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: September 30, 1999
Commission File Number: 0-14786
AUTOINFO, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 13-2867481
- --------------------------------------------------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification number)
of incorporation or organization)
P.O. Box 4383, Stamford, CT 06907-0383
- --------------------------------------------------------------------------------
(Address of principal executive office)
(203) 595-0005
- --------------------------------------------------------------------------------
(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
November 11, 1999: 7,756,953 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 -
September 30, 1999 (unaudited) and
December 31, 1998 ............................................. 3
Consolidated Statements of Operations (unaudited)-
Three and Nine months ended September 30, 1999 and
1998 .......................................................... 4
Consolidated Statements of Cash Flows (unaudited)-
Three and Nine months ended September 30, 1999 and
1998 .......................................................... 5
Notes to Unaudited Consolidated Financial
Statements .................................................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ......................... 12
Part II. Other Information ................................................ 17
Signatures ................................................................ 18
2
<PAGE>
AUTOINFO, INC. AND SUBSIDIARIES
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
-------------- --------------
Unaudited Audited
<S> <C> <C>
ASSETS
Cash $ 42,980 $ 116,570
Short-term investments 997,759 2,282,515
Investment in and advances to subsidiary (741,679) (741,679)
Fixed assets, net -- 250,887
Other assets 43,208 101,929
------------ ------------
$ 342,268 $ 2,010,222
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Subordinated notes and other debt $ 9,395,206 $ 10,038,028
Accrued interest payable 706,995 --
Accounts payable and accrued liabilities 118,494 536,581
------------ ------------
Total liabilities 10,220,695 10,574,609
------------ ------------
Stockholders' Equity
Common stock - authorized 20,000,000 shares
$.01 par value; issued and outstanding -
7,756,953 shares as of September 30, 1999 and
December 31, 1998 77,570 77,570
Additional paid-in capital 17,772,431 17,772,431
Deferred compensation under stock bonus plan (275,691) (,287,097)
Retained deficit (27,452,737) (26,127,291)
------------ ------------
Total stockholders' equity (9,878,427) (8,564,387)
------------ ------------
$ 342,268 $ 2,010,222
============ ============
</TABLE>
See notes to condensed unaudited financial statements
3
<PAGE>
AUTOINFO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Investment income $ 76,400 $ 92,881 $ 26,208 $ 40,386
------------ ------------ ------------ ------------
Costs and expenses:
Interest expense 719,886 50,150 235,325 16,537
Operating expenses 662,694 1,036,714 95,665 131,053
Depreciation & amortization 19,266 59,175 -- 19,725
------------ ------------ ------------ ------------
Total operating expenses 1,401,846 1,146,039 330,990 167,315
------------ ------------ ------------ ------------
Loss from continuing operations (1,325,446) (1,053,158) (304,782) (126,929)
Loss from discontinued operations -- (10,937,521) -- (5,324,212)
------------ ------------ ------------ ------------
Loss before extraordinary item (1,325,446) (11,990,679) (304,782) (5,451,141)
Extraordinary item - gain on debt
extinguishment -- 1,703,017 -- --
------------ ------------ ------------ ------------
Net loss $ (1,325,446) $(10,287,662) $ (304,782) $ (5,451,141)
============ ============ ============ ============
Basic and diluted net (loss) income
per share:
From continuing operations $ (.17) $ (.13) $ (.04) $ (.02)
From discontinued operations -- (1.37) -- (.67)
Extraordinary item -- .21 -- --
------------ ------------ ------------ ------------
Basic and diluted net loss per share $ (.17) $ (1.29) $ (.04) $ (.68)
============ ============ ============ ============
Weighted average number of
common and common
equivalent shares 7,756,953 7,996,752 7,756,953 7,996,752
------------ ------------ ------------ ------------
</TABLE>
See notes to condensed unaudited financial statements
4
<PAGE>
AUTOINFO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 1998
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (1,325,446) $ (4,836,821)
Adjustments to reconcile net (loss) income to net cash
provided by (used in) operating activities:
Depreciation and amortization 19,266 287,898
Amortization of deferred compensation 11,406 8,446
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
Other assets 290,342 2,531,050
Accounts payable and accrued liabilities 288,908 (779,481)
------------ ------------
Net cash provided by (used in) operating activities (715,524) 28,905,712
------------ ------------
Cash flows from investing activities:
Capital expenditures -- (2,863)
Sale of property and equipment -- 78,000
Proceeds from sale of automobile receivables -- 20,661,173
Proceeds from redemptions of short term investments 1,284,756 47,706
------------ ------------
Net cash provided (used in) by investing activities 1,284,756 20,784,016
------------ ------------
Cash flows from financing activities:
Decrease in borrowings, net (642,822) (51,918,970)
Decrease in restricted cash -- 826,113
------------ ------------
Net cash (used in) provided by financing activities (642,822) (51,092,857)
------------ ------------
Net decrease in cash (73,590) (1,403,129)
Cash at beginning of period 116,570 2,506,502
------------ ------------
Cash at end of period $ 42,980 $ 1,103,373
============ ============
</TABLE>
See notes to condensed unaudited financial statements
5
<PAGE>
AUTOINFO, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED FINANCIAL STATEMENTS
Forward Looking Statements
Various 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. These statements involve known and unknown risks,
uncertainties and other factors that may cause our actual results, performance
or achievements to be materially different from any future results, performance
or achievements expressed or implied by these forward-looking statements. The
forward-looking statements included in this report are based on current
expectations that involve numerous risks and uncertainties. Our plans and
objectives are based, in part, on assumptions involving judgments about, 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 our control. Although we believe that
our assumptions underlying the forward-looking statements are reasonable, any of
these assumptions could prove inaccurate and, therefore, we cannot assure you
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 in this report, the inclusion of these
statements should not be interpreted by anyone that our objectives and plans
will be achieved. Factors that could cause actual results to differ materially
from those expressed or implied by forward-looking statements include, but are
not limited to, the factors set forth in, "Certain Factors That May Affect
Future Growth," under Part I, Item 1 of the Company's Annual Report on Form 10-K
for the year ended December 31, 1998 as filed with the Securities and Exchange
Commission.
Note 1. - Business and Summary of Significant Accounting Policies
Business
In December 1995, AutoInfo, Inc., (the "Company"), a Delaware corporation,
acquired the operating assets of Falk Finance Company ("FFC"), a Norfolk,
Virginia based specialty financial services company for $5,125,000 in cash and
the assumption of liabilities and debt approximating $34,000,000. As a result,
the Company became a specialized consumer finance company that acquired and
serviced automobile receivables from automobile dealers selling new and used
vehicles to non-prime customers. In July 1996, the Company commenced operations
of its Northeast Regional center in Norwalk, Connecticut to provide its complete
range of services to dealers in the Northeast.
During 1997 and 1998, several non-prime automobile finance companies,
including the Company, experienced poor loan performance, higher delinquency
rates and increased credit losses on their portfolio assets. In addition, during
this period, a number of non-prime automobile finance companies made strategic
decisions to exit the market-place. This trend was the direct result of several
factors including: (a) the impact of increased levels of competition on loan
acquisition discounts; (b) the heightened demand created by the increased supply
of capital and used automobile inventories; (c) the need to attract consumers
with lower credit qualifications to meet this additional demand; (d) economic
uncertainties and financial difficulties within the non-prime automobile
industry as well as management upheavals at certain industry leaders; and (e)
the increased levels of outstanding consumer debt and personal bankruptcies.
These factors contributed to a significant reduction in available warehouse
lines of credit and a material decline in financial markets investments into the
non-prime automobile industry through the sale of equity securities,
subordinated debt instruments and securitized notes.
6
<PAGE>
The Company experienced material operating losses during 1996, 1997 and
1998. As a result of these losses, the adverse changes in the non-prime
automobile finance industry and the deterioration in the Company's financial
condition, during 1998, the Company discontinued the operation of its non-prime
automotive finance business.
As a result of these factors, the Company was unable to maintain adequate
levels of net worth to satisfy the loan covenant requirement under its warehouse
facility agreement with CS First Boston Mortgage Capital Corp. ("CSFB") and
similar covenants pursuant to securitized notes issued in October 1996. As of
December 31, 1997, CSFB no longer funded the acquisition of non-prime automobile
receivables generated by the Company. The Company, among other actions,
restructured operations and significantly reduced overhead and successfully
completed the sale of approximately $58 million of automobile receivables and
repaid $47 million under its warehouse line with CSFB. Additionally, in
conjunction with a July 1998 sale of approximately $8 million of automobile
receivables which collateralized the Company's securitized notes, the remaining
balance outstanding on these notes of approximately $7 million was paid in full.
During the fourth quarter of 1997, the Company closed its Northeast
Regional center in Norwalk, Connecticut.
During the fourth quarter of 1998, the Company sold all remaining
repossessed vehicles, closed its Norfolk, Virginia operating facility, further
reduced overhead and completed the restructuring of outstanding debt under its
warehouse facility with CSFB and subordinated note holders. After the sale of
all of its automobile receivables, the Company owed CSFB approximately $4.5
million under the warehouse facility. CSFB agreed to a reduction of $2.25
million, which resulted in a gain on extinguishment of approximately $2.0
million net of applicable expenses, and the Company paid the remaining balance
of approximately $2.3 million in cash. The Company also granted CSFB a five year
warrant to purchase 1,357,467 common shares at $ .03 per share. Further, the
holders of the Company's $8.2 million of 12% subordinated notes, due in 1999 and
2000, exchanged such notes for new notes totaling approximately $9.35 million
due in 2007 and 2008 (the "New Notes"). The principal balance of the New Notes
includes accrued interest of approximately $1.15 million through December 31,
1998. Interest on these new notes is due quarterly at the option of the Company
at the rate of 10% if paid in cash and 12% if paid in common shares of the
Company. Interest on the New Notes through September 30, 1999 has been accrued
at the rate of 10%, but not paid. The Company is presently negotiating with
representatives of the debt holders in furtherance of its restructuring plan.
Representatives of these note holders designated three members of the Company's
Board of Directors, one of whom subsequently resigned.
In April 1999, the Company negotiated the termination of its lease in
Montvale, New Jersey and vacated the premises. The Company is presently
occupying temporary office space in Stamford, Connecticut.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. The Company has no remaining
automobile receivables and has ceased to operate as an automobile finance
company. On January 29, 1999, the Company's wholly-owned subsidiary, CarLoan
Co., Inc. ("CLC"), filed a voluntary petition under Chapter 7 of the United
States Bankruptcy Code (Note 12). CLC's carrying amount in the December 31, 1998
consolidated financial statements has been written off as a result of the
bankruptcy filing. The Company is in the process of identifying new business
opportunities in furtherance of its plan to rebuild the Company and create
shareholder value. The foregoing factors raise substantial doubt about the
Company's ability to continue as a going concern. The accompanying consolidated
financial statements do not include any adjustments that might be necessary
should the Company be unable to continue as a going concern. Accordingly, the
carrying amounts of the Company's assets and liabilities do not purport to
represent realizable or settlement amounts.
7
<PAGE>
Summary of Significant Accounting Policies
Basis of Presentation
The financial statements of the Company have been prepared using the
accrual basis of accounting under generally accepted accounting principles
("GAAP"). The accounting policies of the Company conform with GAAP and with
general practices within the financial services industry.
Principles of Consolidation
The 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.
Revenue Recognition
The Company recognized interest income from automobile receivables on the
interest method. The accrual of interest income was suspended when a loan became
ninety days contractually delinquent. All discounts on the purchase of
installment contracts from dealers were held in reserve and were considered to
cover future anticipated credit losses. Fees received for the purchase of
automobile receivables were deferred and amortized to interest income over the
contractual lives of the contracts using the interest method.
Short-term Investments
Investments are carried at cost which approximates market value and
included:
September 30, December 31,
1999 1998
---------- ----------
Common stock and bond funds $ 873,600 $1,000,009
Money market instruments 124,159 386,177
Commercial paper -- 896,329
---------- ----------
$ 997,759 $2,282,515
---------- ----------
Fixed Assets
Fixed assets are carried at cost less accumulated depreciation.
Depreciation of fixed assets is provided on the straight-line method over the
estimated useful lives of the related assets which range from three to five
years. At December 31, 1998, fixed assets consisted predominantly of furniture,
fixtures and equipment at the Company's Montvale, New Jersey headquarters
facility.
During the quarter ended June 30, 1999, the Company terminated its lease
in Montvale, New Jersey and vacated the premises. According, the remaining net
fixed assets were written-off.
Loss Per Share
In 1997, the Company adopted SFAS No. 128, "Earnings Per Share," which
replaced the calculation of primary and fully diluted earnings per share with
basic and diluted earnings per share. Unlike primary earnings per share, basic
earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is similar to the previously
reported fully diluted earnings per share. All earnings per share amounts for
prior periods have been restated to conform to the new requirements.
8
<PAGE>
Basic loss per share is based on net loss divided by the weighted average
number of common shares outstanding. Common stock equivalents outstanding were
antidilutive for the three and nine month periods ended September 30, 1999 and
1998.
Use of Estimates
The preparation of these financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions. These estimates and assumptions affect the reported amounts of
assets, liabilities and contingent liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the periods
presented. The Company believes that all such assumptions are reasonable and
that all estimates are adequate, however, actual results could differ from those
estimates.
Income Taxes
The Company utilizes the asset and liability method for accounting for
income taxes. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
As of September 30, 1999, the Company had a net operating loss
carryforward of approximately $27 million for federal income tax purposes which
expires in 2013 and 2014. Any benefit from the utilization of these net
operating loss carryforwards has been fully reserved for in 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 nine months ended September
30, 1999 and 1998 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, 1998.
Note 3 - Liquidity and Capital Resources
Since its entry into the Non-Prime Automobile industry in December 1995
and until it ceased the operations of its non-prime automobile business during
1998, the Company 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
9
<PAGE>
performance standards with respect to the portfolio of loan contracts
securitized and certain overall financial considerations of the Company as a
whole, including not realizing a net loss from operations in any two consecutive
quarters and maintenance of minimum tangible net worth, as defined, of $7
million. At December 31, 1997 the Company had a tangible deficiency, as defined,
of ($200,000) and, accordingly, did not meet the minimum tangible net worth
standard. In addition, the Company had experienced a net loss from operations
for each of the quarters ended September 30, 1997, December 31, 1997, March 31,
1998 and September 30, 1998. Accordingly, the Company did not meet the interest
coverage ratio requirement. In July 1998, the Company sold approximately $7.7
million of these automobile receivables and received proceeds of approximately
$6.5 million. These proceeds, as well as available balances in Cash Reserve
accounts, were used to redeem the Class A and Class B notes in full.
In December 1996, the Company entered into a financing agreement with CSFB
which provides for a $100 million line of credit to be used for the funding of
the acquisition of non-prime automobile receivables. This facility provides for
borrowings at LIBOR plus 300 basis points. Among other provisions, this facility
requires the Company to maintain tangible net worth, as defined, of $10 million
and is cancelable in the event of a material adverse change in the Company's
business. In October 1997, the Company and CSFB entered into an amended and
restated agreement which provided CSFB with additional collateral including a
residual interest in the anticipated cash flows upon the satisfaction of the
Class A and Class B securitized notes issued in October 1996 and any income tax
refund received by the Company for the tax year ended May 31, 1998. In July
1998, the Company redeemed the Class A and Class B securitized notes resulting
in a residual cash balance consisting primarily of balances in restricted Cash
Reserve accounts of approximately $1.7 million which was remitted to CSFB. In
August 1998, the Company received its federal income tax refund of approximately
$3 million, which was remitted to CSFB. After the sale of all the remaining
automobile receivables in October 1998, the Company owed CSFB approximately $4.5
million. In November 1998, CSFB agreed to a discount of $2.25 million and the
Company paid the remaining balance of approximately $2.3 million in cash. The
Company also granted CSFB a five year warrant to purchase 1,357,467 common
shares at $.03 per share.
The Company has outstanding $9.3 million of subordinated debt comprised of
$8.2 million of 12% notes, included with the liabilities assumed with the
acquisition of FALK Finance Company, Inc. ("FFC") in December 1995, plus accrued
interest of $1.1 million through December 31, 1998. the holders of the Company's
$8.2 million of 12% subordinated notes, due in 1999 and 2000, exchanged such
notes for new notes totaling approximately $9.35 million due in 2007 and 2008
(the "New Notes"). The principle balance of the New Notes includes accrued
interest of approximately $1.15 million through December 31, 1998. Interest on
these new notes is due quarterly at the option of the Company at the rate of 10%
if paid in cash and 12% if paid in common shares of the Company. Interest on the
New Notes through September 30, 1999 has been accrued at the rate of 10%, but
not paid. The Company is presently negotiating with representatives of the debt
holders in furtherance of its restructuring plan. Representatives of these note
holders designated three members of the Company's Board of Directors, one of
whom subsequently resigned.
The Company's liquid assets amounted to $1.0 million as of September 30,
1999.
The Company has no remaining automobile receivables and has ceased to
operate as an automobile finance company. The Company is in the process of
identifying new business opportunities in furtherance of its plan to rebuild the
Company and create shareholder value. If the Company is unsuccessful in
identifying and consummating such a transaction, the Company does not have
sufficient liquid assets and available lines of credit to meet its short and
long-term capital requirements.
Note 4 - Sale of Automobile Receivables
During the nine months ended September 30, 1998 and in October 1998, the
Company sold a total of 8,547 loan contracts with a net principal balance of
approximately $66 million of which 4,374 loan contacts and $29.6 million were
sold during the three month period ended September 30, 1998 and in October 1998.
The proceeds from the sale of these automobile receivables were used to reduce
the outstanding debt under the Company's revolving line
10
<PAGE>
of credit and to redeem in full the Class A and Class B securitized notes. The
Company recognized a loss on these transactions of approximately $3.5 million.
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.
On March 23, 1999, the Company paid $585,000 representing full payment,
net of a $25,000 discount, of principal and accrued interest on a note which had
been previously declared in default by the lender.
Note 6 - Discontinued Operations
During 1998, the Company discontinued the operation of CLC, its non-prime
automobile finance subsidiary. Accordingly, the three and Nine month periods
ended September 30, 1998 has been restated to reflect the operating results for
CLC as discontinued operations and consists of the following:
Nine Months Three Months
Ended Ended
September 30, 1999
------------------------------
Revenues $ 6,880,341 $ 674,936
------------ ------------
Expenses:
Interest expense 4,337,628 175,917
Operating expenses 5,525,418 3,205,816
Depreciation and amortization 359,382 110,934
Provision for credit losses 3,938,300 300
Loss on sale of fixed assets 115,547 --
Loss on sale of automobile receivables 3,541,587 2,506,181
------------ ------------
17,817,862 5,999,148
------------ ------------
Net (loss) from discontinued operations $(10,937,521) $ (5,324,212)
------------ ------------
On January 29, 1999, the Company's wholly owned subsidiary, CarLoan Co.
("CLC") filed a voluntary bankruptcy petition under Chapter 7 of the United
States Bankruptcy Code (the "Bankruptcy Filing"). Since 1995, CLC had operated
the Company's non-prime automobile financing business. As of the date of the
Bankruptcy Filing, CLC had no assets and liabilities of approximately $57
million, including approximately $56 million of intercompany advances from the
Company. Accordingly,. the net liabilities of CLC as of December 31, 1998 have
been reclassified as Investment in and advances subsidiary, subject to
compromise as they may be affected by the outcome of the Bankruptcy Filing.
11
<PAGE>
AUTOINFO, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition And Results of Operations
General
In December 1995, AutoInfo, Inc., (the "Company"), a Delaware corporation,
acquired the operating assets of Falk Finance Company ("FFC"), a Norfolk,
Virginia based specialty financial services company for $5,125,000 in cash and
the assumption of liabilities and debt approximating $34,000,000. As a result,
the Company became a specialized consumer finance company that acquired and
serviced automobile receivables from automobile dealers selling new and used
vehicles to non-prime customers. In July 1996, the Company commenced operations
of its Northeast Regional center in Norwalk, Connecticut to provide its complete
range of services to dealers in the Northeast.
During 1997 and 1998, several non-prime automobile finance companies,
including the Company, experienced poor loan performance, higher delinquency
rates and increased credit losses on their portfolio assets. In addition, during
this period, a number of non-prime automobile finance companies made strategic
decisions to exit the market-place. This trend was the direct result of several
factors including: (a) the impact of increased levels of competition on loan
acquisition discounts; (b) the heightened demand created by the increased supply
of capital and used automobile inventories; (c) the need to attract consumers
with lower credit qualifications to meet this additional demand; (d) economic
uncertainties and financial difficulties within the non-prime automobile
industry as well as management upheavals at certain industry leaders; and (e)
the increased levels of outstanding consumer debt and personal bankruptcies.
These factors contributed to a significant reduction in available warehouse
lines of credit and a material decline in financial markets investments into the
non-prime automobile industry through the sale of equity securities,
subordinated debt instruments and securitized notes.
The Company experienced material operating losses during 1996, 1997 and
1998. As a result of these losses, the adverse changes in the non-prime
automobile finance industry and the deterioration in the Company's financial
condition, the Company determined to discontinue the operation of its non-prime
automotive finance business.
As a result of these factors, the Company was unable to maintain adequate
levels of net worth to satisfy the loan covenant requirement under its warehouse
facility agreement with CS First Boston Mortgage Capital Corp. ("CSFB") and
similar covenants pursuant to securitized notes issued in October 1996. As of
December 31, 1997, CSFB no longer funded the acquisition of non-prime automobile
receivables generated by the Company. The Company, among other actions,
restructured operations and significantly reduced overhead and successfully
completed the sale of approximately $58 million of automobile receivables and
repaid $47 million under its warehouse line with CSFB. Additionally, in
conjunction with a July 1998 sale of approximately $8 million of automobile
receivables which collateralized the Company's securitized notes, the remaining
balance outstanding on these notes of approximately $7 million was paid in full.
During the fourth quarter of 1998, the Company sold all remaining
repossessed vehicles, closed its Norfolk, Virginia operating facility, further
reduced overhead and completed the restructuring of outstanding debt under its
warehouse facility with CSFB and subordinated note holders. After the sale of
all of its automobile receivables, the Company owed CSFB approximately $4.5
million. CSFB agreed to a reduction of $2.25 million and the Company paid the
remaining balance of approximately $2.3 million in cash. The Company also
granted CSFB a five year warrant to purchase 1,357,467 common shares at $ .03
per share. Further, the holders of the Company's $8.2 million of 12%
subordinated notes, due in 1999 and 2000, exchanged such notes for new notes
totaling approximately $9.35 million due in 2007 and 2008 (the "New Notes"). The
New Notes include accrued the capitalization of interest of approximately $1.15
million through December 31, 1998 to principal. Interest on these new notes is
due quarterly at the option of the Company at the rate of 10% if paid in cash
and 12% if paid in
12
<PAGE>
common shares of the Company. In addition, representatives of these note holders
have designated three members of the Company's Board of Directors, one of whom
subsequently resigned.
During the quarter ended June 30, 1999, the Company negotiated the
termination of its lease in Montvale, New Jersey and vacated the premises. The
Company is presently occupying temporary office space in Stamford, Connecticut.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. The Company has no remaining
automobile receivables and has ceased to operate as an automobile finance
company. On January 29, 1999, the Company's wholly-owned subsidiary, CarLoan
Co., Inc. ("CLC"), filed a voluntary petition under Chapter 7 of the United
States Bankruptcy Code. CLC's carrying amount in the December 31, 1998
consolidated financial statements has been written off as a result of the
bankruptcy filing. The Company is in the process of identifying new business
opportunities in furtherance of its plan to rebuild the Company and create
shareholder value. The foregoing factors raise substantial doubt about the
Company's ability to continue as a going concern. The accompanying consolidated
financial statements do not include any adjustments that might be necessary
should the Company be unable to continue as a going concern. Accordingly, the
carrying amounts of the Company's assets and liabilities do not purport to
represent realizable or settlement amounts.
Results of Operations
Three and Nine Months Ended September 30, 1999 and 1998
Revenues
Revenues for the three and nine month periods ended September 30, 1999 and
1998 consisted of interest and dividends on short-term investments.
Costs and Expenses
Interest expense for the three month periods ended September 30, 1999 and
1998 ($235,000 and $35,000, respectively) and the nine month periods ended
September 30, 1999 and 1998 ($720,000 and $50,000, respectively) was related to
subordinated debt and other bank debt. The increase is directly related to the
assumption by the Company of $9,348,000 of subordinated debt pursuant to the
debt restructuring plan implemented during the fourth quarter of 1998.
Operating expenses for the three months ended September 30, 1999 and 1998
($96,000 and $130,000, respectively) and the nine months ended September 30,
1999 and 1998 ($663,000 and $1,037,000, respectively) consisted primarily of
corporate overhead. The decrease is directly related to reduction in corporate
staff and the results of the cost reduction plan implemented by the Company.
Depreciation and amortization expense for the three months ended September
30, 1999 and 1998 ($0 and $20,000, respectively) and for the nine months ended
September 30, 1999 and 1998 ($0 and $60,000, respectively) consisted of the
depreciation of fixed assets. During the quarter ended June 30, 1999, the
Company terminated its lease in Montvale, New Jersey and vacated the premises.
According, the remaining net fixed assets were written-off.
The loss from discontinued operations consists of the operating results of
CLC, the Company's non-prime automobile finance subsidiary which was
discontinued during 1998.
Loss from Operations
13
<PAGE>
The loss from continuing operations for the three months ended September
30, 1999 and 1998 was $305,000 and $127,000, respectively, and for the nine
months ended September 30, 1999 and 1998 was $1,325,000 and $1,053,000,
respectively. The net loss from operations for the three months ended September
30, 1999 and 1998 was $305,000 and $5,451,000, respectively, and for the nine
months ended September 30, 1999 and 1998 was $1,325,000 and $10,288,000,
respectively. The increase in the loss from continuing operations is the direct
result of the assumption by the Company of $9,348,000 of subordinated debt
pursuant to the debt restructuring plan implemented during the fourth quarter of
1998. There is no income tax benefit for the three and nine month periods ended
September 30, 1999 and 1998 since the Company has recorded the utilization of
its available income tax carrybacks as of December 31, 1997.
Liquidity and Capital Resources
Trends and Uncertainties
During 1997 and 1998, several non-prime automobile finance companies,
including the Company, experienced poor loan performance, higher delinquency
rates and increased credit losses on their portfolio assets. In addition, during
this period, a number of non-prime automobile finance companies made strategic
decisions to exit the market-place. This trend was the direct result of several
factors including: (a) the impact of increased levels of competition on loan
acquisition discounts; (b) the heightened demand created by the increased supply
of capital and used automobile inventories; (c) the need to attract consumers
with lower credit qualifications to meet this additional demand; (d) economic
uncertainties and financial difficulties within the non-prime automobile
industry as well as management upheavals at certain industry leaders; and (e)
the increased levels of outstanding consumer debt and personal bankruptcies.
These factors contributed to a significant reduction in available warehouse
lines of credit and a material decline in financial markets investments into the
non-prime automobile industry through the sale of equity securities,
subordinated debt instruments and securitized notes.
The Company experienced material operating losses during 1996, 1997 and
1998. As a result of these losses, the adverse changes in the non-prime
automobile finance industry and the deterioration in the Company's financial
condition, during 1998, the Company discontinued the operation of its non-prime
automotive finance business.
As a result of these factors, the Company was unable to maintain adequate
levels of net worth to satisfy the loan covenant requirement under its warehouse
facility agreement with CS First Boston Mortgage Capital Corp. ("CSFB") and
similar covenants pursuant to securitized notes issued in October 1996. As of
December 31, 1997, CSFB no longer funded the acquisition of non-prime automobile
receivables generated by the Company. The Company, among other actions,
restructured operations and significantly reduced overhead and successfully
completed the sale of approximately $58 million of automobile receivables and
repaid $47 million under its warehouse line with CSFB. Additionally, in
conjunction with a July 1998 sale of approximately $8 million of automobile
receivables which collateralized the Company's securitized notes, the remaining
balance outstanding on these notes of approximately $7 million was paid in full.
During the fourth quarter of 1997, the Company closed its Northeast
Regional center in Norwalk, Connecticut.
During the fourth quarter of 1998, the Company sold all remaining
repossessed vehicles, closed its Norfolk, Virginia operating facility, further
reduced overhead and completed the restructuring of outstanding debt under its
warehouse facility with CSFB and subordinated note holders. After the sale of
all of its automobile receivables, the Company owed CSFB approximately $4.5
million under the warehouse facility. CSFB agreed to a reduction of $2.25
million, which resulted in a gain on extinguishment of approximately $2.0
million net of applicable expenses, and
14
<PAGE>
the Company paid the remaining balance of approximately $2.3 million in cash.
The Company also granted CSFB a five year warrant to purchase 1,357,467 common
shares at $ .03 per share. Further, the holders of the Company's $8.2 million of
12% subordinated notes (Note 5), due in 1999 and 2000, exchanged such notes for
new notes totaling approximately $9.35 million due in 2007 and 2008 (the "New
Notes"). The New Notes include accrued interest of approximately $1.15 million
through December 31, 1998 to principal. Interest on these new notes is due
quarterly at the option of the Company at the rate of 10% if paid in cash and
12% if paid in common shares of the Company. Interest on the New Notes through
September 30, 1999 has been accrued at the rate of 10%, but not paid. The
Company is presently negotiating with representatives of the debt holders in
furtherance of its restructuring plan. Representatives of these note holders
designated three members of the Company's Board of Directors, one of whom
subsequently resigned.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. The Company has no remaining
automobile receivables and has ceased to operate as an automobile finance
company. On January 29, 1999, the Company's wholly-owned subsidiary, CarLoan
Co., Inc. ("CLC"), filed a voluntary petition under Chapter 7 of the United
States Bankruptcy Code. CLC's carrying amount in the December 31, 1998
consolidated financial statements has been written off as a result of the
bankruptcy filing. The Company is in the process of identifying new business
opportunities in furtherance of its plan to rebuild the Company and create
shareholder value. The foregoing factors raise substantial doubt about the
Company's ability to continue as a going concern. The accompanying consolidated
financial statements do not include any adjustments that might be necessary
should the Company be unable to continue as a going concern. Accordingly, the
carrying amounts of the Company's assets and liabilities do not purport to
represent realizable or settlement amounts.
Liquidity and Capital Resources
The Company's cash and short-term investments amounted to $1.1 million as
of September 30, 1999.
The total amount of debt outstanding as of September 30, 1999 and December
31, 1998 was $9.4 million and $10.0 million, respectively. This following table
presents the Company's debt instruments and weighted average interest rates on
such instruments as of September 30, 1999 and December 31, 1998, respectively:
September 30, 1999 December 31,1998
Weighted Weighted
Average Average
Balance Rate Balance Rate
-----------------------------------------
Subordinated debt $9.3 12.0% $9.3 12.0%
Other debt $ .1 8.5% $ .7 8.5%
The Company has no remaining automobile receivables and has ceased to
operate as an automobile finance company. The Company is in the process of
identifying new business opportunities in furtherance of its plan to rebuild the
Company and create shareholder value. If the Company is unsuccessful in
identifying and consummating such a transaction, the Company does not have
sufficient liquid assets and available lines of credit to meet its short and
long-term capital requirements.
Inflation and changing prices had no material impact on revenues or the
results of operations for the three months ended September 30, 1999.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. The Company has no remaining
automobile receivables and has ceased to operate as an automobile finance
company. On January 29, 1999, the Company's wholly-owned subsidiary, CarLoan
Co., Inc. ("CLC"), filed a voluntary petition under Chapter 7 of the United
States Bankruptcy Code. CLC's carrying amount in the December 31, 1998
consolidated financial statements has been written off as a result of the
bankruptcy filing. The Company is
15
<PAGE>
in the process of identifying new business opportunities in furtherance of its
plan to rebuild the Company and create shareholder value. The foregoing factors
raise substantial doubt about the Company's ability to continue as a going
concern. The accompanying consolidated financial statements do not include any
adjustments that might be necessary should the Company be unable to continue as
a going concern. Accordingly, the carrying amounts of the Company's assets and
liabilities do not purport to represent realizable or settlement amounts.
Year 2000
The Company maintained a sophisticated data processing support and
management information systems. Since the Company ceased operating as a
non-prime automobile finance company during 1998, Finance Manager, the Company's
custom designed proprietary software management system, is only used as a source
of historical customer data files. In prior years, this system had been updated
and maintained by the Company's MIS Department based in Norfolk, Virginia.
During 1997, the Company had made a comprehensive assessment of the impact of
the year 2000 on its business. This assessment included the preparation of a
comprehensive inventory of computer systems and computer-controlled devices. As
of December 31, 1997, the Company's compliance efforts were complete. Finance
Manager software was designed to account for consumer loan contracts with
maturity dates beyond the year 2000. This system has been in use by the Company
since 1996. Accordingly, the Company does not expect that the cost of ensuring
Year 2000 compliance will have a material adverse impact on its financial
position or results of operations in the current year or in future years.
16
<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): None
17
<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/ William I. Wunderlich
------------------------------------------
William I. Wunderlich
President and Principal Financial Officer
Date: November 11, 1999
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 42,980
<SECURITIES> 997,759
<RECEIVABLES> 0
<ALLOWANCES> 0
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<CURRENT-ASSETS> 1,040,739
<PP&E> 0
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<CURRENT-LIABILITIES> 825,489
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