The Company has experienced material operating losses during 1997. As a result of this adverse change in the non-prime automobile finance industry and the deterioration in the Company's financial condition, the Company has been 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 is no longer funding the acquisition of non-prime automobile receivables generated by the Company. The Company, among other actions, has restructured operations and significantly reduced overhead. In addition, the Company has modified credit underwriting criteria and reduced the volume of loans purchased from dealers. The Company is exploring several opportunities including the securing of additional warehouse facilities to support an increased level of automobile loan acquisitions, the sale of portfolio assets to reduce outstanding debt and other restructuring alternatives. There is no assurance that the Company will be successful in securing additional warehouse facilities or selling portfolio assets, the failure of which would have a material adverse effect on the Company's financial condition.
Although significantly curtailed, the Company continues to purchase loans from its dealer network.
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
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.
Revenues for the year ended December 31, 1997 totaled $19,846,000 as compared with $13,185,000 in the prior year. Revenues from the non-prime automobile finance business increased to $19,099,000 from $11,789,000 in the prior year. This increase of $7,310,000 is directly related to the growth of the automobile receivables portfolio acquired and serviced by the Company which increased from $62,000,000 as of December 31, 1996 to $97,000,000 as of December 31, 1997. Investment income decreased to $433,000 from $884,000 in the prior year. This decrease is the direct result of the reduction in short-term investments utilized to fund the growth of the Company's automobile receivables portfolio and operations. Revenues from the Company's long distance services business decreased to $315,000 from $512,000 in the prior year. This decrease of $197,000 is the result of the loss of customers to competing long distance carriers.
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 -------------------- --------------------
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 the Company recording additional credit losses based upon an increase in delinquency rates, the higher than
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 -------------------- --------------------
Operating expenses for the year ended December 31, 1996 of $6,913,000 were attributable to the Company's non-prime automobile financing business ($6.5 million), the long distance telephone service business ($.4 million).
The following table summarizes the Company's delinquent accounts that were more than 60 days delinquent as of December 31, 1996 and 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.
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.
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.
$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.
During 1997, 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 the past several months, a number of non-prime automobile finance companies, including the Money Store, have 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 have 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.
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, at the time of issuance, "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, at the time of issuance, "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 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, 1997 the Company had a tangible deficiency, as defined, of ($200,000) and, accordingly, did not meet the minimum tangible net worth standard. In addition, the Company has experienced a net loss from operations for each of the quarters ended September 30, 1997 and December 31, 1997. Accordingly, for the quarter ended December 31, 1997, the Company did not meet the interest coverage ratio requirement.
The Company's liquid assets amounted to $4.7 million as of December 31, 1997. In addition, the Company has $3.0 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 and $1.1 million in restricted collection accounts related to its warehouse line of credit.
1997 1996 Weighted Weighted Average Average Balance Rate Balance Rate ------------------------------------------- Revolving lines of credit $67.9 8.78% $18.1 8.75% Automobile receivable backed notes $14.1 6.91% $31.6 6.75% Subordinated debt $10.2 11.75% $10.2 11.75% Other debt $ 1.0 8.5% $ .5 8.5%
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 described above, as well as the uncertain status of the Company's primary credit facility. In January 1998, the Company entered into an arrangement, know as a "flow-through" strategy, 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 could, if not successful, require the Company to sell certain of the loans in its portfolio to meet its liquidity requirements.
Inflation and changing prices had no material impact on revenues or the results of operations for the year ended December 31, 1997.
The Company maintains sophisticated data processing support and management information systems. Finance Manager, the Company's custom designed proprietary software management system, is updated and maintained by the Company's MIS Department based in Norfolk, Virginia. The Company has made a comprehensive assessment of the impact of the year 2000 on its business. This assessment included the preparation of a comprehensive inventory of computer systems and computer-controlled devices. As of December 31, 1997, the Company's compliance efforts are substantially complete. Finance Manager software was designed to account for consumer loan contracts with maturity dates beyond the year 2000. This system has been in use by the Company since 1996. Accordingly, the
Company does not expect that the cost of ensuring Year 2000 compliance will have a material adverse impact on its financial position or results of operations in the current year or in future years.