U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended December 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ____________
Commission file number 000-15216
AUTOCORP EQUITIES, INC.
(Exact name of small business issuer as specified in its charter)
Nevada 87-0522501
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
5949 Sherry Lane, Suite 525
Dallas, Texas 75225
(Address of principal executive offices)
(214) 378-8271
(Issuer's telephone number)
2980 E. Northern Avenue, Suite A1, Phoenix, Arizona 85028
June 30
(Former name, former address and former fiscal year, if changed since last
report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 No X
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 6,087,184 shares of Common
Stock, $.001 par value, as of May 31, 1999.
Transitional Small Business Disclosure Format (check one): Yes___ No ___
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INDEX
PART I - FINANCIAL INFORMATION Page
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Item 1. Financial Statements
Condensed Consolidated Balance Sheets at December 31, 1998 2
(unaudited) and September 30, 1998 (unaudited)
Condensed Consolidated Statements of Operations (unaudited) for the three 4
months ended December 31, 1998 and 1997
Condensed Consolidated Statements of Cash Flows (unaudited) for 5
the three months ended December 31, 1998 and 1997
Notes to Condensed Consolidated Financial Statements (unaudited) 8
Item 2. Management's Discussion and Analysis or Plan of Operation 16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
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PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
AUTOCORP EQUITIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
December 31, 1998 and September 30, 1998
December 31, September 30,
1998 1998
----------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 145,056 $ 51,979
Accounts receivable, net 188,092 468
Inventory 697,504 95,297
----------- ------------
Total current assets 1,030,652 147,744
PROPERTY AND EQUIPMENT
Furniture and fixtures 5,500 5,500
Office equipment 176,615 4,220
Automobiles 14,500 14,500
Machinery and equipment 10,780 10,780
----------- ------------
207,395 35,000
Less accumulated depreciation
and amortization 11,149 1,361
----------- ------------
196,246 33,639
----------- ------------
Total assets $ 1,226,898 $ 181,383
=========== ============
See accompanying notes to condensed consolidated financial statements.
2
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AUTOCORP EQUITIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
December 31, 1998 and September 30, 1998
December 31, September 30,
1998 1998
----------- ------------
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current portion, long-term debt $ 363,328 $ 987,153
Line of credit 602,960 -
Accounts payable and accrued expenses 490,509 1,489,961
Related party payables 1,400,140 5,678,208
Other current liabilities 188,943 188,943
----------- ------------
Total current liabilities 3,045,880 8,344,265
Long-term debt, net of current portion
and net of discounts of $0 and $5,733,
respectively 81,228 1,534,606
Provision for recourse liability 3,230,000 2,320,000
Commitments and contingencies - -
SHAREHOLDERS' DEFICIT:
Convertible preferred stock, no par value,
5% non-cumulative; liquidation preference
of $1.00 per share; 10,000,000 shares
authorized, 6,578,485 shares issued and
outstanding at December 31, 1998 6,578,485 -
Common stock, par value $.001; 110,000,000
shares authorized, 6,083,848 and 6,099,435
shares issued and outstanding at
December 31, 1998 and September 30, 1998,
respectively 6,084 6,099
Additional paid-in capital 11,486,771 11,469,716
Accumulated deficit (22,964,050) (22,914,303)
Less shares held in trust (227,500) -
Less treasury stock - (569,000)
Less stock subscriptions receivable (10,000) (10,000)
----------- ------------
Total shareholders' deficit (5,130,210) (12,017,488)
----------- ------------
Total liabilities and
shareholders' deficit $ 1,226,898 $ 181,383
=========== ============
See accompanying notes to condensed consolidated financial statements.
3
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AUTOCORP EQUITIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three Months Ended December 31, 1998 and 1997
Three Months Ended
December 31,
1998 1997
------------- -------------
Net revenues $ 1,027,078 $ 1,937,122
Cost of sales 534,039 1,732,705
------------ -----------
Gross profit 493,039 204,417
Selling, administrative
and other operating expenses 645,235 1,178,095
Provision for recourse liability 330,000 -
------------ -----------
Operating loss (482,196) (973,678)
Other expense:
Interest expense (162,796) (85,164)
Other - 2,373
Gain on disposition of subsidiaries 595,245 -
------------ -----------
Net loss $ (49,747) $(1,056,469)
============ ===========
Net loss per share, basic and diluted $ (.01) $ (.21)
============ ===========
Weighted average number of shares
outstanding, basic and diluted 6,155,218 5,081,975
============ ===========
See accompanying notes to condensed consolidated financial statements.
4
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AUTOCORP EQUITIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Three Months Ended December 31, 1998 and 1997
Three Months Ended
December 31,
1998 1997
------------- -------------
Net loss $ (49,747) $ (1,056,469)
Adjustments to reconcile
net loss to net cash provided
by/(used in) operating activities:
Depreciation and
amortization 9,788 22,377
Provision for recourse liability 330,000 -
Gain on disposition
of subsidiaries (595,245) -
Deferred income - (74,099)
Changes in:
Accounts receivable (187,624) (1,361,125)
Related party payables - (45,709)
Receivables from officers - (36,000)
Inventory (602,207) 636,687
Prepaid expenses - 3,903
Deposits - (15,773)
Accounts payable and
accrued expenses 611,591 1,764,830
Bank overdrafts - 171,376
Line of credit 602,960 -
Other 1,700 -
------------- -------------
Total adjustments 170,963 1,066,467
------------- -------------
Net cash provided by
operating activities 121,216 9,998
------------- -------------
Cash flows from investing activities:
Capital expenditures (172,395) (250,159)
------------- -------------
Net cash used in
investing activities (172,395) (250,159)
------------- -------------
See accompanying notes to condensed consolidated financial statements.
5
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AUTOCORP EQUITIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
For the Three Months Ended December 31, 1998 and 1997
Three Months Ended
December 31,
1998 1997
------------- -------------
Cash flows from financing activities:
Principal payments
on long-term debt $ (25,744) $ (16,500)
Proceeds from issuance of
long-term debt 170,000 159,564
------------- -------------
Net cash provided by
financing activities 144,256 143,064
------------- -------------
Net increase/(decrease) in
cash and cash equivalents 93,077 (97,097)
Cash and cash equivalents
at beginning of period 51,979 153,667
------------- -------------
Cash and cash equivalents
at end of period $ 145,056 $ 56,570
============= =============
Supplemental disclosures of cash flow information:
Cash paid for interest $ 10,914 $ 1,119
============= =============
Cash paid for income taxes $ - $ -
============= =============
See accompanying notes to condensed consolidated financial statements.
6
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AUTOCORP EQUITIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
For the Three Months Ended December 31, 1998 and 1997
Three Months Ended
December 31,
1998 1997
------------- -------------
Non-cash transactions
Stock issued for services $ 2,737 $ -
During the three months ended December 31, 1998, the Company issued preferred
shares valued at $6,578,485 and net other equity of $355,803 in exchange for the
extinguishment of $2,223,159 of debt, $4,278,068 of related party payables and
$1,028,306 of other liabilities resulting in a net gain on disposition of
subsidiaries of $595,245. The other equity consisted of $1,724,775 in treasury
stock obtained in the disposition of the Company's subsidiaries, $227,500 of
treasury stock received into a trust, other treasury stock of $2,293,775 issued
in extinguishment of debt and liabilities and $14,303 for 22,000 shares of
common stock converted from debt at $0.65 per share.
See accompanying notes to condensed consolidated financial statements.
7
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AUTOCORP EQUITIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
December 31, 1998
NOTE 1. BASIS OF PRESENTATION
In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements contain all adjustments necessary to
present fairly its financial position and the results of its operations
and cash flows for the periods shown.
Certain prior period amounts have been reclassified to conform to the
current period's presentation.
The preparation of the Company's financial statements in conformity
with generally accepted accounting principles necessarily requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. The results of
operations for the respective three month periods are not necessarily
indicative of the results to be expected for a full year of operations.
These unaudited condensed consolidated financial statements should be
read in conjunction with the Company's annual report of Form 10-KSB for
the year ended September 30, 1998.
A summary of significant accounting policies is currently on file with
the Securities and Exchange Commission on Form 10-KSB.
During the three months ended December 31, 1998 and the year ended
September 30, 1998, the Company's operations were negatively impacted
by the poor performance of its automobile sales and financing
subsidiaries. The Company has a shareholders' deficit of approximately
$5,000,000 at December 31, 1998 and a history of operating losses.
Management's plans to return to profitability are three-fold. First, to
divest itself of the non-productive subsidiaries by exchanging them for
stock held by the Merritt Group, a related party comprised of
individuals who were officers of the Company (see Note 11 below).
Second, to reduce debt and make arrangements to reduce the Company's
exposure to further liability by tendering equity securities to
AutoPrime (see note 7 below) in satisfaction of the Company's liability
to AutoPrime.
8
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AUTOCORP EQUITIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
December 31, 1998
NOTE 1. BASIS OF PRESENTATION (continued)
Third, to achieve operational profitability by purchasing and
generating higher quality notes receivable.
It is not possible to predict the success of management's subsequent
efforts to achieve profitability. If management is unable to achieve
its goals, the Company may find it necessary to undertake other actions
as may be appropriate.
The accompanying condensed consolidated financial statements do not
include any adjustments relating to the recoverability and
classification of the recorded asset amounts or the amounts and
classification of liabilities that might be necessary should the
Company be unable to continue in existence.
NOTE 2. DISPOSITION OF SUBSIDIARIES
In December 1998, an agreement was reached between the two officers
(and largest shareholders) of the Company and the largest creditor of
the Company. The Company agreed to take back 2,653,500 shares of common
stock owned by the officers. In exchange, the Company transferred and
disposed of control over certain operations of the Company to
individuals who were officers of the Company. The largest creditor,
AutoPrime, was tendered 1,091,113 shares of common stock and 6,578,485
shares of preferred stock, in exchange for the conversion of debt of
$6,081,042. These shares were placed in trust for AutoPrime. The
Company further agreed to put certain shares in trust accounts to help
settle other liabilities and contingencies, including obligations to
certain long-term bondholders.
9
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AUTOCORP EQUITIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
December 31, 1998
NOTE 3. LONG-TERM DEBT
Long-term debt at December 31, 1998 and September 30, 1998
consisted of the following:
December 31, September 30,
1998 1998
------------ ------------
Note payable, unsecured, for
acquisition of car lot, payable
in quarterly installments of
$50,000. No interest is charged
on note. Matures March 2000 $ 284,000 $ 284,000
Note payable, unsecured, for
acquisition of finance servicing
facility, payable in monthly
installments of $9,444. No
interest is charged on note.
Matures May 2000 160,556 -
Notes payable, unsecured, payable at
maturity plus interest at rates
from 8% to 24% per annum. Converted
to stock December 1998 - 2,217,884
Capital leases, secured by
equipment, payable in monthly
installments of $1,125 plus interest
rates of 14% to 16% per annum.
Transferred in disposition of
subsidiaries December 1998 - 25,608
Unamortized discounts - (5,733)
------------ ------------
444,556 2,521,759
Less current portion 363,328 987,153
------------ ------------
$ 81,228 $ 1,534,606
============ ============
Maturities of this debt are as follows:
Year ended December 31, 1999 $ 363,328
2000 81,228
------------
$ 444,556
============
10
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AUTOCORP EQUITIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
December 31, 1998
NOTE 4. LINE OF CREDIT
The Company has a $750,000 line of credit with AutoPrime to purchase
used cars for resale on the Company lots. This line of credit, or
flooring plan, is secured 100% by the vehicle inventory and interest is
charged at a rate of 6.5% over the reference rate (currently 7.75%)
resulting in an annual rate of 14.25%. The agreement is revolving and
is renewable each year. The current agreement expires November 26,
1999. There are certain covenants in the agreement that allow for an
earlier due date. At December 31, 1998, $602,960 of the line had been
used, and $147,040 was available.
NOTE 5. COMMITMENTS AND CONTINGENCIES
The Company leases office space and auto lots under noncancellable
operating lease agreements which require monthly payments of $14,904
per month and expire in August 1999. Future minimum annual payments
required under the leases are $67,247 at December 31, 1998.
The Company sells used automobiles using auto financing contracts. The
Company then sells the contracts to a finance company, generally under
a recourse agreement, whereby the Company guarantees the repayment of
the note. If the note holder defaults, the Company is responsible for
repossessing the automobile and either paying the amount due the
finance company or substituting a new loan for the one in default.
In December 1995, the Company's subsidiary, CIC, entered into a
factoring agreement with Travelers Acceptance Corporation ("TAC"). The
agreement allowed TAC to buy the Company's notes receivable at 70% of
the face value of the notes. TAC would then remit to the Company 20% of
the customer payments received. The Company stopped submitting notes to
TAC in October 1997. At September 30, 1998, TAC held notes totaling
$681,141, of which the Company would be contingently liable to repay
approximately $480,000 to TAC if the various note holders all
defaulted. However, in management's estimate, the Company will not have
to repay or replace these notes, nor does management expect the Company
to receive any contingent revenue. As of December 31, 1998, the Merritt
Group assumed responsibility for this liability.
11
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AUTOCORP EQUITIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
December 31, 1998
NOTE 5. COMMITMENTS AND CONTINGENCIES (continued)
In October 1997, the Company entered into an agreement with AutoPrime
to provide financing for the Company's automobile transactions. The
agreement allows AutoPrime to buy the notes at a percentage of face
value (averaging approximately 75%) and then to pay the Company an
additional percentage (averaging approximately 15%) on all principal
collections. The loss ratios of the notes sold have been much greater
than expected to date. However, with the change in management and a
change in the Company's lending criteria, management expects to have
better loan collection results in future periods. The loan balances and
contingent losses reserved are as follows:
December 31, September 30,
1998 1998
----------- ------------
Total liability, including
the contracts sold by
related parties. $10,770,000 $ 7,730,000
Recorded liability, estimated
at 30% of total contracts
outstanding $ 3,230,000 $ 2,320,000
As discussed in Notes 3, 10 and 11, the Company has issued for tender
to AutoPrime 6,578,485 preferred shares, valued at $1.00 per share,
which includes 3,078,485 shares relating to recourse liability on
contracts owned by AutoPrime. The Company has an obligation to maintain
the $1.00 per share value on the remaining 3,237,956 preferred shares
(net of 262,044 shares released from pledge) issued to AutoPrime (in
trust), and is contingently liable for the issuance of additional
preferred shares as may be necessary to maintain such value.
NOTE 6. PURCHASE OF LOAN PORTFOLIOS
In October 1998, the Company purchased a portfolio of finance contracts
secured by used automobiles from an auto dealership in Texas. The
purchase was made for $1,427,098, which represented 68% of the face
value of the loans, which totaled $2,098,674. The Company then sold the
note portfolio to AutoPrime for approximately
12
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AUTOCORP EQUITIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
December 31, 1998
NOTE 6. PURCHASE OF LOAN PORTFOLIOS (continued)
80% of the face value of the loans. The difference of $242,581 was
recorded as an increase to the contingent liabilities as the Company
sold the notes with full recourse. Income will be recognized as the
portfolio matures and collections are received.
Also in October 1998, the Company purchased a portfolio of finance
contracts secured by used automobiles from an auto finance company in
Kentucky. The purchase was made for $1,672,640, which represented 67%
of the face value of the loans, which totaled $2,496,478. The Company
then sold the notes on a full recourse basis to AutoPrime for 80% of
the face value of the loans. The difference of $324,542 was also
recorded as an increase to the contingent liabilities.
NOTE 7. CONCENTRATION OF CREDIT RISK
The Company is reliant on the financing supplied by AutoPrime. At
December 31, 1998 and September 30, 1998, substantially all of the auto
loans made by AutoCorp and its automobile inventory flooring line were
financed by AutoPrime. In December 1998, 1,091,113 shares of common
stock of AutoCorp (approximately 18%) and another 6,578,485 shares of
preferred stock were transferred into trusts and tendered to AutoPrime
in exchange for the relief of certain debts and other consideration.
Upon tender, the preferred stock is convertible to common shares on a
1-for-1 basis at any time starting January 1, 2002. Upon conversion,
AutoPrime would effectively own approximately 61% of AutoCorp's common
stock.
NOTE 8. STOCK TRANSACTIONS
In January 1998, CIC started delivering shares of AutoCorp Equities,
Inc. common stock to holders of its unsecured notes payable as the
unsecured notes began to mature. As of December 31, 1998 and September
30, 1998, 22,000 and 490,076 shares, respectively, had been issued to
convert $88,000 and $1,400,570, respectively, of CIC's notes, which
were in default, plus $0 and $255,297 of accrued interest,
respectively, which resulted in a loss on conversion of $0 and
$184,023, respectively.
13
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AUTOCORP EQUITIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
December 31, 1998
NOTE 8. STOCK TRANSACTIONS (continued)
The Company issued 2,737 and 227,141 shares of common stock at $1.00
and $0.94 per share, respectively, for accounting and consulting
services totaling $2,737 and $212,454 at December 31, 1998 and
September 30, 1998, respectively.
The Company also issued 172,000 shares at par value ($0.001) to a
former officer of the Company as part of his severance agreement with
the Company and 110,200 shares of common stock at $1.00 per share to
another former officer as part of a separate agreement during the year
ended September 30, 1998.
In December 1998, the Company acquired 2,653,500 shares of its common
stock at $0.65 per share in the disposition of its subsidiaries. These
shares, in addition to the 563,500 shares already in the treasury were
issued to three trusts.
Also in December 1998, the Company issued for tender 6,578,485 shares
of its preferred shares and 1,091,113 of its treasury shares in relief
of liabilities assumed in the disposition of its subsidiaries.
NOTE 9. RELATED PARTY TRANSACTIONS
The Company has received advances from and made payments for CIC Fund
V, a company owned by the Merritt Group. AutoPrime also sold contracts
to the Merritt Group and affiliates in an aggregate amount of
approximately $3,000,000, and advanced certain additional funds, all
represented by promissory notes accruing interest at 10% per annum.
The Company was a co-maker of the notes and AutoPrime offset interest
due on the loans and principal payments due from the Merritt Group and
CIC Fund V with funds due to the Company. The balances of amounts owed
to AutoPrime, primarily as a result of repurchase obligations, at
December 31, 1998 and September 30, 1998 were $1,400,140 and
$5,678,208, respectively.
Certain former officers of the Company had various contingent
agreements with the Company. Management believes that no payments will
be made on these agreements in excess of what has been accrued.
14
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AUTOCORP EQUITIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
December 31, 1998
NOTE 10. SHARES HELD IN TRUST
The Company has created three trusts to distribute the shares
previously held in treasury and the shares obtained from the Merritt
group executives. One trust, with 2,517,000 shares, was designated to
assist in satisfying portions of the debts of the Merritt Group and the
Company. 1,091,113 shares of common stock were tendered to AutoPrime as
compensation for certain debt relief. Approximately 654,000 of the
remaining trust shares are designated to allow CIC to convert certain
note holders to equity positions in the Company, with the balance of
approximately 772,000 shares held to meet any contingent liabilities,
as mutually agreed upon by the trustee and AutoCorp management. The
treasury shares in this trust are part of the cost of the disposition
of the subsidiaries. The second trust account was granted 350,000
shares of voting common stock, valued at cost, which approximates
market price at December 31, 1998 of $0.65 per share, to be distributed
to employees of AutoPrime for past services. These shares are
considered part of the compensation to AutoPrime in exchange for the
debt relief.
The third trust account was granted 350,000 shares of voting common
stock to be distributed to current or future employees of the Company.
These shares are also valued at cost, which approximates market price
at December 31, 1998 of $0.65 per share. Management has a plan to
distribute these shares within the current fiscal year, but until
distributed, the shares will remain as a contra equity account.
15
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition or Plan of
Operation
(a) Plan of Operation.
Not applicable.
(b) Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Forward looking statements
This report contains forward looking statements. Additional written or
oral forward looking statements may be made by the Company from time to time in
filings with the Securities and Exchange Commission or otherwise. Such forward
looking statements are within the meaning of that term in Section 27A of the
Securities Act, and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). Such statements may include, but not be limited
to, projections of revenue, income, or loss, estimates of capital expenditures,
plans for future operations, products or services, financing needs or plans, as
well as assumptions relating to the foregoing. The words "believe", "expect",
"anticipate" "estimate", "project", and similar expressions identify forward
looking statements, which speak only as of the date the statement was made.
Forward looking statements are inherently subject to risks and uncertainties,
some of which cannot be predicted or quantified. Future events and actual
results could differ materially from those set forth in, contemplated by, or
underlying the forward looking statements. The Company undertakes no obligation
to publicly update or revise any forward looking statements, whether as a result
of new information, future events, or otherwise. The following disclosures, as
well as other statements in this Report on Form 10-K, including those contained
below in Part II., Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and in the notes to the Company's
consolidated financial statements, describe factors, among others, that could
contribute to or cause such differences, or that could affect the Company's
stock price.
Overview
The Company operates "Buy Here-Pay Here" used car dealerships and underwrites,
finances and services retail installment contracts generated by sales of used
cars by the Company's dealerships. In addition, the Company purchases loan
portfolios of contracts from third party dealerships and finance companies and
services these loan portfolios. The Company targets the non-prime borrowing
segment of the automobile financing industry. The Company finances much of its
operations by selling its retail sales of used cars and the contracts to various
lending sources on a full recourse basis. The contracts are sold at a 20% to 30%
discount and the Company retains certain servicing revenue from collection of
the contracts.
16
<PAGE>
The Company began its used car operations in 1996 with the acquisition of a car
lot in Phoenix, Arizona. By 1997, the Company had seven car lots, five in
Arizona and two in New Mexico. The Company had operating difficulties in 1997
and fiscal 1998 and by the first quarter of the September 30, 1999 fiscal year,
had decided to close down some lots and find a more permanent solution to its
cash flow needs. At the end of December 1998, there was a change in control of
the Company. As part of this, the Company reached an agreement with its primary
lender, AutoPrime, and certain of its officers at the time. The officers
returned most of their shares of the Company's common stock in exchange for the
Company transferring certain assets and liabilities to the officers and the
Company taking primary responsibility for certain recourse liabilities. The
Company tendered shares of common and preferred stock to AutoPrime in exchange
for agreeing to transfer certain liabilities to the former officers and the
agreement of a new credit facility. The Company also purchased a new lot, in
Texas, added a new chief executive officer, and refocused the operation on
providing used cars and financing to the non-prime marketplace. At December 31,
1998, the Company had two operating retail sales operations and had purchased
two bulk portfolios of auto loan contracts. The Company also established a loan
servicing center in Louisville, Kentucky, for the purpose of servicing loans in
a five-state area. The Company's current strategy is to actively establish
retail used car sales operations and purchase non-prime loan portfolios of such
quantity and quality as to move the Company toward profitable operations.
Results of Operations
December 31, 1998 to December 31, 1997.
Revenue in the quarter ended December 31, 1998 was down almost 47% over the same
quarter of the previous year to $1,027,000 due to closing of several lots
between December 1997 and December 1998. The Company had the Suburba lot and the
Austin lot open at December 31, 1998 compared to seven lots open during the
quarter ended December 31, 1997. However, the gross profit was significantly
improved, from 11% to 48% as cars were sold for a much higher average price.
Similarly, the selling and administrative costs declined approximately 45% to
$645,235 as the operations were scaled down by disposing of several lots and a
reduction in administrative personnel. However, the Company's exposure to
portfolio losses increased due to the purchase of the new portfolios. As a
result, Management increased the accrual for portfolio losses by $330,000 to
maintain the 30% loss provision. There was no comparable provision in the same
quarter of the prior year. The Company incurred interest expense of
approximately $162,000 compared to $85,000 in the same quarter of the prior year
as the Company incurred debt to meet its financial obligations and the "floor
plan" line of credit. Total interest bearing debt was reduced by the transaction
at the end of the quarter, but was significantly higher than the previous year
throughout the quarter. The Company recorded a gain on the disposition of the
lots and the offsetting transfer of liabilities to the former officers of almost
$600,000. As a result, the Company ended the quarter with a net loss of
approximately $50,000 compared to a loss of over $1,000,000 in the same quarter
of the previous year.
17
<PAGE>
Cash Flow from Operations.
The Company generated positive cash flow from operations, despite the net loss
for the quarter. The increase in the recourse liability was a non cash activity
while the Company was able to increase its floor plan borrowings from AutoPrime
to fund the increase in inventory and increased its payables and accrued
expenses to meet its various working capital requirements. Similarly, in the
quarter ended December 31, 1997, the Company borrowed from various vendors and
reduced inventory to meet its obligations and was able to generate $10,000 from
operations despite a net loss of over $1,000,000.
Investing and Financing Activities
The Company acquired $170,000 in fixed assets during the quarter as part of the
purchase of a bulk portfolio. As part of the transaction, the Company has an
obligation to pay $170,000 to the seller over two years. During the quarter, the
Company paid down almost $26,000 in long-term debt.
Year 2000 Compliance
We are working to address and prepare for the potential impact of the
year 2000 on the ability of our computerized information systems to accurately
process information that may be date-sensitive. Any of our programs that
recognize a date using "00" as the year 1900 rather than the year 2000 could
result in errors or system failures. We utilize a number of computer programs
across our entire operation. We have not completed our assessment, but currently
we believe that the costs of addressing this issue will not have a materially
adverse impact on our financial position.
Liquidity
The Company has a significant working capital deficit of approximately
$1,900,000 as the operations have not been profitable and the amount owed to
AutoPrime exceeds the assets of the Company. However, this compares favorably to
the working capital deficit of $8,100,000 the Company had at September 30, 1998.
The Company still needs access to credit from AutoPrime or another lender to
help finance the operations. The short term need for a line of credit
collateralized by the inventory of used cars, the floor plan, appears to be
sufficient to meet current operating needs. The working capital line of credit
offered by AutoPrime appears to be sufficient to meet the short-term obligations
of the Company. However, for the mid-term and long-term goals of the Company,
income from operations will be needed to meet the Company's debt requirements
and other obligations. Management believes the available financial resources are
available to meet the short-term obligations.
In the future as the loan portfolios mature, and through improved credit
underwriting, risk management, collection systems and collection efforts, the
Company believes, without assurance, that operations will generate both
significant servicing revenue and interest income to offset the expected bad
debt losses that will arise from operations.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Previously reported in Form 10-KSB for September 30, 1998, filed June 25,
1999.
18
<PAGE>
Item 2. Changes in Securities and Use of Proceeds.
Previously reported in Form 8-K filed on March 11, 1999.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Attached as Exhibits are the following documents:
27.Financial Data Schedule.
(b) Reports on Form 8-K
We did not file any reports on Form 8-K during the quarter ending December
31, 1998.
19
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
has caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
AutoCorp Equities, Inc.
Registrant
Date: June 25, 1999 By: /s/ Charles W. Norman
-----------------------------------------
Charles W. Norman
President and Chief Executive Officer
(Principal Executive Officer and Principal
Financial Officer)
20
<PAGE>
INDEX TO EXHIBITS
Attached as Exhibits are the following documents:
27. Financial Data Schedule.
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