-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FCPi+S7AXoyCqgj1y6JL5yLfvBUSEzU3pk5c5vPBo0IqBmWx2chTKDG+u4lJwLL6 1JTNJR7WTokBtGyFlN76YQ== 0001005477-99-001475.txt : 19990331 0001005477-99-001475.hdr.sgml : 19990331 ACCESSION NUMBER: 0001005477-99-001475 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AUTOINFO INC CENTRAL INDEX KEY: 0000351017 STANDARD INDUSTRIAL CLASSIFICATION: INSURANCE AGENTS BROKERS & SERVICES [6411] IRS NUMBER: 132867481 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-11497 FILM NUMBER: 99578119 BUSINESS ADDRESS: STREET 1: ONE PARAGON DRIVE CITY: MONTVALE STATE: NJ ZIP: 07645 BUSINESS PHONE: 2019301800 MAIL ADDRESS: STREET 1: ONE PARAGON DRIVE STREET 2: SUITE 255 CITY: MONTVALE STATE: NJ ZIP: 07645 10-K405 1 FORM 10K405 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K -------------------------------- (Mark One) |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from . . . . . . . . . . to . . . . . . . . . . Commission File Number 0-14786 AUTOINFO, INC. (Exact name of registrant as specified in its charter) DELAWARE 13-2867481 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) One Paragon Drive Montvale, New Jersey 07645 (Address of principal executive offices) Registrant's telephone number, including area code: (201) 930-1800 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, Par value $.01 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |X| As of March 24, 1999, 7,756,953 shares of the Registrant's common stock were outstanding. The aggregate market value of the common stock (based upon the closing price on the OTC Bulletin Board of the National Association of Securities Dealers on March 24, 1999 of $ .045) of the Registrant held by non-affiliates of the Registrant at that date was approximately $326,000. DOCUMENTS INCORPORATED BY REFERENCE NONE AUTOINFO, INC. Form 10-K Annual Report TABLE OF CONTENTS Page ---- PART I .................................................................. 3 Item 1 Business......................................................... 3 Item 2 Properties....................................................... 6 Item 3 Legal Proceedings................................................ 6 Item 4 Submission of Matters to a Vote of Security Holders.............. 6 PART II .................................................................. 7 Item 5 Market for Registrant's Common Equity and Related Stockholder Matters........................................................ 7 Item 6 Selected Financial Data.......................................... 8 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations.......................................... 9 Item 8 Financial Statements and Supplementary Data...................... 19 Item 9 Changes in and Disagreements With Accountants on Accounting and Financial Disclosures.......................................... 19 PART III .................................................................. 20 Item 10 Directors and Executive Officers of the Registrant............... 20 Item 11 Executive Compensation........................................... 21 Item 12 Security Ownership of Certain Beneficial Owners and Management... 22 Item 13 Certain Relationships and Related Transactions................... 22 PART IV .................................................................. 23 Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K....................................................... 23 FORWARD LOOKING STATEMENT INFORMATION Certain statements made in this Annual Report on Form 10-K are "forward-looking statements" (within the meaning of the Private Securities Litigation Reform Act of 1995) regarding the plans and objectives of management for future operations. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. The forward-looking statements included herein are based on current expectations that involve numerous risks and uncertainties. The Company's plans and objectives are based, in part, on assumptions involving judgements with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the control of the Company. Although the Company believes that its assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate and, therefore, there can be no assurance that the forward-looking statements included in this report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein particularly in view of the Company's early stage operations, the inclusion of such information should not be regarded as a statement by the Company or any other person that the objectives and plans of the Company will be achieved. Factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements include, but are not limited to, the factors set forth herein under the headings "Business," "Certain Factors That May Affect Future Growth" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." 2 PART I Item 1: BUSINESS General 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 $34,000,000. As a result, the Company 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, the Company commenced operations of its Northeast Regional center in Norwalk, Connecticut to provide its complete range of services to dealers in the Northeast. 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. During the fourth quarter of 1997, the Company closed its Northeast Regional center in Norwalk, Connecticut. During the fourth quarter of 1998, the Company sold all remaining repossessed vehicles, closed its Norfolk, Virginia operating facility, further reduced overhead and completed the restructuring of outstanding debt under its warehouse facility with CSFB and subordinated note holders. After the sale of all of its automobile receivables, the Company owed CSFB approximately $4.5 million. CSFB agreed 3 to a reduction 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. Further, the holders of the Company's $8.2 million of 12% subordinated notes, due in 1999 and 2000, exchanged such notes for new notes totaling approximately $9.35 million due in 2007 and 2008 (the "New Notes"). The New Notes include the capitalization of accrued interest of approximately $1.15 million through December 31, 1998 to principal. Interest on these new notes is due quarterly at the option of the Company at the rate of 10% if paid in cash and 12% if paid in common shares of the Company. In addition, representatives of these note holders have designated three members of the Company's Board of Directors. The accompanying financial statements have been prepared assuming the Company will continue as a going concern. The Company has no remaining automobile receivables and has ceased to operate as an automobile finance company. On January 29, 1999, the Company's wholly-owned subsidiary, CarLoanCo., Inc. ("CLC"), filed a voluntary petition under Chapter 7 of the United States Bankruptcy Code. CLC's carrying amount in the December 31, 1998 consolidated financial statements has been written off as a result of the bankruptcy filing. The Company is in the process of identifying new business opportunities in furtherance of its plan to rebuild the Company and create shareholder value. The foregoing factors raise substantial doubt about the Company's ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern. Accordingly, the carrying amounts of the Company's assets and liabilities do not purport to represent realizable or settlement amounts. CERTAIN FACTORS THAT MAY AFFECT FUTURE GROWTH The following factors may affect the future growth of the Company and should be considered by any prospective purchaser of the Company's securities: Accumulated Deficit; Losses; Independent Auditor's Comments Regarding Company's Ability to Continue as a Going Concern. At December 31, 1998, the Company had an accumulated deficit of $8,564,387. The Company also experienced approximately $10 million and $11 million of losses, respectively, during the years ended December 31, 1998 and 1997. Further, the report of the Company's independent auditors in connection with the Company's financial statements at December 31, 1998 and 1997 contains an additional paragraph regarding the Company's ability to continue as a going concern. Among the factors cited by the independent auditors as to the Company's ability to continue as a going concern are that the Company has suffered recurring losses, has ceased operating as an automobile finance company and has filed bankruptcy protection for one of its subsidiaries under Chapter 7 of the United States Bankruptcy Code. The Company has reduced operating expenses and is seeking acquisition and investment opportunities. However, no assurance can be given that the Company will not continue to incur operating losses or that the Company will be able to continue operations as a going concern. Limited Resources; No Present Source of Revenues. At December 31, 1998 and March 1, 1999, the Company had cash and cash equivalents of $2.4 million and $2.1, respectively. On March 23, 1999, the Company paid $585,000 in full payment of a term loan. In addition, as a result of its withdrawal from the automobile non-prime finance market, the Company has no current source of revenue and will not achieve any revenues (other than investment income) until the consummation of a business acquisition, if ever. Moreover, there can be no assurance that any acquisition, if achieved, will result in material revenues from its operations to the Company or that it will operate on a profitable basis. Additional Financing Requirements. The Company's continued operations will depend upon revenues, if any, from operations to be acquired and the availability of equity or debt financing. The 4 Company has no commitments for any acquisitions or additional financing. Further, there can be no assurance that the Company will be able to generate levels of revenues and cash flows sufficient from any acquisition to fund operations or that the Company will be able to obtain additional financing on satisfactory terms, if at all, to achieve profitable operations. Net Operating Loss Carryforward. At December 31, 1998, the Company had approximately $27.4 million in available federal net operating losses for federal tax reporting purposes which may be carried forward to offset future years taxable income subject to certain limitations. The utilization of net operating loss carryforward may be limited by shareholder changes including the possible issuance by the Company of additional shares in one or more financings, acquisitions or payment of interest on outstanding subordinated notes with shares of Common Stock. "Blind Pool"; Broad Discretion of Management. Prospective investors who invest in the Company will do so without an opportunity to evaluate the specific merits or risks of any proposed transactions. As a result, investors will be entirely dependent on the broad discretion and judgment of management in connection with the application of the Company's working capital and the selection of an acquisition or investment target. There can be no assurance that determinations ultimately made by the Company will permit the Company to achieve profitable operations. Acquisition Risks. As part of its business strategy, the Company will evaluate new acquisition opportunities. Acquisitions involve numerous risks, including difficulties in the assimilation of the operations and products or services of the acquired companies, the expenses incurred in connection with the acquisition and subsequent assimilation of operations and products or services and the potential loss of key employees of the acquired company. There can be no assurance that the Company will successfully identify, complete or integrate any future acquisitions, or that acquisitions, if completed, will contribute favorably to the Company's operations and future financial condition. Dependence Upon Executive Officers and Board of Directors. The ability of the Company to successfully effect a transaction will be largely dependent upon the efforts of its management and the Board of Directors. No assurance can be given that the Board of Directors and management will be successful in consummating a transaction and achieving profitability. Limited Trading Market. During 1998, the Company's Common Stock was delisted from the Nasdaq SmallCap market for failure to comply with the minimum listing maintenance requirements. As a result thereof, the Company's Common Stock is traded on the OTC Bulletin Board of the National Association of Security Dealers, Inc. (the "OTC Bulletin Board") and there is a limited trading market in the Common Stock and limited information is available with respect to trading in the Company's Common Stock. No assurances can be given that the Company's Common Stock will continue to trade on the OTC Bulletin Board or that an orderly trading market will be maintained for the Company's Common Stock. Patents, Trademarks and Copyrights "AUTOINFO" is a registered trademark and service mark of the Company. Employees The Company currently has 3 full-time employees. None of the Company's employees are represented by a labor union. The Company considers its relationship with its employees to be good. 5 Item 2: PROPERTIES 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. Item 3. LEGAL PROCEEDINGS The Company is not party to any material legal proceedings. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None 6 Part II Item 5. PRICE RANGE OF COMMON STOCK During 1998, the Company's Common Stock was delisted from the Nasdaq National Market System due to the Company's failure to meet the Nasdaq continued listing maintenance requirements. The Company's Common Stock is currently traded on the OTC Bulletin Board of the National Association of Securities Dealers, Inc. under the symbol AUTO. The following table sets forth, for the periods indicated, the high and low closing bid quotations per share for the Company's Common Stock. Quotations represent interdealer prices without an adjustment for retail markups, markdowns or commissions and may not represent actual transactions: Year Ended December 31, 1998 High Low - -------------------------------------- -------- -------- First quarter 5/8 1/8 Second quarter 7/16 3/16 Third quarter $ .15 $ .02 Fourth quarter 1/16 $ .02 Year Ended December 31, 1997 High Low - -------------------------------------- -------- -------- First quarter 3 3/4 2 3/16 Second quarter 2 7/16 1 3/8 Third quarter 2 7/16 1 7/16 Fourth quarter 1 23/32 3/8 As of March 24, 1999, the closing bid price per share for the Company's Common Stock, as reported by NASDAQ was $0.045. As of March 24, 1999, the Company had approximately 1,500 stockholders of record. Dividend Policy The Company has never declared or paid a cash dividend on its Common Stock. It has been the policy of the Company's Board of Directors to retain all available funds to finance the development and growth of the Company's business. The payment of cash dividends in the future will be dependent upon the earnings and financial requirements of the Company and other factors deemed relevant by the Board of Directors. 7 Item 6. SELECTED CONSOLIDATED FINANCIAL DATA The following is a summary of selected consolidated financial data relating to the Company. This summary has been restated to present the businesses sold as discontinued operations and should be read in conjunction with the audited financial statements included herein.
Seven months Year Year ended ended ended 000's omitted except December 31, December 31, May 31, for per share data ------------------------------------------- ------------ ------- 1998 1997 1996 1995 1995 --------- --------- ---------- -------- ------- Statement of Operations Data: Revenues $ 7,004 $ 19,846 $ 13,185 $ 2,232 $ 1,599 Operating expenses (13,714) (19,089) (12,092) (1,847) (4,009) Provision for credit losses (3,942) (12,456) (5,251) -- -- Write-off of goodwill and other intangibles -- (2,542) -- -- -- Restructuring charges (2,972) (867) -- -- -- Unusual item -- impairment of long-lived assets and additional credit losses on acquired automobile receivables -- -- (19,293) -- -- -------- -------- -------- ------- -------- (Loss) income from continuing operations before tax benefit (13,624) (15,108) (23,451) 385 (2,410) Benefit from income taxes -- (3,986) (4,352) (176) (332) -------- -------- -------- ------- -------- (Loss) income from continuing operations before extraordinary item (13,624) (11,122) (19,099) 561 (2,078) Extraordinary item-- gain on debt extinguishments 3,689 Income from discontinued operations -- -- -- 268 10,404 -------- -------- -------- ------- -------- Net (loss) income (9,935) $(11,122) $(19,099) $ 829 $ 8,326 -------- -------- -------- ------- -------- Basic (loss) income per share (a) from continuing operations $ (1.71) $ (1.39) $ (2.41) $ .07 $ (.28) From extraordinary item .46 From discontinued operations -- -- -- .04 1.42 -------- -------- -------- ------- -------- Net (loss) income per share $ (1.25) $ (1.39) $ (2.41) $ .11 $ 1.14 -------- -------- -------- ------- -------- Diluted (loss) income per share (a) From continuing operations $ (1.71) $ (1.39) $ (2.41) $ .07 (.28) From extraordinary item .46 From discontinued operations -- -- -- .04 1.42 -------- -------- -------- ------- -------- Net (loss) income per share $ (1.25) $ (1.39) $ (2.41) $ .11 $ 1.14 -------- -------- -------- ------- --------
8
Seven months Year Year ended ended ended 000's omitted December 31, December 31, May 31, ------------------------------------------- ------------ ------- 1998 1997 1996 1995 1995 --------- --------- ---------- -------- ------- Balance Sheet Data: Net automobile receivables after allowance for credit losses $ -- $ 78,481 $ 45,814 $25,074 $ -- Cash and short term investments 2,399 4,749 8,698 24,871 8,836 Total assets 2,752 96,614 74,451 65,795 42,357 Total debt 10,038 93,190 60,405 32,746 4,161 Retained earnings (deficit) (26,127) (16,192) (5,071) 14,029 13,199 Stockholders' equity (8,564) 1,311 12,327 31,018 30,121
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. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Cautionary Statement Identifying Important Factors That Could Cause the Company's Actual Results to Differ From Those Projected in Forward Looking Statements. 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. This report also identifies important factors which could cause actual results to differ materially from those indicated by the forward looking statements. These risks and uncertainties include the factors discussed under the heading "Certain Factors That May Affect Future Growth" beginning at page 4 of this report. 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. Overview 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 9 $34,000,000. As a result, the Company 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, the Company commenced operations of its Northeast Regional center in Norwalk, Connecticut to provide its complete range of services to dealers in the Northeast. 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. During the fourth quarter of 1997, the Company closed its Northeast Regional center in Norwalk, Connecticut. During the fourth quarter of 1998, the Company sold all remaining repossessed vehicles, closed its Norfolk, Virginia operating facility, further reduced overhead and completed the restructuring of outstanding debt under its warehouse facility with CSFB and subordinated note holders. After the sale of all of its automobile revceivables, the Company owed CSFB approximately $4.5 million. CSFB agreed to a reduction 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. Further, the holders of the Company's $8.2 million of 12% subordinated notes, due in 1999 and 2000, exchanged such notes for new notes totaling approximately $9.35 million due in 2007 and 2008 (the "New Notes"). The New Notes include accrued the capitalization of interest of approximately $1.15 million through December 31, 1998 to principal. Interest on these new notes is due quarterly at the option of the Company at the rate of 10% if paid in cash and 12% if paid in common shares of the Company. In addition, representatives of these note holders have designated three members of the Company's Board of Directors. 10 The accompanying financial statements have been prepared assuming the Company will continue as a going concern. The Company has no remaining automobile receivables and has ceased to operate as an automobile finance company. On January 29, 1999, the Company's wholly-owned subsidiary, CarLoanCo., Inc. ("CLC"), filed a voluntary petition under Chapter 7 of the United States Bankruptcy Code. CLC's carrying amount in the December 31, 1998 consolidated financial statements has been written off as a result of the bankruptcy filing. The Company is in the process of identifying new business opportunities in furtherance of its plan to rebuild the Company and create shareholder value. The foregoing factors raise substantial doubt about the Company's ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern. Accordingly, the carrying amounts of the Company's assets and liabilities do not purport to represent realizable or settlement amounts. Results of Operations Except as otherwise noted, the following discussion of the results of operations is with respect to the Company's non-prime automobile finance business, its primary business for each of the past three years. For the Year Ended December 31, 1998 Revenues 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 the Company's 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. Costs and Expenses Interest expense for the year ended December 31, 1998 was $4,685,000 as compared to $8,146,000 in the prior year. Interest expenses was primarily related to the non-prime automobile financing business and the debt outstanding under the Company's senior credit facilities, securitized notes and subordinated and other debt. The senior credit facility and the securitized notes were repaid during 1998, primarily as a result of the collection of customer accounts in the ordinary course of business and the sale of automobile receivables. The decrease in interest expense of $3,461,000 is directly related to the sale of portfolio assets and the ceasing to operate as a non-prime automobile finance company. Operating expenses for the year ended December 31, 1998 were $5,050,000 as compared to $10,235,000 in the prior year. The decrease in operating expenses of $5,185,000 is directly related to the sale of portfolio assets and the ceasing to operate as an non-prime automobile finance company. 11 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 the company's Northeast operating center (November 1997) and Mid-Atlantic operating center (December 1998) and the related sale and write off of property and equipment. The Company sold approximately $66 million of automobile receivables resulting in a loss of $3,542,000. The provision for credit losses for the year ended December 31, 1998 was $3,942,000 as compared to $12,456,000 in the prior year, a decrease of $8,514,000. This provision is the result of the Company 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. 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. Extraordinary Item - Gain on Debt Extinguishments The gain on debt settlement consists of $1,703,000 from the extinguishment of the Company's $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 CSFB in final settlement of amounts outstanding under the Company's revolving credit agreement. The two off-balance sheet assets consisted of the Company's 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. The Company's 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. For the Year Ended December 31, 1997 Revenues 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. 12 Net Interest Income on Automobile Receivables 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: 1997 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% ----------- ----------- Net interest margin (1) 10.5% 16.1% ----------- ----------- (1) Net interest margin is net interest income divided by average loans outstanding. 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. Costs and Expenses Interest expense for the year ended December 31, 1997 was $8,146,000 as compared to $3,990,000 in the prior year. Interest expenses was primarily related to the non-prime automobile financing business and the debt outstanding under the Company's senior credit facilities ($67.9 million as of December 31, 1997), securitized notes ($14.1 million as of December 31, 1997) and subordinated and other debt ($11.2 million as of December 31, 1997). The increase in interest expense of $4,156,000 is directly related to the growth of the automobile receivables portfolio acquired and serviced by the Company. 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 13 depreciation ($303,000) related to the expansion of the Company's northeast regional office and relocation of corporate headquarters. 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 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 the Company's decision to consolidate operations in its Norfolk, Virginia operating center during the fourth quarter. Loss from Continuing Operations and Income Tax Benefit The loss from continuing operations before income tax benefit was $15,108,000 as compared to a loss of $23,452,000 in the prior year. This loss is primarily attributable to the provision for credit losses ($12.5 million). The decrease in the loss from continuing operations of $8,344,000 is directly related to the write-off of goodwill and other intangible assets ($11.2 million) and the additional provision for credit losses on the acquired portfolio ($8.1 million) for the year ended December 31, 1996. 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. 14 Automobile Receivables 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 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% =========== === ========== === For the Year Ended December 31, 1996 The Company entered the non-prime automobile finance business in December 1995. The results of operations for the short year (seven months) ended December 31, 1995 include the operation of the Company's non-prime business for only one month. Certain information for the full year ended December 31, 1996 is not comparable to the prior year. Revenues Revenues for the year ended December 31, 1996 were derived from the non-prime automobile finance business ($11,789,000), the long distance telephone service business ($512,000) and investment income ($884,000), respectively. Net Interest Income on Automobile Receivables 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 15 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: 1996 1995(2) ----------- ----------- 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 ----------- ----------- Yield on loans 24.6% 28.1% Cost of funds 10.2% 11.0% ----------- ----------- Net interest spread 14.4% 17.1% ----------- ----------- Net interest margin (1) 16.1% 17.3% ----------- ----------- (1) Net interest margin is net interest income divided by average loans outstanding. (2) Average amounts are for the period from December 6, 1995 through December 31, 1995. Costs and Expenses Interest expense for the year ended December 31, 1996 of $3,990,000 was related to the non-prime automobile financing business and the debt outstanding under the Company's senior credit facilities ($18.1 million as of December 31, 1996), securitized notes ($31.6 million as of December 31, 1996) and subordinated debt ($10.2 million as of December 31, 1996). 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). Depreciation and amortization expense for the year ended December 31, 1996 of $1,189,000 was primarily attributable to the amortization of goodwill and other intangible assets associated with the acquisition of FFC in December 1995. Approximately $784,000 of this amortization was related to the goodwill and other intangibles written off as of December 31, 1996. Provisions for Credit Losses and Impairment of Long-Lived Assets 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. 16 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. Loss from Continuing Operations and Income Tax Benefit 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. Automobile Receivables The following table provides information regarding the Company's allowance for credit losses as of December 31, 1996 and 1995: 1996 1995 ------------ ----------- Allowance for credit losses $ 15,725,000 $ 6,818,000 Percentage of outstanding automobile receivables 25.5% 21.3% The following table summarizes the Company's delinquent accounts that were more than 60 days delinquent as of December 31, 1996 and 1995: 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% ---------- --- ---------- --- Trends and Uncertainties 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. No assurances can be given, however, that the Company will successfully consummate any transaction, or if consummated, that such transaction will enhance shareholder value. As a result, there is substantial doubt about the Company's ability to continue as a going concern. 17 Liquidity and Capital Resources 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 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 had experienced a net loss from operations for each of the quarters ended September 30, 1997, December 31, 1997, March 31, 1998 and June 30, 1998. Accordingly, the Company did not meet the interest coverage ratio requirement. In July 1998, the Company sold approximately $7.7 million of these automobile receivables and received proceeds of approximately $6.5 million. These proceeds, as well as available balances in Cash Reserve accounts, were used to redeem the Class A and Class B notes in full. 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 Company's liquid assets amounted to $2.4 million as of December 31, 1998. 18 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. Inflation and changing prices had no material impact on revenues or the results of operations for the year ended December 31, 1998. The accompanying financial statements have been prepared assuming the Company will continue as a going concern. The Company has no remaining automobile receivables and has ceased to operate as an automobile finance company. On January 29, 1999, the Company's wholly-owned subsidiary, CarLoanCo., Inc. ("CLC"), filed a voluntary petition under Chapter 7 of the United States Bankruptcy Code. CLC's carrying amount in the December 31, 1998 consolidated financial statements has been written off as a result of the bankruptcy filing. The Company is in the process of identifying new business opportunities in furtherance of its plan to rebuild the Company and create shareholder value. The foregoing factors raise substantial doubt about the Company's ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern. Accordingly, the carrying amounts of the Company's assets and liabilities do not purport to represent realizable or settlement amounts. Year 2000 The Company maintained a sophisticated data processing support and management information systems. Since the Company ceased operating as a non-prime automobile finance company during 1998, Finance Manager, the Company's custom designed proprietary software management system, is only used as a source of historical customer data files. In prior years, this system had been updated and maintained by the Company's MIS Department based in Norfolk, Virginia. During 1997, the Company had 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 were 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. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The response to this item is submitted as a separate section of this Report beginning on page F-1. Item 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 19 Part III Item 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Set forth below is information with respect to the Company's Directors and Executive Officers: JASON BACHER, age 60, has been a director of the Company since its inception in 1976. From its inception in 1976 through March 29, 1995, Mr. Bacher was Chairman of the Board and the Chief Executive Officer of the Company. Mr. Bacher has been associated with the automobile salvage industry since 1961 as a principal of Bacher Tire Company, Inc., an automobile recycler located in the New York metropolitan area. In connection with the sale by the Company of a principal portion of its business to ADP Claims Solutions on April 1, 1995, Mr. Bacher joined ADP Claims Solutions and was an employee of ADP through March 1998. PETER C. EINSELEN, age 59, has been a Director of the Company since January 1999. Mr. Einselen served as Senior Vice President and a member of the board of Andersen & Strudwick, a brokerage firm from 1990 to 1998. From 1983 to 1990, Mr. Einselen was employed by Scott and Stringfellow, Incorporated, a brokerage firm. CHARLES A. MILLS, III, age 52, has been a Director of the Company since January 1999. Mr. Mills has been Senior Vice President of Andersen & Strudwick, a brokerage firm ("A&S") since 1986 and was Chairman of the Board of A&S from 1990 to 1995 and from 1994 to the present. He has been Chairman of Mills Value Advisors since 1988. He served as a director of Humphrey Hospitality Trust, Inc. from 1994 to 1998 and Commonwealth Biotechnologies, Inc. from June 1997 to the present. HOWARD NUSBAUM, age 51, has been a director of the Company since its inception in 1976. Mr. Nusbaum, who earned a B.A. degree from Brooklyn College, has been a consultant to the automobile recycling industry since 1976. Mr. Nusbaum is presently President of SWZ Engineering, Inc. THOMAS C. ROBERTSON, age 54, has been a Director of the Company since January 1999. Mr. Robertson has been President, Chief Financial Officer and a Director of Andersen & Strudwick, a brokerage firm ("A&S") since 1988. Mr. Robertson has been President of Gardner & Robertson, a money management firm, since 1997. WILLIAM WUNDERLICH, age 51, joined the Company in October 1992 as its Vice President - Finance, became Chief Financial Officer in January 1993 and President in January 1999. From 1990 to 1992, he served as Vice President of Goldstein Affiliates, Inc., a public adjusting company. From 1981 to 1990, he served as Executive Vice President, Chief Financial Officer and a Director of Novo Corporation, a manufacturer of consumer products. Mr. Wunderlich is a Certified Public Accountant with a B.A. degree in Accounting and Economics from the City University of New York at Queens College. SCOTT ZECHER, age 40, joined the Company in January 1984 and has been a director since 1989. He was the Company's President from January 1993 through December 1998 and its Chief Executive Officer from October 1996 through December 1998. Prior to becoming President and Chief Operating Officer, he held the position of Executive Vice President and Chief Financial Officer. From 1980 to 1984, he was with the accounting firm of KPMG Peat Marwick. Mr. Zecher is a Certified Public Accountant with a B.A. degree in Accounting and Economics from the City University of New York at Queens College. 20 Option Grants during the year ended December 31, 1998 There were no options granted to Named Executives during the year ended December 31, 1998. The exercise price of all outstanding options was reduced to $.10 per share in November 1998. Aggregate Year-End Option Values Shown below is information with respect to unexercised options granted under the Option Plans to the Named Executives and held by them at December 31, 1998. No options were exercised by the Named Executives during 1998.
Number of Unexercised Options at Values of Unexercised In-the-Money Options at 12/31/98 12/31/98 (1) Name Exercisable / Unexercisable (2) Exercisable / Unexercisable ---- ------------------------------- --------------------------- Scott Zecher (3) 263,318 / 300,015 $0 / $0 William Wunderlich 214,991 / 180,009 $0 / $0
(1) Based on the closing price as quoted on the OTC Bulletin Board on December 31, 1998. (2) The exercise price of all outstanding options was reduced on November 4, 1998 and in connection therewith a six-month moratorium was imposed upon execution. (3) These options were cancelled in January 1999 effective with the resignation of Mr. Zecher. Director Compensation During 1998, the Company paid a Directors fee of $750 for each meeting attended by a non-employee director. Commencing in January 1999, the Company ceased paying Directors fees. Item 11: EXECUTIVE COMPENSATION The Summary Compensation table below includes, for the years ended December 31, 1998, 1997 and 1996, individual compensation for services to the Company and its subsidiaries paid to: (1) the Chief Executive Officer; and (2) the other most highly paid executive officers of the Company in Fiscal 1998 whose salary and bonus exceeded $100,000 (together, the "Named Executives")
Long-Term Annual Compensation Compensation All Other Name and Principal Position Year Salary Bonus Options Compensation(1) - --------------------------- ---- ------ ----- ------- --------------- Scott Zecher(3) 1998 $250,000(2) -- -- $4,500 President and 1997 $191,667(2) $ 58,333 -- $4,500 Chief Executive Officer 1996 $150,000(2) $100,000 -- $4,500 William Wunderlich 1998 $150,000 -- -- $4,575 Treasurer and 1997 $142,500 $ 7,500 -- $4,575 Chief Financial Officer 1996 $120,000 $ 30,000 -- $4,500
(1) Represents amount contributed to the Company's 401(k) deferred compensation plan. (2) Represents amounts paid pursuant to Mr. Zecher's employment agreement which was terminated in conjunction with his resignation in January 1999. Employment Agreements Mr. Wunderlich is employed by the Company pursuant to an employment agreement which expires in April 2000. This agreement provides for minimum annual compensation of $150,000 and provides for an annual review by the Board of Directors. 21 Item 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table, together with the accompanying footnotes, sets forth information, as of March 10, 1999, regarding stock ownership of all persons known by the Company to own beneficially 5% or more of the Company's outstanding Common Stock, all directors, and all directors and officers of the Company as a group. Name of Shares of Common Stock Percentage Beneficial Owner Beneficially Owned (1) Of Ownership ---------------- ---------------------- ------------ (i) Directors Jason Bacher 299,939(2) 3.8%(3) Howard Nusbaum 146,154 1.9% Scott Zecher 128,280 1.7% Charles A. Mills, III -- -- Thomas C. Robertson 10,000 * Peter C. Einselen -- -- All executive officers and directors as a group (6 persons) 819,373(4) 10.2%(4) (ii) 5% Stockholders Robert G. Risher (5) 39 Greenhouse Road Houston, TX 77084 514,600 6.4% - -------------- * Less than 1% (1) Unless otherwise indicated below, each director, executive officer and each 5% stockholder has sole voting and investment power with respect to all shares beneficially owned. (2) Includes 91,667 shares subject to currently exercisable options. (3) Assumes that all currently exercisable options or warrants owned by this individual have been exercised. (4) Assumes that all currently exercisable options or warrants owned by members of this group have been exercised. (5) Information with respect to this stockholder has been derived from the Schedule 13D or Schedule 13G filed by such stockholder with the Securities and Exchange Commission. Item 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS On April 28, 1995 the Company entered into a Promissory Note and Security and Pledge Agreement with Scott Zecher, its President, Chief Operating Officer and a Director, pursuant to which the Company lent to Mr. Zecher, consistent with the Company's past practice, the sum of $466,796.64 in connection with Mr. Zecher's exercise of options to acquire 216,799 shares of the Company's Common Stock (the "Shares") under the Company's 1985 and 1986 Stock Option Plans. During 1997, the maturity date of the Note, which is non-interest bearing and secured by the Shares, was extended to November 1999. In November 1998, the Shares were returned to the Company in full satisfaction of the Note. In addition, in connection therewith, Mr. Zecher agreed to the termination of the Employee Protection Trust Agreement between him and the Company. 22 Part IV Item 14: EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K Financial Statements The financial statements listed in the accompanying index to financial statements on Page F-1 are filed as part of this report. Exhibits -------- No. 2A Agreement and Plan of Merger between AutoInfo, Inc. ( New York) and AutoInfo, Inc. (Delaware), January 20, 1987 (2) No. 3A Certificate of Incorporation of the Company. (3) No. 3B Amended and Restated By-Laws of the Company. (11) No. 4A Specimen Stock Certificate. (4) No. 4B Rights Agreement, dated as of March 30, 1995 between AutoInfo, Inc. and American Stock Transfer & Trust Company, as Rights Agent. (5) No. 9A Settlement Agreement, dated June 22, 1995, between AutoInfo, Inc. and Ryback Management Corporation, et al. (12) No. 10A 1985 Stock Option Plan. (1) No. 10B 1986 Stock Option Plan. (3) No. 10C 1989 Stock Option Plan. (7) No. 10D 1992 Stock Option Plan. (10) No. 10E 1997 Stock Option Plan. (16) No. 10F 1997 Non-Employee Stock Option Plan. (16) No. 10G Employment Agreement between AutoInfo, Inc. and William Wunderlich dated as of April 10, 1997. (16) No. 10H Amendment to Employment Agreement between AutoInfo, Inc. and William Wunderlich dated November 4, 1998. * No. 10I Common Stock Purchase Warrant Agreement and Registration Rights Agreement, each dated as of December 10, 1996, between AutoInfo, Inc. and CS First Boston Mortgage Capital Corp. (14) No. 10J Form of Amended Junior Subordinated Promissory Note.* 23 No. 10K Form of Amended Senior Subordinated Promissory Note.*. No. 10L Form of Exchange Agreement between the Corporation and holders of its Senior Subordinated Notes and Junior Subordinated Notes, dated December 7, 1998. * No. 10M Amendment and Forbearance Agreement between Credit Suisse First Boston Mortgage Capital, LLC and AutoInfo, Inc., dated December 10, 1998. * No. 10N Common Stock Purchase Warrant Agreement dated December 10, 1998 between AutoInfo, Inc. and Credit Suisse First Boston Mortgage Capital, LLC. * No. 23 Consent of Arthur Andersen LLP, independent public accountants. * No. 27 Financial Data Schedule. * ----------------------- *Filed as an Exhibit hereto. (1) This Exhibit was filed as an Exhibit to the Company's Registration Statement on Form S-18 (File No. 33-3526-NY) and is incorporated herein by reference. (2) This Exhibit was filed as an Exhibit to the Company's Current Report on Form 8-K dated January 6, 1987 and is incorporated herein by reference. (3) These Exhibits were filed as Exhibits to the Company's definitive proxy statement dated October 20, 1986 and incorporated herein by reference. (4) These Exhibits were filed as Exhibits to the Company's Registration Statement on Form S-1 (File No. 33-15465) and are incorporated herein by reference. (5) This Exhibit was filed as an Exhibit to the Company's Registration Statement on Form 8-A filed April 13, 1995, and is incorporated herein by reference. (6) This Exhibit was filed as an Exhibit to the Company's Annual Report on Form 10-K for the year ended May 31, 1994 and is incorporated herein by reference. (7) This Exhibit was filed as an Exhibit to the Company's definitive proxy statement dated September 25, 1989 and is incorporated herein by reference. (8) These Exhibits were filed as Exhibits to the Company's Current Report on Form 8-K dated December 19, 1991 and are incorporated herein by reference. (9) This Exhibit was filed as an Exhibit to the Company's definitive proxy statement dated March 1, 1995 and is incorporated herein by reference. (10) This Exhibit was filed as an Exhibit to the Company's definitive proxy statement dated October 2, 1992 and is incorporated herein by reference. (11) This Exhibit was filed as an Exhibit to the Company's Current Report on Form 8-K dated March 30, 1995 and is incorporated herein by reference. (12) This Exhibit was filed as an Exhibit to the Company's Annual Report on Form 10-K for the year ended May 31, 1995 and is incorporated herein by reference. (13) This Exhibit was filed as an Exhibit to the Company's Current Report on Form 8-K dated December 6, 1995 and is incorporated herein by reference. (14) This Exhibit was filed as an Exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1996 and is incorporated herein by reference. (15) This Exhibit was filed as an Exhibit to the Company's definitive proxy statement dated April 22, 1997 and is incorporated herein by reference. (16) This Exhibit was filed as an Exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1997 and is incorporated herein by reference. 24 SIGNATURES Pursuant to the requirements of Section 13 or 15(d), the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on March 25, 1999 on its behalf by the undersigned, thereunto duly authorized. AutoInfo, Inc. By: /s/ William I. Wunderlich -------------------------------------- William I. Wunderlich, President and Chief Financial Officer Pursuant to the requirements of the Securities Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities indicated. /s/ William I. Wunderlich - -------------------------- William I. Wunderlich President and Chief Financial March 25, 1999 Officer /s/ Jason Bacher - -------------------------- Jason Bacher Director March 25, 1999 /s/ Peter C. Einselen - -------------------------- Peter C. Einselen Director March 25, 1999 /s/ Charles A. Mills, III - -------------------------- Charles A. Mills, III Director March 25, 1999 /s/ Howard Nusbaum - -------------------------- Howard Nusbaum Director March 25, 1999 /s/ Thomas C. Robertson - -------------------------- Thomas C. Robertson Director March 25, 1999 /s/ Scott Zecher - -------------------------- Scott Zecher Director March 25, 1999 25 AUTOINFO, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Public Accountants F-2 Consolidated Balance Sheets as of December 31, 1998 and 1997 F-3 Consolidated Statements of Operations for the Years Ended December 31, 1998, 1997 and 1996 F-4 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1998, 1997 and 1996 F-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996 F-6 Notes to Consolidated Financial Statements F-7 Information required by schedules called for under Regulation S-X is either not applicable or is included in the Consolidated Financial Statements or Notes thereto. F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of AutoInfo, Inc: We have audited the accompanying consolidated balance sheets of AutoInfo, Inc. (a Delaware corporation) and subsidiaries (the "Company") as of December 31, 1998 and 1997 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of AutoInfo, Inc. and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1, losses incurred by the Company have had a significant adverse impact on the Company's financial position and results of operations and, as a result, the Company has ceased to operate as an automobile finance company. Additionally, as discussed in Note 12, on January 29, 1999, the Company's wholly-owned subsidiary and operator of the Company's automobile finance business filed a voluntary bankruptcy petition under Chapter 7 of the United States Bankruptcy Code. These factors raise substantial doubt about the Company's ability to continue as a going concern. Management's plans with respect to these matters are also described in Note 1. The accompanying consolidated financial statements do not include any adjustments that might result should the Company be unable to continue as a going concern. Arthur Andersen LLP New York, New York March 26, 1999 F-2 AUTOINFO, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1998 AND 1997
ASSETS 1998 1997 ------------- ------------- Gross automobile receivables $ -- $ 126,428,067 Unearned interest -- (28,946,529) ------------- ------------- Net automobile receivables -- 97,481,538 Allowance for credit losses (Note 4) -- (19,000,487) ------------- ------------- Net automobile receivables after allowance for credit losses -- 78,481,051 Cash 116,570 2,506,502 Restricted cash (Note 1) -- 4,088,483 Short-term investments (Note 3) 2,282,515 2,242,069 Fixed assets, net of accumulated depreciation of $258,397 and $1,098,356 as of December 31, 1998 and 1997, respectively 250,887 2,099,126 Other assets 101,929 3,785,355 Refundable income taxes (Note 6) -- 3,411,211 ------------- ------------- $ 2,751,901 $ 96,613,797 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Revolving lines of credit (Note 5) $ -- $ 67,935,706 Automobile receivables backed notes (Note 5) -- 14,063,140 Subordinated notes and other debt (Note 5) 10,038,028 11,190,979 Accounts payable and accrued liabilities 1,278,260 2,112,630 ------------- ------------- Total Liabilities 11,316,288 95,302,455 ------------- ------------- Commitments and contingencies (Note 7) Stockholders' equity (deficit) Common Stock - authorized 20,000,000 shares $.01 par value; issued and outstanding 7,756,953 at December 31, 1998 and 7,996,752 at December 31, 1997 77,570 79,968 Additional paid-in capital 17,772,431 18,233,362 Officer note receivable (Note 8) -- (466,797) Deferred compensation under stock bonus plan (Note 8) (287,097) (342,873) Retained (deficit) (26,127,291) (16,192,318) ------------- ------------- Total stockholders' equity (deficit) (8,564,387) 1,311,342 ------------- ------------- $ 2,751,901 $ 96,613,797 ============= =============
See Accompanying Notes to Consolidated Financial Statements F-3 AUTOINFO, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Years Ended December 31, REVENUES 1998 1997 1996 ---- ---- ---- Interest and other finance revenue $ 6,809,440 $ 19,098,602 $ 11,789,130 Investment income 131,959 432,986 884,459 Long distance telephone services 63,099 314,643 511,534 ------------ ------------ ------------ Total revenues 7 ,004,498 19,846,231 13,185,123 ------------ ------------ ------------ COSTS AND EXPENSES Interest expense 4,684,934 8,145,959 3,989,912 Operating expenses 5,049,621 10,234,902 6,913,086 Depreciation and amortization 438,282 708,248 1,189,298 Loss on sale of automobile receivables 3,541,586 -- -- Write off of goodwill and other intangibles (Note 1) -- 2,541,438 -- Provision for credit losses 3,941,528 12,456,124 5,251,000 Restructuring charges 2,972,170 867,141 ------------ ------------ ------------ 20,628,121 34,953,812 17,343,296 Unusual item - impairment of long-lived assets and additional credit losses on acquired automobile receivables (Note 9) -- -- 19,293,328 ------------ ------------ ------------ Total costs and expenses 20,628,121 34,953,812 36,636,624 ------------ ------------ ------------ (Loss) from operations (13,623,623) (15,107,581) (23,451,501) Income tax benefit -- (3,985,977) (4,352,000) ------------ ------------ ------------ (Loss) from operations before extraordinary item (13,623,623) (11,121,604) (19,099,501) Extraordinary item - gain on debt extinguishments (Note 5) 3,688,650 -- -- ------------ ------------ ------------ Net (loss) $ (9,934,973) $(11,121,604) $(19,099,501) ============ ============ ============ Basic and diluted per share data (Loss) from operations ($ 1.71) ($ 1.39) ($ 2.41) Extraordinary item .46 -- -- ------------ ------------ ------------ Net (loss) per share ($ 1.25) ($ 1.39) ($ 2.41) ============ ============ ============ Weighted average number of common and Common equivalent shares 7,959,860 8,009,097 7,920,515 ------------ ------------ ------------
See Accompanying Notes to Consolidated Financial Statements F-4 AUTOINFO, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Shares of Deferred Common Additional Officer Compensation Retained Stock Common Paid - In Note Under Stock Earnings Outstanding Stock Capital Receivable Bonus Plan (Deficit) ----------- ----- ------- ---------- ---------- --------- Balance January 1, 1996 7,777,752 $ 77,778 $ 17,782,677 $(466,797) $(404,092) $ 14,028,787 Common shares issued 177,000 1,770 388,605 -- -- -- Amortization of deferred compensation -- -- -- -- 18,162 -- Net (loss) -- -- -- -- -- (19,099,501) ---------- -------- ------------ --------- --------- ------------ Balance, December 31, 1996 7,954,752 79,548 18,171,282 (466,797) (385,930) (5,070,714) Common shares issued 64,000 640 89,360 -- -- -- Forfeiture of deferred shares (22,000) (220) (27,280) 27,500 Amortization of deferred compensation -- -- -- -- 15,557 -- Net (loss) -- -- -- -- -- (11,121,604) ---------- -------- ------------ --------- --------- ------------ Balance, December 31, 1997 7,996,752 79,968 18,233,362 (466,797) (342,873) (16,192,318) Forfeiture of deferred shares (23,000) (230) (40,301) -- 40,531 -- Cancellation of officer note receivable (216,799) (2,168) (464,630) 466,797 -- -- Warrants issued -- -- 44,000 -- -- -- Amortization of deferred compensation -- -- -- -- 15,245 -- Net (loss) -- -- -- -- -- (9,934,973) ---------- -------- ------------ --------- --------- ------------ Balance, December 31, 1998 7,756,953 $ 77,570 $ 17,772,431 $-- $(287,097) $(26,127,291) ========== ======== ============ ========= ========= ============
See Accompanying Notes to Consolidated Financial Statements F-5 AUTOINFO, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
December 31, 1998 1997 1996 ------------ ------------ ------------ Cash flows from operating activities: Net(loss) $ (9,934,973) $(11,121,604) $(19,099,501) Adjustments to reconcile net (loss) to net cash (used for)operating activities: Depreciation and amortization expenses 438,282 708,248 1,189,298 Amortization of deferred compensation 15,245 15,557 18,162 Provision for credit losses 3,941,528 12,456,124 5,251,000 Loss on sale of automobile receivables 3,541,586 -- -- Write-off of goodwill and other intangibles -- 2,541,438 -- Restructuring charge 2,684,035 436,086 -- Unusual item - impairment of long-lived assets and additional losses on acquired automobile receivables -- -- 19,293,328 Extraordinary item - gain on debt extinguishments (3,688,650) -- -- Changes in assets and liabilities: Automobile receivables, net 17,260,290 (45,023,631) (34,290,686) Other assets 2,950,867 188,147 (3,081,728) Refundable income taxes 3,411,211 940,789 (4,352,000) Accounts payable and accrued liabilities (1,552,893) 393,729 (311,933) ------------ ------------ ------------ Net cash provided by (used in) continuing operations 19,066,528 (38,465,117) (35,384,060) ------------ ------------ ------------ Cash flows from investing activities: Capital expenditures (2,864) (1,152,537) (1,797,168) Proceeds from the sale of property and equipment 179,867 -- -- Proceeds from the sale of automobile receivables 53,737,647 -- -- Redemption of short-term investments -- 12,899,102 43,941,466 Purchases of short-term investments (40,446) (10,248,972) (24,927,206) ------------ ------------ ------------ Net cash provided by investing activities 53,874,204 1,497,593 17,217,092 ------------ ------------ ------------ Cash Flows from Financing Activities: Issuance of notes -- 51,410,902 36,789,873 Reduction of borrowings (79,419,147) (18,625,868) (8,900,272) Decrease (increase) in restricted cash 4,088,483 2,793,363 (6,881,846) Issuance of common stock -- 90,000 -- ------------ ------------ ------------ Net cash (used in) provided by financing activities (75,330,664) 35,668,397 21,007,755 ------------ ------------ ------------ Net (decrease) increase in cash (2,389,932) (1,299,127) 2,840,787 Cash at beginning of year 2,506,502 3,805,629 964,842 ------------ ------------ ------------ Cash at end of year $ 116,570 $ 2,506,502 $ 3,805,629 ============ ============ ============
See Accompanying Notes to Consolidated Financial Statements F-6 AUTOINFO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 Note 1 - Business and Summary of Significant Accounting Policies Business 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 $34,000,000. As a result, the Company 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, the Company commenced operations of its Northeast Regional center in Norwalk, Connecticut to provide its complete range of services to dealers in the Northeast. 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 financialmarkets investmentsinto 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, during 1998, the Company discontinued 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 (Note5). 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 F-7 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. During the fourth quarter of 1997, the Company closed its Northeast Regional center in Norwalk, Connecticut. During the fourth quarter of 1998, the Company sold all remaining repossessed vehicles, closed its Norfolk, Virginia operating facility, further reduced overhead and completed the restructuring of outstanding debt under its warehouse facility with CSFB and subordinated note holders. After the sale of all of its automobile receivables, the Company owed CSFB approximately $4.5 million under the warehouse facility. CSFB agreed to a reduction of $2.25 million, which resulted in a gain on extinguishment of approximately $2.0 million net of applicable expenses, 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. Further, the holders of the Company's $8.2 million of 12% subordinated notes (Note5), due in 1999 and 2000, exchanged such notes for new notes totaling approximately $9.35 million due in 2007 and 2008 (the "New Notes"). The New Notes include accrued interest of approximately $1.15 million through December 31, 1998 to principal. Interest on these new notes is due quarterly at the option of the Company at the rate of 10% if paid in cash and 12% if paid in common shares of the Company. In addition, representatives of these note holders have designated three members of the Company's Board of Directors. The accompanying financial statements have been prepared assuming the Company will continue as a going concern. The Company has no remaining automobile receivables and has ceased to operate as an automobile finance company. On January 29, 1999, the Company's wholly-owned subsidiary, CarLoanCo., Inc. ("CLC"), filed a voluntary petition under Chapter 7 of the United States Bankruptcy Code (Note 12). CLC's carrying amount in the December 31, 1998 consolidated financial statements has been written off as a result of the bankruptcy filing. The Company is in the process of identifying new business opportunities in furtherance of its plan to rebuild the Company and create shareholder value. The foregoing factors raise substantial doubt about the Company's ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern. Accordingly, the carrying amounts of the Company's assets and liabilities do not purport to represent realizable or settlement amounts. Summary of Significant Accounting Policies Basis of Presentation The financial statements of the Company have been prepared using the accrual basis of accounting under generally accepted accounting principles ("GAAP"). The accounting policies of the Company conform with GAAP and with general practices within the financial services industry. F-8 Principles of Consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly-owned. All significant intercompany balances and transactions have been eliminated in consolidation.(See Note 12) Automobile Receivables Automobile receivables represent retail installment sales contracts purchased from automobile dealers at discounts ranging up to 20%. Allowance for Credit Losses The Company established an allowance for credit losses based upon an evaluation of a number of factors includingprior loss experience, contractual delinquencies, the value of underlying collateral and other factors. The allowance was periodically evaluated for adequacy based upon a review of credit loss experience, delinquency trends, static pool loss analysis and an estimate of future losses inherent in the existing finance receivable portfolio. Subsequent to the purchase of loans, a provision for losses, if any, was charged to income in order to maintain the allowance at an adequate level. The Company charged the allowance for loss account at the time a customer receivable was deemed uncollectable. Any reduction in the required allowance was amortized to income prospectively as an adjustment in the yield on the related loans. The Company estimated and recorded losses, as they became apparent, estimable and probable. Repossessed Vehicles Held for Sale The Company repossessed collateral when a determination was made that collection efforts were unlikely to be successful. The value of a repossessed vehicle is based upon an estimate of its fair value upon liquidation. As of December 31, 1997, there were 605 repossessed vehicles held for resale with an aggregate value of approximately $1,953,000 which amount is included in other assets on the accompanying consolidated balance sheets. As of December 31, 1998, there are no repossessed vehicles in inventory. Revenue Recognition The Company recognized interest income from automobile receivables on theinterest method. The accrual of interest income was suspended when a loan became ninety days contractually delinquent. All discounts on the purchase of installment contracts from dealers were held in reserve and were considered to cover future anticipated credit losses. Fees received for the purchase of automobile receivables were deferred and amortized to interest income over the contractual lives of the contracts using the interest method. Restricted Cash As of December 31, 1997, restricted cash consisted of $3,006,893 held in reserve accounts pursuant to Class A and Class B Auto Backed Notes sold in October 1996 by AutoInfo Receivables Company, a wholly owned subsidiary of the Company (Note 5) and $1,081,590 in F-9 collection accounts pursuant to the Company's revolving credit facility with CSFB (Note 5). As of December 31, 1998, there was no cash held in reserve accounts. Short-term Investments Short-term investments include bond funds, money market instruments and commercial paper. Investments are carried at cost which approximates market value(see Note 3). Fixed Assets Fixed assets are carried at cost less accumulated depreciation. Depreciation of fixed assets is provided on the straight-line method over the estimated useful lives of the related assets which range from three to five years. Depreciation expense totaled $438,282, $529,185 and $238,926 for the years ended December 31, 1998, 1997 and 1996. At December 31, 1998, fixed assets consisted predominantly of furniture, fixtures and equipment at the Company's Montvale, New Jersey headquarters facility. Goodwill and Other Intangibles The excess of cost over the fair value of net assets acquired was allocated to goodwill and other intangibles and was being amortized using the straight-line method over periods of up to twenty years. In March 1995, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The pronouncement is effective for fiscal years beginning after December 15, 1995. This statement requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company uses methods that are consistent with SFAS No. 121 to evaluate the carrying amount of goodwill and other intangibles including comparing estimated future cash flows identified with each long-lived asset group. For purposes of such comparison, portions of unallocated excess of cost over net assets acquired were attributed to related long-lived assets and identifiable intangible assets based upon the relative fair values of such assets at acquisition. In the fourth quarter of 1997, the Company determined that goodwill and other intangible assets were impaired resulting in a charge to operations. In the fourth quarter of 1996, the Company determined that certain components of goodwill and other intangible assets associated with an acquisition were impaired resulting in a charge to operations (see Note 9). Amortization expense related to goodwill and other intangibles totaled $0, $179,064 and $950,372 for the years ended December 31, 1998, 1997 and 1996, respectively. Loss Per Share In 1997, the Company adopted SFAS No. 128, "Earnings Per Share," which replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is similar to the F-10 previously reported fully diluted earnings per share. All earnings per share amounts for prior periods have been restated to conform to the new requirements. Basic loss per share is based on net loss divided by the weighted average number of common shares outstanding. Common stock equivalents outstanding wereantidilutive for the years endedDecember 31, 1998, 1997 and 1996. Use of Estimates The preparation of these financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts of assets, liabilities and contingent liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the periods presented. The Company believes that all such assumptions are reasonable and that all estimates are adequate, however, actual results could differ from those estimates. Income Taxes The Company utilizes the asset and liability method for accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Stock-Based Compensation The Company accounts for stock-based compensation issued to employees in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". The Company did not adopt the financial reporting requirements of Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation," for stock based compensation granted to employees in accordance with the provisions of SFAS 123 and accordingly, the Company has disclosed in the notes to the financial statements the pro forma net loss for the periods presented as if the fair value based method was used.(Note 8). Note 2 - Restructuring Charge During the fourth quarter of 1997, the Company made the decision to consolidate credit, funding and collections operations into its Norfolk, Virginia operating center and close its Northeast regional operating center in Norwalk, Connecticut. This decision was based upon several factors including management's opinion that the efficiencies and operating controls inherent in a centralized operating center approach provide significant benefits and that the presence and dealer relationships in local markets can be maintained through the use of field representatives. The Company recorded a charge to earnings related to this restructuring of F-11 $867,141, of which $436,086 represented non-cash charges. Such amount includes severance costs and the write-off of certain assets. During 1998, the Company, based upon several factors including its deteriorating financial condition, ceased the operation of its non-prime automobile finance business. Accordingly, the Company recorded a charge to earnings related to this restructuring of $2,972,170, of which $2,684,035 represented non-cash charges. Such amount includes severance costs and the write-off of certain assets. Note 3- Short-Term Investments Debt and equity securities used as part of the Company's investment management that may be sold in response to cash needs, changes in interest rates, and other factors have been classified as securities available for sale. Such securities are reported at cost which approximates fair value. December 31, 1998 1997 ---------- ---------- Common stock and bond funds $1,000,009 $1,626,979 Money market instruments 386,177 615,090 Commercial paper 896,329 -- ---------- ---------- $2,282,515 $2,242,069 ---------- ---------- Gains and losses on disposition of securities are recognized on the specific identification method in the period in which they occur. Unrealized gains and losses, if material, would be excluded from earnings and reported as a separate component of stockholders' equity on an after-tax basis. During the years ended December 31, 1998, 1997 and 1996, gains and losses arising from the disposition of marketable securities as well as unrealized gains and losses were not material. F-12 Note 4- Allowance for Credit Losses A rollforward of allowance for credit losses by significant component is as follows: Balance at January 1, 1996 $ 6,818,195 Purchase discounts 9,781,195 Charge offs (15,625,000) Yield adjustments 1,400,000 Additions to reserve 13,351,000 ------------ Balance at December 31, 1996 15,725,390 Purchase discounts 8,973,097 Charge offs (21,776,000) Yield adjustments 4,310,000 Additions to reserve 11,768,000 ------------ Balance at December 31, 1997 19,000,487 Purchase discounts 29,000 Charge offs (13,551,487) Allocated to portfolio sales (9,416,000) Additions to reserve 3,938,000 ------------ Balance at December 31, 1998 $ 0 ------------ The charge offs and additions to reserves for the years ended December 31, 1998, 1997 and 1996 were the result of an increase in delinquency rates, the higher than anticipated level of repossessions, and the poor performance of loans originated by specific independent automobile dealers. Note 5 - Debt Revolving Lines of Credit In December 1996, the Company entered into a revolving credit agreement with CSFB, which provided for borrowings of up to $100 million collateralized by installment automobile loan contracts. Among other provisions, this facility required the Company to maintain tangible net worth, as defined, of $10 million and was 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 automobile receivables backed notes issued in October 1996 and any income tax refund for the tax year ended May 31, 1998. At December 31, 1997 the Company had tangible net worth, as defined, of approximately $2.1 million and, accordingly,did not meet the tangible net worth standard. As of F-13 December 31, 1997, CSFB no longer funded the acquisition of non-prime automobile receivables generated by the Company. Advances outstanding as of December 31, 1997 were $67,935,706 collateralized by net automobile receivables of $80,085,384. The Company experienced material operating losses during 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, during 1998 the Company discontinued the operation of its non-prime automotive finance business. In furtherance thereof, the Company successfully completed the sale of approximately $58 million of automobile receivables. The proceeds of these sales as well as the proceeds of the collection of automobile receivables in the ordinary course of business, the residual cash balances from the redemption of the Class A and Class B automobile receivables backed notes in July 1998 and the federal income tax refund for the tax year ended May 31, 1998 received in August 1998 were remitted to CSFB in reduction of the principal amount of the loan. In November 1998, the Company entered into an agreement with CSFB whereby the outstanding balance of approximately $4.5 million was reduced by $2.25 million and resulted in a gain of approximately $2.0 million net of applicable expenses. The Company repaid the $2.3 million remaining balance and issued 1,357,467 warrants to CSFB to purchase common shares of the Company exercisable over a five year period. Automobile Receivables Backed Notes In October 1996, AutoInfo Receivables Company, a wholly-owned special purpose subsidiary of the Company, sold, in a private placement, $34,281,119 of 6.53% Class A Auto Loan Backed Notes and $2,016,536 of 11.31% Class B Auto Loan Backed Notes with a stated maturity date of January 2002. These notes were being repaid from the collection of payments of principal and interest and were collateralized by approximately $40,330,000 of automobile receivables and a Reserve Account in the amount of approximately $5,600,000. In conjunction with the July 1998 sale of approximately $8 million of automobile receivables which collateralized the Company's securitized notes, the remaining balance outstanding on the Class A and Class B notes of approximately $7 million was paid in full. Subordinated Notes and Other Debt Subordinated notes and other debt consist of the following:
1998 1997 ----------- ----------- Subordinated notes (1) $ 9,348,000 $ 8,200,000 Subordinated notes due January 2000 payable in equal annual installments in January 1998, 1999 and 2000 with interest at 7.55% paid semi-annually (2) -- 2,000,000 Other notes payable due in monthly installments through 2001 with interest at prime to 12.4% (3) 690,028 990,979 ----------- ----------- Total other notes $10,038,028 $11,190,979 ----------- -----------
(1) On December 6, 1995 as part of the acquisition of Falk Finance Company ("FFC"), the Company assumed unsecured subordinated notes in the amount of $9,800,000. In 1996, the Company redeemed $1,600,000 of these notes. In December 1998, the remaining subordinated F-14 notes, due in 1999 and 2000, were exchanged for New Notes, including unpaid interest,totaling approximately $9.35 million due in 2007 and 2008. These New Notes include accrued interest of approximately $1.15 million through December 31, 1998. Interest on these new notes is due quarterly at the option of the Company commencing March 31, 1999 at the rate of 10% if paid in cash and 12% if paid in common shares of the Company. In addition, three representatives of these note holders have been designated as members of the Company's board of directors. (2) In April 1998, the holders of the Company's $2 million 7.55% subordinated notes, originally due in equal principal installments in January 1998, 1999 and 2000, released the Company from such obligation in exchange for two off-balance sheet assets and the Company'slong distance telephone service business. The two off-balance sheet assets consisted of the Company's 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. This transaction resulted in a net gain of $1.7 million to the Company. The Company's 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. In conjunction with the extinguishment of these notes, the Company entered into a consulting arrangement with the noteholder which required monthly payments of $10,000 for twenty four months in exchange for financial advisory services. At December 31, 1998, the Company had charged $160,000 to operations representing its full obligation over the remaining term of the agreement as no further value is anticipated from the consulting agreement. (3) In January 1999, a note with an outstanding principal balance of $605,000 due in monthly installments of approximately $26,000 was declared in default based upon the Company's present financial condition and the Company's discontinuance of its non-prime automobile finance business. This debt was paid in full March 1999 in for a cash payment together with unpaid interest of approximately $585,000. (See Note 12) The Company paid interest of approximately $5,143,000, $7,122,000 and $3,938,000 for the years ended December 31, 1998, 1997 and 1996, respectively. F-15 Note 6 - Income Taxes For the years ended December 31, 1998, 1997 and 1996, the provision (benefit) for income taxes consisted of the following: Years Ended December 31, ------------------------------------------- 1998 1997 1996 ----------- ----------- ----------- Federal $-- $(3,985,977) $(4,352,000) State -- -- -- ----------- ----------- ----------- Income tax benefit $-- $(3,985,977) $(4,352,000) =========== =========== =========== The following table reconciles the Company's effective income tax rate on loss from continuing operations to the Federal Statutory Rate for the years ended December 31, 1998, 1997 and 1996: Years Ended December 31, --------------------------------- 1998 1997 1996 ------ ------ ------ Federal Statutory Rate (34.0)% (34.0)% (34.0)% Effect of: Benefit from tax exempt income (.7) (.8) Valuation allowance against deferred tax assets 34.0 8.3 15.3 ------ ------ ------ 0% (26.4)% (19.5)% ====== ====== ====== The Company paid no income taxes for the years ended December 31, 1998, 1997 and 1996. F-16 Deferred taxes are recorded based upon differences between the financial statement and tax bases of assets and liabilities and available tax credit carrybacks. Temporary differences and carryforwards which give rise to a significant portion of deferred tax assets and liabilities were as follows: December 31, December 31, 1998 1997 ------------ ------------ Deferred tax assets: Net operating loss carryforward $ 9,337,257 $-- Purchase discounts -- 6,221,236 Goodwill -- 3,333,317 Deferred fees -- 117,115 ------------ ------------ Gross deferred tax assets 9,337,257 9,671,668 Less: valuation allowance ( 9,337,257) (5,128,038) ------------ ------------ Deferred tax asset -- 4,543,630 Deferred tax liability: Allowance for credit losses -- 4,543,640 ------------ ------------ Net deferred tax asset $-- $-- ============ ============ The deferred tax asset is fully reserved for as the Company's management does not expect such amounts to be realized. As of December 31, 1998, The Company has a net operating loss carryforward of approximately $27 million for federal income tax purposes which expires in 2013 and 2014. Refundable income taxes on the accompanying consolidated balance sheet as of December 31, 1997 represented the Company's refundable income tax based upon the utilization of available tax credit carrybacks in its federal income tax return. Such amount was received during 1998 and used to repay a portion of the CSFB debt. (Note 5) Note 7 - Commitments and Contingencies Leases The Company is obligated under noncancellable operating leases for premises and equipment expiring at various dates through 2003. Future minimum lease payments for the Company's Montvale, New Jersey headquarters facility and related equipment are approximately $315,000, $305,000, $233,000, $89,000 and $1,000 for each of the years in the five year period ended December 31, 2003. Future minimum lease payments for the Company's Norfolk, Virginia facility are approximately $102,000, $102,000, $51,000, $0 and $0 for each of the years in the five year period ended December 31, 2003. At December 31, 1998, the Company charged $255,469 to operations representing its full obligation over the remaining term of the Norfolk, Virginia facility lease as the Company has ceased operations and no longer occupies this facility. Rent expense for the years ended December 31, 1998, 1997 and 1996 and was approximately $511,000, $399,000 and $227,000, respectively. F-17 401(k) Plan The Company is obligated under its 401(k) Plan to match fifty percent of employee contributions up to a maximum of three percent of eligible compensation. 401(k) Plan expense for the years ended December 31, 1998, 1997 and 1996 was approximately $49,000, $95,000 and $38,000, respectively. Repurchase of Automobile Receivable Contracts In connection with the Company's sales of its automobile receivables (Note 1), the buyers have the right, under certain circumstances, including the inability to obtain perfected title, to put these receivables back to the Company. As of December 31, 1998, automobile receivables with a carrying amount of approximately $300,000 were identified by buyers. The Company has recorded a charge to operations of $300,000 to fully reserve for the return of these receivables to the Company. Other Agreements The Company has an employment agreement with Mr. Wunderlich, the President of the Company, who is also a stockholder. The agreement expires in 2000 and provides forannual compensation of $150,000. In addition, the Company has an employment agreement with a non-officer employee. This agreement expires in April 1999 and provides for an aggregate minimum annual compensation of $150,000 plus a minimum annual bonus of $60,000. At December 31, 1998, the Company had charged $77,000 to operations representing its full obligation over the remaining term of the agreement as the Company anticipates no future value from the employee. Litigation The Company is involved in litigation arising in the ordinary course of its business. Based upon management's and outside counsel's opinions, such litigation is not expected to have a materially adverse impact on the financial position or results of operations of the Company. Note 8 - Stockholders' Equity Stock Bonus Plan The Company, in 1987 and 1995 issued 410,000 and 15,000 shares, respectively,of Common Stock pursuant to a restricted stock bonus plan to key executives, directors and consultants. These shares will vest ratably every two years over a period of 30 years. The unvested portion is subject, upon the occurrence of certain events, to either forfeiture or accelerated vesting. Such shares were recorded at their estimated fair market value at the date of the grant as determined by the Board of Directors and are charged as compensation expense ratably over the vesting period. During 1998 and 1997, 23,000 and 22,000 shares, respectively, were forfeited. As of December 31, 1998 136,666 of such shares had vested and 243,334 remained, subject to forfeiture. F-18 Warrants In connection with the $4,000,000 7.55% subordinated long-term notes issued in January 1994, the Company issued to the noteholders six year warrants to purchase 533,333 shares of Common Stock at a per share price of $4.00. In September 1995, the Company prepaid $2,000,000 of the notes. In conjunction with the prepayment, 196,296 of these warrants were canceled. In April 1998, the Company was released from its remaining obligation (See Note 5)and the remaining warrants to purchase 337,037 shares of Common Stock were canceled. In connection with a May 1986 public offering of Common Stock, the Company issued warrants to the underwriter for the purchase of 96,000 shares of its Common Stock at a per share price of $4.80. In connection with the $2,016,536 Class B Notes issued in October 1996, the Company issued three year warrants to purchase 159,095 shares of Common Stock at a per share price of $2.70. The Company has reserved 159,095 shares of Common Stock for issuance upon exercise of these warrants. In connection with the $100 million credit facility provided by CSFB in December 1996, the Company issued 3 year warrants to purchase 125,000 shares of Common Stock at a per share price of $3.70. In connection with the final settlement with CSFB in November 1998, these warrants were canceled and replaced with new warrants to purchase 1,482,467 shares of the Common Stock at a per share price of $ .03. The Company has reserved 1,482,467 shares of Common Stock for issuance upon exercise of these warrants. No warrants have been exercised to date. Stock Option Plans The Company has five stock option plans, Its 1985 Plan, 1986 Plan, 1989 Plan, 1992 Plan and 1997 Plan (collectively the "Plans"). The Company accounts for these Plans under APB Opinion No. 25, under which no compensation cost has been recognized. Had compensation cost for these Plans been determined consistent with SFAS No. 123, the Company's net loss and loss per share would have been reduced to the following pro forma amounts: 1998 1997 1996 -------------- -------------- -------------- Net (loss) income: As reported $ (9,934,973) $ (11,121,604) $ (19,099,501) Pro forma $ (10,064,124) $ (11,316,689) $ (19,206,821) (Loss) earnings per share: As reported $ (1.25) $ (1.39) $ (2.41) Pro forma $ (1.26) $ (1.41) $ (2.43) The effects of applying SFAS No. 123 in this pro forma disclosure are not indicative of future amounts. Pursuant to the Plans, a total of 2,842,500 shares of Common Stock were made available for grant of stock options. Under the Plans, options have been granted to key personnel for terms of up to ten years at not less than fair value of the shares at the dates of grant and are exercisable in whole or in part at stated times commencing one year after the date of grant. No F-19 further grant will be issued under the 1986 Plan. At December 31, 1998, options to purchase 495,000 shares of Common Stock were exercisable pursuant to the Plans. Weighted average fair value of options granted: 1997 $.61 1996 $.96 The fair value of each option grant is estimated on the date of grant using the Black-Shoals option pricing model with the following weighted assumptions used for grants in 1997, and 1996, respectively:risk-free interest rates of 6.52 and 6.20 percent; expected lives of 4 years for all options granted; expected volatility of 33.0 and 26.2 percent. There were no grants in 1998. Option activity for the years ended December 31, 1998, 1997 and 1996 was as follows: Number of Weighted Average Shares Exercise Price ----------- ----------- Outstanding at January 1, 1996 413,333 $ 3.70 Granted during the year 241,000 2.96 ---------- ---------- Outstanding at December 31, 1996 654,333 3.43 Granted during the year 815,000 1.75 Forfeited during the year (224,500) 3.28 ---------- ---------- Outstanding at December 31, 1997 1,244,833 $ 2.36 Forfeited during the year (749,833) $ 2.24 ---------- ---------- Outstanding at December 31, 1998 (1) 495,000 $ .10 ---------- ---------- (1) In November 1998, all outstanding options were amended to reflect an exercise price of $ .10 per share. On April 10, 1995, an officer of the Company exercised options to acquire 216,799 shares. In connection with this exercise, the Company received a full recourse, non-interest bearing note secured by a pledge of the acquired shares in the amount of $466,797. In November 1998, these shares were returned to the Company and the note was canceled. Other Options An option issued upon the commencement of employment to a non-officer employee in April 1996 to purchase an aggregate of 400,000 shares of the Company's Common Stock was canceled in conjunction with the termination of the related employment agreement in March 1998. F-20 Note 9 - Unusual Item - Impairment of Long-Lived Assets on Acquired Business and Additional Credit Losses on Acquired Automobile Receivables 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 Auto Wholesale, 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, on 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 deemed a significant portion of the goodwill associated with the acquisition of FFC as well as the Non-Compete and Purchase Agreements were of no continuing value and, accordingly, took a charge against operations as of December 31, 1996 of $11,193,000 based on its evaluation of the fair value of such assets in accordance with SFAS No. 121. Furthermore, the Company recorded additional credit losses of $8,100,000 on the acquired automobile receivables during 1996. Note 10 - Fair Value of Financial Instruments The following disclosures of fair value were determined by management using available market information and appropriate valuation methodologies. Considerable judgment is necessary to interpret market data and develop estimated fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize on disposition of the financial instruments. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. Cash and cash equivalents and accounts payable and accrued liabilities are carried at amounts which reasonably approximate fair value. Due to the Company's inability to obtain financing to purchase automobile receivables and the failure of the Company to complete a securitization of its automobile receivables in 1997, an estimate of the fair value of the net automobile receivables outstanding at December 31, 1997 could not be practicably made. Due to the variable rate nature of the Company's revolving line of credit with an aggregate carrying amount of $67,935,706 at December 31, 1997, such amount approximated fair value. The carrying amount of the Company's automobile receivables backed notes totaling $14,063,140 at December 31, 1997 approximated fair value. F-21 Due to the insufficient collateral supporting the Company's subordinated notes and other debt with an aggregate carrying amount of $10,038,028 and $11,190,979 at December 31, 1998 and 1997, a determination of fair value could not be made. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for the purposes of these consolidated financial statements since that date and current estimates of fair value may differ significantly from the amounts presented herein. Note 11 - Quarterly Results of Operations (Unaudited)
Year Ended December 31, 1998 Quarter Ended ----------------------------------------------------------------------------- Mar 31 June 30 Sep 30 Dec 31 ------ ------- ------ ------ Revenues $ 3,920,994 $ 2,337,025 $ 715,322 $ 31,157 Net (loss) income ($ 568,911) ($4,267,910) ($5,450,840) $ 352,688 Basic and diluted per share data: Net (loss) income ($ .07) ($ .53) ($ .68) $ .03 Year Ended December 31, 1997 Quarter Ended ----------------------------------------------------------------------------- Mar 31 June 30 Sep 30 Dec 31 ------ ------- ------ ------ Revenues $ 4,404,905 $ 5,381,105 $ 5,343,430 $ 4,716,791 Net (loss) income $ 248,184 $ 1,561,495 ($ 2,636,007) ($10,295,276) Basic and diluted per share data: Net (loss) income $ .03 $ .19 ($ .32) ($ 1.29)
Note 12 - Subsequent Events On January 29, 1999, the Company's wholly owned subsidiary, CarLoanCo. ("CLC") filed a voluntary bankruptcy petition under Chapter 7 of the United States Bankruptcy Code (the "Bankruptcy Filing"). Since 1995, CLC had operated the Company's non-prime automobile financing business. As of the date of the Bankruptcy Filing, CLC has no assets and liabilities of approximately $57 million, including approximately $56 million of intercompany advances from the Company. Effective January 29, 1999, the liabilities of CLC are classified as subject to compromise as they may be affected by the outcome of the Bankruptcy Filing. F-22 Due to the fact that the Company no longer has control over CLC, statements presented after the date of the Bankruptcy Filing will be restated to reflect CLC as a discontinued operation and to reflect the deconsolidation of CLC effective January 29, 1999. The following balance sheet, as of December 31, 1998, reflects the deconsolidation of CLC as a result of the Company's loss of control due to the Bankruptcy Filing: Cash $ 2,399,085 Investment in and advances to CLC (741,679) Other assets 352,816 ------------ Total assets $ 2,010,222 ------------ Liabilities $ 10,574,609 Stockholders' (deficit) (8,564,387) ------------ Total liabilities and stockholders' (deficit) $ 2,010,222 ------------ On March 23, 1999, the Company paid $585,000 representing full payment, net of a $25,000 discount, of principal and accrued interest on a note which had been previously declared in default by the lender. F-23 EX-10.H 2 AMENDMENT TO EMPLOYMENT AGREEMENT AUTOINFO, INC. November 4, 1998 Mr. William Wunderlich 14 Frost Pond Road Stanford, Connecticut 06903 Re: Amendment to Employment Agreement Dear Bill: At a meeting of the Board of Directors of AutoInfo, Inc. (the "Company") held on November 4, 1998, the term of your Employment Agreement dated as of April 10, 1997 (the "Employment Agreement") was extended and modified as follows: (a) Section 3 of the Employment Agreement is hereby amended and restated to read as follows: "3. Term. The term of this Agreement shall commence on the date hereof and shall continue until April 30, 2000, unless terminated prior thereto in accordance with the terms and provisions hereof (the "Employment Term")." (b) Paragraph (d) of Section 8 of the Agreement is hereby deleted in its entirety and replaced with the following new Paragraph (d): "(d) In the event Auto shall terminate this Agreement other than pursuant to the provisions of Paragraph (a), (b) or (c) of this Section 8 (a "Termination Without Cause"), upon such termination Wunderlich shall be entitled to receive, in addition to any other payments due to Wunderlich pursuant to this Agreement, a severance payment equal to the greater of (a) $150,000, or (b) the compensation due to Wunderlich for the balance of the Employment Term. A Termination Without Cause shall include, but not be limited to, (a) a material breach by the Company of any provision of this Agreement, which breach remains unremedied for fifteen (15) days after written notice." (c) The following new Paragraph (e) is hereby added to section 8: "(e) In the event Auto does not notify Wunderlich in writing on or before December 31, 1999 of its intention to extend the Term of this Agreement for an additional period of not less than one year, Wunderlich shall, provided the Agreement is not terminated for Reasonable Cause, receive a severence payment on April 30, 2000 equal to $75,000." All other terms and provisions of the Employment Agreement shall remain in full force and effect. Further, you hereby agree and confirm that the Employment Agreement entered into as of the 10th day of April, 1995 by and between the Company and you has been terminated and is of no further force and effect and that the Employment Agreement as amended hereby constitutes the only agreement between you and the Company governing the terms and conditions of your employment by the Company. Sincerely, Scott Zecher, Chief Executive Officer AGREED TO AND ACCEPTED: - ------------------------------ William Wunderlich EX-10.J 3 JUNIOR SUBORDINATED PROMISSORY NOTE JUNIOR SUBORDINATED PROMISSORY NOTE THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") OR APPLICABLE STATE SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF AT ANY TIME IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM REGISTRATION. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER SUCH SECURITY, PRIOR TO THE DATE WHICH IS TWO YEARS AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF OR THE LAST DATE ON WHICH THE COMPANY OR ANY AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS SECURITY (OR ANY PREDECESSOR OF SUCH SECURITY) ONLY (A) TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (B) TO AN INSTITUTION THAT IS AN "ACCREDITED INVESTOR" AS DEFINED IN RULE 501(a)(1), (2), (3) OR (7) OF REGULATION D UNDER THE SECURITIES ACT THAT IS ACQUIRING THE SECURITY FOR INVESTMENT PURPOSES AND NOT FOR DISTRIBUTION (WITHIN THE MEANING OF THE SECURITIES ACT), (C) TO THE COMPANY OR, (D) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT OR (E) PURSUANT TO AN EXEMPTION FROM REGISTRATION AS CONFIRMED IN DOCUMENTATION (WHICH AT THE COMPANY'S DISCRETION SHALL INCLUDE AN OPINION OF COUNSEL (WHICH MAY BE IN-HOUSE COUNSEL)) IN FORM AND SUBSTANCE REASONABLY ACCEPTABLE TO THE COMPANY (PROVIDED, HOWEVER, THAT IN THE CASE OF CLAUSE (B) EITHER THE TRANSFEREE OR A U.S. REGISTERED BROKER-DEALER ON ITS BEHALF HAS DELIVERED TO THE COMPANY A TRANSFEREE CERTIFICATE IN THE FORM ATTACHED TO THIS SECURITY). WITH RESPECT TO TRANSFERS PURSUANT TO CLAUSES (A) AND (B) ABOVE, THE HOLDER HEREOF, BY PURCHASING THIS SECURITY, REPRESENTS AND AGREES, FOR THE BENEFIT OF THE COMPANY, THAT IT IS (I) A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A OR (II) AN INSTITUTION THAT IS AN "ACCREDITED INVESTOR" AS DEFINED IN RULE 501(a)(1), (2), (3) OR (7) OF REGULATION D UNDER THE SECURITIES ACT THAT IS HOLDING THIS SECURITY FOR INVESTMENT PURPOSES AND NOT FOR DISTRIBUTION (WITHIN THE MEANING OF THE SECURITIES ACT. Number RJP __ JUNIOR SUBORDINATED PROMISSORY NOTE U.S. $____________ Norfolk, Virginia October ____, 1998 FOR VALUE RECEIVED, the undersigned, AUTOINFO, INC. (the "Company") promises to pay to the order of _______________ the principal sum of __________________________________ ($_____________) Dollars with interest at the rate of ten percent (10%) per annum commencing January 1, 1999. Interest shall be payable quarterly in arrears commencing on March 31, 1999. Interest will be computed on the basis of a 360-day year of 12 full 30-day months. The principal amount hereof shall be payable in full on December 31, 2008, unless extended as set forth herein. At the sole discretion of the Company, any interest payment required to be made pursuant to this Junior Subordinated Promissory Note may be made in cash or in shares of common stock, par value $.01 per share, of the Company (hereinafter referred to as "Common Stock"). In the event the Company elects to make an interest payment in Common Stock, the Company shall deliver to the Holder of this Note the number of shares of Common Stock as shall be equal to the amount of the interest payment then due divided by the "value per share" (as calculated in accordance with the formula set forth below), multiplied by 1.2 and rounded upwards to the nearest whole share. The "value per share" shall be equal to the greater of (a) the average closing bid price of the Common Stock on the OTC Bulletin Board of the National Association of Securities Dealers, Inc. or such other market as from time to time shall be the primary market in which the common stock is then traded for the first ten of the last thirteen trading days preceding an interest payment date; or (b) twenty-five cents ($0.25). In the event that the outstanding shares of the Common Stock of the Company are changed into or exchanged for a different number or kind of shares of the Company or other securities of the Company by reason of merger, consolidation, recapitalization, reclassification, stock split, stock dividend, subdivision, distribution or combination of shares, the Company shall make an appropriate and equitable adjustment to the "value per share", to the end that after such event the Holder's proportionate interest shall be maintained as before the occurrence of such event. Any such adjustment made by the Company or its Board of Directors (the "Board") shall, in the absence of manifest error, be final and binding upon the Holder, the Company and all other interested persons. Nothing in this Agreement shall entitle the Holder to pre-emptive or similar rights with respect to any issuance of Common Stock or other securities for such consideration as the Board may determine; provided, however that if the Company issues any shares or securities convertible into shares at a price or providing for an exercise a price less than eighty-five (85%) percent of the Market Price on the date of issuance within six (6) months prior to the payment of interest in shares of Common Stock , then the value set forth in subsection (b) above (ie. the twenty-five ($0.25) cent per share value) shall, if applicable, thereafter be adjusted downward by multiplying it by a fraction, the numerator of which is the issuance or exercise price and the denominator of which is the Market Price. Any shares of common stock delivered to the Holder pursuant to the terms of this Note in satisfaction of an interest payment will not be registered under the Securities Act of 1933, as amended (the "Act") or the securities laws of any state or other jurisdiction and, therefore, all such shares of Common Stock may not be sold by the Holder, except pursuant to a registration statement which has been declared effective under the Act or pursuant to an exemption from the registration requirements of the Act. Therefore, all such shares of common stock will bear a legend substantially in the following form: "THE SHARES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, (THE "SECURITIES ACT") AND MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED UNLESS A REGISTRATION STATEMENT WITH RESPECT TO THESE SHARES HAS BECOME EFFECTIVE UNDER THE SECURITIES ACT, OR THE CORPORATION HAS BEEN FURNISHED WITH AN OPINION OF COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED." The Company shall pay (i) a late charge of five percent (5%) of any installment of principal or interest due hereunder for failure to make payment within ten (10) days of the due date thereof, and (ii) all costs of collection, including a reasonable attorney's fee, if incurred. Prepayment. This Note may be prepaid, in whole or in part, without premium or penalty, upon thirty (30) days prior written notice of the date of prepayment of this Note. Events of Default and Acceleration. In the event: (a) any payment of any sum due hereunder is not made when due; or 3 (b) of default in the performance of or compliance with any of the provisions in this Note; or (c) the Company, pursuant to or within the meaning of any federal or state bankruptcy law (i) commences a voluntary case or proceeding, (ii) consents to the entry of an order for relief against it in any involuntary case or proceeding, (iii) consents to the appointment of a Custodian of it or for all or substantially all of its property,(iv) makes a general assignment for the benefit of creditors; or (d) a court of competent jurisdiction enters an order or decree under any bankruptcy law that grants relief against the Company in any involuntary case or proceeding, appoints a Custodian of the Company for all or substantially all of its properties, or orders the liquidation of the Company, and in each case the order or decree remains unstayed and in effect for 120 days; provided, however, that if the entry of such order or decree is appealed and dismissed on appeal, then the default hereunder by reason of the entry of such order or decree shall be deemed to have been cured; or (e) the Company defaults on any indebtedness having an outstanding principal amount of more than $1,000,000 (other than the Company's current default on its senior warehouse loan facility with Credit Suisse First Boston Mortgage Capital, LLC), whether such indebtedness now exists or shall be created hereafter, and such default relates to the obligation to pay the principal of any such indebtedness at final maturity; or (f) the Company merges with another corporation in a transaction in which the survivor of the merger does not succeed to substantially all of the assets of the Company; or (g) the Company sells or otherwise disposes of all or substantially all of its assets in a transaction or series of transactions, other than in connection with the sale of the Company's automobile finance receivables business; or and such default in the case as specified above in clause (a) is not cured within fifteen (15) days, or, in the case as specified above in clauses (b) and (e), such default is not cured within thirty (30) days of the Company's receipt of notification by the Holder, then in such event, the entire balance of principal of the Note with all interest then accrued shall, at the option of the Holder hereof, become immediately due and payable. For purposes of this Note, the term "Custodian" means any receiver, trustee, assignee, liquidator, sequestrator or similar official charged with maintaining possession or control over property for one or more creditors. 4 Subordination. This Note and the indebtedness evidenced hereby, including the principal and interest and any renewals or extensions thereof, shall at all times be wholly subordinate and junior in right of payment to the prior payment in full of all Superior Indebtedness, whether outstanding on the date hereof or hereafter created, all in the manner and with the force and effect hereinafter set forth. No payment of principal or interest (other than payments of interest in shares of Common Stock) shall be made hereunder until all indebtedness of the Company whether absolute or contingent, direct or indirect, for principal, premium, if any, and interest (including any interest accruing subsequent to the commencement of bankruptcy, insolvency or similar proceedings, whether or not such interest is an allowable claim in any such proceedings) outstanding at any time payable to Credit Suisse First Boston Mortgage Capital LLC, its successors and assigns (the "CSFB Indebtedness")is satisfied in full. For the purposes hereof, "Superior Holders" shall mean any holders of the "Superior Indebtedness,"and "Superior Indebtedness" shall mean all indebtedness of the Company whether absolute or contingent, direct or indirect, for principal, premium, if any, and interest (including any interest accruing subsequent to the commencement of bankruptcy, insolvency or similar proceedings, whether or not such interest is an allowable claim in any such proceedings) outstanding at any time, payable to (a) Credit Suisse First Boston Mortgage Capital LLC, its successors and assigns ("CSFB") or (b) any other bank, financial institution or other institutional investor in each case not affiliated with the Company. Upon any payment or distribution of assets of the Company of any kind or character, whether in cash, securities or other property to creditors upon any dissolution or winding up or total or partial liquidation or reorganization or readjustment of the Company, whether voluntary or involuntary, in bankruptcy, insolvency, receivership or other cases or proceedings, all principal of, premium, if any, and interest due or to become due upon all Superior Indebtedness shall first be paid in full before the Holder shall be entitled to receive any assets so paid or distributed; and upon any such dissolution or winding up or liquidation or reorganization or readjustment, any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities to which the Holder would be entitled except for the provisions of this paragraph, including any such payment or distribution which may be payable or deliverable by reason of the payment of any other indebtedness of the Company being subordinated to the payment of this Note, shall be paid or distributed by the Company or by any receiver, trustee in bankruptcy, liquidating trustee, agent or other person making such payment or distribution directly to the Superior Holders (pro rata to each such Superior Holder on the basis of the respective amounts of Superior Indebtedness held by such Superior Holder) or their representatives, to the extent necessary to pay all Superior Indebtedness in full, after giving effect to any concurrent payment or distribution to or for the Superior Holders, before any payment or distribution in respect to this Note (for principal, premium, if any, or interest) is made to the Holder. 5 If any payment or distribution of any character, whether in cash, property or securities including any such payment or distribution which may be payable or deliverable by reason of the payment of any other indebtedness of the Company being subordinated to the payment of this Note, shall be received by the Holder in contravention of any of the terms of this Note and before all the Superior Indebtedness shall have been paid in full, such payment or distribution shall be paid held in trust by the Holder for the benefit of the Superior Holders and shall forthwith be paid over or delivered and transferred to the Superior Holders (pro rata to each such Superior Holder on the basis of the respective amounts of Superior Indebtedness held by such Superior Holder) or their representatives, to the extent necessary to pay all Superior Indebtedness in full, after giving effect to any concurrent payment or distribution to or for the Superior Holders. The foregoing subordination shall apply, notwithstanding the availability of any collateral to the Superior Holders or the actual date and time of execution, delivery, recordation, filing or perfection of the Superior Holders? interest in collateral, or the lien or priority of payment thereof, and notwithstanding the fact that any monies owed to the Superior Holders or any claim for the Superior Indebtedness is declared to be fraudulent or preferential, subordinated, avoided, set aside or disallowed, in whole or in part, pursuant to Title 11 of the United States Code (the "Bankruptcy Code?) or other applicable federal or state law. In the event of a proceeding, whether voluntary or involuntary, for insolvency, liquidation, reorganization, dissolution, bankruptcy or other similar proceeding pursuant to the Bankruptcy Code or other applicable federal or state law, the Superior Indebtedness shall include all fees and interest accrued on the Superior Indebtedness in accordance with and at the rates specified in the documents underlying and evidencing the Superior Indebtedness, both for periods before and for periods after the commencement of any of such proceedings, even if the claims for such fees or interest are not allowed pursuant to applicable law. In any case commenced by or against the Company or an affiliate of the Company under any chapter of the Bankruptcy Code or any similar federal or state statute while CSFB remains a Superior Holder, (i) the Holder shall not vote affirmatively in favor of any plan of reorganization or liquidation proposed by or for the Company or any affiliate of the Company unless Superior Holder grants its prior written permission thereto or votes to accept such plan, (ii) the Holder shall file a proof of claim against the Company for its claims under this Note at least five (5) business days before the last day for filing proofs of claims and shall send to CSFB a copy of such proof of claim with evidence of filing with the appropriate court and authority, and (iii) if the Holder fails to timely file sufficient proofs of claim, CSFB may file proofs of claim on behalf of the Holder. The Holder hereby authorizes CSFB to intervene and fully participate in any objection to such proofs of claim, if CSFB chooses to do so in its sole discretion. 6 Standstill. The Holder of this Note agrees, for so long as CSFB is a Superior Holder and for 91 days thereafter, that: (a) it shall simultaneously send to CSFB due notice of any and all defaults under this Note as well as copies of all notices required to be delivered to or by the Company pursuant to this Note; and (b) it shall not, without the prior written consent of CSFB, which consent may be withheld in CSFB's sole discretion, (i) declare a default, monetary or non-monetary, under this Note, (ii) accelerate the indebtedness evidenced by this Note, (iii) commence any enforcement or collection proceeding on this Note including, but not limited to, signing or filing an involuntary petition against the Company or any of its affiliates under the Bankruptcy Code or other applicable federal or state law, (iv) obtain any receiver or other custodian of the assets of the Company or any affiliate of the Company, (v) accept any security interest in collateral of the Company or any affiliate of the Company, or (vi) exercise any bankers lien or rights of set-off or recoupment. This Standstill provision shall remain in full force and effect and shall bind the Holder of this Note until the later of (i) 91 days after the final repayment and full satisfaction of the CSFB Indebtedness, including any amounts outstanding as a result of any refinancing or restructuring of the CSFB Indebtedness or (ii) March 31, 1999. The Holder acknowledges and agrees that the Superior Holders have relied upon and, to the extent applicable, will continue to rely upon the Subordination and Standstill provisions contained herein in extending credit to the Company and amending the terms of such credit extension. The Holder acknowledges and agrees that the Superior Holders may enforce by any lawful means the Subordination and Standstill provisions contained herein. The Holder waives notice of or proof of reliance hereon and protest, demand for payment and notice of default. The Superior Holders shall not be prejudiced in their rights to enforce the Subordination and Standstill provisions contained herein in accordance with their terms by any act or failure to act on the part of the Company. The Subordination and Standstill provisions contained herein are (i) for the benefit of the Superior Holders and may not be rescinded, canceled, amended or modified in any way without the prior written consent thereto of the Superior Holders and (ii) solely for the purpose of defining the relative rights of the Superior Holders on the one hand, and the Holder on the other hand, and nothing herein shall impair, as between the Company and the Holder, the obligation of the Company to pay the principal and interest on this Note in accordance with its terms, nor shall anything herein prevent the Holder from exercising all remedies otherwise permitted by 7 applicable law or hereunder upon default hereunder, subject to the Superior Holders as herein provided. Parity of Notes. This Note and several other notes in the aggregate principal amount of $3,762,000.00 (the "Notes") have been issued as of October 26, 1998 by the Company in exchange for 12% Junior Subordinated Promissory Notes of the Company in the aggregate principal amount of $3.3 million (the "Exchange"). In the event the Company elects to prepay any amounts under the Notes issued in the Exchange, the Company shall make such prepayment to all Holders of Notes in proportion to the principal amount of such Notes. In the event any Holder of Notes issued in the Exchange elects to accelerate Notes held by such Holder as a result of an event of default, the Company shall notify the Holder of this Note of such event. In the event of a default under this Note or any other Notes issued in the Exchange, all Holders of Notes issued in connection with the Exchange shall be deemed to have equal parity. Waivers. The Company (i) waives presentment, demand and protest of every kind respecting this Note, and (ii) agrees that the Holder hereof, at any time or times, without notice to or the consent of the Company, may grant extensions of time, without limit as to the number or the aggregate of such extensions, for the payment of any principal or interest due hereon. No delay or omission by the Holder in the exercise of any right or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right or remedy preclude any other or further exercise thereof or the exercise of any other right or remedy. In the event any payment by or on behalf of the Company to the Holder is held to constitute a preference under the bankruptcy laws, or any other applicable federal or state bankruptcy, insolvency or other similar law, and by reason thereof the Holder is required to refund such payment or pay the amount thereof to any party, such payment by or on behalf of the Company to the Holder shall not constitute a release of the Company from any liability hereunder to the extent of such payment, but the Company agrees to pay the amount of such payment, together with the interest thereon, to the Holder upon demand. Governing Law. This Note shall be deemed to have been delivered by the Company in Norfolk, Virginia, and shall be governed by and construed in accordance with the laws of the Commonwealth of Virginia. Jurisdiction. The Company irrevocably submits to the jurisdiction of any court of the Commonwealth of Virginia or any federal court located in the Commonwealth of Virginia in any suit, action or proceeding arising out of or related to this Note. The Company irrevocably waives, to the fullest extent permitted by law, any objection which it may now or hereafter have to the laying of the venue of any such suit, action or proceeding brought in any such court and any claim that any such suit, 8 action or proceeding brought in such a court has been brought in an inconvenient forum. The Company agrees that a final non-appealable judgment in any such suit, action or proceeding shall be conclusive and binding upon the Company. The Company consents to process being served in any suit, action or proceeding of the nature referred to herein by mailing a copy thereof by registered or certified mail, postage prepaid, return receipt requested, to the address of the Company last known to the Holder. The Company irrevocably waives, to the fullest extent permitted by law, all claim or error by reason of any such service (but does not waive any right to assert lack of subject matter jurisdiction), and the Company agrees that such service (a) shall be deemed in every respect effective service of process upon the Company in any such suit, action or proceeding and (b) shall, to the fullest extent permitted by law, be taken and held to be valid personal service upon and personal delivery to the Company. Nothing in this Agreement shall affect the right of the Holder to serve process in any manner permitted by law or limit the right of the Holder to bring proceeding against the Company in the courts of any jurisdiction or jurisdictions. Waiver of Jury Trial. The Company waives trial by jury in any action or proceeding to which the Company and the Holder may be parties arising out of, in connection with, or in any way pertaining to this Note. It is agreed and understood that this waiver constitutes a waiver by trial by jury of all claims against all parties to such actions or proceedings. This waiver is knowingly, willingly and voluntarily made by the Company, and the Company hereby represents that no representations of fact or opinion have been made by any individual to induce this waiver of trial by jury or to in any way modify or nullify its effect. The Company further represents and warrants that it has been represented in the signing of this document and in the making of this waiver by independent legal counsel, or has had the opportunity to be represented by independent legal counsel selected of its own free will, and that it has had the opportunity to discuss this waiver with counsel. Registration or Transfer. This Note is registered on the books of the Company and is transferable only by surrender thereof at the principal office of the Company duly endorsed or accompanied by a written instrument of transfer duly executed by the registered Holder or his, her or its attorney duly authorized in writing. The Holder hereby agrees to notify the Company prior to any transfer of the Note and to comply with the legend on the face of this Note. Notices. Any notice or communication shall be sufficiently given if in writing and delivered in person or mailed by certified mail, return receipt requested or by telecopier, followed by certified mail, return receipt requested, or by overnight service guaranteeing next day delivery, and providing proof of delivery, addressed as set forth below or at such other address as may be designated by the Company in a notice given hereunder to the Holder 9 (a) If to the Company: AutoInfo, Inc. One Paragon Drive Suite 255 Montvale, New Jersey 07645 Attn: Mr. Scott Zecher Telecopier No.: 201-930-0022 With a copy to: Morse, Zelnick, Rose & Lander, LLP 450 Park Avenue New York, New York 10022 Attn: Kenneth S. Rose, Esq. Telecopier No.: 212-838-9190 (b) If to CSFB: Credit Suisse First Boston Mortgage Capital LLC 11 Madison Avenue, 7th floor New York, NY 10010 Attn: Principal Transaction Group Telecopier No.: 212-325-9964 With a copy to: Thacher Proffitt & Wood Two World Trade Center New York, New York 10048 Attn: Jeffrey Murphy, Esq. Telecopier No.: 212-912-7751 (b) If to the Holder, at the address and telecopier number set forth on the books of the Company. No Recourse Against Others. A director, officer, employee, stockholder, trustee or beneficiary, as such, of the Company shall not have any liability for any obligations of the Company under this Note or for any claim based on, in respect of, or by reason of any such obligations or their creation, absent such individuals actual fraud. The Holder, by accepting this Note, waives and releases all such liability. 10 Severability. In case any provision in this Note shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby, and a Holder shall have no claim therefor against any party hereto. WITNESS the following signature(s) and seal(s). AUTOINFO, INC. By: ------------------------------------- Scott Zecher, Chief Executive Officer The Holder hereby agrees to and accepts the terms and conditions set forth herein. - --------------------------- , Holder 11 FORM OF TRANSFEREE CERTIFICATE [Letterhead of Prospective Purchaser or U.S. Registered Broker-Dealer] Date: __________ AutoInfo, Inc. One Paragon Drive Suite 255 Montvale, New Jersey 07645 Attn: Mr. Scott Zecher Dear Sirs: I. We hereby request that $_________ aggregate principal amount of ten percent (10%) Junior Subordinated Notes (the "Notes"), of AUTOINFO, Inc., a Delaware corporation, be registered in the name set forth below and confirm that the new beneficial owner is an institutional "accredited investor" (as defined in Rule 501(a)(1), (2), (3) or (7) of Regulation D under the Securities Act) that is acquiring the notes for investment purposes and not for distribution (within the meaning of the Securities Act); it has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of its investment in the Notes, and it and any accounts for which it is acting are each able to bear the economic risk of its investment; it is acquiring the Notes purchased by it for its own account or for one or more accounts as to each of which it exercises sole investment discretion. If this letter is being filled out by a prospective purchaser, the undersigned purchaser confirms that the Notes will only be transferred in accordance with the legend on the Notes, and further, that it understands that in connection with any such transfer, the Company may request, and if so requested the undersigned purchaser will furnish, such certificates and other information as may reasonably be required to confirm that any such transfer complies with the restrictions set forth therein. II. For Qualified Institutional Buyers: |_| The Notes are being transferred to a "Qualified Institutional Buyer" (as defined in Rule 144A under the Securities Act), which person has been advised that the Notes have been sold or transferred to it in reliance upon Rule 144A. III. The Notes should be registered as follows (unless the box under II above is checked): 12 Name: Address: Tax Identification Number: Physical Location of Notes (including address): Address: Contact: IV. If this letter is being completed by a U.S. registered broker-dealer on behalf of the transferee, the undersigned broker-dealer confirms that (a) it has delivered to the transferee a notice regarding the restrictions on transfer of the Notes by such transferee as set forth in the legend on the Notes and (b) to the best of its knowledge, the information provided herein about the transferee is true and correct. We represent that we have read the Notes and understand that they are subordinate to all Superior Indebtedness (as defined in the Notes). You are entitled to rely upon this letter and you are irrevocably authorized to produce this letter or a copy hereof to any interested party in any administrative or legal proceeding or official inquiry with respect to the matters covered hereby. Very truly yours, [Name of Prospective Purchaser or U.S. Registered Broker-Dealer] By: ------------------------------------- Title: 13 EX-10.K 4 SUBORDINATED PROMISSORY NOTE SUBORDINATED PROMISSORY NOTE THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") OR APPLICABLE STATE SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF AT ANY TIME IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM REGISTRATION. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER SUCH SECURITY, PRIOR TO THE DATE WHICH IS TWO YEARS AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF OR THE LAST DATE ON WHICH THE COMPANY OR ANY AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS SECURITY (OR ANY PREDECESSOR OF SUCH SECURITY) ONLY (A) TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (B) TO AN INSTITUTION THAT IS AN "ACCREDITED INVESTOR" AS DEFINED IN RULE 501(a)(1), (2), (3) OR (7) OF REGULATION D UNDER THE SECURITIES ACT THAT IS ACQUIRING THE SECURITY FOR INVESTMENT PURPOSES AND NOT FOR DISTRIBUTION (WITHIN THE MEANING OF THE SECURITIES ACT), (C) TO THE COMPANY, (D) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT OR (E) PURSUANT TO AN EXEMPTION FROM REGISTRATION AS CONFIRMED IN DOCUMENTATION (WHICH AT THE COMPANY'S DISCRETION SHALL INCLUDE AN OPINION OF COUNSEL (WHICH MAY BE IN-HOUSE COUNSEL)) IN FORM AND SUBSTANCE REASONABLY ACCEPTABLE TO THE COMPANY (PROVIDED, HOWEVER, THAT IN THE CASE OF CLAUSE (B) EITHER THE TRANSFEREE OR A U.S. REGISTERED BROKER-DEALER ON ITS BEHALF HAS DELIVERED TO THE COMPANY A TRANSFEREE CERTIFICATE IN THE FORM ATTACHED TO THIS SECURITY). WITH RESPECT TO TRANSFERS PURSUANT TO CLAUSES (A) AND (B) ABOVE, THE HOLDER HEREOF, BY PURCHASING THIS SECURITY, REPRESENTS AND AGREES, FOR THE BENEFIT OF THE COMPANY, THAT IT IS (I) A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A OR (II) AN INSTITUTION THAT IS AN "ACCREDITED INVESTOR" AS DEFINED IN RULE 501(a)(1), (2), (3) OR (7) OF REGULATION D UNDER THE SECURITIES ACT THAT IS HOLDING THIS SECURITY FOR INVESTMENT PURPOSES AND NOT FOR DISTRIBUTION (WITHIN THE MEANING OF THE SECURITIES ACT. Number RSP ___ SUBORDINATED PROMISSORY NOTE $_______ Norfolk, Virginia October 26, 1998 FOR VALUE RECEIVED, the undersigned, AUTOINFO, INC. (the "Company") promises to pay to the order of ______________________________ the principal sum of __________________________________ ($__________) Dollars with interest at the rate of ten percent (10%) per annum commencing January 1, 1999. Interest shall be payable quarterly in arrears commencing on March 31, 1999. Interest will be computed on the basis of a 360-day year of 12 full 30-day months. The principal amount hereof shall be payable in full on December 31, 2007, unless extended as set forth herein. At the sole discretion of the Company, any interest payment required to be made pursuant to this Subordinated Promissory Note may be made in cash or in shares of common stock, par value $.01 per share, of the Company (hereinafter referred to as "Common Stock"). In the event the Company elects to make an interest payment in Common Stock, the Company shall deliver to the Holder of this Note the number of shares of Common Stock as shall be equal to the amount of interest payment then due divided by the "value per share" (calculated in accordance with the formula set forth below), multiplied by 1.2 and rounded upward to the nearest whole share. The value per share shall be equal to the greater of the average closing bid price of the Common Stock on the OTC Bulletin Board of the National Association of Securities Dealers, Inc. or such other market as from time to time shall be the primary market on which the stock is then traded for the first ten of the last thirteen trading days preceding an interest payment date or twenty-five cents ($0.25). In the event that the outstanding shares of the Common Stock of the Company are changed into or exchanged for a different number or kind of shares of the Company or other securities of the Company by reason of merger, consolidation, recapitalization, reclassification, stock split, stock dividend, subdivision, distribution or combination of shares, the Company shall make an appropriate and equitable adjustment to the "value per share", to the end that after such event the Holder's proportionate interest shall be maintained as before the occurrence of such event. Any such adjustment made by the Company or its Board of Directors (the "Board") shall, in the absence of manifest error, be final and binding upon the Holder, the Company and all other interested persons. Nothing in this Agreement shall entitle the Holder to pre-emptive or similar rights with respect to 2 any issuance of Common Stock or other securities for such consideration as the Board may determine; provided, however that if the Company issues any shares or securities convertible into shares at a price or providing for an exercise price less than eighty-five (85%) percent of the Market Price on the date of issuance within six (6) months prior to the payment of interest in shares of Common Stock , then the value set forth in subsection (b) above (ie. the twenty-five ($0.25) cent per share value) shall, if applicable, thereafter be adjusted downward by multiplying it by a fraction, the numerator of which is the issuance or exercise price and the denominator of which is the Market Price. Any shares of common stock delivered to the Holder pursuant to the terms of this Note in satisfaction of an interest payment will not be registered under the Securities Act of 1933, as amended (the "Act") or the securities laws of any state or other jurisdiction and, therefore, all such shares of Common Stock may not be sold by the Holder, except pursuant to a registration statement which has been declared effective under the Act or pursuant to an exemption from the registration requirements of the Act. Therefore, all such shares of common stock will bear a legend substantially in the following form: "THE SHARES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, (THE "SECURITIES ACT") AND MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED UNLESS A REGISTRATION STATEMENT WITH RESPECT TO THESE SHARES HAS BECOME EFFECTIVE UNDER THE SECURITIES ACT, OR THE CORPORATION HAS BEEN FURNISHED WITH AN OPINION OF COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED." The Company shall pay (i) a late charge of five percent (5%) of any installment of principal or interest due hereunder for failure to make payment within ten (10) days of the due date thereof, and (ii) all costs of collection, including a reasonable attorney's fee, if incurred. Prepayment. This Note may be prepaid, in whole or in part, without premium or penalty, upon thirty (30) days prior written notice of the date of prepayment of this Note. Events of Default and Acceleration. In the event: 3 (a) any payment of any sum due hereunder is not made when due; or (b) of default in the performance of or compliance with any of the provisions in this Note; or (c) the Company or any Guarantor, pursuant to or within the meaning of any federal or state bankruptcy law (i) commences a voluntary case or proceeding, (ii) consents to the entry of an order for relief against it in any involuntary case or proceeding, (iii) consents to the appointment of a Custodian of it or for all or substantially all of its property, (iv) makes a general assignment for the benefit of creditors; or (d) a court of competent jurisdiction enters an order or decree under any bankruptcy law that grants relief against the Company or any Guarantor in any involuntary case or proceeding, appoints a Custodian of the Company or any Guarantor for all or substantially all of its properties, or orders the liquidation of the Company or any Guarantor, and in each case the order or decree remains unstayed and in effect for 120 days; provided, however, that if the entry of such order or decree is appealed and dismissed on appeal, then the default hereunder by reason of the entry of such order or decree shall be deemed to have been cured; or (e) the Company or any Guarantor defaults on any indebtedness having an outstanding principal amount of more than $1,000,000 (other than the Company's current default on its senior warehouse loan facility with Credit Suisse First Boston Mortgage Capital, LLC), whether such indebtedness now exists or shall be created hereafter, and such default relates to the obligation to pay the principal of any such indebtedness at final maturity; or (f) the Company merges with another corporation in a transaction in which the survivor of the merger does not succeed to substantially all of the assets of the Company; (g) the Company sells or otherwise disposes of all or substantially all of its assets in a transaction or series of transactions, other than in connection with the sale of the Company's automobile finance receivables business; or (h) the Company prepays any of the Junior Subordinated Notes issued by the Company as of October 26, 1998. and such default in the case as specified above in clause (a) is not cured within fifteen (15) days', or, in the case as specified above in clauses (b) and (e), such default is not cured within thirty (30) days of the Company's receipt of notification by the Holder, 4 then in such event, the entire balance of principal of the Note with all interest then accrued shall, at the option of the Holder hereof, become immediately due and payable. For purposes of this Note, the term "Custodian" means any receiver, trustee, assignee, liquidator, sequestrator or similar official charged with maintaining possession or control over property for one or more creditors, and the term "Guarantor" means any guarantor of the payments due to the Holder under this Note. Subordination. This Note and the indebtedness evidenced hereby, including the principal and interest and any renewals or extensions thereof, shall at all times be wholly subordinate and junior in right of payment to the prior payment in full of all Superior Indebtedness, whether outstanding on the date hereof or hereafter created, all in the manner and with the force and effect hereinafter set forth. No payment of principal or interest (other than payments of interest in shares of Common Stock) shall be made hereunder until all indebtedness of the Company whether absolute or contingent, direct or indirect, for principal, premium, if any, and interest (including any interest accruing subsequent to the commencement of bankruptcy, insolvency or similar proceedings, whether or not such interest is an allowable claim in any such proceedings) outstanding at any time payable to Credit Suisse First Boston Mortgage Capital LLC, its successors and assigns (the "CSFB Indebtedness")is satisfied in full. For the purposes hereof, "Superior Holders" shall mean any holders of the "Superior Indebtedness,"and "Superior Indebtedness" shall mean all indebtedness of the Company whether absolute or contingent, direct or indirect, for principal, premium, if any, and interest (including any interest accruing subsequent to the commencement of bankruptcy, insolvency or similar proceedings, whether or not such interest is an allowable claim in any such proceedings) outstanding at any time, payable to (a) Credit Suisse First Boston Mortgage Capital LLC, its successors and assigns ("CSFB") or (b) any other bank, financial institution or other institutional investor in each case not affiliated with the Company. Upon any payment or distribution of assets of the Company of any kind or character, whether in cash, securities or other property to creditors upon any dissolution or winding up or total or partial liquidation or reorganization or readjustment of the Company, whether voluntary or involuntary, in bankruptcy, insolvency, receivership or other cases or proceedings, all principal of, premium, if any, and interest due or to become due upon all Superior Indebtedness shall first be paid in full before the Holder shall be entitled to receive any assets so paid or distributed; and upon any such dissolution or winding up or liquidation or reorganization or readjustment, any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities to which the Holder would be entitled except for the provisions of this paragraph, including any such payment or distribution which may be payable or deliverable by reason of the payment 5 of any other indebtedness of the Company being subordinated to the payment of this Note, shall be paid or distributed by the Company or by any receiver, trustee in bankruptcy, liquidating trustee, agent or other person making such payment or distribution directly to the Superior Holders (pro rata to each such Superior Holder on the basis of the respective amounts of Superior Indebtedness held by such Superior Holder) or their representatives, to the extent necessary to pay all Superior Indebtedness in full, after giving effect to any concurrent payment or distribution to or for the Superior Holders, before any payment or distribution in respect to this Note (for principal, premium, if any, or interest) is made to the Holder. If any payment or distribution of any character, whether in cash, property or securities including any such payment or distribution which may be payable or deliverable by reason of the payment of any other indebtedness of the Company being subordinated to the payment of this Note, shall be received by the Holder in contravention of any of the terms of this Note and before all the Superior Indebtedness shall have been paid in full, such payment or distribution shall be paid held in trust by the Holder for the benefit of the Superior Holders and shall forthwith be paid over or delivered and transferred to the Superior Holders (pro rata to each such Superior Holder on the basis of the respective amounts of Superior Indebtedness held by such Superior Holder) or their representatives, to the extent necessary to pay all Superior Indebtedness in full, after giving effect to any concurrent payment or distribution to or for the Superior Holders. The foregoing subordination shall apply, notwithstanding the availability of any collateral to the Superior Holders or the actual date and time of execution, delivery, recordation, filing or perfection of the Superior Holders' interest in collateral, or the lien or priority of payment thereof, and notwithstanding the fact that any monies owed to the Superior Holders or any claim for the Superior Indebtedness is declared to be fraudulent or preferential, subordinated, avoided, set aside or disallowed, in whole or in part, pursuant to Title 11 of the United States Code (the "Bankruptcy Code") or other applicable federal or state law. In the event of a proceeding, whether voluntary or involuntary, for insolvency, liquidation, reorganization, dissolution, bankruptcy or other similar proceeding pursuant to the Bankruptcy Code or other applicable federal or state law, the Superior Indebtedness shall include all fees and interest accrued on the Superior Indebtedness in accordance with and at the rates specified in the documents underlying and evidencing the Superior Indebtedness, both for periods before and for periods after the commencement of any of such proceedings, even if the claims for such fees or interest are not allowed pursuant to applicable law. In any case commenced by or against the Company or an affiliate of the Company under any chapter of the Bankruptcy Code or any similar federal or state statute while CSFB remains a Superior Holder, (i) the Holder shall not vote affirmatively in favor of any plan of reorganization or liquidation proposed by or for the Company or any affiliate of the Company unless Superior Holder grants its prior written permission thereto or votes to accept such plan, (ii) the Holder shall file a 6 proof of claim against the Company for its claims under this Note at least five (5) business days before the last day for filing proofs of claims and shall send to CSFB a copy of such proof of claim with evidence of filing with the appropriate court and authority, and (iii) if the Holder fails to timely file sufficient proofs of claim, CSFB may file proofs of claim on behalf of the Holder. The Holder hereby authorizes CSFB to intervene and fully participate in any objection to such proofs of claim, if CSFB chooses to do so in its sole discretion. Standstill. The Holder of this Note agrees, for so long as CSFB is a Superior Holder and for 91 days thereafter, that: (a) it shall simultaneously send to CSFB due notice of any and all defaults under this Note as well as copies of all notices required to be delivered to or by the Company pursuant to this Note; and (b) it shall not, without the prior written consent of CSFB, which consent may be withheld in CSFB's sole discretion, (i) declare a default, monetary or non-monetary, under this Note, (ii) accelerate the indebtedness evidenced by this Note, (iii) commence any enforcement or collection proceeding on this Note including, but not limited to, signing or filing an involuntary petition against the Company or any of its affiliates under the Bankruptcy Code or other applicable federal or state law, (iv) obtain any receiver or other custodian of the assets of the Company or any affiliate of the Company, (v) accept any security interest in collateral of the Company or any affiliate of the Company, or (vi) exercise any bankers lien or rights of set-off or recoupment. This Standstill provision shall remain in full force and effect and shall bind the Holder of this Note until the later of (i) 91 days after the final repayment and full satisfaction of the CSFB Indebtedness, including any amounts outstanding as a result of any refinancing or restructuring of the CSFB Indebtedness or (ii) March 31, 1999. The Holder acknowledges and agrees that the Superior Holders have relied upon and, to the extent applicable, will continue to rely upon the Subordination and Standstill provisions contained herein in extending credit to the Company and amending the terms of such credit extension. The Holder acknowledges and agrees that the Superior Holders may enforce by any lawful means the Subordination and Standstill provisions contained herein. The Holder waives notice of or proof of reliance hereon and protest, demand for payment and notice of default. The Superior Holders shall not be prejudiced in their rights to enforce the Subordination and Standstill provisions contained herein in accordance with their terms by any act or failure to act on the part of the Company. 7 The Subordination and Standstill provisions contained herein are (i) for the benefit of the Superior Holders and may not be rescinded, canceled, amended or modified in any way without the prior written consent thereto of the Superior Holders and (ii) solely for the purpose of defining the relative rights of the Superior Holders on the one hand, and the Holder on the other hand, and nothing herein shall impair, as between the Company and the Holder, the obligation of the Company to pay the principal and interest on this Note in accordance with its terms, nor shall anything herein prevent the Holder from exercising all remedies otherwise permitted by applicable law or hereunder upon default hereunder, subject to the Superior Holders as herein provided. Parity of Notes. This Note and several other notes in the aggregate principal amount of $5,586,000.00 (the "Notes") have been issued as of October 26, 1998 by the Company in exchange for $4,900,000 of 12% Subordinated Promissory Notes of the Company in a like aggregate principal amount (the "Exchange"). In the event the Company elects to prepay any amounts under the Notes issued in the Exchange, the Company shall make such prepayment to all Holders of Notes in proportion to the principal amount of such Notes. In the event any Holder of Notes issued in the Exchange elects to accelerate Notes held by such Holder as a result of an event of default, the Company shall notify the Holder of this Note of such event. In the event of a default under this Note or any other Notes issued in the Exchange, all Holders of Notes issued in connection with the Exchange shall be deemed to have equal parity. Waivers. The Company (i) waives presentment, demand and protest of every kind respecting this Note, and (ii) agrees that the Holder hereof, at any time or times, without notice to or the consent of the Company, may grant extensions of time, without limit as to the number or the aggregate of such extensions, for the payment of any principal or interest due hereon. No delay or omission by the Holder in the exercise of any right or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right or remedy preclude any other or further exercise thereof or the exercise of any other right or remedy. In the event any payment by or on behalf of the Company to the Holder is held to constitute a preference under the bankruptcy laws, or any other applicable federal or state bankruptcy, insolvency or other similar law, and by reason thereof the Holder is required to refund such payment or pay the amount thereof to any party, such payment by or on behalf of the Company to the Holder shall not constitute a release of the Company from any liability hereunder to the extent of such payment, but the Company agrees to pay the amount of such payment, together with the interest thereon, to the Holder upon demand. Governing Law. This Note shall be deemed to have been delivered by the Company in Norfolk, Virginia, and shall be governed by and construed in accordance with the laws of the Commonwealth of Virginia. 8 Jurisdiction. The Company irrevocably submits to the jurisdiction of any court of the Commonwealth of Virginia or any federal court located in the Commonwealth of Virginia in any suit, action or proceeding arising out of or related to this Note. The Company irrevocably waives, to the fullest extent permitted by law, any objection which it may now or hereafter have to the laying of the venue of any such suit, action or proceeding brought in any such court and any claim that any such suit, action or proceeding brought in such a court has been brought in an inconvenient forum. The Company agrees that a final non-appealable judgment in any such suit, action or proceeding shall be conclusive and binding upon the Company. The Company consents to process being served in any suit, action or proceeding of the nature referred to herein by mailing a copy thereof by registered or certified mail, postage prepaid, return receipt requested, to the address of the Company last known to the Holder. The Company irrevocably waives, to the fullest extent permitted by law, all claim or error by reason of any such service (but does not waive any right to assert lack of subject matter jurisdiction), and the Company agrees that such service (a) shall be deemed in every respect effective service of process upon the Company in any such suit, action or proceeding and (b) shall, to the fullest extent permitted by law, be taken and held to be valid personal service upon and personal delivery to the Company. Nothing in this Agreement shall affect the right of the Holder to serve process in any manner permitted by law or limit the right of the Holder to bring proceeding against the Company in the courts of any jurisdiction or jurisdictions. Waiver of Jury Trial. The Company waives trial by jury in any action or proceeding to which the Company and the Holder may be parties arising out of, in connection with, or in any way pertaining to this Note. It is agreed and understood that this waiver constitutes a waiver by trial by jury of all claims against all parties to such actions or proceedings. This waiver is knowingly, willingly and voluntarily made by the Company, and the Company hereby represents that no representations of fact or opinion have been made by any individual to induce this waiver of trial by jury or to in any way modify or nullify its effect. The Company further represents and warrants that it has been represented in the signing of this document and in the making of this waiver by independent legal counsel, or has had the opportunity to be represented by independent legal counsel selected of its own free will, and that it has had the opportunity to discuss this waiver with counsel. Registration or Transfer. This Note is registered on the books of the Company and is transferable only by surrender thereof at the principal office of the Company duly endorsed or accompanied by a written instrument of transfer duly executed by the registered Holder or his, her or its attorney duly authorized in writing. The Holder hereby agrees to notify the Company prior to any transfer of the Note and to comply with the legend on the face of this Note. 9 Notices. Any notice or communication shall be sufficiently given if in writing and delivered in person or mailed by certified mail, return receipt requested or by telecopier, followed by certified mail, return receipt requested, or by overnight service guaranteeing next day delivery, and providing proof of delivery, addressed as set forth below or at such other address as may be designated by the Company in a notice given hereunder to the Holder (a) If to the Company: AutoInfo, Inc. One Paragon Drive Suite 255 Montvale, New Jersey 07645 Attn: Mr. Scott Zecher Telecopier No. 201-930-0022 With a copy to: Morse, Zelnick, Rose & Lander, LLP 450 Park Avenue New York, New York 10022 Attn: Kenneth S. Rose, Esq. Telecopier No.: 212-838-9190 (b) If to CSFB: Credit Suisse First Boston Mortgage Capital LLC 11 Madison Avenue, 7th floor New York, NY 10010 Attn: Principal Transactions Group Telecopier No.: (212) 325-9964 With a copy to: Thacher Proffitt & Wood Two World Trade Center New York, New York 10048 Attn: Jeffrey Murphy, Esq. Telecopier No.: 212-912-7751 (c) If to the Holder, at the address and telecopier number set forth on the books of the Company. No Recourse Against Others. A director, officer, employee, stockholder, trustee or beneficiary, as such, of the Company shall not have any liability for any obligations of the Company under this Note or for any claim based on, in respect of, or by reason of any such obligations or their creation, absent such individuals actual fraud. The Holder, by accepting this Note, waives and releases all such liability. Severability. In case any provision in this Note shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall 10 not in any way be affected or impaired thereby, and a Holder shall have no claim therefor against any party hereto. WITNESS the following signature(s) and seal(s). AUTOINFO, INC. By: ------------------------------------- Scott Zecher, Chief Executive Officer The Holder hereby agrees to and accepts the terms and conditions set forth herein. - -------------------------------------- Holder 11 FORM OF TRANSFEREE CERTIFICATE [Letterhead of Prospective Purchaser or U.S. Registered Broker-Dealer] Date: AutoInfo, Inc. One Paragon Drive Suite 255 Montvale, New Jersey 07645 Attn: Mr. Scott Zecher Dear Sirs: I. We hereby request that $_________ aggregate principal amount of ten percent (10%) Subordinated Notes (the "Notes"), of AUTOINFO, INC., a Delaware corporation, be registered in the name set forth below and confirm that the new beneficial owner is an institutional "accredited investor" (as defined in Rule 501(a)(1), (2), (3) or (7) of Regulation D under the Securities Act) that is acquiring the notes for investment purposes and not for distribution (within the meaning of the Securities Act); it has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of its investment in the Notes, and it and any accounts for which it is acting are each able to bear the economic risk of its investment; it is acquiring the Notes purchased by it for its own account or for one or more accounts as to each of which it exercises sole investment discretion. If this letter is being filled out by a prospective purchaser, the undersigned purchaser confirms that the Notes will only be transferred in accordance with the legend on the Notes, and further, that it understands that in connection with any such transfer, the Company may request, and if so requested the undersigned purchaser will furnish, such certificates and other information as may reasonably be required to confirm that any such transfer complies with the restrictions set forth therein. II. For Qualified Institutional Buyers: |_| The Notes are being transferred to a "Qualified Institutional Buyer" (as defined in Rule 144A under the Securities Act), which person has been advised that the Notes have been sold or transferred to it in reliance upon Rule 144A. III. The Notes should be registered as follows (unless the box under II above is checked): 12 Name: Address: Tax Identification Number: Physical Location of Notes (including address): Address: Contact: IV. If this letter is being completed by a U.S. registered broker-dealer on behalf of the transferee, the undersigned broker-dealer confirms that (a) it has delivered to the transferee a notice regarding the restrictions on transfer of the Notes by such transferee as set forth in the legend on the Notes and (b) to the best of its knowledge, the information provided herein about the transferee is true and correct. We represent that we have read the Notes and understand that they are subordinate to all Superior Indebtedness (as defined in the Notes). You are entitled to rely upon this letter and you are irrevocably authorized to produce this letter or a copy hereof to any interested party in any administrative or legal proceeding or official inquiry with respect to the matters covered hereby. Very truly yours, [Name of Prospective Purchaser or U.S. Registered Broker-Dealer] By: ------------------------------------- Title: 13 EX-10.L 5 EXCHANGE AGREEMENT AUTOINFO, INC. December 7, 1998 Charles A. Mills, III, Chairman Anderson & Strudwick Norfolk Southern Towers, Suite 100 Norfolk, Virginia 23514 Re: Exchange Agreement With Respect to Subordinated Notes of CarLoanCo, Inc. Dear Mr. Mills: Reference is made to the $4.9 million dollars principal amount of senior subordinated promissory notes of CarLoanCo, Inc. ("CarLoanCo") currently due May 1, 1999 and held by eight investors for whom you are acting as representative (the "Senior Subordinated Notes") and the $3.3 million dollars of junior subordinated notes of CarLoanCo due December 1, 2000 held by ten investors for whom you are acting as representative (the "Junior Subordinated Notes"). In furtherance of our discussions and the term sheet we exchanged on or about August 6, 1998, this letter sets forth the understanding we have reached with respect to the exchange of the outstanding notes for newly issued subordinated promissory notes of AutoInfo, Inc. (AutoInfo"). We have agreed as follows: 1. On the closing date, you shall use your best efforts to deliver, as representative of the holders of the Senior Subordinated Notes and Junior Subordinated Notes (collectively, the "Notes") each of such notes against delivery to you, on behalf of such holder, of a replacement note in the form of Exhibit A (Senior Subordinated Note) or Exhibit B (Junior Subordinated Note) (collectively, the "New Notes"). 2. In consideration for the exchange of the Notes, AutoInfo hereby agrees that upon the closing it shall elect three designees of Charles A. Mills, III to be members of a six member Board of Directors of AutoInfo for so long as fifty (50%) percent of the original principal amount of the New Notes remain outstanding, AutoInfo shall ensure that such designees continue to be included on management's slate of directors for all subsequent meetings of the shareholders of AutoInfo, and AutoInfo shall use its best efforts to cause the election of such designees. The closing of the exchange of the Notes will not be deemed to have been completed until all actions necessary to comply with the first sentence of this paragraph have taken place. 3. Upon the closing, AutoInfo shall reimburse you, as representative of the Noteholders, for your reasonable legal expenses incurred in connection with the note exchange, which are presently estimated to be approximately $14,000 plus out-of-pocket expenses. The foregoing, together with the terms and provisions of the New Notes, sets forth the entire understanding between the parties with respect to the subject matter hereof, and may not be modified, amended or superceded except by a writing signed by both parties. Sincerely, AUTOINFO, INC. By: ------------------------------------- Scott Zecher, President AGREED TO AND ACCEPTED: - ------------------------------- Charles A. Mills, III as Representative of the Note Holders EX-10.M 6 AGREEMENT AGREEMENT This AGREEMENT (the "Agreement"), dated as of November 20, 1998, by and among Credit Suisse First Boston Mortgage Capital, LLC, a Delaware limited liability company ("CSFB" or "Lender"), as successor-by-merger to CS First Boston Mortgage Capital Corp., CarLoanCo, Inc., a Virginia corporation formerly known as AutoInfo Finance of Virginia, Inc. ("CarLoanCo-VA" or the "Borrower"), and AutoInfo, Inc., a Delaware corporation ("AutoInfo") as Guarantor of the Borrower's obligations to Lender. CarLoanCo-VA and AutoInfo are sometimes referred to herein collectively as the "Company". W I T N E S S E T H: WHEREAS, Lender, Car Loan Co., Inc. ("Car Loan-CT") and Borrower are parties to a certain Amended and Restated Loan, Security and Servicing Agreement dated as of October 21, 1997 (the "Loan Agreement"); and WHEREAS, Car Loan-CT was merged into CarLoanCo-VA on or about October 13, 1998; and WHEREAS, Lender and CarLoanCo-VA, as borrowers, and Crestar Bank, a Virginia banking corporation as Custodian ("Custodian"), are parties to a certain Custody Agreement dated as of December 9, 1996 (the "Custody Agreement"); and WHEREAS, the aggregate outstanding principal amount of all Advances is $4,490,574.73; and WHEREAS, Lender and the Company desire to terminate the commercial relationship between the parties; and WHEREAS, in furtherance thereof, the parties have negotiated and agreed to the terms and conditions contained in the Amendment and Forbearance Agreement in the form annexed hereto as Exhibit A (the "Amendment and Forbearance Agreement"); and WHEREAS, the Amendment and Forbearance Agreement provides for, inter alia, "Contingent Debt Forgiveness" (as defined therein) upon the fulfillment of certain conditions therein; and WHEREAS, Lender desires to be paid, and the Company desires to pay to Lender, the sum of $2,440,786.34 (the "Payoff Amount"), constituting all amounts due and owing under the Loan Agreement, net of the "Contingent Discount" (as defined in the Amendment and Forbearance Agreement) by wire transfer to CitiBank NYC, ABA #021000089, for credit to the account of CS First Boston Corp., Account #09253506 (the "Designated Account") simultaneous with the execution and exchange of this Agreement; and WHEREAS, the Lender and the Company desire to provide for the application of the Contingent Discount and the orderly termination of the debtor/creditor relationship between the Lender and the Company, subject to the fulfillment by the Company of the conditions set forth herein. NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which the parties hereto hereby acknowledge, the parties hereto agree as follows: 1. Payment. Simultaneous with the execution and exchange hereof, the Company has directed the payment of the Payoff Amount by wire transfer to the Designated Account. Subject to the fulfillment by the Company of the conditions set forth in Section 2 below, the Payoff Amount shall constitute full and final payment by the Company and any of its affiliates of all amounts due and owing to the Lender and any of its affiliates on account of or in connection with the Loan Agreement. If the Company fails to fulfill such conditions, the unpaid Advances shall remain owing. 2. Conditions for Debt Forgiveness. The Contingent Discount shall be applied to the account of the Borrower, and no further sums shall be due and owing under or relating to the Loan Agreement provided that, on or before December 15, 1998, the Company delivers to Thacher Proffitt & Wood, attention Jeffrey Murphy, Esq., as attorneys for the Lender, the following documents: (a) Four (4) executed counterparts of the Amendment and Forbearance Agreement in substantially the form of Exhibit A hereto; (b) an original executed Common Stock Purchase Warrant to purchase 125,000 shares of AutoInfo Common Stock in substantially the form of Exhibit B hereto at the price called for in the term sheet between the parties; (c) an original executed Common Stock Purchase Warrant to purchase 1,357,467 shares of AutoInfo Common Stock in substantially the form of Exhibit C hereto at the price called for in the term sheet between the parties; (d) the opinion of Morse, Zelnick, Rose & Lander, LLP, or such other firm reasonably acceptable to Thacher Proffitt & Wood, in substantially the form of Exhibit D hereto; (e) the opinion of Willcox & Savage, PC, or such other firm reasonably acceptable to Thacher Proffitt & Wood, in substantially the form of Exhibit E hereto; (f) two (2) duly executed copies of the AutoInfo, Inc. Officer's Certificate and Incumbency and Documentation Certificate, in substantially the form of Exhibit F hereto; 2 (g) two (2) duly executed copies of the CarLoanCo, Inc. Officer's Certificate and Incumbency and Documentation Certificate, in substantially the form of Exhibit G hereto; (h) two (2) duly executed copies of the Certificate of Scott J. Zecher, in substantially the form of Exhibit H hereto; and (i) a fully executed General Release by the Company of the Lender, in substantially the form of Exhibit I hereto. Thacher Proffitt & Wood shall hold each of the foregoing documents delivered to it by or on account of the Company in escrow pending its delivery to Morse, Zelnick, Rose & Lander, LLP, attention Kenneth S. Rose, Esq., as attorneys for the Company, of the following documents: (a) two (2) fully executed counterparts of the Amendment and Forbearance Agreement; (b) a fully executed General Release by the Lender of the Company, in substantially the form of Exhibit J hereto; and (c) the original Common Stock Purchase Warrant No. M-1 previously issued by AutoInfo to the Lender. 3. Binding Effect; Survival of Provisions. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. 4. Captions. The section headings contained in this Agreement are and shall be without substantive meaning or content of any kind whatsoever and are not part of the agreement between the parties hereto or thereto. 5. Amendments and Waivers. This Agreement shall not be amended, modified or waived except by written consent of all of the parties hereto. 6.. Governing Law; Severability. This Agreement shall be a contract made under and governed by, and construed in accordance with, the laws of the State of New York without regard to conflict of laws principles. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by or unenforceable or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition, unenforceability or invalidity, without invalidating the remainder of such provision or the remaining provisions of the Agreement. 7. Execution in Counterparts. The Agreement may be executed in any number of counterparts, by original or facsimile signature, each of which shall be deemed to be an original and all of which together shall be deemed to be one and the same instrument. 3 8. Full Agreement. This Agreement, together with the Loan Agreement, contains the entire agreement of the parties with respect to the subject matter hereof and supersedes and cancels all prior or contemporaneous understandings, agreements, writings (including but not limited to that certain letter dated November 18, 1998 from Michael A, Commaroto, Vice President of Lender to Scott Zecher, President of AutoInfo) and discussions between the parties. Accordingly, the parties do hereby agree that in any arbitration, mediation or court proceeding in which the interpretation or enforcement of this Agreement is sought or requested, or otherwise at issue, No prior or subsequent oral representations, warranties or agreements shall be admissible or otherwise binding on the parties except as expressly set forth herein. No modification, amendment or waiver of any provisions of this Agreement shall in any event be effective unless the same shall be in writing and duly executed by all of the parties hereto. [THE BALANCE OF THIS PAGE IS INTENTIONALLY LEFT BLANK] 4 IN WITNESS WHEREOF, the parties hereby have caused this Agreement to be executed by their respective officers or members thereunto duly authorized as of the date and year first above written. CREDIT SUISSE FIRST BOSTON MORTGAGE CAPITAL, LLC By: ------------------------------------- Name: Michael A. Commaroto Title: Vice President CARLOANCO, INC. By: ------------------------------------- Name: Scott Zecher Title: Chief Executive Officer AUTOINFO, INC. By: ------------------------------------- Name: Scott Zecher Title: Chief Executive Officer 5 EX-10.N 7 COMMON STOCK PURCHASE WARRANT CONFORMED COPY COMMON STOCK PURCHASE WARRANT Warrant No. M - 3 NEITHER THIS WARRANT NOR THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND NEITHER THIS WARRANT NOR SUCH SHARES MAY BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT OR AN EXEMPTION FROM SUCH REGISTRATION REQUIREMENT, AND, IF AN EXEMPTION SHALL BE APPLICABLE, THE HOLDER SHALL HAVE DELIVERED AN OPINION OF COUNSEL REASONABLY ACCEPTABLE TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED. Void after 5:00 p.m. Eastern Standard Time, on November 30, 2003. WARRANT TO PURCHASE COMMON STOCK OF AUTOINFO, INC. FOR VALUE RECEIVED, AUTOINFO, INC., a Delaware corporation, (the "Company"), hereby certifies that Credit Suisse First Boston Mortgage Capital, LLC, or its permitted assigns, (the "Holder") is entitled to purchase from the Company, at any time, or from time to time, commencing on the date hereof, and prior to 5:00 p.m., Eastern Standard Time, on November 30, 2003, a total of 1,357,467 subject to adjustment as provided herein) fully paid and nonassessable shares of the Common Stock, par value $.01 per share, of the Company for an aggregate purchase price of $40,724.01 (based upon $0.03 per share). (Hereinafter, (i) said Common Stock, together with any other equity securities which may be issued by the Company with respect thereto or in substitution therefor, is referred to as the "Common Stock", (ii) the shares of the Common Stock purchasable hereunder are referred to as the "Warrant Shares", (iii) the aggregate purchase price payable hereunder for the Warrant Shares is referred to as the "Aggregate Warrant Price", (iv) the price payable hereunder for each of the Warrant Shares is referred to as the "Per Share Warrant Price", (v) this Warrant, and all warrants hereafter issued in exchange or substitution for this Warrant, are referred to as the "Warrant" and (vi) the holder of this Warrant is referred to as the "Holder"). The Per Share Warrant Price is subject to adjustment as hereinafter provided. Except as otherwise provided in Section 3, in the event of any such adjustment, the number of Warrant Shares shall be adjusted by dividing the Aggregate Warrant Price by the Per Share Warrant Price in effect immediately after such adjustment. 1. Exercise of Warrant. This Warrant may be exercised, in whole at any time or in part from time to time, commencing on the date hereof (the "Commencement Date") and prior to 5:00 p.m., Eastern Standard Time, on November 30, 2003, by the Holder of this Warrant by the surrender of this Warrant (with the subscription form at the end hereof duly executed) at the address set forth in Subsection 10 (a) hereof, together with proper payment of the Aggregate Warrant Price, or the proportionate part thereof if this Warrant is exercised in part. Payment for Warrant Shares shall be made (i) in cash, by certified or official bank check or wire transfer payable to the order of the Company, (ii) by Net-Issue Exercise (as hereinafter defined), or (iii) by any combination of (i) or (ii) A "Net-Issue Exercise" meant a "cashless" exercise by a holder by delivery of a subscription form instructing the Company to retain, in payment of the Aggregate Warrant Price (or portion thereof), a number of Warrant Shares (the "Payment Shares") equal to the quotient of the Aggregate Per Share Warrant Price of the Warrant Shares issuable in respect of Warrants then being exercised by Net-Issue Exercise divided by the Market Price (as hereinafter defined) of such shares as of the date of exercise, and to deduct the number of Payment Shares from the Warrant Shares to be delivered to such holder. If this Warrant is exercised in part, this Warrant must be exercised for a minimum of 1,000 shares of the Common Stock, and the Holder is entitled to receive a new Warrant covering the number of Warrant Shares in respect of which this Warrant has not been exercised and setting forth the proportionate part of the Aggregate Warrant Price applicable to such remaining Warrant Shares. Upon such surrender of this Warrant, the Company will issue a certificate or certificates in the name of the Holder for the largest number of whole shares of the Common Stock to which the Holder shall be entitled and, (a) in lieu of any fractional share of the Common Stock to which the Holder shall be entitled, cash equal to the fair value of such fractional share (determined in such reasonable manner as the Board of Directors of the Company shall determine), or (b) deliver a new Warrant for the proportionate part thereof in respect of which this Warrant has not been exercised, if this Warrant is exercised in part, pursuant to the provisions of this Warrant. 2. Reservation of Warrant Shares. The Company agrees that, prior to the expiration of this Warrant, the Company will at all times have authorized and in reserve, free from preemptive rights, and will keep available, solely for issuance or delivery upon the exercise of this Warrant, the shares of the Common Stock as from time to time shall be receivable upon the exercise of the Warrant. The Company covenants and agrees that all shares of Common Stock which are issuable hereunder will, upon issuance, be duly authorized and issued, fully paid and non-assessable. 3. Anti-Dilution Provisions. (a) In case the Company shall hereafter (i) pay a dividend or make a distribution on its capital stock in shares of Common Stock, including options and other securities convertible into, or exchangeable for Common Stock, (ii) subdivide its outstanding shares of Common Stock into a greater number of shares, (iii) combine its outstanding shares of Common Stock into a smaller number of shares or (iv) issue by reclassification of its Common Stock any shares of capital stock of the Company, the Per Share Warrant Price in effect immediately prior to such action shall be adjusted so that if the Holder surrendered this Warrant for exercise immediately thereafter the Holder would be entitled to receive the number of shares of Common Stock or other capital stock of the Company which he would have owned immediately following such action had such Warrant been exercised immediately prior thereto. An adjustment made pursuant to this subsection (a) shall become effective immediately after 2 the record date in the case of a dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or reclassification. If, as a result of an adjustment made pursuant to this subsection (a), the Holder of this Warrant shall become entitled to receive shares of two or more classes of capital stock or shares of Common Stock and other capital stock of the Company, the Board of Directors (whose determination shall be conclusive and shall be described in a written notice to the Holder of this Warrant promptly after such adjustment) shall in good faith determine the allocation of the adjusted Per Share Warrant Price between or among shares of such classes of capital stock or shares of Common Stock and other capital stock; provided that the effect thereof does not materially adversely affect the value of this Warrant. (b) In case of any reorganization, consolidation or merger to which the Company is a party, other than a merger or consolidation in which the Company is the continuing corporation, or in case of any sale or conveyance to another entity of the property of the Company as an entirety or substantially as an entirety, or in the case of any statutory exchange of securities with another corporation (including any exchange effected in connection with a merger of a third corporation into the Company), the Holder shall have the right thereafter to convert this Warrant into the kind and amount of securities, cash or other property which he would have owned or have been entitled to receive immediately after such reorganization, consolidation, merger, statutory exchange, sale or conveyance had such Warrant been converted immediately prior to the effective date of such reorganization, consolidation, merger, statutory exchange, sale or conveyance and in any such case, if necessary, appropriate adjustment shall be made in the application of the provisions set forth in this Section 3 with respect to the rights and interests thereafter of the Holder to the end that the provisions set forth in this Section 3 shall thereafter correspondingly be made applicable, as nearly as may reasonably be, in relation to any shares of stock or other securities or property thereafter deliverable on the conversion of this Warrant. The above provisions of this subsection (b) shall similarly apply to successive reorganizations, consolidations, mergers, statutory exchanges, sales or conveyances. Notice of any such reorganization, consolidation, merger, statutory exchange, sale or conveyance and of said provisions so proposed to be made, shall be mailed to the Holder not less than 20 days prior to such event. A sale of all or substantially all of the assets of the Company for a consideration consisting primarily of securities shall be deemed a consolidation or merger for the foregoing purposes. (c) If the Company shall, at any time after the date hereof issue any shares of Common Stock, other than Excluded Shares (as defined in subsection (h) below), for a consideration per share less than the Market Price in effect immediately prior to such issuance, then (i) the Per Share Warrant Price in effect immediately prior to each such instance shall forthwith be adjusted to a price equal to the Per Share Warrant Price then in effect multiplied by the quotient obtained by dividing (a) an amount equal to the sum of (1) the total number of shares of Common Stock outstanding immediately prior to such issuance multiplied by the Market Price in effect immediately prior to such issuance, plus (2) the consideration received by the Company upon such issuance, by (b) the total number of shares of Common Stock outstanding immediately after such issuance multiplied by the Market Price in effect immediately prior to such issuance, and (ii) the number of shares of Common Stock then 3 issuable upon the exercise of Warrant shares outstanding immediately prior to each such issuance shall forthwith be adjusted by adding a number of shares of Common Stock equal to the product of (a) the number of shares of Common Stock issuable upon the exercise of Warrant Shares outstanding immediately prior to such issuance, times (b) the quotient obtained by dividing (1) an amount equal to the Per Share Warrant Price in effect immediately prior to such issuance less the Per Share Warrant Price in effect immediately after such issuance, by (2) the Per Share Warrant Price in effect immediately after such issuance. (d) For the purpose of any adjustment of the Per Share Warrant Price and the number of shares of Common Stock issuable upon exercise of the Warrants pursuant to the clause (c), the following provisions shall be applicable: (e) In the case of the issuance of Common Stock for cash, the consideration shall be deemed to be the amount of cash received by the Company therefor. (i) In the case of the issuance of Common Stock for a consideration in whole or in part other than cash, the consideration other than cash shall be deemed to be the "fair value" of such consideration as determined in the good faith judgment of the Board of Directors of the Company. (ii) In the case of the issuance of (x) options to purchase or rights to subscribe for Common Stock, (y) securities by their terms convertible into or exchangeable for Common Stock or (z) options to purchase or rights to subscribe for such convertible or exchangeable securities: (1) the aggregate maximum number of shares of Common Stock deliverable upon exercise of such options to purchase or rights to subscribe for Common Stock shall be deemed to have been issued at the time such options or rights were issued and for a consideration equal to the consideration (determined in the manner provided in subdivisions (i) and (ii) above), if any, received by the Company upon the issuance of such options or rights plus the minimum purchase price provided in such options or rights for the Common Stock covered thereby; (2) the aggregate maximum number of shares of Common Stock deliverable upon conversion of or in exchange for any such convertible or exchangeable securities or upon the exercise of options to purchase or rights to subscribe for such convertible or exchangeable securities and subsequent conversion or exchange thereof shall be deemed to have been issued at the time such securities were issued or such options or rights were issued and for a consideration equal to the consideration received by the Company for any such securities and related options or rights (excluding any cash received on account of accrued interest or accrued dividends), plus the minimum amount of additional consideration, if any, to be received by the Company upon the conversion or exchange of such securities or the exercise of any related options or rights (the consideration in each case to be determined in the manner provided in subdivisions (i) and (ii) above); 4 (3) on any change in the number of shares or exercise price of Common Stock deliverable upon exercise of any such options or rights or conversions of or exchange for such convertible or exchangeable securities, other than a change resulting from the antidilution provisions thereof, the Per Share Warrant Price and the number of shares of Common Stock issuable upon exercise of the Warrants shall forthwith be readjusted to such Per Share Warrant Price and to such number of shares as would have obtained had the adjustment made at the time of the issuance of such options, rights or securities not converted prior to such change been made upon the basis of such change; and (4) on the expiration of any such options or rights, the termination of any such rights to convert or exchange or the expiration of any options or rights related to such convertible or exchangeable securities, the Per Share Warrant Price and the number of shares of Common Stock issuable upon exercise of the Warrants shall forthwith be readjusted to such Per Share Warrant Price and to such number of shares as would have obtained had such options, rights, securities, or options or rights related to such securities (as have not theretofore been converted, exchanged or exercised) not been issued. (f) Whenever the Per Share Warrant Price is adjusted as provided in this Section 3 and upon any modification of the rights of the Holder of this Warrant in accordance with this Section 3, the Company shall promptly prepare a certificate of an officer of the Company, setting forth the Per Share Warrant Price and the number of Warrant Shares after such adjustment or modification, a brief statement of the facts requiring such adjustment or modification and the manner of computing the same and cause a copy of such certificate to be mailed to the Holder. (g) If the Board of Directors of the Company shall declare any dividend or other distribution in cash or property (including securities other than Common Stock) with respect to the Common Stock, the Company shall mail notice thereof to the Holder not less than 15 days prior to the record date fixed for determining shareholders entitled to participate in such dividend or other distribution. (h) the Company will not, by amendment of its Certificate of Incorporation or by-laws , or through any reorganization, transfer of assets, reclassification, merger, dissolution, issue or sale of securities or otherwise, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed by the Company hereunder but will at all times in good faith assist in the carrying out of all the provisions hereof and in the taking of all such actions as may be necessary or appropriate in order to protect the rights of the holders of the Warrants against impairment. (i) For purposes of this Section 3, "Excluded Shares" shall mean (i) all shares issued upon (a) exercise or conversion of any other warrants outstanding on the date hereof, (b) exercise of any options outstanding on the date hereof, and (c) the issuance of shares of Common Stock or options to purchase such shares, to officers, employees or directors of the Company and its subsidiaries pursuant to any bona fide equity incentive plan, or other incentive arrangement. 5 (j) Definition of Market Price. "Market Price" shall mean either: (1) if shares of the Common Stock are listed or admitted to trading on any exchange or quoted through NASDAQ or any similar organization, the average of the daily closing prices per share of the Common Stock for the 20 consecutive trading days immediately preceding the date of public announcement of the event giving rise to adjustment under this Section 3 or, if no such public announcement is made with respect to such event, the average of the daily closing prices per share of the Common Stock for the 20 consecutive trading days immediately preceding the day as of which the "Market Price" is being determined. The closing price of each day shall be the last sale price regular way or, in case no such sale takes place on such day, the average of the closing bid and asked prices regular way, in either case on the New York Stock Exchange, or, if shares of the Common Stock are not listed or admitted to trading on the New York Stock Exchange, on the principal national securities exchange or national market on which the shares are listed or admitted to trading or quoted, or if the shares are not so listed or admitted to trading or quoted, the average of the highest reported bid and lowest reported asked prices as furnished by the National Association of Securities Dealers, Inc. through NASDAQ or through a similar organization if NASDAQ is no longer reporting such information; or (2) if such shares of Common Stock are not listed or admitted to trading on any exchange or quoted through NASDAQ or any similar organization, such value shall be determined by the Board of Directors of the Company, in good faith and in the exercise of reasonable business judgment, without taking into consideration any premium for share representing control of the Company, any discount for any minority interest therein or any restrictions on transfer under Federal and applicable state securities laws or otherwise, which determination shall be conclusive, and which determination of valuation shall be sent in writing by the Board of Directors to the registered holders of Warrants outstanding. 4. Fully Paid Stock: Taxes. The Company agrees that the shares of the Common Stock represented by each and every certificate for Warrant Shares delivered on the exercise of this Warrant shall, at the time of such delivery, be duly and properly authorized, validly issued and outstanding, fully paid and non-assessable, and not subject to preemptive rights, and the Company will take all such actions as may be necessary to assure that the par value or stated value, if any, per share of the Common Stock is at all times equal to or less than the then Per Share Warrant Price. The Company further covenants and agrees that it will pay, when due and payable, any and all Federal and state stamp or similar taxes that may be payable in respect of the issue of any Warrant Share or certificate therefor. 5. Transfer. (a) Securities Laws. Neither this Warrant nor the Warrant Shares issuable upon the exercise hereof have been registered under the Securities Act of 1933, as amended (the "Securities Act"), or under any state securities laws, and unless so registered, may not be 6 transferred, sold, pledged, hypothecated or otherwise disposed of unless an exemption from such registration is available. In the event the Holder desires to transfer this Warrant or any of the Warrant Shares issued, the Holder must give the Company prior written notice of such proposed transfer including the name and address of the proposed transferee. Such transfer may be made only (i) upon receipt by the Company of an opinion of counsel reasonably satisfactory to the Company to the effect that the proposed transfer will not violate the provisions of the Securities Act, or the rules and regulations promulgated under either such act; or (ii) if the Warrant or Warrant Shares to be sold or transferred have been registered under the Securities Act and there is in effect a current prospectus meeting the requirements of Subsection 10(a) of the Securities Act, which is being or will be delivered to the purchaser or transferee at or prior to the time of delivery of the certificates evidencing the Warrant or Warrant Shares to be sold or transferred. (b) Conditions to Transfer. Prior to any such proposed transfer, and as a condition thereto, if such transfer is not made pursuant to an effective registration statement under the Securities Act, the Holder will, if requested by the Company, deliver to the Company (i) an investment covenant signed by the proposed transferee, (ii) an agreement by such transferee to the impression of the restrictive investment legend set forth herein on the certificate or certificates representing the securities acquire by such transferee and (iii) an agreement by such transferee that the Company may place a "stop transfer order" with its transfer agent or registrar.. (c) Transfer. Except as restricted hereby, this Warrant and the Warrant Shares issued may be transferred by the Holder in whole or in part at any time or from time to time. Upon surrender of this Warrant to the Company or at the office of its stock transfer agent, if any, with assignment documentation duly executed and funds sufficient to pay any transfer tax, and upon compliance with the foregoing provisions, the Company shall, without charge, execute and deliver a new Warrant in the name of the assignee named in such instrument of assignment, and this Warrant shall promptly be canceled. Any assignment, transfer, pledge, hypothecation or other disposition of this Warrant attempted contrary to the provisions of this Warrant, or any levy of execution, attachment or other process attempted upon the Warrant, shall be null and void and without effect. (d) Legend and Stop Transfer Orders. Unless the Warrant Shares have been registered under the Securities Act, or the Company shall have received an opinion of counsel satisfactory to the Company to the effect that it is not required, upon exercise of any part of the Warrant and the issuance of any of the shares of Warrant Shares, the Company shall instruct its transfer agent to enter stop transfer orders with respect to such shares, and all certificates representing Warrant Shares shall bear on the face thereof substantially the following legend, insofar as is consistent with Delaware law: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") OR APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE SOLD, TRANSFERRED, PLEDGED, 7 HYPOTHECATED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR IN A TRANSACTION WHICH, IN THE OPINION OF COUNSEL TO THE HOLDER HEREOF IN FORM AND SUBSTANCE REASONABLY SATISFACTORY TO COUNSEL TO THE COMPANY, IS EXEMPT FROM REGISTRATION UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS." 6. Listing of Common Stock. The Company covenants and agrees for the benefit of the Holders and each other holder of any Common Stock issued upon exercise of the Warrants, that at the time of and in connection with the listing of Common Stock on any national securities exchange, it will, at its expense, use its best efforts to cause the shares of Common Stock issuable from time to time upon exercise of the Warrants to be approved for listing, subject to notice of issuance, and will provide prompt notice to each such exchange of the issuance thereof from time to time. 7. Registration Rights. The Holder is hereby granted the registration rights with respect to the Common Stock underlying this Warrant as more fully described in that certain Registration Rights Agreement made as of December 10, 1996 by and between the Company and CS First Boston Mortgage Capital Corp. 8. Loss, etc., of Warrant. Upon receipt of evidence satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant, and of indemnity reasonably satisfactory to the Company, if lost, stolen or destroyed, and upon surrender and cancellation of this Warrant, if mutilated, the Company shall execute and deliver to the Holder a new Warrant of like date, tenor and denomination. 9. Warrant Holder Not Shareholder. Except as otherwise provided herein, this Warrant does not confer upon the Holder any right to vote or to consent to or receive notice as a shareholder of the Company, as such, in respect of any matters whatsoever, or any other rights or liabilities as a shareholder, prior to the exercise hereof. 10. Communication. No notice or other communication under this Warrant shall be effective unless the same is in writing and is mailed by first-class mail, postage prepaid, addressed to: (a) the Company at One Paragon Drive, Suite 255, Montvale, New Jersey, Attn.: President, or such other address as the Company has designated in writing to the Holder, or (b) the Holder at 11 Madison Avenue, New York, NY 10010, Attn.: Michael A. Commaroto, or such other address as the Holder has designated in writing to the Company. 8 11. Headings. The headings of this Warrant have been inserted as a matter of convenience and shall not affect the construction hereof. 12. Applicable Law. This Warrant shall be governed by and construed in accordance with the laws of the State of New York without giving effect to the principles of conflicts of law thereof. 13. Gender and Number. As used in this Warrant, the masculine, feminine or neuter gender and the singular or plural number shall be deemed to include the others whenever the context so indicates or requires. IN WITNESS WHEREOF, AUTOINFO, INC., has caused this Warrant to be signed by its President and its corporate seal to be hereunto affixed and attested by its Assistant Secretary this 10th day of December, 1998. ATTEST: AUTOINFO, INC. /s/ Kenneth S. Rose By: /s/ Scott Zecher, - --------------------------------- ------------------------------------- Kenneth S. Rose, Scott Zecher, Assistant Secretary President 9 SUBSCRIPTION The undersigned, ________________________, pursuant to the provisions of the foregoing Warrant agrees to subscribe for the purchase of ____________________ shares of the Common Stock of AUTOINFO, INC. covered by said Warrant, and makes payment therefor in full at the price per share provided by said Warrant. Dated: _____________________ Signature:______________________________ Address: _______________________________ ASSIGNMENT FOR VALUE RECEIVED ___________________________, hereby sells, assigns and transfers unto ___________________________ the foregoing Warrant and all rights evidenced thereby, and does irrevocably constitute and appoint ______________________________, attorney, to transfer said Warrant on the books of AUTOINFO, INC. Dated: _____________________ Signature:______________________________ Address: _______________________________ PARTIAL ASSIGNMENT FOR VALUE RECEIVED _________________________ hereby assigns and transfers unto _____________________ the right to purchase ________________ shares of the Common Stock of AUTOINFO, INC. by the foregoing Warrant, and a proportionate part of said Warrant and the rights evidenced hereby, and does irrevocably constitute and appoint ___________________________ attorney, to transfer that part of said Warrant on the books of AUTOINFO , INC. Dated: _____________________ Signature:______________________________ Address: _______________________________ ________________________________________ EX-23 8 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-K, into AutoInfo, Inc.'s previously filed Registration Statement, File No. 33-34442. New York, New York March 24, 1998 EX-27 9 FINANCIAL DATA SCHEDULE
5 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 116,570 2,282,515 0 0 0 2,501,014 509,284 (258,397) 2,751,901 1,278,260 10,038,028 77,570 0 0 (8,641,957) 2,751,901 7,004,498 7,004,498 0 5,487,903 6,513,756 3,941,528 4,684,934 (13,623,623) 0 (13,623,623) 0 3,688,650 0 (9,934,973) (1.25) (1.25)
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