a) The common stock equivalents for the years ended December 31, 1998, 1997 and 1996 were 20,899, 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.
Pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, readers of this report are advised that this document contains both statements of historical facts and forward looking statements. Forward looking statements are subject to certain risks and uncertainties, which could cause actual results to differ materially from those indicated by the forward looking statements. Examples of forward looking statements include, but are not limited to (i) projections of revenues, income or loss, earnings per share, capital expenditures, dividends, capital structure and other financial items, (ii) statements of the plans and objectives of the Company or its management or Board of Directors, with respect to new business acquisitions and enhancement of Shareholder value, (iii) statements of future economic performance, and (iv) statements of assumptions underlying other statements and statements about the Company and its business or business prospects.
The following Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Company's Financial Statements and the notes thereto appearing elsewhere in this report.
In December 1995, AutoInfo, Inc., (the "Company"), a Delaware corporation, 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
During 1997 and 1998, several non-prime automobile finance companies, including the Company, experienced poor loan performance, higher delinquency rates and increased credit losses on their portfolio assets. In addition, during this period, a number of non-prime automobile finance companies made strategic decisions to exit the market-place. This trend was the direct result of several factors including: (a) the impact of increased levels of competition on loan acquisition discounts; (b) the heightened demand created by the increased supply of capital and used automobile inventories; (c) the need to attract consumers with lower credit qualifications to meet this additional demand; (d) economic uncertainties and financial difficulties within the non-prime automobile industry as well as management upheavals at certain industry leaders; and (e) the increased levels of outstanding consumer debt and personal bankruptcies. These factors contributed to a significant reduction in available warehouse lines of credit and a material decline in financial markets investments into the non-prime automobile industry through the sale of equity securities, subordinated debt instruments and securitized notes.
The Company 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 Company's financial condition, the Company determined to discontinue the operation of its non-prime automotive finance business.
As a result of these factors, the Company was unable to maintain adequate levels of net worth to satisfy the loan covenant requirement under its warehouse facility agreement with CS First Boston Mortgage Capital Corp. ("CSFB") and similar covenants pursuant to securitized notes issued in October 1996. As of December 31, 1997, CSFB no longer funded the acquisition of non-prime automobile receivables generated by the Company. The Company, among other actions, restructured operations and significantly reduced overhead and successfully completed the sale of approximately $58 million of automobile receivables and repaid $47 million under its warehouse line with CSFB. Additionally, in conjunction with a July 1998 sale of approximately $8 million of automobile receivables which collateralized the Company's securitized notes, the remaining balance outstanding on these notes of approximately $7 million was paid in full.
Restructuring charges for the year ended December 31, 1998 consists primarily of costs related to the ceasing to operate as a non-prime automobile finance company. 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.
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, 1997 and 1996:
Average loans receivable $88,128,000 $45,394,000 ----------- ----------- Average debt 81,200,000 37,629,000 ----------- -----------
Interest revenue $17,269,000 $11,167,000 Interest expense 7,988,000 3,839,000 ----------- ----------- Net interest income $ 9,281,000 $ 7,328,000 ----------- -----------
Yield on loans 19.6% 24.6% Cost of funds 9.8% 10.2% ----------- ----------- Net interest spread 9.8% 14.4% ----------- -----------
The increase in average loans receivable and average debt and the corresponding increase in interest revenue and interest expense is directly related to the growth in the Company's non-prime automobile business. The decline in yield on loans is the result of the growth of the Company's portfolio in states with lower interest rate caps as well as the allocation of a portion of unearned future interest to reserves at the date of loan acquisition.
depreciation ($303,000) related to the expansion of the Company's northeast regional office and relocation of corporate headquarters.
1997 1996 ------------ ------------ Allowance for credit losses $ 19,000,000 $ 15,725,000 Percentage of outstanding automobile receivables 19.5% 25.5%
1997 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 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 had 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 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 was 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.
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.
Since its entry into the Non-Prime Automobile industry in December 1995 and until it ceased the operations of its non-prime automobile business during 1998, 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 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. In July 1998, the Company redeemed the Class A and Class B securitized notes resulting in a residual cash balance consisting primarily of balances in restricted Cash Reserve accounts of approximately $1.7 million which was remitted to CSFB. In August 1998, the Company received its federal income tax refund of approximately $3 million, which was remitted to CSFB. After the sale of all the remaining automobile receivables in October 1998, the Company owed CSFB approximately $4.5 Million. In November 1998, CSFB agreed to a discount of $2.25 Million and the Company paid the remaining balance of approximately $2.3 Million in cash. The Company also granted CSFB a five year warrant to purchase 1,357,467 common shares at $.03 per share.
The Company has outstanding $9.3 million of subordinated debt comprised of $8.2 million of 12% notes, included with the liabilities assumed with the acquisition of FALK Finance Company, Inc. ("FFC") in December 1995, plus accrued interest of $1.1 million through December 31,1998.
The total amount of debt outstanding as of December 31, 1998 and 1997 was $10.0 million and $93.2 million, respectively. This following table presents the Company's debt instruments and weighted average interest rates on such instruments as of December 31, 1998 and 1997, respectively:
1998 1997 ---- ---- Weighted Weighted Average Average Balance Rate Balance Rate ------------------------------------- Revolving lines of credit -- -- $67.9 8.78% Automobile receivable backed notes -- -- $14.1 6.91% Subordinated debt $ 9.3 12.0% $10.2 11.75% Other debt $ .7 7.75 $ 1.0 8.5%
The Company has no remaining automobile receivables and has ceased to operate as an automobile finance company. The Company is in the process of identifying new business opportunities in furtherance of its plan to rebuild the Company and create shareholder value. If the Company is unsuccessful in identifying and consummating such a transaction, the Company does not have sufficient liquid assets and available lines of credit to meet its short and long-term capital requirements.