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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended March 31, 1998
OR
__ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _____ to _____
Commission file number 1-10569
AUTOLEND GROUP, INC.
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(Exact name of registrant as specified in the charter)
Delaware 22-3137244
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(State or other jurisdiction (I.R.S. Employer
of incorporation of organization) Identification No.)
600 Central SW, Third Floor, Albuquerque, New Mexico 87102
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(Address of principal executive offices) (Zip Code)
(505) 247-9429
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
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COMMON STOCK, $.002 PAR VALUE NONE
Securities registered pursuant to Section 12(g) of the Act:
CLASS A WARRANTS
CLASS B WARRANTS
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 herein, and will not be contained, to the
best of the 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]
The number of shares outstanding of the Registrant's common stock was 6,079,530
at July 1, 1998.
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13, or 15(d) of the Securities
Exchange Act of 1934 after the distribution of securities under a plan confirmed
by a court. Yes [X] No ___
Based on the closing sale price on June 18, 1998 (the last reported sale price),
the aggregate market value of the voting stock held by nonaffiliates of the
Registrant was $55,457.
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TABLE OF CONTENTS
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Page
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Part I
Item 1. Business..................................................................... 1
Item 2. Properties................................................................... 9
Item 3. Legal Proceedings............................................................ 10
Item 4. Submission of Matters to a Vote of Securities Holders........................ 11
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters........ 11
Item 6. Selected Financial Data...................................................... 13
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations.................................................................. 15
Item 7A. Quantitative and Qualitative Disclosures about Market Risk................... 21
Item 8. Financial Statements and Supplementary Data.................................. 21
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.................................................................. 21
Part III
Item 10. Directors and Executive Officers of the Registrant........................... 21
Item 11. Executive Compensation....................................................... 23
Item 12. Security Ownership of Certain Beneficial Owners and Management............... 25
Item 13. Certain Relationships and Related Transactions............................... 26
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............. 26
Signatures.................................................................................. 31
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This report should be read in its entirety. No one section of the report deals
with all aspects of the subject matter.
FORWARD-LOOKING INFORMATION
The following discussions include "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Forward-looking statements are not historical
facts; they involve risks and uncertainties that could cause the Company's
results to differ materially from those in the forward-looking statements. The
risks and uncertainties that may affect the operations, performance,
development, and results of the Company's business include significant risk
factors inherent in the consummation of any plan in a Chapter 11 bankruptcy
case, e.g., the risk of liquidating assets at less than their projected value
and claims being allowed in an amount different from the amounts projected by
the Company; the consummation of certain pending settlements of litigation
affecting interests of the Company; the perceived difficulties from the
Company's
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bankruptcy which could adversely affect its existing and proposed operations and
other difficulties relating to its Chapter 11 bankruptcy; and the risks relating
to the operation of a gaming business which forms a significant part of the
Company's Plan of Reorganization. From time to time, AutoLend Group, Inc., may
publish or otherwise make available forward-looking statements. All subsequent
forward-looking statements, whether written or oral and whether made by or on
behalf of the Company, are also expressly qualified by these cautionary
statements.
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PART I
ITEM 1. BUSINESS.
GENERAL
AutoLend Group, Inc., a Delaware corporation formerly known as CAPX Corporation
(with its subsidiaries, the "Company" or "AutoLend"), through its wholly owned
subsidiaries, AutoLend Corporation, AutoLend IAP, Inc. ("IAP"), LB NM, Inc.
("LBNM"), and American Life Resources Group, Inc. ("ALRG"), has been engaged in
the businesses of: (i) maintaining a portfolio of sub-prime consumer car loan
contracts purchased from used-car dealers ("Installment Contract Receivables");
(ii) providing short-term two to six weeks "floor" financing to selected used-
car dealers for purchases of used automobiles ("Inventory Assistance Program");
and (iii) maintaining a portfolio of unmatured life insurance policies
("Policies") purchased from persons with life-threatening illnesses, a business
generically referred to as viatical settlements.
The Company presently maintains a residual portfolio of Installment Contracts
Receivable through its subsidiary AutoLend Corporation; the Company ceased
purchasing these consumer car loans in December 1995. The portfolio of
Installment Contracts Receivable at March 31, 1998 was $0.5 million before
reserves, and consisted of 178 active consumer loans. The Company also presently
maintains a residual portfolio of Policies through its subsidiaries LBNM and
ALRG; the Company ceased purchasing such Policies in September 1994. The 15
remaining Policies have a combined face value of $1.9 million and a net book
value of $0.3 million on March 31, 1998. Since the sale of IAP in September 1996
(see "Discontinued Operations" below), the Company's business activities have
been primarily concentrated on the development or acquisition of a new business,
the resolution of certain obligations and litigation associated with former
operations, the collection of amounts due from the outstanding Installment
Contracts Receivable, and the collection of proceeds from the Policies.
As a result of the Company's inability to make repayment on, and resultant
default against, its outstanding 9.5 percent Convertible Subordinated Debentures
due September 19, 1997 (the "Debentures," as described more fully below), on
September 22, 1997, the Company filed for protection (the "Bankruptcy Petition")
under Chapter 11 of the United States Bankruptcy Code (the "Code") in the United
States Bankruptcy Court for the District of New Mexico (the "Bankruptcy Court").
The Company is presently operating its business as a debtor-in-possession under
Chapter 11 and is subject to the jurisdiction and supervision of the Bankruptcy
Court. Under Chapter 11, certain claims against the Company in existence before
the filing of the petition for relief under the federal bankruptcy laws are
stayed while the Company continues business as debtor-in-possession. Effective
January 16, 1998, the Company filed its initial detailed Plan of Reorganization
and a Disclosure Statement (collectively, the "Plan"), which outline the
Company's plans for the resolution of the bankruptcy and for the development of
a new business. The Plan has been revised several times as conditions require.
A hearing on the
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Disclosure Statement is scheduled for July 30, 1998. Because of the Bankruptcy
Petition, there is substantial doubt about the Company's ability to continue as
a going concern.
EVENTS LEADING UP TO THE COMPANY'S BANKRUPTCY
At the end of March 1994, when the Company was still called CAPX Corporation,
its net equity was a positive $2.7 million. At about this time, the Company's
former management launched the sub-prime consumer car loan business through
AutoLend Corporation and soon thereafter changed the Company's name to AutoLend
Group, Inc. By December 1995, net equity was down to $0.7 million and, more
significantly, for the 21-month period from March 1994 to December 1995,
cumulative losses before the impact of Debenture buybacks totaled $12.1 million.
These losses were predominately due to the operations of the consumer car loan
business. On December 26, 1995, the founder of the Company, Nunzio DeSantis,
who was still the largest single stockholder, commenced legal actions against
the then-current management of the Company. This stockholder litigation took
nine months, and resulted in a Stipulation of Settlement that was approved,
after due notice, by the Delaware Chancery Court (the "Stipulation"). By the
time Mr. DeSantis and new management took control of the Company in September
1996, net equity had fallen to a negative $6.9 million (after further losses
during that time of about $7.4 million). By September 1996, in the 30 months
since the start of the consumer car loan business, losses totaling $19.6 million
had been incurred before the impact of Debenture buybacks. In addition, in the
first six months after new management took control, additional loan loss
expenses and asset write-downs were made against the former operations of the
Company, further deteriorating the net equity. In spite of this substantial
negative net equity, the new management of the Company was faced with the
requirement of repaying $22.1 million in Debenture debt (plus accrued interest)
by September 1997.
On October 22, 1996, approximately one month after new management assumed
control of the Company, the Company initiated an exchange offer (the "Exchange
Offer") for its outstanding Debentures (see "Debentures and the Exchange
Offer"). However, on November 1, 1996, four holders of the Company's Debentures
filed an involuntary petition against the Company in Bankruptcy Court. The
petition was dismissed effective April 7, 1997. During the pendency of this
action until its dismissal, the Company was restricted in its ability to
actively pursue any new business activity (see "Involuntary Bankruptcy
Proceeding").
After the dismissal of the Involuntary Bankruptcy Proceeding on April 8, 1997,
the Exchange Offer expired, and the Company issued an aggregate of 1.4 million
shares of its common stock $.002 par value per share (the "Common Stock") and
57,800 shares of newly created preferred stock $.002 par value per share (the
"Preferred Stock") in exchange for $7.2 million in principal amount of
Debentures. In addition, accrued interest, totaling $1.1 million was canceled.
In connection with the Exchange Offer, a non-cash charge of $6.3 million was
recorded (see "Debentures and the Exchange Offer" below).
During the year ended March 31, 1998, excluding the Exchange Offer, the Company
also repurchased Debentures representing $8.9 million in combined principal
amount and accrued
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interest for $5.7 million in cash, which resulted in a gain of $3.2 million. As
a result of the Exchange Offer and the subsequent Debenture repurchases, the
principal balance of Debentures and accrued interest during the fiscal year
ended March 31, 1998, were reduced to $7.2 million and $1.7 million,
respectively.
On September 19, 1997, the entire principal balance of the Debentures became due
and payable. For approximately a year and a half prior to this due date, the
Company had a negative net equity. During the year leading up to the due date,
this equity deficit had been substantially reduced, but not to the point where
the remaining Debentures could be redeemed. Therefore, on September 22, 1997,
the Company filed a voluntary petition for protection under Chapter 11 of the
Code in the Bankruptcy Court.
In conjunction with the present Chapter 11 proceedings, the Company has filed
its Plan with the Bankruptcy Court proposing the resolution of the bankruptcy
and the future course of its business. The success of the Plan is highly
dependent on the acquisition by the Company of a new business which consists
primarily of acquiring and operating gaming devices and machines for certain
non-profit organizations located in New Mexico. The Plan will be distributed to
the Company's creditors before the balloting and confirmation hearing on the
Plan, and will need approval by the Bankruptcy Court. The Company expects this
process will take several months to complete after Bankruptcy Court approval.
Although the Company intends to reorganize and emerge from Chapter 11, it cannot
assure that it will be able to do so. If the Company is prevented from emerging
from bankruptcy, it would most likely be liquidated, which would result in the
elimination of the Common and Preferred Stock, and payments to creditors of
amounts less than their claims. Management believes that the amounts which
might be received by creditors under such a liquidation scenario would likely be
less than as proposed under the Plan.
THE PURSUIT OF A CONTROLLING INTEREST IN ITB
In connection with the Company's pursuit of a new business, shortly after new
management assumed control, the Company entered into negotiations in October
1996 to directly purchase an approximately 25 percent equity interest (the "ITB
Shares") in International Thoroughbred Breeders, Inc. ("ITB"), in a private sale
from ITB's former chairman, Robert E. Brennan ("Brennan"). ITB is an American
Stock Exchange listed 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. ITB is much larger than the Company, having a
net equity of approximately $75 million, annual revenues of approximately $68
million, and approximately 700 employees (according to ITB's most recent Form
10-Q and Form 10-K).
However, due to the involuntary bankruptcy proceeding (see "Involuntary
Bankruptcy Proceeding" below) (the "Involuntary Bankruptcy Proceeding"), the
Company was prevented from consummating the purchase. With the Company thus
blocked, Nunzio DeSantis (the Company's Chairman and CEO) and Anthony Coelho (a
Director of the Company) formed NPD, Inc. ("NPD") to purchase the ITB Shares.
In connection with its purchase, which was
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effective January 15, 1997, NPD was granted the right to appoint a majority of
the Directors of the Board of ITB. Concurrently with its formation, NPD had
agreed to grant the Company the right to later purchase the ITB Shares from NPD
at the same price NPD had agreed to pay for the ITB Shares. As consideration,
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. The Company further
agreed that, following the dismissal of the Involuntary Bankruptcy Proceeding,
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 to effectuate
this, would deposit $2.0 million into a cash collateral escrow account to secure
NPD's obligation (the "Escrow" deposit). However, the Bankruptcy Court before
which the Involuntary Bankruptcy Proceeding was pending enjoined the making of
the agreed-upon loan by the Company to NPD and, as a result, the right was not
granted to the Company. Nonetheless, following the dismissal of the Involuntary
Bankruptcy Proceeding, and in accordance with its agreement, the Company
executed and delivered its guarantee, depositing the required $2.0 million in
the cash collateral escrow account. At March 31, 1998, the funds were held in
escrow by an unrelated third party and were invested in U.S. Treasury
obligations.
On July 10, 1997, a loan of $3.0 million was made to NPD (the "NPD Loan"). The
loan accrues interest at the rate of 10 percent per annum, and is payable in
full, together with all accrued interest, on July 9, 1999. The loan is secured
by a pledge by NPD of the ITB Shares owned by it, subject to a prior lien and
pledge by NPD of the ITB Shares as security for NPD's obligation to pay the
balance of the purchase price due for the ITB Shares. NPD used the proceeds of
the loan to repay an earlier loan made by an unaffiliated third party, which
repayment resulted also in the cancellation of an option which NPD had
previously granted to the unaffiliated third party to purchase the ITB Shares.
THE ITB OPTION
As a result of the Involuntary Bankruptcy Proceeding against the Company, the
Company was prevented from entering into a negotiated agreement which would have
enabled it to purchase an approximately 25 percent equity interest in ITB.
Consequently, NPD was formed and consummated the purchase of the ITB Shares.
In August 1997 the Company purchased from NPD an option to purchase the ITB
Shares held by NPD (the "Option"). The Option granted to the Company is subject
to an option granted by NPD to Mr. DeSantis to purchase 50 percent of the ITB
Shares owned by NPD at the date of exercise. Furthermore, both of the options
owned by the Company and by Mr. DeSantis are subject to a one year option
previously granted by NPD to an unaffiliated third party in January 1997. This
option provided this individual the right to purchase 50 percent of the ITB
Shares owned by NPD at the date of exercise.
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The Option held by the Company states that it must purchase all of the ITB
Shares owned by NPD at the date of exercise, which would be from one-fourth of
the shares originally purchased by NPD at a minimum, to 100 percent of these
shares in the event no other options are exercised. Prior to consummating the
purchase of the Option, the Company's Board of Directors obtained and reviewed a
draft of a third-party appraisal of the Option, which set the value of the
Option at $2.5 million if the Company has the ability to acquire 100 percent of
the ITB Shares. As of June 19, 1998, this appraisal had not been finalized.
The Company paid $0.2 million in cash for the Option at the closing date, and
also executed a note (the "NPD Note Payable"), which accrues interest at 10
percent per annum and is payable in full, including accrued and unpaid interest,
on July 9, 1999. The total principal amount of the NPD Note Payable is $2.3
million, if the Company has the ability to acquire 100 percent of the ITB
Shares, but is reduced proportionally (including accrued interest from the date
of inception) by the percentage of the ITB Shares unavailable, as stated above.
Therefore, at March 31, 1998, only one-fourth of the potential purchase price
and corresponding debt, or $425,000, and one-fourth of the potential option
right, has been reflected in the Company's consolidated financial statements.
However, the balance of the debt obligation does represent a contingent
obligation in the event that the Company has the ability to acquire all the ITB
Shares held by NPD.
The provisions of the Option stipulate that it may not be exercised by a company
in bankruptcy, and the Option expires on August 29, 1998. The Option may
however be extended at the discretion of NPD. In the event that the Company
were to be able to exercise the Option, the Company would purchase the ITB
Shares from NPD at the same price paid by NPD, which was $4.00 per share.
However, this would only be attractive to the Company if the then market price
of the ITB Shares were higher than this $4.00 "strike price." ITB stock has been
suspended from trading since October 13, 1997, and last traded at $3.50. It is
unclear if the stock will resume trading before the expiration of the Option.
THE PENDING ITB SETTLEMENT
On June 5, 1998, the Company, as debtor-in-possession, filed an adversary claim
with the Bankruptcy Court against NPD: AutoLend Group Inc. vs. NPD Inc.,
Adversary No. 98-1136M (hereinafter, the "NPD Claim"). The NPD Claim seeks,
among other things, the return to the Company of the $2.0 million Escrow deposit
(plus interest), the immediate repayment to the Company by NPD of the $3.0
million NPD Loan (plus interest), and the cancellation of the Option and
corresponding cancellation of the Company's obligations under the NPD Note
Payable and return of the $0.2 million cash down payment on the Option.
On July 2, 1998, all the members of ITB's Board of Directors, and various other
parties (including NPD) involved in litigation over ITB, jointly executed and
filed with the Court of Chancery in the State of Delaware (the "Chancery Court")
a Stipulation and Agreement of Compromise, Settlement and Release, C.A. No.
15919, which was entered into subject to the Chancery Court's (and certain other
creditors specified therein) approval (hereinafter, the "Delaware ITB
Agreement"). The Delaware ITB Agreement addresses many issues outside the
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scope of the Company's concern; its provisions relevant to the Company include
the return of the $2.0 million Escrow deposit (plus interest) to the Company,
the exchange of mutual releases, and the purchase by ITB from NPD of the ITB
Shares with a combination of cash and ITB's assumption of NPD's note payable to
the Brennan estate. (According to NPD's financial statements, as obtained in the
Bankruptcy process, NPD at present has little or no cash, and its primary asset
is the presently untradable block of ITB Shares. Thus, the receipt of cash by
NPD from ITB under the Delaware ITB Agreement would substantially facilitate the
resolution of the NPD Claim described above.) The Delaware ITB Agreement also
provides for additional contingent consideration which may be received by NPD in
connection with the possible sale of ITB's Las Vegas, Nevada, real estate. The
Delaware ITB Agreement is contingent upon approval by various parties including
the Bankruptcy Court and the Chancery Court, and further requires the Company to
assume ITB's office lease in Albuquerque (which is where the Company presently
subleases its offices), and cancels all options relating to the ITB Shares,
including the ITB Option. A hearing on the Delaware ITB Agreement is set for
August 25, 1998.
On July 10, 1998, the Company, as a debtor-in-possession, filed with the
Bankruptcy Court the Debtor's Motion to Approve Compromise (ITB Transaction),
No. 11-97-15499-MA (hereinafter, the "ITB Settlement"). This ITB Settlement
provides for, among other things, the Bankruptcy Court's approval of the
Delaware ITB Agreement, and subject to the final approval of the Delaware ITB
Agreement by all necessary parties (including the Chancery Court), the ITB
Settlement provides for the resolution of the NPD Claim described above.
Specifically, the ITB Settlement would result in the return of the $2.0 million
Escrow deposit (plus interest) to the Company, the cancellation of the ITB
Option and corresponding Company obligation under the NPD Note Payable, the
prepayment to the Company by NPD of $2.3 million of the $3.0 million NPD Loan,
and the contingent payment to the Company by NPD of a portion of the additional
funds which may be received by NPD (or its affiliates) in connection with the
possible sale of ITB's Las Vegas real estate (which contingent funds could, in
combination with the $2.3 million, exceed the $3.0 million NPD Loan owed to the
Company). The deadline for receipt of objections to the ITB Settlement is July
30, 1998.
If the ITB Settlement is approved by the Bankruptcy Court and all of the
remaining approvals for the Delaware ITB Agreement are received, including
approval by the Chancery Court, the Company will receive cash of $4.3 million
plus interest (which is presently anticipated to be received at the end of
September 1998, although no assurance can be given to such date), and will have
its obligation under the NPD Note Payable canceled, and will have the
possibility of receipt of certain additional contingent consideration. There
can be no assurances that such approvals from the Chancery Court, the Bankruptcy
Court, and certain creditors named in the Delaware ITB Agreement can be
obtained. If the ITB Settlement and the Delaware ITB Agreement are not
approved, the receipt by the Company of comparable amounts of cash cannot be
assured, and whatever cash is ultimately received by the Company would almost
certainly take significantly longer to receive.
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EMPLOYEES
As of March 31, 1998, the Company and its subsidiaries had three full-time
employees. The Company believes its relations with its employees are good.
ADDITIONAL DISCLOSURE ON ISSUES REFERENCED ABOVE
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 "Discontinued Operations" below). 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.
DEBENTURES AND THE EXCHANGE OFFER
In September 1991, the Company, under its initial name of CapRx, Ltd., issued
$55.0 million in principal amount of its 9.5 percent Convertible Subordinated
Debentures due September 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 were
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
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(and ultimately, reaching a point of 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 offer to exchange
shares of its Common Stock and its newly created Preferred Stock for any or all
outstanding Debentures tendered in the Exchange 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 Exchange 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
Exchange Offer, and issued an aggregate of approximately 1.4 million shares of
Common Stock and 57,800 shares of Preferred Stock. Pursuant to the Exchange
Offer, the Company issued 855,205 shares of Common Stock valued at $0.5625 per
share and 57,800 shares of its Preferred Stock valued at $100 per share in
excess of the original conversion privilege offered by these Debentures. As a
result, the Company recorded during the year ended March 31, 1998, a non-cash
transaction: a conversion change of $6.3 million, an increase to additional
paid-in capital of $14.5 million, and an increase in the Common Stock of $2,889
and Preferred Stock of $116.
Since the expiration of the Exchange Offer, the Company has repurchased
Debentures for approximately $5.7 million in cash, at a discount from face
value. Notwithstanding the Exchange Offer and subsequent Debenture purchases,
the Company's assets remained insufficient to repay the remaining outstanding
Debentures when they become due. As a result, the Company filed for protection
under Chapter 11 of the Code in the Bankruptcy Court on September 22, 1997.
INVOLUNTARY BANKRUPTCY PROCEEDING
On November 1, 1996, four holders of the Company's Debentures filed a petition
against the Company in the Bankruptcy Court alleging that the Company was not
paying its debts as they became due. 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 (see Note 6
to the Company's consolidated financial statements).
Following the dismissal of the Involuntary Bankruptcy Proceeding, the Company
was able to consummate the Exchange Offer, and the Company again directed its
efforts toward seeking a viable acquisition opportunity in the gaming or
entertainment business and continued to collect Installment Contract Receivables
from its consumer finance business and to service Policies in its viatical
business.
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DISCONTINUED OPERATIONS
In connection with the Stipulation (see "Change in Management" above), the
Company's former subsidiary, IAP, was sold on September 18, 1996, to Auction
Finance Group, Inc., a corporation controlled by Steve Simon, the former
President and chairman of the Board of the Company, pursuant to the Stipulation
arising in connection with stockholder derivative litigation commenced against
the Company by certain shareholders and former directors, one of whom has become
Chairman of the Board and Chief Executive Officer, and another of whom was a
director (see "Change in Management" above and Note 9 to the Company's
consolidated financial statements). IAP was begun in March 1995, was
unprofitable while it was owned by the Company, and to the best of management's
knowledge, is still unprofitable.
PREFERRED STOCK
In connection with the Exchange Offer (see "Debentures and Exchange Offer"
above), the Company issued 57,800 shares of Preferred Stock with a stated value
of $100 per share and 1.4 million shares of Common Stock. Dividends are at an
annual rate of 14 percent on the stated value, payable quarterly, and at the
option of the Company may be paid in cash, common stock, preferred stock, or a
combination thereof. Dividends unpaid at March 31, 1998, totaled approximately
$600,000.
ITEM 2. PROPERTIES.
On August 8, 1997, the Company relocated its principal executive offices from
215 Central NW to 600 Central SW, Albuquerque, New Mexico. At March 31, 1998,
this space was being leased on a month-to-month basis. The Company believes
that these arrangements are adequate to meet its needs.
In May 1994, the Company leased approximately 17,000 square feet of office space
in Miami Beach, Florida, under a six-year non-cancelable lease. In February
1996, the Company moved out of these premises before the lease expiration date.
As of September 30, 1997, approximately 35 months of the lease remained at a
cost of $341,250 per year. On January 28, 1998, the Bankruptcy Court approved a
settlement with the landlord, dated October 31, 1997, which released the Company
from its obligations under the lease. The Company paid the landlord $105,850
(including funds on deposit) for complete satisfaction of all claims. The
Company had provided a lease loss accrual of $516,000 during the fiscal year
1997 for the rent payments and other lease-related expenses called for under the
lease. Because of the Bankruptcy Court-approved settlement with the landlord, a
gain on settlement of the Miami lease of $266,378 was recorded for the fiscal
year ended March 31, 1998.
Rent expense for operating leases has been lowered substantially. It was
approximately $14,000 for the fiscal year ended March 31, 1998, compared to
$179,000 for the fiscal year ended March 31, 1997, and $306,000 for the fiscal
year ended March 31, 1996.
9
<PAGE>
ITEM 3. LEGAL PROCEEDINGS.
Voluntary Bankruptcy On September 22, 1997, the Company filed the Bankruptcy
- --------------------
Petition for protection under Chapter 11 of the Code in the Bankruptcy Court.
Effective January 16, 1998, the Company filed the Plan with the Bankruptcy Court
proposing its plans for resolving the bankruptcy. The Plan has been amended
several times as existing conditions from time to time require. A hearing on
the Disclosure Statement is scheduled for July 30, 1998.
Living Benefits, Inc. On September 12, 1996, before present management took
- --------------------
control, a complaint was filed against the Company in the United States District
Court for the District of New Mexico by Living Benefits, Inc. (the "Plaintiff")
[Living Benefits, Inc., a New Mexico corporation, v. AutoLend Group, Inc., a
Delaware corporation (formerly known as CAPX Corporation) and LB NM, Inc., a
Delaware corporation: Case No. CIV 96 0993 SC]. The complaint alleges that the
Company is obligated to the Plaintiff for more than $1.6 million, with interest
at 8.75 percent 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 and attorney's fees. On June 11, 1997, an Offer of Judgment was made to
the Plaintiff of $656,600 with costs accrued as of that date; the offer was
rejected by the Plaintiff. On December 30, 1997, the Plaintiff filed a claim for
approximately $1.7 million, plus legal fees and punitive damages, with the
Bankruptcy Court. On April 15, 1998, this suit was turned over to the
jurisdiction of the Bankruptcy Court. This claim is presently classified as
Unliquidated and Unimpaired under the Plan. A scheduling order has since been
entered by the Bankruptcy Court, establishing July 31, 1998, as the discovery
completion deadline; August 31, 1998, was established as the deadline for filing
dispositive motions, and a status conference has been set for September 9, 1998.
The trial is expected to begin about October 24, 1998. The Company disputes this
claim and will vigorously defend against any claim by the Plaintiff as part of
the Company's Bankruptcy Petition.
Rodman & Renshaw, Inc. On September 24, 1997, Rodman & Renshaw, Inc., an
- ----------------------
investment banking firm ("Rodman"), filed a complaint against several
defendants, including the Company (collectively, "Defendants") in the Supreme
Court of the State of New York, County of New York. The action against the
Company was stayed by the filing of the Bankruptcy Petition before the Company's
due date for filing an answer. Rodman alleges damages of $250,000 and requests
costs, interest, and punitive damages of $1,000,000 from all the Defendants. The
complaint alleges that the Defendants are liable to Rodman for damages by
depriving Rodman of its fee for its efforts to procure financing for the buyers
in connection with the disposition of IAP. The Company has several defenses to
these claims, and believes that it may be improperly included as one of the
Defendants. The Company will defend this action in a claims objection proceeding
in its bankruptcy proceedings or as otherwise appropriate.
AutoLend Group, Inc. v. NPD, Inc. On June 5, 1998, the Company filed Adversary
- ---------------------------------
No. 98-1136M, a compliant to recover certain transfers pursuant to 11 U.S.C.
(S)548. In the complaint, the Company has requested relief as follows: avoidance
of certain transfers from the Company to NPD pursuant to 11 U.S.C. (S)548(a);
the return to the Company of the $2.0 million deposited
10
<PAGE>
plus accrued interest in the cash collateral escrow account; a requirement that
NPD release the Company from the note payable to NPD; the return of the $0.2
million cash paid to NPD for the ITB Option; early repayment of the $3.0 million
which the Company lent to NPD; and pre- and post-judgment interest, costs, and
attorneys fees (see Item 1. Business "The Pursuit of a Controlling Interest in
ITB," "The ITB Option," and "The Pending ITB Settlement").
AutoLend Group, Inc. v. Nunzio P. DeSantis. On June 5, 1998, the Company filed
- -------------------------------------------
Adversary No. 98-1135M, a complaint to recover certain transfers pursuant to 11
U.S.C. (S)(S)547 and 548, and for indemnity. The Company has requested relief
in the form of the return of $597,500 in payments, plus indemnity for any
amounts which NPD fails to pay in the event the Company is granted judgment
against NPD for pre and post- judgment interest, costs, and attorneys fees.
AutoLend Group, Inc. v. Jeffrey Ovington. On June 5, 1998, the Company filed
- -----------------------------------------
Adversary No. 98-1134M, which is a complaint for recovery of certain transfers
pursuant to 11 U.S.C. (S)(S)547 and 548. The Company has requested relief in
the form of the return of $100,000 in compensation payments, plus pre- and post-
judgment interest, costs, and attorneys fees.
AutoLend Group, Inc. v. Vincent Villanueva. On June 18, 1998, the Company filed
- -------------------------------------------
Adversary No. 98-1145M, a complaint to recover certain transfers pursuant to 11
U.S.C. (S)(S)547 and 548. The Company has requested relief in the form of the
return of $39,647 in payments, plus pre- and post-judgment interest, costs, and
attorneys fees.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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 Class A Warrants were quoted on the Nasdaq Smallcap Market
under the symbols "CARS" and "CARSW," respectively. On that date, the Common
Stock and the Class A Warrants were delisted from the Nasdaq Smallcap Market
because of 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, when it was also delisted
for failure to meet minimum net equity requirements of that exchange.
The following table states for the periods indicated the range of high and low
bid prices for the Common Stock and the Class A Warrants as reported by Nasdaq
(until May 21, 1996), the Boston Stock Exchange (from May 22, 1996, to August
20, 1996), and the Electronic Bulletin
11
<PAGE>
Board (thereafter). There were no trades of the Preferred Stock during the
fiscal year ended March 31, 1998, and therefore have not been reflected in the
schedule below. The prices reflect inter-dealer prices without markup, markdown,
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, 1997:
Quarter ended June 30, 1996 $1.38 $ .50 $ --(2) $ --(2)
Quarter ended September 30, 1996 1.19 .56 --(2) --(2)
Quarter ended December 31, 1996 .94 .31 .01 .01
Quarter ended March 31, 1997 .69 .16 .01 .01
Fiscal Year Ended March 31, 1998:
Quarter ended June 30, 1997 0.56 0.19 .01 .01
Quarter ended September 30, 1997 0.22 0.05 --(2) --(2)
Quarter ended December 31, 1997 0.15 .01 --(2) --(2)
Quarter ended March 31, 1998 .10 .01 --(2) --(2)
Fiscal year ending March 31, 1999:
Quarter ended June 30, 1998 .07 .01 --(2) --(2)
</TABLE>
(1) Each Class A Warrant entitles the registered holder thereof to purchase
one share of Common Stock and one Class B Warrant through January 31,
1998, 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 January 31, 1998, at an
exercise price of $7.00 subject to adjustment. The Class A and Class B
Warrants were due to expire on January 31, 1998, when the Company was
under the restrictions of the Chapter 11 Bankruptcy Proceeding and was
thus unable to address the issue of extending their expiration date. The
Plan includes provisions for treatment of the Warrants, subject to
confirmation in the Bankruptcy Proceeding.
(2) There were no reported trades of Class A Warrants during these periods.
As of July 1, 1998, the last reported sale price for the Common Stock was $.01
based upon a June 18, 1998, trade on the Electronic Bulletin Board. At July 1,
1998, there were 6,079,530 shares of common stock outstanding and 78 holders of
record.
The Company has paid no dividends on its Common Stock. The Company presently
intends to retain any earnings to finance the development of its future business
as approved in the Chapter 11 process. In addition, until all dividends on the
outstanding shares of Preferred Stock have been paid, no dividend or other
distribution may be paid on the Common Stock.
In connection with the Exchange Offer, the Company issued 57,800 shares of
Preferred Stock with a stated value of $100 per share. Dividends on the
Preferred Stock are at an annual rate of 14 percent on the stated value, payable
quarterly, and at the option of the Company are payable,
12
<PAGE>
in cash, common stock, preferred stock, or a combination thereof. Dividends
unpaid on the Preferred Stock at March 31, 1998, totaled approximately $600,000.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial data of the Company for the fiscal years ended
March 31, 1998, 1997, 1996, 1995, and 1994, has been derived from the Company's
audited consolidated financial statements and should be read in conjunction with
the consolidated financial statements and the notes thereto. The Company
actively pursued the Policies (viatical settlements) business from April 1991 to
September 1994. In May 1994, it commenced its Installment Contract Receivables
(consumer car loans) business and in December 1995 ceased to purchase
Installment Contract Receivables. The Inventory Assistance Program was started
in March 1995 and sold in September 1996. The Company has since been engaged in
no active business other than to collect the remaining Installment Contract
Receivables and the Policies. Accordingly, results of operations are not
indicative of future results (see "Management's Discussion and Analysis of
Financial Condition and Results of Operations").
13
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year Ended March 31
--------------------------------------------------------------
In Thousands (except earnings per share)
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
Statement of Operations Data:
- -----------------------------
<S> <C> <C> <C> <C> <C>
Finance charges on installment contracts $ 588 $ 1,671 $ 7,808 $ 2,719 $ -
Net revenue from matured insurance policies 9 404 542 6,678 6,509
---------- ---------- ---------- ---------- ----------
Total net revenues $ 597 $ 2,075 $ 8,350 $ 9,397 $ 6,509
========== ========== ========== ========== ==========
Operating earnings/(loss), including
loan loss provisions $(1,469) $ (7,402) $ (10,404) $ 1,190 $ 3,404
Net interest expense (571) (1,816) (2,687) (4,531) (4,317)
Write-off of assets and accrual of expenses related
to the consumer loan and viatical businesses (132) (2,109) - - -
Realized gains/(losses) on sales of marketable securities - - 1 (1,649) (33)
Tax offset to loss - 86 4,936 - -
Miscellaneous other income/(expense), net (250) (461) (27) 28 -
---------- ---------- ---------- ---------- ----------
Results of operations, including interest expense,
before Debenture conversion charge (2,422) (11,702) (8,181) (4,962) (946)
Non-cash debenture conversion charge (6,261) - - - -
---------- ---------- ---------- ---------- ----------
Net loss before discontinued operations,
extraordinary item, and cumulative effect of
change in accounting principle (8,683) (11,702) (8,181) (4,962) (946)
Extraordinary item - net gain on early
extinguishment of debt 3,172 - 7,307 2,030 -
Discontinued operations:
Earnings/(loss) from operations of
discontinued subsidiary - (153) (48) (68) -
Gain on sale of subsidiary - 320 - - -
Cumulative effect of change in accounting principle - - 177 - -
---------- ---------- ---------- ---------- ----------
Net loss $(5,511) $(11,535) $ (745) $ (3,000) $ (946)
========== ========== ========== ========== ==========
</TABLE>
14
<PAGE>
Per Share Data:
- --------------
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Loss per share before discontinued operations, extraordinary item,
and cummulative effect of change in accounting principle $ (1.44) $ (2.53) $ (1.77) $ (1.07) $ (0.20)
Discontinued operations - 0.04 (0.01) (0.01) -
---------- ---------- ---------- ---------- ----------
Loss per share before extraordinary items and cumulative
effect of change in accounting principle (1.44) (2.49) (1.78) (1.08) (0.20)
Extraordinary items:
Gain on early extinguishment of debt: 0.53 - 1.58 0.44 -
---------- ---------- ---------- ---------- ----------
Loss per share before cumulative effect of change in
accounting principle (0.91) (2.49) (0.20) (0.64) (0.20)
Cumulative effect of change in accounting principle - - 0.04 - -
---------- ---------- ---------- ---------- ----------
Net loss $ (0.91) $ (2.49) $ (0.16) $ (0.64) $ (0.20)
========== ========== ========== ========== ==========
Weighted average number of common and common equivalent
shares outstanding 6,039,391 4,634,530 4,634,530 4,634,530 4,641,605
========== ========== ========== ========== ==========
Balance Sheet Data:
- ------------------
Total Assets $ 7,640 $ 16,276 $ 24,485 $ 55,002 $ 61,382
Total Liabilities 11,078 28,128 28,802 54,574 58,672
Total Stockholders' Equity. (3,438) (11,852) (317) 428 2,710
</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 begin its viatical
settlements business until April 1991 when it acquired certain assets of Living
Benefits, Inc. ("LBI"), including covenants not to compete from LBI's former
owners. In April 1993, the Company acquired certain operating assets of
American Life Resources Corporation (ALR Corp.), which was also engaged in the
viatical settlements business; ALR Corp. retained the policies it had purchased
before January 14, 1993. The Company generally ceased purchasing these Policies
in September 1994, and by July 1995 had sold the majority of Policies still
outstanding. Goodwill and intangibles related to these acquisitions were
amortized over the remaining life of the Policies portfolio, extending through
the fiscal year ended March 31, 1996, when they were fully amortized. The
Company still holds a small residual portfolio of Policies.
The Company commenced purchasing "sub-prime" consumer used-car loans, or
Installment Contract Receivables, in May 1994 through AutoLend Corporation and
ceased purchasing them in December 1995. Loan loss provisions for this business
from May 1994 through March 1997 totaled $13.9 million, on revenues of $12.8
million for the same period. The results of this business were the primary
reasons the Company was unable to service the outstanding Debentures which
forced it to file the Bankruptcy Petition. The net impact for the year ended
March 31, 1998, was marginally positive, as the portfolio "winds down."
15
<PAGE>
The Company commenced its Inventory Assistance Program in March 1995. IAP was
unprofitable and was sold on September 18, 1996. Accordingly, for the fiscal
years ended March 31, 1997, and 1996, net assets of IAP are included in the
Company's financial 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.
Since the sale of IAP, the Company's business activities have been primarily
concentrated on the acquisition or development of a new business in the gaming
industry, the resolution of certain obligations and litigation associated with
former operations, the collection of amounts due from the outstanding
Installment Contract Receivables and the collection of proceeds from the
Policies.
RESULTS OF OPERATIONS
Fiscal year ended March 31, 1998, compared to fiscal year ended March 31, 1997
While the net loss for the year ended March 31, 1998, was approximately $5.5
million, this loss included a voluntary, non-cash conversion charge of
approximately $6.3 million related to the retirement of certain outstanding
Debentures. Excluding the Exchange Offer transaction, the Company's earnings
were positive (which, as shown in the "Selected Financial Data" herein, is a
result which has not been attained in the prior four years). Furthermore, the
Exchange Offer incurring the $6.3 million charge resulted in the retirement of
$8.3 million in debt, with no cash outlay by the Company, and further resulted
in the improvement of the Company's equity by approximately $8 million.
Revenues on the consumer loan portfolio from Installment Contract Receivables
(consumer used-car loans) were approximately $0.6 million for the fiscal year
ended March 31, 1998, which represented a $1.1 million decrease compared to the
$1.7 million realized for the fiscal year ended March 31, 1997. 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. Future revenue from
the remaining portfolio of used-car loans will be substantially less than that
realized in the 1998 fiscal year.
Net viatical revenues from the Policies for the fiscal year ended March 31,
1998, were $9,000, which represents approximately a $0.4 million decrease
compared to the $0.4 million recognized for the fiscal year ended March 31,
1997. Net viatical revenues from the Policies 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
primarily from the reduced size of the Company's Policy portfolio. Future net
revenues from the remaining portfolio of approximately 15 Policies will be
irregular, depending on the mortality of the insured. During the year ended
March 31, 1998, the aggregate book value of the Policies were written down by
$0.2 million, to an estimated current fair market value. At
16
<PAGE>
March 31, 1998, the aggregate estimated current fair market value of the
portfolio was $0.3 million.
General and administrative expenses for the fiscal year ended March 31, 1998,
were $2.1 million, compared to $5.9 million expended in the prior year. The
decrease of $3.8 million resulted primarily from reductions in professional
fees, the reduced size of the car loan portfolio, and the effect of the
Company's downsizing in September 1996. The cost of collecting the consumer car
portfolio is included in general and administrative expenses.
Provisions for credit losses during fiscal year 1998 were deminimus. The
provision for credit losses was $3.6 million for the year ended March 31, 1997.
The decrease in credit loss provisions of approximately $3.6 million was
primarily the result of the shrinking size of the total portfolio.
During the year ended March 31, 1998, the Company's operating loss was $1.5
million, compared to an operating loss of $7.4 million during the year ended
March 31, 1997. The $5.9 million decrease in operating loss was primarily
attributable to the developments described above, including the reduction in
general and administrative expense of $3.8 million and the reduction of $3.6
million in credit loss provisions, partially offset by net revenues decline of
$1.5 million, yielding a net improvement of $5.9 million.
Interest expense related to the outstanding Debentures was $0.9 million for the
1998 fiscal year, as compared to $2.2 million for the prior year, resulting in a
$1.3 million improvement.
In connection with Debentures repurchased during the year ended March 31, 1998,
the Company realized a $3.2 million gain on early extinguishment of debt.
As a result of the Exchange Offer, during the year ended March 31, 1998, the
Company recorded a non-cash transaction: a conversion charge of $6.3 million, an
increase to additional paid-in capital of $14.5 million, deminimus increases to
Common and Preferred Stock values, the elimination of $8.3 million in debt, and
the improvement is net equity of approximately $8 million.
Net loss for the year ended March 31, 1998, was $5.5 million, or $0.91 per
share, as compared to a loss of $11.5 million, or $2.49 per share, for the same
period last year. This $6.0 million improvement was due to the factors
discussed above, including a $3.8 million decrease in general and administrative
expenses, a $3.6 million decrease in provision for credit losses, an improvement
of $3.2 million due to early extinguishment of debt, a $1.2 million decrease in
accrued interest expense, and a $2.3 million decrease in write-offs related to
the consumer car loan and viatical settlements businesses, all of which was
partially offset by a $1.5 million decrease in net revenues and a $6.3 million
non-cash charge for the Exchange Offer.
17
<PAGE>
Fiscal year ended March 31, 1997, compared to fiscal year ended March 31, 1996
Revenues on the consumer loan portfolio from Installment Contract Receivables
(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 from the Policies 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. The decrease in
viatical revenues from the Policies resulted from the reduced size of the
Company's viatical policy portfolio. The Company generally ceased to purchase
Policies after September 1994 and, in May and July 1995, sold most of its
portfolio to Viaticus, Inc., for $17.5 million (which represented 225 policies).
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.
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. The cost of
collecting the consumer car portfolio is included in general and administrative
expenses; this effort has been subcontracted out since January 1996.
Credit losses in connection with the portfolio of Installment Contract
Receivables 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 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 gain on early extinguishment of debt in the year ended March 31, 1996;
these offsets to operating losses were not available in the year ended March 31,
1997.
18
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's immediate viability as a going concern depends upon the continued
restructuring of its obligations and, ultimately, the installation of a new line
of business and the attainment of profitability. At March 31, 1998, the Company
had cash and cash equivalents of $0.8 million, and total liabilities exceeded
total assets. On September 22, 1997, the Company filed for voluntary bankruptcy
reorganization. The Company anticipates, but cannot assure, that it will emerge
from Chapter 11 as a restructured, viable entity. If the Company is prevented
from emerging, it would most likely be liquidated, which would result in the
elimination of the common stock, and in payments to debt holders of amounts less
than their claims. Management believes that amounts which might be received by
creditors under such a liquidation scenario would likely be less than as
proposed under the Plan.
Cash flow from operations was a negative $0.7 million for the fiscal year ended
March 31, 1998. This compares to the positive cash flow from operations of $3.0
million for the fiscal year ended March 31, 1997. The decrease of $3.7 million
was primarily due to the combined net effect of a reduction in cash receipts of
$7.1 million and offsetting cash operating expenditure reductions of $3.4
million. The $7.1 million reduction in cash receipts resulted from a $5.1
million decrease in car loan receipts (due to the shrinking size of the
portfolio), a $1.7 million decrease from the prior period's nonrecurring net
viatical collections and a $0.3 million decrease in miscellaneous other cash
received. The $3.4 million in cash operating expenditure reductions resulted
primarily from reductions in general and administrative expense, including
significant reductions in professional fees paid.
The Company's portfolio of Installment Contract Receivables at March 31, 1998,
was $0.5 million (excluding contracts for which there has been a repossession of
underlying collateral or a charge-off) before the impact of reserves, and
consisted of 178 active used-car loans. The Company ceased purchasing
Installment Contracts in December 1995.
The Company's portfolio of unmatured viatical insurance Policies totaled 15 at
March 31, 1998, having a combined face value of $1.9 million and a net book
value of $0.3 million. The Company generally ceased purchasing new Policies in
September 1994.
Cash used in investing activities for the fiscal year ended March 31, 1998, was
$5.2 million, which was primarily the result of funding the $2.0 million escrow
deposit account in connection with the NPD transaction for the ITB Shares, and
the loan to NPD for $3.0 million. For the fiscal year ended March 31, 1997,
cash provided from investing activities was a positive $6.3 million, primarily
due to the sale of IAP and the resultant conversion of its receivables to cash.
Cash used in financing activities during the fiscal year ended March 31, 1998,
was $5.7 million and was the result of the repurchase of Debentures. There was
no cash flow from financing activities for the fiscal year ended March 31, 1997.
In summary, the Company decreased its cash and cash equivalents by $11.6 million
during the fiscal year ended March 31, 1998, to a total of $0.8 million. The
decrease was largely due to the
19
<PAGE>
repurchase of Debentures, the loan to NPD, and the funding of the escrow
account. In comparison, there was a $9.2 million increase in cash during the
fiscal year ended March 31, 1997, primarily due to the collections on
receivables and the sale of IAP. During the fiscal year, the Company's net
equity increased substantially, from a deficit of $11.9 million at March 31,
1997, to a smaller deficit of $3.4 million at March 31, 1998, an improvement of
approximately $8.4 million.
The Company's primary source of capital has been sales of equity and debt
securities, including its 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 and the Exchange Offer, the
outstanding principal balance of the Debentures was $7.2 million, plus $1.7
million of accrued interest, at March 31, 1998.
Year 2000 Issue
Like any other company, advances and changes in technology can significantly
affect the business and operations of the Company. For example, a challenging
problem is that many computer systems worldwide cannot recognize the year 2000
or years thereafter. No easy technological "quick fix" has yet been developed
for this problem.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard (SFAS) No. 130, "Reporting Comprehensive Income."
SFAS No. 130 is effective for fiscal years beginning after December 15, 1997.
It established standards for reporting comprehensive income and its components
in annual financial statements. Reclassification of comparative financial
statements or financial information for earlier periods is required upon
adoption of SFAS No. 130.
Statement of Financial Accounting Standards No. 131, Disclosure about Segments
of a Business Enterprise ("SFAS 131"), establishes standards for the way that
public enterprises report information about operating segments in annual
financial statements and requires reporting of selected information about
operating segments in interim financial statements issued to the public. It
also establishes standards for disclosures regarding products and services,
geographic areas and major customers. SFAS 131 defines operating segments as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance.
Both SFAS 130 and SFAS 131 are effective for financial statements for periods
beginning after December 15, 1997 and require comparative information for
earlier years to be restated. Due to the recent issuance of these standards,
management has been unable to fully evaluate the impact, if any, they may have
on future financial statement disclosures.
20
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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 April 21, 1998, the Company informed the accounting firm of KPMG Peat Marwick
LLP ("Peat Marwick") that the Company would not retain it to audit the Company's
financial statements for the fiscal year ending March 31, 1998. Peat Marwick had
been the Company's principal accountants since December 1996. For the fiscal
year ending March 31, 1997, Peat Marwick's opinion was modified due to
uncertainty as to the Company's ability to continue as a going concern. The
Company had no disagreements with Peat Marwick 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 Peat Marwick was not
based on the expectation that any disagreement would arise for the current
fiscal year.
On April 17, 1998, the Bankruptcy Court approved the Company's selection of
Meyners + Company, LLC, as its principal accountants for the fiscal year ending
March 31, 1998, and thereafter.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table gives 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.
21
<PAGE>
<TABLE>
<CAPTION>
Year First
Elected
Name Age Director Position
---- --- -------- --------
<S> <C> <C> <C>
Nunzio P. DeSantis 47 1993 Chairman of the Board,
President, Chief Executive
Officer and Director
Anthony Coelho 56 1996 Director
Philip J. Vitale, M.D. 52 1992 Director
Jeffrey Ovington 46 N/A Executive Vice President
and Treasurer
</TABLE>
Nunzio P. DeSantis has been Chairman of the Board, President and Chief Executive
Officer 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 1989 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"), an American Stock Exchange listed company, since January 1997. Mr.
DeSantis also is President and Chairman of the Board of NPD, Inc., a private
company which owns an approximately 25 percent interest in ITB. Before September
1995 and for more than five years, Mr. DeSantis was Chairman of the Board and
Chief Executive Officer of Diagnostek, Inc., a New York Stock Exchange traded
company (until its sale in 1995).
Anthony Coelho has been Chairman of the Board of ITB since January 1997. From
1995 to 1997, he was Chairman and Chief Executive Officer of ETC w/tci, Inc., a
subsidiary of Tele-Communications, Inc. 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., ITB, 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.
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 on
other governing boards and in other governing capacities for Lovelace at various
times from 1980 until 1989, while it 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 Executive Vice President, with Diagnostek, Inc., a leading pharmacy
benefit manager which had annual revenues in excess of $400 million, which was
acquired by Value Health, Inc. For 14 years
22
<PAGE>
prior thereto, he served in various capacities with Martin Marietta Corp. (now
Lockheed-Martin), General Electric Company, and ITT.
ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
The following table states information concerning the compensation paid for
fiscal years ended March 31, 1998, 1997, and 1996, to persons who served as
Chairman of the Board, President, Chief Executive Officer, Executive Vice
President, and Treasurer during fiscal year 1998 and to a former Chairman and
Chief Executive Officer who resigned on September 18, 1996, pursuant to the
Stipulation. Other than officers, no other executive officer of the Company who
served at the end of fiscal year 1998 received compensation for the fiscal year
ended March 31, 1998, which exceeded $100,000.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
SUMMARY COMPENSATION TABLE
- ------------------------------------------------------------------------------------------------------------------------------------
Annual Compensation Long Term Compensation
--------------------------------------------------------------------------------
Awards Payouts
--------------------------------------
Other
Annual Restricted Securities
Compen- Stock Underlying LTIP All other
Bonus sation ($) Award(s) Options/ Payouts Compen-
Name and Principal Position Year Salary ($) ($) (1) ($) SARs (#) ($) sation ($)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Nunzio P. DeSantis 1998 $281,250 -- -- -- 2,000,000 -- --
Chairman of the Board 1997 172,000 250,000 -- -- -- -- --
& Chief Executive Officer (5) 1996 -- -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Jeffrey Ovington 1998 110,036 100,000 -- -- -- -- --
Executive Vice President 1997 84,790 -- -- -- -- -- --
& Treasurer 1996 -- -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Steve Simon 1998 -- -- -- -- -- -- --
Former Chairman 1997 123,956(6) -- -- -- -- 400,000(4) $480,410(3)
& Chief Executive Officer (2) 1996 174,996 -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
_______________
(1) The aggregate amount of perquisites and other personal benefits paid to the
named persons did not exceed the lesser of 10 percent of each officer's
total annual salary and bonus for the 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 Stipulation.
(3) Includes $270,410 representing the remaining balance under his employment
contract, which was paid in a lump sum, as part of the Stipulation and
$210,000 pursuant to a consulting agreement.
(4) As part of the transactions constituting the Stipulation, Mr. Simon was
granted options to purchase 400,000 shares of common stock and forfeited
all options previously granted to him, including those granted in fiscal
year 1996.
(5) Mr. DeSantis was appointed Chairman of the Board and Chief Executive
Officer on September 18, 1996, as part of the transactions constituting the
Stipulation.
(6) Mr. Simon's salary for 1997 was based on working from April 1, 1997, to
September 16, 1997.
23
<PAGE>
OPTIONS GRANTED IN THE LAST FISCAL YEAR - 1998
The following table states information concerning stock option grants made
during fiscal 1998 to the persons named in the Summary Compensation Table above.
Also in accordance with the SEC rules, the hypothetical gains or "option
spreads" for each option grant are shown based on compound annual rates of stock
price appreciation of 5 and 10 percent from the grant date to the expiration
date. The assumed rates of growth are prescribed by the SEC and are for
illustration only; they are not intended to predict future stock prices, which
will depend upon market conditions and the Company's future performance.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Potential Realizable
Value at Assumed
Annual Rates of
Stock Price
Appreciation
for Option Term
- ------------------------------------------------------------------------------------------------------------
Number of
Securities Percent of Total
Underlying Options/ Exercise or
Options/SARs to Employees Base Price Expiration
Name Granted (#) in Fiscal Year ($/Sh) Date 5% ($) 10% ($)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Nunzio P. DeSantis 2,000,000 99% $0.1875 July 2, 2007 $ 0 $ 0
- ------------------------------------------------------------------------------------------------------------
</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.
FISCAL YEAR-END OPTION VALUES 1998
The following table provides information concerning fiscal year-end values of
unexercised options held by the persons named in the Summary Compensation Table
above. No options were exercised by those persons during fiscal year 1998.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Options/SARs at Options/SARs at
FY-End (#) FY-End ($)
- -----------------------------------------------------------------------------------------------------------
Shares
Acquired on Exercisable/ Exercisable/
Name Exercise (#) Value Realized ($) Unexercisable Unexercisable
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Nunzio P. DeSantis -- -- 2,000,000/0 $0/0
- -----------------------------------------------------------------------------------------------------------
Steve Simon -- -- 400,000/0(2)(3) $0/0
- -----------------------------------------------------------------------------------------------------------
</TABLE>
_______________
24
<PAGE>
(1) At July 1, 1998, the option exercise price exceeded the market price of the
common stock.
(2) Represents options granted in connection with the Stipulation.
(3) 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.
COMPENSATION OF DIRECTORS
Directors who are not employees of the Company received immediately exercisable
options to purchase 125,000 shares of the Company's common stock, for market
price on the date of issue.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table states certain information concerning stock ownership of all
persons known by the Company to own beneficially 5 percent 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 1, 1998,
when the Company had outstanding 6,079,530 shares of Common Stock, excluding
treasury shares.
<TABLE>
<CAPTION>
Amount and
Name and Address Nature of
of Beneficial Owner Beneficial Percent of
or Identity of Group Ownership(1) Class Owned
- -------------------- ------------ -----------
<S> <C> <C>
Nunzio P. DeSantis 2,533,900 (2) 31.4%
600 Central Ave. SW, 3rd Floor
Albuquerque, NM 87102
Allen & Company Incorporated 880,743 (3) 13.2%
Allen Holding, Inc.
711 Fifth Avenue
New York, NY 10022
Banque Paribas 660,000 10.9%
Paris, France
Steve Simon 400,000 (4) 6.2%
930 Washington Avenue
Miami Beach, FL 33139
Philip J. Vitale, M.D. 285,000 (5) 4.5%
Lovelace Journal Center
5150 Journal Center Blvd.
Albuquerque, NM 87109
</TABLE>
25
<PAGE>
<TABLE>
<S> <C> <C>
Anthony Coelho 125,000 (6) 2.0%
700 14/th/ St., NW, 5/th/ Floor
Washington, DC 20005
All current directors and
executive officers as a
group (4 persons) 2,943,900 (7) 35.6 %
</TABLE>
_______________
(1) Unless otherwise indicated below, the named person is deemed to have sole
voting and dispositive power for the shares listed opposite his 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.
(3) Includes 608,438 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.
(5) Includes 285,000 shares issuable upon exercise of options exercisable
within 60 days
(6) Represents shares issuable upon exercise of options exercisable within 60
days.
(7) Includes 2,535,000 shares issuable upon exercise of options exercisable
within 60 days.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Company's President and Chief Executive Officer is the second largest holder
of the Company's stock (owning outright approximately 534,000 shares, or about 8
percent) and also owns a controlling interest in NPD, with which the Company
engaged in significant transactions during the year. At March 31, 1998, the
Company owed NPD $450,667 related to a debt obligation and was owed $3,254,507
by NPD, for a loan made to NPD during the fiscal year ended March 31, 1998, and
the related accrued interest. Both obligations accrue interest at 10 percent and
are payable in full, including accrued and unpaid interest, on July 9, 1999. For
other related transactions, see Item 1. Business "The Pursuit of a Controlling
Interest in ITB," "The ITB Option," and "The Pending ITB Settlement," and
footnotes 6, 7, and 18 to the Company's financial statements.
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:
(a) (1) Financial Statements
Independent Auditors' Reports
26
<PAGE>
Consolidated Balance Sheets March 31, 1998, and 1997
Consolidated Statements of Operations Years Ended
March 31, 1998, 1997, and 1996
Consolidated Statements of Stockholders' Equity Years Ended
March 31, 1998, 1997, and 1996
Consolidated Statements of Cash Flows Years Ended
March 31, 1998, 1997, and 1996
Notes to Consolidated Financial Statements
(a) (2) Financial Statement Schedule
Schedule II Valuation and Qualifying Accounts March 31,
1998, 1997, and 1996
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, 1998.
(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 Bylaws of AutoLend Group, Inc. (12)
4.1 Form of 9.5 percent Convertible Subordinated Debentures (2)
4.2 Warrant Agreement (1)
4.3 Unit Purchase Option (1)
27
<PAGE>
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 T. 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, among Marbrad, Inc., and American Life
Resources Corporation, Steve Simon, and Helen Porter (6)
10.10 Asset Purchase Agreement among American Life Resources Group, Inc.,
American Life Resources Corporation, Steve Simon, and Helen Porter (6)
10.13 Noncompete Agreement between ALRG and Steve Simon (6)
10.14 Noncompete Agreement between ALRG and Helen Porter (6)
28
<PAGE>
10.15 Guaranty Agreement made by the Registrant for the benefit of ALR, Corp.,
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 incorporated herein by reference.
(2) Filed 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 incorporated 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 Form
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.
(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.
29
<PAGE>
(9) Filed on March 7, 1994, as an exhibit to the Registrant's PostEffective
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.
30
<PAGE>
SIGNATURES
Pursuant to 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 14, 1998 By: /s/ Nunzio P. DeSantis
------------------------------
Nunzio P. DeSantis
Chairman of the Board and
Chief Executive Officer
Pursuant to the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the Registrant in the capacities and
on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Nunzio P. DeSantis Chairman of the Board, July 14, 1998
--------------------------
Nunzio P. DeSantis Chief Executive Officer
(Principal executive officer)
/s/ Jeffrey Ovington Executive Vice President July 14, 1998
--------------------------
Jeffrey Ovington (principal accounting and
financial officer)
/s/ Philip J. Vitale, M.D. Director July 14, 1998
--------------------------
Philip J. Vitale, M.D.
/s/ Anthony Coelho Director July 14, 1998
--------------------------
Anthony Coelho
31
<PAGE>
AUTOLEND GROUP, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Annual Financial Statements: Pages
-----
<S> <C>
Independent Auditors' Reports ................................................. F.2
Consolidated Balance Sheets as of March 31, 1998, and March 31, 1997....... F.8
Consolidated Statements of Operations for the Years Ended
March 31, 1998, 1997, and 1996.................................... F.9
Consolidated Statements of Stockholders' Deficit for the Years Ended
March 31, 1998, 1997, and 1996....................................... F.11
Consolidated Statements of Cash Flows for the Years Ended
March 31, 1998, 1997, and 1996....................................... F.12
Notes to Consolidated Financial Statements.................................. F.14
Financial Statement Schedule:
Schedule II Valuation and Qualifying Accounts
March 31, 1998, 1997, and 1996.............................................. S.1
</TABLE>
F-1
<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., a debtor-in-possession (the "Company"), as of March 31, 1998, and the
related consolidated statements of operations, stockholders' 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 for the year ended March 31, 1998. 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 1998 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
and subsidiaries as of March 31, 1998, 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 1998 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.
F-2
<PAGE>
To the Board of Directors and
Stockholders of AutoLend Group, Inc.
The accompanying 1998 consolidated financial statements and related financial
statement schedule have been prepared assuming that the Company will continue as
a going concern. As discussed in Note 2 to the consolidated financial
statements, the Company filed a voluntary petition for bankruptcy for protection
under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy
Court for the District of New Mexico on September 22, 1997. In addition, the
Company has suffered recurring losses from operations and has a net capital
deficiency that raise substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters are described in Note 3.
The 1998 consolidated financial statements and related financial statement
schedule do not include any adjustments that might result from the outcome of
this uncertainty.
/s/Meyners + Company, LLC
Meyners + Company, LLC
Albuquerque, New Mexico
June 19, 1998, except for
Note 18 which is as of
July 10, 1998
F-3
<PAGE>
INDEPENDENT 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.
F-4
<PAGE>
To the Board of Directors and Stockholders of
AutoLend Group, Inc.
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.
/s/KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Albuquerque, New Mexico
May 16, 1997, except for
Note 14 which is as of
July 10, 1997
F-5
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
AutoLend Group, Inc.
We have audited the accompanying consolidated balance sheet of AutoLend Group,
Inc. (the "Company") as of March 31, 1996, and the related statements of
operations, stockholders' equity, and cash flows for the year 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.
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 the
results of its operations and its cash flows for the year 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.
F-6
<PAGE>
To the Board of Directors and Stockholders of
AutoLend Group, Inc.
As discussed in Note 1 to the financial statements, although management of the
Company has used its best judgement 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-7
<PAGE>
AUTOLEND GROUP, INC., AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998, AND 1997
<TABLE>
<CAPTION>
1998 1997
------------------- -----------------
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 769,736 $ 12,399,932
Prepaid expenses 167,381 66,814
Accounts receivable--matured insurance policies - 48,000
Installment contracts receivable $ 461,592 $ 2,909,069
Collateral owned-gross 22,286 206,529
Allowance for credit losses (187,669) (1,068,545)
---------------- ----------------
$ 296,209 $ 2,047,053
Installment contracts receivable-net
ITB Option, less allowance of $200,000 at March 31, 1998 425,000 -
Escrow deposit 2,000,000
Interest on escrow deposit 62,060
Note receivable - NPD, Inc. 3,035,292 -
Interest receivable on note receivable - NPD, Inc. 219,215 -
Purchased insurance policies at estimated market value; face
value of $1,879,420 at March 31, 1998, and $1,948,530 at
March 31, 1997 329,193 513,390
Securities in IAP, less allowance of $390,000 at March 31, 1998 250,000 800,000
Fixed assets, less accumulated depreciation of $68,614 at
March 31, 1998, and $52,023 at March 31, 1997 39,611 67,795
Consulting agreement - 140,000
Debt issuance costs, less accumulated amortization of
$3,592,190 at March 31, 1998, and $3,519,502 at
March 31, 1997 - 113,904
Other 46,011 79,112
---------------- ----------------
$ 7,639,708 $ 16,276,000
Total assets ================ ================
LIABILITIES:
Liabilities subject to compromise:
Accounts payable $ 55,276 $ -
Accrued interest expensed on debentures 1,372,819 -
Convertible subordinated debentures at face value 7,225,000 -
Allowance for estimated legal fees and settlement costs 1,434,944 -
---------------- ----------------
Total liabilities subject to compromise 10,088,039 -
---------------- ----------------
Liabilities not subject to compromise:
Accounts payable 95,135 945,610
Accrued liabilities 79,674 1,269,933
Accrued interest expense on debentures 364,160 3,206,120
Note payable - NPD, Inc. 425,000 -
Accrued interest - NPD, Inc. 25,667 -
Accrued acquisition costs - 656,542
Convertible subordinated debentures at face value - 22,050,000
---------------- ----------------
Total liabilities not subject to compromise 989,636 28,128,205
---------------- ----------------
Total liabilities $ 11,077,675 28,128,205
---------------- ----------------
Stockholders' Deficit
Preferred stock, $.002 par value. Authorized 5,000,000
shares; 57,800 issued and outstanding at March 31, 1998 116 -
Common stock, $.002 par value. Authorized 40,000,000
shares; issued 6,079,530 shares at March 31, 1998, and
4,634,530 at March 31, 1997 12,158 9,269
Additional paid-in capital 20,459,946 5,946,904
Unrealized holding loss (590,000) -
Accumulated deficit (23,320,187) (17,808,378)
Total stockholders' deficit ---------------- ----------------
(3,437,967) (11,852,205
---------------- ----------------
Total liabilities and stockholders' deficit $ 7,639,708 $ 16,276,000
================ ================
</TABLE>
See accompanying notes to consolidated financial statements
F-8
<PAGE>
AUTOLEND GROUP, INC., AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
---------------- ---------------- ----------------
<S> <C> <C> <C>
Revenues:
Finance charges on installment contracts $ 587,616 $ 1,670,663 $ 7,808,369
Revenues from matured insurance policies 69,109 505,292 1,326,706
---------------- ---------------- ----------------
Gross revenues 656,725 2,175,955 9,135,075
Cost of matured insurance policies (60,125) (101,285) (784,848)
---------------- ---------------- ----------------
Total net revenues $ 596,600 $ 2,074,670 $ 8,350,227
General and administrative expenses (2,106,636) (5,851,888) (9,914,990)
Provision for credit gain (losses) 41,000 (3,625,078) (8,839,461)
---------------- ---------------- ----------------
Operating loss $ (1,469,036) $ (7,402,296) $ (10,404,224)
---------------- ---------------- ----------------
Other income/(expense):
Interest income:
Interest income on cash and cash equivalents 207,116 333,251 603,356
NPD, Inc., note receivable 219,215 - -
Realized gain/(loss) on sale of securities, net - (49,853) 1,137
Interest expense:
Debentures (881,918) (2,148,914) (3,289,876)
NPD, Inc., note payable (25,667) - -
Other (27,082) - -
Write-down of purchased insurance policies (131,772) (925,300) -
Lease termination expense - (516,000) -
Gain on lease termination 266,378 - -
Write-down of AutoLend IAP, Inc., securities (160,000) (200,000) -
Write-off fixed assets (3,720) (667,238)
Gain on sale of viatical trademarks - - 300,000
Loss on sale of viatical portfolio - - (392,063)
Other income/(expense) (204,128) (212,118) 65,337
Debenture conversion charge (6,261,052) - -
---------------- ---------------- ----------------
Total net other expense $ (7,002,630) $ (4,386,172) $ (2,712,109)
---------------- ---------------- ----------------
Loss before reorganization costs, benefit from income
taxes, discontinued operations, extraordinary item,
and cumulative effect of change in accounting
principle (8,471,666) (11,788,468) (13,116,333)
Reorganization costs incurred after
Chapter 11 proceedings (211,667) - -
---------------- ---------------- ----------------
Loss before benefit from income taxes, discontinued
operations, extraordinary item, and cumulative (8,683,333) (11,788,468) (13,116,333)
effect of change in accounting principle
Benefit from income taxes - 86,082 4,935,676
---------------- ---------------- ----------------
Loss before discontinued operations, extraordinary item,
and cumulative effect of change in accounting
principle (8,683,333) (11,702,386) (8,180,657)
Discontinued operations:
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)
Gain on sale of subsidiary net of income tax expense
of $164,887 - 320,074 -
---------------- ---------------- ----------------
Loss before extraordinary items and cumulative effect
of change in accounting principle (8,683,333) (11,535,285) (8,228,252)
Extraordinary items:
Gain on early extinguishment of debt, net of
amortization of deferred costs of $57,000 and
$947,877 in 1998 and 1996 and income tax
expense of $4,847,156 in 1996 (3,171,524) - 7,306,970
---------------- ---------------- ----------------
Loss before cumulative effect of change in accounting
principle (5,511,809) (11,535,285) (921,282)
Cumulative effect of change in accounting principle,
net of income tax expense of $117,239 - - 176,735
---------------- ---------------- ----------------
Net loss $ (5,511,809) $ (11,535,285) $ (744,547)
================ ================ ================
</TABLE>
See accompanying notes to consolidated financial statements.
F-9
<PAGE>
AUTOLEND GROUP, INC., AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS - CONTINUED
YEARS ENDED MARCH 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
--------------- -------------- ---------------
<S> <C> <C> <C>
Loss per share before discontinued operations,
extraordinary item, and cumulative
effect change in accounting principle $ (1.44) $ (2.53) $ (1.77)
Discontinued operations - 0.04 (0.01)
--------------- -------------- ---------------
Loss per share before extraordinary items and cumulative
effect of change in accounting principle (1.44) (2.49) (1.78)
Extraordinary items:
Gain on early extinguishment of debt 0.53 - 1.58
--------------- -------------- ---------------
Loss per share before cumulative effect of change in account (0.91) (2.49) (0.20)
Cumulative effect of change in accounting principle - - (0.04)
--------------- -------------- ---------------
Net loss $ (0.91) $ (2.49) $ (0.16)
=============== ============== ===============
Weighted average number of common and common equivalent
shares outstanding 6,039,391 4,634,530 4,634,530
=============== ============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
F-10
<PAGE>
AUTOLEND GROUP,INC.,AND SUBSIDIARIES (Debtor-in-Possession)
Consolidated Statements of Stockholders' Deficit
Years Ended March 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
Preferred Stock Common Stock Unrealized Additional
----------------------- ----------------------
# of $ # of $ Holding Paid-In Accumulated
Shares Amount Shares Amount Loss Capital Deficit
----------- --------- ----------- --------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31,1995 - $ - 4,634,530 $ 9,269 $ - $ 5,946,904 $ (5,528,546)
Net Loss - - - - (744,547)
----------- --------- ----------- --------- ----------- ------------ -------------
Balance at March 31, 1996 - - 4,634,530 9,269 - 5,946,904 (6,273,093)
Net Loss - - - - - - (11,535,285)
----------- --------- ----------- --------- ----------- ------------ -------------
Balance at March 31, 1997 - - 4,634,530 9,269 - 5,946,904 (17,808,378)
Common and Preferred shares issued
in the exchange offer 57,800 116 1,445,000 2,889 - 14,513,042 -
Unrealized holding loss - - - - (590,000) - -
Net Loss - - - - - - (5,511,809)
----------- --------- ----------- --------- ----------- ------------ -------------
Balance at March 31, 1998 57,800 $ 116 6,079,530 $ 12,158 $ (590,000) $ 20,459,946 $ (23,320,187)
=========== ========= =========== ========= =========== ============ =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-11
<PAGE>
AUTOLEND GROUP, INC., AND SUBSIDIARIES (Debtor-in-Possession)
Consolidated Statements of Cash Flow
Years ended March 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------------ -------------- --------------
<S> <C> <C> <C>
Cash flow from operating activities:
Net loss $ (5,511,809) $ (11,535,285) $ (744,547)
Adjustments to reconcile net loss to net cash
flow from operating activities:
Amortization of intangible assets and debt
issuance costs 56,443 242,777 2,390,073
Depreciation expense 24,464 104,156 259,533
Gain on early extinguishment of debt, net of
amortization (3,171,524) - (12,154,123)
Charge for debenture conversion, net of
amortizaton 6,261,052 - -
Gain on lease termination (266,378) - -
Provision for credit losses, net of
recoveries (41,000) 3,625,078 8,839,461
Write-off of fixed assets 3,720 667,238 36,007
Write-down of purchased insurance policies 131,772 925,300 -
Write-down of AutoLend IAP, Inc., securities 160,000 200,000 -
Realized gains (losses) on securities
available for sale - 49,853 (1,137)
Gain on sale of subsidiary, IAP - (986,961) -
Gain on sale of assets - - (300,000)
Provision for estimated legal fees
and settlement costs 200,000 - -
Change in net assets of discontinued
operations - (1,008,078) (4,858,380)
Changes in assets and liabilities:
Prepaid expenses (100,567) - -
Accounts receivable--matured insurance
policies - 1,357,947 3,578,618
Installment contracts receivable 1,839,844 5,878,710 (6,683,571)
Interest on escrow deposit (62,060) - -
Interest receivable on note receivable-
NPD, Inc. (219,215) - -
Purchased insurance policies 52,425 6,494 17,803,351
Consulting agreement 140,000 - -
Other assets 33,101 107,469 1,301,177
Accrued interest receivable - - 79,499
Accounts payable and accrued
liabilities (1,719,080) 1,231,445 609,182
Accrued interest expense 907,585 2,094,751 (1,430,673)
Other liabilities 578,402 - -
------------- -------------- -------------
Cash provided (used) by operating activities $ (702,825) $ 2,960,894 $ 8,724,470
------------- -------------- -------------
Cash flow from investing activities:
Funding of escrow $ (2,000,000) $ - $ -
Loan to NPD (3,035,292) - -
Purchase ITB stock option (200,000) - -
Purchases of securities available
for sale - - (14,414,871)
Proceeds from sale of securities
available for sale - 125,000 23,922,979
Proceeds from disposition of IAP - 5,963,388 -
Proceeds from sale of fixed assets - 185,995 -
Purchase of fixed assets - (4,075) (492,799)
------------- -------------- -------------
Cash provided (used) by investing
activities $ (5,235,292) $ 6,270,308 $ 9,015,309
------------- -------------- -------------
Cash flow from financing activities:
Early extinguishment of debt (5,692,079) - (15,848,000)
------------- -------------- -------------
Cash provided (used) in financing
activities $ (5,692,079) $ - (15,848,000)
------------- -------------- -------------
Net increase(decrease) in cash and cash
equivalents $ (11,630,196) $ 9,231,202 1,891,779
Cash and cash equivalents at beginning of period 12,399,932 3,168,730 1,276,951
------------- -------------- -------------
Cash and cash equivalents at end of period $ 769,736 $ 12,399,932 $ 3,168,730
============= ============== =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-12
<PAGE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
During 1998, the Company paid approximately $173,000 in professional fees in
connection with the Chapter 11 proceeding. Additionally during 1997, the Company
paid $27,082 in interest.
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
During 1998, the Company purchased an option to acquire stock in exchange for
$200,000 cash and a note payable with present obligation of $425,000 (see Note
7). Additionally, the Company converted debentures with a face value of
$7,225,000 and outstanding accrued interest of $1,065,575 for 57,800 shares of
preferred stock and 1,445,000 shares of common stock, with an aggregate par
values of $116 and $2,889, respectively. This resulted in a non-cash conversion
charge of $6,261,052.
F-13
<PAGE>
AUTOLEND GROUP, INC., AND SUBSIDIARIES
Notes to Consolidated Financial Statements
MARCH 1, 1998, 1997, AND 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation; Going Concern
The accompanying consolidated financial statements of AutoLend Group,
Inc., and its wholly owned subsidiaries (the "Company") have been prepared
on a going-concern basis, which contemplates the realization of assets and
the satisfaction of liabilities and commitments in the normal course of
business.
As a result of the Company's inability to make repayment on, and resultant
default against, its outstanding 9.5 percent Convertible Subordinated
Debentures (the "Debentures"), as described more fully in Note 2, the
Company filed for protection under Chapter 11 of the United States
Bankruptcy Code in the United States Bankruptcy Court for the District of
New Mexico (the "Bankruptcy Court"). The Company is presently operating
its business as a debtor-in-possession under Chapter 11 and is subject to
the jurisdiction and supervision of the Bankruptcy Court. Under Chapter
11, certain claims against the Company in existence before the filing of
the petition for relief under the federal bankruptcy laws are stayed while
the Company continues business operations as debtor-in-possession.
The Company maintains a portfolio of sub-prime consumer used-car loans
("Installment Contract Receivables") through its subsidiary, AutoLend
Corporation. LB NM, Inc., and American Life Resources Group, Inc.,
maintain a portfolio of life insurance policies purchased from persons
with life-threatening illnesses, a business generically referred to as
viatical settlements (the "Policies"). The Company ceased purchasing
Installment Contract Receivables in December 1995 and Policies in
September 1994 and does not at this time intend to recommence those
activities.
AutoLend IAP, Inc., provided short-term financing to selected used-car
dealers for purchases of used automobiles at certain regional auctions in
the United States. On September 18, 1996, the Company entered into a stock
purchase agreement to sell AutoLend IAP, Inc., and it was sold.
Because the Company's liabilities have exceeded its assets since March
1996, and the Company has been in a Chapter 11 Voluntary Bankruptcy
Proceeding since September 1997, there is substantial doubt about the
Company's ability to continue as a going concern. The Company's viability
as a going concern depends upon the restructuring of its obligations and,
ultimately, the attainment of profitability. The Company has filed a Plan
of Reorganization and Disclosure Statement (collectively, the "Plan"),
which contain the Company's proposal for resolving the bankruptcy. A
hearing on the Disclosure Statement is scheduled for July 30, 1998, and
the Company expects the process will take several months
F-14
<PAGE>
beyond that date. Although the Company intends to reorganize and emerge
from Chapter 11, it cannot assure that it will be able to do so. If the
Company is prevented from emerging from Chapter 11, it would most likely
be liquidated, which would result in the elimination of common and
preferred stock, and payments to creditors of amounts less than their
claims. Management believes that payments to creditors under such a
liquidation scenario would likely be less than that as proposed under the
Plan.
The Company's financial statements as of March 31, 1998, have been
presented in conformity with the American Institute of Certified Public
Accountants' Statement of Position 90-7, "Financial Reporting By Entities
in Reorganization Under the Bankruptcy Code," issued November 19, 1990
("SOP 90-7"). The statement requires a segregation of liabilities subject
to compromise by the Bankruptcy Court as of the bankruptcy filing date
(September 22, 1997) and identification of all transactions and events
that are directly associated with the reorganization of the Company.
Prior year's comparative balances have not been reclassified to conform to
current year balances stated under SOP 90-7.
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. No petition under the United
States Bankruptcy Code has been filed for the subsidiaries. Below is the
condensed (unconsolidated) financial statements of AutoLend Group, Inc.,
the only entity that had filed for Chapter 11 protection as of March 31,
1998.
F-15
<PAGE>
AutoLend Group, Inc.
Condensed (Unconsolidated) Balance Sheet
March 31, 1998
<TABLE>
<S> <C>
Asset:
Cash and cash equivalents (excludes subsidiaries) $ 80,356
Prepaid expenses 167,381
Fixed assets net 39,611
Receivable from subsidiaries 12,793,262
Investment in subsidiaries (11,535,549)
IAP securities 250,000
Escrow deposit excluding interest 2,000,000
Note receivable NPD, Inc. 3,035,292
Interest receivable on note receivable NPD, Inc. 219,215
ITB stock option, net 425,000
Other assets 108,070
---------------
Total Assets $ 7,582,638
===============
Liabilities:
Liabilities subject to compromise $ 10,088,039
Liabilities not subject to compromise 932,566
---------------
Total Liabilities $ 11,020,605
Stockholders' Deficit: (3,437,967)
---------------
Total Liabilities and Stockholders' Deficit $ 7,582,638
===============
</TABLE>
See pages F-8 through F-13 for consolidated financial statements.
F-16
<PAGE>
Autolend Group, Inc.
Condensed (Unconsolidated) Statement of Operations
For the year ended March 31, 1998
<TABLE>
<S> <C>
Total net revenues (excludes subsidiaries) $
General and administrative expenses (1,547,877)
----------------
Operating earnings (loss) (1,547,877)
----------------
Other income (expense):
Interest income on cash and cash equivalents 190,673
Accrued interest income on NPD, Inc., note 219,215
Other income/(expense) (102,658)
Accrued interest expense (907,585)
Debenture conversion charge (6,261,052)
Equity in loss of subsidiaries (267,690)
----------------
Total net other expense (6,923,781)
----------------
Loss before reorganization costs, income taxes, and extraordinary item (8,471,658)
Reorganization costs incurred after Chapter 11 proceedings (211,667)
----------------
Loss before income taxes and extraordinary item (8,683,325)
Benefit from income taxes -
----------------
Loss before discontinued operations, extraordinary item (8,683,325)
Gain on early extinguishment of debt, net of amortization of
deferred costs of $57,000 3,171,524
----------------
Net Loss $ (5,511,801)
================
</TABLE>
See pages F-8 through F-13 for consolidated financial statements
F-17
<PAGE>
AutoLend Group, Inc.
Condensed (Unconsolidated) Statement of Cash Flow
For the year ended March 31, 1998
<TABLE>
<S> <C>
Cash Flow from operating activities: $ (5,511,801)
Net loss
Adjustments to reconcile loss to net cash flow from operating activities:
Amortization of intangible assets and debt issuance costs 56,443
Depreciation expense 26,364
Gain on early extinguishment of debt, net of amortization (3,171,524)
Debenture conversion charge, net of amortization 6,261,052
Gain on lease termination (226,378)
Equity in net income of subsidiaries 267,690
Write-off of fixed assets 3,720
Write-down of AutoLend IAP, Inc., securities 160,000
Changes in assets and liabilities:
Prepaid expenses (100,567)
Interest on escrow deposit (62,060)
Accrued interest receivable - NPD, Inc. (219,215)
Consulting agreement 140,000
Receivable from subsidiaries 2,411,087
Other assets 12,741
Accounts payable and accrued liabilities (954,038)
Accrued interest expense 907,585
--------------
Cash (used) by operating activities (40,902)
--------------
Cash flow from investing activities:
Funding of Escrow (2,000,000)
Loan to NPD (3,035,292)
Purchase ITB stock option (200,000)
--------------
Cash used by investing activities (5,235,292)
--------------
Cash flow from financing activities:
Early extinguishment of debt (5,692,079)
--------------
Cash used in financing activities (5,692,079)
--------------
Net (decrease) in cash and cash equivalents (10,968,273)
Cash and cash equivalents at beginning of period 11,048,629
--------------
Cash and cash equivalents at end of period (excludes subsidiaries) $ 80,356
==============
</TABLE>
See pages F-8 through F-13 for consolidated financial statements.
Because of 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, which mature in 90 days or
less from the date of acquisition.
F-18
<PAGE>
(c) Securities
Securities investments (including options) that the Company has the
positive intent and ability to hold to maturity are classified as held-to-
maturity securities. Securities investments that are bought and held
principally to sell in the near term are classified as trading securities.
Securities investments not classified as either held-to-maturity or
trading securities are classified as available-for-sale securities.
Available-for-sale securities are recorded at fair value and are included
in investments and other assets on the balance sheet, with the change in
fair value during the period excluded from earnings as a separate
component of equity. The Company determines the cost of its investments in
securities based on specific identification.
(d) Recent Accounting Pronouncements and Developments
In March 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings Per Share (SFAS 128").
SFAS 128 provides a different method of calculating earnings per share
than is currently used in APB Opinion 15. SFAS 128 provides for the
calculation of basic and diluted earnings per share. Basic earnings per
share includes no dilution and is computed by dividing income available to
common stockholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflects the
potential dilution of securities that could share in the earnings of an
entity, similar to existing fully diluted earnings per share. The Company
adopted the provisions for computing earnings per share set forth in SFAS
128 in fiscal year 1998. The adoption of SFAS 128 does not have a material
effect on the Company's previously reported earnings per share
information.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard (SFAS) No. 130, "Reporting Comprehensive
Income." SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. It established standards for reporting comprehensive
income and its components in annual financial statements. Reclassification
of comparative financial statements or financial information for earlier
periods is required upon adoption of SFAS No. 130.
Statement of Financial Accounting Standards No. 131, Disclosure about
Segments of a Business Enterprise ("SFAS 131"), establishes standards for
the way that public enterprises report information about operating
segments in annual financial statements and requires reporting of selected
information about operating segments in interim financial statements
issued to the public. It also establishes standards for disclosures
regarding products and services, geographic areas and major customers.
SFAS 131 defines operating segments as components of an enterprise about
which separate financial information is available that is evaluated
regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance.
Both SFAS 130 and SFAS 131 are effective for financial statements for
periods beginning after December 15, 1997 and require comparative
information for earlier years to be restated. Due to
F-19
<PAGE>
the recent issuance of these standards, management has been unable to
fully evaluate the impact, if any, they may have on future financial
statement disclosures.
Statement of Financial Accounting Standards No. 129, Disclosure of
Information about Capital Structure ("SFAS 129") effective for periods
ending after December 15, 1997, establishes standards for disclosing
information about an entity's capital structure. SFAS 129 requires
disclosure of the pertinent rights and privileges of various securities
outstanding (stock options, warrants, preferred stock, debt and
participation rights) including dividend and liquidation preferences,
participant rights, call prices and dates, conversion or exercise prices
and redemption requirements. Adoption of SFAS 129 will have no effect on
the Company as it currently discloses the information specified.
(e) Revenue Recognition
Installment Contract Receivables: Revenues from finance charges on
Installment Contract Receivables (used car loans) are recognized when
earned and are based on the difference between gross cash flow from an
Installment Contract Receivables and the total amount paid by the Company
to acquire the Contracts. Loan discounts are recorded as unearned income
at the time of initial investment in a loan contract and are amortized
over the life of the loan to revenue. Loan costs are amortized against
revenue as an adjustment of yield.
The accrual of interest revenue on receivable balances (recognition of
revenue) is suspended when a loan is delinquent for 30 days or more. The
accrual is resumed when the loan becomes contractually current, and past-
due interest revenue is recognized then. The Company initially performed,
in house, all functions associated with origination, servicing, and
collection of the contracts; however, since January 1996, the Company has
used an outside contractor to service the Installment Contract
Receivables.
Allowance for Credit Losses Installment Contract Receivables: An allowance
for credit losses is maintained at a level which, in management's
judgment, is adequate to absorb credit losses inherent in the Installment
Contract Receivables portfolio. The amount of the allowance is based on
management's evaluation of the collectibility of the Installment Contract
Receivables portfolio, including the nature of the portfolio and specific
impaired loans. Allowances for impaired loans are generally determined
based on aging, collateral values, or present value of estimated cash
flows.
The allowance for credit losses is established through provisions charged
to income and is based on management's evaluation of potential losses
after considering such factors as current delinquency data, changes in the
Installment Contract Receivables portfolio, and other pertinent factors.
Charge-offs are recorded against the allowance when management believes
that the collectibility of the principal is unlikely.
There are inherent uncertainties in determining the allowance for credit
losses in a long-established Installment Contract Receivables portfolio.
Additionally, the somewhat limited
F-20
<PAGE>
duration of historical experience for this specific portfolio compounds these
uncertainties. As a result, the aggregate losses ultimately incurred by the
Company for the Installment Contract Receivables portfolio may 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 it is reasonable to cover the losses inherent in the
Installment Contract Receivables portfolio at March 31, 1998, and 1997.
Purchased Insurance Policies: Revenue and cost of revenue are recognized upon
the maturity of a Policy (death of the insured). Unmatured Policies are
carried, at estimated market value, as an investment asset. The cost of a
Policy includes the initial purchase price, insurance premiums, and other direct
expenditures paid by the Company for the purchase and maintenance of the Policy.
Revenues are accounted for as "Gross Revenues" (i.e., before deduction of costs)
and as "Net Revenues" (after deduction of costs). Net Revenues are combined
with revenues from other business operations in calculating the Company's Total
(net) Revenues.
The ability to recognize matured policy revenue during the period in which a
Policy matures depends on the Company's receiving notification of its maturity
from a representative of the insured. In some instances, notification may not
occur until significantly after the insured's death and after the financial
statements have been finalized for the period in which the Policy matured. To
the extent Policy maturities cannot be recorded in the period the Policy
matures, the revenue and cost related to the maturity are recognized in the
statement of operations after the maturity of the Policy.
Allowance for Credit Losses - Purchased Insurance Policies: The allowance is
established through provisions charged to income and is based on management's
evaluation of potential losses after consideration of present value of the face
value of the Policy less the present value of any future obligations relating to
the Policy. Charge-offs are recorded against the allowance when management
believes that the collectibility of the Policy is unlikely.
Inventory Assistance Program: Revenues from the inventory assistance program
("IAP") financing consisted of non-refundable administrative fees and 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 did
not exceed six weeks. IAP revenues were recognized only from March 1995 through
September 1996, when the IAP subsidiary was sold (see Note 9).
(f) Debt Issuance Cost Amortization
Debt issuance costs are amortized over the life of the related debt. At March
31, 1998, debt issuance costs had been fully amortized.
(g) 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-21
<PAGE>
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 highly possible that any such deferred tax assets will not be usable.
(h) Fair Value of Financial Instruments
The Company's financial instruments include accounts receivable on matured
Policies, Installment Contract Receivables, purchased Policies, an escrow
account, securities in IAP, the ITB stock option, the NPD note receivable,
accounts payable, accrued liabilities, the note payable on the stock option, and
the Debentures. The fair values of these financial instruments have been
determined using available market information and interest rates as of
March 31, 1998.
At March 31, 1998, the fair value of the Debentures, which were due in September
1997 and not paid, was substantially less than the carrying value of $7.2
million plus accrued interest, 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 repurchased Debentures at a discount from face value during the year
ended March 31, 1998. The fair values of all other financial instruments were
not materially different from their carrying value.
(i) Earnings per Share
Primary earnings per share amounts are computed based on the weighted average
number of shares actually outstanding, which were 6,039,391 for 1998 and
4,634,530 for 1997. The convertible provision of the Convertible Subordinated
Debentures is contingent upon the future market price of the Company's stock;
based on the market price on June 18, 1998, it is probable that none of the
Debentures would convert to shares of Common Stock. Furthermore, the effects of
options, which are presently outstanding for 3,660,000 shares of common stock
were anti-dilutive; therefore, fully diluted earnings per share amounts are not
presented because they do not differ significantly from primary earnings per
share.
(j) Use of Estimates
The preparation of the Company's consolidated financial statements conforms with
generally accepted accounting principles, and requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
F-22
<PAGE>
(k) 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 vehicle is charged to the allowance
for credit losses. Any losses on the sale of the vehicles are charged to
operations.
(l) Year 2000 Issue
Like any other company, advances and changes in technology can significantly
affect the business and operations of the Company. For example, a challenging
problem is that many computer systems worldwide cannot recognize the year 2000
or years thereafter. No easy technological "quick fix" has yet been developed
for this problem. The Company has not determined the magnitude of the problem,
if any and therefore, no provision has been made in the financial statements.
(2) VOLUNTARY BANKRUPTCY REORGANIZATION
On September 19, 1997, the entire principal balance of the Company's Debentures
became due and payable and the Company's projected cash flow was not adequate to
meet the debt requirements. Therefore, on September 22, 1997, the Company filed
a voluntary petition for protection under Chapter 11 of the U.S. Bankruptcy Code
in the United States Bankruptcy Court for the District of New Mexico. Although
the Company intends to reorganize and emerge from Chapter 11, it cannot assure
that it will be able to do so. If the Company is prevented from emerging from
Chapter 11, it would most likely be liquidated, which would result in the
elimination of the common and preferred stock, and in payments to creditors of
amounts less than their claims. Management believes that amounts which might be
received by creditors under such a liquidation scenario would likely be less
than as proposed under the Plan.
(3) REORGANIZATION PLAN REGARDING FUTURE BUSINESS
In conjunction with the present Chapter 11 proceedings, the Company filed
effective January 16, 1998, a Plan of Reorganization with the Bankruptcy Court
proposing its plans for resolving the bankruptcy. In conjunction with the Plan
of Reorganization, the Company has also filed a detailed Disclosure Statement
which outlines its plans for new business (collectively, the "Plan"). The
success of the Plan is highly dependent on the acquisition by the Company of a
new business, which consists primarily of acquiring and operating gaming devices
and machines for certain non-profit organizations located in New Mexico. The
Plan will be distributed to the Company's creditors in advance of balloting and
a hearing on the confirmation of the Plan, and will need approval of the
Bankruptcy Court. A hearing on the Disclosure Statement is scheduled for July
30, 1998. The Company expects that this process will take several more months
thereafter.
F-23
<PAGE>
(4) INVOLUNTARY BANKRUPTCY PETITION DISMISSED
Approximately six weeks after a court-approved Stipulation of Settlement in
which the current management assumed control of the Company, on November 1,
1996, four holders of the Company's Debentures filed an involuntary petition
against the Company in the Court (the "Involuntary Petition"). The petition was
dismissed effective April 7, 1997. During the pendency of this action until its
dismissal, the Company was restricted in its ability to actively pursue any new
business activity.
(5) DEBENTURES
On October 22, 1996, the Company initiated its offer to exchange common stock,
$.002 par value per share ("common stock"), and 14 percent cumulative
convertible preferred stock, $.002 par value per share ("preferred stock"), for
its outstanding Debentures ("Exchange Offer"). After the dismissal of the
Involuntary Petition (see Note 4) on April 8, 1997, the Exchange Offer expired,
and the Company issued an aggregate of 1.4 million shares of its common stock
and 57,800 shares of its preferred stock in exchange for $7.2 million in
principal amount of Debentures. Pursuant to the Exchange Offer, the Company
issued 855,205 shares of common stock valued at $0.5625 per share and 57,800
shares of its preferred stock valued at $100 per share in excess of the original
conversion privilege offered by these Debentures. As a result, the Company
recorded during the year ended March 31, 1998, a non-cash transaction: a
conversion charge of $6.3 million, an increase to additional paid-in capital of
$14.5 million, and an increase in the common stock of $2,889 and preferred stock
of $116. In addition, accrued interest on the Debentures, totaling $1.1
million, was canceled.
During the 12 months ended March 31, 1998, and excluding the Exchange Offer, the
Company repurchased Debentures representing $8.9 million in combined principal
amount and accrued interest for $5.7 million in cash, which resulted in a gain
of $3.2 million.
As a result of the Exchange Offer and the subsequent Debenture repurchases, the
balance of Debentures and interest on March 31, 1998, were $7.2 million in
principal and $1.7 million in interest. All outstanding principal became due on
the remaining Debentures on September 19, 1997; however, this payment
was not made (See Note 2 above).
(6) THE PURSUIT OF A CONTROLLING INTEREST IN ITB
International Thoroughbred Breeders, Inc. ("ITB") is an American Stock Exchange
listed 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. ITB is much larger than AutoLend, and has a net equity of approximately
$75 million, annual revenues of approximately $68 million, and approximately 700
employees (according to ITB's most recent Form 10-Q and Form 10-K).
F-24
<PAGE>
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 (see Note 6 to the financial statements), the Company was
prevented from consummating the purchase. As an alternative to the direct
acquisition of the ITB stock, Nunzio DeSantis (the Company's Chairman and CEO)
and Anthony Coelho (a Director of the Company) formed NPD, Inc. ("NPD") to
purchase the ITB shares. In connection with its purchase, which was effective
January 15, 1997, NPD was granted the right to appoint a majority of the
Directors of the Board of ITB.
Concurrently with its formation, NPD had agreed to grant the Company the right
to later purchase the ITB shares from NPD at the same price NPD had agreed to
pay for the ITB shares. As consideration, 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's bankruptcy estate at closing. The Company 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's bankruptcy estate for the ITB shares and to
effectuate this, would deposit $2.0 million into a cash collateral escrow
account to secure NPD's obligation. However, the Bankruptcy Court before which
the involuntary petition was pending enjoined the making of the agreed-upon loan
by the Company to NPD and, as a result, the right was not granted to the
Company. Nonetheless, following the dismissal of the involuntary bankruptcy
petition, and in accordance with its agreement, the Company executed and
delivered its guarantee as aforesaid, depositing the required $2.0 million in
the cash collateral escrow account. At March 31, 1998, the funds held in escrow
by a third party were invested in U.S. Treasury obligations.
On July 10, 1997, a loan of $3.0 million was made to NPD. The loan accrues
interest at the rate of 10 percent per annum, and is payable in full, together
with all accrued interest, on July 9, 1999. The loan is secured by a pledge by
NPD of the shares of common stock of ITB owned by it, subject to a prior lien
and pledge by NPD of the shares held by Brennan as security for NPD's obligation
to pay the balance of the purchase price due for the ITB shares. NPD used the
proceeds of the loan to repay an earlier loan made by an unaffiliated third
party, which repayment resulted in the cancellation of an option which NPD had
previously granted to the unaffiliated third party to purchase the ITB shares.
(7) THE ITB OPTION
As a result of the earlier involuntary bankruptcy proceeding against the Company
(see Note 6 to the financial statements) the Company was prevented from entering
into a negotiated agreement which would have enabled it to purchase an
approximately 25 percent equity interest in ITB. Consequently, NPD was formed
and consummated the same ITB purchase (see Note 6 above). After the dismissal
of the involuntary bankruptcy petition, in order to reinstate the Company
approximately to the position it would have been in as purchaser of the ITB
Shares, in June 1997 the Company's Board of Directors approved an agreement in
principal with NPD to finally consummate an option purchase.
F-25
<PAGE>
Thus, in August 1997 the Company purchased from NPD an option to purchase the
ITB shares held by NPD (the "Option"). The Option granted to the Company is
subject to an option granted by NPD to Mr. DeSantis to purchase 50 percent of
the ITB shares owned by NPD at the date of exercise. Furthermore, both of the
options owned by the Company and by Mr. DeSantis are subject to a one year
option previously granted by NPD to an unaffiliated third party in January 1997.
This option provided this individual the right to purchase 50 percent of the ITB
shares owned by NPD at the date of exercise.
The Option held by the Company states that it must purchase all of the ITB
shares owned by NPD at the date of exercise, which would be from one-fourth of
the shares originally purchased by NPD at a minimum, to 100 percent of these
shares in the event no other options are exercised. Prior to entering into this
agreement, the Company's Board of Directors obtained and reviewed a draft of a
third-party appraisal of the Option, which set the value of the Option at $2.5
million if the Company has the ability to acquire 100 percent of the shares. As
of June 19, 1998, this appraisal had not been finalized.
The Company paid $200,000 in cash for the Option at the closing date, and also
executed a note, which accrues interest at 10 percent per annum and is payable
in full, including accrued and unpaid interest, on July 9, 1999. The principal
amount of the note is $2.3 million, if the Company has the ability to acquire
100 percent of the shares, but is reduced proportionally (including accrued
interest from the date of inception) to the percentage of the ITB shares
unavailable, as stated above. Therefore, at March 31, 1998, only one-fourth of
the purchase price, and the corresponding related debt, or $425,000, and one-
fourth of the potential option right, has been reflected. However, the balance
of the debt obligation does represent a contingent obligation in the event that
the Company has the ability to acquire all of the shares held by NPD.
The provisions of the Option stipulate that it may not be exercised by a company
in bankruptcy, and the Option expires on August 29, 1998. The Option may
however be extended at the discretion of NPD. In the event that the Company
were able to exercise the Option, the Company would purchase the ITB shares from
NPD at the same price paid by NPD, which was four dollars per share. However,
it is highly unlikely that this option would be exercised by the Company unless
the "strike price" exceeded $4 per share. ITB stock has been suspended from
trading since October 1997, and last traded at approximately $3.50. It is
unclear if the stock will resume trading before the expiration of the Option and
therefore, establish a market price.
See Note 18 regarding the Pending ITB Settlement.
(8) PREFERRED STOCK
In connection with the Exchange Offer (see Note 5 above), the Company issued
57,800 shares of preferred stock with a stated value of $100 per share.
Dividends are at an annual rate of 14 percent of the stated value, payable
quarterly, at the option of the Company in either cash, common stock, preferred
stock, or a combination thereof. Dividends unpaid at March 31, 1998, totaled
approximately $600,000.
F-26
<PAGE>
(9) DISCONTINUED OPERATIONS
One of the Company's subsidiaries, AutoLend IAP, Inc. ("IAP"), was sold on
September 18, 1996, to its departing management. The Company received full,
undiscounted payment in cash for all IAP's receivables outstanding, and also
received cash payment for the book value of equipment and fixtures used in the
business. In addition, the Company received shares of IAP's preferred stock.
These shares of preferred stock had a face value of $1.0 million bearing
interest at 11 percent. 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 percent of IAP at the date of
conversion. At March 31, 1998, management of the Company was negotiating with
the new owners of IAP for the early repayment of the preferred stock. Since no
agreement has been executed, the fair value of the investment was reduced to
$250,000; this amount represents the escrow deposit available to guarantee the
redemption of the stock.
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:
<TABLE>
<CAPTION>
Fiscal Year Ending March 31
------------------------------
1998 1997 1996
------- -------- ----------
<S> <C> <C> <C>
Revenue $ - $825,706 $379,667
Net loss - (152,973) (47,595)
Loss per common share - (0.03) (0.01)
</TABLE>
(10) INSTALLMENT CONTRACT RECEIVABLES
At March 31, 1998, and 1997, Installment Contract Receivables consisted of the
following:
<TABLE>
<CAPTION>
1998 1997
---------- -----------
<S> <C> <C>
Installment contracts receivable $ 541,803 $ 3,828,706
Unearned finance charges (80,211) (919,637)
---------- -----------
Installment contracts receivable, net of
unearned finance charges 461,592 2,909,069
Collateral owned 22,286 206,529
Allowance for credit losses (187,669) (1,068,545)
---------- -----------
Installment contracts receivable, net $ 296,209 $2,047,053
========== ===========
</TABLE>
F-27
<PAGE>
A summary of the allowance for credit losses on the Installment Contracts
Receivable is as follows:
<TABLE>
<CAPTION>
Fiscal Year ending March 31
------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Balance - beginning of period $ 1,068,545 $ 3,995,296 $ 1,544,000
Provision for losses, net of recoveries (89,000) 3,625,078 8,839,461
Charge offs and adjustments (791,876) (6,551,829) (6,388,165)
------------ ------------ ------------
Balance - end of period $ 187,669 $ 1,068,545 $ 3,995,296
============ ============ ============
</TABLE>
Most of the Company's Installment Contract Receivables are due from consumers in
the Southeast, West, and Northeast regions of the United States. To some extent,
realization of the receivables will depend on local economic conditions. The
Company holds vehicle titles as collateral for all contracts receivable until
the contracts are paid in full.
(11) PURCHASED INSURANCE POLICIES
At March 31, 1998, and 1997, the face values of the policies held was $1,879,420
and $1,948,530, respectively. The historical cost, including capitalized
acquisition costs, of these policies at March 31, 1998, and 1997 was $1,386,265
and $1,438,690, respectively.
A summary of the allowance for credit losses on the Purchased Insurance Policies
is as follows:
<TABLE>
<CAPTION>
1998 1997
------------ -----------
<S> <C> <C>
Balance - beginning of period $ 925,300 $ 145,713
Provision for write-down and valuation allowance 131,772 779,587
------------ -----------
Balance - end of period $1,057,072 $ 925,300
============ ===========
</TABLE>
(12) SECURITIES
At March 31, 1998, certain securities classified as available-for-sale were
written down to their estimated realizable values, because, in the opinion of
management, the decline in market value of those securities is considered to be
other than temporary.
F-28
<PAGE>
No securities were classified as trading or held-to-maturity at March 31, 1998,
or 1997. Investments in available-for-sale securities are summarized as follows
at March 31:
<TABLE>
<CAPTION>
1998 1997
------------------------------- ---------------------------------
Corporate Corporate
Stock Option Debt Stock Option Debt
(ITB) (IAP Stock) (ITB) (IAP Stock)
---------------- ----------- ------------- ---------------
<S> <C> <C> <C> <C>
Cost $ 625,000 $ 800,000 $ - $ 1,000,000
Permanent impairment - 160,000 - 200,000
Unrealized losses 200,000 390,000 -
---------------- ----------- ------------- ---------------
Fair market value $ 425,000 $ 250,000 $ - $ 800,000
================ =========== ============= ===============
</TABLE>
There were no realized gains or losses on securities for the year ended March
31, 1998. Realized gains and losses on securities available-for-sale were
$(49,853) and $1,137 for the years ended March 31, 1997 and 1996 respectively.
(13) FIXED ASSETS
For the fiscal year ended March 31, 1998, furniture and fixtures and computers
and software are stated at cost. Depreciation is computed by using the straight-
line method over five years, the estimated useful life of the asset(s). A
summary of fixed assets and depreciation recorded for the fiscal years ended
March 31, 1998, and 1997, is as follows:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Furniture and Fixtures $ 27,809 $ 32,241
Computers and Software 80,416 78,323
Leasehold Improvements - 9,254
--------- ---------
Gross book value 108,225 119,818
Less: Accumulated Depreciation (68,614) (52,023)
--------- ---------
Total net book value $ 39,611 $ 67,795
========= =========
</TABLE>
(14) INCOME TAXES
A reconciliation of the Company's actual income tax benefit to that computed
using the United States federal statutory rate of 34 percent is as follows:
F-29
<PAGE>
<TABLE>
<CAPTION>
Years ended March 31
-----------------------------------------------------
1988 1997 1996
-----------------------------------------------------
<S> <C> <C> <C>
Computed "expected" tax benefit $ (1,874,012) $ (3,921,997) $ (253,146)
Increase (decrease) in income taxes resulting from:
Non-deductible debt to stock conversion 2,131,472 - -
Amortization of goodwill - 223,225 (401,590)
Limitation of net operating loss carryforward (257,460) 3,698,772 654,736
---------------- ------------ -----------
Total income tax expense $ - $ - $ -
================ ============ ===========
</TABLE>
The tax effects of temporary differences that give rise to deferred tax
liabilities at March 31, 1998, and 1997, are presented below:
<TABLE>
<CAPTION>
1998 1997
------------- ------------
<S> <C> <C>
Deferred Tax assets:
Bad debt reserve $ 91,392 $ 167,395
Capital loss carryover 203,227 203,227
Net operating loss 5,617,126 5,716,454
Valuation reserve on investment
and insurance policies 487,493 436,391
----------- -----------
Subtotal: gross deferred tax assets $ 6,399,238 $ 6,523,467
----------- -----------
Deferred tax liabilities:
Other 18,575 18,575
----------- -----------
Subtotal: gross deferred tax liabilities $ 18,575 $ 18,575
----------- -----------
Net deferred tax asset, before valuation
allowance $ 6,380,663 $ 6,504,892
Valuation allowance for deferred tax assets (6,380,663) (6,504,892)
----------- -----------
Total net deferred tax asset $ - $ -
=========== ===========
</TABLE>
(15) STOCKHOLDERS' EQUITY
On July 31, 1990, the Company made a public offering of 900,000 units at $10
each, with each unit consisting of three common shares and three redeemable
Class A warrants. Total proceeds from the sale of these units were $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 were $500,000, less
underwriting discounts and commissions of $57,750. The underwriters also
received an additional option to
F-30
<PAGE>
purchase 90,000 units at $12 per unit, exercisable over two years commencing on
July 31, 1993; this additional option expired unexercised.
Each Class A warrant entitled the registered holder to purchase one common share
and one redeemable Class B warrant at an exercise price of $4.00 through its
expiration date. Each Class B Warrant entitled the registered holder to
purchase one common share at $7.00 from the date of issuance through its
expiration date. The Class A and Class B warrants were subject to redemption at
$0.05 per warrant on 30 days' prior written notice if 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 was
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,
1998, 2,555,500 Class A warrants and 108,000 Class B warrants were outstanding.
The Warrants were due to expire on January 31, 1998, when the Company was under
the restrictions of the Chapter 11 Bankruptcy proceeding and was thus unable to
address the issue of extending their expiration date. The Plan and Disclosure
Statement include provisions for treatment of the Warrants; this, however is
subject to confirmation under the Bankruptcy Proceeding.
In connection with the Company's issuance of Debentures (Note 5), 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 to purchase 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 times ranging from five to ten years.
AUTOLEND GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998, 1997, AND 1996
The options are summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------------- ----------------------------- ------------------------------
Weighted- Weighted- Weighted-
# of Average # of Average # of Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
---------- ---------------- ------------ ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 1,100,000 $ 2.47 1,865,000 $ 2.77 1,370,000 $ 3.22
Granted (1) 2,720,000 0.19 525,000 2.65 495,000 1.54
Forfeited (160,000) 3.25 (1,290,000) 2.98 - 2.98
----------- ---------------- ------------ ---------------- ----------- ----------------
Outstanding at end of year 3,660,000 0.74 1,100,000 2.47 1,865,000 2.77
Options exercisable at year end 3,660,000 820,000 911,667
</TABLE>
(1) Management has determined that the fair value of the options is nominal.
F-31
<PAGE>
The following table summarizes information about the options outstanding at
March 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------------- ----------------------------------------
Number Weighted-Average Weighted- Number Weighted-
Outstanding Remaining Average Exercisable Average
Exercise Price at March 31, 1998 Contractual Life Exercise Price at March 31, 1998 Exercise Price
------------------ ---------------------- ------------------ --------------- --------------------- ----------------
<S> <C> <C> <C> <C> <C>
$ 0.1875 2,720,000 8 1/2 Years $ 0.19 2,720,000 $ 0.19
1.50 - 2.25 395,000 7 1/2 Years 1.81 395,000 1.81
2.65 525,000 (1) 2.65 525,000 2.65
3.00 - 4.625 20,000 4 1/2 Years 3.81 20,000 3.81
--------------------- --------------- -------------------- ---------------
$ 0.1875 - 4.625 3,660,000 7 1/2 Years $ 0.74 3,660,000 $ 0.74
</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.
(16) 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 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 the 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, 1998.
(17) COMMITMENTS AND CONTINGENCIES
Effective August 8, 1997, the Company relocated its principal executive offices
from 215 Central NW, Albuquerque, New Mexico to 600 Central SW, Albuquerque, New
Mexico. The Company leases this space on a month-to-month basis.
Miami office lease. The Company had previously leased approximately 17,000
- ------------------
square feet of office space in Miami Beach, Florida, under a six-year non-
cancelable lease, effective May 1994. In February 1996, the Company moved out
of these premises. At September 30, 1997, approximately 35 months of the lease
remained at a cost of $341,250 per year. On January 28, 1998, the
Bankruptcy Court approved a settlement with the landlord, dated October 31,
1997, which released the Company from its obligations under the lease. The
Company paid the landlord $105,850 (including funds already on deposit) in
complete satisfaction of all claims. The Company had provided a lease loss
accrual of $516,000 during fiscal year 1997 for the rent payments and other
lease-related expenses called for under the lease. Because of the Court-
approved settlement with the landlord, a gain on settlement of the Miami lease
of $266,378 was recorded for the fiscal year ended March 31, 1998.
The Company is currently considering a sale of a portfolio of installment
receivables, which are non-performing and which have been fully reserved, to an
independent third party. There is
F-32
<PAGE>
also a sales and use tax refund opportunity applicable to those receivables
because the borrower defaulted. The Company is currently pursuing a potential
refund of some of these taxes. The amounts relating to these events are not
readily determinable, and recovery is not certain. Therefore, these financial
statements do not reflect the potential financial impact related to these
activities.
Living Benefits, Inc. litigation. 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 in the
acquisition agreement. 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, Inc. (the "Plaintiff) (Living Benefits Inc., 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
more than $1,657,914, with interest at 8.75 percent 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 had admitted that it was obligated to the Plaintiff for $656,542
pursuant to an agreement entered into between the Company and the Plaintiff in
June 1995, and which the Company alleges has since been breached by the
Plaintiff. On June 11, 1997, an Offer of Judgment was made to the Plaintiff of
$656,600 with costs accrued as of that date. The Plaintiff rejected the offer.
The Company has accrued an amount for purposes of financial conservatism, but
disputes the notion that such an amount is owed, and the Company intends to
resolve the dispute through Bankruptcy Court. The Company disputes this claim
and will vigorously defend against any claim by the Plaintiff as part of the
Bankruptcy Petition. However, the Company is currently unable to predict with
any degree of certainty the final resolution of this matter.
Rodman & Renshaw, Inc. On September 24, 1997, Rodman & Renshaw, Inc., an
- ----------------------
investment banking firm ("Rodman"), filed a complaint against several
defendants, including the Company (collectively, "Defendants") in the Supreme
Court of the State of New York, County of New York. The action against the
Company was stayed by the filing of the Bankruptcy Petition before the Company's
due date for filing an answer. Rodman alleges damages of $250,000 and requests
costs, interest, and punitive damages of $1,000,000 from all the Defendants. The
complaint alleges that the Defendants are liable to Rodman for damages by
depriving Rodman of its fee for its efforts to procure financing for the buyers
in connection with the disposition of IAP. The Company has several defenses to
these claims, and believes that it may be improperly included as one of the
Defendants. The Company will defend this action in a claims objection proceeding
in its bankruptcy proceedings or as otherwise appropriate.
AutoLend Group, Inc. v. NPD, Inc. On June 5, 1998, the Company filed Adversary
- ---------------------------------
No. 98-1136M, a complaint to recover certain transfers pursuant to 11 U.S.C.
(S)548. In the complaint, the Company has requested relief as follows:
avoidance of certain transfers from the Company to NPD, Inc., pursuant to 11
U.S.C. (S)548(a); the return to the Company of the $2.0 million deposited plus
accrued interest in the cash collateral escrow account in connection with the
Brennan bankruptcy to secure the Company's guarantee obligation, and a
requirement that NPD release the Company from the note payable to NPD; the
return of the $200,000 cash paid to NPD for the ITB option; repayment of the
$3.0 million which the Company lent to NPD; and pre- and post-judgment interest,
costs, and attorneys fees.
AutoLend Group, Inc. v. Nunzio P. DeSantis. On June 5, 1998, the Company filed
- -------------------------------------------
Adversary No. 98-1135M, a complaint to recover certain transfers pursuant to 11
U.S.C. (S)(S)547 and 548,
F-33
<PAGE>
and for indemnity. The Company has requested relief in the form of the return of
$597,500 in payments, plus indemnity for any amounts which NPD fails to pay in
the event the Company is granted judgment against NPD for interest, costs, and
attorneys fees.
AutoLend Group, Inc. v. Jeffrey Ovington. On June 5, 1998, the Company filed
- -----------------------------------------
Adversary No. 98-1134M, a complaint to recover certain transfers pursuant to 11
U.S.C. (S)(S)547 and 548. The Company has requested relief in the form of the
return of $100,000 in compensation payments, plus pre- and post-judgment
interest, costs, and attorneys fees.
AutoLend Group, Inc. v. Vincent Villanueva. On June 18, 1998, the Company filed
- -------------------------------------------
Adversary No. 98-1145M, a complaint to recover certain transfers pursuant to 11
U.S.C. (S)(S)547 and 548. The Company has requested relief in the form of the
return of $39,647.47 in payments, plus pre- and post-judgment interest, costs,
and attorneys fees.
The Company is also a party to legal proceedings and claims that arise during
the ordinary course of business.
Contingency related to the ITB Option and NPD: On September 22, 1997, the
- ----------------------------------------------
Company filed a voluntary petition for protection under Chapter 11 of the Code
("Bankruptcy Petition") in the Bankruptcy Court. In conjunction with the
Chapter 11 proceedings, the Company filed, effective January 16, 1998, a
detailed Plan of Reorganization ("Plan") and Disclosure Statement (the
"Disclosure Statement"), which outline the Company's plans for new business. A
hearing on the Disclosure Statement is scheduled for July 30, 1998. Because of
the environment, which lead to the Bankruptcy Petition, there is substantial
doubt about the Company's ability to continue as a going concern.
In analyzing the Plan, the potential benefits of the ITB Option, the Company's
cash flow requirements, and various other factors, the Company has determined
that it may be advantageous to negotiate with NPD and Nunzio P. DeSantis for an
agreement to "unwind" the ITB Option and associated transactions. (see Notes 6
and 7). This may result in the following:
Return to the Company of the $2.0 million deposited in the cash collateral
escrow account in connection with the Brennan bankruptcy to secure the
Debtor's guarantee obligation, and a release of the Debtor from the
Brennan/NPD guarantee;
Termination of the $2.3 million note payable by the Company to NPD for the
option to acquire 100 percent of the ITB shares owned by NPD, and a
negotiated return (complete or partial) of the $200,000 cash paid to NPD
for the ITB option; and repayment by NPD of the $3.0 million which the
Company lent to NPD, plus some negotiated amount of interest. The Company
anticipates that NPD will request a discount for payment of the note prior
to its maturity.
F-34
<PAGE>
In addition, the Company would release any and all security interests,
collateral, pledges and other rights in and to the ITB Stock, or to any
property or rights of NPD, and the Company would no longer have any rights
with regard to the ITB shares.
Such an "unwinding" is contingent upon negotiations and agreements with NPD
and with Nunzio P. DeSantis individually. The Company anticipates that
negotiations would include requests for releases by NPD and Nunzio P.
DeSantis, in addition to negotiations concerning the present value of the
notes, possible discounts for the notes, the declining value of the option,
and other factors. (see Note 18 below regarding a subsequent event).
(18) SUBSEQUENT EVENT
On June 5, 1998, the Company, as debtor-in-possession, filed an adversary
claim with the Bankruptcy Court against NPD: AutoLend Group Inc. vs. NPD
Inc., Adversary No. 98-1136M (hereinafter, the "NPD Claim"). The NPD Claim
seeks, among other things, the return to the Company of the $2.0 million
Escrow deposit (plus interest), the immediate repayment to the Company by
NPD of the $3.0 million NPD Loan (plus interest), and the cancellation of
the Option and corresponding cancellation of the Company's obligations
under the NPD Note Payable and return of the $0.2 million cash down payment
on the Option (see Notes 6 and 7).
On July 2, 1998, all the members of ITB's Board of Directors, and various
other parties (including NPD) involved in litigation over ITB, jointly
executed and filed with the Court of Chancery in the State of Delaware (the
"Chancery Court") a Stipulation and Agreement of Compromise, Settlement and
Release, C.A. No. 15919, which was entered into subject to the Chancery
Court's (and certain other creditors specified therein) approval
(hereinafter, the "Delaware ITB Agreement"). The Delaware ITB Agreement
addresses many issues outside the scope of the Company's concern; its
provisions relevant to the Company include the return of the $2.0 million
Escrow deposit (plus interest) to the Company, the exchange of mutual
releases, and the purchase by ITB from NPD of the ITB Shares with a
combination of cash and ITB's assumption of NPD's note payable to the
Brennan estate. The Delaware ITB Agreement is contingent upon approval by
various parties including the Bankruptcy Court and the Chancery Court, and
further requires the Company to assume ITB's office lease in Albuquerque,
New Mexico. This lease requires an annual obligation of approximately
$108,000 and expires in 2002. It is this space, which is where the Company
presently subleases its offices. This agreement cancels all options
relating to the ITB Shares, including the ITB Option (see Note 7). A
hearing on the Delaware ITB Agreement is set for August 25, 1998.
On July 10, 1998, the Company, as a debtor-in-possession, filed with the
Bankruptcy Court the Debtor's Motion to Approve Compromise (ITB
Transaction), No. 11-97-15499-MA (hereinafter, the "ITB Settlement"). This
ITB Settlement provides for, among other things, the Bankruptcy Court's
approval of the Delaware ITB Agreement,
F-35
<PAGE>
and subject to the final approval of the Delaware ITB Agreement by all
necessary parties (including the Chancery Court), the ITB Settlement
provides for the resolution of the NPD Claim described above. Specifically,
the ITB Settlement would result in the return of the $2.0 million Escrow
deposit (plus interest) to the Company, the cancellation of the ITB Option
and corresponding Company obligation under the NPD Note Payable, the
prepayment to the Company by NPD of $2.3 million of the $3.0 million NPD
Loan, and the contingent payment to the Company by NPD of a portion of the
additional funds which may be received by NPD (or its affiliates) in
connection with the possible sale of ITB's Las Vegas real estate (which
contingent funds could, in combination with the $2.3 million, exceed the
$3.0 million NPD Loan owed to the Company). The deadline for receipt of
objections to the ITB Settlement is July 30, 1998.
If the ITB Settlement is approved by the Bankruptcy Court and all of the
remaining approvals for the Delaware ITB Agreement are received, including
approval by the Chancery Court, the Company will receive cash of $4.3
million plus interest (which is presently anticipated to be received at the
end of September 1998, although no assurance can be given to such date),
and will have its obligation under the NPD Note Payable canceled, and will
have the possibility of receipt of certain additional contingent
consideration. There can be no assurances that such approvals from the
Chancery Court, the Bankruptcy Court, and certain creditors named in the
Delaware ITB Agreement can be obtained. If the ITB Settlement and the
Delaware ITB Agreement are not approved, the receipt by the Company of
comparable amounts of cash cannot be assured, and whatever cash is
ultimately received by the Company would almost certainly take
significantly longer to receive.
F-36
<PAGE>
SCHEDULE II
AUTOLEND GROUP, INC., AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
March 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
Balance at Charged to Amount on
Beginning Costs and Balance
of Period Expenses Sheet
-----------------------------------------------
Description
- -----------
<S> <C> <C> <C>
Year ended March 31, 1998: $ 600,000 $ - $ 600,000
Intangible assets - accumulated amortization 2,708,278 - 2,708,278
Goodwill - accumulated amortization 3,519,501 56,443 3,575,944
Debt issuance costs - accumulated amortization
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
</TABLE>
S-1
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ANNUAL
REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 769,736
<SECURITIES> 250,000
<RECEIVABLES> 461,592
<ALLOWANCES> 187,669
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 108,225
<DEPRECIATION> 68,614
<TOTAL-ASSETS> 7,639,708
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
116
<COMMON> 12,158
<OTHER-SE> (3,450,241)
<TOTAL-LIABILITY-AND-EQUITY> 7,639,708
<SALES> 0
<TOTAL-REVENUES> 656,725
<CGS> 0
<TOTAL-COSTS> 2,166,761
<OTHER-EXPENSES> 6,680,567
<LOSS-PROVISION> 250,772
<INTEREST-EXPENSE> 934,667
<INCOME-PRETAX> (8,683,333)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,683,333)
<DISCONTINUED> 0
<EXTRAORDINARY> 3,171,524
<CHANGES> 0
<NET-INCOME> (5,511,809)
<EPS-PRIMARY> (0.91)
<EPS-DILUTED> (0.91)
</TABLE>
