-----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, AWp7MRmsMgGTbNaYDi5s0E62lxqAkAxxs7Wrc8sUu51O/mMSE+gB8vtqIlcaMrcH /b6zqfX54qnkz5XAmkkvxg== 0001005477-98-001507.txt : 19980513 0001005477-98-001507.hdr.sgml : 19980513 ACCESSION NUMBER: 0001005477-98-001507 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980512 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-Q SEC ACT: SEC FILE NUMBER: 001-11497 FILM NUMBER: 98616724 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-Q 1 FORM 10-Q FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (X) QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended: MARCH 31, 1998 Commission File Number: 0-14786 AUTOINFO, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 13-2867481 - -------------------------------------------------------------------------------- (State or other jurisdiction of incorporation (I.R.S. Employer Identification or organization) number) One Paragon Drive, Suite 255, Montvale, New Jersey 07645 - -------------------------------------------------------------------------------- (Address of principal executive office) (201) 930-1800 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) 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 |_| Number of shares outstanding of the registrant's common stock as of April 30, 1998: 7,996,752 shares of common stock, $.01 par value. AUTOINFO, INC. AND SUBSIDIARIES INDEX Part I. Financial Information: Item 1. Financial Statements: Page Balance Sheets - March 31, 1998 (unaudited) and December 31, 1997............ 3 Statements of Operations (unaudited) - Three months ended March 31, 1998 and 1997.................. 4 Statements of Cash Flows (unaudited) - Three months ended March 31, 1998 and 1997.................. 5 Notes to Unaudited Financial Statements..................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......................... 12 Part II. Other Information ............................................... 18 Signatures................................................................ 19 2 AUTOINFO, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS March 31, December 31, 1998 1997 ------------- ------------- Unaudited Audited ASSETS Gross automobile receivables $ 76,192,577 $ 126,428,067 Unearned interest (15,782,385) (28,946,529) ------------- ------------- Net automobile receivables 60,410,192 97,481,538 Allowance for credit losses (9,469,295) (19,000,487) ------------- ------------- Net automobile receivables after allowance for credit losses 50,940,897 78,481,051 Cash 974,292 2,506,502 Restricted cash 4,705,933 4,088,483 Short-term investments 2,167,415 2,242,069 Automobile receivables held for sale 6,450,000 -- Fixed assets, net 1,948,945 2,099,126 Other assets 3,249,294 3,785,355 Refundable income taxes 3,411,211 3,411,211 ------------- ------------- $ 73,847,987 $ 96,613,797 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Revolving line of credit $ 49,373,946 $ 67,935,706 Automobile receivables backed notes 10,686,022 14,063,140 Subordinated notes and other debt 11,135,519 11,190,979 Accounts payable and accrued liabilities 1,905,851 2,112,630 ------------- ------------- Total liabilities 73,101,338 95,302,455 ------------- ------------- Stockholders' Equity Common stock - authorized 20,000,000 shares $.01 par value; issued and outstanding - 7,996,752 shares as of March 31, 1998 and December 31, 1997 79,968 79,968 Additional paid-in capital 18,233,362 18,233,362 Officer note receivable (466,797) (466,797) Deferred compensation under stock bonus plan (338,655) (342,873) Retained deficit (16,761,229) (16,192,318) ------------- ------------- Total stockholders' equity 746,649 1,311,342 ------------- ------------- $ 73,847,987 $ 96,613,797 ============= ============= See notes to condensed unaudited financial statements 3 AUTOINFO, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Three Months Ended March 31, 1998 1997 ----------- ----------- Revenues: Interest and other finance revenue $ 3,843,506 $ 4,251,243 Investment income 25,184 61,604 Long distance telephone services 52,304 92,061 ----------- ----------- Total revenues 3,920,994 4,404,908 ----------- ----------- Costs and expenses: Interest expense 2,162,658 1,569,398 Operating expenses 1,839,858 2,323,817 Depreciation & amortization 150,619 152,071 Loss on sale of automobile receivables 336,770 -- ----------- ----------- Total operating expenses 4,489,905 4,045,286 ----------- ----------- (Loss) income from continuing operations (568,911) 359,622 Provision for income taxes -- 111,438 ----------- ----------- Net (loss) income $ (568,911) $ 248,184 =========== =========== Basic and diluted net (loss) income per share $ (.07) $ .03 =========== =========== Weighted average number of common and common ----------- ----------- equivalent shares 7,996,752 7,995,816 ----------- ----------- See notes to condensed unaudited financial statements 4 AUTOINFO, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended March 31, 1998 1997 ------------ ------------ Cash flows from operating activities: Net (loss) income $ (568,911) $ 248,184 Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 150,619 152,071 Amortization of deferred compensation 4,218 4,540 Loss on sale of automobile receivables 336,770 -- Changes in assets and liabilities: Automobile receivables, net 8,893,933 (14,584,929) Other assets 535,061 1,630,668 Accounts payable and accrued liabilities (206,779) 202,015 ------------ ------------ Net cash provided by (used in) operating activities 9,144,911 (12,347,451) ------------ ------------ Cash flows from investing activities: Capital expenditures (438) (295,157) Proceeds from sale of short-term investments 74,654 2,562,182 Purchases of short-term investments -- (4,113,185) Proceeds from sale of automobile receivables 11,860,451 -- ------------ ------------ Net cash provided by (used in) investing activities 11,934,667 (1,846,160) ------------ ------------ Cash flows from financing activities: (Decrease) increase in borrowings, net (21,994,338) 11,877,516 Issuance of common stock -- 90,000 Decrease in restricted cash (617,450) (35,813) ------------ ------------ Net cash (used in) provided by financing activities (22,611,788) 11,931,703 ------------ ------------ Net decrease in cash (1,532,210) (2,261,908) Cash at beginning of period 2,506,502 4,307,038 ------------ ------------ Cash at end of period $ 974,292 $ 2,045,130 ============ ============
See notes to condensed unaudited financial statements 5 AUTOINFO, INC. AND SUBSIDIARIES NOTES TO UNAUDITED FINANCIAL STATEMENTS 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 through March 31, 1998 was to purchase non-prime automobile retail installment contracts from independent and franchised used vehicle dealers. The Company serviced 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, provided for the Company to continue to purchase contracts which meet established underwriting criteria only through March 1997. In 1997 approximately 7% 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. The Company has experienced material operating losses during 1997 and in the first quarter of 1998. 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. The Company is exploring several opportunities including the sale of portfolio assets to reduce outstanding debt and other restructuring alternatives. During the first quarter of 1998 and in April 1998, the Company successfully completed the sale of approximately $20 million of automobile receivables. There is no assurance that the Company will be successful in securing 6 additional warehouse facilities or selling additional portfolio assets, the failure of which could 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. See Notes 4 and 5 regarding the sale of automobile receivables during 1998. In January 1998, the Company entered into an arrangement with a new funding source whereby it could purchase loan contracts which meet specified criteria and sell them through to this source for a fee. Due to several factors in the marketplace, including new underwriting guidelines and buying criteria, the Company has determined that this new loan acquisition program was not suited for its existing customer base of independent used car dealers. As a result, as of April 1, 1998, the Company has ceased the acquisition of new loan contracts. In addition, in April 1998 the Company sold its long distance telephone service business (see Note 5). Accordingly, the Company's remaining business is the servicing of automobile receivables. These factors raise substantial doubt about the Company's ability to continue as a going concern. Accordingly, the accompanying financial statements have been prepared assuming the Company will continue as a going concern. The accompanying consolidated financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern. 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%. Automobile Receivables Held for Sale During the first quarter of 1998, the Company established criteria for segregating specific pools of automobile receivables as held for sale. These criteria include, among other factors, an intent by the Company to sell such assets within one year, an agreement as to the specific loan contracts to be sold, the selling price and the successful completion of due diligence by the purchaser. Based upon these criteria, the Company has segregated as held for sale $6,450,000 of net automobile receivables as of March 31, 1998. 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. 7 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. 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 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 March 31, 1998 and December 31, 1997, there were 583 and 605 repossessed vehicles held for resale with an aggregate value of approximately $1,732,000 and $1,953,000 respectively, which amounts are included in other assets on the accompanying 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 automobile receivables 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 $2,361,000 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 and $2,345,155 in collection accounts pursuant to the Class A and Class B Auto Backed Notes and the Company's revolving credit facility with CSFB. 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: March 31, December 31, 1998 1997 ------------ ------------ Common stock and bond funds $ 1,533,212 $ 1,626,979 Money market instruments 634,203 615,090 ------------ ------------ $ 2,167,415 $ 2,242,069 ============ ============ Gains and losses on disposition of securities are recognized on the specific identification method in the period in which they occur. Unrealized gains and losses, if material, would be excluded from earnings and reported as a separate component of stockholders' equity on an after-tax basis. During the three month period ended March 31, 1998, gains and losses arising from the disposition of marketable securities as well as unrealized gains and losses were not material. Fixed Assets 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. Net Income (Loss) Per Share In 1997, the Company adopted SFAS No. 128, "Earnings Per Share," which replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is 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 were antidilutive for the three month period ended March 31, 1998 and 17,817 shares for the three month period ended March 31, 1997. 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. Note 2 - General The accompanying unaudited condensed financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions for Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments consisting of normal recurring accruals considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 1998 and 1997 are not necessarily indicative of the results that may be expected for a full fiscal year. For further information, refer to the financial statement and footnotes thereto included in the Company's report on Form 10-K for the year ended December 31, 1997. 9 Note 3 - 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 and March 31, 1998, the Company had a tangible deficiency as defined 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, December 31, 1997 and March 31, 1998. Accordingly, 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 and March 31, 1998 the Company 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. At March 31, 1998, the Company had 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. In April 1998, the holders of the 7.55% notes released the Company from its obligation under such debt in exchange for certain off-balance sheet assets of the Company. (see Note 5 - Subsequent Events) In January 1998, the Company entered into an arrangement, know as a "flow-through" strategy, with a new funding source whereby it could purchase loan contracts which meet specified criteria and sell them through to this source for a fee. Due to several factors in the marketplace, including new underwriting guidelines and buying criteria, the Company has determined that the new loan acquisition program was not suited for its existing customer base of independent used car dealers. As a result, as of April 1, 1998, the Company has ceased the acquisition of new loan contracts. As of December 31, 1997, the Company is not receiving advances under its senior credit facility. Therefore, unless the Company is able to continue the successful sale of automobile receivable or obtain additional lines of credit, the Company will not have sufficient liquid assets and available lines of credit to meet its short and long-term capital requirements. 10 Note 4 - Sale of Automobile Receivables During the three months ended March 31, 1998, the Company, in two separate transactions, sold a total of 1,473 loan contracts with a net principal balance of approximately $13.3 million. The proceeds from the sale of these automobile receivables of approximately $11.9 million were used to reduce the outstanding debt under the Company's revolving line of credit. The Company recognized a loss on these transactions of approximately $337,000. Note 5 - Subsequent Events In April 1998, the holders of the Company's $2 million of 7.55% subordinated notes, originally due in equal principal installments in January 1998, 1999 and 2000, released the Company from such obligation in exchange for two off-balance sheet assets and its long distance telephone service business. The two off-balance sheet assets consist of the Company's preferred stock investment in ComputerLogic, Inc. ("ComputerLogic") and an equity interest in a start-up corporation pursuing a roll-up transaction of new car dealerships. This transaction resulted in a net gain of $2.5 million on the retirement of debt and write-off of previously recorded reserves related to the Company's ComputerLogic investment. The Company's preferred stock investment in ComputerLogic was written off in May 1995 due to the poor financial condition of ComputerLogic and its failure to make timely dividend payments. In April 1998, the Company sold a total of 971 loan contracts with a net principal balance of approximately $7.2 million. The proceeds from the sale of these automobile receivables of approximately $6.3 million were used to reduce the outstanding debt under the Company's revolving line of credit. Any resulting gain or loss on this transaction, after the allocation of applicable allowance for credit losses, is not expected to be material. 11 AUTOINFO, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition And Results of Operations Forward Looking Statements Certain statements made in this Quarterly Report on Form 10-Q 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 The Company, since December 1995, has been 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 and in the first quarter of 1998. As a result of an 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. The Company is exploring several opportunities including the sale of portfolio assets to reduce outstanding debt and other restructuring alternatives. During the first quarter of 1998 and in April 1998, the Company successfully completed the sale of approximately $20 million of automobile receivables. There is no assurance that the Company will be successful in securing additional warehouse facilities or selling additional portfolio assets, the failure of which would have a material adverse effect on the Company's financial condition. In January 1998, the Company entered into an arrangement with a new funding source whereby it could purchase loan contracts which meet specified criteria and sell them through to this source for a fee. Due to several factors in the marketplace, including new underwriting guidelines and buying criteria, the Company has determined that these new loan acquisition program was not suited for its existing customer base of independent used car dealers. As a result, as of April 1, 1998, the Company has ceased the acquisition of new loan contracts. These factors raise substantial doubt about the Company's ability to continue as a going concern. 12 Results of Operations Three Months Ended March 31, 1998 and 1997 Revenues Revenues for the three month periods ended March 31, 1998 and 1997 were derived from the interest and other finance revenue ($3,844,000 and $4,251,000, respectively), investment income ($25,000 and $62,000, respectively) and the long-distance telephone service business ($52,000 and $92,000, respectively). The decrease in the interest and other finance revenue is directly related to the decline in the Company's portfolio of automobile receivables from $74,306,000 to $67,860,000. The decrease in investment income is the result of the reduction in short term investments from $6,443,000 to $2,167,000. The decline in long-distance telephone service revenues is the result of the loss of customers to competing long-distance carriers. Net Interest Income on Automobile Installment Contracts Receivable The Company's principal revenue source is the net interest income, or net spread, earned on its automobile installment contracts receivable. 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 contracts receivable portfolio for the three month periods ended March 31, 1998 and 1997: Three Months Ended March 31, 1998 1997 ----------- ----------- Average loans receivable $85,894,000 $66,577,000 ----------- ----------- Average loans payable 82,221,000 63,280,000 ----------- ----------- Interest income $ 3,671,000 $ 3,812,000 Interest expense 2,250,000 1,532,000 ----------- ----------- Net interest income $ 1,421,000 $ 2,280,000 ----------- ----------- Yield on loans(1) 17.0% 22.9% Cost of funds 10.9% 9.7% ----------- ----------- Net interest spread 6.1% 13.2% ----------- ----------- Net interest margin(2) 6.6% 13.7% ----------- ----------- (1) Percentages are presented on an annualized basis (2) Net interest margin is net interest income divided by average loans outstanding Costs and Expenses Interest expense for the three month periods ended March 31, 1998 and 1997 ($2,163,000 and $1,569,000, respectively) was primarily related to the debt outstanding under the Company's senior credit facility, automobile receivables backed notes and subordinated debt. The increase is directly related to the increase in average outstanding debt. 13 Operating expenses for the three months ended March 31, 1998 and 1997 ($1,840,000 and $2,324,000, respectively) consisted primarily of the operating expenses of the non-prime automobile finance business and corporate overhead. The decrease is directly related to the closing of the Northeast Region operating center in November 1997 and the results of the cost reduction plan implemented by the Company. Depreciation and amortization expense for the three months ended March 31, 1998 and 1997 ($151,000 and $152,000, respectively) consisted of the depreciation of fixed assets. The loss on sale of automobile receivables in the three months ended March 31, 1998 ($337,000) relates to the sale of $13 million of automobile receivables. Loss from Operations Loss from operations for the three month period ended March 31, 1998 was $569,000 compared with income from operations for the three month period ended March 31, 1997 of $360,000. There is no income tax benefit for the three month period ended March 31, 1998 as the Company has recorded the utilization of its available income tax carrybacks as of December 31, 1997. Automobile Receivables The following table provides information regarding the Company's allowance for credit losses as of March 31, 1998 and December 31, 1997: March 31, December 31, 1998 1997 --------------------------------- Allowance for credit losses $9,469,000 $ 19,000,000 Percentage of outstanding automobile receivables 15.7% 19.5% The following table summarizes the Company's delinquent accounts that were more than 60 days delinquent as of March 31, 1998 and December 31, 1997: March 31, December 31, 1998 1997 ------------------------------------------- Amount %(1) Amount %(1) ------------------------------------------- 60 to 89 days delinquent $1,544,000 1.8% $ 3,199,000 2.5% 90 days or more delinquent 5,224,000 6.1% 6,992,000 5.6% ------------------------------------------- Total delinquent loans $6,768,000 7.9% $10,191,000 8.1% =========================================== (1) All percentages are based on gross loans outstanding and are presented on an annualized basis. Management has reviewed its past due loans and repossessed collateral as March 31, 1998 and, in management's opinion, the allowance for credit losses is adequate to absorb current and future losses in the portfolio. Liquidity and Capital Resources 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 14 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 and in the first quarter of 1998. 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. The Company is exploring several opportunities including 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. 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 and March 31, 1998 the Company had a tangible deficiency, as defined 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, December 31, 1997 and March 31, 1998. Accordingly, 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 15 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 March 31, 1998 the Company had tangible net worth, as defined, of approximately $1.6 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. 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. In April 1998, the holders of the 7.55% notes released the Company from such obligation in exchange for two off-balance sheet assets and its long distance telephone service business. The Company's cash and short-term investments amounted to $3.1 million as of March 31, 1998. In addition, the Company has $2.4 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 $2.3 million in restricted collection accounts related to the Securitized Notes and its warehouse line of credit. The total amount of debt outstanding as of March 31, 1998 and December 31, 1997 was $71.2 million and $93.2 million, respectively. This following table presents the Company's debt instruments and weighted average interest rates on such instruments as of March 31, 1998 and December 31, 1997, respectively: March 31, 1998 December 31,1997 Weighted Weighted Average Average Balance Rate Balance Rate ------------------------------------------- Revolving lines of credit $49.4 8.69% $67.9 8.78% Automobile receivable backed notes $10.7 6.77% $14.1 6.91% Subordinated debt $10.2 11.75% $10.2 11.75% Other debt $ .9 8.5% $ 1.0 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 could purchase loan contracts which meet specified criteria and sell them through to this source for a fee. Due to several factors in the marketplace, including new underwriting guidelines and buying criteria, the Company has determined that the new loan acquisition program was not suited for its existing customer base of independent used car dealers. As a result, as of April 1, 1998, the Company has ceased the acquisition of new loan contracts. As of December 31, 1997, the Company is not receiving advances under its senior credit facility. Therefore, unless the Company is able to obtain additional lines of credit, the Company will 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 three months ended March 31, 1998. Year 2000 16 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 were substantially complete. Finance Manager software was designed to account for consumer loan contracts with maturity dates beyond the year 2000. This system has been in use by the Company since 1996. Accordingly, the Company does not expect that the cost of ensuring Year 2000 compliance will have a material adverse impact on its financial position or results of operations in the current year or in future years. 17 AUTOINFO, INC. AND SUBSIDIARIES Part II - OTHER INFORMATION Item 1 - 3: Inapplicable Item 4: Submission of Matters to a Vote of Security Holders: None Item 5: Inapplicable Item 6 (a): None Item 6 (b): No reports on Form 8-K were filed by the Registrant during the quarter for which this report is filed. 18 SIGNATURES Pursuant to the requirements of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto authorized. AUTOINFO, INC. (Registrant) /s/ Scott Zecher ---------------------------------- Scott Zecher President & Chief Executive Officer /s/ William I. Wunderlich ---------------------------------- William I. Wunderlich Treasurer, Secretary and Principal Financial Officer Date: May 11, 1998 EX-27 2 ART. 5 FDS FOR THE 10-Q
5 1 U.S. DOLLARS 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 1.00000 5,680,225 2,167,415 60,410,192 (9,469,295) 0 71,899,042 2,947,920 (998,975) 73,847,987 1,905,851 71,195,487 79,968 0 0 666,681 73,847,987 3,920,994 3,920,994 0 1,990,477 336,770 0 2,162,658 (568,911) 0 (568,911) 0 0 0 (568,911) (0.070) (0.070)
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