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: June 30, 1998
Commission File Number: 0-14786
AUTOINFO, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 13-2867481
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(State or other jurisdiction (I.R.S. Employer Identification number)
of incorporation or organization)
One Paragon Drive, Suite 255, Montvale, New Jersey 07645
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(Address of principal executive office)
(201) 930-1800
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(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 July
31, 1998: 7,996,752 shares of common stock, $.01 par value.
<PAGE>
AUTOINFO, INC. AND SUBSIDIARIES
INDEX
Part I. Financial Information:
Item 1. Financial Statements: Page
Consolidated Balance Sheets -
June 30, 1998 (unaudited) and December 31, 1997................ 3
Consolidated Statements of Operations (unaudited)-
Three and Six months ended June 30, 1998 and 1997.............. 4
Consolidated Statements of Cash Flows (unaudited)-
Three and Six months ended June 30, 1998 and 1997.............. 4
Notes to Unaudited Consolidated Financial Statements........... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................ 9
Part II. Other Information................................................... 13
Signatures................................................................... 14
2
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AUTOINFO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1998 1997
------------- -------------
Unaudited
ASSETS
Gross automobile receivables $ 33,014,669 $ 126,428,067
Unearned interest (6,327,286) (28,946,529)
------------- -------------
Net automobile receivables 26,687,383 97,481,538
Allowance for credit losses (6,924,354) (19,000,487)
------------- -------------
Net automobile receivables after allowance for
credit losses 19,763,029 78,481,051
Cash 1,103,373 2,506,502
Restricted cash 3,262,370 4,088,483
Short-term investments 2,194,363 2,242,069
Automobile receivables held for sale 6,477,776 --
Fixed assets, net 1,620,543 2,099,126
Other assets 1,663,245 3,785,355
Refundable income taxes 3,002,271 3,411,211
------------- -------------
$ 39,086,970 $ 96,613,797
============= =============
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Liabilities:
Revolving line of credit $ 24,187,831 $ 67,935,706
Automobile receivables backed notes 8,027,290 14,063,140
Subordinated notes and other debt 9,055,734 11,190,979
Accounts payable and accrued liabilities 1,333,148 2,112,630
------------- -------------
Total liabilities 42,604,003 95,302,455
------------- -------------
Stockholders' (Deficit) Equity
Common stock - authorized 20,000,000 shares
$.01 par value; issued and outstanding -
7,996,752 shares as of June 30, 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 (334,427) (342,873)
Retained deficit (21,029,139) (16,192,318)
------------- -------------
Total stockholders' (deficit) equity (3,517,033) 1,311,342
------------- -------------
$ 39,086,970 $ 96,613,797
============= =============
See notes to condensed unaudited financial statements
3
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AUTOINFO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30, June 30,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Interest and other finance
revenue $ 6,142,306 $ 9,394,830 $ 2,298,919 $ 5,143,587
Investment income 52,495 213,537 27,311 151,933
Long distance telephone services 63,099 177,646 10,795 85,585
------------ ------------ ------------ ------------
Total revenues 6,257,900 9,786,013 2,337,025 5,381,105
------------ ------------ ------------ ------------
Costs and expenses:
Interest expense 3,664,161 3,547,779 1,501,503 1,978,381
Operating expenses 3,273,072 4,830,641 1,433,333 2,506,824
Depreciation & amortization 287,898 319,584 137,279 167,513
Provision for credit losses 3,938,300 -- 3,938,300 --
Loss on sale of automobile
receivables 1,035,406 -- 698,636 --
Other expenses 598,901 -- 598,901 --
------------ ------------ ------------ ------------
Total operating expenses 12,797,738 8,698,004 8,307,952 4,652,718
------------ ------------ ------------ ------------
(Loss) income from operations (6,539,838) 1,088,009 (5,970,927) 728,387
Income tax benefit -- (721,670) -- (833,108)
------------ ------------ ------------ ------------
(Loss) income before extraordinary item (6,539,838) 1,809,679 (5,970,927) 1,561,495
Extraordinary item -
extinguishment 1,703,017 -- 1,703,017 --
------------ ------------ ------------ ------------
Net (loss) income $ (4,836,821) $ 1,809,679 $ (4,267,910) $ 1,561,495
============ ============ ============ ============
Basic and diluted (loss) income per share:
(Loss) income per share before
extraordinary item $ (.82) $ .22 $ (.74) $ .19
Extraordinary item .21 -- .21 --
------------ ------------ ------------ ------------
Basic and diluted net income per
share $ (.61) $ .22 $ (.53) $ .19
============ ============ ============ ============
Weighted average number of
common and common
equivalent shares 7,996,752 8,007,730 7,996,752 8,018,752
------------ ------------ ------------ ------------
</TABLE>
See notes to condensed unaudited financial statements
4
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AUTOINFO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (4,836,821) $ 1,809,679
Adjustments to reconcile net (loss) income to net cash
provided by (used in) operating activities:
Depreciation and amortization 287,898 319,584
Amortization of deferred compensation 8,446 9,081
Loss on sale of automobile receivables 1,035,406 --
Loss on sale of property and equipment 115,547 --
Changes in assets and liabilities:
Automobile receivables, net 30,543,667 (35,676,816)
Other assets 2,531,050 (297,176)
Income tax refund receivable 868,269
Accounts payable and accrued liabilities (779,481) (117,498)
------------ ------------
Net cash provided by (used in) operating activities 28,905,712 (33,084,877)
------------ ------------
Cash flows from investing activities:
Capital expenditures (2,863) (589,907)
Sale of property and equipment 78,000 --
Proceeds from sale of automobile receivables 20,661,173 --
Proceeds from redemptions of short term investments 47,706 6,416,358
Purchases of short term investments -- (5,882,643)
------------ ------------
Net cash provided (used in) by investing activities 20,784,016 (56,192)
------------ ------------
Cash flows from financing activities:
Decrease in borrowings, net (51,918,970) 30,231,605
Issuance of common stock -- 90,000
Decrease in restricted cash 826,113 807,861
------------ ------------
Net cash (used in) provided by financing activities (51,092,857) 31,129,466
------------ ------------
Net decrease in cash (1,403,129) (2,011,603)
Cash at beginning of period 2,506,502 4,307,038
------------ ------------
Cash at end of period $ 1,103,373 $ 2,295,435
============ ============
</TABLE>
See notes to condensed unaudited financial statements
5
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AUTOINFO, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED FINANCIAL STATEMENTS
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.
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 typically with impaired credit histories and
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
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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 and second quarters 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 and
second quarters and in July of 1998, the Company successfully completed the sale
of approximately $44 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 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%.
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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 $6,478,000 of net automobile receivables as of June 30, 1998 (See Note 6).
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 uncollectible. 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.
During the first six months and in July of 1998, the Company sold a significant
portion of its automobile receivables and continues to pursue opportunities for
additional portfolio sales . The provision for credit losses as of June 30, 1998
has been adjusted based upon the estimated fair value of its remaining portfolio
resulting in an additional provision for credit losses of $3,938,000 as of June
30, 1998.
Concentration of Credit Risks
The Company's primary credit risk relates to existing loans with individuals who
cannot obtain traditional forms of financing. The Company has acquired
automobile receivables in several 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 June 30, 1998 and December 31, 1997, there were 475 and 605 repossessed
vehicles held for resale with an aggregate value of approximately $1,214,000 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.
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Restricted Cash
Restricted cash consists of $2,057,000 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 $1,205,000 in
collection accounts pursuant to 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:
June 30, December 31,
1998 1997
---------- ----------
Common stock and bond funds $2,157,000 $1,627,000
Money market instruments 37,000 615,000
---------- ----------
$2,194,000 $2,242,000
========== ==========
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 and
six month periods ended June 30, 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 and six month periods ended June 30, 1998 and
were 62,444 and 40,131 shares for the three and six month periods ended June 30,
1997, respectively.
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.
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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.
As of June 30, 1998, the Company has a net operating loss carryforward of
approximately $9.8 million which expires in 2013. Any benefit from the
utilization of this net operating loss carryforward had been fully reserve for
resulting in no impact on the accompanying financial statements.
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 and six months ended June 30, 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.
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 June 30, 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,
March 31, 1998 and June 30, 1998. Accordingly, the Company did not meet the
interest coverage ratio requirement (See Note 6 - Subsequent Events).
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
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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 June 30, 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 June 30, 1998, the Company had outstanding subordinated debt consisting of
$8.2 million of 12% notes which were included with the liabilities assumed with
the acquisition of FALK Finance Company, Inc. ("FFC") in December 1995.
In January 1998, the Company entered into an arrangement, known 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.
Note 4 - Sale of Automobile Receivables
During the six months ended June 30, 1998, the Company sold a total of 4,173
loan contracts with a net principal balance of approximately $36 million of
which 2,700 loan contacts and $22.7 million were in the three month period ended
June 30, 1998. The proceeds from the sale of these automobile receivables 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
$413,000.
Note 5 - Debt Extinguishment
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 $1.7 million. 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.
Note 6 - Subsequent Events
In July 1998, the Company sold loan contracts with a net principal balance of
approximately $7.7 million. The proceeds from the sale of these automobile
receivables of approximately $6.5 million were used to redeem in full the Class
A and Class B securitized notes sold in October 1996. As a result of the
redemption of such notes, the restricted
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cash held in reserve accounts in connection with such notes was released and
applied by the Company as a reduction in the outstanding balance of the
Company's revolving credit facility with CSFB. The Company recognized a loss on
this transaction of approximately $622,000.
During the three months ended June 30, 1998, the Company's common stock was
delisted from the Nasdaq National Market System and moved to the Nasdaq Small
Cap Market based upon the Company's failure to meet recently approved
maintenance requirements. In July 1998, the Company's stock was delisted from
the NASDAQ Small Cap Market. Trading in the Company's common stock is currently
conducted on the OTC Bulletin Board of the National Association of Securities
Dealers, Inc. under the symbol AUTO.
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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 1996, 1997 and in
the first and second quarters 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 six
months and in July of 1998, the Company successfully completed the sale of
approximately $44 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.
13
<PAGE>
Results of Operations
Three and Six Months Ended June 30, 1998 and 1997
Revenues
Revenues for the three month periods ended June 30, 1998 and 1997 were derived
from interest and other finance revenue ($2,299,000 and $5,144,000,
respectively), investment income ($27,000 and $152,000, respectively) and the
long-distance telephone service business ($11,000 and $86,000, respectively).
Revenues for the six month periods ended June 30, 1998 and 1997 were derived
from the interest and other finance revenue ($6,142,000 and $9,395,000,
respectively), investment income ($52,000 and $214,000, respectively) and the
long-distance telephone service business ($63,000 and $178,000, 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
$96,698,000 to $34,216,000. The decrease in investment income is the result of
the reduction in short term investments from $4,358,000 to $2,194,000. The
decline in long-distance telephone service revenues is the result of the
exchange of this business in settlement of $2 million of subordinated debt in
April 1998 (See Note 5).
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 and six month periods ended June 30, 1998 and 1997:
<TABLE>
<CAPTION>
Six Months Ended June 30, Three Months Ended June 30,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Average loans receivable $68,098,000 $76,295,000 $50,244,000 $85,270,000
----------- ----------- ----------- -----------
Average loans payable 67,890,000 71,500,000 53,670,000 78,870,000
----------- ----------- ----------- -----------
Interest income $ 5,699,000 $ 8,261,000 $ 2,073,000 $ 4,449,000
Interest expense 3,631,000 3,472,000 1,483,000 1,941,000
----------- ----------- ----------- -----------
Net interest income $ 2,068,000 $ 4,789,000 $ 590,000 $ 2,508,000
----------- ----------- ----------- -----------
Yield on loans (1) 16.7% 21.7% 16.5% 20.8%
Cost of funds 10.7% 9.7% 11.0% 9.8%
----------- ----------- ----------- -----------
Net interest spread 6.0% 12.0% 5.5% 11.0%
----------- ----------- ----------- -----------
Net interest margin (2) 6.0% 12.6% 4.7% 11.7%
----------- ----------- ----------- -----------
</TABLE>
(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 June 30, 1998 and 1997
($1,502,000 and $1,978,000, respectively) and the six month periods ended June
30, 1998 and 1997 ($3,664,000 and $3,548,000, respectively)
14
<PAGE>
was primarily related to the debt outstanding under the Company's senior credit
facility, automobile receivables backed notes and subordinated debt. The
decrease in the three month period ended June 30,1998 is directly related to the
decrease in average outstanding debt as a result of the lack of new loan
origination activity and the sale of portfolio assets (See Note 4).
Operating expenses for the three months ended June 30, 1998 and 1997 ($1,433,000
and $2,507,000, respectively) and the six months ended June 30, 1998 and 1997
($3,273,000 and $4,831,000, 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 regional
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 June 30, 1998
and 1997 ($137,000 and $168,000, respectively) and the six months ended June 30,
1998 and 1997 ($288,000 and $320,000, respectively) consisted of the
depreciation of fixed assets. The decrease is related to assets associated with
the closing of the Company's northeast regional operating center.
The provision for credit losses for the three and six months ended June 30, 1988
of $3,938,000 represents the additional reserve required to reduce the carrying
amount of the Company's remaining portfolio of automobile receivables to its
estimated fair value. This is based upon the Company's present intent to
continue to pursue opportunities to sell portfolio assets.
The loss on sale of automobile receivables in the three and months ended June
30, 1998 ($699,000 and $1,035,000, respectively) relates to the sale of $44
million of automobile receivables.
Other expenses of $599,000 in the three and six months ended June 30, 1998
consists primarily of the write-off of deferred finance costs relating to the
Company's warehouse line of credit which has been accelerated based upon the
sale of portfolio assets and the loss on sale of fixed assets.
Loss from Operations
The loss from operations for the three month period ended June 30, 1998 was
$5,971,000 compared with income from operations for the three month period ended
June 30, 1997 of $728,000. The loss from operations for the six month period
ended June 30, 1998 was $6,540,000 compared with income from operations for the
six month period ended June 30, 1997 of $1,088,000. The increase in the loss
from operations in both the three and six months ended June 30, 1998 is
primarily the result of losses on the sale of portfolio assets and the
additional provision for credit losses. There is no income tax benefit for the
three and six month periods ended June 30, 1998 as the Company has recorded the
utilization all 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 June 30, 1998 and December 31, 1997:
June 30, December 31,
1998 1997
-----------------------
Allowance for credit losses $6,924,000 $19,000,000
Percentage of outstanding automobile receivables 25.9% 19.5%
15
<PAGE>
The following table summarizes the Company's accounts that were more than 60
days delinquent as of June 30, 1998 and December 31, 1997:
June 30, December 31,
1998 1997
-------------------------------------
Amount %(1) Amount %(1)
-------------------------------------
60 to 89 days delinquent $2,019,000 4.8% $ 3,199,000 2.5%
90 days or more delinquent 5,152,000 12.4% 6,992,000 5.6%
-------------------------------------
Total delinquent loans $7,171,000 17.2% $10,191,000 8.1%
=====================================
(1) All percentages are based on gross loans outstanding and are presented
on an annualized basis.
In management's opinion, the allowance for credit losses is adequate to absorb
current and future losses in the portfolio based upon its estimated air value as
of June 30, 1998.
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 1996, 1997 and in
the first and second quarters 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.
16
<PAGE>
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 June 30, 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,
March 31, 1998 and June 30, 1998. Accordingly, the Company did not meet the
interest coverage ratio requirement.
In July 1998, the Company sold approximately $7.7 million of these automobile
receivables and received proceeds of approximately $6.8 million. The Class A and
Class B notes were redeemed in full.
In December 1996, the Company entered into a financing agreement with CSFB which
provides for a $100 million line of credit to be used for the funding of the
acquisition of non-prime automobile receivables. This facility provides for
borrowings at LIBOR plus 300 basis points. Among other provisions, this facility
requires the Company to maintain tangible net worth, as defined, of $10 million
and is cancelable in the event of a material adverse change in the Company's
business. In October 1997, the Company and CSFB entered into an amended and
restated agreement which provided CSFB with additional collateral including a
residual interest in the anticipated cash flows upon the satisfaction of the
Class A and Class B securitized notes issued in October 1996 and any income tax
refund received by the Company for the tax year ended May 31, 1998.
At June 30, 1998 the Company had tangible net worth, as defined, of
approximately $3.1 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.
At June 30, 1998, the Company had outstanding subordinated debt consisting of
$8.2 million of 12% notes which were included with the liabilities assumed with
the acquisition of FALK Finance Company, Inc. ("FFC") in December 1995.
The Company's cash and short-term investments amounted to $3.3 million as of
June 30, 1998. In addition, the Company has $1.2 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 $2.1 million in
restricted collection accounts related to the Securitized Notes and its
warehouse line of credit.
17
<PAGE>
The total amount of debt outstanding as of June 30, 1998 and December 31, 1997
was $41.3 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 June 30, 1998 and December 31, 1997, respectively:
June 30, 1998 December 31,1997
----------------------------------------
Weighted Weighted
Average Average
Balance Rate Balance Rate
----------------------------------------
Revolving lines of credit $24.2 8.66% $67.9 8.78%
Automobile receivable backed notes $8.0 6.75% $14.1 6.91%
Subordinated debt $8.2 12.00% $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 and six months ended June 30, 1998.
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 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.
18
<PAGE>
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.
19
<PAGE>
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: August 11, 1998
20
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1.00000
<CASH> 4,364,743
<SECURITIES> 2,194,363
<RECEIVABLES> 26,687,383
<ALLOWANCES> (6,924,354)
<INVENTORY> 0
<CURRENT-ASSETS> 37,466,427
<PP&E> 2,586,685
<DEPRECIATION> (966,142)
<TOTAL-ASSETS> 39,086,970
<CURRENT-LIABILITIES> 1,333,148
<BONDS> 5
79,968
0
<COMMON> 0
<OTHER-SE> (3,597,001)
<TOTAL-LIABILITY-AND-EQUITY> 39,086,970
<SALES> 6,257,900
<TOTAL-REVENUES> 6,257,900
<CGS> 0
<TOTAL-COSTS> 3,560,970
<OTHER-EXPENSES> 1,634,307
<LOSS-PROVISION> 3,938,300
<INTEREST-EXPENSE> 3,664,161
<INCOME-PRETAX> (6,539,838)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,539,838)
<DISCONTINUED> 0
<EXTRAORDINARY> 1,703,017
<CHANGES> 0
<NET-INCOME> (4,836,821)
<EPS-PRIMARY> (0.610)
<EPS-DILUTED> (0.610)
</TABLE>
