-----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, HLjacmH4VZXxpdoA+6q5zPtxD0TdcSu/KfwG7KVOZhrkqfd0XM01gflDZF7+SxyC +mZ4PsaGdvMa7u/BQPxNLg== 0001005477-98-000966.txt : 19980331 0001005477-98-000966.hdr.sgml : 19980331 ACCESSION NUMBER: 0001005477-98-000966 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980330 SROS: NASD 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-K SEC ACT: SEC FILE NUMBER: 001-11497 FILM NUMBER: 98578264 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-K 1 FORM 10-K ================================================================================ 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, 1997 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. |_| As of March 23, 1998, 7,996,752 shares of the Registrant's common stock were outstanding. The aggregate market value of the common stock (based upon the closing price on the NASDAQ National Market System on March 20, 1998 of $ .25 of the Registrant held by non-affiliates of the Registrant at that date was approximately $1,809,000 DOCUMENTS INCORPORATED BY REFERENCE NONE PART 1 Item 1: BUSINESS FORWARD-LOOKING STATEMENTS 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 the continued expansion of business. Assumptions relating to the foregoing involve judgments 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 representation by the Company or any other person that the objectives and plans of the Company will be achieved. General AutoInfo, Inc. (the "Company") is a consumer finance company specializing in the business of purchasing, selling and servicing retail automobile installment contracts ("Contracts") originated by dealers ("Dealers") in the sale of new and used automobiles, light trucks and passenger vans. Through its purchases, the Company provides financing to borrowers with limited credit histories, lower than average incomes or past credit problems ("Non-Prime Borrowers"). The Company serves as an alternative source of financing for Dealers, allowing sales to customers who otherwise might not be able to obtain financing from more traditional sources of automobile financing such as banks, credit unions or finance companies affiliated with major automobile manufacturers. During 1996 and through the third quarter of 1997, the Company employed a regional center approach, as compared to the branch network or centralized approach utilized by a number of other non-prime automobile finance companies. During the fourth quarter of 1997, the Company closed its Northeast regional center and consolidated all operations including credit, funding, underwriting and collections in its Mid Atlantic regional center. It is 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. In December 1995, the Company entered the non-prime automobile finance market (the "Non-Prime Market") through the acquisition, by a wholly-owned subsidiary, of the operating assets of Falk Finance Company ("FFC"), a Norfolk, Virginia based non-prime automobile consumer finance company. During 1996, the Company expanded on the FFC platform in establishing its Mid-Atlantic regional service center which services dealers in Delaware, Georgia, Maryland, North Carolina, South Carolina and Virginia, providing a complete range of automobile consumer finance services including sales and marketing, credit, servicing and collection. 2 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. This center was closed in November 1997. During 1997, several non-prime automobile finance companies, including the Company, experienced poor loan performance, higher delinquency rates and increased credit losses on their portfolio assets. In addition, during the past several months, a number of non-prime automobile finance companies, including the Money Store, have made strategic decisions to exit the market-place. This trend was the direct result of several factors including: (a) the impact of increased levels of competition on loan acquisition discounts; (b) the heightened demand created by the increased supply of capital and used automobile inventories; (c) the need to attract consumers with lower credit qualifications to meet this additional demand; (d) economic uncertainties and financial difficulties within the non-prime automobile industry as well as management upheavals at certain industry leaders; and (e) the increased levels of outstanding consumer debt and personal bankruptcies. These factors have contributed to a significant reduction in available warehouse lines of credit and a material decline in financial markets investments into the non-prime automobile industry through the sale of equity securities, subordinated debt instruments and securitized notes. The Company has experienced material operating losses during 1997. As a result of this adverse change in the non-prime automobile finance industry and the deterioration in the Company's financial condition, the Company has been unable to maintain adequate levels of net worth to satisfy the loan covenant requirement under its warehouse facility agreement with CS First Boston Mortgage Capital Corp. ("CSFB") and similar covenants pursuant to securitized notes issued in October 1996. As of December 31, 1997, CSFB is no longer funding the acquisition of non-prime automobile receivables generated by the Company. The Company, among other actions, has restructured operations and significantly reduced overhead. In addition, the Company has modified credit underwriting criteria and reduced the volume of loans purchased from dealers. The Company is exploring several opportunities including the securing of additional warehouse facilities to support an increased level of automobile loan acquisitions, the sale of portfolio assets to reduce outstanding debt and other restructuring alternatives. There is no assurance that the Company will be successful in securing additional warehouse facilities or selling portfolio assets, the failure of which would have a material adverse effect on the Company's financial condition. During the third quarter of 1997, the Company explored the sale of approximately $40 million of securitized notes backed by approximately $48 million of automobile receivables. However, several factors, including adverse market conditions, prevented the consummation of this transaction. The Company's ability to continue to acquire automobile receivables as well as plan for future expansion is directly related to its ability to secure required capital. In the past, the Company has demonstrated the ability to secure warehouse lines of credit, issue receivable secured notes and obtain subordinated debt. However, the Company's ability to secure required capital has been hampered based upon the inability to consummate the sale of securitized notes, as well as the uncertain status of the Company's primary credit facility. In January 1998, the Company entered into an arrangement with a new funding source whereby it can purchase loan contracts which meet specified criteria and sell them through to this source for a fee. This arrangement enables the Company to continue to purchase loans and service its dealer network. The success of this program, as well as the Company's ability to secure additional funding sources, will materially impact the Company's future business activities and, if not 3 successful, could require the Company to sell certain of the loans in its portfolio to meet its liquidity requirements. These factors raise substantial doubt about the Company's ability to continue as a going concern. Although significantly curtailed, the Company continues to purchase loans from its dealer network and employs the following strategies: Emphasis on Dealer Relationships--The Company believes that it is crucial to identify and meet dealers' financing needs. When presented with a loan application, the Company attempts to notify the dealer within one hour or less whether it will approve the automobile loan for purchase from the dealer. The Company's business hours generally coincide with those of the dealership and, in some cases, the Company will provide loan processing on the dealer's premises during dealer promotions. The Company also provides dealers with flexibility in developing loan structures to accommodate the needs of their customers, such as extended payment terms or low down-payment requirements when credit quality is deemed adequate. The Company, through its sales force, maintains frequent contacts with dealers and recommends service enhancements when warranted. By employing consistent loan underwriting and purchasing guidelines, the Company believes that it provides dealers with a reliable and consistent source of financing. Expansion of Dealer Network--The Company is constantly undertaking marketing activities with a view towards expanding its dealer network. These efforts include offering innovative products and services to its dealer network, such as CarLoanNet, the interactive internet loan application service recently introduced by the Company. Maintenance of Underwriting and Loan Purchasing Guidelines--The Company has developed and is continually modifying a proprietary credit scoring system designed to maintain rigorous underwriting guidelines for its loan processing operations. The Company's credit approval system monitors many evaluation criteria, including debt-to-income, payment-to-income, loan-to-value, bankruptcy score, credit score and stability factors, and each loan application is reviewed by one of the Company's credit specialists to determine whether the loan should be approved. To ensure the integrity of the credit approval system, management tracks, on a daily basis, the approval rates and delinquency and loss rates. Expansion of Products and Services - The Company is constantly evaluating new and improved services to offer to its Dealer network to both maximize revenues and achieve further operating efficiencies. The Non-Prime Auto Finance Industry The automobile finance industry is generally divided by the types of automobiles sold (new versus used) and the credit worthiness of the borrower. Generally, banks, savings and loan associations, credit unions, large independent finance companies and captive finance companies such as Ford Motor Credit, GMAC and Chrysler Credit tend to provide financing for new automobiles purchased by prime customers. The non-prime segment of this overall market is comprised of both private and publicly traded companies providing credit availability to consumers who are higher financial risks and who have limited 4 access to traditional financing sources. These independent finance companies tend to provide financing for used automobiles sold through new and used automobile dealerships at higher interest rates commensurate with the higher risk associated with the non-prime consumer. During 1997, several non-prime automobile finance companies, including the Company, experienced poor loan performance, higher delinquency rates and increased credit losses on their portfolio assets. In addition, during the past several months, a number of non-prime automobile finance companies, including the Money Store, have made strategic decisions to exit the market-place. This trend was the direct result of several factors including: (a) the impact of increased levels of competition on loan acquisition discounts; (b) the heightened demand created by the increased supply of capital and used automobile inventories; (c) the need to attract consumers with lower credit qualifications to meet this additional demand; (d) economic uncertainties and financial difficulties within the non-prime automobile industry as well as management upheavals at certain industry leaders; and (e) the increased levels of outstanding consumer debt and personal bankruptcies. These factors have contributed to a significant reduction in available warehouse lines of credit and a material decline in financial markets investments into the non-prime automobile industry through the sale of equity securities, subordinated debt instruments and securitized notes. Operations Dealer Contract Purchase Programs As of March 20, 1998, the Company had agreements ("Dealer Agreements") with Dealers in 12 states. Dealers submit Contracts to the Company for purchase, although such Dealers are under no obligation to submit any Contracts to the Company, nor is the Company obligated to purchase any Contracts. For the twelve months ended December 31, 1997, substantially all of the Contracts purchased by the Company consisted of financing for used cars. When a retail automobile buyer elects to obtain financing from a Dealer, an application is taken for submission by the Dealer to its financing sources. Typically, a Dealer will submit the buyer's application to more than one financing source for review. The Company believes the Dealer's decision to finance the automobile purchase with the Company, rather than other financing sources, is based primarily upon an analysis of the discounted purchase price offered for the Contract, the timeliness of response, the cash resources of the financing source, and any conditions to purchase. The Company receives loan applications by fax. Upon receipt of a loan application from a Dealer, the Company's credit personnel order a credit bureau report on the applicant to document the buyer's credit history. If, upon review by a Company credit officer, it is determined that the application meets the Company's underwriting criteria, a decision is made to purchase the Contract. When presented with a loan application, the Company attempts to notify the Dealer within one hour as to whether it intends to purchase such Contract. The Company buys Contracts directly from Dealers and does not make loans directly to purchasers of automobiles. The Company currently purchases Contracts from Dealers at discounts up to 10% of the total amount financed under the Contracts, depending on the perceived credit risk of the Contract. Discounts averaged 10.9% for the twelve months ended December 31, 1997. The Company attempts to control Dealer misrepresentation by carefully screening the Contracts it purchases, by establishing and maintaining professional business relationships with Dealers, and by 5 including certain representations and warranties by the Dealer in the Dealer Agreement. Pursuant to the Dealer Agreement, the Company may require the Dealer to repurchase any Contract in the event that the Dealer breaches its representations or warranties. There can be no assurance, however, that any Dealer will have the financial resources to satisfy its repurchase obligations to the Company. Contract Purchase Criteria To be eligible for purchase by the Company, a Contract must have been originated by a Dealer that has entered into a Dealer Agreement to sell Contracts to the Company. The Contracts must be secured by a first priority lien on a new or used automobile, light truck or passenger van and must meet the Company's underwriting criteria. In addition, each Contract requires the borrower to maintain physical damage insurance covering the financed vehicle and naming the Company as a loss payee. The Company or any purchaser of the Contract from the Company may, nonetheless, suffer a loss upon theft or physical damage of any financed vehicle if the borrower fails to maintain insurance as required by the Contract or is unable to pay for repairs to or replacement of the vehicle or is otherwise unable to fulfill its obligations under the Contract. The Company believes that its objective underwriting criteria enable it to evaluate effectively the creditworthiness of Non-Prime Borrowers and the adequacy of the financed vehicle as security for a Contract. These criteria include standards for price, term, amount of down payment, installment payment and add-on interest rate, mileage, age and type of vehicle, amount of the loan in relation to the value of the vehicle, borrower's income level, job and residence stability, credit history and debt serviceability, and other factors. These criteria are subject to change from time to time as circumstances may warrant. Upon receiving this information with the borrower's application, the Company's credit department will verify the borrower's employment, residency, insurance and credit information provided by the borrower by contacting various parties noted on the borrower's application, credit information bureaus and other sources. Further, the Company conducts a direct telephonic interview with the prospective borrower. The Company typically completes its credit review and consummates its purchase of a Contract within 48 hours of a complete financing package from the Dealer. All of the Contracts purchased by the Company are self-amortizing and provide for level payments over the term of the Contract. For Contracts purchased by the Company in the twelve months ended December 31, 1997, the retail purchase price of the related automobiles averaged $11,700. Contracts financing such purchases had annual percentage rates of interest ("APRs") averaging 20.45%. The average original principal amount financed under Contracts purchased in the twelve months ended December 31, 1997 was approximately $9,700, with an average original term of approximately 49 months and an average down payment of 16.3% of the retail purchase price of the vehicle. All Contracts may be prepaid at any time without penalty. In the event a borrower elects to prepay a Contract in full, the payoff amount is calculated by deducting the unearned interest (as determined by the "Rule of 78's" method, where applicable) from the Contract balance. Each Contract purchased by the Company prohibits the sale or transfer of the financed vehicle without the secured party's consent and allows for the acceleration of the maturity of a Contract upon a sale or transfer without such consent. In most circumstances, the Company will not consent to a sale or transfer of a financed vehicle unless the related Contract is prepaid in full. The Company believes that the most important requirements to succeed in the Non-Prime Market are the ability to control borrower and Dealer misrepresentation at the point of origination; the development and consistent implementation of objective underwriting criteria specifically designed to 6 evaluate the creditworthiness of Non-Prime Borrowers; and the maintenance of an active program to monitor performance and collect payments. Collection Procedures The Company believes that its ability to monitor performance and collect payments owed from Non-Prime Borrowers is primarily a function of its collection approach and support systems. The Company believes that if payment problems are identified early and the Company's collection staff works closely with borrowers to address these problems, it is possible to correct many of them before they escalate further. To this end, the Company utilizes pro-active collection procedures, which include early and frequent contact with delinquent borrowers; educating borrowers as to the importance of maintaining good credit; and employing a consultative and customer service approach to assist the borrower in meeting his or her obligations, which includes attempting to identify the underlying causes of delinquency and cure them whenever possible. In support of its collection activities, the Company maintains a computerized collection system specifically designed to service automobile installment sale contracts with Non-Prime Borrowers. The Company typically attempts to make telephonic contact with delinquent borrowers on the first day after their monthly payment due date. Upon making contact with the borrower at his home or workplace the collector inquires of the borrower the reason for the delinquency and when the Company can expect to receive payment. The collector will attempt to cause the borrower to make a promise for the delinquent payment for a time generally not to exceed one week from the date of the call. If the borrower makes such a promise, the account is placed on a pending status and is not contacted until the outcome of the promise is known. If the payment is made by the promise date and the account is no longer delinquent, the account is routed out of the collection system. If the payment is not made, or if the payment is made, but the account remains delinquent, the account is returned to the collector for subsequent contacts. If a borrower fails to make or keep promises for payments, or if the borrower is uncooperative or attempts to evade contact or hide the vehicle, a supervisor will review the collection activity relating to the account to determine if repossession of the vehicle is warranted. Generally, a decision will occur between the 45th and 60th day past the borrower's payment due date, but could occur sooner or later, depending on the specific circumstances. If a decision to repossess is made by a supervisor, such assignment is given to one of many licensed, bonded repossession agents used by the Company. When the vehicle is recovered, the repossession agent delivers it to a wholesale auto auction where it is kept until it is liquidated, usually within 60 days of the repossession. Liquidation proceeds are applied to the borrower's outstanding obligation under the Contract and the borrower is advised of his obligation to pay any deficiency balance that remains. The Company uses all practical means available to collect deficiency balances, including filing for judgments against borrowers where appropriate. Management Information Systems The Company maintains sophisticated data processing support and management information systems. Finance Manager, the Company's custom-designed proprietary software management system, is updated and maintained by the Company's MIS Department based in Norfolk, Virginia. Financing Activity Warehouse Facilities. The Company uses a warehouse facility to finance its purchase of loans. The facility provides for borrowing at the LIBOR rate plus 300 basis points. Amounts outstanding under 7 the warehouse facility are secured by the automobile loans pledged to the lender as collateral for borrowings under the facility, 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 for the tax year ended May 31, 1998. 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. 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 under the CSFB facility. As of December 31, 1997, CSFB is no longer funding the acquisition of non-prime automobile receivables generated by the Company. Securitization of Loans. The Company pursues a strategy of securitizing loans through the sale of asset-backed securities. Securitization is used by companies as a cost-competitive source of capital compared to traditional corporate debt financing alternatives. The Company utilizes the net proceeds from securitizations to purchase additional automobile loans and to pay down outstanding warehouse facilities. The Company securitized approximately $40 million in automobile loans during 1996. Among other provisions, these asset-backed notes require the maintenance of certain performance standards with respect to the portfolio of loan contracts securitized and certain overall financial considerations of the Company as a whole, including not realizing a net loss from operations in any two consecutive quarters and maintenance of minimum tangible net worth, as defined, of $7 million. At December 31, 1997 the Company had a tangible deficiency, as defined, of ($200,000) and, accordingly, did not meet the minimum tangible net worth standard. In addition, the Company has experienced a net loss from operations for each of the quarters ended September 30, 1997 and December 31, 1997. Accordingly, for the quarter ended December 31, 1997, the Company did not meet the interest coverage ratio requirement. During the third quarter of 1997, the Company explored the sale of approximately $40 million of securitized notes backed by approximately $48 million of automobile receivables. However, several factors including adverse market conditions as well as the performance of the Company's automobile receivables prevented the consummation of a transaction. In a securitization, the Company (through its special purpose wholly-owned subsidiary, AutoInfo Receivables Company, a Delaware corporation ("ARC")), transfers automobile loans to newly-formed securitization trusts, which issue one or more classes of asset-backed securities. The asset-backed securities are simultaneously sold to investors (except for certain subordinated classes of securities which may be retained by the Company). Each month, collections of principal and interest on the automobile loans are used by the trustee to pay the holders of the related asset-backed securities, to fund spread accounts as a source of cash to cover shortfalls in collections, if any, and to pay expenses. The Company continues to act as the servicer of the automobile loans held by the trust in return for a monthly fee. To improve the cost effectiveness of its securitization program, the Company arranges for credit enhancement to achieve a desired credit rating on the asset-backed securities issued. The credit enhancement for securitizations generally take the form of financial guaranty insurance policies issued by MBIA (the "Credit Enhancer"), which insures payments of principal and interest due on the asset-backed securities. The spread account for any securitization is generally funded with the interest collected on the loans that exceeds the sum of the interest payable to holders of asset-backed securities, the monthly servicing fee and certain other amounts. Funds are withdrawn from the spread account to cover any shortfalls in amounts payable on insured asset-backed securities or to reimburse the Credit Enhancer for 8 draws on its financial guaranty insurance policy. In addition, the funds on deposit in any spread account for a securitization may be withdrawn to cover shortfalls in collections or to reimburse the Credit Enhancer for draws on policies issued in other securitizations. ARC is entitled to receive amounts from the spread accounts to the extent the amounts deposited exceed predetermined required minimum levels. The spread accounts cannot be accessed by the Company or ARC until such levels have been reached or with the consent of the Credit Enhancer. After such levels are reached, excess cash will be distributed to ARC and then transferred to the Company. Sales and Marketing The Company markets its dealer financing programs through a staff of 6 trained field sales representatives. The main duties of a field representative are to solicit and enroll new dealers into the program, train the dealers regarding the specific aspect of the Company's loan acquisition program, encourage additional contract volume and provide a direct hands on customer contact on a regular basis. Presently, the Company concentrates its marketing efforts in the MidAtlantic and Northeast regions. Competition The non-prime automotive consumer finance market is both highly competitive and fragmented. As such, the Company encounters competition in both the MidAtlantic and Northeastern markets from local, regional and national consumer finance companies, many of whom have raised significant capital through equity offerings, securitization of their loan portfolios and warehouse lines of credit during the past several years. Other more traditional finance sources, such as banks and captive automobile finance companies, have not generally serviced the non-prime segment of the market. Within the last few years, several large companies, including Ford Motor Company, have announced their entry into the non-prime marketplace. The major competitive factors leading to the dealer's choice of financing source are the consistency of the application of underwriting guidelines, the competitiveness of financing terms and dealer fees, the timeliness of application approval and funding and the financial stability of the source. The Company believes that it competes favorably on these factors. Regulation The Company's business is subject to regulations and licensing under various federal, state and local statutes and regulations. The Company maintains all licenses necessary for the lawful conduct of its business and operations. The Company is not licensed to make loans directly to borrowers. Several federal and state consumer protection laws, including the Federal Truth-In-Lending Act, the Federal Equal Credit Opportunity Act, the Federal Fair Debt Collection Practices Act and the Federal Trade Commission Act, regulate the extension of credit in consumer credit transactions. These laws mandate certain disclosures with respect to finance charges on Contracts and impose certain other restrictions on Dealers. In addition, laws in a number of states impose limitations on the amount of finance charges that may be charged by Dealers on credit sales. The so called Lemon Laws enacted by the federal government and various states provide certain rights to purchasers with respect to motor vehicles that fail to satisfy express warrantees. The application of Lemon Laws or violation of such other federal and state laws may give rise to a claim or defense of a borrower against a Dealer and its assignees, including the Company and purchasers of Contracts from the Company. The Dealer Agreement contains representations by the Dealer that, as of the date of assignment of Contracts, no such claims or defenses have been asserted or threatened with respect to the Contracts and that all requirements of such federal and state laws have been complied with in all material respects. Although a Dealer would be obligated to repurchase Contracts that involve a breach of such warranty, there can be no assurance that the Dealer will have the financial 9 resources to satisfy its repurchase obligations to the Company. Certain of these laws also regulate the Company's loan servicing activities, including its methods of collection. Although the Company believes that it is currently in compliance with applicable statutes and regulations, there can be no assurance that the Company will be able to maintain such compliance. The failure to comply with such statutes and regulations could have a material adverse effect upon the Company. Furthermore, the adoption of additional statutes and regulations, changes in the interpretation and enforcement of current statutes and regulations or the expansion of the Company's business into jurisdictions that have adopted more stringent regulatory requirements than those in which the Company currently conducts business could have a material adverse effect upon the Company. Upon the purchase of Contracts by the Company, the original Contracts and related title documents for the financed vehicles are delivered by the selling Dealers to the Company. The Dealer Agreement and related assignment contain representations and warrantees by the Dealer that an application for state registration of each financed vehicle, naming the Company as secured party with respect to the vehicle, was effected at the date of sale of the related Contract to the Company, and that all necessary steps have been taken to obtain a perfected first priority security interest in each financed vehicle in favor of the Company under the laws of the state in which the financed vehicle is registered. If a Dealer or the Company, because of clerical error or otherwise, has failed to take such action in a timely manner, or to maintain such interest with respect to a financed vehicle, neither the Company nor any purchaser of the related Contract from the Company would have a perfected security interest in the financed vehicle and its security interest may be subordinate to the interest of, among others, subsequent purchasers of the financed vehicle, holders of perfected security interests or a trustee in bankruptcy of the borrower. The security interest of the Company or the purchaser of a Contract may also be subordinate to the interests of third parties if the interest is not perfected due to administrative error by state recording officials. Moreover, fraud or forgery by the borrower could render a Contract unenforceable against third parties. In such events, the Company could be required by the purchaser to repurchase the Contract. In the event the Company is required to repurchase a Contract, it will generally have recourse against the Dealer from which it purchased the Contract. This recourse will be unsecured except for a lien on the vehicle covered by the Contract, and there can be no assurance that any Dealer will have the financial resources to satisfy its repurchase obligations to the Company. Subject to any recourse against Dealers, the Company will bear any loss on repossession and resale of vehicles financed under Contracts repurchased by it from investors. Under the laws of many states, liens for storage and repairs performed on a vehicle and for unpaid taxes take priority over a perfected security interest in the vehicle. Pursuant to its securitization purchase commitments, the Company generally warrants that, to the best of the Company's knowledge, no such liens or claims are pending or threatened with respect to a financed vehicle, which may be or become prior to or equal with the lien of the related Contracts. In the event that any of the Company's representations or warranties proves to be incorrect, the trust or the investor would be entitled to require the Company to repurchase the Contract relating to such financed vehicle. The Company, on behalf of purchasers of Contracts, may take action to enforce the security interest in financed vehicles with respect to any related Contracts in default by repossession and resale of the financed vehicles. The Uniform Commercial Code ("UCC") and other state laws regulate repossession sales by requiring that the secured party provide the borrower with reasonable notice of the date, time and place of any public sale of the collateral, the date after which any private sale of the collateral may be held and of the borrower's right to redeem the financed vehicle prior to any such sale and by providing that any such sale be conducted in a commercially reasonable manner. Financed vehicles repossessed generally are resold by the Company through unaffiliated wholesale automobile networks or auctions, which are attended principally by used car dealers. 10 In the event of a repossession and resale of a financed vehicle, after payment of outstanding liens for storage, repairs and unpaid taxes, to the extent those liens take priority over the Company's security interest, and after payment of the reasonable costs of retaking, holding and selling the vehicle, the secured party would be entitled to be paid the full outstanding balance of the Contract out of the sale proceeds before payments are made to the holders of junior security interests in the financed vehicles, to unsecured creditors of the borrower, or, thereafter, to the borrower. Under the UCC and other laws applicable in most states, a creditor is entitled to obtain a deficiency judgment from a borrower for any deficiency on repossession and resale of the motor vehicle securing the unpaid balance of such borrower's motor vehicle loan. However, some states impose prohibitions or limitations on deficiency judgments. If a deficiency judgment were granted, the judgment would be a personal judgment against the borrower for the shortfall, and a defaulting borrower may often have very little capital or few sources of income available following repossession. Therefore, in many cases, it may not be useful to seek a deficiency judgment against a borrower or, if one is obtained, it may be settled at a significant discount. Patents, Trademarks and Copyrights "AUTOINFO" is a registered trademark and service mark of the Company. Employees The Company currently has 98 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. Item 2: PROPERTIES The Company's MidAtlantic Regional Center leases approximately 8,000 square feet of space at 863 Glenrock Road, Norfolk, Virginia. The lease runs through April 2001 and provides for an annual rent of $96,000. The Company's Northeast Regional Center leases approximately 10,000 square feet of space at 444 Westport Avenue, Norwalk, Connecticut. The lease runs through May 2001 and provides for an annual rental of $107,500. In connection with the closing of this facility, the Company has received an offer to sub-lease such space for rents which would mitigate its current contractual obligations. The Company maintains an operational facility of approximately 800 square feet at 6818 Grover Street, Omaha, Nebraska. The lease for such facility runs through June 1998 at an annual rent of $10,000. The Company rents approximately 7,800 square feet of space at One Paragon Drive, Montvale, New Jersey where it maintains its executive offices. The lease runs through June 2002 at an annual rental of approximately $170,000, subject to certain rent escalation provisions. The Company believes that its present facilities are suitable and adequate for its reasonably foreseeable growth. 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 11 Part II Item 5. PRICE RANGE OF COMMON STOCK The Company's Common Stock is traded in the over-the-counter market and is quoted through the National Association of Securities Dealers Automated Quotation System ("NASDAQ") on the National Market System 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 as reported by NASDAQ. -------- -------- Year Ended December 31, 1996 High Low - -------------------------------------- -------- -------- First quarter 3 1/2 3 Second quarter 3 7/16 3 1/16 Third quarter 3 2 Fourth quarter 3 7/8 2 3/4 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 20, 1998, the closing bid price per share for the Company's Common Stock, as reported by NASDAQ was $0.25. As of March 23, 1998, the Company had approximately 400 stockholders of record. Possible Delisting of Common Stock from Nasdaq Market The Securities and Exchange Commission (the "Commission") has approved new maintenance requirements for the Nasdaq National Market. For continuing listing on the Nasdaq National Market, a company, among other criteria, must now have at least $4,000,000 of total net tangible assets, 750,000 shares in the Public Float, a market value of its Public Float of $5,000,000 and a minimum bid price of $1.00 per share. At December 31, 1997, the Company did not meet the net tangible assets, value of public float or minimum bid price requirement. The Company does not have a reasonable expectation of meeting these requirements in the near future. Accordingly, it appears likely that the Company's Common Stock will be dropped from the Nasdaq National Market. In the event that the Company's Common Stock is delisted from the Nasdaq Stock Market, trading, if any, in the Company's Common Stock would thereafter be conducted in the over-the-counter market in the so-called "pink sheets" published by the National Quotation Bureau or the OTC Bulletin Board of the National Association of Securities Dealers, Inc. As a consequence of such delisting, a shareholder would likely find it more difficult to sell or to obtain quotations as to prices of the Company's Common Stock. 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. 12 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.
000's omitted Year ended Year ended December 31, Seven months ended May 31, -------------------------- December 31, -------------------------- 1997 1996 1995 1995 1994 -------- -------- -------- -------- -------- Statement of Operations Data: Revenues $ 19,846 $ 13,185 $ 2,232 $ 1,599 $ 2,075 Operating expenses (19,089) (12,092) (1,847) (4,009) (2,283) Provision for credit losses (12,456) (5,251) -- -- -- Write-off of goodwill and other intangibles (2,542) -- -- -- -- Restructuring charge (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 (15,108) (23,451) 385 (2,410) (208) Benefit from income taxes (3,986) (4,352) (176) (332) (65) -------- -------- -------- -------- -------- (Loss) income from continuing operations (11,122) (19,099) 561 (2,078) (143) Income from discontinued -- -- 268 10,404 2,164 -------- -------- -------- -------- -------- Net (loss) income $(11,122) $(19,099) $ 829 $ 8,326 $ 2,021 -------- -------- -------- -------- -------- Basic (loss) income per share (a) From continuing operations $ (1.39) $ (2.41) $ .07 (.28) $ (.02) From discontinued operations -- -- .04 1.42 .30 -------- -------- -------- -------- -------- Net (loss) income per share $ (1.39) $ (2.41) $ .11 $ 1.14 $ .28 -------- -------- -------- -------- -------- Diluted (loss) income per share (a) From continuing operations $ (1.39) $ (2.41) $ .07 (.28) $ (.02) From discontinued operations -- -- .04 1.40 .29 -------- -------- -------- -------- -------- Net (loss) income per share $ (1.39) $ (2.41) $ .11 $ 1.12 $ .27 -------- -------- -------- -------- -------- Balance Sheet Data: Net automobile receivables after allowance for credit losses $ 78,481 $ 45,814 $ 25,074 $ -- $ -- Cash and short term investments 4,749 8,698 24,871 8,836 7,509 Total Assets 96,614 74,451 65,795 42,357 26,387 Total debt 93,190 60,405 32,746 4,161 4,784 Retained earnings (deficit) (16,192) (5,071) 14,029 13,199 4,873 Stockholders' equity 1,311 12,327 31,018 30,121 20,857
(a) The common stock equivalents for the years ended December 31, 1997 and 1996 were 61,864 and 16,875. The common stock equivalents for these shares were not included in the calculation of diluted (loss) per common share because the effect would be antidilutive. 13 Item #7: Management's Discussion and Analysis of Financial Condition and Results of Operations The Company, since December 1995, is a specialized consumer finance company that acquires and services automobile receivables from automobile dealers selling new and used vehicles to non-prime customers. The Company has experienced material operating losses during 1997. As a result of this adverse change in the non-prime automobile finance industry and the deterioration in the Company's financial condition, the Company has been unable to maintain adequate levels of net worth to satisfy the loan covenant requirement under its warehouse facility agreement with CS First Boston Mortgage Capital Corp. ("CSFB") and similar covenants pursuant to securitized notes issued in October 1996. As of December 31, 1997, CSFB is no longer funding the acquisition of non-prime automobile receivables generated by the Company. The Company, among other actions, has restructured operations and significantly reduced overhead. In addition, the Company has modified credit underwriting criteria and reduced the volume of loans purchased from dealers. The Company is exploring several opportunities including the securing of additional warehouse facilities to support an increased level of automobile loan acquisitions, the sale of portfolio assets to reduce outstanding debt and other restructuring alternatives. There is no assurance that the Company will be successful in securing additional warehouse facilities or selling portfolio assets, the failure of which would have a material adverse effect on the Company's financial condition. The Company's ability to continue to acquire automobile receivables as well as plan for future expansion is directly related to its ability to secure required capital. In the past, the Company has demonstrated the ability to secure warehouse lines of credit, issue receivable secured notes and obtain subordinated debt. However, the Company's ability to secure required capital has been hampered based upon the inability to consummate the sale of securitized notes, as well as the uncertain status of the Company's primary credit facility. In January 1998, the Company entered into an arrangement with a new funding source whereby it can purchase loan contracts which meet specified criteria and sell them through to this source for a fee. This arrangement enables the Company to continue to purchase loans and service its dealer network. The success of this program, as well as the Company's ability to secure additional funding sources, will materially impact the Company's future business activities and, if not successful, could require the Company to sell certain of the loans in its portfolio to meet its liquidity requirements. These factors raise substantial doubt about the Company's ability to continue as a going concern. Although significantly curtailed, the Company continues to purchase loans from its dealer network. Results of Operations On April 1, 1995, the Company consummated the sale of certain assets, net of certain liabilities, constituting the operating assets of the Orion Network, Compass Network, Checkmate Computer Systems, and Insurance Parts Locator businesses. On July 20, 1995, the Company consummated the sale 14 of the operating assets of its insurance inspection services business. The Results of Operations of these businesses have been classified as discontinued operations. On December 6, 1995, the Company, through a wholly owned subsidiary, acquired the operating assets of FALK Finance Company (FFC), a Norfolk, Virginia based specialized financial services company. As a result of this acquisition, the Company's primary business is to purchase non-prime automobile receivables from new and used automobile dealers. The Company services these dealers by providing specialized financing programs for buyers who typically have impaired credit histories and are unable to access traditional sources of available consumer credit. On February 28, 1996, the Company made an election to change its fiscal year-end from May 31 to December 31. The Company believes this change provides shareholders with information on a basis more comparable to other public entities in the specialized automobile finance industry. The Company's continuing operations consist of its non-prime automobile finance business and its long distance telephone services business. Except as otherwise noted, the following discussion of the results of operations is with respect to the Company's continuing operations. 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. 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: 15 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% 16.3% -------------------- -------------------- (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 expense 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 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 16 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. 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 1997 1996 1996 ----------- ------- ----------- ------- Amount % Amount % ----------- ------- ----------- ------- 60 to 89 days delinquent $ 3,199,000 2.5% $ 3,290,000 4.1% 90 days or more delinquent 6,992,000 5.6% 1,739,000 2.2% ----------- ------- ----------- ------- Total delinquent loans $10,191,000 8.1% $ 5,029,000 6.3% ----------- ------- ----------- ------- 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. 17 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 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) 16.3% 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. 18 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. 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% 19 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% ---------- ----------- ---------- ----------- For the Seven Months Ended December 31, 1995 On February 28, 1996, the Company elected to change its fiscal year end to December 31. This decision is directly related to the acquisition of FFC and the entry by the Company into the non-prime automobile finance industry. It is the belief of management that the ability to compare the performance of the Company against numerous other publicly traded non-prime automobile finance companies which report the results of operations on a calendar year will provide for more meaningful dissemination of financial information and is in the best interest of the public and the Company's shareholders. Operations for the seven months ended December 31, 1995 include the operating results of the Company's non-prime auto finance business since December 6, 1995, the acquisition date. Revenues Revenues of $2,232,000 for the seven month period ended December 31, 1995 were derived from the non-prime auto finance business for the month of December ($772,000), the Company's long distance telephone services business ($440,000) and investment income ($1,020,000). Costs and Expenses Interest expense for the seven month period ended December 31, 1995 was $416,000 and relates to the debt assumed relating to the acquisition of FFC in December 1995 of approximately $34,000,000 and to the $4,000,000 subordinated notes issued by the Company in January 1994 and notes payable issued in connection with an acquisition in January 1994. In September, 1995, the Company elected to prepay $2,000,000 of the subordinated notes. Operating expenses for the seven month period ended December 31, 1995 were $1,346,000 and consisted primarily of corporate office costs and the operating expenses of the non-prime auto finance business acquired in December 1995. Depreciation and amortization expense for the seven month period ended December 31, 1995 was $85,000 and consisted primarily of the amortization of goodwill and other intangible assets associated with the acquisition of FFC in December 1995. Income from Continuing Operations and Income Tax Benefit Income from continuing operations before taxes for the seven month period ended December 31, 1995 was $385,000. The income tax benefit for the seven month period ended December 31, 1995 was 20 $176,000. The Company recorded a tax benefit as a result of a substantial portion of its investment income being derived from instruments exempt from federal taxation. Loss from Discontinued Operations Loss from discontinued operations for the seven month period ended December 31, 1995 was $28,000 and was related solely to the operations of the Company's insurance inspection services business sold in July 1995. Gain on Sale of Discontinued Operations The gain on sale of discontinued operations for the period ended December 31, 1995 was $297,000 and was related solely to the sale of the Company's insurance inspection services business in July 1995. Trends and Uncertainties During 1997, several non-prime automobile finance companies, including the Company, experienced poor loan performance, higher delinquency rates and increased credit losses on their portfolio assets. In addition, during the past several months, a number of non-prime automobile finance companies, including the Money Store, have made strategic decisions to exit the market-place. This trend was the direct result of several factors including: (a) the impact of increased levels of competition on loan acquisition discounts; (b) the heightened demand created by the increased supply of capital and used automobile inventories; (c) the need to attract consumers with lower credit qualifications to meet this additional demand; (d) economic uncertainties and financial difficulties within the non-prime automobile industry as well as management upheavals at certain industry leaders; and (e) the increased levels of outstanding consumer debt and personal bankruptcies. These factors have contributed to a significant reduction in available warehouse lines of credit and a material decline in financial markets investments into the non-prime automobile industry through the sale of equity securities, subordinated debt instruments and securitized notes. The Company has experienced material operating losses during 1997. As a result of this adverse change in the non-prime automobile finance industry and the deterioration in the Company's financial condition, the Company has been unable to maintain adequate levels of net worth to satisfy the loan covenant requirement under its warehouse facility agreement with CS First Boston Mortgage Capital Corp. ("CSFB") and similar covenants pursuant to securitized notes issued in October 1996. As of December 31, 1997, CSFB is no longer funding the acquisition of non-prime automobile receivables generated by the Company. The Company, among other actions, has restructured operations and significantly reduced overhead. In addition, the Company has modified credit underwriting criteria and reduced the volume of loans purchased from dealers. The Company is exploring several opportunities including the securing of additional warehouse facilities to support an increased level of automobile loan acquisitions, the sale of portfolio assets to reduce outstanding debt and other restructuring alternatives. There is no assurance that the Company will be successful in securing additional warehouse facilities or selling portfolio assets, the failure of which would have a material adverse effect on the Company's financial condition. These factors raise substantial doubt about the Company's ability to continue as a going concern. 21 Liquidity and Capital Resources Since its entry into the Non-Prime Automobile industry in December 1995, 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 experienced a net loss from operations for each of the quarters ended September 30, 1997 and December 31, 1997. Accordingly, for the quarter ended December 31, 1997, the Company did not meet the interest coverage ratio requirement. 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. 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 under the CSFB facility. As of December 31, 1997, CSFB is no longer funding the acquisition of non-prime automobile receivables generated by the Company. During the third quarter of 1997, the Company explored the sale of approximately $40 million of securitized notes backed by approximately $48 million of automobile receivables. However, several factors, including adverse market conditions, prevented the consummation of this transaction. The Company has outstanding $10.2 million of subordinated debt. Of this amount, $8.2 million of 12% notes was included with the liabilities assumed with the acquisition of FALK Finance Company, Inc. ("FFC") in December 1995 and $2.0 million of 7.55% notes issued by the Company. A principal payment of $667,000 was due on the $2.0 million debt in January 1998. The Company did not make this installment payment and has agreed to a modification agreement which extends the due date for this payment to March 31, 1998. 22 The Company's liquid assets amounted to $4.7 million as of December 31, 1997. In addition, the Company has $3.0 million in Restricted Cash Reserve accounts established pursuant to the Indenture Agreement executed in conjunction with the issuance of Securitized Notes issued pursuant to the Private Placement Memorandum dated October 11, 1996 and $1.1 million in restricted collection accounts related to its warehouse line of credit. The total amount of debt outstanding as of December 31, 1997 and 1996 was $93.2 million and $60.4 million, respectively. This following table presents the Company's debt instruments and weighted average interest rates on such instruments as of December 31, 1996 and 1996, respectively: 1997 1996 Weighted Weighted Average Average Balance Rate Balance Rate ------------------------------------------- Revolving lines of credit $67.9 8.78% $18.1 8.75% Automobile receivable backed notes $14.1 6.91% $31.6 6.75% Subordinated debt $10.2 11.75% $10.2 11.75% Other debt $ 1.0 8.5% $ .5 8.5% The Company's ability to continue to acquire automobile receivables as well as plan for future expansion is directly related to its ability to secure required capital. In the past, the Company has demonstrated the ability to secure warehouse lines of credit, issue receivable secured notes and obtain subordinated debt. However, the Company's ability to secure required capital has been hampered based upon the inability to consummate the sale of securitized notes, as described above, as well as the uncertain status of the Company's primary credit facility. In January 1998, the Company entered into an arrangement, know as a "flow-through" strategy, with a new funding source whereby it can purchase loan contracts which meet specified criteria and sell them through to this source for a fee. This arrangement enables the Company to continue to purchase loans and service its dealer network. The success of this program, as well as the Company's ability to secure additional funding sources, will materially impact the Company's future business activities and could, if not successful, require the Company to sell certain of the loans in its portfolio to meet its liquidity requirements. As of December 31, 1997, the Company is not receiving advances under its senior credit facility. Therefore, unless the Company is able to successfully implement a flow through strategy or obtain additional lines of credit, the Company does not have sufficient liquid assets and available lines of credit to meet its short and long-term capital requirements. Inflation and changing prices had no material impact on revenues or the results of operations for the year ended December 31, 1997. Year 2000 The Company maintains sophisticated data processing support and management information systems. Finance Manager, the Company's custom designed proprietary software management system, is updated and maintained by the Company's MIS Department based in Norfolk, Virginia. The Company has made a comprehensive assessment of the impact of the year 2000 on its business. This assessment included the preparation of a comprehensive inventory of computer systems and computer-controlled devices. As of December 31, 1997, the Company's compliance efforts are substantially complete. Finance Manager software was designed to account for consumer loan contracts with maturity dates beyond the year 2000. This system has been in use by the Company since 1996. Accordingly, the 23 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. 24 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: SCOTT ZECHER, age 39, joined the Company in January 1984, and became its President and Chief Operating Officer in January 1993 and its Chief Executive Officer in October 1996. Prior to becoming President and Chief Operating Officer, he held the position of Executive Vice President and Chief Financial Officer. He became a director of the Company in 1989. 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. JASON BACHER, age 59, 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. ROBERT FAGENSON, age 49, has been an officer and director of Fagenson & Co., Inc., a registered broker-dealer, for more than five years. Mr. Fagenson is a member of the Board of Directors of the New York Stock Exchange. Since April 1983, Mr. Fagenson has also served as the Secretary and a director of Starr Securities, Inc., a registered broker- dealer, which was the underwriter of the Company's initial public offering in May 1986. Mr. Fagenson has been a director of the Company since June 1986. Mr. Fagenson is also a director of Healthy Planets Products, Inc., Microtel Franchise and Development Corp. and Rentway, Inc. Mr. Fagenson has a B.S. degree in Business Administration from Syracuse University. HOWARD NUSBAUM, age 50, 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. He is presently President of SWZ Engineering, Inc. JEROME STENGEL, 61, has been a Vice President, Treasurer and Chief Financial Officer of Genovese Drug Stores, Inc., an American Stock Exchange company, for more than five years. Mr. Stengel is a Certified Public Accountant with a B.B.A. degree from the City University of New York. He has been a director of the Company since 1987. WILLIAM WUNDERLICH, age 50, joined the Company in October 1992 as its Vice President-Finance and became Chief Financial Officer in January 1993. From 1990 to 1992, he served as Vice President of Goldstein Affiliates, Inc., a public insurance 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. 25 Option Grants during the year ended December 31, 1997 During 1997 the Compensation Committee of the Company granted performance based options to Scott Zecher, the Company's President and Chief Executive Officer and William Wunderlich, the Company's Chief Financial Officer under the 1997 Plan, subject to stockholder approval of the 1997 Plan. The 1997 Plan was approved at the 1997 Annual Stockholders' meeting. Pursuant to the grants, Mssrs. Zecher and Wunderlich received options to purchase 450,000 and 270,000 shares of Common Stock, respectively, at an exercise price equal to $1.75, the fair market value of the Common Stock on the date the 1997 Plan was approved. The vesting of such options is based upon the market performance of the Company's Common Stock. Such options will vest in thirds upon the closing price of the Company's Common Stock reaching $5.00, $7.50 and $10.00, respectively. These price thresholds must be achieved within two, four and six years, respectively, from the date of grant. Any options which do not vest in accordance with the terms of the grant, as well as any options which have not vested as of the termination date of the grantee's employment with the Company, will be restored to the status of unissued options under the 1997 Plan and will be available for further issuance in accordance with the terms and provisions of the 1997 Plan. 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, 1997. No options were executed by Named Executives during 1997. Values of Unexercised Number of Unexercised In-the-Money Options at Options at 12/31/97 12/31/96(1) ------------------------- ------------------------- Name Exercisable/Unexercisable Exercisable/Unexercisable - ---- ------------------------- ------------------------- Scott Zecher 86,666/476,667 $0/$0 William Wunderlich 111,667/283,333 $0/$0 - ---------- (1) Based on the closing price as quoted on NASDAQ/NMS on December 31, 1997. Director Compensation The Company pays a Directors fee of $750 for each meeting attended by a non-employee director. Item 11: EXECUTIVE COMPENSATION The Summary Compensation Table below includes, for the years-ended December 31, 1997 and 1996 and the seven months ended December 31, 1995 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 1995 whose salary and bonus exceeded $100,000 (together, the "Named Executives"). 26
Long-Term All Name and Principal Annual Compensation Compensation Other Position Year Salary Bonus Options Compensation(2) - ------------------ ---- ------ ------------ ------------ --------------- Scott Zecher 1997 $150,000 $100,000 -- $ 4,500 President and 1996 $150,000 $100,000 -- $ 4,500 Chief Executive 1995(1) $ 87,500 $ 50,000 -- $ 2,625 Officer William Wunderlich 1997 $120,000 $ 30,000 -- $ 4,575 Treasurer and 1996 $120,000 $ 30,000 -- $ 4,500 Chief Financial 1995(1) $ 70,000 $ 15,000 -- $ 1,320 Officer
- ---------- (1) Represents the seven month period ended December 31, 1995. (2) Represents amounts contributed to the Company's 401(k) deferred compensation plan. Employment Agreements Messrs. Zecher and Wunderlich are employed by the Company pursuant to employment agreements which expire in April 1999. These agreements provide for minimum annual compensation of $150,000 and $120,000, respectively, and provide for annual review by the Board of Directors. The Company has entered into supplemental employment agreements (the "Supplemental Employment Agreements") with Messrs. Zecher and Wunderlich (the "Covered Executives"), which provide that if there is a Change in Control of the Company (as defined therein) during the Protected Period (described below), the terms of the Supplemental Employment Agreements will supersede the Covered Executives' existing employment agreements and will govern the terms of the Covered Executives' employment following the Change in Control for a three-year term, in the case of Mr. Zecher, and a two-year term, in the case of Mr. Wunderlich (the "Employment Term"). For these purposes, the Protected Period is a three-year period which commenced on April 10, 1995 and is automatically extended for one year on and each April 10 thereafter, unless the Company otherwise notifies the Covered Executive at least 90 days prior thereto. The Supplemental Employment Agreements provide that during the Employment Term the Covered Executives will remain employed in their capacities with the Company as of the Change in Control and will continue to receive an annual salary (the "Base Salary") and benefits at least equal to that which they received prior to the Change in Control and an annual bonus at least equal to the Covered Executive's average annual bonus during the three years prior to the Change in Control. The Supplemental Employment Agreements provide that if, during the Employment Term, the Covered Executive's employment is terminated by the Company other than for Cause or Disability or by the Executive either for Good Reason or during the 60-day Window Period commencing on the anniversary of the Change in Control (as each of the foregoing terms are defined in the applicable Supplemental Employment Agreement), the Covered Executive would receive a severance payment equal to the sum of his Base Salary and the higher of his annual bonus for the then most recent year or his average annual bonus during the three years preceding the Change in Control (the "Highest Annual Bonus") multiplied by two, in the case of Mr. Zecher, and one and one-half, in the case of Mr. Wunderlich. In addition, the restrictions on any stock-related incentive awards held by the Covered Executive would lapse and he would be entitled to continued coverage under the Company's life, health and disability benefits for two years following termination of his employment (three years in the case of Mr. Zecher) or until he receives similar benefits from a new employer. Mr. Zecher's Supplemental Employment Agreement also provides that if he is subject to excise taxes under Section 4999 of the Internal Revenue Code on any payments or benefits triggered by 27 a Change in Control, he will be entitled to receive an additional amount such that after the payment of all applicable taxes he will retain an amount equal to that which he would have retained absent the excise taxes. In connection with the Supplemental Employment Agreements, the Company also approved the creation and funding of an Employee Protection Trust, which is a form of grantor trust under which the assets of the trust remain subject to the satisfaction of the general claims of the Company's creditors, to provide for the payment of all benefits payable under the Supplemental Employment Agreements. The Supplemental Employment Agreements were entered into on April 10, 1995, after Steel Partners II LP acquired 14.9% of the Company's Common Stock. In the opinion of the Board, it was necessary and desirable to enter into the Supplemental Employment Agreements and to implement the Employee Protection Trust so that the Covered Executives would concentrate on performing their duties and promoting the best interests of the Company and its stockholders without being concerned about the possibility of a Change in Control. In the opinion of the Board of Directors, the provisions of the Supplemental Employment Agreements and the Employee Protection Trust would not have any significant impact on the decision of any person or entity relating to whether or not to acquire the Company or effect a Change in Control although a person or entity interested in acquiring, or effecting a Change in Control, of the Company may view the provisions of the Supplemental Employment Agreement and the funding of the Employee Protection Trust as making it more difficult to consummate an acquisition, or effect a Change in Control, of the Company. In addition, in the opinion of the Board of Directors, entering into the Supplemental Employment Agreements and implementing the Employee `Protection Trust and the funding thereof would not have an adverse impact on the Company's ability to execute its business strategy in pursuing value for the benefit of all stockholders. 28 Item 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table, together with the accompanying footnotes, sets forth information, as of March 26, 1998, 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 nominees, 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 341,605(2) 4.2%(5) Robert Fagenson 30,750(3) * (5) Howard Nusbaum 146,154 1.8% Jerome Stenge(l) 35,000 * Scott Zecher 391,745(4) 4.8%(5) All executive officers 1,056,921(7) 12.7%(6) And directors as a group (6 persons) Robert G. Risher(7) 39--Greemhouse Road Houston, TX 77084 514,600 6.4% Dimensional Fund Advisors, Inc.(7) 1299 Ocean Avenue Santa Monica, CA 90401 474,913 5.9% Irving B. Harris(7) 2 North LaSalle Street Suite 505 Chicago, IL 60602 497,372 6.1% - ---------- * 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 83,333 shares subject to currently exercisable options. (3) Includes (i) 1,500 shares owned by the Fagenson & Co. Profit Sharing Plan and Employee Pension Plan, of which Mr. Fagenson is a trustee, and (ii) 29,250 shares issuable upon exercise of a Common Stock purchase warrant held by Mr. Fagenson which is currently exercisable. (4) Includes 86,666 shares subject to currently exercisable options or warrants. Mr. Zecher's address is c/o AutoInfo, Inc., One Paragon Drive, Suite 255, Montvale, New Jersey 07645. (5) Assumes that all currently exercisable options or warrants owned by this individual have been exercised. (6) Assumes that all currently exercisable options or warrants owned by members of the group have been exercised. (7) 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 29 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. 30 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.(15) No. 10F 1997 Non-Employee Stock Option Plan.(15) No. 10G Employment Agreement between AutoInfo, Inc. and Scott Zecher dated January 1, 1994, as amended by Agreement dated April 10, 1995(12) No. 10H Supplemental Employment Agreement between AutoInfo, Inc. and Scott Zecher dated as of April 10, 1995.(12) No. 10I Amendment to Employment Agreement between AutoInfo, Inc. and Scott Zecher dated April 10, 1997.* No. 10J Employment Agreement between AutoInfo, Inc. and William Wunderlich dated as of April 10, 1997.* No. 10K Supplemental Employment Agreement between AutoInfo, Inc. and William 31 Wunderlich as of April 10, 1995.(12) No. 10L Form of AutoInfo, Inc. Employee Protection Trust Agreement dated August 17, 1995.(12) No. 10M Form of Restricted Stock Grant Agreement between AutoInfo, Inc. and certain officers, directors and consultants.(4) No. 10N Note Agreement dated January 10, 1994 between AutoInfo, Inc. and certain investors with respect to issuance of 7.55% Subordinated Notes due January 9, 2000 and Common Stock Purchase Warrants.(6) No. 10O Asset Purchase Agreement dated January 31, 1995 between ADP Claims Solutions Group, Inc. and AutoInfo, Inc.(9) No. 10P Promissory Note and Security and Pledge Agreement dated April 28, 1995 between AutoInfo, Inc. and Scott Zecher.(12) No. 10Q Loan Sale Agreement dated October 1, 1996 between AutoInfo Finance of Virginia, Inc. and AutoInfo Receivables Company.(14) No. 10R Indenture dated October 1, 1996 among AutoInfo Receivables Company, as Issuer, Crestar Bank, as Custodian, and Bankers Trust Company, as Indenture Trustee.(14) No. 10S Servicing Agreement dated as of October 1, 1996 by and among AutoInfo Finance of Virginia, Inc., Servicer, AutoInfo Receivables Company, Issuer, Bankers Trust, Indenture Trustee and Back-Up Servicer and Crestar Bank, Custodian.(14) No. 10T Common Stock Purchase Warrant Agreement and Registration Rights Agreement, each dated October 11, 1996, between AutoInfo, Inc. and SunAmerica Life Insurance Company.(14) No. 10U Loan Security and Servicing Agreement, dated as of December 9, 1996, among AutoInfo Finance of Virginia, Inc., as Borrower and as Servicer, CarLoanCo., Inc., as Borrower and as Servicer, and CS First Boston Mortgage Capital Corp., as Lender.(14) No. 10V Custody Agreement, dated as of December 9, 1996, by and among CS First Boston Mortgage Capital Corp., Lender, AutoInfo Finance of Virginia, Inc., Borrower and Servicer, CarLoanCo., Inc., Borrower and Servicer, and Crestar Bank, Custodian.(14) No. 10W 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. 21 Subsidiaries of the Registrant.(14) 32 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) This Exhibit was filed as Exhibits to the Company's definitive proxy statement dated October 20, 1986 and incorporated herein by reference. (4) This Exhibit was 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. 33 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 27, 1997 on its behalf by the undersigned, thereunto duly authorized. AutoInfo, Inc. By: /s/ Scott Zecher --------------------------------- Scott Zecher, President and Chief Executive 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/ Scott Zecher ------------------------ Scott Zecher Director, President, Chief Executive Officer March 27, 1998 /s/ William Wunderlich ------------------------ William Wunderlich Chief Financial Officer, Secretary and Treasurer (Principal Financial & March 27, 1998 Accounting Officer) /s/ Jason Bacher ------------------------ Jason Bacher Director March 27, 1998 ------------------------ Robert Fagenson Director /s/ Howard Nusbaum ------------------------ Howard Nusbaum Director March 27, 1998 /s/ Jerome Stengel ------------------------ Jerome Stengel Director March 27, 1998 34 AUTOINFO, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Public Accountants F-2 Consolidated Balance Sheets as of December 31, 1997 and 1996 F-3 Consolidated Statements of Operations for the Years Ended December 31, 1997 and 1996 and the Seven Months Ended December 31, 1995 F-4 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1997 and 1996 and the Seven Months Ended December 31, 1995 F-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 1997 and 1996 and the Seven Months Ended December 31, 1995 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, 1997 and 1996 and the related consolidated statements of operations, stockholders' equity and cash flows for the years ended December 31, 1997 and 1996 and the seven month period ended December 31, 1995. 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, 1997 and 1996, and the results of their operations and their cash flows for the years ended December 31, 1997 and 1996 and the seven month period ended December 31, 1995, 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, as discussed in Note 8, the Company has violated certain financial covenants related to its revolving credit facility and its automobile receivables backed notes. Additionally, the Company's primary lender under its revolving credit facility has ceased funding the Company's acquisition of non-prime automobile receivables and, accordingly, the Company has significantly curtailed the purchase of loans from its dealer network. 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 24, 1998 F-2 AUTOINFO, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1997 AND 1996
ASSETS 1997 1996 ------------- ------------- Gross automobile receivables $ 126,428,067 $ 81,406,679 Unearned interest (28,946,529) (19,867,745) ------------- ------------- Net automobile receivables 97,481,538 61,538,934 Allowance for credit losses (Note 7) (19,000,487) (15,725,390) ------------- ------------- Net automobile receivables after allowance for credit losses 78,481,051 45,813,544 Cash 2,506,502 3,805,629 Restricted cash (Note 9) 4,088,483 6,881,846 Short-term investments (Note 6) 2,242,069 4,892,199 Fixed assets, net of accumulated depreciation of $1,098,356 and $352,145 as of December 31, 1997 and 1996, respectively 2,099,126 1,725,774 Goodwill and other intangibles, net of accumulated amortization of $153,668 as of December 31, 1996 (Notes 2 and 13) -- 2,906,587 Other assets 3,785,355 4,073,502 Refundable income taxes (Note 10) 3,411,211 4,352,000 ------------- ------------- $ 96,613,797 $ 74,451,081 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Revolving lines of credit (Note 9) $ 67,935,706 $ 18,082,472 Automobile receivables backed notes (Note 9) 14,063,140 31,611,989 Subordinated notes and other debt (Note 9) 11,190,979 10,710,330 Accounts payable and accrued liabilities 2,112,630 1,718,901 ------------- ------------- Total Liabilities 95,302,455 62,123,692 ------------- ------------- Commitments and contingencies (Note 11) Stockholders' equity Common Stock - authorized 20,000,000 shares $.01 par value; issued and outstanding 7,996,752 at December 31, 1997 and 7,954,752 at December 31, 1996 79,968 79,548 Additional paid-in capital 18,233,362 18,171,282 Officer note receivable (Note 12) (466,797) (466,797) Deferred compensation under stock bonus plan (Note 12) (342,873) (385,930) Retained (Deficit) (16,192,318) (5,070,714) ------------- ------------- Total stockholders' equity 1,311,342 12,327,389 ------------- ------------- $ 96,613,797 $ 74,451,081 ============= =============
See Accompanying Notes to Consolidated Financial Statements F-3 AUTOINFO, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 AND THE SEVEN MONTHS ENDED DECEMBER 31, 1995
Seven Months Year Ended Year Ended Ended December 31, December 31, December 31, REVENUES 1997 1996 1995 ------------ ------------ ------------ Interest and other finance revenue $ 19,098,602 $ 11,789,130 $ 771,502 Investment income 432,986 884,459 1,020,382 Long distance telephone services 314,643 511,534 439,839 ------------ ------------ ------------ Total revenues 19,846,231 13,185,123 2,231,723 ------------ ------------ ------------ COSTS AND EXPENSES Interest expense 8,145,959 3,989,912 415,904 Operating expenses 10,234,902 6,913,086 1,346,218 Depreciation and amortization 708,248 1,189,298 84,889 Write off of goodwill and other intangibles (Note 2) 2,541,438 -- -- Provision for credit losses 12,456,124 5,251,000 -- Restructuring charge (Note 3) 867,141 -- -- ------------ ------------ ------------ 34,953,812 17,343,296 1,847,011 Unusual item - impairment of long-lived assets and additional credit losses on acquired automobile receivables (Note 13) -- 19,293,328 -- ------------ ------------ ------------ Total costs and expenses 34,953,812 36,636,624 1,847,011 ------------ ------------ ------------ (Loss) income from continuing operations before income tax benefit (15,107,581) (23,451,501) 384,712 Income tax benefit (3,985,977) (4,352,000) (175,960) ------------ ------------ ------------ (Loss) income from continuing operations (11,121,604) (19,099,501) 560,672 Income from discontinued operations net of income tax benefit (Note 5) -- -- 268,676 ------------ ------------ ============ Net (loss) income $(11,121,604) $(19,099,501) $ 829,348 ============ ============ ============ Basic and diluted per share data (Note 16): (Loss) income from continuing operations ($ 1.39) ($ 2.41) $ .07 Income from discontinued operations -- -- .04 ------------ ------------ ------------ Net (loss) income per share ($ 1.39) ($ 2.41) $ .11 ============ ============ ============ Weighted average number of common and Common equivalent shares 8,009,097 7,920,515 7,770,917 ------------ ------------ ------------
See Accompanying Notes to Consolidated Financial Statements F-4 AUTOINFO, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 AND THE SEVEN MONTHS ENDED DECEMBER 31, 1995
Deferred Shares of Additional Compensation Retained Common Stock Common Paid - In Officer Note Under Stock Earnings Outstanding Stock Capital Receivable Bonus Plan (Deficit) -------------- ----------- --------------- -------------- --------------- ------------ Balance June 1, 1995 7,756,252 $ 77,563 $ 17,725,267 $ (466,797) $ (414,686) $ 13,199,439 Exercise of stock options 21,500 215 57,410 -- -- -- Amortization of deferred compensation -- -- -- -- 10,594 -- Net income -- -- -- -- -- 829,348 ------------ ------------ ------------ ------------ ------------ ------------ Balance December 31, 1995 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) ============ ============ ============ ============ ============ ============
See Accompanying Notes to Consolidated Financial Statements F-5 AUTOINFO, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 AND THE SEVEN MONTHS ENDED DECEMBER 31, 1995
December 31, December 31, December 31, 1997 1996 1995 ------------- ------------- ------------- Cash flows from operating activities: Net (loss) income $ (11,121,604) $ (19,099,501) $ 829,348 Adjustments to reconcile net (loss) income to net cash (used for) operating activities: Depreciation and amortization expenses 708,248 1,189,298 84,889 Amortization of deferred compensation 15,557 18,162 10,594 Gain on sale of discontinued operations -- -- (449,756) Provision for credit losses 12,456,124 5,251,000 -- Write-off of goodwill and other intangibles 2,541,438 -- -- Restructuring charge 436,086 -- -- Unusual item - impairment of long-lived assets and additional losses on acquired automobile receivables -- 19,293,328 -- Changes in assets and liabilities: Automobile receivables, net (45,023,631) (34,290,686) (986,632) Other assets 188,147 (3,081,728) (573,645) Refundable income taxes 940,789 (4,352,000) -- Accounts payable and accrued liabilities 393,729 (311,933) (6,625,804) ------------- ------------- ------------- Net cash (used for) continuing operations (38,465,117) (35,384,060) (7,711,006) ------------- ------------- ------------- Net cash (used for) discontinued operations -- -- (105,141) ------------- ------------- ------------- Cash flows from investing activities: Sale of discontinued operations -- -- 3,750,000 Acquisitions -- -- (4,912,333) Capital expenditures (1,152,537) (1,797,168) (497,661) Redemption of short-term investments 12,899,102 43,941,466 103,294,353 Purchases of short term investments (10,248,972) (24,927,206) (88,886,323) ------------- ------------- ------------- Net cash provided by investing activities 1,497,593 17,217,092 12,748,036 ------------- ------------- ------------- Cash Flows from Financing Activities: Issuance of notes 51,410,902 36,789,873 -- Reduction of borrowings (18,625,868) (8,900,272) (4,546,540) Decrease (increase) in restricted cash 2,793,363 (6,881,846) -- Issuance of common stock 90,000 -- -- Exercise of stock options -- -- 57,625 ------------- ------------- ------------- Net cash provided by (used for) financing activities 35,668,397 21,007,755 (4,488,915) ------------- ------------- ------------- Net (decrease) increase in cash (1,299,127) 2,840,787 442,974 Cash at beginning of year 3,805,629 964,842 521,868 ------------- ------------- ------------- Cash at end of year $ 2,506,502 $ 3,805,629 $ 964,842 ============= ============= =============
See Accompanying Notes to Consolidated Financial Statements F-6 AUTOINFO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 AND THE SEVEN MONTHS ENDED DECEMBER 31, 1995 Note 1 - Business and Summary of Significant Accounting Policies Business On December 6, 1995, AutoInfo, Inc. (the "Company"), a Delaware corporation, through a newly formed wholly owned subsidiary, acquired the operating assets of Falk Finance Company ("FFC"), a Norfolk, Virginia based specialized financial services company, for $5,125,000 in cash and the assumption of liabilities and debt approximating $34,000,000 (Note 4). As a result of this acquisition, the Company's primary business is to purchase non-prime automobile retail installment contracts from independent and franchised used vehicle dealers. The Company services these dealers by providing specialized financing programs for buyers who typically have impaired credit histories and are unable to access traditional sources of available consumer credit. In conjunction with the acquisition of FFC, the Company entered into a ten year agreement with Charlie Falk Auto Wholesale, Incorporated ("CFAW"). This agreement provided and established the basis for conducting business and the criteria under which the Company purchased contracts from CFAW. Effective December 31, 1996, the Company and CFAW mutually agreed to and entered into a termination agreement which, among other provisions, provides for the Company to continue to purchase contracts which meet established underwriting criteria only through March 1997 (see Note 13). In 1997 and 1996, approximately 7% and 38%, respectively, of all contracts funded by the Company were purchased from CFAW. 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. This center was closed during the fourth quarter of 1997. During 1997, several non-prime automobile finance companies, including the Company, experienced poor loan performance, higher delinquency rates and increased credit losses on their portfolio assets. In addition, during the past several months, a number of non-prime automobile finance companies, including the Money Store, have made strategic decisions to exit the market-place. This trend was the direct result of several factors including: (a) the impact of increased levels of competition on loan acquisition discounts; (b) the heightened demand created by the increased supply of capital and used automobile inventories; (c) the need to attract consumers with lower credit qualifications to meet this additional demand; (d) economic uncertainties and financial difficulties within the non-prime automobile industry as well as management upheavals at certain industry leaders; and (e) the increased levels of outstanding consumer debt and personal bankruptcies. These factors have contributed to a significant reduction in available warehouse lines of credit and a material decline in financial markets investments into the non-prime automobile industry through the sale of equity securities, subordinated debt instruments and securitized notes. F-7 The Company has experienced material operating losses during 1997. As a result of this adverse change in the non-prime automobile finance industry and the deterioration in the Company's financial condition, the Company has been unable to maintain adequate levels of net worth to satisfy the loan covenant requirement under its warehouse facility agreement with CS First Boston Mortgage Capital Corp. ("CSFB") and similar covenants pursuant to securitized notes issued in October 1996 (Note 9). As of December 31, 1997, CSFB is no longer funding the acquisition of non-prime automobile receivables generated by the Company. The Company, among other actions, has restructured operations and significantly reduced overhead. In addition, the Company has modified credit underwriting criteria and reduced the volume of loans purchased from dealers. The Company is exploring several opportunities including the securing of additional warehouse facilities to support an increased level of automobile loan acquisitions, the sale of portfolio assets to reduce outstanding debt and other restructuring alternatives. There is no assurance that the Company will be successful in securing additional warehouse facilities or selling portfolio assets, the failure of which would have a material adverse effect on the Company's financial condition. During the third quarter of 1997, the Company explored the sale of approximately $40 million of securitized notes backed by approximately $48 million of automobile receivables. However, several factors, including adverse market conditions, prevented the consummation of this transaction. The Company's ability to continue to acquire automobile receivables as well as plan for future expansion is directly related to its ability to secure required capital. In the past, the Company has demonstrated the ability to secure warehouse lines of credit, issue receivable secured notes and obtain subordinated debt. However, the Company's ability to secure required capital has been hampered based upon the inability to consummate the sale of securitized notes, as well as the uncertain status of the Company's primary credit facility. In January 1998, the Company entered into an arrangement with a new funding source whereby it can purchase loan contracts which meet specified criteria and sell them through to this source for a fee. This arrangement enables the Company to continue to purchase loans and service its dealer network. The success of this program, as well as the Company's ability to secure additional funding sources, will materially impact the Company's future business activities and, if not successful, could require the Company to sell certain of the loans in its portfolio to meet its liquidity requirements. These factors raise substantial doubt about the Company's ability to continue as a going concern. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. Accordingly, 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 As further discussed in Note 2, due to the substantial doubt regarding the Company's ability to continue as a going concern, the Company determined that the carrying amount of its goodwill and other intangibles was impaired and, accordingly, such amounts have been written off in 1997. Although significantly curtailed, the Company continues to purchase loans from its dealer network. Prior to December 1995, the Company operated in different business lines. During the fiscal year ended May 31, 1995 and on July 20, 1995, the Company sold substantially all of its operating F-8 assets for $34,100,000 in cash in two separate transactions. As a result, the Company's sole operating business which remained provides long distance telephone communications services 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. 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. 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 in the FFC acquired portfolio as of the date of acquisition based upon an evaluation of a number of factors including prior loss experience, contractual delinquencies, the value of underlying collateral and other factors. At the time of the purchase of installment contracts from dealers an allowance for credit losses is established based on an analysis of similar factors. The allowance is 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, is charged to income in order to maintain the allowance at an adequate level. The Company charges the allowance for loss account at the time a customer receivable is deemed uncollectable. Any reduction in the required allowance will be amortized to income prospectively as an adjustment in the yield on the related loans. The estimate of the allowance for credit losses requires a high degree of judgment based upon, among other things, the inherent risk associated with the portfolio of loans being purchased from dealers. Changes in estimates and additional losses on portfolios could develop in the future based on changes in economic factors and other circumstances and such changes could be significant. The Company estimates and records losses as they become apparent, estimable and probable. Concentration of Credit Risks The Company's primary credit risk relates to lending to individuals who cannot obtain traditional forms of financing. The Company has acquired automobile receivables in 13 states and, accordingly, does not believe that its business is subject to credit risk with respect to geographic concentration. F-9 Repossessed Vehicles Held for Sale The Company repossesses the collateral when a determination is made that collection efforts are unlikely to be successful. The value of a repossessed vehicle is recorded based upon the lower of the carrying amount of the automobile receivable or an estimate of the fair value of the collateral upon liquidation. As of December 31, 1997 and 1996, there were 605 and 304 repossessed vehicles held for resale with an aggregate value of approximately $1,953,000 and $804,000, respectively, which amounts are included in other assets on the accompanying consolidated balance sheets. Revenue Recognition The Company recognizes interest income from automobile receivables on the interest method. The accrual of interest income is suspended when a loan is ninety days contractually delinquent. All discounts on the purchase of installment contracts from dealers are held in reserve and are considered to cover future anticipated credit losses. Fees received for the purchase of automobile receivables are deferred and amortized to interest income over the contractual lives of the contracts using the interest method. Restricted Cash Restricted cash consists 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 9) and $1,081,590 in collection accounts pursuant to the Company's revolving credit facility with CSFB (Note 9). Short-term Investments Short-term investments include common stock and bond funds, money market instruments and municipal bonds. Investments are carried at cost which approximates market value (see Note 6). 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 $529,185, $238,926 and $14,587 for the years ended December 31, 1997 and 1996 and the seven months ended December 31, 1995, respectively. 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 currently 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 F-10 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 (see Note 2). In the fourth quarter of 1996, the Company determined that certain components of goodwill and other intangible assets associated with the acquisition of FFC were impaired resulting in a charge to operations (see Note 13). Amortization expense related to goodwill and other intangibles totaled $179,064, $950,372, and $70,302 for the years ended December 31, 1997 and 1996 and the seven months ended December 31, 1995, respectively. (Loss) Earnings 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 very similar to the 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) earnings per share is based on net (loss) income divided by the weighted average number of common shares outstanding. Common stock equivalents outstanding were antidilutive for the years ended December 31, 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. Management estimates that are particularly sensitive to change relate to the determination of the adequacy of the allowance for credit losses on automobile receivables. 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. F-11 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 12). New Accounting Pronouncements In July 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income." SFAS 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements. SFAS 130 is effective for fiscal years beginning after December 15, 1997 with earlier application permitted. In July 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." SFAS 131 requires disclosures for each segment that are similar to those required under current standards with the addition of quarterly disclosure requirements and a finer partitioning of geographic disclosures. SFAS 131 is effective for fiscal years beginning after December 15, 1997 with earlier application permitted. In management's opinion, SFAS Nos. 130 and 131, when adopted, will not have a material effect on the Company's financial statements. Note 2 - Write-Off of Goodwill and Other Intangibles Due to the substantial doubt regarding the Company's ability to continue as a going concern (Note 1), the Company determined that the carrying amount of its goodwill and other intangibles was impaired, and accordingly, such amounts have been written-off in 1997. Note 3 - 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 $867,141, of which $436,086 represents non-cash charges. Such amount includes severance costs and the write-off of certain assets. F-12 Note 4 - Business Acquisitions On December 6, 1995, the Company, through a newly formed wholly owned subsidiary, acquired the operating assets of Falk Finance Company ("FFC"), a Norfolk, Virginia based specialized financial services company, for $5,125,000 in cash and the assumption of liabilities and debt approximating $34,000,000. The results of operations of this business have been consolidated with the Company since December 6, 1995. The following unaudited pro-forma results of operations for the seven month period ended December 31, 1995 is presented as though the Company's business acquisition during the seven month period ended December 31, 1995 had occurred at the beginning of the period: Revenues $ 5,957,662 Net income $ 601,400 Net income per share $ .08 Note 5 - Discontinued Operations On July 20, 1995, the Company sold the assets relating to its Insurance Inspection Services business for $3,750,000 in cash. The gain on the sale was $296,839 after applicable taxes of $152,917. Summarized results of operations of the discontinued operations were as follows: For the seven months ended December 31, 1995 ------------- Revenues $ 533,318 ========= (Loss) before income taxes (42,685) Income tax (benefit) (14,522) --------- Net (loss) from discontinued operations $ (28,163) ========= Gain on sale $ 449,756 Income Taxes 152,917 --------- Net income from sale of discontinued operations $ 296,839 ========= Note 6 - 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 and have maturities of less than one year and included: F-13 December 31, December 31, 1997 1996 ------------ ------------ Common stock and bond funds $1,626,979 $2,883,524 Money market instruments 615,090 665,619 Municipal bonds -- 1,343,056 ---------- ---------- $2,242,069 $4,892,199 ---------- ---------- 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, 1997 and 1996 and the seven month period ended December 31, 1995, gains and losses arising from the disposition of marketable securities as well as unrealized gains and losses were not material. Note 7 - Credit Losses A rollforward of allowance for credit losses by significant component is as follows: Portfolio Acquired from Other FFC Portfolios Total ------------- ------------ ------------ Balance at December 31, 1995 $ 6,122,195 $ 696,000 $ 6,818,195 Purchase discounts -- 9,781,195 9,781,195 Charge offs (10,469,000) (5,156,000) (15,625,000) Yield adjustments -- 1,400,000 1,400,000 Additions to reserve (Note 13) 8,100,000 5,251,000 13,351,000 ------------ ------------ ------------ Balance at December 31, 1996 3,753,195 11,972,195 15,725,390 Purchase discounts -- 8,973,097 8,973,097 Charge offs (2,874,000) (18,902,000) (21,776,000) Yield adjustments -- 4,310,000 4,310,000 Additions to reserve -- 11,768,000 11,768,000 ------------ ------------ ------------ Balance at December 31, 1997 $ 879,195 $ 18,121,292 $ 19,000,487 ------------ ------------ ------------ The charge offs and additions to reserves for the years ended December 31, 1997 and 1996 are 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 8 - Investment In December 1991, the Company acquired a Preferred Stock Investment (3,293 shares of $500 par value, 7% cumulative convertible preferred stock) in ComputerLogic, Inc., a Georgia corporation ("ComputerLogic"), which offers computer based products to the automobile parts and repair industries. The Preferred Stock elects not less than 40% of the ComputerLogic board of directors. The Company's Preferred Stock Investment is convertible into 38% of the outstanding capital stock of F-14 ComputerLogic. The purchase price consisted of cash of $1,250,000 and 101,667 shares of the Company's Common Stock. The investment was being carried at the lower of cost or net realizable value. The Company as of May 31, 1995 wrote off its preferred stock investments totaling $1,804,256 which included unpaid management fees and unpaid preferred stock dividends of $155,460 as of May 31, 1995 and determined that any future fees and dividend received would be recorded as income when received. During the years ended December 31, 1997 and 1996 the Company received $144,000 and $280,000, respectively, in dividends from ComputerLogic. Note 9 - Debt Revolving Lines of Credit In December 1996, the Company entered into a revolving credit agreement with CS First Boston Mortgage Capital Corp. ("CSFB"), which provides for borrowings of up to $100 million collateralized by installment automobile loan contracts. 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 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 December 31, 1997, CSFB is no longer funding the acquisition of non-prime automobile receivables generated by the Company and, accordingly, the Company has significantly curtailed the purchase of loans from its dealer network. The note matures in December 1999. Interest is payable monthly at the LIBOR rate (5.96% as of December 31, 1997) plus 3%. Advances outstanding as of December 31, 1997 were $67,935,706 collateralized by net automobile receivables of $80,085,304 and the weighted average interest rate for the month of December 1997 was 8.96% In conjunction with the acquisition of FFC on December 6, 1995, the Company entered into a revolving credit facility with Finova Capital Corporation ("Finova") which provided for borrowings of up to $42 million. Interest is payable monthly at the prime rate (8.25% at December 31, 1996) plus 1.75%. Advances outstanding as of December 31, 1996 were $14,839,000 and the weighted average interest rate for the month of December 1996 was 10.0%. This revolving credit facility was terminated and repaid through the utilization of the CSFB revolving credit facility in January 1997. The unused portion of the line of credit with CSFB as of December 31, 1997 was approximately $32 million. However, as of December 31, 1997, CSFB has ceased to fund the acquisition of non-prime automobile receivables generated by the Company. F-15 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 are repaid from the collection of payments of principal and interest and are collateralized by approximately $40,330,000 of automobile receivables and a Reserve Account in the amount of approximately $5,600,000. In addition, the repayment of principal of the Class A Notes is guaranteed by insurance issued by MBIA Insurance Corporation, a nationally recognized insurance company. At the time of issuance, the Class A Notes were rated AAA by Standard & Poors's Rating Group and Aaa by Moody's Investor Service and the Class B Notes were rated BB by Standard & Poors's Rating Group. The Company acts as servicer and, as such, performs collection and servicing activities on these receivables. An Indenture and Servicing Agreement requires, among other provisions, 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 tangible deficiency, as defined, of ($200,000) and, accordingly, did not meet the minimum tangible net worth standard. In addition, the Company has experienced a net loss from operations for the quarter ended September 30, 1997 and December 31, 1997. Accordingly, for the quarter ended December 31, 1997, the Company did not meet the interest coverage ratio requirement. The proceeds from the issuance of these notes were used to reduce the borrowings under the Company's senior credit facility as well as to fund the Reserve Account. The assets of AutoInfo Receivables Company are not available to pay general creditors of the Company. As of December 31, 1997, the balance of the Class A and Class B Notes, the underlying loan contracts receivable backing these Notes and the Reserve Account balances were as follows: Underlying Reserve Receivables Account Note Balance Balance Balance ------------ ------------ ----------- Class A Notes $ 13,176,625 $ 15,289,671 $ 2,804,292 Class B Notes 886,515 (a) 202,602 ------------ ----------- $ 14,063,140 $ 3,006,894 ------------ ----------- (a) The Class B Notes are collateralized by the loan contracts only after the Class A noteholders are paid in full. F-16 Subordinated Notes and Other Debt Subordinated notes and other debt consist of the following: 1997 1996 ----------- ----------- Subordinated notes (a) $ 8,200,000 $ 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 (b) 2,000,000 2,000,000 Other notes payable due in monthly installments through 2001 with interest at prime to 12.4% 990,979 510,330 ----------- ----------- Total other notes $11,190,979 $10,710,330 ----------- ----------- (a) On December 6, 1995 as part of the acquisition of FFC, the Company assumed unsecured subordinated notes in the amount of $9,800,000. In 1996, the Company redeemed $1,600,000 of the Series B Notes. These notes bear interest at the rate of 12% per annum, payable monthly. The Series A Notes ($4,900,000) mature on May 1, 1999 and the Series B Notes ($3,300,000) mature on December 31, 2000. (b) The Company did not make the installment payment due in January 1998 and has agreed to a modification agreement which extends the due date for this installment to March 31, 1998. The Company paid interest of approximately $7,122,000 and $3,938,000 for the years ended December 31, 1997 and 1996, respectively, and $231,000 for the seven month period ended December 31, 1995. Note 10 - Income Taxes For the years ended December 31, 1997 and 1996 and the seven months ended December 31, 1995, the provision (benefit) for income taxes consisted of the following: Year ended Year ended Year ended December 31, December 31, December 31, 1997 1996 1995 ----------- ----------- ----------- Federal $(3,985,977) $(4,352,000) $ (184,960) State -- -- 9,000 ----------- ----------- ----------- Income tax benefit on loss from continuing operations $(3,985,977) $(4,352,000) $ (175,960) ----------- ----------- ----------- Income tax on income from discontinued operations: Federal -- -- $ (14,522) ----------- ----------- ----------- -- -- $ (14,522) ----------- ----------- ----------- F-17 Income taxes on gain on sale of discontinued operations: Federal -- -- $ 152,917 ----------- ----------- ----------- -- -- $ 152,917 ----------- ----------- ----------- The following table reconciles the Company's effective income tax rate on (loss) income from continuing operations to the Federal Statutory Rate for the years ended December 31, 1997 and 1996 and the seven month period ended December 31, 1995: Year ended Year ended Year ended December 31, December 31, December 31, 1997 1996 1995 ----------- ----------- ----------- Federal Statutory Rate (34.0)% (34.0)% 34.0% Effect of: State and local taxes, net of federal Benefit -- -- (.8) Benefit from tax exempt income (.7) (.8) (81.4) Preferred stock investment write-off -- -- -- Valuation allowance against deferred tax assets 8.3 15.3 -- Other, net -- -- 2.5 ----------- ----------- ----------- (26.4)% (19.5)% (45.7)% =========== =========== =========== The Company paid income taxes of approximately $0, $0 and $6,632,000 for the years ended December 31, 1997 and 1996 and the seven month period ended December 31, 1995, respectively. 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, 1997 1996 ----------- ----------- Deferred tax assets: Purchase discounts $ 6,221,236 $ 2,514,163 Goodwill 3,333,317 2,518,163 Deferred fees 117,115 -- ----------- ----------- Gross deferred tax assets 9,671,668 5,032,326 Less: valuation allowance (5,128,038) (4,290,054) ----------- ----------- Deferred tax asset 4,543,630 742,272 Deferred tax liability: Allowance for credit losses 4,543,640 742,272 ----------- ----------- Net deferred tax asset $ -- $ -- =========== =========== F-18 The deferred tax asset is fully reserved for as the Company's management does not expect such amounts to be realized. Refundable income taxes on the accompanying consolidated balance sheets as of December 31, 1997 and 1996 represent the Company's refundable income tax based upon the utilization of available tax credit carrybacks in its federal income tax return. Note 11 - Commitments and Contingencies Leases The Company is obligated under noncancellable operating leases for premises and equipment expiring at various dates through 1999. Future minimum lease payments are $581,000, $537,000, $517,000, $272,000 and $95,000 for each of the five year periods ended December 31, 2002. Lease expense for the years ended December 31, 1997 and 1996 and the seven month period ended December 31, 1995 was approximately $399,000, $227,000 and $68,000, respectively. 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, 1997 and 1996 and the seven month period ended December 31, 1995 was approximately $95,000, $38,000 and $3,000, respectively. Other Agreements The Company has employment agreements with Messrs. Zecher and Wunderlich, two officers of the Company, one of whom is also a stockholder. The agreements expire through 1999 and provide for aggregate annual compensation of approximately $400,000. 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. An employment agreement with another non-officer employee was terminated in March 1998. The Company has entered into supplemental employment agreements (the "Supplemental Employment Agreements") with Messrs. Zecher and Wunderlich (the "Covered Executives"), which provide that if there is a Change in Control of the Company (as defined therein) during the Protected Period (described below), the terms of the Supplemental Employment Agreements will supersede the Covered Executives' existing employment agreements and will govern the terms of the Covered Executives' employment following the Change in Control for a three-year term, in the case of Mr. Zecher, and a two-year term, in the case of Mr. Wunderlich (the "Employment Term"). The Supplemental Employment Agreements provide that during the Employment Term, the Covered Executives will remain employed in their capacities with the Company as of the Change in Control and will continue to receive an annual salary (the "Base Salary") and benefits at least equal to that which they received prior to the Change in Control and an annual bonus at least equal to the Covered Executive's average annual bonus during the three years prior to the Change in Control. The Supplemental Employment Agreements provide that if, during the Employment Term, the Covered Executive's employment is terminated by the Company other than for Cause or Disability or by the Executive either for Good Reason or during the 60-day Window Period commencing on the anniversary F-19 of the Change in Control (as each of the foregoing terms are defined in the applicable Supplemental Employment Agreement), the Covered Executive would receive a severance payment equal to the sum of his Base Salary and the higher of his annual bonus for the then most recent year or his average annual bonus during the three years preceding the Change in Control (the "Highest Annual Bonus") multiplied by two, in the case of Mr. Zecher, and one and one-half, in the case of Mr. Wunderlich. In addition, the restrictions on any stock-related incentive awards held by the Covered Executive would lapse and he would be entitled to continued coverage under the Company's life, health and disability benefits for two years following termination of his employment (three years in the case of Mr. Zecher) or until he receives similar benefits from a new employer. Mr. Zecher's Supplemental Employment Agreement also provides that if he is subject to excise taxes under Section 4999 of the Internal Revenue Code on any payments or benefits triggered by a Change in Control, he will be entitled to receive an additional amount such that after the payment of all applicable taxes, he will retain an amount equal to that which he would have retained absent the excise taxes. In connection with the Supplemental Employment Agreements, the Company also approved the creation of an Employment Protection Trust Agreement which is a form of a grantor trust under which the assets of the trust remain subject to the satisfaction of the general claims of the Company's creditors, to provide for the payment of all benefits payable under the Supplemental Employment Agreements. 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 12 - Stockholders' Equity Possible Delisting of Common Stock from Nasdaq Market The Securities and Exchange Commission (the "Commission") has approved new maintenance requirements for the Nasdaq National Market. For continuing listing on the Nasdaq National Market, a company, among other criteria, must now have at least $4,000,000 of total net tangible assets, 750,000 shares in the Public Float, a market value of its Public Float of $5,000,000 and a minimum bid price of $1.00 per share. At December 31, 1997, the Company did not meet the net tangible assets, value of public float or minimum bid price requirement. The Company does not have a reasonable expectation of meeting these requirements in the near future. Accordingly, it appears likely that the Company's Common Stock will be dropped from the Nasdaq National Market. In the event that the Company's Common Stock is delisted from the Nasdaq Stock Market, trading, if any, in the Company's Common Stock would thereafter be conducted in the over-the-counter market in the so-called "pink sheets" published by the National Quotation Bureau or the OTC Bulletin Board of the National Association of Securities Dealers, Inc. As a consequence of such delisting, a shareholder would likely find it more difficult to sell or to obtain quotations as to prices of the Company's Common Stock. 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 1997, 22,000 shares were forfeited. As of December 31, 1997 135,667 of such shares had vested and 267,333 remained, subject to forfeiture. 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. The Company has reserved 337,037 shares of Common Stock for issuance upon the exercise of the remaining warrants. 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 F-20 of $4.80. During fiscal 1992, 66,750 warrants to purchase shares of the Company's Common Stock expired. The remaining 29,250 warrants are exercisable through May 1998. The Company has reserved 29,250 shares of Common Stock for issuance upon the exercise of these warrants. In connection with the $2,016,536 Class B Notes issued in October 1996, the Company issued 3 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. The Company has reserved 125,000 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, The 1985 Plan, The 1986 Plan, The 1989 Plan, The 1992 Plan and The 1997 Plan ("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) income and (loss) earnings per share would have been reduced to the following pro forma amounts: 1997 1996 1995 ------------ ------------ ------------ Net (loss) income: As reported $(11,121,604) $(19,099,501) $829,348 Pro forma $(11,316,689) $(19,206,821) $806,178 (Loss) earnings per share: As reported ($1.39) ($2.41) $.11 Pro forma ($1.41) ($2.43) $.10 The effects of applying SFAS No. 123 in this pro forma disclosure are not indicative of future amounts. SFAS No. 123 does not apply to awards prior to 1995, and additional awards in future years are anticipated. 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 further grant will be issued under the 1986 Plan. At December 31, 1997, options to purchase 429,833 shares of Common Stock were exercisable with respect to the Plans. F-21 Option activity for the years ended December 31, 1997 and 1996 and the seven months ended December 31, 1995 was as follows: Number of Weighted Average Shares Exercise Price ----------- ---------------- Outstanding at June 1, 1995 434,833 $ 3.75 Exercised during the period (21,500) 2.68 ---------- ---------- Outstanding at December 31, 1995 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 ---------- ---------- Weighted average fair value of options granted: 1997 $ .61 1996 $ .96 1995 $ 1.14 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, 1996 and 1995, respectively: risk-free interest rates of 6.52, 6.20 and 6.36 percent; expected lives of 4 years for all options granted; expected volatility of 33.0, 26.2 and 29.1 percent. 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. The due date has been extended through November 1999. 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. Note 13 - 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 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 F-22 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. Note 14 - 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 failure of the Company to complete a securitization of its automobile receivables in 1997 (Note 9), an estimate of the fair value of the net automobile receivables outstanding at December 31, 1997 and 1996 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 and $18,082,472 at December 31, 1997 and 1996, respectively, such amounts approximate fair value. The carrying amounts of the Company's automobile receivables backed notes totaling $14,063,140 and $31,611,989 at December 31, 1997 and 1996 approximate fair value. Due to the current financial condition of the Company, the inability of the Company to obtain financing and insufficient collateral supporting the Company's subordinated notes and other debt with an aggregate carrying amount of $11,190,979 and $10,710,330 at December 31, 1997 and 1996 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. F-23 Note 15 - Quarterly Results of Operations (Unaudited) Year Ended December 31, 1997 Quarter Ended ------------------------------------------------------- March 31 June 30 September 30 December 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) Year Ended December 31, 1996 Quarter Ended ------------------------------------------------------- March 31 June 30 September 30 December 31 ----------- ----------- ------------ ------------ Revenues $ 2,758,043 $ 3,115,163 $ 3,343,430 $ 3,968,487 Net (loss) income $ 401,549 $ (939,051) $ (3,095,320) $(15,466,679) Basic and diluted per share data Net (loss) income $ .05 $ (.12) $ (.39) $ (1.95) Note 16 - Calculation of Earnings Per Share The following table reconciles the components of basic and diluted (loss) earnings per share for net (loss) income for the years ended December 31, 1997 and 1996 and the seven months ended December 31, 1995: F-24
1997 1996 1995 ------------ ------------ ------------ Numerator: Basic (loss) earnings per common share - (loss) income available to common shareholders $(11,121,604) $(19,099,501) $ 829,348 Effect of dilutive securities (a) -- -- -- ------------ ------------ ------------ Diluted (loss) earnings per common share - (loss) income available to common shareholders $(11,121,604) ($19,099,501) $ 829,348 ------------ ------------ ------------ Denominator: Basic (loss) earnings per common share - weighted average common shares outstanding 8,009,097 7,920,515 7,765,261 Effect of dilutive securities (a) -- -- 5,656 ------------ ------------ ------------ Diluted (loss) earnings per common share - weighted average common and common equivalent shares outstanding 8,009,097 7,920,515 7,770,917 ------------ ------------ ------------ Basic and diluted (loss) earnings per common share $ (1.39) $ (2.41) $ .11 ------------ ------------ ------------
(a) The common stock equivalents for the years ended December 31, 1997 and 1996 were 61,864 and 16,875. The common stock equivalents for these shares were not included in the calculation of diluted (loss) per common share because the effect would be antidilutive. Note 17 - Subsequent Event - Sale of Automobile Receivables On March 24, 1998, the Company sold 1,210 automobile receivables with a net balance of approximately $11,192,000 for net cash proceeds of $9,932,000, which was applied as a reduction of the loans outstanding under the Company's revolving credit agreement with CSFB. Any resulting gain or loss, on this transaction after the allocation of applicable allowance for credit losses, is not expected to be material. F-25 EX-10.I 2 EMPLOYMENT AGREEMENT EXHIBIT 10 I August 13, 1997 Mr. Scott Zecher 1341 Hudson Road Teaneck, New Jersey 07666 Re: Employment Agreement dated January 1, 1994, as amended Dear Scott: Reference is made to the Employment Agreement dated as of January 1, 1994 by and between AutoInfo, Inc. (the "Company") and you, as amended by letter agreement dated April 10, 1995 (the "Agreement"). On July 30, 1997 the Compensation Committee of The Board of Directors of the Company by unanimous approval made the following amendments to the Agreement: 1. Section 3 of the Agreement is hereby amended and restated as follows: "3. Term. The Term of this Agreement shall commence on the date hereof and shall continue until April 30, 1999, unless terminated prior thereto in accordance with the terms and provisions hereof (the "Employment Term")." 2. Section 4 of the Agreement is hereby amended and restated as follows: "4. Compensation. Auto shall pay to Zecher a salary at the rate of $250,000 per year, payable in such manner as Auto shall determine, but in no event any less often than monthly, less withholding required by law and other deductions agreed to by Zecher. Zecher's annual salary may be increased during the Employment Term in the sole discretion of the Board." 3. Section 5 of the Agreement is hereby amended and restated as follows: "5. Bonus. In addition to the compensation provided for in Paragraph 4 of this Agreement, Zecher shall during the Employment Term participate in the Company's then existing and effective profit sharing and bonus plans. Furthermore Zecher shall receive such other bonuses as determined in the sole discretion of the Board. Any bonuses shall be paid in such manner as the parties mutually agree." Mr. Scott Zecher August 13, 1997 4. The Agreement is hereby amended to include the following new Section 8(e): "8(e). Auto may terminate this Agreement at any time without cause on thirty days written notice to Zecher (a "Termination Without Cause"). Upon a Termination Without Cause, Zecher shall be entitled to receive, in addition to any other payments then due Zecher pursuant to this Agreement through the date of such termination (ie., accrued but unpaid salary, bonuses and expense reimbursements), and in lieu of any further compensation for any period after the date of such termination, a severance payment equal to $250,000 (the "Severance Payment"), payable in full upon the effective termination date. A termination pursuant to this Section 8(e) shall, upon Zecher's election, be null and void if Zecher does not receive the Severance Payment on or before the effective termination date. In addition to the Severance Payment, upon a Termination Without Cause the Company shall, (i) at its sole expense, provide Zecher with group health benefits covering him and his family, on such terms as are generally made available to executive officers of the Company, for the lesser of one (1) year following such termination or until Zecher is provided with similar coverage by a subsequent employer; and (ii) provide Zecher with the use of his Company leased vehicle for the lesser of one (1) year following such termination or until Zecher is provided with a similar bernefit by a subsequent employer and during such period shall bear all expenses relating to the insurance, maintenance and repair of such vehicle." All of the other terms and conditions of the Agreement shall remain in full force and effect and shall not be effected by this amendment. By Order of the Board of Directors /s/ Andrew Gaspar ------------------------------------- Andrew Gaspar, Chairman of the Board AGREED TO ACCEPTED: /s/ Scott Zecher - -------------------------- Scott Zecher EX-10.J 3 EMPLOYMENT AGREEMENT EXHIBIT 10 J EMPLOYMENT AGREEMENT AGREEMENT dated as of April 10, 1997 by and between AutoInfo, Inc., a Delaware corporation ("Auto") and William Wunderlich residing at 14 Frost Pond Road, Stanford, Connecticut 06903 ("Wunderlich"). WHEREAS, Wunderlich is currently the Chief Financial Officer of Auto; and WHEREAS, the Company desires to assure itself of the benefit of Wunderlich's services and experience for a period of time; and WHEREAS, Wunderlich is willing to enter into an agreement to that end with the Company upon the terms and conditions herein set forth. NOW THEREFORE, in consideration of the premises and covenants herein contained, the parties hereto agree as follows: 1. Employment. Auto hereby employs Wunderlich as its Chief Financial Officer and Wunderlich hereby accepts such employment and agrees to perform his duties and responsibilities hereunder in accordance with the terms and conditions hereinafter set forth. 2. Duties and Responsibilities. Wunderlich shall be the Chief Financial Officer of Auto during the Employment Term (as defined below). Wunderlich shall report to and be subject to the direction of the President and Board of Directors (the "Board") of Auto and Wunderlich shall perform such duties as may be assigned to him from time to time by the President or the Board; provided, that such duties shall be of a nature consistent with the dignity and authority of the positions of Chief Financial Officer. During the Employment Term Wunderlich shall, subject to the Company's vacation policy, devote substantially all of his normal business time and attention to the businesses of Auto and its subsidiaries and affiliates and shall perform such duties in a diligent, trustworthy, loyal, businesslike and efficient manner, all for the purpose of advancing the business of Auto and its subsidiaries and affiliates. Nothing contained in this Agreement shall be deemed to prohibit Wunderlich from devoting a nominal amount of his time to his (and his family's) personal investments, provided, however, that, in case of conflict, the performance of Wunderlich's duties under this Agreement shall take precedence over his activities with respect to such investments. 3. Term. The Term of this Agreement shall commence on the date hereof and shall continue until April 30, 1999, unless terminated prior thereto in accordance with the terms and provisions hereof (the "Employment Term"). 4. Compensation. Auto shall pay to Wunderlich a salary at the rate of $150,000 per year, payable in such manner as Auto shall determine, but in no event any less often than monthly, less withholding required by law and other deductions agreed to by Wunderlich. Wunderlich's annual salary may be increased during the Employment Term in the sole discretion of the Board. 5. Bonus. In addition to the compensation provided for in Paragraph 4 of this Agreement, Wunderlich shall during the Employment Term participate in the Company's then existing and effective profit sharing and bonus plans. Furthermore Wunderlich shall receive such other bonuses as determined in the sole discretion of the Board. 6. Principal Office. Without Wunderlich's consent, Auto shall not require Wunderlich to maintain his principal office in any location other than the Northern New Jersey area. 7. Expenses and Benefits. (a) Auto shall, consistent with Auto's policy of reporting and reimbursement of business expenses, reimburse Wunderlich for such other ordinary and necessary entertainment and business related expenses as shall be incurred by Wunderlich in the course of the performance of his duties under this Agreement. (b) Auto recognizes that Wunderlich will be required to incur significant travel in rendering services to Auto hereunder and in connection therewith Auto shall during the Employment Term provide Wunderlich with a automobile allowance of $750 per month which the parties agree shall be used to pay all of the expenses associated with the operation of an automobile including, without limitation, maintenance, repair and insurance costs. (c) Wunderlich shall be entitled to participate, to the extent he qualifies, in such life insurance, hospitalization, disability and other medical insurance plans or programs as are generally made available to executive officers of Auto which shall be consistent with the programs and benefits currently offered to Wunderlich. 8. Termination. (a) Auto shall have the right to terminate this Agreement for disability in the event Wunderlich suffers any illness or incapacity of such character as to substantially disable him from performing his duties hereunder for a period of more than one hundred and eighty (180) consecutive days in any one calendar year upon Auto giving at least thirty (30) days written notice of its intention to so terminate. If Wunderlich shall resume his duties hereunder within thirty (30) days following the receipt of such notice and shall perform such duties for forty (40) days of the next sixty (60) consecutive days thereafter, the Employment Term shall continue without interruption and such notice of intention to terminate shall have no further force or validity. 2 (b) This Agreement shall terminate upon the death of Wunderlich, except that Wunderlich's salary shall be payable to his estate for one hundred eighty (180) days thereafter, together with all accrued bonuses and outstanding unreimbursed expenses. (c) Auto may terminate this Agreement at any time with Reasonable Cause upon five (5) days written notice to Wunderlich. "Reasonable Cause" means (i) conviction of a crime involving moral turpitude; (ii) Wunderlich having engaged in any activity in competition with Auto, without Auto's consent; (iii) Wunderlich having divulged any secret or confidential information of a material nature belonging to Auto, without Auto's consent, except as required by law; (iv) Wunderlich's dishonesty or misconduct that is damaging or detrimental to Auto in any material respect; or (v) Wunderlich's breach of any material term of this Agreement; provided, however, that notice under this provision shall not be effective unless Wunderlich shall have first received written notice from Auto of the specific acts or omissions alleged to constitute a breach of any material term of this Agreement, and such breach continues unremedied for a period of fifteen (15) days after such notice . (d) If either (i) a third person, including a "group" as defined in Section 13(d)y(3) of the Securities Exchange Act of 1934, becomes the beneficial owner of shares of Auto having 25% or more of the total number of votes that may be cast for the election of directors of Auto or (ii) as the result of, or in connection with, any cash tender or exchange offer, merger or other business combination, sale of assets or contested election, or any combination of the foregoing transactions (a "Transaction"), the persons who were directors of Auto before the Transaction shall cease to constitute a majority of the Board or the Board of Directors of any successor to Auto; then and in such event for a period of one hundred and twenty (120) days following the occurrence of such an event Wunderlich may elect to terminate this Agreement upon five (5) days prior written notice to Auto and 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. 9. Non-Competition. Wunderlich covenants and agrees that during his employment hereunder and for a period of two years after his employment hereunder is terminated, he will not, without the prior written consent of Auto, (a) compete with the business of Auto or any of its subsidiaries or affiliates and, in particular, he will not without such consent, directly or indirectly, own, manage, operate, finance, join, control or participate in the ownership, management, operation, financing or control of, or be connected as a director, officer, employee, partner, consultant or agent with, any business in competition with or similar to the business of Auto or any of its subsidiaries or affiliates; provided, however, that Wunderlich may own up to two percent of the capital stock of any publicly traded corporation in competition with the business of Auto or any of its subsidiaries or affiliates if the fair market value of such corporation's outstanding capital stock exceeds $100 million, and (b) divert, take away, interfere with or attempt to take away any present or former employee or customer of Auto or any of its subsidiaries or affiliates. The provisions of this Section 9 shall no longer be applicable if Wunderlich's employment is terminated by Auto (other than for cause) or by 3 Wunderlich pursuant to the provisions of Section 8(d) hereof during the Employment Term. In the event that the provisions of this Section 9 should ever be deemed to exceed the time or geographic limitations or any other limitations permitted by applicable law, then such provisions shall be deemed reformed to the maximum permitted by applicable law. Wunderlich acknowledges and agrees that the foregoing covenant is an essential element of this Agreement and that, but for the agreement of Wunderlich to comply with the covenant, the Company would not have entered into this Agreement, and that the remedy at law for any breach of the covenant will be inadequate and the Company, in addition to any other relief available to it, shall be entitled to temporary and permanent injunctive relief without the necessity of proving actual damage. 10. Confidential Information. Wunderlich recognizes and acknowledges that the customer lists, patents, inventions, copyrights, methods of doing business, trade secrets and proprietary information of Auto including, without limitation, as the same may exist from time to time, are valuable, special and unique assets of the business of Auto. Except in the ordinary course of business or as required by law, Wunderlich shall not, during or after the Employment Term, disclose any such list of customers or any part thereof, any such patents, inventions, copyrights, methods of doing business, trade secrets or proprietary information which are not otherwise in the public domain to any person, firm, corporation or other entity for any reason whatsoever. In addition, Wunderlich specifically acknowledges and agrees that the remedy at law for any breach of the foregoing shall be inadequate and that AutoInfo and the Company, in addition to any other relief available to them, shall be entitled to temporary and permanent injunctive relief without the necessity of proving actual damage. 11. COBRA. In the event of Wunderlich's death during the term of this Agreement, Auto shall make all COBRA medical premium payments for Wunderlich's family for the three year period following his death. 12. Opportunities. During his employment with Auto, Wunderlich shall not take any action which might divert from Auto or any of its subsidiaries or affiliates any opportunity which would be within the scope of any of the present or future businesses of Auto or any of its subsidiaries or affiliates. 13. Contents of Agreement, Parties in Interest, Assignment, etc. This Agreement sets forth the entire understanding of the parties hereto with respect to the subject matter hereof. All of the terms and provisions of this Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective heirs, representatives, successors and assigns of the parties hereto, except that the duties and responsibilities of Wunderlich hereunder which are of a personal nature shall neither be assigned nor transferred in whole or in party by Wunderlich. This Agreement shall not be amended except by a written instrument duly executed by Auto and Wunderlich. 14. Severability. If any term or provision of this Agreement shall be held to be invalid or unenforceable for any reason, such term or provision shall be ineffective to the extend 4 of such invalidity or unenforceability without invalidating the remaining terms and provisions hereof, and this Agreement shall be construed as if such invalid or unenforceable term or provision had not been contained herein. 15. Notices. Any notice, request, instruction or other document to be given hereunder by any party to the other party shall be in writing and shall be deemed to have been duly given when delivered personally or five (5) days after dispatch by registered or certified mail, postage prepaid, return receipt requested, to the party to whom the same is so given or made: If to Auto addressed to: AutoInfo, Inc. 1600 Route 208 Fair Lawn, New Jersey 07410 Attn: President with a copy to: Morse, Zelnick, Rose & Lander, LLP 450 Park Avenue New York, New York 10178 Attn: Kenneth S. Rose, Esq. If to Wunderlich addressed to: William Wunderlich 14 Frost Pond Road Stanford, Connecticut 06903 or at such other address as the one party shall specify to the other party in writing. 16. Counterparts and Headings. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and all which together shall constitute one and the same instrument. All headings are inserted for convenience of reference only and shall not affect the meaning or interpretation of this Agreement. 17. Governing Law. This Agreement shall be construed in accordance with the laws of the State of New Jersey. 18. Arbitration. Any disputes arising hereunder shall be submitted to arbitration before a single arbitrator in New York City under the rules and regulations of the American Arbitration Association. Any award in such arbitration proceeding may be enforced in any court of competent jurisdiction. 5 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered as of the day and year first above written. AUTOINFO, INC. By: /s/ Scott Zecher ----------------------------------- Scott Zecher, President /s/ William Wunderlich ----------------------------------- William Wunderlich 6 EX-23 4 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS 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. /s/ Arthur Andersen LLP New York, New York March 24, 1998 EX-27 5 FINANCIAL DATA SCHEDULE
5 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 6,594,985 2,242,069 97,481,538 (19,000,487) 0 94,514,671 3,197,482 (1,098,356) 96,613,797 2,112,630 93,189,825 79,968 0 0 1,231,374 96,613,797 19,846,231 19,846,231 0 10,943,150 3,408,579 12,456,124 8,145,959 (15,107,581) (3,985,977) (11,121,604) 0 0 0 (11,121,604) (1,390) (1,390)
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