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. In connection with the closing of this facility, the Company has received an offer to sub-lease such space for rents which would mitigate its current contractual obligations. 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 1998 at an annual rent of $10,000. The Company rents approximately 7,800 square feet of space at One Paragon Drive, Montvale, New Jersey where it maintains its executive offices. The lease runs through June 2002 at an annual rental of approximately $170,000, subject to certain rent escalation provisions. The Company believes that its present facilities are suitable and adequate for its reasonably foreseeable growth.
(a) The common stock equivalents for the years ended December 31, 1997 and 1996 were 61,864 and 16,875. The common stock equivalents for these shares were not included in the calculation of diluted (loss) per common share because the effect would be antidilutive.
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.
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. In the past, the Company has demonstrated the ability to secure warehouse lines of credit, issue receivable secured notes and obtain subordinated debt. However, the Company's ability to secure required capital has been hampered based upon the inability to consummate the sale of securitized notes, as well as the uncertain status of the Company's primary credit facility. In January 1998, the Company entered into an arrangement with a new funding source whereby it can purchase loan contracts which meet specified criteria and sell them through to this source for a fee. This arrangement enables the Company to continue to purchase loans and service its dealer network. The success of this program, as well as the Company's ability to secure additional funding sources, will materially impact the Company's future business activities and, if not successful, could require the Company to sell certain of the loans in its portfolio to meet its liquidity requirements.
These factors raise substantial doubt about the Company's ability to continue as a going concern.
of the operating assets of its insurance inspection services business. The Results of Operations of these businesses have been classified as discontinued operations.
Yield on loans 19.6% 24.6% Cost of funds 9.8% 10.2% -------------------- -------------------- Net interest spread 9.8% 14.4% -------------------- --------------------
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 the Company.
Depreciation and amortization expense for the year ended December 31, 1997 was $708,000 as compared to $1,189,000 in the prior year and was primarily attributable to the amortization of goodwill and other intangible assets associated with the acquisition of FFC in December 1995. The decrease in depreciation and amortization expense of $481,000 is related to the reduction in amortization ($784,000) due to the write off of $11,193,000 of this goodwill as of December 31, 1996 offset by an increase in depreciation ($303,000) related to the expansion of the Company's northeast regional office and relocation of corporate headquarters.
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 the Company's decision to consolidate operations in its Norfolk, Virginia operating center during the fourth quarter.
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 tax losses incurred, the Company has recorded an income tax benefit of $3,986,000 for the year ended December 31, 1997 and $4,352,000 for the year ended December 31, 1996. The current year benefit consists of a carryback claim of $575,000 filed and received for the tax year ended May 31, 1997 and an anticipated carryback claim of $3,411,000. The income tax benefit of $4,352,000 for the year ended December 31, 1996 was received in 1997.
The following table provides information regarding the Company's allowance for credit losses as of December 31, 1997 and 1996:
1997 1996 ------------- ------------- Allowance for credit losses $ 19,000,000 $ 15,725,000 Percentage of outstanding automobile receivables 19.5% 25.5%
The following table summarizes the Company's delinquent accounts that were more than 60 days delinquent as of December 31, 1997 and 1996:
1997 1997 1996 1996 ----------- ------- ----------- ------- Amount % Amount % ----------- ------- ----------- ------- 60 to 89 days delinquent $ 3,199,000 2.5% $ 3,290,000 4.1% 90 days or more delinquent 6,992,000 5.6% 1,739,000 2.2% ----------- ------- ----------- ------- Total delinquent loans $10,191,000 8.1% $ 5,029,000 6.3% ----------- ------- ----------- -------
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 years ended December 31, 1996 and the seven months ended December 31, 1995:
Yield on loans 24.6% 28.1% Cost of funds 10.2% 11.0% -------------------- -------------------- Net interest spread 14.4% 17.1% -------------------- --------------------
1996 1995 ------------ ------------ Allowance for credit losses $ 15,725,000 $ 6,818,000 Percentage of outstanding automobile receivables 25.5% 21.3%
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% ---------- ----------- ---------- -----------
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.
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
In December 1996, the Company entered into a financing agreement with CSFB 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. 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. In October 1997, the Company and CSFB entered into an amended and restated agreement which provided CSFB with additional collateral including a residual interest in the anticipated cash flows upon the satisfaction of the Class A and Class B securitized notes issued in October 1996 and any income tax refund received by the Company for the tax year ended May 31, 1998.
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. A principal payment of $667,000 was due on the $2.0 million debt in January 1998. The Company did not make this installment payment and has agreed to a modification agreement which extends the due date for this payment to March 31, 1998.
The total amount of debt outstanding as of December 31, 1997 and 1996 was $93.2 million and $60.4 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 1996, respectively:
As of December 31, 1997, the Company is not receiving advances under its senior credit facility. Therefore, unless the Company is able to successfully implement a flow through strategy or obtain additional lines of credit, the Company does not have sufficient liquid assets and available lines of credit to meet its short and long-term capital requirements.