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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1997
Commission file number 1-10569
AutoLend Group, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 22-3137244
- --------------------------------- -------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
215 Central NW, Suite 3B, Albuquerque, New Mexico 87102
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(Address of principal executive offices) (ZipCode)
(505) 768-1000
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act:
Title of Class Name of Exchange on Which Registered
- ----------------------------- ------------------------------------
Common Stock, $.002 par value None
Securities registered pursuant to Section 12(g) of the Act:
--Units --Redeemable Class A Warrants
--Common Stock
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes __X__ No ____.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained, and will not be contained, to the best of
Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of July 9, 1997 the registrant had 6,079,530 shares of Common Stock
outstanding. The aggregate market value of the Common Stock held by
non-affiliates as of July 9, 1997 was approximately $ 1.1 million.
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<PAGE>
Part I
ITEM 1. BUSINESS.
General
AutoLend Group, Inc., a Delaware corporation formerly known as CAPX Corporation
(together with its subsidiaries, "AutoLend" or the "Company"), was, until
September 18, 1996, a consumer finance company which, through its wholly-owned
subsidiaries, AutoLend IAP, Inc. ("IAP"), AutoLend Corporation, LB NM, Inc.
("LBNM") and American Life Resources Group, Inc. ("ALRG"), was engaged in the
business of: (i) providing short-term (two to six weeks) "floor" financing to
used-car dealers for inventory purchases at regional car auctions throughout the
United States; (ii) maintaining a portfolio of sub-prime consumer installment
loan contracts purchased from used-car dealers ("Installment Contracts
Receivable"); and (iii) maintaining a portfolio of life insurance policies
("Policies") purchased from individuals facing life-threatening illnesses, a
business generically referred to as viatical settlements.
On September 18, 1996, the Company sold IAP to Auction Finance Group, Inc., a
corporation controlled by Steve Simon, the former President and Chairman of the
Board of the Company ("Simon"), pursuant to a Stipulation of Settlement dated
May 3, 1996 which arose in connection with stockholder derivative litigation
commenced against the former management of the Company by certain stockholders,
one of whom, as a result, became Chairman of the Board and Chief Executive
Officer. See "Change in Management."
Since the sale of IAP, the Company has been engaged in no active business other
than the collection of amounts due under the outstanding Installment Contract
Receivables and the collection of proceeds from the Policies. The Company's
management currently is engaged in identifying potential acquisition
opportunities which are expected to be principally within the gaming and
entertainment industries. Following the change in the Company's management in
September 1996, management's efforts for the balance of fiscal year 1997 were
directed toward improving the Company's financial condition, both to preserve
its cash resources and to enhance the Company's likelihood of attracting a
suitable acquisition opportunity.
However, shortly after the new management assumed control, the Company's
progress was materially adversely effected by an involuntary bankruptcy
proceeding instituted against the Company which was not dismissed until after
the end of the fiscal year. See "Involuntary Bankruptcy Petition." With the
April 1996 dismissal of the involuntary bankruptcy proceeding, the legal
impediments on the Company's ability to operate have finally been removed, and
the Board of Directors is able to resume its efforts to pursue viable business
opportunities intended to return the Company to profitability. To date, no
agreements in principle have been reached with any third parties, and there can
be no assurance that the Company will be successful in its acquisition efforts.
1
<PAGE>
Change in Management
In December 1995, Nunzio DeSantis, Courtlandt Miller, and Vincent Villanueva,
stockholders of the Company (collectively, the "Plaintiff Stockholders"),
commenced an action in the Delaware Chancery Court against certain former
officers and directors of the Company (collectively, the "Defendants"), seeking
to enjoin the Company's then current management and Board of Directors from
taking certain contemplated actions.
The Plaintiff Stockholders and the Defendants entered into extensive arms-length
negotiations concerning a change in existing management and the resolution of
all claims between the parties. As a result of these negotiations, the parties
entered into a Stipulation of Settlement ("the Stipulation"). The Stipulation
was approved by the Court after due notice was sent to all of the Company's
stockholders. The transactions constituting the Stipulation were consummated on
September 18, 1996. Pursuant to the Stipulation, all pending claims were
dismissed and, among other things: (i) the former executive management of the
Company resigned, (ii) all of the directors of the Company other than Dr. Philip
Vitale resigned from the Board; (iii) Mr. DeSantis was appointed to the Board
and was elected Chairman and Chief Executive Officer; and, (iv) the Company's
AutoLend IAP, Inc. subsidiary was sold to an affiliate of the departing
management (see note 6 to the consolidated financial statements). As a result,
the entire management and employee staff of the Company was changed and
significantly reduced, and the Company's offices were moved from Miami Beach,
Florida, to Albuquerque, New Mexico. See "Legal Proceedings" and "Certain
Relationships and Related Party Transactions."
Exchange Offer
In September 1991, the Company issued $55.0 million in principal amount of its
9.5% Convertible Subordinated Debentures due 1997 (the "Debentures") in a
private placement offering to European investors. During fiscal years 1995 and
1996, the Company prepaid without penalty $32.9 million in principal amount of
Debentures, at a cost of approximately $17.8 million, leaving the outstanding
principal amount of Debentures at $22.1 million at March 31, 1997. All
outstanding Debentures are due to be paid in their entirety on September 19,
1997.
Following the substantial losses incurred in the consumer used-car finance
business, the decision by prior management to terminate that business, the
Company's deterioration to a position of negative net worth and, finally, the
change in management, the Company's viability as a going concern became
dependent upon the restructuring of its obligations and asset base (and
ultimately, a return to profitability). The new management and Board desired to
return the Company to profitability through engaging in new businesses. However,
since the entire utilization of the Company's assets would have been
insufficient to repay the outstanding Debentures when they became due, an
alternative resolution was sought which would be mutually acceptable to the
Company and the Debenture holders.
Consequently, on October 22, 1996, the Company initiated an exchange offer
(the "Offer")
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<PAGE>
to exchange shares of its Common Stock and 14% Cumulative Convertible
Preferred Stock for any or all of its outstanding Debentures tendered in the
Offer, on the basis of 200 shares of Common Stock and eight shares of Preferred
Stock for each $1,000 principal amount of Debentures exchanged, including
accrued interest thereon. On April 8, 1997, at the expiration of the Offer as
extended by the Company, the Company accepted for exchange an aggregate of
approximately $7.2 million in principal amount of Debentures which had been
tendered in the Offer, and issued an aggregate of approximately 1.4 million
shares of Common Stock and approximately 58,000 shares of Preferred Stock. Since
the expiration of the Offer, the Company has repurchased Debentures for
approximately $5.7 million in cash, at a discount from face value.
Notwithstanding the Offer and subsequent Debenture purchases, the Company's
assets remain insufficient to repay the remaining outstanding Debentures when
they become due.
Involuntary Bankruptcy Petition
On November 1, 1996, four holders of the Company's Debentures filed a petition
against the Company in the United States Bankruptcy Court for the District of
New Mexico alleging that the Company was not paying its debts as they became
due. The Company filed an answer to the involuntary petition denying that it was
a proper subject of a bankruptcy proceeding.
During the pendency of the involuntary proceeding, the Bankruptcy Court granted
the petitioning creditors' motion to enjoin the Company from acquiring a
controlling interest in International Thoroughbred Breeders, Inc. ("ITB"), an
American Stock Exchange traded company which owns and operates Garden State Park
and Freehold Raceway in New Jersey and which owns the former El Rancho Casino
property in Las Vegas, Nevada. The Company initially had entered into
negotiations in October 1996 to directly purchase an approximately 25% equity
interest in ITB in a private sale from ITB's former Chairman, Robert E. Brennan;
however, due to the involuntary petition in bankruptcy, the Company was
prevented from consummating the purchase. As a result, Nunzio DeSantis and
Anthony Coelho, two of the Company's board members, formed NPD, Inc. to purchase
the ITB shares. NPD had agreed to grant the Company an option to purchase the
ITB shares for the price NPD was paying for the ITB shares, in consideration of
the Company making a loan to NPD to finance a portion of the purchase price
which would be due to Brennan at closing. As a result of the Bankruptcy Court's
injunction, however, the Company was also prevented from making a loan and was,
therefore, denied the option to acquire the ITB shares. NPD nonetheless
proceeded to take control of ITB without the Company's participation. The Board
of Directors of the Company and NPD ultimately reached an agreement in June 1997
for the Company to purchase an option from NPD to acquire the ITB shares. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
In March, 1997 the petitioning creditors accepted an offer from an unaffiliated
third party to purchase their Debentures. In connection with the repurchase, the
Bankruptcy Court granted a joint motion of the Company and the petitioning
creditors, and the involuntary bankruptcy petition was dismissed against the
Company, effective April 7, 1997.
Following the dismissal of the involuntary bankruptcy petition, the Company
has again been
3
<PAGE>
directing its efforts toward seeking a viable acquisition opportunity in the
gaming or entertainment business. The Company also has been continuing to
collect loan receivables from its consumer finance business and to service
policies in its viatical business.
Employees
As of March 31, 1997, the Company and its subsidiaries had four full-time
employees. The Company believes its relations with its employees are good.
ITEM 2. PROPERTIES.
Effective September 18, 1996, the Company relocated its principal executive
offices from Miami Beach, Florida to a 2,000 square foot office in Albuquerque,
New Mexico under a twelve-month lease which is currently on a month-to-month
basis. The Company pays monthly rent of approximately $1,975.
The Company also leases approximately 17,000 square feet of office space in
Miami Beach, Florida, effective May 1994, under a six-year noncancelable lease.
In February 1996, the Company moved out of these premises. As of March 31, 1997,
forty and one-half months of the lease remained at a cost of $341,250 per year.
The Company is currently subleasing part of the space on a short-term basis and
is seeking a party to sublease or assume its obligations under the lease; any
such sublease or assumption is likely to be at a loss to the Company, given
that current local real estate rental rates are lower than that prescribed by
the lease. A lease loss accrual of $516,000 was provided during fiscal 1997, and
at March 31, 1997, $435,326 of the accrual remained.
ITEM 3. LEGAL PROCEEDINGS.
On December 26, 1995, Nunzio P. DeSantis, Courtlandt G. Miller and Vincent
Villanueva, stockholders of the Company (collectively, the "Plaintiff
Stockholders"), commenced an action (the "Derivative Suit") in the Delaware
Court of Chancery for New Castle County (the "Court") against certain former
officers and directors of the Company (collectively, the "Defendants"), and the
Company as nominal defendant, seeking, among other things, to temporarily,
preliminarily and, if necessary, permanently enjoin the Company's management and
Board of Directors from taking certain contemplated actions, including selling
one of its subsidiaries to Steve Simon, the former President of the Company
("Simon"), and continuing the repurchase of the Company's 9.5% Convertible
Subordinated Debentures (the "Debentures") due 1997, until a special meeting of
the Company's stockholders could be held. The Plaintiff Stockholders also sought
damages to the extent the Defendants proceeded with any of these actions before
injunctive relief could be obtained and for any breaches of fiduciary duty,
gross mismanagement and/or gross negligence that may have occurred.
4
<PAGE>
The Defendants denied all claims of wrongdoing and soon after the Plaintiff
Stockholders commenced the Derivative Suit, the Plaintiff Stockholders and the
Defendants entered into extensive arms-length negotiations concerning a change
in existing management, the composition of the Board pending the next annual
meeting of stockholders of the Company, and the resolution of all claims between
the parties. As a result of these negotiations, the parties entered into a
Stipulation of Settlement on May 3, 1996 (the "Stipulation"). The Stipulation
was approved by the Court on July 16, 1996 after due notice was sent to all of
the Company's stockholders and notwithstanding the objection of one stockholder
of the Company. The order became final and unappealable on August 16, 1996 and
the transactions pursuant to the Stipulation closed on September 18, 1996.
Pursuant to the Stipulation, all pending claims, including those alleged in the
Derivative Suit, were dismissed and, among the things: (i) the former executive
management of the Company resigned; (ii) all of the directors of the Company
other than Dr. Philip Vitale resigned from the Board; (iii) Mr. DeSantis was
appointed to the Board and was elected Chairman and Chief Executive Officer;
(iv) IAP was sold to an entity formed by Simon in consideration for the payment
to the Company of approximately $6.0 million in cash in settlement of all
intercompany receivables and for the issuance to the Company of cumulative
preferred stock, with a face amount of $1.0 million, in the newly formed entity
which acquired IAP; and (v) Simon and Helen Porter, the Company's then executive
vice president, were paid amounts due under their employment agreements, entered
into consulting agreements with the Company and were issued stock options in
lieu of other stock options which they had agreed to forfeit.
On September 12, 1996, a complaint was filed against the Company in the United
States District Court for the District of New Mexico by Living Benefits (Living
Benefits, a New Mexico corporation, v. Autolend Group, Inc., a Delaware
corporation, formerly known as CAPX Corporation, and LB NM, Inc., a Delaware
corporation; Cause No. CIV 96 0993 SC). The complaint alleges that the Company
is obligated to the plaintiff for an amount in excess of $1,657,914, together
with interest at the rate of 8.75% from June 30, 1992, for "earn-out payments"
allegedly owed under a contract between the plaintiff and the Company dated
March 14, 1992. The plaintiff is also seeking punitive damages for bad faith in
an undisclosed amount as well as attorney's fees. The Company has admitted that
it is obligated to the plaintiff in the amount of $656,542 pursuant to an
agreement which had been entered into between the Company and the plaintiff in
June 1995 and which the Company alleges had since been breached by the
plaintiff. On June 11, 1997, an Offer of Judgement was made to the plaintiff in
the amount of $656,600 together with costs accrued as of that date. The Company
will vigorously defend against any action which seeks to extend its liability to
the plaintiff beyond its admitted obligation.
On March 25, 1997 the United States Bankruptcy Court for the District of
New Mexico entered a final order dismissing the Involuntary Chapter 11 case (No.
11-96-14835 MA Involuntary), effective April 7, 1997. See "Business-Involuntary
Bankruptcy Petition."
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
5
<PAGE>
Part II
Item 5. MARKET OF REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock currently trades under the symbol "AUTL" in the
over-the-counter market on the Electronic Bulletin Board. Until May 21, 1996,
the Common Stock and Warrants were quoted on the Nasdaq Smallcap Market under
the symbol "CARS" and "CARSW", respectively. On that date the Common Stock and
Warrants were delisted from the Nasdaq Smallcap Market due to the Company's
failure to meet minimum net equity eligibility criteria for continued listing.
The Common Stock was also listed on the Boston Stock Exchange under the symbol
"OTO" until August 20, 1996.
The following table sets forth for the periods indicated the range of high and
low bid prices for the Common Stock and Warrants as reported by Nasdaq (until
May 21, 1996), the Boston Stock Exchange (from May 22, 1996 until August 20,
1996), and the Electronic Bulletin Board (thereafter). The prices reflect
inter-dealer prices without mark-up, mark-down or commissions and may not
necessarily represent actual transactions.
<TABLE>
<CAPTION>
Common Stock Class A Warrants (1)
----------------- --------------------
High Low High Low
---- --- ----- ---
<S> <C> <C> <C> <C>
Fiscal Year Ended March 31, 1996:
Quarter ended June 30, 1995 $ 2 3/8 $ 1 3/8 $ 3/8 $ 5/32
Quarter ended September 30, 1995 2 5/8 1 9/16 19/32 3/16
Quarter ended December 31, 1995 2 1/16 7/8 19/32 1/8
Quarter ended March 31, 1996 1 3/8 7/8 7/16 3/16
Fiscal Year Ending March 31, 1997:
Quarter ended June 30, 1996 $ 1 3/8 $ 1/2 $ -- (2) $ --(2)
Quarter ended September 30, 1996 1 3/16 9/16 -- (2) --(2)
Quarter ended December 31, 1996 15/16 5/16 .01 .01
Quarter ended March 31, 1997 11/16 5/32 .01 .01
</TABLE>
(1) Each Class A Warrant entitles the registered holder thereof to purchase one
share of Common Stock and one Class B Warrant through July 30, 1997 at an
exercise price of $4.00 subject to adjustment. Each Class B Warrant
entitles the registered holder thereof to purchase one share of Common
Stock from the date of issuance through July 30, 1997 at an exercise price
of $7.00 subject to adjustment.
(2) There were no reported trades in the Class A Warrants during these periods.
As of July 9, 1997 the last reported sale price for the Common Stock was $.1875
based upon a June 19, 1997 trade on the Electronic Bulletin Board, At July 9,
1997 there were 6,079,530 shares of Common Stock outstanding, and there were 77
holders of record.
6
<PAGE>
The Company has not paid any dividends on its Common Stock. The Company
presently intends to retain any earnings to finance growth and, therefore, does
not anticipate paying dividends on the Common Stock in the foreseeable future.
Moreover, the Company presently anticipates that dividends on the Preferred
Stock, all of which were issued in the Exchange Offer for Debentures, will be
payable other than in cash.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data of the Company for the fiscal years ended
March 31, 1997, 1996, 1995, 1994 and 1993 has been derived from the audited
consolidated financial statements and should be read in conjunction with such
consolidated financial statements and the notes thereto. The Company was engaged
in the viatical settlements business from April 1991 to September 1994. In May
1994, it commenced its Installment Contracts (consumer car loans) business and
in December 1995, ceased to purchase installment contracts. The Inventory
Assistance Program was started in March 1995 and was sold pursuant to the
Stipulation in September 1996. Accordingly, results of operations are not
indicative of future operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
<TABLE>
<CAPTION>
Fiscal Year Ended March 31
---------------------------------------
In Thousands (except earnings per share)
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Finance charges on installment contracts $ 1,671 $ 7,808 $ 2,719 $ -- $ --
Net revenue from matured insurance policies 404 542 6,678 6,509 4,079
Operating earnings/(loss)including
loan loss provisions $ (7,402) $(10,404) $ 1,190 $ 3,404 $ 2,070
Net interest income/ (expense) (1,816) (2,687) (4,531) (4,317) (2,440)
Write off of assets and accrual of expenses
related to the consumer loan and
viatical businesses (2,109) -- -- -- --
Tax offset to loss 86 4,936 -- -- --
Net earnings/(loss) before discontinued operations,
extraordinary item and cumulative effect
of change in accounting principle $(11,702) $ (8,181) $(4,962) $ (946) $ 116
Extraordinary item-net gain on
early extinguishment of debt -- 7,307 2,030 -- --
Discontinued operations:
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Earnings/(loss) from operations of discontinued
subsidiary (153) (48) (68) -- --
Gain on sale of subsidiary 320 -- -- -- --
Cumulative effect of change in
accounting principle -- 176 -- -- --
Net Earnings/(Loss) $(11,535) $ (745) $(3,000) $ (946) $ 116
========= ======== ======== ======== =======
Net earnings (loss) per share before
taxes, extraordinary item, discontinued
operations, and cumulative effect of
change in accounting principle $ (2.54) $ (2.83) $ (1.07) $ (0.02) $ 0.02
Tax offset to loss -- 1.07 -- -- --
Extraordinary item-net gain on
early extinguishment of debt -- 1.58 0.44 -- --
Net earnings/ (loss) per share $ (2.49) $ (0.16) $ (0.65) $ (0.02) $ 0.06
========= ======== ======== ======== =======
Balance Sheet Data:
Total Assets $ 16,276 $24,485 $55,002 $61,382 $63,439
Total Liabilities 28,128 24,802 54,574 58,672 58,550
Total Stockholder's Equity (11,852) (317) 428 2,710 4,889
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
General
Although the Company was organized in May 1989, it did not commence its viatical
settlements business until April 1991 when it acquired certain assets of Living
Benefits, Inc. ("LBI") and covenants not to compete from the former owners of
LBI. In April 1993, the Company acquired certain operating assets of American
Life Resources Corporation ("ALRC"), which was also engaged in the viatical
settlements business. ALRC retained the Policies it had purchased prior to
January 14, 1993. Goodwill and intangibles related to these acquisitions were
amortized over the remaining life of the viatical portfolio, extending through
the fiscal year ended March 31, 1996, at which time they were fully amortized.
The Company commenced purchasing Installment Contracts Receivable in May 1994
and ceased making such purchases in December 1995. The Company commenced its
Inventory Assistance Program ("IAP") in March 1995. Under the terms of the
Stipulation (see "Business-Change in Management"), IAP was sold by the Company
effective September 18, 1996. Accordingly, for the fiscal years ended March 31,
1997 and 1996, net assets of IAP are included in the Financial
8
<PAGE>
Statements as "Net assets of discontinued operations," and IAP net operating
losses are included as "Discontinued operations--loss from operations of
discontinued subsidiary," net of applicable income tax. IAP's revenues consist
of a non-refundable administrative fee received on the date of each loan, and
interest revenue collected and recognized during the time the loan is
outstanding. For the fiscal years ended March 31, 1997 and 1996, administrative
fees and interest revenues totaled $ 0.8 million and $ 0.4 million,
respectively.
Since the sale of IAP, the Company has been engaged in no active business other
than the collection of amounts due under the outstanding Installment Contract
Receivables and the collection of proceeds from the Policies. The Company's
management currently is engaged in identifying potential acquisition
opportunities which are expected to be principally within the gaming and
entertainment industries.
Results of Operations
Fiscal year ended March 31, 1997 compared to fiscal year ended March 31, 1996
Revenues on the consumer loan portfolio from Installment Contracts Receivable
(consumer used-car loans) were $1.7 million for the fiscal year ended March 31,
1997, which represented a $6.1 million decrease compared to the $7.8 million
realized for the fiscal year ended March 31, 1996. This decrease resulted from
the reduced size of the Company's loan portfolio; the Company ceased purchasing
consumer loans in December 1995. The principal repayment portion of the loans is
not reflected in gross revenues.
Net viatical revenues were $ 0.4 million for the year ended March 31, 1997,
which represented a $ 0.1 million decrease compared to the $ 0.5 million
realized for the fiscal year ended March 31, 1996. Net viatical revenues are
determined by subtracting the policy cost from the relevant face value after a
policy "matures" (becomes payable by the insurance company). The decrease in
viatical revenues resulted from the reduced size of the Company's viatical
policy portfolio. The Company generally ceased to purchase such policies after
September 1994 and, in May and July 1995, sold the majority of the Company's
portfolio to Viaticus, Inc. for $17.5 million (which represented a total of 225
policies). Future net revenues from the remaining portfolio of approximately
nineteen policies will be irregular, depending upon the timing of mortality of
the insured. During the year ended March 31, 1997, the aggregate book value of
the policies had been written-down by $0.9 million, to estimated current fair
market value. The Company's management presently intends to realize cash from
these policies in the next twelve to eighteen months.
General and administrative expenses for the fiscal year ended March 31, 1997
were $5.9 million, compared to $9.9 million expended in the prior year. The
decrease of $4.0 million resulted from the effect of the Company's downsizing in
December 1995, and the additional downsizing in September 1996 following the
change in management. The cost of collecting the consumer car portfolio is
included in general and administrative expenses; this effort has been
subcontracted out since January 1996. Provision for credit losses in connection
with the portfolio of installment
9
<PAGE>
contracts receivable were $3.6 million for the year ended March 31, 1997, which
represents a decrease of $5.2 million compared to the $8.8 million provided for
the year ended March 31, 1996. The decrease was primarily the result of the
shrinking size of the total portfolio.
During the year ended March 31, 1997, the Company's operating loss was $7.4
million, compared to an operating loss of $10.4 million during the year ended
March 31, 1996. The decrease in operating loss was primarily attributable to the
developments described above, including the combined reduction of general and
administrative expense and credit loss provisions by $9.3 million, while total
net revenues declined by $6.2 million, yielding a net improvement of $3.0
million.
The net loss for the year ended March 31, 1997 was $11.5 million or $2.49 per
share. The net loss for the year ended March 31, 1996 was $ 0.7 million, or $
0.16 per share. The change in net loss was attributable primarily to the $12.2
million non-recurring gain on early extinguishment of debt. These offsets to
operating losses were not available in the year ended March 31, 1997.
Fiscal year ended March 31, 1996 compared to fiscal year ended March 31, 1995
Revenues from Installment Contracts Receivable (consumer used-car loans) were
$7.8 million for the fiscal year ended March 31, 1996, which represents a $5.1
million increase compared to the $2.7 million realized for the fiscal year ended
March 31, 1995. This increase resulted from the increased size of the Company's
portfolio of Installment Contracts Receivable for the fiscal year ended March
31, 1996.
Net viatical revenues were $ 0.5 million, reflecting the maturity of 12 Policies
for the year ended March 31, 1996, as compared with $6.7 million, reflecting the
maturity of 195 Policies during the fiscal year ended March 31, 1995. The result
is a $6.2 million decrease in net viatical revenues for the year ended March 31,
1996. The decrease in policy maturities and net viatical revenues resulted from
the Company's decision not to purchase new Policies after September 1994, and
the sale in May and July 1995 of a total of 225 policies for approximately $17.5
million to Viaticus, Inc.
General and administrative expenses were $ 9.9 million during the year end March
31, 1996, an increase of $ 3.3 million during the year ended March 31, 1996,
from the $6.6 million incurred during the year ended March 31, 1995. This
increase resulted primarily from approximately $1.9 million in increased costs
due to the expanded activity of the Company's Installment Contracts Receivable
business during the first three quarters of the year, $ 0.4 million in legal and
professional fees, $ 0.2 million in severance pay resulting from the Company's
downsizing during the third quarter of 1996, and $ 0.2 million in costs incurred
in 1993 and 1994 relating to the Company's offering of securities and its 1995
organization of an Australian joint venture. As a result of the Company's
downsizing during the third quarter of 1996, salary expense was approximately $
0.2 million during the three months ended March 31, 1996 as compared with
approximately $ 0.9 million during the three months ended September 30, 1995.
10
<PAGE>
Provision for credit losses in connection with the portfolio of installment
contracts receivable were $8.8 million for the year ended March 31, 1996, which
represents an increase of $7.3 million compared to the $1.5 million provided for
the year ended March 31, 1995. The $7.3 million increase in credit loss
provision resulted both from the increased size of the portfolio and the rapid
deterioration of the portfolio, which led to the decision to cease purchasing
such loan contracts.
During the year ended March 31, 1996, the Company's operating loss was $10.4
million, as compared to operating income of $1.2 million during the year ended
March 31, 1995. The decrease in operating income was primarily attributable to
the $7.3 million increase in the credit loss provision combined with a $3.3
million increase in general and administration expenses and a $1.0 million
decrease in net revenues.
The net loss for the year ended March 31, 1996 was $0.7 million or $.16 per
share. The net loss for the year ended March 31, 1995 was $3.0 million or $.65
per share. The change in net loss was attributable primarily to the
deterioration in operating income offset by the $7.3 million gain on early
extinguishment of debt and the $4.9 million benefit from income taxes during the
year ended March 31, 1996.
Liquidity and Capital Resources
The Company's immediate viability as a going concern is dependent upon the
restructuring of its obligations, and ultimately, a return to profitability. At
March 31, 1997, the Company had cash and cash equivalents of $12.4 million,
which represents a significant increase for the year. The Company believes it
has sufficient funds to finance currently contemplated operations for a short
period of time, but would require additional funds to finance the complete
repayment of the Debentures which remain outstanding following the Offer.
There was positive cash flow from operations of $3.0 million for the fiscal year
ended March 31, 1997. These cash flows were primarily derived from the
administration and ongoing liquidation and payout of the Installment Contracts
Receivable portfolio of consumer car loans. Cash flows from operations for the
fiscal year ended March 31, 1996 were $8.7 million, which included $17.8 million
from the sale of a substantial portion of the viatical portfolio. Consequently,
the net operating effect excluding this infusion of cash from the sale of the
portfolio was a deficit of approximately $9.1 million. The relative improvement
in the present period against this deficit is primarily due to the cessation of
further use of the Company's funds for investment in both the consumer car loan
portfolio and the IAP dealer loan portfolio.
The Company's portfolio of Installment Contracts Receivable at March 31, 1997
was $2.9 million (excluding such contracts with respect to which there has been
a repossession of underlying collateral, a charge-off, or the establishment of a
reserve), and consisted of approximately 900 active used car loans. The Company
commenced its purchases of these contracts in May 1994 and ceased purchases in
December 1995.
11
<PAGE>
The Company's portfolio of unmatured viatical insurance policies totaled 19 at
March 31, 1997, having a combined face value of $2.0 million and a net book
value of $ 0.5 million. The Company generally ceased purchasing new policies in
September 1994.
Cash flows from investing activities for the fiscal year ended March 31, 1997
were a positive $6.2 million, which was due primarily to the consummation of the
transactions constituting the Stipulation, including the disposition of IAP.
This resulted in the conversion of the IAP dealer loan receivables portfolio of
approximately $5.9 million into cash without any loan losses. For the fiscal
year ended March 31, 1996, cash flows from investing activities were positive as
securities held for resale (i.e., cash invested for higher yields) of $9.0
million were converted into immediately available cash.
There were no cash flows from financing activities during the fiscal year ended
March 31, 1997, as compared with a cash flow deficit from financing activities
of $15.8 million for the fiscal year ended March 31, 1996. This resulted from
the use during fiscal year 1996 of the Company's cash for the early
extinguishment of certain of the Company's Debentures.
In summary, the Company increased its cash and cash equivalents by $9.2 million
during the year ended March 31, 1997, to a total of $12.4 million. This increase
was largely due to the sale of IAP (and the resulting full conversion of the IAP
receivables to cash), and was also influenced by the collections on the consumer
car loan portfolio (which collections were offset to a degree by operating
expenses). In comparison, for the fiscal year ended March 31, 1996, there was a
$1.9 million increase in cash and cash equivalents, to a total of $3.2 million.
This increase was primarily generated by the sale of the viatical portfolio for
$17.8 million, which was offset by the usage of $15.8 million in the Debenture
repurchase.
The Company's primary source of capital has been sales of equity and debt
securities, including the Company's initial equity offering in July 1990, which
resulted in net proceeds of approximately $7.6 million, and a September 1991
sale of Debentures which resulted in net proceeds of $51.4 million. As a result
of prior year Debenture prepayments without penalty, the outstanding principal
balance of Debentures was $22.1 million at March 31, 1997. No additional amounts
were prepaid during the fiscal year ended March 31, 1997. Annual interest
payments were made in accordance with the terms of the Indenture in September
1992, 1993, 1994 and 1995, but the September 1996 payments were not paid due to
the Offer. See Item 1 above (Business; Exchange Offer) and Note 3 to Financial
Statements (Convertible Subordinate Debentures).
As a result of the involuntary bankruptcy proceeding against the Company,
the Company was prevented from purchasing from Robert Brennan ("Brennan") an
approximately 25% equity interest in International Thoroughbred Breeders, Inc.
("ITB"). Consequently, NPD, Inc. ("NPD"), a newly formed company owned by Nunzio
P. DeSantis and Anthony Coelho, the Chairman and Chief Executive Officer and a
Director, respectively, of the Company, purchased the ITB shares in lieu of the
Company. NPD concurrently granted the Company an option to purchase the ITB
shares. In consideration of the option, the Company agreed to make a loan to NPD
to finance a portion of the cash purchase price to be paid by NPD to Brennan at
closing and further agreed that, following the dismissal of the involuntary
bankruptcy petition, it would guarantee up to $2.0 million of NPD's obligation
to pay the remaining portion of the purchase price due Brennan for the ITB
shares, and deposit $2.0 million into a cash collateral escrow account to secure
its guarantee obligation.
The Bankruptcy Court enjoined the proposed loan by the Company to NPD, and,
as a result, the option was not granted to the Company. Nonetheless, following
the dismissal of the involuntary bankruptcy petition, in accordance with the
agreement, the Company executed and delivered its guarantee as aforesaid and
deposited the required $2.0 million in the cash collateral escrow account. In
June 1997, in order to reinstate the Company to the position it would have been
as the purchaser of the ITB shares, the Company's Board of Directors approved an
agreement in principle with NPD pursuant to which the Company could purchase
from NPD, for a purchase price of $2.5 million ($200,000 in cash and a note for
$2.3 million), an option to acquire 100% of the ITB shares owned by NPD. If the
option is exercised, the Company will purchase the ITB shares for the same cash
portion of the purchase price NPD paid for the ITB shares and by assuming the
$5.8 million promissory note issued by NPD to Brennan at the closing for the
remainder of the purchase price for the ITB shares.
In addition, the Company is making a loan to NPD for $3.0 million secured
by the ITB shares, subject to a prior lien on the ITB shares granted to Brennan.
NPD will use the loan proceeds to repay an earlier loan made to NPD by an
unaffiliated third party, which repayment will terminate the third party's prior
option to purchase the ITB shares which had been granted when it made the loan.
The option granted to the Company is subject to an option which has been
granted by NPD to Mr. DeSantis to purchase 50% of the ITB shares from NPD which,
if exercised by Mr. DeSantis, would nonetheless permit the Company to acquire
the remaining 50% of the ITB shares. Upon exercise of the option by Company, its
guarantee would terminate and the $2.0 million cash collateral would be released
to the Company. Furthermore, each of the Company's and Mr. DeSantis' option is
subject to an option which was granted by NPD to Robert Green at the closing of
the ITB share purchase to purchase 50% of the ITB shares. In the event either
the Green or DeSantis options are exercised then the $2.3 million note held by
NPD in partial payment of the option will be reduced proportionately by the
percentage of the ITB shares remaining subject to the option.
At March 31, 1997, the Company had cash on hand of $12.4 million. Subsequently,
the Company paid $5.7 million to buy back Debentures at a discount from face
value. Had these transactions occurred as of March 31, 1997, the cash balance
would have been reduced to $6.7 million. Notwithstanding these purchases and the
Exchange Offer (see Item 1 above), the Company's assets remain insufficient to
repay the presently outstanding Debentures when they come due in September 1997.
There can be no assurance that the
12
<PAGE>
Company will be able to successfully resolve its liquidity issue.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The responses to this Item are submitted in a separate section of this Annual
Report on Form 10- K. See Index to Consolidated Financial Statements on page
F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
On November 5, 1996, the Company informed the accounting firm of Deloitte &
Touche LLP ("Deloitte") that the Company would not retain it to audit the
Company's financial statements for the fiscal year ending March 31, 1997.
Deloitte had been the Company's principal accountants since the fiscal year
ended March 31, 1995. The Company has had no significant disagreements with its
former principal accountants on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure. The
Company's decision not to continue to retain Deloitte was not based on the
expectation that any disagreement would arise for the current fiscal year. The
decision not to retain Deloitte was made in connection with the change in
management of the Company, and the resulting change in location of its corporate
headquarters to Albuquerque, New Mexico, where Deloitte does not maintain an
office.
On November 5, 1996, the Company engaged the accounting firm of KPMG Peat
Marwick LLP ("Peat Marwick") as its principal accountants for the fiscal year
ending March 31, 1997. Prior to the Company's engagement of Deloitte, the
Company had engaged Peat Marwick as its principal accountants in connection with
the audit of the Company's financial statements beginning with the fiscal year
ended March 31, 1990 through the fiscal year ended March 31, 1994.
Part III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth certain information regarding the Company's
directors and executive officers. Directors serve until the next annual meeting
of stockholders and until their successors are duly elected and qualified.
Officers serve at the pleasure of the Board of Directors.
<TABLE>
<CAPTION>
Year First
Name Age Elected Director Position
---- --- ---------------- --------
<S> <C> <C> <C>
Nunzio P. DeSantis 46 1993 Chairman of the Board,
President, Chief Executive
Officer and Director
</TABLE>
13
<PAGE>
<TABLE>
<S> <C> <C> <C>
Anthony Coelho 55 1996 Director
Philip J. Vitale, M.D. 51 1992 Director
E. Gerald Riesenbach 59 1996 Director; Secretary
Vincent Villanueva 54 1996 Director
Jeffrey Ovington 45 N/A Executive Vice President;
Treasurer
</TABLE>
Nunzio P. DeSantis has been President, Chief Executive Officer and Chairman
of the Board of the Company since September 1996. Mr. DeSantis previously served
as Chief Executive Officer and Chairman of the Board of Directors from the
Company's inception in 1991 until his resignation from these positions in
September 1993 and May 1994, respectively. Mr. DeSantis has also served as Chief
Executive Officer and a director of International Thoroughbred Breeders, Inc.
("ITB") since January 1997. Mr. DeSantis also is President and Chairman of the
Board of NPD, Inc., a private company which owns a controlling interest in ITB.
Prior to September 1995 and for more than five years, Mr. DeSantis was Chairman
of the Board and Chief Executive Officer of Diagnostek, Inc.
Anthony Coelho is Chairman and Chief Executive Officer of ETC, w/tci, the
Washington based education, training, and communication subsidiary of
Tele-Communications, Inc. (TCI). Since January 1997, Mr. Coelho has also served
as Chairman of the Board of ITB. From 1989 to 1995, Mr. Coelho served as a
Managing Director of the New York investment banking firm Wertheim Schroeder &
Co., Inc., and from 1990 to 1995 he also served as President and Chief Executive
Officer of Wertheim Schroeder Investment Services, Inc. Mr. Coelho also serves
as a director of ICF Kaiser International, Inc., Service Corporation
International, Tankology Environmental, Inc., Tele-Communications, Inc,
International Thoroughbred Breeders, Inc. and Cyberonics, Inc. In addition, Mr.
Coelho serves on Fleishman-Hillard, Inc.'s Advisory Board. Mr. Coelho is a
former U.S. Representative from California and Majority Whip of the U.S. House
of Representatives.
E. Gerald Riesenbach is a partner in the Philadelphia based law firm of Cozen
and O'Connor, general counsel to the Company. Prior to February 1995 and for
more than five years, he was a partner with the law firm of Wolf, Block, Schorr
and Solis-Cohen.
Vincent Villanueva currently is a business consultant. From 1991 to
September 1995, he was V.P. Corp./Public Affairs of Diagnostek, Inc.
Philip J. Vitale, M.D. has been a director of the Company since February
1992. Dr. Vitale has been a doctor of medicine, specializing in urology, at the
Lovelace Medical Center, Albuquerque, New Mexico ("Lovelace") since 1978. Dr.
Vitale served on the Board of Directors of Lovelace from 1985 until 1989, and
served on other governing boards and in governing capacities for
14
<PAGE>
Lovelace at various times from 1980 until 1989, during which time Lovelace was
owned by several different entities.
Jeffrey Ovington has been Executive Vice President of the Company since
September 1996. From May 1993 to July 1995 he served in various capacities,
including as Executive Vice President with Diagnostek, Inc. a leading pharmacy
benefit manager, acquired by Value Health, Inc. For 14 years prior thereto, he
served in various capacities with Martin Marietta Corp., General Electric
Company, and ITT.
ITEM 11. EXECUTIVE COMPENSATION.
Summary Compensation Table
The following table sets forth information concerning the compensation paid for
fiscal year 1997 and the fiscal years ended March 31, 1996 and March 31, 1995 to
those persons who served as Chief Executive Officer during fiscal year 1997.
Other than those persons identified as Chief Executive Officer, no other
executive officer of the Company who served as an executive officer of the
Company at the end of fiscal year 1997 received compensation for the fiscal year
ended March 31, 1997 which exceeded $100,000.
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation
Other Annual SAR # of All Other
Name and Principal Position Year Salary ($) Compensation (1) Awards Options Compensation($)
- --------------------------- ---- ---------- ----------------- ------ ------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Steve Simon 1997 $604,366 (3) -- -- 400,000(4) --
Chairman of the Board 1996 174,996 -- -- 300,000(4) --
& Chief Executive Officer (2) 1995 185,396 -- -- 125,000(4) --
Nunzio P. DeSantis 1997 422,000 -- -- -- --
Chairman of the Board
& Chief Executive Officer (5)
</TABLE>
(1) The aggregate amount of perquisites and other personal benefits paid to the
named individuals did not exceed the lesser of 10% of such officer's total
annual salary and bonus for such fiscal years and $50,000.
(2) Mr. Simon resigned as Chairman of the Board and Chief Executive Officer on
September 18, 1996 as part of the transactions constituting the
Stipulation. See "Business - Change in Management."
(3) Includes $270,410 representing the remaining balance under his employment
contract which was paid in a lump sum, and $210,000 in consulting agreement
payments also paid in a lump sum, as part of the Stipulation.
(4) As part of the transactions constituting the Stipulation, Mr. Simon was
granted options to purchase 400,000 shares of Common Stock and forfeited
all options previously granted to him, including those granted in fiscal
years 1996 and 1995. See "Business - Change in Management."
15
<PAGE>
(5) Mr. DeSantis was appointed Chairman of the Board and Chief Executive
Officer on September 18, 1996 as part of the transactions constituting the
Stipulation. See "Business - Change in Management."
Options Granted in the Last Fiscal Year
The following table sets forth information concerning stock option grants made
during fiscal 1997 to the persons named in the Summary Compensation Table above.
Also in accordance with the SEC rules, the hypothetical gains or "option
spreads" for each option grant are shown based on compound annual rates of stock
price appreciation of 5% and 10% from the grant date to the expiration date. The
assumed rates of growth are prescribed by the SEC and are for illustrative
purposes only; they are not intended to predict future stock prices, which will
depend upon market conditions and the Company's future performance
<TABLE>
<CAPTION>
% of Total Potential Realizable Value at
Options Assumed Annual Rate of Stock
# of Granted to Appreciation for Option
Options Employees in Exercise Price Expiration Term (2)
Name Granted Fiscal Year per Share(1) Date 5% 10%
- ---- ------- ----------- ------------ ---- --------------
<S> <C> <C> <C> <C> <C> <C>
Steve Simon 400,000(3) 76% $2.65 (4) $ 0 $ 0
Nunzio P.
DeSantis -- -- -- -- -- --
</TABLE>
- --------------
(1) Options were granted with an exercise price equal to or greater than the
market price of the stock at the date of grant.
(2) The dollar amounts under these columns are the result of calculations at
the 5% and 10% rates required by the SEC and therefore are not intended to
forecast possible future appreciation of the stock price. The potential
realizable value calculation on the basis of the current market price
demonstrates that the exercise price will exceed the market price for the
foreseeable future.
(3) Represents options granted in connection with the Stipulation. See
"Business."
(4) The options expire on the thirty-first day following the tenth consecutive
trading day that the Market Price (as defined in the option agreement) of
the Company's Common Stock equals or exceeds $6.00 per share, subject to an
extension of the option term if the Common Stock is then not registered
under the Securities Act of 1933, as amended.
Fiscal Year-End Option Values - 1997
The following table provides information concerning fiscal year-end values
of unexercised
16
<PAGE>
options held by the persons named in the Summary Compensation Table above. No
options were exercised by such persons during fiscal year 1997.
<TABLE>
<CAPTION>
Shares Number of Unexercised Value of Unexercised In-the
Acquired on Value Options at Year End Money Options (1)
Name Exercise Realized($) Exercisable/Unexercisable Exercisable/Unexercisable
---- -------- ----------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Steve Simon -- -- 400,000/0 $0/0
Nunzio P. DeSantis -- -- 0/0 $0/0
</TABLE>
- ---------------
(1) At March 31, 1997, the option exercise price exceeded the market price of
the Common Stock.
Compensation of Directors
Directors who are not employees of the Company received immediately
exercisable options to purchase 125,000 common shares of the Company's Common
Stock.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The following table sets forth certain information concerning stock ownership of
all persons known by the Company to own beneficially 5% or more of the Company's
outstanding Common Stock, each current director and all current directors and
executive officers of the Company as a group as of July 3, 1997, on which date
the Company had outstanding 6,079,530 shares of Common Stock, excluding treasury
shares.
Amount and
Name and Address Nature of
of Beneficial Owner Beneficial Percent of
or Identity of Group Ownership(1) Class Owned
- -------------------- ------------ -----------
Nunzio P. DeSantis 2,533,900 (2) 31.4%
215 Central Ave., NW, Suite 3-B
Albuquerque, NM 87107
Banque Paribas 660,000 10.9%
Paris, France
Allen & Company Incorporated 541,924 (3) 8.2%
Allen Holding, Inc.
711 Fifth Avenue
New York, NY 10022
17
<PAGE>
Steve Simon 463,750 (4) 7.2%
930 Washington Avenue
Miami Beach, FL 33139
Philip J. Vitale, M.D. 300,700 (5) 4.7%
Lovelace Journal Ctr.
5150 Journal Center Blvd.
Albuquerque, NM 87109
Vincent Villanueva 240,000 (6) 3.8%
842 Stover, SW
Albuquerque, NM 87102
E. Gerald Riesenbach, Esquire 125,000 (7) 2.0%
1900 Market Street, 3rd Floor
Philadelphia, PA 19103
Anthony Coelho 125,000 (7) 2.0%
700 14th St., NW, 5th Fl
Washington, DC 20005
All current directors and executive officers
as a group (5 persons) 3,424,600 (8) 38.5%
(1) Unless otherwise indicated below, the named person is deemed to have sole
voting and dispositive power with respect to the shares set forth opposite
such person's name.
(2) Includes 2,000,000 shares issuable upon exercise of options exercisable
within 60 days. Does not include 51,600 shares owned by the Diagnostek
Charitable Foundation, for which Mr. DeSantis serves as Voting Trustee,
with respect to which Mr. DeSantis has disclaimed beneficial ownership.
Does not include 63,750 shares of Common Stock beneficially owned by Mr.
Simon and Ms. Porter which are subject to a Voting Trust under the terms of
the Stipulation and for which Mr. DeSantis serves as Voting Trustee.
(3) Includes 495,498 shares issuable upon exercise of Unit Purchase Options and
of Class A and Class B Warrants issuable upon exercise of Unit Purchase
Options and the Class A and Class B Warrants included therein.
(4) Includes 400,000 shares issuable upon exercise of options exercisable
within 60 days. Includes 63,750 shares which are subject to a Voting Trust,
for which Mr. DeSantis serves as Voting Trustee.
(5) Includes 7,500 shares held by Dr. Vitale jointly with his wife. Includes
285,000 shares issuable upon exercise of options exercisable within 60
days.
(6) Includes 175,000 shares issuable upon exercise of options exercisable
within 60 days.
(7) Represents shares issuable upon exercise of options exercisable within 60
days.
(8) Includes 2,810,000 shares issuable upon exercise of options exercisable
within 60 days.
18
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
On September 18, 1996, the transactions constituting the Stipulation were
consummated. These transactions included, among other things, the sale of IAP by
the Company to a newly formed affiliate of Simon and Helen Porter, a former
executive officer of the Company, for consideration including (i) payment to the
Company of approximately $6.0 million, which primarily represents the Company's
full book value of short term dealer auction finance loans outstanding, (ii) the
issuance to the Company by IAP of Preferred Stock with a face amount of $1
million and a cumulative preferred dividend of 11%, with dividend payments
beginning 26 months following issuance, and redemption rights beginning 36
months from issuance at face amount plus accrued interest; (iii) the deposit by
IAP of $250,000 into escrow in support of the redemption rights; and (iv) the
representation and warranty by IAP that it had no less than $2 million of common
equity, and $5 million in subordinated debt financing as of the closing.
In addition, IAP purchased from the Company certain fixed assets for $175,000,
representing the book value of those assets recorded on the financial statements
of the Company. Some of the licenses, trade names, trademarks and software of
the Company used by IAP for its business were also assigned to IAP, with IAP
granting the Company a license of limited duration for the continued use of
certain of such licenses, trade names, trademarks and software necessary to the
Company's business.
In addition, as part of the Stipulation, the Company granted Mr. Simon and Ms.
Porter options to purchase 400,000 shares of common stock and 125,000 shares of
common stock, respectively, at an exercise price of $2.65 per share. The options
are immediately exercisable and expire on the thirty-first day following the
tenth consecutive trading day that the Market Price (as defined in the option
agreements) of the Common Stock exceeds $6.00 per share, subject to an extension
of the option term if the shares issuable upon exercise of the option are not
then registered under the Securities Act of 1933, as amended. Upon the grant of
the aforementioned options, all options which had previously been granted to Mr.
Simon and Ms. Porter were forfeited to the Company.
Each of Mr. Simon and Ms. Porter also have entered into three year
consulting agreements with the Company pursuant to which each is providing
assistance to the Company principally in the collection and adjudication of
outstanding automobile loan receivables. In consideration for such consulting
services, the Company paid each of Mr. Simon and Ms. Porter $210,000 in a lump
sum payment.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON
FORM 8-K.
The following financial statements have been filed with and are included in
this Report:
19
<PAGE>
(a) (1) Financial Statements
Independent Auditors' Reports
Consolidated Balance Sheets - March 31, 1997 and 1996
Consolidated Statements of Operations - Years Ended March 31,
1997, 1996 and 1995
Consolidated Statements of Stockholders' Equity - Years Ended
March 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows - Years Ended March 31,
1997, 1996 and 1995
Notes to Consolidated Financial Statements
(a) (2) Financial Statement Schedule
Schedule II -- Valuation and Qualifying Accounts - March 31,
1997, 1996 and 1995
All other schedules have been omitted because they are inapplicable or the
information is provided in the financial statements (including the notes
thereto) included in this Annual report.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended
March 31, 1997.
(a) (3) Exhibits
2.1 Reorganization Agreement between CAP Rx, Ltd. and CAPX Corporation (2)
3.1 Certificate of Incorporation of CAP Rx, Ltd. (1)
3.2 Memorandum of Association of CAP Rx, Ltd., including Memorandum of
increase of Share Capital (1)
3.3 Amended By-Laws of CAP Rx, Ltd. (1)
3.4 Certificate of Incorporation of AutoLend Group, Inc. (12)
3.5 By-Laws of AutoLend Group, Inc. (12)
20
<PAGE>
4.1 Form of 9.5% Convertible Subordinated Debentures (2)
4.2 Warrant Agreement (1)
4.3 Unit Purchase Option (1)
4.4 Stock Purchase Warrant granted to Banque Degroof Luxembourg, S.A. (2)
4.5 Stock Purchase Warrant granted to Till A. Petrocchi (2)
10.1 Re-insurance Agreement between CAP Rx Insurance, Ltd. and Plant
Insurance Registrant (1)
10.2 Letter Agreement between CAP Rx, Ltd. and Plant Insurance Registrant
(1)
10.3 Administrative Agreement between CAP Rx, Ltd. and Parker Risk
Management (Bermuda) Ltd. (1)
10.4 1989 Incentive and Non-Statutory Stock Option Plan of the
Registrant (1)*
10.5 Letter agreement between Westbroke Limited and the Registrant (2)
10.6 Acquisition Agreement among Rob T. Worley, Sr. and Rob T. Worley, Jr.,
Living Benefits, Inc. and CAP Rx, Ltd. (2)
10.6.1 Addendum to Acquisition Agreement (2)
10.6.2 Second Addendum to Acquisition Agreement
10.7 Employment Agreement between LB NM, Inc. and Rob Worley, Sr. (2)
10.8 Employment Agreement between LB NM, Inc. and Rob T. Worley, Jr. (2)
10.9 Lease Agreement for space at 6100 Seagull Street, N.E., Albuquerque,
New Mexico (2)
10.9.1 Addendum to Lease Agreement (2)
10.9.2 Lease Agreement, dated April 15, 1993, for space at 6100 Seagull
Street
10.9.3 Lease, dated March 17, 1992, between Marbrad, Inc. and American Life
Resources Corporation, Steve Simon and Helen Porter (6)
10.10 Asset Purchase Agreement between American Life Resources Group, Inc.,
American Life Resources Corporation, Steve Simon and Helen Porter (6)
21
<PAGE>
10.13 Noncompetitive Agreement between ALRG and Steve Simon (6)
10.14 Noncompetitive Agreement between ALRG and Helen Porter (6)
10.15 Guaranty Agreement made by the Registrant for the benefit of ALRC,
Steve Simon and Helen Porter (6)
10.16 Viatical settlement forms (8)
10.17 Agreement between the Registrant and the McLeron Group Limited dated
December 3, 1993 (9)
10.18 Lease Agreement between Arquitectonica International Corporation and
CAPX Corporation dated May 11, 1994 (10)
21 Subsidiaries of the Registrant (10)
28.1 Cooperation and Assistance Agreement between Park Risk Management
(Colorado) Inc. and Health Care Services, Inc. (1)
- -----------------
(1) Filed as an exhibit to the Registrant's Registration Statement on Form F-1
(Registration No. 33-29251) and incorporation herein by reference.
(2) Files as an exhibit to the Registrant's Annual Report on Form 10-K for the
year ended March 31, 1991 and incorporated herein by reference.
(3) Filed on December 26, 1991 as an exhibit to the Registrant's Post-Effective
Amendment No. 1 to Registration Statement on Form F-1 on Form S-1
(Registration No. 33-29251) and incorporated herein by reference.
(4) Filed on February 18, 1992 as an exhibit to the Registrant's Post-Effective
Amendment No. 3 to Registration Statement on Form F-1 on Form S-1
(Registration No. 33-29251) and incorporation herein by reference.
(5) Filed on February 18, 1992 as an exhibit to the Registrant's Post-Effective
Amendment No. 4 to Registration Statement on Form F-1 on For S-1
(Registration No. 33-29251) and incorporated herein by reference.
(6) Filed as an exhibit to the Registrant's Current Report on Form 8-K, filed
with the Commission on April 21, 1993 and incorporated herein by reference.
22
<PAGE>
(7) Filed on May 12, 1993 as an exhibit to the Registrant's Post-Effective
Amendment No.6 to Registration Statement on Form F-1 on Form S-1
(Registration No. 33-292251) and incorporated herein by reference.
(8) Filed on October 29, 1993 as an exhibit to the Registrant's Post-Effective
Amendment No. 6 to Registration Statement on Form F-1 on Form S-1
(Registration No. 33-292251) and incorporated herein by reference.
(9) Filed on March 7, 1994 as an exhibit to the Registrant's Post-Effective
Amendment No. 6 to Registration Statement on Form F-1 on Form S-1
(Registration No. 33-292251) and incorporated herein by reference.
(10) Filed on June 26, 1994 as an exhibit to the Registrant's Annual Report on
Form 10-K for the year ended March 31, 1994 and incorporated herein by
reference.
(11) Filed on June 29, 1995 as an exhibit to the Registrant's Annual Report on
Form 10-K for the year ended March 31, 1994 and incorporated herein by
reference.
(12) Filed on July, 15 1996 as an exhibit to the Registrant's Annual Report on
Form 10-K of the year ended March 31, 1996 and incorporated herein by
reference.
* Constitutes a compensatory plan or arrangement required to be filed as an
exhibit to this Report.
23
<PAGE>
AUTOLEND GROUP, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Pages
Annual Financial Statements:
Independent Auditors' Reports.......................................... F-2
Consolidated Balance Sheets - March 31, 1997 and 1996...................F-4
Consolidated Statements of Operations -
Years Ended March 31, 1997, 1996 and 1995.........................F-5
Consolidated Statements of Stockholders' Equity (Deficit)-
Years Ended March 31, 1997, 1996 and 1995..........................F-7
Consolidated Statements of Cash Flows-
Years Ended March 31, 1997, 1996 and 1995..........................F-8
Notes to Consolidated Financial Statements..............................F-9
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts
March 31, 1997, 1996 and 1995......................................S-1
F-1
<PAGE>
AUDITORS REPORT
To the Board of Directors and Stockholders of
AutoLend Group, Inc.
We have audited the consolidated balance sheet of AutoLend Group, Inc. and
subsidiaries as of March 31, 1997, and the related statements of operations,
stockholders' equity (deficit), and cash flows for the year then ended. In
connection with our audit of the consolidated financial statements, we also have
audited the financial statement schedule listed in the accompanying index. These
consolidated financial statements and the financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion the 1997 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
and subsidiaries as of March 31, 1997, and the results of their operations and
their cash flows for the year then ended in conformity with generally accepted
accounting principles. Also, in our opinion, the related 1997 financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly, in all material respects,
the information set forth therein.
The accompanying 1997 consolidated financial statements and related financial
statements schedule have been prepared assuming that the Company will continue
as a going concern. As discussed in Note 4 to the consolidated financial
statements, the Company has suffered recurring losses from operations and has a
net capital deficiency that raises substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters and
need to restructure its obligations are also described in Note 4. The 1997
consolidated financial statements and related financial statement schedule do
not include any adjustments that might result from the outcome of this
uncertainty.
KPMG Peat Marwick LLP
Albuquerque, New Mexico
May 16, 1997, except for note
14 which is as of July 10, 1997
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
AutoLend Group, Inc.
We have audited the accompanying consolidated balance sheets of AutoLend Group,
Inc. (the "Company") as of March 31, 1996 and 1995, and the related statements
of operations, stockholders' equity, and cash flows for the years then ended.
Our audit also included the financial statement schedule listed in the Index at
Item 8. These financial statements and the financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits. The financial statements of the Company for the year ended March 31,
1994 were audited by other auditors whose report, dated May 27, 1994, expressed
an unqualified opinion on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company at March 31, 1996 and 1995, and
the results of its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles. Also, in our opinion,
such financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.
As discussed in Note 1 to the financial statements, although management of the
Company has used its best judgment to arrive at its estimate of the allowance
for credit losses and believes that the same is reasonable to cover the losses
inherent in the installment contracts receivable portfolio however such amount
could differ materially in the near term.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company's recurring losses from operations and
stockholders' capital deficiency raise substantial doubt about its ability to
continue as a going concern. Management's plans concerning these matters are
also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ DELOITTE & TOUCHE LLP
- ------------------------------
DELOITTE & TOUCHE LLP
Miami, Florida
July 15, 1996
F-3
<PAGE>
AUTOLEND GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Assets:
Cash and cash equivalents $ 12,399,932 $ 3,168,730
Securities available for sale -- 175,000
Accounts receivable - matured insurance policies 48,000 1,405,947
Installment contracts receivable $ 2,909,069 $ 13,760,394
Collateral owned-gross 206,529 1,785,743
Allowance for credit losses (1,068,545) (3,995,296)
------------ ------------
Installment contracts receivable-net (note 7) $ 2,047,053 $ 11,550,841
------------ ------------
Purchased insurance policies, face value of $2,053,530 at March 31, 1997
and $2,171,198 at March 31, 1996 $ 513,390 $ 1,445,184
Debt issuance costs, less accumulated amortization of $ 3,519,501 at
March 31, 1997 and $3,276,724 at March 31, 1996 113,904 356,681
Fixed assets, less accumulated depreciation of $ 52,023 at
March 31, 1997 and $397,620 at March 31, 1996 67,795 1,013,173
Net assets of discontinued operations -- 4,974,047
Securities of AutoLend IAP, Inc. (note 6) 800,000 --
Capitalized consulting contract 140,000 --
Other 145,926 395,486
------------ ------------
Total assets $ 16,276,000 $ 24,485,089
============ ============
Liabilities:
Accounts payable $ 945,610 $ 787,036
Accrued liabilities 1,269,933 197,062
Accrued acquisition costs (note 13) 656,542 656,542
Accrued interest expense 3,206,120 1,111,369
Convertible subordinated debentures (note 3 and 14) 22,050,000 22,050,000
------------ ------------
Total liabilities $ 28,128,205 $ 24,802,009
------------ ------------
Stockholders' Equity/(Deficit):
Preferred stock, $.002 par value. Authorized 5,000,000
shares: none issued or outstanding (note 14) $ -- $ --
Common stock, $.002 par value. Authorized 40,000,000
shares; issued 4,634,530 shares at March 31, 1997 and $ 9,269 $ 9,269
March 31, 1996
Additional paid-in capital 5,946,904 5,946,904
Accumulated deficit (17,808,378) (6,273,093)
------------ ------------
Total stockholders' equity/(deficit) $(11,852,205) $ (316,920)
------------ ------------
Total liabilities and stockholders' equity $ 16,276,000 $ 24,485,089
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
AUTOLEND GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended March 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Revenues:
Finance charges on installment contracts $ 1,670,663 $ 7,808,369 $ 2,718,905
Revenues from matured insurance policies 505,292 1,326,706 19,937,906
------------ ------------ ------------
Gross revenues 2,175,955 9,135,075 22,656,811
Cost of matured insurance policies 101,285 784,848 13,260,256
------------ ------------ ------------
Total net revenues $ 2,074,670 $ 8,350,227 $ 9,396,555
General and administrative expenses 5,851,888 9,914,990 6,645,623
Provision for credit losses 3,625,078 8,839,461 1,561,062
------------ ------------ ------------
Operating earnings (loss) $ (7,402,296) $(10,404,224) $ 1,189,870
------------ ------------ ------------
Other income/(expense):
Interest income on investments $ 333,251 $ 603,356 $ 1,196,095
Realized gains/(loss) on sale of securities, net (49,853) 1,137 (1,649,252)
Other income/(expenses) (212,118) 65,337 28,204
Interest expense (2,148,914) (3,289,876) (5,727,005)
Write off of fixed assets (667,238) -- --
Write down of purchased insurance policies (925,300) -- --
Lease termination expense (516,000) -- --
Write down of AutoLend IAP Inc. securities (Note 6) (200,000) -- --
Net gain (loss) on sale of viatical portfolio -- (392,063) --
Gain on sale of viatical trademarks -- 300,000 --
------------ ------------ ------------
Total net other income/(expense) $ (4,386,172) $ (2,712,109) $ (6,151,958)
------------ ------------ ------------
Loss before income taxes, discontinued operations,
extraordinary item and cumulative effect of
change in accounting principle $(11,788,468) $(13,116,333) $ (4,962,088)
Benefit from income taxes 86,082 4,935,676 --
------------ ------------ ------------
Loss before discontinued operations,
extraordinary item and cumulative effect
of change in accounting principle $(11,702,386) $ (8,180,657) $ (4,962,088)
Discontinued operations:
Earnings (loss) from operations of
discontinued subsidiary, net of income tax
benefit of $78,805 and $8,716, in 1997 and 1996,
respectively (152,973) (47,595) (67,735)
Gain on sale of subsidiary net of income tax
expense of $164,887 320,074 -- --
Loss before extraordinary item and cumulative effect
of change in accounting principle $(11,535,285) $ (8,228,252) $ (5,029,823)
Extraordinary item-gain on early extinguishment
of debt, net of amortization of deferred costs
of $947,877 and income tax expense of
$4,847,153 in 1996 -- 7,306,970 2,030,000
------------ ------------ ------------
Loss before cumulative effect of change in
accounting principle $(11,535,285) $ (921,282) $ (2,999,823)
Cumulative effect of change in accounting
principle, net of income tax expense of $117,239 -- 176,735 --
------------ ------------ ------------
Net income/(loss) $(11,535,285) $ (744,547) $ (2,999,823)
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE>
AUTOLEND GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended March 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
Years Ended March 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Loss before taxes, discontinued operations, extraordinary items,
and cumulative effect of change in accounting principle $ (2.54) $ (2.83) $ (1.07)
Benefit from income taxes 0.01 1.06 --
----------- ------------ ------------
Loss per share before discontinued operations,
extraordinary item and cumulative effect of
change in accounting principle $ (2.53) $ (1.77) $ (1.07)
Discontinued operations 0.04 (0.01) (0.02)
----------- ----------- -----------
Loss per share before extraordinary item and
cumulative effect of change in accounting principle $ (2.49) $ (1.78) $ (1.09)
Earnings per share on extraordinary item --gain
on early extinguishment of debt -- 1.58 .44
----------- ----------- -----------
Loss per share before cumulative effect of change in
accounting principle $ (2.49) $ (0.20) $ (0.65)
Earning per share cumulative effect of change in
accounting principle -- 0.04 --
----------- ----------- -----------
Net loss per common share $ (2.49) $ (0.16) $ (0.65)
=========== =========== ===========
Weighted average number of common and common
equivalent shares outstanding 4,634,530 4,634,530 4,634,530
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
AUTOLEND GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit)
Years Ended March 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Unrealized
Common Stock Additional Gains (Losses)
Paid-In Accumulated on Securities Treasury
Shares Amount Capital Deficit for Sale Stock Total
---------- -------- ------------------------------------------ -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1994 4,634,530 $ 9,269 $5,946,904 $ (2,528,723) $(717,389) $ -- $ 2,710,061
Unrealized gains on securities
available for sale 718,059 718,059
Net Loss (2,999,823) (2,999,823)
---------- ------- ----------- ----------- ---------- -------- -------------
Balance at March 31, 1995 4,634,530 $ 9,269 $5,946,904 $ (5,528,546) $ 670 $ -- $ 428,297
Net Loss (744,547) (670) (745,217)
---------- ------- ----------- ----------- ---------- -------- -------------
Balance at March 31, 1996 4,634,530 $ 9,269 $5,946,904 $ (6,273,093) $ -- $ -- $ (316,920)
Net Loss (11,535,285) (11,535,285)
---------- ------- ----------- ------------ ---------- -------- -------------
Balance at March 31, 1997 4,634,530 $ 9,269 $5,946,904 $(17,808,378) $ -- $ -- $(11,852,205)
========== ======= =========== ============= ========== ======== =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
AUTOLEND GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended March 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $(11,535,285) $ (744,547) $ (2,999,823)
Adjustments to reconcile net earnings (loss) to net
cash flows from operating activities:
Amortization of debt issuance costs 242,777 2,390,073 1,474,358
Depreciation expense 104,156 259,533 113,499
Writeoff of fixed assets 667,238 36,007 --
Write down of purchased insurance policies 925,300 -- --
Gain on early extinguishment of debt, net of
amortization -- (12,154,123) (2,030,000)
Write down of AutoLend IAP, Inc. Securities 200,000 -- --
Gain on sale of subsidiary, AutoLend IAP, Inc. (986,961) -- --
Gain on sale of assets -- (300,000) --
Provision for credit losses 3,625,078 8,839,461 1,561,062
Realized gains(losses) on securities available for sale 49,853 (1,137) 1,649,252
Change in net assets of discontinued operations (1,008,078) (4,858,380) (115,667)
Changes in assets and liabilities:
Accounts receivable-matured insurance policies 1,357,947 3,578,618 (1,547,942)
Installment contracts receivable 5,878,710 (6,683,571) (15,267,793)
Purchased insurance policies 6,494 17,803,351 12,536,593
Accrued interest receivable -- 79,499 170,112
Other assets 107,469 1,301,177 (1,287,320)
Accounts payable and accrued liabilities 1,231,445 609,182 150,749
Accrued interest expense 2,094,751 (1,430,673) (249,383)
------------ ------------ ------------
Cash provided by operating activities $ 2,960,894 $ 8,724,470 $ (5,842,303)
------------ ------------ ------------
Cash flows from investing activities:
Purchases of securities available for sale $ -- $(14,414,871) $(13,400,903)
Proceeds from sale of securities available for sale 125,000 23,922,979 22,352,612
Proceeds from sale of AutoLend IAP, Inc. 5,963,388 -- --
Proceeds from sale of fixed assets 185,995 -- --
Purchase of fixed assets (4,075) (492,799) (755,125)
------------ ------------ ------------
Cash provided by investing activities $ 6,270,308 $ 9,015,309 $ 8,196,584
------------ ------------ ------------
Cash flow from financing activities:
Early extinguishment of debt $ -- $(15,848,000) $ (1,970,000)
------------ ------------ ------------
Cash used in financing activities $ -- $(15,848,000) $ (1,970,000)
------------ ------------ ------------
Cash and cash equivalents at beginning of period $ 9,231,202 $ 1,891,779 $ 384,281
Net increase in cash and cash equivalents 3,168,730 1,276,951 892,670
------------ ------------ ------------
Cash and cash equivalents at end of period $ 12,399,932 $ 3,168,730 $ 1,276,951
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
AUTOLEND GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1997, 1996 and 1995
(1) Summary of Significant Accounting Policies
(a) Basis of Presentation
The Company's consolidated financial statements include the accounts of
AutoLend Group, Inc. and its wholly-owned subsidiaries, AutoLend Corporation,
AutoLend IAP, Inc. (through September 18, 1996), LB NM, Inc., and American Life
Resources Group, Inc.
The Company maintains a portfolio of Retail Installment Loan Contracts (consumer
used-car loans) through its wholly-owned subsidiary, AutoLend Corporation. LB
NM, Inc. and American Life Resources Group, Inc. maintain a portfolio of life
insurance policies purchased from individuals facing life-threatening illnesses,
a business generically referred to as viatical settlements. The Company ceased
purchasing consumer used-car loans in December 1995 and life insurance policies
in September 1994 and does not at this time intend to recommence such
activities.
AutoLend IAP provided short-term (2 to 6 weeks) financing to selected used car
dealers for purchases of used automobiles at certain regional auctions
throughout the United States. On September 18, 1996, the Company entered into a
stock purchase agreement for the sale of AutoLend IAP (see Note 6), and the
subsidiary was sold.
Due to the nature of the Company's business, the accompanying consolidated
balance sheets have been presented as nonclassified. Significant intercompany
accounts and transactions are eliminated.
(b) Cash and Cash Equivalents
Cash and cash equivalents include debt securities with maturities of 90 days or
less at the time of acquisition
(c) Securities Available for Sale
Securities available for sale are reported at fair value (based on quoted market
prices). Realized gains and losses on the sale of securities available for sale
are reported in the Consolidated Statements of Operations. For the purpose of
determining the amount of realized gains and losses, the Company determines the
cost of its investment in securities based on specific identification.
F-9
<PAGE>
AUTOLEND GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1997, 1996 and 1995
(d) Revenue recognition
Consumer Automobile Financing: Revenues from finance charges on Installment
Contracts Receivable are recognized when earned, and are based on the difference
between gross cash flow from a Contract and the total amount paid by the Company
to acquire said Contract. Loan discounts are recorded as unearned income at the
time of initial investment in a loan contract, and such discounts are amortized
to income over the remaining life of the loan. Interest charges are computed
using the "Rule of 78" interest calculation method. Loan costs are amortized
against income as an adjustment of yield.
Accrual of interest income on receivable balances (and thereby, recognition of
revenue) is suspended when a loan is delinquent for thirty days or more. Accrual
is resumed when the loan becomes contractually current, and past-due interest
income is recognized at that time. The Company initially performed in-house
substantially all of the functions associated with origination, servicing, and
collection of the contracts; however, since January 1996, the Company has
utilized an outside contractor to service installment loans.
Allowance for Credit Losses: An allowance for credit losses is maintained
at a level which, in management's judgement, is adequate to absorb credit losses
inherent in the Installment Contracts Receivable portfolio. The amount of the
allowance is based on management's evaluation of the collectibility of the
Installment Contracts Receivable portfolio, including the nature of the
portfolio and specific impaired loans. Allowances for impaired loans are
generally determined based on aging, collateral values, or the present value of
estimated cash flows. Because of uncertainties associated with general economic
conditions, collateral values, and future cash flows on impaired loans, it is
possible that management's estimate of credit losses inherent in the Installment
Contracts Receivable portfolio, and the resultant allowance, may change
materially in the near term.
The allowance for credit losses is established through provisions charged to
income and is based on management's evaluation of potential losses after
consideration of such factors as current delinquency data, changes in the
Installment Contracts Receivable portfolio composition, and other pertinent
factors. Charge-offs are recorded against the allowance when management believes
that the collectibility of the principal is unlikely. Recoveries of amounts
previously charged-off are credited to the allowance.
There are inherent uncertainties in determining the allowance for credit losses
in an established Installment Contracts Receivable portfolio. Additionally, the
limited duration of historical experience for this specific portfolio compounds
such uncertainties. As a result of such uncertainties, the aggregate losses
ultimately incurred by the Company with respect to the
F-10
<PAGE>
AUTOLEND GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1997, 1996 and 1995
Installment Contracts Receivable portfolio may significantly differ from the
allowance for credit losses in the accompanying financial statements. Management
has used its best judgment to arrive at its estimate of the allowance for credit
losses, and believes that the same is reasonable to cover the losses inherent in
the Installment Contracts Receivable portfolio at March 31, 1997 and 1996.
Viatical Settlements: Revenue and cost of revenue is recognized upon the
maturity of a policy (death of the insured). Before such maturity (and
consequent revenue and cost recognition), Policies are carried as an investment
asset. The cost of a Policy includes the initial purchase price, insurance
premiums, and other direct expenditures paid by the Company in connection with
the purchase and maintenance of the Policy. Revenues are accounted for as "Gross
Revenues" (i.e., before deduction of acquisition and related costs), and as "Net
Revenues" (after deduction of such costs). Net Revenues are combined with
revenues from other business operations in calculating the Company's Total (net)
Revenues.
The ability to recognize viatical revenue during the period in which a policy
matures depends on the Company receiving notification of policy maturity from a
representative of the insured, which, in some instances, may not occur until
significantly after the death of the insured and after the financial statements
have been finalized for the period during which the policy matured. The Company
is unable to estimate the face value and cost of policies which may have matured
but for which no notification has been received. To the extent policy maturities
cannot be recorded in the period the policy matures due to this delay in
notification, the revenue and cost related to such maturity is recognized in the
statements of operations subsequent to the maturity of the policy.
IAP Dealer Auction Financing: Revenues from auction financing, consisting
of non-refundable administrative fees, were recognized at the time of contract.
Interest income on IAP dealer receivables was recorded as unearned income and
amortized over the loan period, which does not usually exceed six weeks.
(e) Debt Issuance Cost Amortization
Debt issuance costs are amortized over the life of the related debt.
(f) Income Taxes
The Company calculates income taxes using the asset and liability method
prescribed by Financial Accounting Standards Board Statement No. 109 -
"Accounting for Income Taxes."
F-11
<PAGE>
AUTOLEND GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1997, 1996 and 1995
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
Company, based on the weight of the available evidence, provides an offsetting
valuation allowance against deferred tax assets to the extent it determines it
is more likely than not that any such deferred tax assets will not be usable.
(g) Fair Value of Financial Instruments
The Company's financial instruments include securities available for sale,
accounts receivable, matured insurance policies, installment contracts
receivable, dealer receivables, purchased insurance policies, accounts payable
and accrued liabilities, and convertible debentures. The fair value of such
financial instruments have been determined using available market information
and interest rates as of March 31, 1997.
At March 31, 1997, the fair value of the 9.5% Convertible Subordinated
Debentures due 1997 was substantially less than the carrying value of
$22,050,000 based on the uncertainty of the Company's ability to continue as a
going concern. The Company's management is unable to determine with any
precision or certainty what the fair value is at this time; however, the Company
has repurchased Debentures at a discount from face value and is currently
seeking to further reduce Debenture obligations at a discount. The fair value of
all other financial instruments was not materially different than their carrying
value.
(h) Earning per Share
Earnings per common and common equivalent share is computed based on the
weighted average number of common shares and, if dilutive, common equivalent
shares (options and warrants) outstanding during the period.
(i) Use of Estimates
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles 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
F-12
<PAGE>
AUTOLEND GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1997, 1996 and 1995
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
(j) Collateral Owned
Collateral owned consists of repossessed automobiles which are recorded at the
lower of the loan amount or the fair value of the vehicle on the date of
foreclosure as determined by industry information. Any excess of the loan
balance over the estimated fair value of the repossessed vehicle is charged to
the allowance for loan losses. Any losses on the sale of the repossessed
vehicles are charged to operations.
(2) Change in Management
In December 1995, Nunzio DeSantis, Courtlandt Miller, and Vincent Villanueva,
stockholders of the Company (collectively, the "Plaintiff Stockholders"),
commenced an action in the Delaware Chancery Court against certain former
officers and directors of the Company (collectively, the "Defendants"), seeking
to enjoin the Company's then current management and Board of Directors from
taking certain contemplated actions.
The Plaintiff Stockholders and the Defendants entered into extensive arms-length
negotiations concerning a change in existing management and the resolution of
all claims between the parties. As a result of these negotiations, the parties
entered into a Stipulation of Settlement ("the Stipulation"). The Stipulation
was approved by the Court after due notice was sent to all of the Company's
stockholders. The transactions constituting the Stipulation were consummated on
September 18, 1996. Pursuant to the Stipulation, all pending claims were
dismissed and, among other things: (i) the former executive management of the
Company resigned, received the payment remaining under their respective
employment agreements totaling $502,000, and entered into consulting agreements
with the Company; (ii) all of the directors of the Company other than Dr. Philip
Vitale resigned from the Board; (iii) Mr. DeSantis was appointed to the Board
and was elected Chairman and Chief Executive Officer; and, (iv) the Company's
AutoLend IAP, Inc. subsidiary was sold to an affiliate of the departing
management (see note 6). As a result, the entire management and employee staff
of the Company was changed and significantly reduced, and the Company's offices
were moved from Miami Beach, Florida, to Albuquerque, New Mexico.
F-13
<PAGE>
AUTOLEND GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1997, 1996 and 1995
(3) Convertible Subordinated Debentures
On September 19, 1991, the Company received net proceeds of $51.4 million
from the issuance to European investors of $55.0 millon of its 9.5% Convertible
Subordinated Debentures (the "Debentures"). During fiscal year ended March 31,
1996, the Company prepaid without penalty $28.9 million principal at a cost of
approximately $15.8 million plus accrued interest, resulting in a gain on early
extinguishment of Debentures of $13.1 million. For fiscal year ended March 31,
1995, the Company prepaid without penalty $4.0 million principal at a cost of
$2.0 million plus accrued interest and reported a gain on early extinguishment
of Debentures of $2.0 million. The outstanding principal balance of Debentures
is $22.1 million at March 31, 1997. The Debentures, which mature September 19,
1997, require annual interest payments of 9.5%. At March 31, 1997, accrued
interest on the outstanding Debentures was $ 3.2 million. A balance of $ 0.1
million in debt issuance costs from an original total of $ 3.6 million remained
to be amortized as of March 31, 1997.
The Debentures, which are subordinated to any current or future senior debt, are
convertible by the holders into the Company's common stock at the rate of one
common share per $12.25 principal amount. In addition, the Company may require
conversion beginning September 19, 1993 if the common stock market price exceeds
$15.00 per share for 20 consecutive days. There were no conversions during the
years ended March 31, 1997 and 1996.
On October 22, 1996, the Company initiated an Exchange Offer to exchange
shares of common and preferred stock for any or all outstanding Debentures,
including all accrued interest which may be due. The terms of the Exchange Offer
included 200 shares of common stock and 8 shares of preferred stock (with such
preferred stock having a stated value of $100 per share) for each $1,000 in face
value of Debentures validly tendered for exchange, all in accordance with the
terms of, and subject to the conditions of, the Exchange Offer. The Exchange
Offer expired on April 8, 1997, and the Company accepted all Debentures tendered
thereunder. (See Note 14, Subsequent Events).
(4) Going Concern
The Company's viability as a going concern is dependent upon the restructuring
of its obligations, and, ultimately, a return to profitability. During the
eighteen months ended December 31, 1995, the Company had incurred operating
losses of approximately $9.8 million, prior to which period the Company was not
in the consumer automobile financing business. In December 1995, the Company
ceased purchasing automobile installment contracts receivable and concurrently
downsized its operations significantly, terminating approximately three-quarters
of
F-14
<PAGE>
AUTOLEND GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1997, 1996 and 1995
its work force. In the following months ended September 1996, additional
operating losses of $ 4.2 million were incurred, primarily due to loan loss
provisions associated with the automobile financing portfolio. On September 18,
1996, the Company consummated the settlement of certain stockholder litigation,
and entered into various agreements providing for, among other things, the
disposition of certain operations, and the replacement of prior management (see
Note 2).
Current management is faced with the immediate need to restructure the Company's
obligations. The total outstanding principal amount of the Debentures is due
September 19, 1997. Although the Company currently has sufficient liquidity to
meet its interest obligations under the Debentures, and other obligations in
general, the Company does not presently have such liquidity to repay the entire
principal under the outstanding Debentures when it becomes due in September
1997.
On September 19, 1996 the Company was obligated to make an annual interest
payment of approximately $2.1 million on the Debentures. The Company's decision
not to distribute this payment was due to the commencement of the Exchange
Offer. The Exchange Offer expired on April 8, 1997, and the Company accepted all
Debentures tendered thereunder, which totaled $7.2 million in face value (see
Note 14).
The Company believes it has sufficient funds to finance its current operations
through at least mid-September 1997, but would require additional funds to
finance the repayment of the entire face amount of the outstanding Debentures.
The Company is currently working on the resolution of this issue, but can not
guarantee the outcome at this time.
(5) Involuntary Bankruptcy Petition
Commencing on November 1, 1996, the Company was the subject of a filing of a
creditors' petition by four holders of the Company's Debentures alleging that
the Company was not generally paying its debts as they became due. The Company
filed an answer to the creditors' petition, denying that it was a proper subject
of a bankruptcy proceeding. The case was dismissed on March 25, 1997, and the
dismissal became effective April 7, 1997. During the pendancy of this action
until its resolution, the Company was restricted in its ability to launch any
new business activity.
(6) Discontinued Operation
In connection with the Stipulation (see Note 2), the Company's former
subsidiary, AutoLend IAP,
F-15
<PAGE>
AUTOLEND GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1997, 1996 and 1995
Inc., (IAP) was sold, effective September 18, 1996, to an affiliate of departing
management. The Company received full, undiscounted payment in cash for all IAP
receivables outstanding, and also received cash payment for the book value of
equipment and fixtures utilized in the business. In addition, the Company
received shares of IAP's preferred stock, with a face value of $1 million
bearing interest at 11%. If the face value and accrued interest is not repaid to
the Company in full at the end of three years, the Company may convert the
preferred stock into common stock equal to 51% of IAP at the date of conversion.
At March 31, 1997, management of the Company was negotiating with the new owners
of IAP for the early repayment of the preferred stock and, therefore, has
recorded a writedown of the investment of $200,000.
As a result of the sale of IAP, the past results of operations of IAP have been
treated as a discontinued operation in the accompanying financial statements. No
interest expense has been allocated to discontinued operations. Summarized
results of IAP included in the accompanying financial statements are as follows:
Fiscal Year ending March 31
1997 1996 1995
---- ---- ----
Revenue $ 825,706 $ 379,667 $ 2,163
Net income (loss) (152,973) (47,595) (67,735)
Income (loss) per
common share (0.03) (0.01) (0.02)
(7) Installment Contracts Receivable
At March 31, 1997 and 1996, Installment Contracts Receivable consisted of the
following:
1997 1996
---- ----
Installment contracts receivable $ 3,828,706 $ 19,247,551
Unearned finance charges (919,637) (5,487,157)
------------ ------------
Installment contract receivable, net of
unearned finance charges $ 2,909,069 $ 13,760,394
Collateral owned 206,529 1,785,743
Allowance for credit losses (1,068,545) (3,995,296)
------------ ------------
Installment contracts receivable, net $ 2,047,053 $11,550,841
============ ===========
F-16
<PAGE>
AUTOLEND GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1997, 1996 and 1995
A summary of the allowance for credit losses is as follows:
Balance - beginning of period $ 3,995,296 $ 1,544,000
Provision for losses 3,625,078 8,839,461
Charge offs and adjustments (6,551,829) (6,388,165)
----------- -----------
Balance - end of period $ 1,068,545 $ 3,995,296
=========== ===========
Most of the Company's Installment Contracts Receivable are due from consumers in
the Southeast, West and Northeast regions of the United States. To some extent,
realization of the receivables will be dependent on local economic conditions.
The Company holds vehicle titles as collateral for all contracts receivable
until such contracts are paid in full.
(8) Purchased Insurance Policies
At March 31, 1997, the remaining purchased insurance policies have been written
down to fair value based on a review of the individual policies and the
estimated market for viatical policies.
(9) Securities Available for Sale
Securities Available for Sale at March 31, 1997 and 1996 are summarized as
follows:
1997 1996
--------------------- ----------------------
Cost Fair Value Cost Fair Value
Marketable Equity Securities $ -- $ -- $ 175,000 $ 175,000
======== ======== ========= =========
Years Ended March 31,
---------------------
1997 1996 1995
---- ---- ----
Realized gains $ -- $1,137 $ 115,621
Realized losses (49,853) -- (1,764,873)
-------- ------ -----------
Net gain/ (loss) $(49,853) $1,137 $(1,649,252)
======== ====== ===========
F-17
<PAGE>
AUTOLEND GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1997, 1996 and 1995
(10) Income Taxes
A reconciliation of the Company's actual income tax expense/(benefit) to that
computed using the U.S. Federal statutory rate of 34% is as follows:
<TABLE>
<CAPTION>
Years ended March 31,
---------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Computed "expected" tax expense/(benefit) $(3,921,997) $ (253,146) $(1,019,940)
Increase (decrease) in income taxes resulting from:
Amortization of goodwill 223,225 (401,590) 246,483
Limitation of net operating loss carryforward 3,698,772 654,736 773,457
------------ ----------- -----------
Total income tax expense $ -0- $ -0- $ -0-
============ =========== ===========
</TABLE>
The tax effects of temporary differences that give rise to deferred tax
liabilities at March 31, 1997 and 1996 are presented below:
<TABLE>
<CAPTION>
March 31
--------
1997 1996
---- ----
<S> <C> <C>
Deferred Tax assets:
Bad debt reserve $ 167,395 $ 1,743,093
Capital loss carryover 203,227 482,445
Net operating loss 5,706,454 --
Valuation reserve on investment
and insurance policies 436,391 --
Other -- 11,061
----------- -----------
Subtotal: gross deferred tax assets $ 6,513,467 $ 2,236,599
----------- -----------
Deferred tax liabilities:
Net basis of fixed assets $ 6,129 $ 60,208
Other 12,446 12,077
----------- -----------
Subtotal: gross deferred tax liabilities $ 8,575 $ 72,285
----------- -----------
Net deferred tax asset (liability), before valuation
allowance $ 6,504,892 2,164,314
Valuation allowance for deferred tax assets (6,504,892) (2,164,314)
----------- -----------
Total net deferred tax asset (liability) $ -0- $ -0-
=========== ===========
</TABLE>
F-18
<PAGE>
AUTOLEND GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1997, 1996 and 1995
At March 31, 1997, the Company had net operating loss carry forwards of
approximately $14.7 million, which expire in the year 2012, and capital loss
carry forwards of approximately $0.3 million.
(11) Stockholder's Equity
On July 31, 1990, the Company made a public offering of 900,000 units at $10
each, each unit consisting of three common shares and three redeemable Class A
warrants. Total proceeds from the sale of these units was $9,000,000, less
offering costs of $1,815,591. In addition, the underwriters for the public
offering exercised an option to purchase 50,000 units to cover over-allotments.
Total proceeds from the sale of these option units was $500,000, less
underwriting discounts and commissions of $57,750. The underwriters also
received an additional option to purchase 90,000 units at $12 per unit,
exercisable over a period of two years commencing July 31, 1993; this additional
option expired unexercised.
Each Class A warrant entitles the registered holder to purchase one common share
and one redeemable Class B warrant at an exercise price of $4.00 through July
30, 1997. Each Class B warrant entitles the registered holder to purchase one
common share at $7.00 from the date of issuance through their expiration date.
Each class of warrants is currently set to expire on July 30, 1997. The Class A
and Class B warrants are subject to redemption at $0.05 per warrant on 30 days
prior written notice provided the closing bid price of the common shares exceeds
$5.50 and $9.70 per share, respectively, for 30 consecutive business days ending
within 15 days of the date of notice of redemption. During the year ended March
31, 1993, 151,500 Class A warrants and 44,500 Class B warrants were exercised. A
total of 1,000 Class A warrants were exercised during the year ended March 31,
1992. In addition, the Company repurchased 142,000 Class A warrants at a total
cost of $227,355. At March 31, 1997, there were 2,555,500 Class A warrants and
108,000 Class B warrants outstanding.
In connection with the Company's issuance of Debentures (Note 3), the Company
granted to the distribution agent a warrant to purchase 269,388 shares of common
stock exercisable at $12.25 per share through September 18, 1996, which expired
unexercised. The Company has also granted warrants to individuals to purchase
25,000 common shares at $3.00 per share through March 11, 2001 and 20,000 common
shares at $12.25 through September 18, 2001.
The Company has a stock option plan under which both incentive and non-qualified
stock options may be granted for the purchase of up to 4,500,000 shares of
common stock. For options granted as incentive stock options under the plan, the
exercise price must be at least equal to the fair market value on the date of
the grant. The exercise price for non-qualified options may be less than fair
market value. The options expire at various time ranging from five to ten years.
F-19
<PAGE>
AUTOLEND GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1997, 1996 and 1995
The options are summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------ ---------------------------- --------------------------
Weighted-Average Weighted-Averag Weighted-Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------ -------------- ------ -------------- ------ --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 1,865,000 $ 2.77 1,370,000 $3.22 620,000 $4.40
Granted 525,000 2.65 495,000 1.54 750,000 2.24
Forfeited (1,290,000) 2.98 -- -- -- --
----------- ---------- ---------
Outstanding at end of year 1,100,000 2.47 1,865,000 2.77 1,370,000 3.22
Options exercisable at year end 820,000 911,667 640,000
</TABLE>
Management has determined that the fair value of the options granted in 1997 is
nominal.
The following table summarizes information about the options outstanding at
March 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
Number Weighted-Average Number
Outstanding Remaining Weighted-Average Exercisable Weighted-Average
Exercise Price at March 31, 1997 Contractual Life Exercise Price at March 31, 1997 Exercise Price
-------------- ----------------- ---------------- --------------- ----------------- --------------
<S> <C> <C> <C> <C> <C>
$1.50-2.50 445,000 8 1/2 yrs $1.86 215,000 $1.86
2.65 525,000 -- (1) 2.65 525,000 2.65
3.00-4.625 105,000 7 3.31 55,000 3.60
6.00 25,000 5 1/2 6.00 25,000 6.00
--------- -------
1.50-6.00 1,100,000 8 2.47 820,000 2.61
</TABLE>
- -----------------
(1) These options expire on the thirty-first day following the tenth
consecutive trading day that the Market Price (as defined in the option
agreement) of the Company's Common Stock equals or exceeds $6.00 per share,
subject to an extension of the option term if the Common Stock is then not
registered under the Securities Act of 1933, as amended.
F-20
<PAGE>
AUTOLEND GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1997, 1996 and 1995
(12) Sale of Certain Assets
On May 8, 1995 and July 18, 1995, American Life Resources Group ("ALRG") and LB
NM, Inc. ("LBNM") entered into agreements with Viaticus, Inc. ("Viaticus"), a
subsidiary of the CNA Insurance Companies, under which ALRG and LBNM agreed to
assign to Viaticus certain viatical insurance policies. Under the terms of the
agreements, upon receipt by Viaticus of satisfactory acknowledgement by the
insurer, payment of a predetermined amount for each policy would be remitted to
the Company. During fiscal year ended March 31, 1996, approximately $17.5
million was received as payment for policies with completed assignments to
Viaticus. There are no outstanding amounts receivable under the agreements at
March 31, 1997.
(13) Commitments and Contingencies
The Company leases its office space and certain equipment under operating leases
that expire at various times over the next four years.
On September 18, 1996, the Company moved its corporate offices to Albuquerque,
New Mexico from Miami Beach, Florida. The Company leases approximately 2,000
square feet of office space in Albuquerque on a month to month basis at an
annual cost of $23,700. At the time of this move, the Company was able to convey
a noncancelable lease for over 3,000 square feet in Miami which carried a base
rent of $35,700.
The Company also leases approximately 17,000 square feet of office space in
Miami Beach, Florida, effective May 1994, under a six-year noncancelable lease.
In February 1996, the Company moved-out of these premises. As of March 31, 1997,
forty and one half months of the lease remained at a cost of $341,250 per year,
plus escalation. The Company is currently subleasing part of the space on a
short term basis and is seeking a party to sublease or assume its obligations
under the lease; any such sublease or assumption is likely to be at a loss to
the Company, given that current local real estate rental rates are lower than
that prescribed by the lease. During 1997, a lease loss accrual of $516,000 has
been provided. At March 31, 1997, $435,326 of the accrual remains.
Rent expense for operating leases was $178,702, $306,335 and $224,574 for the
years ended March 31, 1997, and 1996 and 1995 respectively. Future estimated
lease payments for noncancelable operating leases with initial or remaining
lease term in excess of one year as of March 31, 1997 are:
F-21
<PAGE>
AUTOLEND GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1997, 1996 and 1995
Year ending March 31,
1998 $ 342,950
1999 341,250
2000 341,250
2001 127,973
----------
Total estimated contractual lease payments $1,153,423
==========
Effective April 1, 1991, the Company acquired certain equipment, covenants not
to compete, and the future operations of Living Benefits, Inc. ("LBI"). The
acquisition agreement provides for the payment of contingent consideration based
on a share of the profits of LBI's business. No contingent consideration payment
was required for the year ended March 31, 1992. At March 31, 1993, the Company
accrued $549,258 as contingent consideration for fiscal year 1993, which was
paid on July 19, 1993. The Company and the principals of LBI are disputing the
remaining amounts of consideration due based on differences in interpretation of
certain computational items set forth in the acquisition agreement. The Company
has accrued an amount based on its interpretation of the agreement and intends
to negotiate a settlement of the dispute. On September 12, 1996, a complaint was
filed against the Company in the United States District Court for the District
of New Mexico by Living Benefits (Living Benefits, a New Mexico corporation, v.
Autolend Group, Inc., a Delaware corporation, formerly known as CAPX
Corporation, and LB NM, Inc., a Delaware corporation; Cause No. CIV 96 0993 SC).
The complaint alleges that the Company is obligated to the plaintiff for an
amount in excess of $1,657,914, together with interest at the rate of 8.75% from
June 30, 1992, for "earn-out payments" allegedly owed under a contract between
the plaintiff and the Company dated March 14, 1992. The plaintiff is also
seeking punitive damages for bad faith in an undisclosed amount as well as
attorney's fees. The Company has admitted that it is obligated to the plaintiff
in the amount of $656,542 pursuant to an agreement which had been entered into
between the Company and the plaintiff in June 1995 and which the Company alleges
had since been breached by the plaintiff. On June 11, 1997, an Offer of
Judgement was made to the plaintiff in the amount of $656,600 together with
costs accrued as of that date. The Company will vigorously defend against any
action which seeks to extend its liability to the plaintiff beyond its admitted
obligation. However, the Company is currently unable to predict with certainty
the final resolution of this matter.
The Company is also a party to legal proceedings and claims which arise during
the ordinary course of business.
(14) Subsequent Events
On April 8, 1997, the Company closed the Exchange Offer (note 3) and issued
approximately 1.4 million shares of the Company's common stock and approximately
58,000 shares of the Company's newly created 14% cumulative convertible
preferred stock in exchange for
F-22
<PAGE>
AUTOLEND GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1997, 1996 and 1995
approximately $7.2 million of face value of the Debentures. Each share of the
convertible preferred stock has a stated value of $100 and a par value of $.002.
As a result of the Exchange Offer, the Company will record in the quarter ending
June 30, 1997 a charge to operations of approximately $6 million and an equal
offsetting increase to additional paid-in capital. In addition, accrued interest
on the convertible debentures, totaling approximately $1.0 million at March 31,
1997, will be cancelled. The exchange would have resulted in a net increase to
stockholders' equity of approximately $8.2 million had the transaction occurred
on March 31, 1997.
Subsequent to March 31, 1997, the Company repurchased Debentures for
approximately $5.7 million in cash at a discount from face value. Had these
transactions occurred as of March 31, 1997, the Company's cash balance would
have been reduced to approximately $6.7 million.
Notwithstanding the Exchange Offer and the Debenture repurchases, the Company's
assets remain insufficient to repay the remaining outstanding Debentures when
they become due.
As a result of the involuntary bankruptcy proceeding against the Company,
the Company was prevented from purchasing from Robert Brennan ("Brennan") an
approximately 25% equity interest in International Thoroughbred Breeders, Inc.
("ITB"). Consequently, NPD, Inc. ("NPD"), a newly formed company owned by Nunzio
P. DeSantis and Anthony Coelho, the Chairman and Chief Executive Officer and a
Director, respectively, of the Company, purchased the ITB shares in lieu of the
Company. NPD concurrently granted the Company an option to purchase the ITB
shares. In consideration of the option, the Company agreed to make a loan to NPD
to finance a portion of the cash purchase price to be paid by NPD to Brennan at
closing and further agreed that, following the dismissal of the involuntary
bankruptcy petition, it would guarantee up to $2.0 million of NPD's obligation
to pay the remaining portion of the purchase price due Brennan for the ITB
shares, and deposit $2.0 million into a cash collateral escrow account to secure
its guarantee obligation.
The Bankruptcy Court enjoined the proposed loan by the Company to NPD, and,
as a result, the option was not granted to the Company. Nonetheless, following
the dismissal of the involuntary bankruptcy petition, in accordance with the
agreement, the Company executed and delivered its guarantee as aforesaid and
deposited the required $2.0 million in the cash collateral escrow account. In
June 1997, in order to reinstate the Company to the position it would have been
as the purchaser of the ITB shares, the Company's Board of Directors approved an
agreement in principle with NPD pursuant to which the Company could purchase
from NPD, for a purchase price of $2.5 million ($200,000 in cash and a note for
$2.3 million), an option to acquire 100% of the ITB shares owned by NPD. If the
option is exercised, the Company will purchase the ITB shares for the same cash
portion of the purchase price NPD paid for the ITB shares and by assuming the
$5.8 million promissory note issued by NPD to Brennan at the closing for the
remainder of the purchase price for the ITB shares.
In addition, the Company is making a loan to NPD for $3.0 million secured
by the ITB shares, subject to a prior lien on the ITB shares granted to Brennan.
NPD will use the loan proceeds to repay an earlier loan made to NPD by an
unaffiliated third party, which repayment will terminate the third party's prior
option to purchase the ITB shares which had been granted when it made the loan.
The option granted to the Company is subject to an option which has been
granted by NPD to Mr. DeSantis to purchase 50% of the ITB shares from NPD which,
if exercised by Mr. DeSantis, would nonetheless permit the Company to acquire
the remaining 50% of the ITB shares. Upon exercise of the option by Company, its
guarantee would terminate and the $2.0 million cash collateral would be released
to the Company. Furthermore, each of the Company's and Mr. DeSantis' option is
subject to an option which was granted by NPD to Robert Green at the closing of
the ITB share purchase to purchase 50% of the ITB shares. In the event either
the Green or DeSantis options are exercised then the $2.3 million note held by
NPD in partial payment of the option will be reduced proportionately by the
percentage of the ITB shares remaining subject to the option.
F-23
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
AUTOLEND GROUP, INC.
Date: July 10, 1997 By: /s/ Nunzio P. DeSantis
-----------------------
Nunzio P. Desantis
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant, and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ Nunzio P. DeSantis Chairman of the Board, July 10, 1997
- ----------------------------- Chief Executive Officer
Nunzio P. DeSantis (principal executive officer)
/s/ Jeffrey Ovington Executive Vice President July 10, 1997
- ----------------------------- (principal accounting and
Jeffrey Ovington financial officer)
/s/ Gerald Riesenbach, Esq. Secretary, and Director July 10, 1997
- -----------------------------
Gerald Riesenbach
/s/ Philip J. Vitale, M.D. Director July 10, 1997
- -----------------------------
Philip J. Vitale, M.D.
/s/ Anthony Coelho Director July 10, 1997
- -----------------------------
Anthony Coelho
/s/ Vincent Villanueva Director July 10, 1997
- -----------------------------
Vincent Villanueva
</TABLE>
F-24
<PAGE>
Schedule II
AUTOLEND GROUP, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts
March 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Balance at Charged to Amount on
Beginning Costs and Balance
Description of Period Expenses Sheet
- -----------
<S> <C> <C> <C>
Year ended March 31, 1997
Intangible Assets - accumulated amortization $ 600,000 -- $ 600,000
Goodwill-accumulated amortization 2,708,278 -- 2,708,278
Debt issuance costs - accumulated amortization 3,276,724 242,777 3,519,501
Year ended March 31, 1996
Intangible assets - accumulated amortization $ 293,949 $ 306,051 $ 600,000
Goodwill - accumulated amortization 1,128,413 1,579,865 2,708,278
Debt issuance costs - accumulated amortization 1,824,690 1,452,034 3,276,724
Year ended March 31, 1995
Intangible assets - accumulated amortization $ 120,000 $ 173,949 $ 293,949
Goodwill - accumulated amortization 431,957 696,456 1,128,413
Debt issuance costs - accumulated amortization 1,220,737 603,953 1,824,690
</TABLE>
S-1
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 12,400
<SECURITIES> 0
<RECEIVABLES> 3,164
<ALLOWANCES> 1,069
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 120
<DEPRECIATION> 52
<TOTAL-ASSETS> 16,276
<CURRENT-LIABILITIES> 0
<BONDS> 22,050
0
0
<COMMON> 9
<OTHER-SE> (11,861)
<TOTAL-LIABILITY-AND-EQUITY> 16,276
<SALES> 2,075
<TOTAL-REVENUES> 2,075
<CGS> 0
<TOTAL-COSTS> 5,852
<OTHER-EXPENSES> 2,237
<LOSS-PROVISION> 3,625
<INTEREST-EXPENSE> 2,149
<INCOME-PRETAX> (11,788)
<INCOME-TAX> (86)
<INCOME-CONTINUING> (11,702)
<DISCONTINUED> 167
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,535)
<EPS-PRIMARY> (2.489)
<EPS-DILUTED> (2.489)
</TABLE>
