The following Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our Financial Statements and the notes thereto appearing elsewhere in this report.
In December 1995, we acquired the operating assets of Falk Finance Company ("FFC"), a Norfolk, Virginia based specialty financial services company for $5,125,000 in cash and the assumption of liabilities and debt approximating $34,000,000. As a result, we became a specialized consumer finance company that acquired and serviced automobile receivables from automobile dealers selling new and used vehicles to non-prime customers. In July 1996, we commenced operations of our northeast regional center in Norwalk, Connecticut to provide a complete range of services to dealers in the Northeast.
We experienced material operating losses during 1996, 1997 and 1998. As a result of these losses, the adverse changes in the non-prime automobile finance industry and the deterioration in the our financial condition, we determined to discontinue the operation of our non-prime automotive finance business.
As a result of these factors, we were unable to maintain adequate levels of net worth to satisfy the loan covenant requirement under our warehouse facility agreement and similar covenants pursuant to securitized notes issued in October 1996. As of December 31, 1997, our warehouse lender was no longer funding the acquisition of non-prime automobile receivables we generated. Accordingly among other actions, we restructured operations and significantly reduced overhead and successfully completed the sale of approximately $58 million of automobile receivables and repaid $47 million under our warehouse line. Additionally, in conjunction with a July 1998 sale of approximately $8 million of automobile receivables which collateralized our securitized notes, the remaining balance outstanding on these notes of approximately $7 million was paid in full.
During 1999, we continued to reduce operating overhead by negotiating the termination of its lease in Montvale, New Jersey and vacating the premises.
We are in the process of identifying new business opportunities in furtherance of our rebuilding plan in our continuing effort to create shareholder value. The foregoing factors raise substantial doubt about our ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments that might be necessary should we be unable to continue as a going concern. Accordingly, the carrying amounts of our assets and liabilities do not purport to represent realizable or settlement amounts.
Operating expenses totaled $785,000 for the year ended December 31, 1999 as compared with $5,050,000 in the prior year period. The decrease of $4,265,000 relates directly to the discontinuance of our non-prime auto finance business as well as other reductions in corporate overhead.
Unrealized holding loss of $80,000 for the year ended December 31, 1999 represents losses on trading securities based upon the fair market value as of the balance sheet date.
Income tax benefit for the year ended December 31, 1999 totaling $142,000 is the result of an audit by the Internal Revenue Service of our tax returns for the years ended May 31, 1993 through 1998.
The gain on debt extinguishment for the year ended December 31, 1998 totaling $3,689,000 consists of $1,703,000 from the extinguishment of our $2 million of 7.55% subordinated notes, in exchange for two off-balance sheet assets and its long distance telephone service business and $1,986,000 as the result of a discount granted by our warehouse lender in final settlement of amounts outstanding under our warehouse facility. The two off-balance sheet assets consisted a preferred stock investment in ComputerLogic, Inc. ("ComputerLogic") and an equity interest in a start-up corporation pursuing a roll-up transaction of new car dealerships. Our preferred stock investment in ComputerLogic was written off in May 1995 due to the poor financial condition of ComputerLogic and its failure to make timely dividend payments.
Revenues for the year ended December 31, 1998 totaled $7,004,000 as compared with $19,846,000 in the prior year. Revenues from the non-prime automobile finance business decreased to $6,809,000 from $19,099,000 in the prior year. This decrease of $12,842,000 is directly related to the sale of portfolio assets and the ceasing to operate as a non-prime automobile finance company. Investment income decreased to $132,000 from $433,000 in the prior year. This decrease is the direct result of the reduction in short-term investments utilized to repay senior indebtedness and fund operations. Revenues from our long distance services business decreased to $63,000 from $315,000 in the prior year. This decrease of $252,000 is the result of the sale of this business in settlement of outstanding indebtedness in April 1998.
Depreciation and amortization expense for the year ended December 31, 1998 was $438,000 as compared to $708,000 in the prior year. The decrease in depreciation and amortization expense of $270,000 is related to the closing of our northeast operating center (November 1997) and Mid-Atlantic operating center (December 1998) and the related sale and write off of property and equipment.
We sold approximately $66 million of automobile receivables resulting in a loss of $3,542,000.
distance telephone service business and $1,986,000 as the result of a discount granted by our warehouse lender in final settlement of amounts outstanding under our warehouse facility. The two off-balance sheet assets consisted of a preferred stock investment in ComputerLogic, Inc. ("ComputerLogic") and an equity interest in a start-up corporation pursuing a roll-up transaction of new car dealerships. Our preferred stock investment in ComputerLogic was written off in May 1995 due to the poor financial condition of ComputerLogic and its failure to make timely dividend payments.
Interest revenue $17,269,000 Interest expense 7,988,000 ----------- Net interest income $ 9,281,000 -----------
Operating expenses for the year ended December 31, 1997 were $10,235,000 as compared to $6,913,000 in the prior year. The increase in operating expenses of $3,322,000 is directly related to the growth of the automobile receivables portfolio acquired and serviced by us.
The provision for credit losses for the year ended December 31, 1997 was $12,456,000 as compared to $5,251,000 in the prior year, an increase of $7,205,000. This provision is the result of our recording additional credit losses based upon an increase in delinquency rates, the higher than anticipated level of repossessions and the poor performance of loans originated by specific independent automobile dealers.
The restructuring charge for the year ended December 31, 1997 of $867,000, which includes severance and other operating costs as well as the write-off of certain assets in its Connecticut operating center, is the result of our decision to consolidate operations in its Norfolk, Virginia operating center during the fourth quarter.
------------------ Amount % ----------- ---- 60 to 89 days delinquent $ 3,199,000 2.5% 90 days or more delinquent 6,992,000 5.6% ----------- ---
During 1999, we negotiated the termination of our lease in Montvale, New Jersey and relocated to temporary space in Stamford, Connecticut as part of our continuing effort to reduce operating expenses and preserve corporate capital. Our main business focus became the challenge to seek out business opportunities in furtherance of our plan to rebuild the company and create shareholder value. These efforts were inhibited by the negative net worth and remaining subordinated debt of $9.3 million. Therefore, we commenced discussions with our noteholders regarding the restructuring of this debt to enhance the possibility of consummating a transaction to return us to an operating status and create value.
At December 31, 1999, we had outstanding $9.3 million of subordinated debt outstanding comprised of $8.2 million of 12% notes, included with the liabilities assumed with the acquisition of FALK Finance Company, Inc. in December 1995, plus accrued interest of $1.1 million through December 31,1998.
The total amount of debt outstanding as of December 31, 1999 and 1998 was $9.4 million and $10.0 million, respectively. This following table presents our debt instruments and weighted average interest rates on such instruments as of December 31, 1999 and 1998, respectively:
The accompanying financial statements have been prepared assuming we will continue as a going concern. We have no remaining automobile receivables and have ceased to operate as an automobile finance company. On February 2, 2000, we filed a disclosure statement and reorganization plan (the "Plan") pursuant to Chapter 11 of Title 11 of the United States Bankruptcy Code. The Plan provides for the issuance of one share of our common stock and a cash payment of $ 0.03 for each dollar of approximately $9.5 million of unsecured debt. At the time of filing, the requisite number and dollar amount of the unsecured creditor group had voted to support the Plan. Preliminary hearings were held to consider compliance with the disclosure requirements. Certain objections and issues have been raised by the court and other interested parties. These issues will be addressed in an amended disclosure statement that we will file. A hearing to consider our amended disclosure statement and compliance with the disclosure requirements has been scheduled for May 11, 2000. No assurances can be given that our reorganization plan will be confirmed by the court. All documents on file in our bankruptcy proceeding, case no. 00-10368, can be viewed on the Bankruptcy Court's Internet site at: http://ecf.nysb.uscourts.gov/index.html
Inflation and changing prices had no material impact on revenues or the results of operations for the year ended December 31, 1999.