dividend received would be recorded as income when received. During the year
ended December 31, 1996 the Company received $280,000 in fees and dividends from
ComputerLogic.
F-12
Note 8 - Debt
Revolving Lines of Credit
In December 1996, the Company entered into a revolving credit agreement
with CS First Boston Mortgage Capital Corp. ("CSFB"), which provides for
borrowings of up to $100 million collateralized by installment automobile loan
contracts. Among other provisions, this facility requires the Company to
maintain tangible net worth, as defined, of $10 million and is cancelable in the
event of a material adverse change in the Company's business. At December 31,
1996, the Company had approximately $10.3 million of tangible net worth and was
in compliance with all other covenants. The Company expects to maintain
compliance with these covenants through 1997 and beyond. The note matures
December 1999 and is renewable each year at the option of the lender. Interest
is payable monthly at the LIBOR rate ( 5.55% as of December 31, 1996) plus 3%.
Advances outstanding as of December 31, 1996 were $3,243,000 and the weighted
average interest rate for the month of December 1996 was 8.6%.
In conjunction with the acquisition of FFC on December 6, 1995, the
Company entered into a revolving credit facility with Finova Capital Corporation
("Finova") which provided for borrowings of up to $42 million. Interest is
payable monthly at the prime rate (8.25% at December 31, 1996) plus 1.75%.
Advances outstanding as of December 31, 1996 were $14,839,000 and the weighted
average interest rate for the month of December 1996 was 10.0%. This revolving
credit facility was terminated and repaid through the utilization of the CSFB
revolving credit facility in January 1997.
The total amount available under these lines at December 31, 1996 was
approximately $82 million.
F-13
Automobile Receivables Backed Notes
In October 1996, AutoInfo Receivables Company, a wholly-owned special
purpose subsidiary of the Company, sold, in a private placement, $34,281,119 of
6.53% Class A Auto Loan Backed Notes and $2,016,536 of 11.31% Class B Auto Loan
Backed Notes with a stated maturity date of January 2002. These Notes are repaid
from the collection of payments of principal and interest and are collateralized
by approximately $40,330,000 of automobile receivables and a Reserve Account in
the amount of approximately $5,600,000. In addition, the repayment of principal
of the Class A Notes is guaranteed by insurance issued by MBIA Insurance
Corporation, a nationally recognized insurance company. The Class A Notes were
rated AAA by Standard & Poors's Rating Group and Aaa by Moody's Investor
Service. The Class B Notes were rated BB by Standard & Poors's Rating Group.
The Company acts as servicer and, as such, performs collection and
servicing activities on these receivables. An Indenture and Servicing Agreement
requires, among other provisions, the maintenance of certain performance
standards with respect to the portfolio of loan contracts securitized and
certain overall financial considerations of the Company as a whole, including
not realizing a net loss from operations in any two consecutive quarters and
maintenance of minimum tangible net worth, as defined, of $7 million. At
December 31, 1996, the Company had approximately $7.7 million of tangible net
worth and was in compliance with all other covenants. The Company expects to
maintain compliance with these covenants through 1997 and beyond. The proceeds
from the issuance of these notes were used to reduce the borrowings under the
Company's senior credit facility as well as to fund the Reserve Account. The
assets of AutoInfo Receivables Company are not available to pay general
creditors of the Company.
As of December 31, 1996, the balance of the Class A and Class B Notes, the
underlying loan contracts receivable backing these Notes and the Reserve Account
balances were as follows:
Underlying Reserve
Note Receivables Account
Balance Balance Balance
----------- ----------- ----------
Class A Notes $29,595,453 $34,303,344 $6,178,783
Class B Notes 2,016,536 (a) 201,654
----------- ----------
$31,611,989 $6,380,437
----------- ----------
(a) The Class B Notes are collateralized by the loan contracts only
after the Class A noteholders are paid in full.
F-14
Subordinated Notes and Other Debt
Subordinated notes and other debt consist of the following:
1996 1995
----------- -----------
Subordinated notes (a) $ 8,200,000 $ 9,800,000
Subordinated notes due January 2000 payable in equal
annual installments in January 1998, 1999 and 2000 with
interest at 7.55% paid semi-annually 2,000,000 2,000,000
Other notes payable due in monthly installments through 2001
with interest at prime to 12.4% 510,330 267,166
----------- -----------
Total other notes $10,710,330 $12,067,166
----------- -----------
(a) On December 6, 1995 as part of the acquisition of FFC, the Company
assumed unsecured subordinated notes in the amount of $9,800,000. In
1996, the Company redeemed $1,600,000 of the Series B Notes. These
notes bear interest at the rate of 12% per annum, payable monthly.
The Series A Notes ($4,900,000) mature on May 1, 1999 and the Series
B Notes ($3,300,000) mature on December 31, 2000.
The Company paid interest of approximately $3,938,000 for the year ended
December 31, 1996, $231,000 for the seven month period ended December 31, 1995
and $308,000 during the fiscal year ended May 31, 1995, respectively.
Note 9 - Income Taxes
For the year ended December 31, 1996, the seven months ended December 31,
1995 and for the year ended May 31, 1995, the provision (benefit) for income
taxes consisted of the following:
Seven Months
Year ended Ended Year ended
December 31, December 31, May 31,
1996 1995 1995
----------- ----------- -----------
Federal $(4,352,000) $ (184,882) $ (320,331)
State -- 8,922 (11,949)
----------- ----------- -----------
Income tax benefit on loss from
continuing operations $(4,352,000) $ (175,960) $ (332,280)
----------- ----------- -----------
Income tax on income from
discontinued operations:
Federal -- $ (14,522) $ 593,093
State -- -- (90,558)
----------- ----------- -----------
$ -- $ (14,522) $ 502,535
----------- ----------- -----------
Income taxes on gain on sale of
discontinued operations:
Federal -- $ 152,917 $ 7,148,753
State -- -- 509,888
----------- ----------- -----------
$ -- $ 152,917 $ 7,658,641
----------- ----------- -----------
F-15
The following table reconciles the Company's effective income tax rate on
income (loss) from continuing operations to the Federal Statutory Rate for the
year ended December 31, 1996, the seven month period ended December 31, 1995 and
for the year ended May 31, 1995:
Seven Months
Year ended Ended Year Ended
December 31, December 31, May 31,
1996 1995 1995
------ ------ ------
Federal Statutory Rate (34.0)% 34.0% (34.0)%
Effect of:
State and local taxes, net of federal
benefit -- (.8) (.2)
Benefit from tax exempt income (.8) (81.4) (7.0)
Preferred stock investment write-off -- -- 23.1
Valuation allowance against deferred
tax assets 15.3 -- --
Other, net -- 2.5 4.3
-------- -------- --------
(19.5)% (45.7)% (13.8)%
======== ======== ========
The Company paid income taxes of approximately $0, $6,632,000 and
$884,000, for the year ended December 31, 1996, the seven month period ended
December 31, 1995 and for the fiscal year ended May 31, 1995, respectively.
Note 10 - Commitments and Contingencies
Leases
The Company is obligated under noncancellable operating leases for
premises and equipment expiring at various dates through 1999. Future minimum
lease payments are $313,000, $204,000, $167,000, $142,000 and $53,000 for each
of the five year periods ended December 31, 2001. Lease expense for the year
ended December 31, 1996, the seven month period ended December 31, 1995 and the
year ended May 31, 1995 was approximately $ 227,000, $68,000 and $384,000,
respectively.
401(k) Plan
The Company is obligated under its 401(k) Plan to match fifty percent of
employee contributions up to a maximum of three percent of eligible
compensation. 401(k) Plan expense for the year ended December 31, 1996, the
seven month period ended December 31, 1995 and the year ended May 31, 1995 was
approximately $38,000, $ 3,000 and $72,000, respectively.
Other Agreements
The Company has employment agreements with two officers of the Company,
one of whom is also a stockholder. The agreements expire through 1998 and
provide for aggregate annual compensation of approximately $400,000. In
addition, the Company has an employment agreement with a non-officer employee.
This agreement expires in April 2000 and provides for an aggregate minimum
annual compensation of $140,000 plus a bonus equal to one-tenth of one percent
(1/10%) of the outstanding net performing installment contract receivable
portfolio of the Company's non-prime auto finance business generated in the
Northeast Region. An employment agreement with another non-officer employee was
terminated in January 1997. In accordance with this
F-16
termination, the Company is obligated for compensation at an annual rate of
$140,000 through October 1997.
The Company has entered into supplemental employment agreements (the
"Supplemental Employment Agreements") with Messrs. Zecher and Wunderlich (the
"Covered Executives"), which provide that if there is a Change in Control of the
Company (as defined therein) during the Protected Period (described below), the
terms of the Supplemental Employment Agreements will supersede the Covered
Executives' existing employment agreements and will govern the terms of the
Covered Executives' employment following the Change in Control for a three-year
term, in the case of Mr. Zecher, and a two-year term, in the case of Mr.
Wunderlich (the "Employment Term").
The Supplemental Employment Agreements provide that during the Employment
Term, the Covered Executives will remain employed in their capacities with the
Company as of the Change in Control and will continue to receive an annual
salary (the "Base Salary") and benefits at least equal to that which they
received prior to the Change in Control and an annual bonus at least equal to
the Covered Executive's average annual bonus during the three years prior to the
Change in Control. The Supplemental Employment Agreements provide that if,
during the Employment Term, the Covered Executive's employment is terminated by
the Company other than for Cause or Disability or by the Executive either for
Good Reason or during the 60-day Window Period commencing on the anniversary of
the Change in Control (as each of the foregoing terms are defined in the
applicable Supplemental Employment Agreement), the Covered Executive would
receive a severance payment equal to the sum of his Base Salary and the higher
of his annual bonus for the then most recent year or his average annual bonus
during the three years preceding the Change in Control (the "Highest Annual
Bonus") multiplied by two, in the case of Mr. Zecher, and one and one-half, in
the case of Mr. Wunderlich. In addition, the restrictions on any stock-related
incentive awards held by the Covered Executive would lapse and he would be
entitled to continued coverage under the Company's life, health and disability
benefits for two years following termination of his employment (three years in
the case of Mr. Zecher) or until he receives similar benefits from a new
employer. Mr. Zecher's Supplemental Employment Agreement also provides that if
he is subject to excise taxes under Section 4999 of the Internal Revenue Code on
any payments or benefits triggered by a Change in Control, he will be entitled
to receive an additional amount such that after the payment of all applicable
taxes, he will retain an amount equal to that which he would have retained
absent the excise taxes. In connection with the Supplemental Employment
Agreements, the Company also approved the creation of an Employment Protection
Trust Agreement which is a form of a grantor trust under which the assets of the
trust remain subject to the satisfaction of the general claims of the Company's
creditors, to provide for the payment of all benefits payable under the
Supplemental Employment Agreements.
Note 11 - Stockholders' Equity
Stock Bonus Plan
The Company has issued 425,000 shares of Common Stock pursuant to a
restricted stock bonus plan to key executives, directors and consultants.
These shares will vest ratably every two years over a period of 30 years.
The unvested portion is subject, upon the occurrence of certain events, to
either forfeiture or accelerated vesting. Such shares are recorded at their
estimated fair market value as determined by the Board of Directors and are
charged as compensation expense ratably over the vesting period. As of December
31, 1996 110,333 of such shares had vested and 314,667 remained, subject to
forfeiture.
F-17
Warrants
In connection with the $4,000,000 7.55% subordinated long-term notes
issued in January 1994, the Company issued to the noteholders six year warrants
to purchase 533,333 shares of Common Stock at a per share price of $4.00. In
September 1995, the Company prepaid $2,000,000 of the notes. In conjunction with
the prepayment, 196,296 of these warrants were canceled. The Company has
reserved 337,037 shares of Common Stock for issuance upon the exercise of the
remaining warrants. No such warrants have been exercised to date.
In connection with a May 1986 public offering of Common Stock, the Company
issued warrants to the underwriter for the purchase of 96,000 shares of its
Common Stock at a per share price of $4.80. During fiscal 1992, 66,750 warrants
to purchase shares of the Company's Common Stock expired. The remaining 29,250
warrants are exercisable through May 1998. The Company has reserved 29,250
shares of Common Stock for issuance upon the exercise of these warrants.
In connection with the $2,016,536 Class B Notes issued in October 1996,
the Company issued 3 year warrants to purchase 159,095 shares of Common Stock at
a per share price of $2.70. The Company has reserved 159,095 shares of Common
Stock for issuance upon exercise of these warrants.
In connection with the $100 million credit facility provided by CSFB in
December 1996, the Company issued 3 year warrants to purchase 125,000 shares of
Common Stock at a per share price of $3.70. The Company has reserved 125,000
shares of Common Stock for issuance upon exercise of these warrants.
Stock Option Plans
The Company has four stock option plans, The 1985 Plan, The 1986 Plan, The
1989 Plan and The 1992 Plan ("the Plans"). The Company accounts for these Plans
under APB Opinion No. 25, under which no compensation cost has been recognized.
Had compensation cost for these Plans been determined consistent with FASB
Statement No. 123, the Company's net income (loss) and earnings (loss) per share
would have been reduced to the following pro forma amounts:
1996 1995
-------------- --------------
Net income (loss):
As reported $ (19,099,501) $ 829,348
Pro forma $ (19,206,821) $ 806,178
Earnings (loss) per share:
As reported ($2.41) $.11
Pro forma ($2.43) $.10
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts. SFAS No. 123 does not apply to awards prior to
1995, and additional awards in future years are anticipated. Pursuant to the
Plans, a total of 1,287,500 shares of Common Stock were made available for grant
of stock options. Under the Plans, options have been granted to key personnel
for terms of up to ten years at not less than fair value of the shares at the
dates of grant and are exercisable in whole or in part at stated times
commencing one year after the date of grant. No further grant will be issued
under the 1986 Plan. At December 31, 1996, options to purchase 275,000 shares of
Common Stock were exercisable with respect to the Plans.
F-18
Option activity for the year ended December 31, 1996, the seven months
ended December 31, 1995 and the fiscal year ended May 31, 1995 was as follows:
Number of Weighted Average
Shares Exercise Price
--------- ----------------
Outstanding at June 1, 1994 697,799 $2.94
Granted during the year 270,000 3.41
Exercised during the year (502,966) 2.47
Forfeited during the year (30,000) 2.96
-------- -----
Outstanding at May 31, 1995 434,833 3.75
Exercised during the period (21,500) 2.68
-------- -----
Outstanding at December 31, 1995 413,333 3.70
Granted during the year 241,000 2.96
-------- -----
Outstanding at December 31, 1996 654,333 $3.43
-------- -----
Weighted average fair value of options granted:
1996 $ .96
1995 $ 1.14
The fair value of each option grant is estimated on the date of grant
using the Black-Shoals option pricing model with the following weighted
assumptions used for grants in 1996 and 1995, respectively: risk-free interest
rates of 6.20 and 6.36 percent; expected lives of 3 years for all options
granted; expected volatility of 26.2 and 29.1 percent.
On April 10, 1995, an officer of the Company exercised options to acquire
216,799 shares. In connection with this exercise, the Company received a full
recourse, non-interest bearing note due in November 1997, secured by a pledge of
the acquired shares in the amount of $466,797.
Other Options
In April 1996, the Company issued non-qualified options to purchase
400,000 shares of the Company's Common Stock at an exercise price of $3.125 per
share to a new employee. These shares will vest over a four year period based
upon, in part the performance of the Company's non-prime auto finance business
in the Northeast region.
An option issued upon the commencement of employment to another
non-officer employee in December 1995 to purchase an aggregate of 375,000 shares
of the Company's Common Stock was canceled in conjunction with the termination
of the related employment agreement.
Note 12 - Unusual Item - Impairment of Long-Lived Assets on Acquired Business
and Additional Credit Losses on Acquired Automobile Receivables
The acquisition of FFC in December 1995 included a portfolio of non-prime
automobile receivables of approximately $31 million of which approximately 80%
had been acquired by FFC from CFAW. In addition to the tangible assets acquired,
the Company entered into a Non-Compete Agreement and a 10 year Purchase
Agreement with CFAW which, among other provisions, provided for the continued
purchase of automobile receivables based upon established underwriting criteria
at the sole discretion and option of the Company. During the year ended December
31, 1996, the quality of the automobile receivables acquired from CFAW, both
prior to the acquisition date and subsequent thereto, as evidenced by the number
of repossessions and the charge-off incurred, came into question. The Company
determined to cease acquiring automobile receivables from CFAW and accordingly,
effective December 31, 1996, the Company entered into a Modification and
Termination Agreement with CFAW.
As a result of this action and other factors, the Company has deemed that
a significant portion of the goodwill associated with the acquisition of FFC as
well as the Non-Compete and Purchase Agreements are of no continuing value and,
accordingly, has taken a charge against operations as of December 31, 1996 of
$11,193,000 based on its evaluation of the realizable value of such assets in
accordance with SFAS No. 121. Furthermore, the Company recorded additional
credit losses of $8,100,000 on the acquired automobile receivables.
F-19