In May 1994, the Company leased approximately 17,000 square feet of office space in Miami Beach, Florida, under a six-year non-cancelable lease. In February 1996, the Company moved out of these premises before the lease expiration date. As of September 30, 1997, approximately 35 months of the lease remained at a cost of $341,250 per year. On January 28, 1998, the Bankruptcy Court approved a settlement with the landlord, dated October 31, 1997, which released the Company from its obligations under the lease. The Company paid the landlord $105,850 (including funds on deposit) for complete satisfaction of all claims. The Company had provided a lease loss accrual of $516,000 during the fiscal year 1997 for the rent payments and other lease-related expenses called for under the lease. Because of the Bankruptcy Court-approved settlement with the landlord, a gain on settlement of the Miami lease of $266,378 was recorded for the fiscal year ended March 31, 1998.
The Company commenced purchasing "sub-prime" consumer used-car loans, or Installment Contract Receivables, in May 1994 through AutoLend Corporation and ceased purchasing them in December 1995. Loan loss provisions for this business from May 1994 through March 1997 totaled $13.9 million, on revenues of $12.8 million for the same period. The results of this business were the primary reasons the Company was unable to service the outstanding Debentures which forced it to file the Bankruptcy Petition. The net impact for the year ended March 31, 1998, was marginally positive, as the portfolio "winds down."
Since the sale of IAP, the Company's business activities have been primarily concentrated on the acquisition or development of a new business in the gaming industry, the resolution of certain obligations and litigation associated with former operations, the collection of amounts due from the outstanding Installment Contract Receivables and the collection of proceeds from the Policies.
Net viatical revenues from the Policies for the fiscal year ended March 31, 1998, were $9,000, which represents approximately a $0.4 million decrease compared to the $0.4 million recognized for the fiscal year ended March 31, 1997. Net viatical revenues from the Policies are determined by subtracting the policy cost from the relevant face value after a Policy "matures" (becomes payable by the insurance company). The decrease in viatical revenues resulted primarily from the reduced size of the Company's Policy portfolio. Future net revenues from the remaining portfolio of approximately 15 Policies will be irregular, depending on the mortality of the insured. During the year ended March 31, 1998, the aggregate book value of the Policies were written down by $0.2 million, to an estimated current fair market value. At
March 31, 1998, the aggregate estimated current fair market value of the portfolio was $0.3 million.
General and administrative expenses for the fiscal year ended March 31, 1998, were $2.1 million, compared to $5.9 million expended in the prior year. The decrease of $3.8 million resulted primarily from reductions in professional fees, the reduced size of the car loan portfolio, and the effect of the Company's downsizing in September 1996. The cost of collecting the consumer car portfolio is included in general and administrative expenses.
Provisions for credit losses during fiscal year 1998 were deminimus. The provision for credit losses was $3.6 million for the year ended March 31, 1997. The decrease in credit loss provisions of approximately $3.6 million was primarily the result of the shrinking size of the total portfolio.
As a result of the Exchange Offer, during the year ended March 31, 1998, the Company recorded a non-cash transaction: a conversion charge of $6.3 million, an increase to additional paid-in capital of $14.5 million, deminimus increases to Common and Preferred Stock values, the elimination of $8.3 million in debt, and the improvement is net equity of approximately $8 million.
Fiscal year ended March 31, 1997, compared to fiscal year ended March 31, 1996
General and administrative expenses for the fiscal year ended March 31, 1997, were $5.9 million, compared to $9.9 million expended in the prior year. The decrease of $4.0 million resulted from the effect of the Company's downsizing in December 1995 and the additional downsizing in September 1996. The cost of collecting the consumer car portfolio is included in general and administrative expenses; this effort has been subcontracted out since January 1996.
Credit losses in connection with the portfolio of Installment Contract Receivables were $3.6 million for the year ended March 31, 1997, which represents a decrease of $5.2 million compared to the $8.8 million for the year ended March 31, 1996. The decrease was primarily the result of the shrinking size of the total portfolio.
The net loss for the year ended March 31, 1997, was $11.5 million, or $2.49 per share. The net loss for the year ended March 31, 1996, was $0.7 million, or $0.16 per share. The change in net loss was attributable primarily to the $12.2 million gain on early extinguishment of debt in the year ended March 31, 1996; these offsets to operating losses were not available in the year ended March 31, 1997.
The Company's immediate viability as a going concern depends upon the continued restructuring of its obligations and, ultimately, the installation of a new line of business and the attainment of profitability. At March 31, 1998, the Company had cash and cash equivalents of $0.8 million, and total liabilities exceeded total assets. On September 22, 1997, the Company filed for voluntary bankruptcy reorganization. The Company anticipates, but cannot assure, that it will emerge from Chapter 11 as a restructured, viable entity. If the Company is prevented from emerging, it would most likely be liquidated, which would result in the elimination of the common stock, and in payments to debt holders of amounts less than their claims. Management believes that amounts which might be received by creditors under such a liquidation scenario would likely be less than as proposed under the Plan.
Cash flow from operations was a negative $0.7 million for the fiscal year ended March 31, 1998. This compares to the positive cash flow from operations of $3.0 million for the fiscal year ended March 31, 1997. The decrease of $3.7 million was primarily due to the combined net effect of a reduction in cash receipts of $7.1 million and offsetting cash operating expenditure reductions of $3.4 million. The $7.1 million reduction in cash receipts resulted from a $5.1 million decrease in car loan receipts (due to the shrinking size of the portfolio), a $1.7 million decrease from the prior period's nonrecurring net viatical collections and a $0.3 million decrease in miscellaneous other cash received. The $3.4 million in cash operating expenditure reductions resulted primarily from reductions in general and administrative expense, including significant reductions in professional fees paid.
The Company's portfolio of unmatured viatical insurance Policies totaled 15 at March 31, 1998, having a combined face value of $1.9 million and a net book value of $0.3 million. The Company generally ceased purchasing new Policies in September 1994.
In summary, the Company decreased its cash and cash equivalents by $11.6 million during the fiscal year ended March 31, 1998, to a total of $0.8 million. The decrease was largely due to the
repurchase of Debentures, the loan to NPD, and the funding of the escrow account. In comparison, there was a $9.2 million increase in cash during the fiscal year ended March 31, 1997, primarily due to the collections on receivables and the sale of IAP. During the fiscal year, the Company's net equity increased substantially, from a deficit of $11.9 million at March 31, 1997, to a smaller deficit of $3.4 million at March 31, 1998, an improvement of approximately $8.4 million.
The Company's primary source of capital has been sales of equity and debt securities, including its initial equity offering in July 1990, which resulted in net proceeds of approximately $7.6 million, and a September 1991 sale of Debentures which resulted in net proceeds of $51.4 million. As a result of prior year Debenture prepayments without penalty and the Exchange Offer, the outstanding principal balance of the Debentures was $7.2 million, plus $1.7 million of accrued interest, at March 31, 1998.
Like any other company, advances and changes in technology can significantly affect the business and operations of the Company. For example, a challenging problem is that many computer systems worldwide cannot recognize the year 2000 or years thereafter. No easy technological "quick fix" has yet been developed for this problem.
In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard (SFAS) No. 130, "Reporting Comprehensive Income." SFAS No. 130 is effective for fiscal years beginning after December 15, 1997. It established standards for reporting comprehensive income and its components in annual financial statements. Reclassification of comparative financial statements or financial information for earlier periods is required upon adoption of SFAS No. 130.
Both SFAS 130 and SFAS 131 are effective for financial statements for periods beginning after December 15, 1997 and require comparative information for earlier years to be restated. Due to the recent issuance of these standards, management has been unable to fully evaluate the impact, if any, they may have on future financial statement disclosures.
The responses to this Item are submitted in a separate section of this Annual Report on Form 10-K. See Index to Consolidated Financial Statements on page.