<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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.
--------------------
(Exact name of registrant as specified in its charter)
Delaware 22-3137244
-------- ----------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
600 Central SW, Third Floor, Albuquerque, New Mexico 87102
-----------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(505) 247-9429
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
--- ---
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
--- ---
Applicable only to corporate issuers:
The number of shares outstanding of the Registrant's common stock was 6,079,530
at October 26, 1998.
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<PAGE>
AUTOLEND GROUP, INC., AND SUBSIDIARIES
TABLE OF CONTENTS
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements................................................ 4
Consolidated Balance Sheets as of September 30, 1998, and March 31, 1998.. 4
Consolidated Statements of Operations for the three- and six-month
periods ended September 30, 1998, and 1997.............................. 5
Consolidated Statements of Cash Flows for the six-month period ended
September 30, 1998, and 1997............................................ 6
Notes to Consolidated Financial Statements................................ 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................... 19
Item 3. Quantitative and Qualitative Disclosure about Market Risk........... 22
PART II - OTHER INFORMATION
Item 1. Legal Proceedings................................................... 23
Item 2. Changes in Securities and Use of Proceeds........................... 23
Item 3. Defaults Upon Senior Securities..................................... 23
Item 4. Submission of Matters to a Vote of Security Holders................. 23
Item 5. Other Information................................................... 23
Item 6. Exhibits and Reports on Form 8-K.................................... 24
SIGNATURES.................................................................. 25
2
<PAGE>
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 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.
3
<PAGE>
AUTOLEND GROUP, INC., AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 MARCH 31, 1998
------------------ ------------------
(unaudited) (audited)
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 1,490,075 $ 769,736
Accounts receivable - matured policies 878,740 --
Prepaid expenses -- 167,381
Installment contracts receivable-gross $ 218,773 $ 461,592
Collateral owned-gross -- 22,286
Allowance for credit losses (114,401) (187,669)
------------------ ------------------
Installment contracts receivable-net $ 104,372 $ 296,209
ITB Option, less allowance of $200,000 at September 30, 1998, and March 31, 1998 425,000 425,000
Escrow deposit 2,000,000 2,000,000
Interest on escrow deposit 114,018 62,060
Note receivable - NPD, Inc. 3,035,292 3,035,292
Interest receivable on note receivable - NPD, Inc. 370,980 219,215
Purchased insurance policies at estimated market value; face value of $875,920
at September 30, 1998 and $1,879,420 at March 31, 1998 133,740 329,193
Securities in IAP less allowance of $390,000 at March 31, 1998 -- 250,000
Fixed assets, less accumulated depreciation of $72,376 at September 30, 1998,
and $68,614 at March 31, 1998 24,764 39,611
Other 46,011 46,011
------------------ ------------------
Total assets $ 8,622,992 $ 7,639,708
================== ==================
LIABILITIES:
Liabilities subject to compromise:
Accounts payable $ 97,079 $ 55,276
Accrued interest expense on debentures (pre-petition) 1,372,819 1,372,819
Convertible subordinated debentures at face value 7,225,000 7,225,000
Allowance for estimated legal fees and settlement costs 1,434,944 1,434,944
------------------ ------------------
Total liabilities subject to compromise 10,129,842 10,088,039
------------------ ------------------
Liabilities not subject to compromise:
Accounts payable 44,759 56,355
Contingent liabilities - reorganization 290,430 48,872
Accrued liabilities 64,498 69,582
Accrued interest expense on debentures (post-petition) 707,347 364,160
Note payable - NPD, Inc. 425,000 425,000
Accrued interest expense - NPD, Inc. 46,917 25,667
------------------ ------------------
Total liabilities not subject to compromise 1,578,951 989,636
------------------ ------------------
Total liabilities $ 11,708,793 $ 11,077,675
------------------ ------------------
STOCKHOLDERS' DEFICIT:
Preferred stock, $.002 par value. Authorized 5,000,000 shares;
57,800 issued and outstanding at September 30, 1998, and March 31, 1998 $ 116 $ 116
Common stock, $.002 par value. Authorized 40,000,000 shares;
issued 6,079,530 shares at September 30, 1998, and March 31, 1998 12,158 12,158
Additional paid-in capital 20,459,946 20,459,946
Unrealized holding loss (200,000) (590,000)
Accumulated deficit (23,358,021) (23,320,187)
------------------ ------------------
Total stockholders' deficit $ (3,085,801) $ (3,437,967)
------------------ ------------------
Total liabilities and stockholders' deficit $ 8,622,992 $ 7,639,708
================== ==================
</TABLE>
See accompanying notes to consolidated financial statements, which are an
integral part of these financial statements
4
<PAGE>
AUTOLEND GROUP, INC., AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTH PERIOD ENDED SIX MONTH PERIOD ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------ ------------ ------------ ------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Finance charges on installment contracts $ 35,006 $ 193,981 $ 77,311 $ 410,594
Revenues from matured insurance policies 983,228 -- 988,228 --
------------ ------------ ------------ ------------
Gross revenues 1,018,234 193,981 1,065,539 410,594
Cost of matured insurance policies (692,400) -- (692,400) --
------------ ------------ ------------ ------------
Total net revenues $ 325,834 $ 193,981 $ 373,139 $ 410,594
General and administrative expenses (380,647) (876,653) (766,148) (1,424,917)
Provision for credit gains (losses), net of recoveries 117,000 -- 219,000 --
------------ ------------ ------------ ------------
Operating income (loss) $ 62,187 $ (682,672) $ (174,009) $ (1,014,323)
------------ ------------ ------------ ------------
Other income (expense):
Interest income on cash and cash equivalents $ 30,359 $ 22,523 $ 60,571 $ 139,657
NPD, Inc., note receivable interest income accrued 75,882 67,229 151,764 67,229
Debentures interest expense accrued (171,593) (187,823) (343,187) (538,727)
NPD, Inc., note payable interest expense accrued (10,625) (19,167) (21,250) (19,167)
Other income (expense) 41,518 (13,540) 41,518 (27,086)
Write-off of fixed assets -- -- (4,570) --
Insurance policy write down recapture 495,683 -- 495,683 --
Debenture conversion charge -- -- -- (6,261,051)
------------ ------------ ------------ ------------
Total net other income (expense) $ 461,224 $ (130,778) $ 380,529 $ (6,639,145)
------------ ------------ ------------ ------------
Income (loss) before income taxes, reorganization costs,
and extraordinary item $ 523,411 $ (813,450) $ 206,520 $ (7,653,468)
Provision for income tax - federal -- (40,000) -- (40,000)
------------ ------------ ------------ ------------
Income (loss) before reorganization costs and extraordinary item $ 523,411 $ (853,450) $ 206,520 $ (7,693,468)
Reorganization costs incurred after Chapter 11 proceedings (117,210) -- (244,354) --
------------ ------------ ------------ ------------
Income (loss) before extraordinary item $ 406,201 $ (853,450) $ (37,834) $ (7,693,468)
Extraordinary item:
Gain on early extinguishment of debt -- 2,240,276 -- 3,171,524
------------ ------------ ------------ ------------
Net income (loss) $ 406,201 $ 1,386,826 $ (37,834) $ (4,521,944)
============ ============ ============ ============
Per Share:
Operating income (loss) $ 0.01 $ (0.11) $ (0.03) $ (0.17)
Total net other income (expense) 0.08 (0.02) 0.06 (1.10)
------------ ------------ ------------ ------------
Income (loss) before income taxes, reorganization costs,
and extraordinary item $ 0.09 $ (0.13) $ 0.03 $ (1.27)
Provision for income tax - federal -- (0.01) -- (0.01)
------------ ------------ ------------ ------------
Income (loss) before reorganization costs and extraordinary item $ 0.09 $ (0.14) $ 0.03 $ (1.28)
Reorganization costs incurred after Chapter 11 proceedings (0.02) -- (0.04) --
------------ ------------ ------------ ------------
Income (loss) before extraordinary item $ 0.07 $ (0.14) $ (0.01) $ (1.28)
Extraordinary item:
Gain on early extinguishment of debt -- 0.37 -- 0.53
------------ ------------ ------------ ------------
Net income (loss) $ 0.07 $ 0.23 $ (0.01) $ (0.75)
============ ============ ============ ============
Weighted average number of common and common
equivalent shares outstanding 6,079,530 6,079,530 6,079,530 5,999,252
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements, which are an
integral part of these financial statements.
5
<PAGE>
AUTOLEND GROUP, INC., AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTH PERIOD ENDED
SEPTEMBER 30,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Cash flow from operating activities:
Net loss $ (37,834) $ (4,521,944)
Adjustments to reconcile net loss to net cash flow from operating activities
Amortization of intangible assets and debt issuance costs -- 56,443
Depreciation expense 10,277 12,452
Gain on early extinguishment of debt, net of amortization -- (3,171,524)
Charge for debenture conversion, net of amortization -- 6,261,051
Realized loss on sale of IAP securities 25,440
Provision for credit (gains) losses, net of recoveries (219,000) --
Write-off of fixed assets 4,570 --
Recapture of insurance policy write down (495,683)
Changes in assets and liabilities:
(Increase) decrease in assets:
Accounts receivable matured policies (878,740)
Prepaid expenses 167,381 --
Installment contracts receivable 409,573 1,247,287
Purchased insurance policies 692,400
Interest on escrow deposit (51,958) --
Interest receivable on note receivable - NPD, Inc. (151,765) (67,229)
Other assets -- (245,407)
Increase (decrease) in liabilities:
Accounts payable and accrued liabilities 266,681 (1,003,411)
Accrued interest expense 364,437 537,016
------------ ------------
Cash provided (used) by operating activities $ 105,779 $ (895,266)
------------ ------------
Cash flow from investing activities:
IAP securities $ 614,560 $ --
Funding of escrow -- (2,000,000)
Loan to NPD -- (3,035,292)
Purchase ITB stock option -- (200,000)
------------ ------------
Cash provided (used) by investing activities $ 614,560 $ (5,235,292)
------------ ------------
Cash flow from financing activities:
Early extinguishment of debt $ -- $ (5,692,079)
------------ ------------
Cash provided (used) in financing activities -- (5,692,079)
------------ ------------
Net increase(decrease) in cash and cash equivalents $ 720,339 $(11,822,637)
Cash and cash equivalents at beginning of period 769,736 12,399,932
------------ ------------
Cash and cash equivalents at end of period $ 1,490,075 $ 577,295
============ ============
</TABLE>
See accompanying notes to consolidated financial statements, which are an
integral part of these financial statements.
6
<PAGE>
AUTOLEND GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of AutoLend
Group, Inc., and its wholly owned subsidiaries (collectively, the "Company"
or "AutoLend") have been prepared in accordance with generally accepted
accounting principles for interim financial information in accordance with
the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all the information and footnotes required
by generally accepted accounting principles for complete financial
statements. However, except as disclosed herein, there has been no
material change in the information included in the Company's Annual Report
on Form 10-K for the year ended March 31, 1998. The statements should be
read in conjunction with the consolidated financial statements contained in
the Company's Annual Report on Form 10-K for the year ended March 31, 1998.
The information furnished, in the opinion of management, reflects all
adjustments (consisting of normal recurring accruals), considered necessary
to present fairly the results of operations of the Company for the six-
month period ended September 30, 1998. The operating results for the six
months ended September 30, 1998, are not necessarily indicative of results
which may be expected for the year ending March 31, 1999.
The financial statements have also 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. (See Note 1.(c) below for
description and status of the bankruptcy process.) The Statement does not
require that comparative balances be reclassified to conform to current
year balances stated under SOP 90-7. As such, prior year's balances are
not reclassified.
The Company's unaudited consolidated financial statements include the
accounts of AutoLend Group, Inc., and its wholly owned subsidiaries,
AutoLend Corporation, LB NM, Inc., and American Life Resources Group, Inc.
No petition under the United States Bankruptcy Code has been filed for the
subsidiaries.
(b) RECENT ACCOUNTING PRONOUNCEMENTS
The Company adopted Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income ("SFAS 130"). SFAS 130 requires that all
components of comprehensive income and total comprehensive income be
reported on one of the following: a statement of income and comprehensive
income, a statement of comprehensive income, or a statement of
stockholders' equity. Comprehensive income is comprised of net income and
all changes to stockholders' equity, except those due to investments by
owners (changes in paid in capital) and distributions to owners
(dividends). (See Note 11)
7
<PAGE>
AUTOLEND GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company adopted Statement of Financial Accounting Standards No. 129,
Disclosure of Information about Capital Structure ("SFAS 129"). SFAS 129
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 has no effect on the Company as it currently discloses the
information specified.
The Company adopted Statement of Financial Accounting Standards No. 131,
Disclosure about Segments of a Business Enterprise ("SFAS 131"). 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. Adoption of SFAS
129 has no effect on the Company's current disclosures.
(c) GOING CONCERN
The accompanying unaudited consolidated financial statements 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 %
Convertible Subordinated Debentures (the "Debentures") (see Notes 2 and 7
below), the Company filed for reorganization on September 22, 1997 (the
"Voluntary Bankruptcy Proceeding") 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. See
last paragraph below in this Note 1.(c) for present status of the Voluntary
Bankruptcy Proceeding.
The Company maintains a residual portfolio of sub-prime consumer used-car
loans ("Installment Contracts Receivable") through its wholly owned
subsidiary, AutoLend Corporation. The Company commenced purchasing these
loans in May 1994, and while under prior management, ceased purchasing them
in December 1995. Loan loss provisions for this business from its
inception through March 1997 totaled $13.9 million (which amount does not
include salaries, rent, and other operating expenses associated with the
car loan business). The results of this business were the primary reasons
the Company developed a negative net equity, which precluded the Company
from being able to generate the necessary cash flow to service its debt
obligations (under the terms of the Debentures), which in turn forced the
Company to file for
8
<PAGE>
AUTOLEND GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
bankruptcy. Financial results of this residual portfolio from April 1997 to
the present have, in total, been marginally positive.
The Company's two other wholly owned subsidiaries, LB NM, Inc., and
American Life Resources Group, Inc., maintain a residual 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 Policies in September 1994 and
does not intend to recommence those activities.
AutoLend IAP, Inc., a former wholly owned subsidiary ("IAP"), provided
short-term financing to selected used-car dealers for purchases of used
automobiles at certain regional auctions in the United States. IAP was
started in March 1995 and was unprofitable. On September 18, 1996, when
new management was installed, the Company sold IAP.
Because the Company's liabilities have exceeded its assets since March
1996, and the Company has been in the 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 (the "Plan of Reorganization") and a Disclosure Statement
(the "Disclosure Statement," and together with the Plan of Reorganization,
the "Plan"), that contain the Company's proposal for resolving the
bankruptcy (see Notes 2 and 3 below). The Disclosure Statement was
approved by the Bankruptcy Court on September 28, 1998, and the entire Plan
was mailed to creditors and other interest holders on October 5, 1998.
Ballots are due to be returned by December 4, 1998, and the final
Confirmation Hearing is scheduled to take place on December 15 and 16,
1998. 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 its common stock,
$.002 par value per share (the "Common Stock") and 14% cumulative
convertible preferred stock, $.002 par value per share (the "Preferred
Stock") and its Class A and B Warrants, and payments to creditors for
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.
(2) VOLUNTARY BANKRUPTCY REORGANIZATION FILING
At the end of March 1994, the Company's net equity was a positive $2.7
million. Shortly thereafter, the Company's prior management launched the
sub-prime consumer car loan business. By December 1995, net equity was
down to $0.7 million, and cumulative losses (since March 1994) before the
impact of the redemption of Debentures totaled $12.l million. In late
December 1995, Nunzio DeSantis, the Company's then-largest stockholder (who
is now the Company's Chief Executive Officer, but was not at that time an
officer, employee, or director), commenced legal actions against the then-
current management. This resulted in a Stipulation of Settlement that was
approved, after due notice, by the Delaware Chancery Court, and installed
new management for the Company effective mid-September 1996. However, by
about this time, net equity had already deteriorated to a negative $6.9
million. In the first six months after new
9
<PAGE>
AUTOLEND GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
management took control, additional car-loan loss expenses and asset write-
downs were made against the former operations of the Company, further
deteriorating net equity, which reached a low point of a negative $11.9
million in March 1997.
New management took immediate and substantive steps to turn the Company
around, including the Debenture Exchange Offer (see Note 7 below), the
repurchase of some Debentures at a discount, the pursuit of a new business
(see Note 4 below), and the cutting of overhead costs (which were reduced
by 43% in new management's first year, resulting in reductions of
approximately $3.3 million in general and administrative expenses for the
twelve months ended September 1997, as compared to the prior twelve
months). These efforts resulted in the reduction of the net equity deficit
to below a negative $3 million (which was an improvement of over $9 million
from the low point), but the improvements were nonetheless not enough in
the twelve months that new management had between taking control in
September 1996 and the Debenture repayment due date of September 1997.
In that twelve months between taking control in September 1996 and the
Debenture repayment due date of September 1997, new management had
successfully eliminated two-thirds of the Debenture debt that had been
outstanding when new management took control in September 1996. However on
September 19, 1997, the remaining principal balance (plus all accrued
interest) of the Debentures became due and payable, requiring a cash
disbursement on that date of approximately $8.6 million, which was still in
excess of the Company's capabilities. Therefore, on September 22, 1997,
the Company filed a voluntary petition for reorganization under Chapter 11
of the U.S. Bankruptcy Code in the Bankruptcy Court. Thus, in addition to
its normal SEC reporting requirements, the Company also files required
reports and disclosures with the Bankruptcy Court, including a monthly
operating statement. Also see Note 1 above.
(3) REORGANIZATION PLAN REGARDING FUTURE BUSINESS
In conjunction with the Voluntary Bankruptcy Proceeding, 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 outlining its plans for new business. The Plan has
been amended and expanded in response to input from external parties in the
bankruptcy process.
The success of the Plan is highly dependent on the Company's acquisition
and/or development of a new business (which consists primarily of acquiring
and operating gaming devices and machines for certain non-profit
organizations in New Mexico), and the resolution of the ITB/NPD
transactions (see Notes 4, 5, and 6 below). The Plan has been distributed
to the Company's creditors for balloting, and a hearing to confirm the Plan
of Reorganization is scheduled to be held by the Bankruptcy Court on
December 15 and 16, 1998.
10
<PAGE>
AUTOLEND GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(4) THE PURSUIT OF A CONTROLLING INTEREST IN ITB
In connection with the pursuit of a new business, shortly after new
management assumed control (see Note 2 above), the Company entered into
negotiations in October 1996 to directly purchase an approximately 25%
equity interest (the "ITB Shares") in International Thoroughbred Breeders,
Inc. ("ITB"), in a private sale from ITB's former chairman, Robert E.
Brennan ("Brennan"). At that time, ITB was listed on the American Stock
Exchange. It owns and operates Garden State Park and Freehold Raceway in
New Jersey, and owns the former El Rancho Casino property in Las Vegas,
Nevada (also see Note 5 below). ITB is much larger than the Company, and
has a net equity of approximately $60 million, annual revenues of
approximately $68 million, and approximately 625 employees subject to
seasonal variations (according to ITB's most recent Form 10-Q and Form 10-
K).
However, because of the involuntary bankruptcy petition filed against the
Company, which was dismissed effective April 7, 1997 (the "Involuntary
Petition"), the Company was prevented from consummating the purchase. As
an alternative to the Company's acquisition of the ITB Shares, Nunzio
DeSantis (the Company's Chairman and Chief Executive Officer) 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 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 (the "Escrow Deposit") 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 Petition, and in
accordance with its agreement, the Company executed and delivered its
guarantee as aforesaid, and made the Escrow Deposit. At September 30,
1998, the funds held in the Escrow Deposit by a third party were invested
in U.S. Treasury obligations. This Escrow Deposit is now subject to recent
settlement actions as described in Note 6 below.
On July 10, 1997, a loan of $3.0 million was made by the Company to NPD
(the "NPD Loan"). The NPD Loan accrues interest at 10% per annum, and is
payable in full, together with all accrued interest, on July 9, 1999. The
NPD Loan is secured by a pledge by NPD of the ITB Shares owned by it,
subject to a prior lien and pledge by NPD to Brennan's estate 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 NPD 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. The NPD Loan
is now subject to recent settlement actions as described in Note 6 below.
11
<PAGE>
AUTOLEND GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(5) THE ITB OPTION
As a result of the Involuntary Petition filed against the Company, the
Company was prevented from entering into a negotiated agreement which would
have enabled it to purchase the ITB Shares; consequently, NPD was formed
and consummated the purchase of the ITB Shares (see Note 4 above). After
the dismissal of the Involuntary 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 principle with NPD to finally consummate an option purchase.
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 the option owned by the Company and the option owned by
Mr. DeSantis are subject to a one-year option previously granted by NPD to
an unaffiliated third party in January 1997. This option gave this person
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 ITB Shares originally purchased by NPD at a minimum,
to 100 percent of these shares if no other options are exercised.
The Company paid $200,000 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 principal amount of the note 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 to
purchase under the terms of the Option. Therefore, at September 30, 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 on the Company's balance sheet. However, the balance of the debt
obligation represents a contingent obligation of the Company if the Company
were to have the ability to acquire all ITB Shares originally held by NPD.
The NPD Note Payable is now subject to recent settlement actions as
described in Note 6 below.
The Option stipulates that it may not be exercised by a company in
bankruptcy. The Option has been extended for an additional year by NPD (at
no cost to the Company), and currently expires on August 29, 1999. In the
event that the Company was able to exercise the Option, the Company would
purchase the ITB Shares from NPD at the same price paid by NPD, which was
$4 per share. However, it is highly unlikely that the Company would
exercise the Option unless the "strike price" exceeded $4 per share, and
other issues were resolved. ITB common stock has been suspended from
regular trading since October 13 1997, when it last traded at $3.50 per
share. On August 7, 1998, ITB was delisted by the American Stock Exchange.
ITB stock is presently listed for trading on the NQB Pink Sheets, and has
approximately three market makers, although no trading market has yet
developed. ITB is presently attempting to get its stock quoted on the OTC
Bulletin Board. It is unclear if the stock will resume widespread trading
providing liquidity before the expiration of the Option, and therefore
establish a relevant current market
12
<PAGE>
AUTOLEND GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
price. Furthermore, any exercise of the Option would now be subject to
recent settlement actions as described in Note 6 below.
(6) 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 (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.
This NPD Claim is now subject to recent settlement actions as described in
the following two paragraphs.
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. (According to NPD's financial statements 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). 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 was contingent upon
approval by various parties (including the Bankruptcy Court, the Chancery
Court, and certain creditors named in the Delaware ITB Agreement), and
further requires the Company to assume ITB's office lease in Albuquerque
(where the Company presently subleases its offices), and cancels all
options relating to the ITB Shares, including the Option purchased by the
Company. A hearing on the Delaware ITB Agreement was held on August 25,
1998 and a Chancery Court order approving the Agreement was signed by the
Judge October 6, 1998, which order has a 30-day appeal period. The
Delaware ITB Agreement is currently subject to the expiration of the 30-day
appeal period, the execution of an agreement by ITB with the Brennan Estate
bankruptcy trustee (which is in turn subject to the approval of the US
Bankruptcy Court for the State of New Jersey, which has jurisdiction over
the Brennan bankruptcy estate), and ITB's successful negotiation of an
agreement with its current lender or the arrangement of alternative
financing.
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 (the "ITB Settlement"). The 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
13
<PAGE>
AUTOLEND GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Agreement by all necessary parties, the ITB Settlement provides for the
resolution of the NPD Claim. 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 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). Two objections to the ITB Settlement were filed. On September 10,
1998, a slightly modified form of the motion was approved by the Bankruptcy
Court.
If all remaining requirements for the consummation of the Delaware ITB
Agreement are received (including approval by certain creditors named in
the Delaware ITB Agreement), the Company will receive $4.3 million plus
interest (which is presently anticipated to be received in cash in December
1998, although no assurance can be given to that 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 certain creditors named
in the Delaware ITB Agreement can be obtained. If the Delaware ITB
Agreement is not consummated, the Company's receipt 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.
(7) DEBENTURES AND EXCHANGE OFFER
Following the substantial losses incurred in the consumer used-car finance
business, and the decision by prior management to terminate that business,
and the Company's deterioration to a position of negative net worth (after
which point there was a change in management), the Company's viability as a
going concern became dependent upon the restructuring of its obligations
and asset base (and ultimately, reaching a point of profitability). 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 its offer to exchange Common Stock and Preferred Stock for its
outstanding Debentures (the "Exchange Offer"). After the dismissal of the
Involuntary Petition, on April 8, 1997, the Exchange Offer expired, and the
Company thereby 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
principal amount of Debentures. In addition, accrued interest on the
Debentures, totaling $1.1 million, was canceled.
All outstanding principal became due on the remaining Debentures on
September 19, 1997; however, this payment was not made (see Notes 1 and 2
above). The principal balance of the Debentures and interest accrued
thereon at September 30, 1998, was $7.2 million and $2.1 million,
respectively.
14
<PAGE>
AUTOLEND GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(8) PREFERRED STOCK
In connection with the Exchange Offer (see Note 7 above), effective April
8, 1997, the Company issued 57,800 shares of newly created Preferred Stock
with a stated value of $100 per share. Dividends are at an annual rate of
14 percent on the stated value, payable quarterly, at the option of the
Company in either cash, Common Stock, Preferred Stock, or a combination
thereof. Dividends must be paid on Preferred Stock before any dividends
can be paid on Common Stock.
At September 30, 1998, the Company had dividends in arrears on its
Preferred Stock. In the unlikely event the Company were to elect to pay
cash dividends, the amount owed at September 30, 1998, would have been
approximately $1.2 million in total, or $21 per share of Preferred Stock.
However, in lieu thereof, the Company may choose to pay such dividends by
issuing additional shares of Preferred Stock and/or Common Stock.
(9) NET OPERATING LOSS CARRYFORWARDS
The Company has available at September 30, 1998, unused capital loss
carryforwards and operating loss carryforwards that may provide future tax
benefits, which expire as follows:
Year of Unused Capital Loss Unused Net Operating Loss
Expiration Carryforwards Carryforwards
-------------- ------------------- -------------------------
2001 $ 524,000 $ -
2010 - 448,500
2011 - 14,500
2012 - 14,020,000
2013 - 1,046,000
------------------- -------------------------
Total $ 524,000 $ 15,529,000
=================== =========================
Capital loss carryforwards arise due to losses incurred on the disposal of
capital assets, and may be used to offset future capital gains associated
with the disposal of capital assets (but may not be used to offset ordinary
income). Net operating loss carryforwards are the result of prior (and
current) years' operations, which had recorded a net loss in terms of
income tax computations. In general, operating loss carryforwards can be
used to offset future operating profits, thus negating the necessity to pay
corresponding future income taxes (until the loss carryforwards become used
up or expire). Any such future operating profits (which might realize
these tax benefits) could be derived internally, or could be derived from
acquiring additional assets, or from the purchase of another qualified
business entity through the acquisition of its stock. If there is a
substantial change in ownership involved, then tax benefits could be
reduced. Other limiting factors may also apply. Capital loss
carryforwards and net operating loss carryforwards are collectively
referred to herein as the "Loss Carryforwards."
After consultation with its lawyers and accountants, the Company's
management believes that, if the Plan of Reorganization is confirmed and
approved in substantially its present form, the Loss Carryforwards would be
reduced by between $1.4 million and $4.0 million in the bankruptcy
15
<PAGE>
AUTOLEND GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
process, and the remainder would be intact and usable after bankruptcy. At
a typical corporate statutory tax rate of 34%, these remaining losses can,
in a valid situation, result in the cancellation of a requirement to pay
from $3.7 million to $4.6 million in federal income taxes, either
immediately in one year, or spread out over a number of years.
Thus, management believes that, in a properly structured corporate
transaction, the Loss Carryforwards represent a potentially realizable
benefit to the Company, with a potential value of approximately the $4
million in tax savings that they represent. Any such future value would be
permanently destroyed if the Company's Bankruptcy Proceedings were
converted to a Chapter 7 liquidation proceeding.
(10) SECURITIES AND EARLY REDEMPTION OF IAP
Before the commencement of the Voluntary Bankruptcy Proceedings (see Notes
1 and 2 above), the Company's management had commenced negotiations with
Auction Finance Group, Inc. ("AFG") regarding the possible early redemption
of the Company's IAP securities. AFG is operated by former management of
the Company, which purchased the Company's former IAP subsidiary in
September 1996. In addition to receiving cash at closing for the full
value of IAP's assets, the Company also received securities with a face
value of $1.0 million. The securities provide for a single cash payment at
the end of three years (i.e., in September 1999) for the full face value
plus accrued interest, or, failing the making of such payment, the
conversion of the securities into common stock of IAP representing 51% of
IAP's total common stock after such issuance.
IAP was started in March 1995, was unprofitable while it was part of the
Company, and according to AFG's representations (including audited
financial statements), IAP remains unprofitable and has a negative net
equity. If IAP were unable to make the cash payment in September 1999, it
would then be unlikely that a conversion of its IAP securities into a 51%
ownership interest would yield the Company substantial value or cash.
In light of the Company's need to maximize and expedite the receipt of cash
for its creditors, the Company explored the possibility of an early
redemption of its IAP securities by giving some discount as consideration
for an immediate cash payment from AFG. An amount of $600,000 plus some
partial interest was offered by AFG, and on July 17, 1998, the Company,
through its bankruptcy counsel, received a letter indicating that such
funds were on deposit and ready, pending approval of the transaction by the
Bankruptcy Court. On the same day, the Company filed a motion with the
Bankruptcy Court [the Debtor's Motion to Approve Compromise (IAP Note)] to
approve the transaction. On July 20, 1998, a Notice of Filing was filed
with the Court. On August 21, 1998, the Court approved the Motion. On
September 30, 1998 the IAP redemption was consummated, for which $614,560
in cash was received by the Company.
No securities were classified as trading or held-to-maturity at September
30, 1998, or 1997. Investments held as available-for-sale securities
(maturing within one to five years) are summarized as follows at September
30:
16
<PAGE>
AUTOLEND GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
-------------------------- --------------------------
Corporate Corporate
Stock Option Debt Stock Option Debt
(ITB) (IAP Stock) (ITB) (IAP Stock)
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Fair market value, beginning of period $ 425,000 $ - $ 425,000 $1,000,000
Permanent impairment - - - (200,000)
------------ ----------- ------------ -----------
Fair market value, end of period $ 425,000 $ - $ 425,000 $ 800,000
============ =========== ============ ===========
</TABLE>
There was a $25,440 realized loss on the sale of securities during the six
months ended September 30, 1998.
(11) COMPREHENSIVE INCOME
As referenced in Note 1(b) above, Statement of Financial Accounting
Standards 130, Comprehensive Income (or "SFAS 130"), has recently become
required to be set forth in the Company's consolidated financial
statements. A primary intent of SFAS 130 is to provide a supplemental
examination of income, showing Net Income adjusted by those transactions
and events which were not reflected in Net Income that occurred during the
period, and that affected equity of the Company from non-owner sources.
Typically, comprehensive income would include equity adjustments for
unrealized gains and losses on available-for-sale securities, minimum
pension liabilities adjustments, and foreign currency transaction
adjustments. On this basis, for the six months ended September 30, 1998
and 1997, the Company's Comprehensive Income is the same as the net loss as
reported by the consolidated statements of operations.
(12) CONTINGENCIES
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. The Company had admitted that it was obligated
to the Plaintiff for $656,542 pursuant to a settlement agreement entered
into in June 1995, and which the Company alleges has since been breached by
the Plaintiff. On December 30, 1997, the Plaintiff filed a claim for
approximately $1.7 million, plus legal fees and punitive damages, with
17
<PAGE>
AUTOLEND GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
the Bankruptcy Court. On April 15, 1998, this suit was turned over to the
jurisdiction of the Bankruptcy Court. A scheduling conference on September
9, 1998, has established December 18, 1998, as the discovery completion
deadline; and January 15, 1999, was established as the deadline for
submission of exhibits and documentary evidence. The trial is scheduled for
January 20, 1999. The Company has accrued an amount for purposes of
financial conservatism, but disputes the notion that such an amount is
owed. The Company disputes this claim and will defend against any claim by
the Plaintiff as part of the Company's bankruptcy procedure. However, the
Company is currently unable to predict with any degree of certainty the
final resolution of this matter.
ITB Settlement. The Bankruptcy Court has approved a resolution of the ITB
and NPD transactions. However, this Motion is dependent upon external
legal proceedings in Delaware involving ITB and various third parties. If
the terms of the Motion are ultimately consummated, then substantial cash
will be brought back into the Company. See Note 6 above.
18
<PAGE>
AUTOLEND GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Results of Operations: Six-month periods ended September 30, 1998, and
1997
In summary, the Company recorded a net loss of approximately $38,000 for
the six month period ended September 30, 1998. Contributing to the loss
was approximately $0.3 million of non-cash accruals for various interest
expenses, which would be resolved under the Company's proposed Plan of
Reorganization. As further explained below, general and administrative
expenses (or overhead costs) have been reduced. Additionally, these
results do not include the return of principal with respect to the
Installment Contracts Receivable portfolio. The net result of the above is
that total cash on hand increased over the six month period by
approximately $0.7 million, to a total of approximately $1.5 million at
September 30, 1998 (which total represents an increase of approximately
$0.9 million, more than doubling the amount on hand in late September 1997,
when the Company filed for bankruptcy). Net equity increased during the
six months by approximately $0.4 million.
Revenues from Installment Contracts Receivable (consumer used-car loans)
were approximately $77,000 during the six months ended September 30, 1998,
which represented a $0.3 million decrease compared to the $0.4 million
realized during the six months ended September 30, 1997. This decrease is
a result of the reduced size of the Company's portfolio of such loans; the
Company ceased purchasing new loans in December 1995, and as loans are paid
in full or written off, the portfolio decreases in size. The substantial
cost to collect these loans is not reflected in net revenue, but as general
and administrative expenses. Future revenues from this portfolio will, in
general, decline from their present level of $35,000 per quarter.
Net viatical revenues realized from Policies in the six months ended
September 30, 1998, were $0.3 million, as compared to no such revenues in
the six months ended September 30, 1997. The Company generally ceased
purchasing Policies after September 1994, and in May and July 1995, sold
the majority of its portfolio. Future net revenues from the remaining
portfolio of eleven Policies will be irregular, depending primarily upon
the timing of mortality of the insured.
General and administrative expenses were $0.8 million during the six months
ended September 30, 1998, which represented a reduction of $0.6 million, or
46%, compared to the $1.4 million expended during the six months ended
September 30, 1997. This decrease resulted primarily from a $0.4 million
reduction in overhead expenses, and a $0.2 million decrease in the cost of
administering and collecting the portfolio of Installment Contracts
Receivable (which is included in general and administrative expenses),
which was partially offset by $0.2 million increase due to costs associated
with post Chapter 11 reorganization costs.
Provisions for credit losses in connection with the portfolio of
Installment Contracts Receivable for the six months ended September 30,
1998 represents a $0.2 million recovery of bad debt, as compared to no
provisions for the six months ended September 30, 1997. This improvement
of $0.2 million was primarily the result of collections on old loans which
had, in the past, been more than six months in arrears and had therefore
been written off, in accordance with the Company's long-standing
procedures.
19
<PAGE>
AUTOLEND GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Operating losses for the six months ended September 30, 1998, were $0.2
million, compared to $1.0 million reported for the six months ended
September 30, 1997. In total, the $0.8 million reduction in operating
losses was primarily due to (as detailed above) the reduction in general
and administrative expenses (exclusive of reorganization costs) of $0.6
million and the recovery of bad debt of $0.2 million.
Non-operating income for the six months ended September 30, 1998 totaled
$0.4 million, compared to a non-operating loss of $6.6 million for the six
months ended September 30, 1997. The $0.4 million income for the present
period was primarily due to a viatical policy write-down recapture of $0.5
million, plus accrued interest income of $0.2 million, partially offset by
$0.3 million in accrued interest expense. The $7.0 million improvement of
the present period over the prior period is primarily due to the non-
recurring $6.3 million debenture conversion charge in the prior period, the
$0.5 million viatical policy write-down recapture in the present period,
and a $0.2 million reduction in accrued interest expense.
In addition to the above, for the six months ended September 30, 1998, the
Company incurred $0.2 million in reorganization costs related to the
bankruptcy proceedings. There were no such reorganization costs in the
prior period.
The net effect of all of the foregoing resulted in a net loss of $38,000,
or $0.01 per share, for the six months ended September 30, 1998. The net
loss for the same period last year was $4.5 million, or $0.75 per share.
The decrease in net loss of $4.5 million was attributable primarily to a
combination of the following items. During the six months ended September
30 1997, the Company recorded a non-cash charge for Debenture conversion of
$6.3 million offset by a $3.2 million gain on early extinguishment of debt
in connection with Debentures repurchased. During the six months ended
September 30, 1998, operating losses were reduced by $0.8 million, interest
expense decreased by $0.2 million and the Company realized a recapture on
insurance policy write downs of $0.5 million as compared to the same period
last year.
Results of Operations: Three-month periods ended September 30, 1998, and
1997
Revenues from Installment Contracts Receivable (consumer used-car loans)
were approximately $35,000 during the three months ended September 30,
1998, which represented a $0.2 million decrease compared to the $0.2
million realized during the three months ended September 30, 1997. This
decrease is a result of the reduced size of the Company's portfolio of such
loans.
Net viatical revenues realized from Policies in the three months ended
September 30, 1998, were $0.3 million, as compared to no such revenues in
the three months ended September 30, 1997. Future net revenues from the
remaining portfolio of eleven Policies will be irregular, depending
primarily upon the timing of mortality of the insured.
General and administrative expenses were $0.4 million during the three
months ended September 30, 1998, which represented a reduction of $0.5
million, or 55%, compared to the $0.9 million expended during the three
months ended September 30, 1997. This decrease resulted primarily from a
$0.4 million reduction in overhead expenses, and a $0.1 million decrease in
the cost of
20
<PAGE>
AUTOLEND GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
administering and collecting the portfolio of Installment Contracts
Receivable, which was partially offset by $0.1 million increase due to
costs associated with post Chapter 11 reorganization costs.
Provisions for credit losses in connection with the portfolio of
Installment Contracts Receivable for the three months ended September 30,
1998 represent a $0.1 million recovery of bad debt, as compared to no
provisions for the three months ended September 30, 1997. This improvement
was primarily the result of collections on old loans which had, in the
past, been more than six months in arrears and had therefore been written
off, in accordance with the Company's long-standing procedures.
Operating income for the three months ended September 30, 1998 was $62,000,
compared to an operating loss of $0.7 million reported for the three months
ended September 30, 1997. In total, the $0.7 million improvement in
operations was primarily due to (as detailed above) the reduction in
general and administrative expenses (exclusive of reorganization costs) of
$0.5 million, a $0.1 million recovery of bad debt, and a $0.1 million
increase in net revenue.
Non-operating income for the three months ended September 30, 1998 totaled
$0.5 million, compared to a non-operating loss of $0.1 million for the
three months ended September 30, 1997. The $0.4 million income for the
present period was primarily due to a viatical policy write-down recapture
of $0.5 million, plus accrued interest income of $0.1 million, partially
offset by $0.2 million in accrued interest expense. The $0.6 million
improvement of the present period over the prior period is primarily due to
the non-recurring $0.5 million viatical policy write-down recapture in the
present period.
In addition to the above, for the three months ended September 30, 1998,
the Company incurred $0.1 million in reorganization costs related to the
bankruptcy proceedings. There were no such reorganization costs in the
prior period.
The net effect of all of the foregoing resulted in net income of $0.4
million, or $0.07 per share, for the three months ended September 30, 1998.
The net income for the same period last year was $1.4 million, or $0.23 per
share. The decrease in net income of $1.0 million was attributable
primarily to a combination of the following items. During the three months
ended September 30, 1997, the Company realized a $2.2 million gain on early
extinguishment of debt which was not available in the same period this
year. Operating losses decreased by $0.7 million during the three months
ended September 30, 1998 and the Company recorded a recapture on insurance
policy write-downs of $0.5 million as compared to the same period last
year.
LIQUIDITY AND CAPITAL RESOURCES
The Company's immediate viability as a going concern depends on the
restructuring of its obligations, and, ultimately, the formation of a
profitable line of business. At September 30, 1998, the Company had cash
and cash equivalents of approximately $1.5 million, and total liabilities
exceeded total assets 1.4 to 1. On September 22, 1997, the Company filed
for voluntary bankruptcy reorganization (see Notes 1 and 2 to the Company's
Consolidated
21
<PAGE>
AUTOLEND GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Financial Statements). 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, Preferred Stock,
and Class A and B Warrants, 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 bankruptcy reorganization Plan.
Cash flows from operations was a positive $0.1 million for the six months
ended September 30, 1998. This compares to a negative cash flow from
operations of $0.9 million for the six months ended September 30, 1997.
The improvement of $1.0 million is primarily due to reduced cash
expenditures for legal, professional, and consulting of $1.1 million,
reduced cash expenditures for Directors' & Officers' liability insurance of
$0.4 million, reduction in cash payroll of $0.3 million, and the receipt of
$0.2 million in viatical policy payouts, all of which was partially offset
by a reduction of $0.8 million in Installment Contracts Receivable
receipts, and the expenditure of $0.2 million on reorganization under the
bankruptcy.
The portfolio of Installment Contracts Receivable at September 30, 1998 was
$0.2 million (excluding receivables for which there was repossession of the
underlying collateral or a charge-off, and before the effect of reserves).
The portfolio consisted of 71 active used-car loans, of which approximately
31% (on a dollar-weighted basis) are thirty days or more past due. The
Company commenced purchasing these Installment Contracts Receivable in May
1994, and ceased purchases on December 22, 1995. Future revenues from this
portfolio will, in general, decline from their present level as the loans
mature and the portfolio thus diminishes.
The Company's portfolio of unmatured viatical insurance Policies consisted
of 11 policies at September 30, 1998, having a combined face value of
approximately $0.9 million and a net book value of approximately $0.1
million. The Company recognized $0.3 million in net revenue and a $0.5
million recapture on insurance policy write-downs from 4 policies during
the six months ended September 30, 1998. The Company generally ceased
purchasing new Policies as of September 1994. Receipt of revenues from
these Policies will be irregular, depending upon the timing of the
mortality of the insured.
Cash flows provided by investing activities was $0.6 million for the six
months ended September 30, 1998, as a result of the IAP securities
redemption. This compared to cash used by investing activities for the six
months ended September 30, 1997 of $5.2 million, which was the result of
funding the Escrow Deposit, the loan to NPD, and the purchase of the ITB
Option in 1997.
There were no cash flows from financing activities during the six months
ended September 30, 1998, as compared to $5.7 million in cash used by
financing activities during the six months ended September 30, 1997, which
was the result of the redemption of Debentures during 1997.
In summary, due to the foregoing factors, the Company's cash and cash
equivalents increased by approximately $0.7 million during the six months
ended September 30, 1998, to a total of $1.5 million. This increase was
largely due to the sale of the IAP securities, and the positive cash flow
from operations. In comparison, for the six months ended September 30,
1997, there was a
22
<PAGE>
AUTOLEND GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
$11.8 million decrease in cash equivalents, largely due to the funding of
the Escrow Deposit, the loan to NPD, the purchase of the ITB Option, the
buyback of Debentures, and an operating deficit.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable
23
<PAGE>
AUTOLEND GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Rodman & Renshaw, Inc. On September 24, 1997, Rodman & Renshaw, Inc., a
Delaware corporation ("Rodman"), filed a complaint against several
defendants, including the Company and its former subsidiary, AutoLend IAP,
Inc., in the Supreme Court of the State of New York, County of New York.
The Company believes that it was improperly included as one of the
Defendants. On September 17, 1998, Rodman executed a release, which
included the Company, effectively dismissing the proceeding against the
Company.
AutoLend Group, Inc. v. Cozen & O'Connor. On August 24, 1998, the Company
filed Adversary No. 98-1199M, a complaint to recover certain payments made
by the Company to Cozen & O'Connor, a Philadelphia-based law firm
("Cozen"). This complaint seeks the possible return of up to $564,000.
AutoLend Group, Inc. v. Standard Capital. On August 24, 1998, the Company
filed Adversary No. 98-1198M, a complaint to recover certain payments made
by the Company to Standard Capital Group, Inc., a California corporation
("Standard Capital"). This complaint seeks the possible return of up to
$189,000.
First National Bank of Clifton Forge v. AutoLend. On August 6, 1998, a
Motion for Judgment was filed in the Circuit Court of Alleghany County,
State of Virginia, Case No. CL98-43. The Motion seeks up to $54,000 in
compensatory damages and up to $75,000 in punitive damages for alleged
actions that took place between May 1995 and August 1997, involving car
loans and the Company's former subsidiary, AutoLend IAP, Inc. The Company
learned of this Motion on September 1, 1998, and was unaware of the
underlying issues up to that point in time, and is now investigating the
situation. The Company believes it has likely been improperly named as the
defendant.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
24
<PAGE>
AUTOLEND GROUP, INC., AND SUBSIDIARIES
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
27 -- Financial Data Schedule
(b) Reports on Form 8-K.
None
25
<PAGE>
AUTOLEND GROUP, INC., AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the following duly authorized persons.
AUTOLEND GROUP, INC.
(Registrant)
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Nunzio P. DeSantis Chairman of the Board, October 27, 1998
- ----------------------- Chief Executive Officer
Nunzio P. DeSantis
/s/ Jeffrey Ovington Executive Vice President October 27, 1998
- ----------------------- (principal accounting and
Jeffrey Ovington financial officer)
26
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<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,490,075
<SECURITIES> 0
<RECEIVABLES> 1,097,513
<ALLOWANCES> 114,401
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<PP&E> 97,140
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0
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<OTHER-SE> (3,098,075)
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<SALES> 1,065,539
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<TOTAL-COSTS> 1,458,548
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<LOSS-PROVISION> (219,000)
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