<PAGE>
================================================================================
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 December 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.
--------------------
(Exact name of registrant as specified in its charter)
Delaware 22-3137244
-------- ----------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
600 Central SW, Third Floor, Albuquerque, New Mexico 87102
-----------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(505) 768-1000
--------------
(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 February 2, 1999.
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<PAGE>
AUTOLEND GROUP, INC., AND SUBSIDIARIES (Debtor-in-Possession)
AUTOLEND GROUP, INC., AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
PART I--FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements................................................................................. 4
Consolidated Balance Sheets as of December 31, 1998, and March 31, 1998................................... 4
Consolidated Statements of Operations for the three- and nine-month periods
ended December 31, 1998, and 1997....................................................................... 5
Consolidated Statements of Cash Flows for the nine-month periods ended
December 31, 1998, and 1997............................................................................. 6
Notes to Consolidated Financial Statements................................................................ 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................................................... 20
Item 3. Quantitative and Qualitative Disclosure about Market Risk............................................ 24
<CAPTION>
PART II--OTHER INFORMATION
Item 1. Legal Proceedings.................................................................................... 25
Item 2. Changes in Securities and Use of Proceeds............................................................ 25
Item 3. Defaults Upon Senior Securities...................................................................... 25
Item 4. Submission of Matters to a Vote of Security Holders.................................................. 25
Item 5. Other Information.................................................................................... 25
Item 6. Exhibits and Reports on Form 8-K..................................................................... 25
SIGNATURES................................................................................................... 26
</TABLE>
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 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
YEAR 2000 ISSUES
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 properly recognize the
year 2000 or years thereafter. No easy, comprehensive, technological "quick
fix" has yet been developed in the United States or elsewhere for this problem.
Not only might the problem affect a company's computers, but the company could
also be impacted by problems at other companies, through supplier relationships,
etc.
Fortunately, the Company's present small base of operations is not heavily
dependent upon computers. The Company uses accounting software on a small
network and other software tools for financial reporting and word processing.
Steps are being taken to test for compliance and, if necessary, upgrade
computers and software within the Company. The ultimate cost for completing
this process is not yet known, but management does not expect to spend more than
$10,000. Testing and any necessary upgrades should be completed by August 1999.
The Company has received written assurance of Y2K compliance from the outside
service which maintains its portfolio of Installment Contracts Receivable.
Management is reasonably confident, in general, about the Company's level of
exposure. However, with the drastic scenarios worldwide discussed in the media,
the Company cannot guarantee that it will not be in some way detrimentally
impacted.
3
<PAGE>
AUTOLEND GROUP, INC., AND SUBSIDIARIES (Debtor-in-Possession)
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, 1998 March 31, 1998
(unaudited) (audited)
----------------- --------------
<S> <C> <C>
Assets:
Cash and cash equivalents $ 2,292,059 $ 769,736
Prepaid expenses - 167,381
Installment contracts receivable--gross $ 164,248 $ 461,592
Collateral owned--gross - 22,286
Allowance for credit losses (100,168) (187,669)
----------------- --------------
Installment contracts receivable--net $ 64,080 $ 296,209
ITB Option, less allowance of $200,000 at September 30, 1998, and
at March 31, 1998 425,000 425,000
Escrow deposit 2,000,000 2,000,000
Interest receivable on escrow deposit 140,069 62,060
Note receivable--NPD, Inc. 3,035,292 3,035,292
Interest accrued on note receivable--NPD, Inc. 446,863 219,215
Purchased insurance policies at estimated market value; face value of $875,920
at December 31, 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 $77,329 at December 31, 1998,
and $68,614 at March 31, 1998 19,811 39,611
Other 46,311 46,011
----------------- --------------
Total assets $ 8,603,225 $ 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 1,525,000 1,434,944
----------------- --------------
Total liabilities subject to compromise 10,219,898 10,088,039
----------------- --------------
Liabilities not subject to compromise:
Accounts payable 59,715 56,355
Contingent liabilities--reorganization 381,116 48,872
Accrued liabilities 227,711 232,458
Accrued interest expense on debentures (post-petition) 878,941 364,160
Note payable--NPD, Inc. 425,000 425,000
Accrued interest expense--NPD, Inc. 57,542 25,667
----------------- --------------
Total liabilities not subject to compromise 2,030,025 1,152,512
----------------- --------------
Total liabilities $ 12,249,923 $ 11,240,551
----------------- --------------
Stockholders' Deficit:
Preferred stock, $.002 par value. Authorized 5,000,000 shares;
57,800 issued and outstanding at December 31, 1998, and March 31, 1998 $ 116 $ 116
Common stock, $.002 par value. Authorized 40,000,000 shares;
issued 6,079,530 shares at December 31, 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 (23,918,918) (23,483,063)
----------------- --------------
Total stockholders' deficit $ (3,646,698) $ (3,600,843)
----------------- --------------
Total liabilities and stockholders' deficit $ 8,603,225 $ 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 Nine Month Period Ended
December 31, December 31,
--------------------------- --------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Finance charges on installment contracts $ 17,610 $ 126,128 $ 94,921 $ 536,722
Revenues from matured insurance policies - 69,109 988,228 69,109
----------- ----------- ----------- -----------
Gross revenues 17,610 195,237 1,083,149 605,831
Cost of matured insurance policies - (60,125) (692,400) (60,125)
----------- ----------- ----------- -----------
Total net revenues $ 17,610 $ 135,112 $ 390,749 $ 545,706
General and administrative expenses (274,232) (519,341) (1,040,380) (1,944,258)
Provision for credit losses, net of recoveries 87,000 (30,000) 306,000 (30,000)
----------- ----------- ----------- -----------
Operating income (loss) (169,622) (414,229) (343,631) (1,428,552)
----------- ----------- ----------- -----------
Other income (expense):
Interest income on cash and cash equivalents $ 13,462 $ 993 $ 74,034 $ 140,650
NPD, Inc., note receivable interest income accrued 75,884 75,632 227,648 142,861
Debentures interest expense accrued (171,594) (171,594) (514,781) (710,325)
NPD, Inc., note payable interest expense accrued (10,625) (57,500) (31,875) (76,667)
Other income (expense), net (64,005) - (22,488) (27,086)
Write-off of fixed assets - - (4,570) -
Insurance policy write down recapture - - 495,683 -
Debenture conversion charge - - - (6,261,051)
----------- ----------- ----------- -----------
Total net other income (expense) $ (156,878) $ (152,469) $ 223,651 $(6,791,618)
----------- ----------- ----------- -----------
Income (loss) before reorganization costs, income taxes,
and extraordinary item $ (326,500) $ (566,698) $ (119,980) $(8,220,170)
Reorganization costs incurred during Chapter 11 proceedings (71,521) - (315,875) -
----------- ----------- ----------- -----------
Income (loss) before income taxes and extraordinary item $ (398,021) $ (566,698) $ (435,855) $(8,220,170)
Provision for income taxes - federal - - - (40,000)
----------- ----------- ----------- -----------
Income (loss) before extraordinary item $ (398,021) $ (566,698) $ (435,855) $(8,260,170)
Extraordinary item:
Gain on early extinguishment of debt - - - 3,171,524
----------- ----------- ----------- -----------
Net income (loss) $ (398,021) $ (566,698) $ (435,855) $(5,088,646)
=========== =========== =========== ===========
Per Share:
Operating income (loss) $ (0.03) $ (0.07) $ (0.06) $ (0.24)
Total net other income (expense) (0.03) (0.02) 0.04 (1.12)
----------- ----------- ----------- -----------
Income (loss) before reorganization costs, income taxes,
and extraordinary item $ (0.05) $ (0.09) $ (0.02) $ (1.36)
Reorganization costs incurred after Chapter 11 proceedings (0.01) - (0.05) -
----------- ----------- ----------- -----------
Income (loss) before reorganization costs and extraordinary item $ (0.07) $ (0.09) $ (0.07) $ (1.36)
Provision for income tax - federal - - - (0.01)
----------- ----------- ----------- -----------
Income (loss) before extraordinary item $ (0.07) $ (0.09) $ (0.07) $ (1.37)
Extraordinary item:
Gain on early extinguishment of debt - - - 0.53
----------- ----------- ----------- -----------
Net income (loss) $ (0.07) $ (0.09) $ (0.07) $ (0.84)
=========== =========== =========== ===========
Weighted average number of common and common
equivalent shares outstanding 6,079,530 6,079,530 6,079,530 6,026,011
=========== =========== =========== ===========
</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>
Nine Month Period Ended
December 31,
---------------------------------
1998 1997
------------- -------------
<S> <C> <C>
Cash flow from operating activities:
Net loss $ (435,855) $ (5,088,643)
Adjustments to reconcile net loss to net cash flow from operating activities
Amortization of intangible assets and debt issuance costs - 56,443
Depreciation expense 15,230 18,918
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 (306,000) 30,000
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 - 60,125
Prepaid expenses 167,381 -
Installment contracts receivable 538,129 1,554,793
Purchased insurance policies 691,136 -
Interest on escrow deposit (78,009) -
Interest accrued on note receivable - NPD, Inc. (227,648) (142,861)
Other assets (300) (88,474)
Increase (decrease) in liabilities:
Accounts payable and accrued liabilities 462,716 (1,003,647)
Accrued interest expense 546,656 786,992
------------- -------------
Cash provided (used) by operating activities $ 907,763 $ (726,827)
------------- -------------
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 $ 1,522,323 $ (11,654,198)
Cash and cash equivalents at beginning of period 769,736 12,399,932
------------- -------------
Cash and cash equivalents at end of period $ 2,292,059 $ 745,734
============= =============
</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 nine-
month period ended December 31, 1998. The operating results for the nine
months ended December 31, 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, since it currently discloses that
information.
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 allocating resources and 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 6
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 does not include
salaries, rent, and other operating expenses of the car loan business).
The results of this business were the primary reasons the Company developed
a negative net equity, which precluded it from generating the necessary
cash flow to service its debt obligations (under the Debentures), which in
turn forced
8
<PAGE>
AUTOLEND GROUP, INC., AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
the Company to file for 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 its ability to continue as
a going concern. The Company's viability as a going concern depends upon
restructuring its obligations and, ultimately, attaining profitability.
The Company has filed a Plan of Reorganization (the "Plan of
Reorganization") and a Disclosure Statement (both together, the "Plan"),
that contain its proposal for resolving the bankruptcy (see Note 2 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 have been received, as the voting
deadline was December 4, 1998; the votes were almost entirely in favor of
the Plan. The final Confirmation Hearing took place on February 3, 1999,
when the judge confirmed the Company's Plan. The Company believes that the
Plan will become effective about early March. After the resulting
reorganization of the Company's assets and liabilities, the Company will
have a positive net equity.
(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 (now
the Company's Chief Executive Officer, but not then 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; new management for the Company was
installed in mid-September 1996. However, about this time, net equity had
already deteriorated to a negative $6.9 million. In the first nine months
after new 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.
9
<PAGE>
AUTOLEND GROUP, INC., AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
New management took immediate and substantive steps to turn the Company
around, including the Debenture Exchange Offer (see Note 6 below), the
repurchase of some Debentures at a discount, the pursuit of a new business
(see Note 3 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
above 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 has also been filing
required reports and disclosures with the Bankruptcy Court, including a
monthly operating statement. Also see Note 1 above.
The Company filed its first Disclosure Statement and Plan of Reorganization
(jointly, the "Plan") in January 1998. The Disclosure Statement (as
subsequently amended) was approved in September 1998, and the Plan was
mailed to creditors and interest holders in October. Voting was completed
in December 1998, and the Confirmation Hearing was held on February 3,
1999. The judge confirmed the Plan, which should become effective about
early March. At that point, it is anticipated that the Company will have a
positive net equity resulting from the relief of debt obligations currently
outstanding.
(3) 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 ("Brennan"). At
that time, ITB was listed on the American Stock Exchange, and owned and
operated Garden State Park and Freehold Raceway in New Jersey, and owned
the former El Rancho Casino property in Las Vegas, Nevada (also see Note 4
below). ITB was much larger than the Company, and had 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 then 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
10
<PAGE>
AUTOLEND GROUP, INC., AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
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 purchase the ITB Shares from NPD later 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 Company's agreed-upon loan to NPD, and
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 December 31, 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 5 below, and as of January 29, 1999, was returned, in
cash and with interest, to the Company (see Note 14 below).
On July 10, 1997, the Company made a loan of $3.0 million to NPD (the "NPD
Loan"). The NPD Loan accrued interest at 10 percent per annum, and was to
be payable in full, with all accrued interest, on July 9, 1999. The NPD
Loan has been secured by NPD's pledge of the ITB Shares it owned, subject
to NPD's prior lien and pledge to Brennan's estate of the ITB Shares as
security for NPD's obligation to pay the balance of the purchase price of
the ITB Shares. NPD used the proceeds of the NPD Loan to repay an earlier
loan made by an unaffiliated third party; this 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 5 below, and, as
of January 29, 1999, $2.3 million had been repaid, in cash, to the Company
(see Note 14 below).
(4) 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 3 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 a one-year option to
purchase the ITB Shares held by NPD (the "Option"). During 1998, the
Option was extended to August 1999 by NPD (at no cost to the Company). The
Option that has been held by the Company states that the Company must
purchase all of the ITB Shares owned
11
<PAGE>
AUTOLEND GROUP, INC., AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
by NPD at the date of any 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 prior options were exercised. In the event that the
Company were 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.
The Company paid $200,000 in cash for the Option at the closing date, and
also executed a note (the "NPD Note Payable") which accrued interest at 10
percent per annum and was to be payable in full, including accrued and
unpaid interest, on July 9, 1999. The principal amount of the note was
$2.3 million if the Company had the ability to acquire 100 percent of the
ITB Shares, but would have been 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, 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. The NPD Note Payable is now subject to
recent settlement actions as described in Note 5 below. Pursuant to these
settlement actions, it is anticipated that both the Option right and the
related note payable obligation will be cancelled on the effective date of
the Reorganization (see Note 14 below).
(5) The 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. 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
12
<PAGE>
AUTOLEND GROUP, INC., AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
its offices), and cancels all options relating to the ITB Shares, including
the Option purchased by the Company.
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 the resolution of the NPD Claim.
Specifically, the ITB Settlement results 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,
NPD's
prepayment to the Company of $2.3 million of the $3.0 million NPD Loan, and
NPD's contingent payment to the Company of a portion of the additional
funds which may be received by NPD (or its affiliates) for 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. The ITB Settlement is contingent upon the Company's
receipt of approximately $4.4 million in cash under the Delaware ITB
Agreement (which has now occurred, as detailed below) and the effective
date of the Company's Reorganization Plan, which is expected to be about
early March 1999.
A hearing on the Delaware ITB Agreement was held on August 25, 1998, and
the judge signed a Chancery Court order approving the Agreement on October
6, and the order became effective on approximately November 6, 1998. In
January 1999, the Brennan Estate signed an agreement with ITB which
provides for that Estate's approval of the Delaware ITB Agreement, and the
U.S. Bankruptcy Court for New Jersey further approved the agreement between
the Brennan Estate and ITB. On January 28, 1999, the Delaware ITB Agreement
closed, subject to the final effective date of the Company's Reorganization
Plan. As consideration under the Delaware ITB Agreement, and subject to
the effective date of the Reorganization as mandated in the ITB Settlement,
the Company received from ITB and NPD a total of $4,446,771 in cash on
January 29, 1999.
(6) Debentures and Exchange Offer
Following the substantial losses incurred in the consumer used-car finance
business, prior management's decision to terminate that business, and the
Company's deterioration to a position of negative net worth (after which
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 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.
13
<PAGE>
AUTOLEND GROUP, INC., AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
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 December 31, 1998, was $7.2 million and $2.3 million,
respectively. Under the Reorganization Plan as confirmed by the judge on
February 3, 1999, these Debentures (including accrued interest thereon)
will be cancelled in exchange for cash, notes, and stock in the Reorganized
Company (see Note 14 below).
(7) Preferred Stock
In connection with the Exchange Offer (see Note 6 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 December 31, 1998, the Company had dividends in arrears on its Preferred
Stock. In the unlikely event the Company were to pay cash dividends, the
amount owed at December 31, 1998, would have been approximately $1.4
million, or $24 per share of Preferred Stock. However, in lieu thereof,
the Company may pay the dividends by issuing additional shares of Preferred
Stock and/or Common Stock. Additionally, under the Reorganization Plan,
this Preferred Stock and any associated dividends will be cancelled in
exchange for certain rights to purchase stock in the Reorganized Company
(see Note 14 below).
(8) Net Operating Loss Carryforwards
The Company has available as of December 31, 1998, unused capital loss
carry-forwards and operating loss carry-forwards that may provide future
tax benefits, which expire as follows:
Year of Unused Capital Loss Unused Net Operating Loss
Expiration Carryforwards Carryforwards
---------- ------------------- -------------------------
2001 $1,359,000 $ -
2002 1,023,000 -
2012 - 11,460,000
2013 - 220,000
2014 - 560,000
------------------- -------------------------
Total $2,382,000 $12,240,000
=================== =========================
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
14
<PAGE>
AUTOLEND GROUP, INC., AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
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."
The Company's management believes that, after the Plan of Reorganization
becomes effective, the Loss Carryforwards would be reduced by approximately
$4.7 million in the bankruptcy process, and the remainder would be intact
and potentially 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 approximately $2.5 million in
federal income taxes, either immediately in one year, or spread out over a
number of years. The requirements to utilize such loss carryforwards are
very strict and limited.
(9) Prior Period Restatement Disclosure
Accumulated deficit, at the beginning of 1998, has been adjusted to correct
errors made in prior years. The errors relate to the incorrect calculation
of intangible property tax. Had the errors not been made, net loss in the
prior years would have been increased by approximately $0.2 million. The
effect of the errors on prior years accumulated deficit is detailed below:
Balance at beginning of
period as previously reported ($23,320,187)
Prior year adjustment for taxes -
error in calculation of intangible
property tax (162,876)
---------------
Balance at end of period ($23,483,063)
(10) Securities and Early Redemption of IAP
Before 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 the Company's former management, 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,
if the payment is not made, the conversion of the securities into common
stock of IAP representing 51% of IAP's total common stock after such
issuance.
IAP, 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
15
<PAGE>
AUTOLEND GROUP, INC., AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
then be unlikely that a conversion of its IAP securities into a 51%
ownership interest would yield the Company substantial value or cash.
Because 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 the Bankruptcy Court's approval of
the transaction. 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 December
31, 1998, or 1997. Investments held as available-for-sale securities
(maturing within one to five years) are summarized as follows at December
31:
<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>
A $25,440 loss was realized on the sale of securities during the nine
months ended December 31, 1998.
(11) Comprehensive Income
As referenced in Note 1(b) above, the Company is now complying with
Statement of Financial Accounting Standards 130, Comprehensive Income
("SFAS 130"), in the its consolidated financial statements. A primary
intent of SFAS 130 is to provide a supplemental examination of income,
showing Net Income adjusted by transactions and events which were not
reflected in Net Income that occurred during the period, and that affected
the Company's equity from non-owner sources. Typically, comprehensive
income includes 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 nine
months ended December 31, 1998 and 1997, the Company's Comprehensive Income
is the same as the net loss reported in the consolidated statements of
operations.
16
<PAGE>
AUTOLEND GROUP, INC., AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
(12) Resolution of Significant Litigation
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 alleged that the Company was obligated to the Plaintiff
for more than $1.6 million, with interest from June 30, 1992, for "earn-out
payments" under a contract between the Plaintiff and the Company dated
March 14, 1992. The Plaintiff also sought punitive damages for bad faith
in an undisclosed amount and attorney's fees. On June 11, 1997, an Offer
of Judgment 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. A scheduling
conference was held on September 9, 1998, and January 15, 1999, was
established as the deadline for submission of exhibits and documentary
evidence. The trial was held on January 20 and 21, 1999, during which the
Plaintiff alleged it was owed $4.2 million (including interest and
attorney's fees). Before the completion of the trial, on January 21, 1999,
the Company and the Plaintiff reached a settlement for $1,525,000. Under
the terms of the settlement, the Company will make this payment after the
effective date of its Plan of Reorganization.
(13) 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 properly recognize the year 2000 or years thereafter. No easy,
comprehensive, technological "quick fix" has yet been developed in the
United States or elsewhere for this problem. Not only might the problem
affect a company's computers, but the company could also be impacted by
problems at other companies, through supplier relationships, etc.
Fortunately, the Company's present small base of operations is not heavily
dependent upon computers. The Company uses accounting software on a small
network and other software tools for financial reporting and word
processing. Steps are being taken to test for compliance and, if
necessary, upgrade computers and software within the Company. The ultimate
cost for completing this process is not yet known, but management does not
expect to spend more than $10,000. Testing and any necessary upgrades
should be completed by August 1999. The Company has received written
assurance of Y2K compliance from the outside service which maintains its
portfolio of Installment Contracts Receivable. Management is reasonably
confident, in general, about the Company's level of exposure. However,
with the drastic scenarios worldwide discussed in the media, the Company
cannot guarantee that it will not be in some way detrimentally impacted.
17
<PAGE>
AUTOLEND GROUP, INC., AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
(14) Subsequent Events
On January 21, 1999, a settlement of the Living Benefits litigation was
reached (see Note 12 above) calling for the Company to pay $1,525,000 in
cash. On January 29, 1999, the Company received $4,446,771 in cash under
the Delaware ITB Agreement and the ITB Settlement (which is still subject
to the effective date of the Company's Plan of Reorganization; see Note 5
above). Other significant assets and liabilities are also affected by the
agreements. On February 3, 1999, at the Reorganization Confirmation
Hearing, the judge confirmed the Company's Plan of Reorganization (see
Notes 1 and 2 above). The effective date of the Plan should be
approximately early March 1999; significant assets and liabilities are
affected by the Reorganization, including the Debenture debt and cash. In
total, these three events will have a substantial impact on the Company's
Income Statement and Balance Sheet. Upon the effective date of the Plan,
it is anticipated that the Company's net equity will be increased by
approximately $4.9 million. This increase to equity includes an estimated
gain of $6.2 million resulting from the retirement of Debenture debt and
includes a $1.3 million operating loss associated with the ITB settlement.
The gain on the retirement of Debenture debt has been estimated based on a
stock value of $.02 a share as reported by the last trade dated February 4,
1999. An abbreviated proforma Balance Sheet is presented below, as if
these three events (including the distribution of cash to Living Benefits
and the Debenture holders) had happened at December 31, 1998.
18
<PAGE>
AUTOLEND GROUP, INC., AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
Abbreviated Consolidated Balance Sheets
(unaudited)
Pro forma, assuming Living Benefits paid, ITB Settlement finalized,
and Reorganization effected
At December 31, 1998
--------------------
($-000) Actual Pro forma
(see p.4)
--------- ---------
Cash and equivalents $ 2,292 $ 1,959
Car loan installment contracts receivable, net 64 64
Purchased viatical policies @ est. mkt. val. 134 134
Escrow deposit, plus accrued int. rec. 2,140 -
Note receivable, plus accrued interest 3,482 -
ITB option investment 425 -
Fixed assets, net of depreciation 20 20
Miscellaneous other assets 46 46
-------- --------
Total Assets $ 8,603 $ 2,223
-------- --------
Accounts payable--regular $ 60 $ 60
Accounts payable--pre-petition, frozen 97 -
Contingent Liabilities--reorganization 381 -
Accrued liabilities 65 65
Debentures at face, plus accrued interest 9,477 -
Five-year note to debenture holders - 624
NPD note payable, plus accrued interest 483 -
Allowance for legal fees and settlement cost 1,525 -
Miscellaneous other liabilities 162 162
-------- --------
Total Liabilities $ 12,250 $ 911
-------- --------
Stockholders' Equity/(Deficit) ($3,647) $ 1,312
-------- --------
Total Liabilities and Stockholders' Equity $ 8,603 $ 2,223
-------- --------
Note:
----
Excludes any cash received from stock subscriptions in the Reorganization.
The ITB Settlement is included as if completed by December 31, 1998;
however, it actually occurred in January, and so a small amount of
additional cash was received to cover escrow interest for January;
likewise, final accrued interest on the Notes Receivable and Payable will
be slightly higher. The Reorganization impact is included as if finalized
at December 31, 1998; actual final contingent liabilities and cash usage
will be higher; final cash balance will be lower.
19
<PAGE>
AUTOLEND GROUP, INC., AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Results of Operations: Nine-month periods ended December 31, 1998, and
1997
The Company recorded a net loss of approximately $0.4 million for the nine-
month period ended December 31, 1998. Contributing to the loss was
approximately $0.5 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 have been substantially reduced. Additionally, these reported
income results do not reflect the return of principal with respect to the
Installment Contracts Receivable portfolio. The net result is that total
cash on hand increased over the nine-month period by approximately $1.5
million, to a total of approximately $2.3 million at December 31, 1998
(which represents an increase of about $1.7 million since the Company filed
for bankruptcy and is almost four times the amount on hand at that filing
in late September 1997).
Revenues from Installment Contracts Receivable (consumer used-car loans)
were approximately $0.1 million during the nine months ended December 31,
1998, which represented a $0.4 million decrease compared to the $0.5
million realized during the nine months ended December 31, 1997. This
decrease is a result of the reduced size of the Company's portfolio of
those 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 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 $18,000 per quarter.
Net viatical revenues realized from Policies in the nine months ended
December 31, 1998, were $0.3 million, as compared to de minimis revenues in
the nine months ended December 31, 1997. The increase was due to the
maturity of 4 policies. The Company generally ceased purchasing Policies
after September 1994 and, and in May and July 1995, sold the majority of
its portfolio. Future net revenues from the remaining portfolio of 11
Policies will be irregular, depending primarily upon the timing of
mortality of the insured.
General and administrative expenses were $1.0 million during the nine
months ended December 31, 1998, which represented a reduction of $0.9
million, or 48%, compared to the $1.9 million expended during the nine
months ended December 31, 1997. This decrease resulted primarily from a
$0.6 million reduction in overhead expenses and a $0.3 million decrease in
the cost of administering and collecting the portfolio of Installment
Contracts Receivable (which is included in general and administrative
expenses). (These amounts exclude the $0.3 million in post-Chapter 11
reorganization costs.)
Provisions for credit losses in connection with the portfolio of
Installment Contracts Receivable for the nine months ended December 31,
1998 represents a net recovery of previously charged off loans in excess of
current period provisions of $0.3 million. This is compared to a net
provision of $30,000 for the nine months ended December 31, 1997. This
improvement of $0.3 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.
20
<PAGE>
AUTOLEND GROUP, INC., AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations.
(continued)
Operating losses for the nine months ended December 31, 1998, were $0.3
million, compared to losses of $1.4 million for the nine months ended
December 31, 1997. In total, the $1.1 million reduction in operating
losses was primarily due to (as detailed above) the reduction in general
and administrative expenses (exclusive of reorganization costs) of $0.9
million and the recovery of bad debt of $0.3 million, which were partially
offset by a $0.2 million decrease in total net revenues.
The impact of non-operating items for the nine months ended December 31,
1998 was a net $0.2 million income, compared to a non-operating loss of
$3.6 million for the nine months ended December 31, 1997. The $0.2 million
income for the present period was primarily due to a viatical policy write-
down recapture of $0.5 million, plus interest income of $0.3 million,
partially offset by $0.6 million in accrued interest expense. The $3.8
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 (which was partially offset by a $3.2 million gain on
early extinguishment of debt), 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 nine months ended December 31, 1998, the
Company incurred $0.3 million in reorganization costs related to the
bankruptcy proceedings. There were no reorganization costs in the prior
period.
The net effect of all of the foregoing was a net loss of $0.4 million, or
$0.07 per share, for the nine months ended December 31, 1998. The net loss
for the same period last year was $5.1 million, or $0.84 per share. The
decrease in net loss of $4.7 million was attributable primarily to a
combination of the following items. During the nine months ended December
31 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 nine months ended
December 31, 1998, operating losses were reduced by $1.1 million. The
Company realized a recapture on insurance policy write-downs of $0.5
million, and accrued interest expense decreased by $0.2 million as compared
to the same period last year. These items were partially offset by 0.3
million in reorganization costs in the present period.
Results of Operations: Three-month periods ended December 31, 1998, and
1997
Revenues from Installment Contracts Receivable (consumer used-car loans)
were approximately $18,000 during the three months ended December 31, 1998,
which represented a $0.1 million decrease compared to the $0.1 million
realized during the three months ended December 31, 1997. This decrease is
a result of the reduced size of the Company's portfolio of those loans.
No revenues were realized from viatical Policies in the three months ended
December 31, 1998, as compared to de minimis net revenues in the three
months ended December 31, 1997. Future net revenues from the remaining
portfolio of 11 Policies will be irregular, depending primarily upon the
timing of mortality of the insured.
21
<PAGE>
AUTOLEND GROUP, INC., AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations.
(continued)
General and administrative expenses were $0.3 million during the three
months ended December 31, 1998, which represented a reduction of $0.2
million, or 47%, compared to the $0.5 million expended during the three
months ended December 31, 1997. This decrease resulted primarily from a
$0.1 million reduction in overhead expenses, and a $0.1 million decrease in
the cost of administering and collecting the portfolio of Installment
Contracts Receivable. (These amounts exclude the $72,000 in post-Chapter
11 reorganization costs.)
Provisions for credit losses in connection with the portfolio of
Installment Contracts Receivable for the three months ended December 31,
1998 represent a $87,000 recovery of bad debt, as compared to $30,000 in
provisions for the three months ended December 31, 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 loss for the three months ended December 31, 1998 was $0.2
million, compared to an operating loss of $0.4 million reported for the
three months ended December 31, 1997. In total, the $0.2 million
improvement in operations was primarily due to (as detailed above) the
reduction in general and administrative expenses (exclusive of
reorganization costs) of $0.2 million, and a $0.1 million recovery of bad
debt, which were partially offset by a $0.1 million decrease in net
revenue.
Non-operating loss for the three months ended December 31, 1998 totaled
$0.2 million, compared to a non-operating loss of $0.2 million for the
three months ended December 31, 1997. The loss for the present period was
primarily due to accrued interest expense and other miscellaneous expense.
In addition to the above, for the three months ended December 31, 1998, the
Company incurred $72,000 in reorganization costs related to the bankruptcy
proceedings. There were no reorganization costs in the prior period.
The net effect of all of the foregoing was a net loss of $0.4 million, or
$0.07 per share, for the three months ended December 31, 1998. The net
loss for the same period last year was $0.6 million, or $0.09 per share.
The decrease in net loss of $0.2 million was attributable primarily to a
combination of the following items. General and administrative expenses
decreased by $0.2 million during the three months ended December 31, 1998,
bad debt recoveries were $0.1 million better. These improvements were
partially offset by a $0.1 million decrease in net revenues.
Liquidity and Capital Resources
The Company's immediate viability as a going concern depends on
restructuring its obligations and, ultimately, forming a profitable line of
business. At December 31, 1998, the Company had cash and cash equivalents
of approximately $2.3 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
Financial Statements). The Company expects to emerge from Chapter 11 as a
restructured, viable entity. On February 3,
22
<PAGE>
AUTOLEND GROUP, INC., AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations.
(continued)
1999, the Company's Reorganization Plan was confirmed by the Bankruptcy
Court; this Confirmation should be effective early March. At that point,
the Company will have a positive net equity.
Cash flows from operations were a positive $0.9 million for the nine months
ended December 31, 1998. This compares to a negative cash flow from
operations of $0.7 million for the nine months ended December 31, 1997.
The improvement of $1.6 million is primarily due to reduced cash
expenditures for legal, professional, and consulting services of $1.1
million, the receipt of $1.1 million in viatical policy payouts, reduced
cash expenditures for Directors' and Officers' liability insurance of $0.4
million, and a reduction in cash payroll of $0.3 million, all of which were
partially offset by a reduction of $1.0 million in Installment Contracts
Receivable receipts and the expenditure of $0.3 million on reorganization
under the bankruptcy.
The portfolio of Installment Contracts Receivable at December 31, 1998 was
$0.2 million (excluding receivables for which the underlying collateral was
repossessed or charged off, and before the effect of reserves). The
portfolio consisted of 42 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 December 31, 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 nine months ended December 31, 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 were $0.6 million for the nine
months ended December 31, 1998, as a result of the IAP securities
redemption. This compared to cash used by investing activities for the nine
months ended December 31, 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. On January 29, 1999, the Company received $4.4 million in
additional cash; see Notes 5 and 14 to the Consolidated Financial
Statements.
There were no cash flows from financing activities during the nine months
ended December 31, 1998, as compared to $5.7 million in cash used by
financing activities during the nine months ended December 31, 1997, which
was the result of the redemption of Debentures during 1997.
In summary, because of the foregoing factors, the Company's cash and cash
equivalents increased by approximately $1.5 million during the nine months
ended December 31, 1998, to a total of $2.3 million at December 31, 1998.
This increase was due to the positive cash flow from operations and the
sale of the IAP securities. In comparison, for the nine months ended
December 31, 1997, there was an $11.7 million decrease in cash equivalents,
largely due to the buyback of Debentures, the loan to NPD, the funding of
the Escrow Deposit, the purchase of the
23
<PAGE>
AUTOLEND GROUP, INC., AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations.
(continued)
ITB Option, and an operating deficit. Additionally, as mentioned above, on
January 29, 1999, the Company received $4.4 million in cash, increasing its
cash balances on hand to over $6 million.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Not applicable.
24
<PAGE>
AUTOLEND GROUP, INC., AND SUBSIDIARIES
Part II: Other Information
Item 1. Legal Proceedings.
First National Bank of Clifton Forge v. AutoLend. On August 6, 1998, a Motion
for Judgment was filed in the Circuit Court of Allegheny County, Virginia, Case
No. CL98-43. The Motion sought 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
before that was unaware of the underlying issues. The Company believes it was
improperly named as the defendant. On January 6, 1999, an order dismissing the
Motion was approved by the Circuit Court, at no cost to the Company.
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.
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 Securities Exchange Act of 1934, the registrant has 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, February 12, 1999
---------------------- Chief Executive Officer
Nunzio P. DeSantis
/s/ Jeffrey Ovington Executive Vice President February 12, 1999
-------------------- (principal accounting and
Jeffrey Ovington financial officer)
26
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,292,059
<SECURITIES> 0
<RECEIVABLES> 164,248
<ALLOWANCES> 100,168
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<PP&E> 97,140
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0
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<OTHER-SE> (3,658,972)
<TOTAL-LIABILITY-AND-EQUITY> 8,603,225
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<CGS> 692,400
<TOTAL-COSTS> 1,732,780
<OTHER-EXPENSES> 320,445
<LOSS-PROVISION> (306,000)
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