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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 2000
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 (I.R.S. Employer
of incorporation of 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)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
Common Stock, $.002 par value NQB Pink Sheets
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [_].
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The number of shares outstanding of the registrant's Common Stock was 1,088,803
at June 26, 2000.
The market value of the voting stock of the registrant held by nonaffiliates of
the registrant on June 26, 2000 was not determinable; there have been no trades
of the new common stock as of June 26, 2000.
There are no documents incorporated herein by reference.
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 [_]
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TABLE OF CONTENTS
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PAGE
Part I
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Item 1. Business.................................................................. 1
Item 2. Properties................................................................ 6
Item 3. Legal Proceedings......................................................... 6
Item 4. Submission of Matters to a Vote of Securities Holders..................... 7
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................................... 8
Item 6. Selected Financial Data................................................... 10
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations..................................................... 12
Item 7A. Quantitative and Qualitative Disclosures about Market Risk................ 19
Item 8. Financial Statements and Supplementary Data............................... 19
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................................. 19
Part III
Item 10. Directors and Executive Officers of the Registrant........................ 20
Item 11. Executive Compensation.................................................... 21
Item 12. Security Ownership of Certain Beneficial Owners and Management............ 22
Item 13. Certain Relationships and Related Transactions............................ 24
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.......... 25
Signatures............................................................................... 27
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This report should be read in its entirety. No one section of the report deals
with all aspects of the subject matter.
FORWARD-LOOKING INFORMATION
The following discussions include "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Forward-looking statements are not historical
facts; they involve risks and uncertainties that could cause the Company's
results to differ materially from those in the forward-looking statements. The
risks and uncertainties that may affect the operations, performance,
development, and results of the Company's business include significant risk
factors, including the perceived difficulties from the Company's past bankruptcy
(which could adversely affect its existing and proposed operations); and, the
Company's present financial condition. From time to time, the Company may
publish or otherwise make available forward-looking statements. All subsequent
forward-looking statements, whether written or oral and whether made by or on
behalf of the Company, are also expressly qualified by these cautionary
statements.
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PART I
ITEM 1. BUSINESS.
GENERAL
AutoLend Group, Inc. (the "Company"), is a holding company headquartered in
Albuquerque, New Mexico. The Company is currently winding down two businesses.
The Company primarily operates through its subsidiaries, which are:
AutoLend Corporation, which maintains a residual portfolio of sub-prime
consumer used-car loan contracts purchased from used-car dealers (also
referred to as installment contracts receivable, or the "Loans"). AutoLend
Corporation ceased purchasing these Loans in December 1995. This portfolio
now consists entirely of inactive Loans that have been more than six months
in arrears and have been written off. The Loans presently provide us an
irregular net cash flow of approximately $11,000 per month, which amount will
likely diminish. There are approximately 3,900 Loans, having a combined face
value of approximately $15 million. A portion of this Loan portfolio is
presently "out of statute" (i.e., no longer legally enforceable).
On April 1, 2000, the Company adopted a plan to sell the Loan portfolio
business. As a result, the Company has had discussions to sell the entire
portfolio to an unaffiliated third party. Due to the evolution of the
Company's Loan portfolio to one which no longer has any current "active"
Loans, and due to management's decision to enter negotiations to sell the
remaining portfolio of "inactive" (written-off) Loans, as of April 1, 2000
the Company will henceforth treat the car Loan portfolio as a discontinued
operation.
American Life Resources Group, Inc., and LBNM, Inc., which maintain
portfolios of unmatured life insurance policies purchased from persons with
life-threatening illnesses, a business generically referred to as viatical
settlements (the "Policies"). These subsidiaries generally ceased purchasing
Policies in September 1994. The 5 remaining Policies had an aggregate face
value of approximately $366,000 and a net book value of $36,000 on
March 31, 2000.
For over two years, the Company's activities have been concentrated on resolving
the (recently-concluded) bankruptcy, and in its attempt to develop and obtain
licensure as a distributor for a gaming business (which has been a division of
the Company, under the name of Kachina Gaming) [this attempt was terminated in
June, 2000; see "Attempted New Business," below]. Additionally, during the last
year the Company has worked to get its Registration Statement (as required by
the Plan of Reorganization) made effective (which was made effective by the
Securities and Exchange Commission (the "SEC") on January 19, 2000). The
Company has also continued to collect amounts due from the residual Loan
portfolio as well as the residual Policy portfolio.
[Note: The Company is not affiliated with the website www.autolend.com, nor is
the Company affiliated with the Miami-based business, AutoLend IAP (which is
owned by Auction Finance Group, Inc.)]
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As a result of the Company's inability to make repayment on, and resultant
default on, its outstanding Debentures due September 19, 1997, the Company filed
for protection under Chapter 11 of the United States Bankruptcy Code in the
United States Bankruptcy Court for the District of New Mexico (the "Bankruptcy
Court") on September 22, 1997. Under Chapter 11, claims against the Company in
existence before the filing of the bankruptcy petition have now been resolved.
The Bankruptcy Court confirmed the Company's creditor-approved Plan of
Reorganization, which became effective March 5, 1999, at which time the Company
attained a positive net equity (in conjunction with the adoption of fresh start
accounting), and was no longer classified as a "debtor-in-possession." On
January 13, 2000, the Bankruptcy Court entered its final decree, thereby closing
the Company's Chapter 11 case.
The losses that had forced the Company into bankruptcy were caused primarily by
the business the earlier Miami-based management team had initiated, operated,
and then stopped; i.e., purchasing and maintaining a portfolio of sub-prime
consumer car loan contracts. This car Loan business produced cumulative
operating losses in excess of $20 million, resulting in a state of negative net
equity (which reached a low point of negative $11.9 million in March 1997), with
a large debt payment looming (in September 1997). As a result, management was
changed (in September 1996) and moved to Albuquerque, and this new management
team significantly reduced expenses and took other actions that improved the
Company's financial condition, resulting in a substantially improved net equity
position. In the twelve months between taking control in September 1996 and the
Debenture repayment due date of September 1997, the Albuquerque-based management
team had successfully eliminated two-thirds of the over $22 million in Debenture
debt that had been outstanding when they took control, and had improved net
equity by $10 million from its low point. 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.
On March 5, 1999, the Plan of Reorganization became effective, resulting in the
cancellation (effective on that date) of the Company's debts and common stock,
and giving certain substitute rights under the Plan to creditors and to the
Company's cancelled shares of stock.
Over two years after the filing of the voluntary reorganization petition, on
January 13, 2000, the Bankruptcy Court entered its final decree, thereby closing
the Company's Chapter 11 case. In connection with the resolution of the
bankruptcy, unsecured creditors have received payments for 100 percent of their
allowed claims. Likewise, qualified former Debenture holders have received, in
aggregate, $2.9 million in cash payments, as well as stock in the reorganized
Company, and uncollateralized, non-interest-bearing notes. [The first annual
payment on these notes was originally scheduled for March 5, 2000; however, that
$0.1 million payment has not yet been made; see Note 16 to the Company's
Consolidated Financial Statements.]
When the old common stock was cancelled as required by the creditor-approved
Plan of Reorganization, holders of the old common stock were provided an
opportunity to subscribe in the offering of new stock which formed the new
ownership of the Company. Since this offering
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was not open to anyone not holding old cancelled shares, outsiders had to
purchase cancelled shares if they wished to participate; this feature allowed
holders of the cancelled shares the opportunity to sell the shares if they did
not wish to subscribe. The subscription was concluded on April 18, 2000, thereby
establishing the new ownership of, and controlling interest in, the Company.
ATTEMPTED NEW BUSINESS
The Company has been considering various prospects to develop a new business
suitable for its situation. In general, any new business development is
difficult, and the Company's particular realities impose significant constraints
that make such an undertaking even more difficult. These constraints include
the following: the need to acquire or develop the business without paying
substantial cash or taking on significant debt; the handicap of not having
actively traded stock to use to procure this business; the requirement that,
after launch, the business will not need a significant capital investment to
fund its initial operations; and, the requirement that the new business
immediately produce a positive cash flow.
The Plan involved developing a new business that would have consisted primarily
of providing gaming devices and gaming machines for certain non-profit fraternal
organizations in New Mexico. On approximately July 2, 1999, the first legalized
gaming in a non-profit fraternal organization began in New Mexico. The Company
proposed to provide, supply, and service gaming devices as described in the New
Mexico "Gaming Control Act," and the business would have been regulated by the
New Mexico Gaming Control Board (the "Gaming Control Board") as described in the
Gaming Control Act. The Company commenced its efforts in this arena under the
name of Kachina Gaming, which was organized as a Division of the Company. In
connection with these efforts the Company had hired a Vice President of Gaming
Development and Marketing.
The Company's management has believed that it could obtain the proper licenses,
gaming machines, and contracts with non-profit organizations to make this
business viable. In this regard, the Company made application in February 1999
to the Gaming Control Board for licensure as a distributor. Additionally, the
Company signed contingent contracts with fraternal organizations whereby the
Company would supply gaming machines to licensed operators. The contracts are
contingent upon certain matters, such as the Company and the fraternal
organizations' ability to obtain the appropriate state licensing as well as the
actual approval of the respective contracts by the Gaming Control Board. The
Company held discussions with several licensed gaming machine manufacturers with
respect to obtaining such machines.
The Gaming Control Board has been processing the Company's application for
licensure as a distributor. In connection with this review, the Company
received correspondence from them indicating that the process was significantly
lengthened due to, and dependant upon the outcome of, the SEC investigation.
(On February 16, 1999, we were notified by our counsel that we were subject to
an investigation by the SEC; see "Item 3. Legal Proceedings" below.)
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On June 13, 2000, the Company was informed by the staff of the SEC that the
staff intends to recommend that the Commission bring a civil injunctive action
against the Company and an officer for alleged violations of securities laws.
The Company believes it has defenses against this staff recommendation, and
plans a formal submission to the Commission under SEC procedures. Nonetheless,
on or about June 15, 2000, the Company decided to terminate its attempt to
become licensed by the Gaming Control Board. Thus, the Company must now find
some other business to enter, or else be acquired, merge, or possibly liquidate
and close.
GOING CONCERN
At March 31, 2000, the Company had cash and cash equivalents of $373,000, and a
positive net equity of $186,000. The equity is exclusive of any remaining
amounts due pursuant to the Albuquerque office lease obligation which
approximated $300,000 at March 31, 2000. The Company believes that it presently
has insufficient cash necessary to meet its daily operating requirements without
regard to obligations currently due the debenture holders, through the fiscal
year ending March 31, 2001. The Company is not likely to be able to secure and
install a new, profitable line of business in this time frame. Thus, the
Company will likely have to either be acquired, merge, or liquidate. Without
either an infusion of capital, and / or the sale or realization of assets for
cash at greater than net book value, the Company may not be able to meet all its
present obligations. The Company is temporarily without a Chairman of the
Board, and temporarily has less than the required minimum of three Directors as
stated in the Company's Bylaws.
Due to the legal opinion of the Company's counsel, the first annual $0.1 million
payment to former debenture holders who became note holders was not made as
originally scheduled, and as of the date of this filing, has not been made. The
Company's management presently plans to put the issue forth to the Company's new
shareholders and directors for resolution. The payments that are due are, at
this point, due primarily to controlling shareholders (but not to management).
Management is seeking appropriate guidance with respect to this issue.
POTENTIAL CHANGE IN CONTROL
The Company is aware that an independent third party has had discussions with
persons representing the majority of shares outstanding regarding the possible
purchase of a controlling interest in the Company. The Company is not a party
to the negotiations or discussions, and has no knowledge of whether any such
transaction may occur, or if it did occur, what its impact might be.
CONTINGENT RIGHTS -- EL RANCHO PROPERTY
In connection with NPD, Inc.'s participation in the Delaware ITB Chancery Court
litigation (which was settled effective November 6, 1998), and in connection
with the Company's adversary proceeding against NPD, Inc. (the terms of which
were finalized as part of the NM Bankruptcy Court ITB settlement approved in
September 1998 and consummated in January
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1999, and which was administratively closed by Court order on June 26, 2000),
and furthermore in connection with the Company's adversary proceeding against
Nunzio DeSantis (which was settled effective January 7, 2000), the Company
received certain contingent rights. [See Item 10, Directors and Executive
Officers; Item 13, Certain Relationships and Related Transactions; and Note 5 to
the Company's Consolidated Financial Statements -- Related Party Transactions.]
The contingent rights which the Company received are with respect to possible
proceeds receivable in the event that International Thoroughbred Breeders' real
estate holding in Las Vegas, Nevada sold above a certain threshold amount, under
certain conditions. The Company's rights thereunder may be up to $2.0 million.
According to a Form 8-K filed with the SEC by ITB on June 7, 2000, the former El
Rancho Hotel property sold on May 22, 2000. The Company is presently
investigating its legal options necessary to realize any potential benefit which
may be due from this sale as disclosed by the ITB Form 8-K filing.
Employees
As of June 26, 2000, the Company and its subsidiaries had six employees. Two of
these employees are anticipated to leave the Company in July, 2000. Of the
remaining four employees, one (the Chief Executive Officer) is working without
salary, and the other three are temporarily receiving half or partial salary
(which does not constitute a waiver under any written contract). The Company
cannot guarantee that it will be able to retain its employees under these
conditions, or to replace employees where needed.
AVAILABLE "LOSS CARRYFORWARDS"
The Company currently has unused operating loss carryforwards ("OLC's") and
capital loss carryforwards ("CLC's") which expire at various times. Federal
OLC's total $9.7 million, and expire between the years 2012 and 2020. State
OLC's total $9.8 million, and expire between the years 2002 and 2005. CLC's
total $1.0 million, and expire in the year 2002. At a combined federal and
state corporate statutory tax rate of 38.6 percent, the present OLC's can, in a
valid situation, result in the cancellation of a requirement to pay
approximately $3.7 million in federal and state income taxes, either immediately
in one year or spread out over many years.
The requirements to utilize such loss carryforwards are strict, and the
possibilities for usage are extremely limited. In general, OLC's 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. CLC's may be used to offset future
capital gains associated with the disposal of capital assets (but may not be
used to offset ordinary income).
FRESH-START REPORTING
In accordance with the American Institute of Certified Accountants' Statement of
Position (SOP) 90-7, "Financial Reporting by Entities in Reorganization Under
the Bankruptcy Code,"
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the Company has adopted fresh-start reporting as of March 5, 1999, which gives
effect to its emergence from Chapter 11 and reorganization at that time. The
Company's Consolidated Financial Statements, included elsewhere in this
Form 10-K, provide information regarding the Company's Chapter 11 process and
adoption of fresh-start reporting.
ITEM 2. PROPERTIES.
During February 1999, the Company assumed the lease on its offices at 600
Central SW, Albuquerque, New Mexico pursuant to a legal settlement involving the
return of substantial funds to the Company (see Notes 5 and 16 of the
Consolidated Financial Statements). The lease terminates on July 31, 2002, and
the gross lease payments are presently $10,130 per month. Each August 1, the
lease payments may be adjusted according to any changes in the Consumer Price
Index. The Company has in the past subleased a portion of its space on a month-
to-month basis, and has been trying during the past year to sublease
approximately half of its space.
Rent expense for operating leases was approximately $123,000 for the fiscal
year-ended March 31, 2000 (which was partially offset by sublease rental income
of $16,000), as compared to rent expense of $28,000 for the fiscal year ended
March 31, 1999, $14,000 for the fiscal year ended March 31, 1998, $179,000 for
the fiscal year ended March 31, 1997, and $306,000 for the fiscal year ended
March 31, 1996.
ITEM 3. LEGAL PROCEEDINGS.
SEC Investigation. On February 16, 1999, the Company was notified by its
counsel that it was subject to an investigation by the SEC. The Company
cooperated fully with the staff of the SEC to aid their understanding of the
matters of concern. Management believes that the investigation is now complete.
SEC Recommendation. On June 13, 2000, the Company was informed by the staff of
the SEC that the staff intends to recommend that the Commission bring a civil
injunctive action against the Company, as well as one against its chief
executive officer, for alleged violations of federal securities laws. The SEC
staff has informed the Company that it does not intend to recommend civil
penalties, fines, or disgorgement from the Company, but does intend to recommend
civil penalties against the officer as an individual. Management believes that
the SEC staff recommendations are based on activities that took place prior to
October 1997 in connection with the Company's tender offer for the Company's
debentures, the adequacy of the Company's disclosure related to the tender
offer, the purchase of debentures at a discount from face value, and previously
reported transactions in connection with International Thoroughbred Breeders,
Inc.
Under SEC procedures, the Company plans to respond to the SEC staff's
recommendation in a formal submission to the Commission, and then enter into
discussion with the SEC. Thereafter, the Commission may follow the SEC staff
recommendations, or decline to follow them, or take
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other action. If the Commission follows the staff recommendations, an extensive
legal process could proceed in Federal Court. Should an injunction ultimately be
issued against the Company, the Company would be prohibited from engaging in
acts similar to the ones that led to the recommendation for the injunction, and
from violations of federal securities laws. Such an injunction against the
Company would have to be disclosed in any future filings or registrations of
Company securities, and may have other ramifications as well.
The Company believes that it has defenses with respect to the SEC staff
allegations against it, but is unable to predict the outcome of the process.
Closing of the Bankruptcy. On July 2, 1999, the Company filed a Motion for
Final Decree to close the bankruptcy estate. On September 28, 1999, a court
hearing was held on the motion, and on January 13, 2000, the Bankruptcy Court
entered its final decree, thereby closing the bankruptcy.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
On March 5, 1999, the Plan of Reorganization became effective, and all of the
Company's outstanding Common Stock, Preferred Stock, and Class A and B Warrants
were cancelled. These cancelled equities were given certain substitute rights
under the Plan, and as a result, the cancelled common stock had continued to
trade for about a year. These old common shares (which originally had imprinted
the Cusip number of 124767 104, which was changed after the Company's name
change, to Cusip number 052786 100, and which bore the Company's prior name
"CAPX Corporation," and which were blue) are no longer valid and no longer
trade.
The Company's Common Stock had traded under the symbol "AUTL" in the over-the-
counter market on the Electronic Bulletin Board (the OTC BB), until March 18,
2000. At the end of trading on that date, as previously announced and
scheduled, the Company halted the trading of the old shares (which had been
cancelled since March 5, 1999), since the subscription rights would no longer be
in effect, per the Plan of Reorganization, on the next trading day. The ticker
symbol AUTL will no longer be used to represent the Company's shares.
On April 18, 2000, the subscription under the Registration Statement concluded,
and the new ownership of the Company was established. On or about April 20,
2000, the shares of new Common Stock were distributed, resulting in new total
stock outstanding of 1,088,803 shares. The Company's stock is presently
available for trade via the NQB Pink Sheets, and the Company is attempting to
get the stock listed on the Over The Counter Bulletin Board (the "OTC BB").
Listing on the OTC BB enables the easy lookup of stock price quotes on the
internet by investors. Although it is available for trading, there have been no
trades of the stock since it has been issued, as of June 26, 2000. The new
ticker symbol is "ALEN," and the new shares have a new Cusip number, 052786 308.
The new shares bear the legend "AutoLend Group, Inc.," and are green.
The approximately 6 million old shares (i.e., AUTL) which traded between March
5, 1999 and March 18, 2000 did not represent the traditional equity claim on the
Company during that period, but instead were effectively a rights certificate.
The approximately 1.1 million new shares (i.e., ALEN) which are now the only
shares outstanding (and which were distributed in April, 2000) are again a
traditional equity claim share.
Previously, and until May 21, 1996, the Common Stock and Class A Warrants were
quoted on the Nasdaq Smallcap Market under the symbols "CARS" and "CARSW,"
respectively. On that date, the Common Stock and the Class A Warrants were
delisted from the Nasdaq Smallcap Market because of the Company's failure to
meet minimum net equity eligibility criteria for continued listing. The Common
Stock was also listed on the Boston Stock Exchange under the
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symbol "OTO" until August 20, 1996, when it was also delisted for failure to
meet that exchange's minimum net equity requirements.
The following table states for the periods indicated the range of high and low
bid prices for the old Common Stock and Class A Warrants as reported on the
Electronic Bulletin Board. As noted above, the old Common Stock (as well as the
Warrants and Preferred Stock) was canceled on March 5, 1999, and the following
does not necessarily represent any trading pattern that may develop for the new
Common Stock issued in late April 2000. There were no trades of the Preferred
Stock during the fiscal years ended March 31, 1999 or 2000, and, therefore, they
have not been reflected in the schedule below. The prices reflect inter-dealer
prices without markup, markdown, or commissions and may not necessarily
represent actual transactions.
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Common Stock Class A Warrants (1)
------------ --------------------
High Low High Low
---- --- ---- ---
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Old Common Stock (cancelled March 5, 1999):
Fiscal Year ended March 31, 1999:
Quarter ended June 30, 1998 0.07 0.01 --(2) --(2)
Quarter ended September 30, 1998 0.06 0.01 --(2) --(2)
Quarter ended December 31, 1998 0.03 0.01 --(2) --(2)
Quarter ended March 31, 1999 0.10 0.01 --(2) --(2)
Fiscal Year ended March 31, 2000:
Quarter ended June 30, 1999 0.12 0.02 --(2) --(2)
Quarter ended September 30, 1999 0.44 0.02 --(2) --(2)
Quarter ended December 31, 1999 0.34 0.04 --(2) --(2)
Quarter ended March 31, 2000 0.12 0.03 --(2) --(2)
New Common Stock (distributed April 20, 2000):
Fiscal Year ended March 31, 2001:
Period of April 1 to June 26, 2000 (4) n/a n/a --(3) --(3)
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(1) Each Class A Warrant entitled the registered holder thereof to purchase one
share of Common Stock and one Class B Warrant through January 31, 1998, at
an exercise price of $4.00 subject to adjustment. Each Class B Warrant
entitled the registered holder thereof to purchase one share of Common
Stock from the date of issuance through January 31, 1998, at an exercise
price of $7.00 subject to adjustment. The Company also granted Warrants to
individuals to purchase 25,000 Common Shares at $3.00 per share through
March 11, 2001, and 20,000 Common Shares at $12.25 through September 18,
2001. The Plan of Reorganization included provisions for treatment of the
Warrants, wherein all Warrants expired on March 4, 2000.
(2) There were no reported trades of Class A Warrants during these periods.
(3) After March 4, 2000, the Warrants ceased to have any legal or financial
significance.
(4) There have been no trades of the new stock, as of June 26, 2000.
At March 4, 1999, there were 6,079,530 shares of (old) Common Stock outstanding
and 80 holders of record. As of March 5, 1999, all outstanding shares of Common
Stock were cancelled pursuant to the Plan of Reorganization. However, these old
shares continued to trade, as they conferred (modified) rights as prescribed in
the Plan of Reorganization, until sixty days
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after the Company's Plan of Reorganization became effective (which occurred on
January 19, 2000). Thus, on March 19, 2000, these old (cancelled) shares no
longer had any legal significance, and the Company had their trading terminated
(which was scheduled and announced in advance). On April 18, 2000, the
subscription under the Registration Statement concluded, and the new ownership
of the Company was established. At June 26, 2000, there were 1,088,803 shares of
(new) Common Stock outstanding and 8 holders of record (excluding shares held in
street name); the Company estimates that there are a total of approximately 25
beneficial owners. In addition, there were 4,875 equivalent shares subscribed-
for which were issuable; these shares represent the 25% payment received on
19,500 shares which were purchased under the subscription on the 25% per quarter
payment method. At March 31, 2000, the number of shares purchased pursuant to
this subscription were accounted for as issuable equal to the equivalent of
shares actually 100% paid for. As there are no requirements binding a subscriber
to continue making future payments towards the subscription, an accrual for the
unpaid amounts was not recorded at March 31, 2000.
The Company has paid no dividends on its Common Stock. The Company presently
intends to retain any earnings to finance the development of its future
business.
ITEM 6. SELECTED FINANCIAL DATA.
An order confirming the Company's Plan of Reorganization became effective on
March 5 1999, and on January 13, 2000, the Bankruptcy Court entered its final
decree, thereby closing the bankruptcy. In accordance with the American
Institute of Certified Public Accountants' Statement of Position 90-7, the
Company was required to adopt fresh-start accounting as of March 5, 1999.
The predecessor Company's financial statements (prior to March 6, 1999) are not
comparable to the reorganized Company's financial statements (subsequent to
March 5, 1999). (See Note 1 to the Company's Consolidated Financial
Statements.) However, for purposes of management's discussion and analysis of
results of operations, the year ended March 31, 1999, is being compared to 2000
and 1998 since the results of operations are comparable except for the
extraordinary item in 1999, which resulted from the implementation of the Plan
of Reorganization.
The following selected financial data of the Company for the fiscal years ended
March 31, 2000, 1999, 1998, 1997, and 1996 has been derived from the Company's
audited consolidated financial statements and should be read in conjunction with
the consolidated financial statements and the notes thereto.
10
<PAGE>
<TABLE>
<CAPTION>
Fiscal Years Ended March 31:
----------------------------------------------------------------------
In Thousands (except earnings per share)
2000 1999 1998 1997 1996
----------- ----------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Finance charges on installment contracts $ 10 $ 117 $ 588 $ 1,671 $ 7,808
Net revenue from matured insurance policies 5 248 9 404 542
----------- ----------- ------------- ------------- ------------
Total net revenues $ 15 $ 365 $ 597 $ 2,075 $ 8,350
=========== =========== ============= ============= ============
Operating (loss), including loan loss provisions and
recoveries $(1,221) $ (998) $ (1,469) $ (7,402) $(10,404)
Net interest income/(expense) 87 (187) (508) (1,816) (2,687)
Write-off of assets, and accrual of expenses
related to the consumer loan and viatical businesses - (69) (132) (2,109) -
Insurance policy write-down recapture 106 536 - - -
Cancellation of Florida tax claim 178 - - - -
Realized gains/(losses) on sales of marketable securities - - - - 1
Tax offset to loss - - - 86 4,936
Miscellaneous other income/(expense), net 45 (40) (101) (461) (27)
----------- ----------- ------------- ------------- ------------
Results of operations, including interest expense,
before debenture conversion charge (805) (758) (2,210) (11,702) (8,181)
Non-cash debenture conversion charge - - (6,261) - -
----------- ----------- ------------- ------------- ------------
Net loss before reorganization costs, bankruptcy court
settlements, discontinued operations, extraordinary
items, and cumulative effect of change in
accounting principle (805) (758) (8,471) (11,702) (8,181)
Bankruptcy reorganization expenses (190) (492) (212) - -
Gain on adversary claim and (loss) on
settlement ITB / NPD 451 (1,368) - - -
----------- ----------- ------------- ------------- ------------
Net loss before discontinued operations,
extraordinary items, and cumulative effect of
change in accounting principle (544) (2,618) (8,683) (11,702) (8,181)
Discontinued operations:
(Loss) from operations of
discontinued subsidiary - - - (153) (48)
Gain on sale of subsidiary - - - 320 -
Extraordinary items:
Gain as result of reorganization 178 5,342 - - -
Net gain on early extinguishment of debt - - 3,172 - 7,307
Cumulative effect of change in accounting principle - - - - 177
----------- ----------- ------------- ------------- ------------
Net income/(loss) $ (366) $2,724 $ (5,511) $ (11,535) $ (745)
=========== =========== ============= ============= ============
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
Per Share Data:
Fiscal Years Ended March 31:
-------------------------------------------------------------
2000 1999 1998 1997 1996
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Loss per share before reorganization costs, bankruptcy court settle-
ments, discontinued operations, extraordinary items, and cumulative
effect of change in accounting principle $ (0.77) * $ (1.40) $ (2.53) $ (1.77)
Bankruptcy reorganization expenses (0.18) * (0.04) - -
Gain on adversary claim, (loss) on settlement ITB / NPD 0.43 * - - -
Discontinued operations - * - 0.04 (0.01)
Extraordinary items:
Net gain as a result of reorganization 0.17 * - - -
Gain on early extinguishment of debt - * 0.53 - 1.58
Cumulative effect of change in accounting principle - * - - 0.04
----------- ----------- ----------- ----------- -----------
Net income/(loss) $ (0.35) * $ (0.91) $ (2.49) $ (0.16)
=========== =========== =========== =========== ===========
Weighted average number of common and common equivalent
shares outstanding 45,367 * 6,039,391 4,634,530 4,634,530
Weighted average number of common and common equivalent
shares issuable and outstanding 1,042,237 * -- -- --
Balance Sheet Data: As of March 31:
-------------------------------------------------------------
2000 1999 1998 1997 1996
---------- ----------- ----------- ----------- -----------
Total Assets $ 772 $ 5,197 $ 7,640 $ 16,276 $ 24,485
Total Liabilities 586 4,629 11,078 28,128 24,802
Total Stockholders' Equity 186 568 (3,438) (11,852) (317)
</TABLE>
* The per share data for 1999 above has not been presented due to the
cancellation of all common stock and common stock equivalents as of March 5,
1999. No uncancelled stock was outstanding at March 31, 1999.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
Although the Company was organized in May 1989, it did not begin its viatical
settlements business until April 1991, when it acquired certain assets of Living
Benefits, Inc. ("LBI"), including covenants not to compete from LBI's former
owners. In April 1993, the Company acquired certain operating assets of
American Life Resources Corporation (ALR Corp.), which was also engaged in the
viatical settlements business. ALR Corp. retained the viatical insurance
Policies it had purchased before January 14, 1993. The Company generally ceased
purchasing the Policies in September 1994, and by July 1995, had sold the
majority of Policies still outstanding. Goodwill and intangibles related to
these acquisitions have been fully amortized. The Company still holds a small
residual portfolio of Policies.
The Company commenced purchasing "sub-prime" consumer used-car Loans, or
installment contract receivables, in May 1994 through AutoLend Corporation, and
ceased purchasing them in December 1995. Loan loss provisions for this business
from May 1994 through March 1997 totaled $13.9 million, on revenues of $12.8
million for the same period. The results of this
12
<PAGE>
business were the primary reason the Company was unable to service its
outstanding Debentures, which forced the Company to file the Bankruptcy
Petition.
For over two years, the Company's activities have been concentrated on resolving
the (recently-concluded) bankruptcy, and in its attempt to develop and obtain
licensure as a distributor for a gaming business (which has been a division of
the Company, under the name of Kachina Gaming), which attempt was terminated in
June, 2000. Additionally, during the last year the Company has worked to get
its Registration Statement (as required by the Reorganization Plan) made
effective (which was made effective by the SEC January 19, 2000). The Company
has also continued to collect amounts due from the residual Loan portfolio as
well as the residual Policy portfolio.
At March 31, 2000, the Company had cash and cash equivalents of $373,000, and a
positive net equity of $186,000. The equity is exclusive of any remaining
amounts due pursuant to the Albuquerque office lease obligation, which
approximated $300,000 at March 31, 2000. The Company believes that it presently
has insufficient cash necessary to meet its daily operating requirements without
regard to obligations currently due the debenture holders, through the fiscal
year ending March 31, 2001. The Company is not likely to be able to secure and
install a new, profitable line of business in this time frame. Thus, the
Company will likely have to either be acquired, merge, or liquidate. Without
either an infusion of capital, and / or the sale or realization of assets for
cash at greater than net book value, the Company may not be able to meet all its
present obligations.
RESULTS OF OPERATIONS
An order confirming the Company's Plan of Reorganization became effective on
March 5 1999, and on January 13, 2000, the Bankruptcy Court entered its final
decree, thereby closing the bankruptcy. In accordance with the American
Institute of Certified Public Accountants' Statement of Position 90-7, the
Company was required to adopt fresh-start accounting as of March 5, 1999.
The predecessor Company's financial statements (prior to March 6, 1999) are not
comparable to the reorganized Company's financial statements (subsequent to
March 5, 1999). (See Note 1 to the Company's Consolidated Financial
Statements.) However, for purposes of management's discussion and analysis of
results of operations, the year ended March 31, 1999, is being compared to 2000
and 1998 since the results of operations are comparable except for the
extraordinary item in 1999 which resulted from the implementation of the Plan of
Reorganization.
Fiscal year ended March 31, 2000, compared to fiscal year ended March 31, 1999
The Company recorded a net loss of approximately $0.4 million for the year ended
March 31, 2000. Contributing to the net loss was an operating loss of $1.2
million and $0.2 million
13
<PAGE>
in reorganization expenses, which were partially offset by $1.0 million in non-
operating income, court settlements, and extraordinary items.
Net revenues realized from viatical insurance Policies in the year ended March
31, 2000, were approximately $5,000, as compared to $248,000 in net viatical
revenues in the year ended March 31, 1999. The current period revenues were the
result of the maturity of one Policy, for gross proceeds of $38,000, against a
cost of $33,000. These amounts exclude the impact of the sale of four Policies,
the results of which were booked as a gain rather than as revenues. 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 five Policies will be irregular, depending primarily upon
the timing of mortality of the insured. Net viatical revenues from the Policies
are determined by subtracting the Policy cost from the relevant face value after
a Policy "matures" (becomes payable by the insurance company).
Revenues from sub-prime consumer used-car Loans (which are also referred to as
installment contracts receivable) were approximately $10,000 during the year
ended March 31, 2000, which represented a $107,000 decrease compared to the
$117,000 realized during the year ended March 31, 1999. 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. There will be no future revenues from this portfolio, as the "active"
portion has now been reduced to zero, as all the Loans have either been paid in
full or written-off. The Company's long-standing policy has been to write-off
Loans after they have become more than six months in arrears; at that point,
the Loan may be pursued for collection, but is categorized as "inactive."
Collections on inactive Loans are not booked as revenues, but as income. The
primary significance of the Loan portfolio in the future will be in this loan
loss recovery on the "inactive" Loans, as described below. On April 1, 2000,
the Company adopted a plan to sell the used car Loan portion of the Company's
business, and henceforth this business activity will be considered a
discontinued operation. Income from loan loss recovery in connection with the
portfolio of Loans for the year ended March 31, 2000 represent a $0.3 million
net recovery of previously charged-off Loans, in excess of current period
provisions. This is compared to a net recovery of $0.4 million for the year
ended March 31, 1999. This inactive portion of the portfolio consists of
approximately 3,900 written-off Loans; the Company is presently in discussions
regarding the possible sale of the entire Loan portfolio. There is also a sales-
and use-tax refund opportunity applicable to those receivables because the
borrower defaulted. The Company is has pursued a potential refund of some of
these taxes. The amounts relating to these events are not readily determinable,
and recovery is not certain. Therefore, these consolidated financial statements
do not reflect the potential financial impact related to these activities.
General and administrative expenses were $1.5 million during the year ended
March 31, 2000, which represented a reduction of $0.3 million, compared to the
$1.8 million expended during the year ended March 31, 1999. This decrease
resulted from a combination of offsetting factors, including a $163,000 expense
reduction due to the non-reoccurrence of the Florida (prior-year) tax claim, a
$140,000 reduction in insurance costs, a $76,000 reduction in legal and
accounting
14
<PAGE>
fees (exclusive of S-1 and reorganization costs), and a $42,000 reduction in car
Loan portfolio administration expenses, all of which were partially offset by a
$94,000 increase in rent expenses and $73,000 in net expenses of the S-1
Registration (after proceeds). The $1.5 million expended during the year-ended
March 31, 2000 consisted primarily of $679,000 in salaries, payroll taxes, and
benefits, $348,000 in legal and accounting fees, $123,000 in rent, $96,000 in
car Loan portfolio administration costs, and $51,000 in insurance expenses.
(These amounts exclude the $0.2 million and $0.5 million in post-Chapter 11
reorganization costs for the fiscal years ended March 31, 2000 and 1999,
respectively.)
Operating losses for the year ended March 31, 2000, were $1.2 million, compared
to operating losses of $1.0 million for the year ended March 31, 1999. In
total, the $0.2 million increase in operating losses were primarily due to a
$0.4 million decrease in combined revenues and operating incomes, as well as the
decreased recovery of bad debt of $0.1 million, which were partially offset by
the reduction in general and administrative expenses (exclusive of
reorganization costs) of $0.3 million.
The impact of non-operating income, court settlements and extraordinary items
for the year ended March 31, 2000, was a net $1.0 million, compared to $4.2
million for the year ended March 31, 1999. This results in a net decrease in
non-operating income of $3.2 million, which difference is due to a confluence of
one-time events, as follows. The $1.0 million non-operating income for the
present period was primarily due to the $451,000 gain as a result of the
settlement with Nunzio DeSantis (see Item 13., Certain Relationships and Related
Transactions), a cancellation of a $178,000 Florida tax claim, a $178,000 gain
on a Debenture settlement, a viatical policy write-down recapture of $106,000,
and interest income of $87,000. The $4.2 million non-operating income for the
prior year was primarily due to the $5.3 million gain on debt forgiveness, a
viatical policy write-down recapture of $0.5 million, and interest income of
$0.5 million, all of which was partially offset by a $1.4 million loss on the
NPD/ITB settlement, $0.6 million in accrued interest expense, and $0.1 million
in miscellaneous other expenses.
In addition to the above, for the year ended March 31, 2000, the Company
incurred $0.2 million in reorganization costs related to the bankruptcy
proceedings, compared to $0.5 million in the prior year, amounting to a
reduction of $0.3 million in reorganization costs.
The net effect of the foregoing was a net loss of $0.4 million for the year
ended March 31, 2000. The net income for the same period last year was $2.7
million. The $0.4 million loss in the current period was due primarily to an
operating loss of $1.2 million and reorganization costs of $0.2 million,
partially offset by non-operating income of $1.0 million. The net income for
the prior year of approximately $2.7 million was primarily due to non-operating
income of $4.2 million, partially offset by an operating loss of $1.0 million
and reorganization costs of $0.5 million. The net decrease in income of $3.1
million, as compared to the prior fiscal year, was attributable primarily to the
prior year $5.3 million gain on debt forgiveness effected by the bankruptcy,
which was partially offset that year by a $1.4 million loss on the NPD/ITB
settlement. Additionally, the most recent fiscal year had $0.6 million higher
in other net non-
15
<PAGE>
operating income and $0.3 million lower in reorganization costs, which were
partially offset by a $0.1 million higher operating loss.
Fiscal year ended March 31, 1999, compared to fiscal year ended March 31, 1998
The Company recorded a net income of approximately $2.7 million for the year
ended March 31, 1999. Contributing to the net income was an approximately
$5.3 million gain on debt forgiveness, which was offset by an approximately
$1.4 million loss on the NPD/ITB settlement, an operating loss of $1.0 million,
and other expenses of $0.2 million.
Net viatical revenues realized from viatical insurance Policies in the year
ended March 31, 1999, were $0.2 million, as compared to de minimis revenues in
the year ended March 31, 1998. The increase was due to the maturity of 4
policies.
Revenues from consumer used-car Loans were approximately $0.1 million during the
year ended March 31, 1999, which represented a $0.5 million decrease compared to
the $0.6 million realized during the year ended March 31, 1998. This decrease
is a result of the reduced size of the Company's portfolio of the Loans.
Provisions for credit losses in connection with the portfolio of car Loans for
the year ended March 31, 1999 represent a $0.3 million net recovery of
previously charged-off loans, in excess of current period provisions. This is
compared to a net recovery of $41,000 for the year ended March 31, 1998. 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.
General and administrative expenses were $1.8 million during the year ended
March 31, 1999, which represented a reduction of $0.3 million, compared to the
$2.1 million expended during the year ended March 31, 1998. This decrease
resulted primarily from a $0.3 million decrease in the cost of administering and
collecting the portfolio of Loans (which is included in general and
administrative expenses). (These amounts exclude the $0.3 million in post-
Chapter 11 reorganization costs.)
Operating losses for the year ended March 31, 1999, were $1.0 million, compared
to losses of $1.5 million for the year ended March 31, 1998. In total, the
$0.5 million reduction in operating losses were primarily due to (as detailed
above) the reduction in general and administrative expenses (exclusive of
reorganization costs) of $0.3 million and the recovery of bad debt of
$0.4 million, which were partially offset by a $0.2 million decrease in total
net revenues.
The impact of non-operating items for the year ended March 31, 1999, was a net
$4.2 million income, compared to a non-operating loss of $3.8 million for the
year ended March 31, 1998. The $4.2 million income for the March 1999 fiscal
year was primarily due to the $5.3 million gain on debt forgiveness, a viatical
policy write-down recapture of $0.5 million, and interest income of
$0.5 million, all of which was partially offset by a $1.4 million loss on the
NPD/ITB
16
<PAGE>
settlement, $0.6 million in accrued interest expense, and $0.1 million in
miscellaneous other expenses. The $3.8 million non-operating loss for the
earlier year was primarily due to the non-recurring $6.3 million Debenture
conversion charge, offset by a $3.2 million gain on early extinguishment of
debt, plus interest income of $0.4 million, partially offset by $0.9 million in
accrued interest expense and $0.2 million in other miscellaneous expense.
In addition to the above, for the year ended March 31, 1999, the Company
incurred $0.5 million in reorganization costs related to the bankruptcy
proceedings, compared to $0.2 million in the prior year.
The net effect of the foregoing was a net income of $2.7 million for the year
ended March 31, 1999. The net loss for the previous period was $5.5 million.
The increase in net income of $8.2 million was attributable primarily to a
combination of the following items. During the year ended March 31, 1999, the
Company recorded a $5.3 million gain on debt forgiveness offset by a
$1.4 million loss on the NPD/ITB settlement, plus $0.2 million in other non-
operating expense items, and a $1.0 million operating loss, resulting in a total
net income of $2.7 million. During the year ended March 31, 1998, 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, an operating loss of
$1.5 million and $0.9 million in other non-operating expenses for a total net
loss of $5.5 million.
LIQUIDITY AND CAPITAL RESOURCES
The Company's immediate viability as a going concern depends upon the successful
installation of a new line of business and the attainment of profitability. On
September 22, 1997, the Company filed for voluntary bankruptcy reorganization.
On March 5, 1999, the Company's Plan of Reorganization became effective, and on
January 13, 2000, the Bankruptcy Court entered its final decree, thereby closing
the bankruptcy. Cash flow from operations was a negative $1.5 million for the
fiscal year ended March 31, 2000, and a negative $0.7 million for each of the
fiscal years ended March 31, 1999 and 1998. At March 31, 2000, the Company had
cash and cash equivalents of $373,000, and a positive net equity of $186,000.
The equity is exclusive of any remaining amounts due pursuant to the Albuquerque
office lease obligation, which approximated $300,000 at March 31, 2000. The
Company believes that it presently has insufficient cash necessary to meet its
daily operating requirements without regard to obligations currently due the
debenture holders, through the fiscal year ending March 31, 2001. The Company
is not likely to be able to secure and install a new, profitable line of
business in this time frame. Thus, the Company will likely have to either be
acquired, merge, or liquidate. Without either an infusion of capital, and / or
the sale or realization of assets for cash at greater than net book value, the
Company may not be able to meet all its present obligations.
The Company's portfolio of car Loans at March 31, 2000, had a net book value of
zero, and a face-value of approximately $15 million, and consisted of
approximately 3,900 inactive (written-off) Loans. A portion of this Loan
portfolio is presently "out of statute" (i.e., no longer legally enforceable).
The Company ceased purchasing these Loans in December 1995, and is presently in
discussions to sell the portfolio. Henceforth, the Loan operations will be
classified
17
<PAGE>
as discontinued. The Company's portfolio of unmatured viatical insurance
Policies totaled five at March 31, 2000, having a combined face value of
$366,000 and a net book value of $36,000. The Company generally ceased
purchasing Policies in September 1994.
There was a de minimus amount of cash used by investing activities for the
fiscal year ended March 31, 2000. For the fiscal year ended March 31, 1999,
cash used by investing activities was $4.9 million, which was primarily the
result of the return of the $2.0 million escrow deposit account in connection
with the NPD transaction for the ITB Shares, the $2.3 million partial repayment
of the loan to NPD, and the early redemption of IAP securities of $0.6 million.
Cash used in financing activities for the fiscal year ended March 31, 2000 was
$3.0 million, which was primarily due to payments to qualified former Debenture
holders, per the Plan of Reorganization. There was no cash provided by or used
in financing activities during the fiscal year ended March 31, 1999.
In summary, the Company decreased its cash and cash equivalents by $4.6 million
during the fiscal year ended March 31, 2000, to a total of $0.4 million. The
decrease was largely due to payments to qualified former Debenture holders (per
the Plan of Reorganization) of $2.9 million, and the $1.5 million net use of
cash for operating activities and other business expenses. In comparison, there
was a $4.2 million increase in cash during the fiscal year ended March 31, 1999,
primarily due to the return of the escrow deposit of $2.0 million, the partial
repayment of the NPD loan of $2.3 million, and the early redemption of the IAP
securities, partially offset by the $0.7 million net use of cash from
operations. During the fiscal year, the Company's net equity decreased, from a
positive $0.6 million at March 31, 1999, to a positive $0.2 million at
March 31, 2000, a decrease of approximately $0.4 million.
The Company's primary source of capital has been sales of equity and debt
securities, including its initial equity offering in July 1990, which resulted
in net proceeds of approximately $7.6 million, and a September 1991 sale of
Debentures which resulted in net proceeds of $51.4 million. As a result of
prior year Debenture prepayments without penalty and the Debenture exchange
offer, the outstanding principal balance of the Debentures was $7.2 million,
(plus accrued interest), at March 4, 1999, prior to the effective date of the
Plan of Reorganization. On March 5, 1999, all outstanding Debenture debt (and
accrued interest) was canceled in conjunction with the Plan of Reorganization.
The Company's Registration Statement became effective on January 19, 2000, under
which the Company sold shares and thereby received a small amount of additional
equity capital (and distributed other shares to certain former Debenture holders
without the receipt of additional capital).
During the fiscal year ended March 31, 2000, the Company suffered recurring
losses from operations that has raised substantial doubt about its ability to
continue as a going concern. As a result of the Company's economic condition
and the legal opinion of the Company's counsel, the first $0.1 million payment
to former debenture holders who became note holders was not made as originally
scheduled, and as of the date of this filing, has not been made (see Notes 3 and
16 to the Consolidated Financial Statements).
18
<PAGE>
Year 2000 Issue
Like any other company, advances and changes in technology can significantly
affect the business and operations of the Company. For example, the "Y2K"
problem is that some computer systems may not properly recognize the year 2000
or years thereafter. 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.
The Company has two outside service-providers upon which we rely, and whose
operational failure could in turn impact our operations. The Company has been
assured by these third-party providers that they are in compliance with the year
2000 issue; however, the assurances may not be legally binding. Thus far, we
have not encountered or been advised of any Y2K problems regarding these
providers.
The Company's present internal base of operations is not heavily dependent upon
computers. Certain "Y2K" testing and upgrading has been completed.
Additionally, data and program files are backed-up on tape regularly and are
stored off-site. Thus far, we have not become aware of any internal Y2K
problems.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The responses to this Item are submitted in a separate section of this Annual
Report on Form 10-K. See Index to Consolidated Financial Statements on page
F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
19
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table gives certain information regarding the Company's directors
and executive officers. Directors serve until the next annual meeting of
stockholders and until their successors are duly elected and qualified.
Officers serve at the pleasure of the Board of Directors.
<TABLE>
<CAPTION>
Year First
Elected
Name Age Director Position
<S> <C> <C> <C>
Nunzio P. DeSantis 49 1993 President, Chief Executive
Officer; former Chairman of the
Board and Director
Philip J. Vitale, M.D. 54 1992 Director, and Corporate Secretary
Jeffrey Ovington 48 N/A Executive Vice President
and Treasurer
</TABLE>
Nunzio P. DeSantis was Chairman of the Board, President and Chief Executive
Officer of the Company from September 1996 through April 30, 2000. On May 1,
2000, Mr. DeSantis resigned in his capacity as Chairman and Director, but
continues to serve as President and Chief Executive Officer. Mr. DeSantis
previously served as Chief Executive Officer and Chairman of the Board of
Directors from the Company's inception in 1989 until his resignation from these
positions in September 1993 and May 1994, respectively. Mr. DeSantis has also
served as Chief Executive Officer and a director of International Thoroughbred
Breeders, Inc. ("ITB"), an American Stock Exchange listed company, from January
1997 to January 1999. Mr. DeSantis also is President and Chairman of the Board
of NPD, Inc., a private company that owned an approximately 25 percent interest
in ITB. Before September 1995 and for more than five years, Mr. DeSantis was
Chairman of the Board and Chief Executive Officer of Diagnostek, Inc., a New
York Stock Exchange traded company (until its sale in 1995).
Philip J. Vitale, M.D., has been a director of the Company since February 1992,
and has also become Corporate Secretary (since April 2000). Dr. Vitale has been
a doctor of medicine, specializing in urology, at the Lovelace Medical Center,
Albuquerque, New Mexico ("Lovelace"), since 1978. Dr. Vitale served on the
Board of Directors of Lovelace from 1985 until 1989, and on other governing
boards and in other governing capacities for Lovelace at various times from 1980
until 1989, while it was owned by several different entities.
Julius Golden became a director of the Company effective April 17, 2000.
Mr. Golden is, and has been for more than the last five years, President of
Group West Advertising, Inc.
20
<PAGE>
Mr. Golden resigned effective June 19, 2000, due to an insufficient number of
Board members for a properly functioning Board.
Jeffrey Ovington has been Executive Vice President of the Company since
September 1996. From May 1993 to July 1995, he served in various capacities,
including Executive Vice President, with Diagnostek, Inc., a leading pharmacy
benefit manager with annual revenues in excess of $400 million, which was
acquired by Value Health, Inc. For 14 years prior thereto, he served in various
capacities with General Electric Company, Martin Marietta Corp. (now Lockheed-
Martin), and ITT. The Company executed an employment letter agreement with Mr.
Ovington, which set his base salary at $115,000 per year and provides for
severance pay under certain conditions.
The Company is temporarily without a Chairman of the Board, and temporarily has
less than the required minimum of three Directors as stated in the Company's
Bylaws. Management has requested that the representative of the majority of
shares outstanding appoint one or more Directors to the Board. The Company
anticipates conducting an organizational shareholder meeting and vote as soon as
practicable.
ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
The following table provides information concerning the compensation paid for
fiscal years ended March 31, 2000, 1999, and 1998, to persons who served as
Chairman of the Board, President, Chief Executive Officer, Executive Vice
President, and Treasurer during fiscal year 2000. There was no other executive
officer of the Company who served at the end of fiscal year 2000.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
SUMMARY COMPENSATION TABLE
---------------------------------------------------------------------------------------------------------------------------
Name and Principal All other
Position Annual Compensation Long Term Compensation Compen-
sation ($)(1)
----------------------------------------------------------------------------------------------------------------------------
Awards Payout
----------------------------------------------------------------------------------------------------------------------------
Other
Annual Restricted Securities
Compen- Stock Underlying
sation Award(s) Options/ LTIP
Year Salary ($) Bonus ($) ($)(1) ($) SARs(#) Payout($)
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Nunzio P. DeSantis 2000 $237,500 $ - $ - $ - - $ - $ -
President, and Chief 1999 18,269 (2) - - - - - -
Executive Officer 1998 281,250 - - - 2,000,000 - -
--------------------------------------------------------------------------------------------------------------------------
Jeffrey Ovington 2000 $122,200 (3) $ - $ - $ - - $ - $ -
Executive Vice President 1999 156,478 (3) 100,000 (3) - - - - -
and Treasurer 1998 110,036 - - - - - 100,000
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
21
<PAGE>
(1) Except as indicated, the aggregate amount of perquisites and other personal
benefits paid to the named persons did not exceed the lesser of 10 percent
of each officer's total annual salary and bonus for the fiscal years and
$50,000.
(2) Of the $237,500 that was originally listed for fiscal year 1999 salary for
Nunzio P. DeSantis, only $18,269 was actually paid to him, and the other
$219,231 was accrued as a contingent liability as of March 31, 1999.
However, this unpaid, accrued salary was later canceled as part of the
settlement of the adversary claim against Mr. DeSantis (see Item 13
"Certain Relationships and Related Transactions").
(3) Of the fiscal year 1999 compensation listed for Mr. Ovington, only $95,661
was actually paid during that fiscal year; the remainder was accrued as a
contingent liability at March 31, 1999, and was then paid in the following
fiscal year.
As of June 26, 2000, Mr. DeSantis is temporarily receiving no salary, and Mr.
Ovington is temporarily receiving partial salary; no contractual rights are
waived by this situation.
COMPENSATION OF DIRECTORS
Prior to the Company's Reorganization, Directors who are not employees of the
Company received immediately exercisable Options to purchase 125,000 shares of
the Company's old Common Stock for market price on the date of issue. In
connection with the Plan of Reorganization, all Options to purchase shares of
old Common Stock were canceled and were replaced with substitute rights to
purchase new Common Stock at $4.00 per share, which rights expired on March 4,
2000. At present, no Directors hold any Options, and no Directors receive
salary or pay for their services as Director.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
On March 5, 1999, the Company's Plan of Reorganization became effective, and all
of the outstanding Common Stock, Preferred Stock, Class A and B Warrants, and
Options were cancelled. The Company's Registration Statement on Form S-1 was
made effective by the SEC on January 19, 2000, and on April 18, 2000, the final
subscription period ended. On or about April 20, 2000, the Company's new Common
Stock shares were distributed.
In accordance with the Plan of Reorganization, the former Debenture holders were
issued, in aggregate, 1.02 million shares of new Common Stock, out of a total of
1.09 million shares issued. There are five former Debenture holders who
received stock in this distribution. The largest such holder is believed to
presently have approximately 63 percent of the total outstanding shares, and the
second largest holder has approximately 24 percent of the shares. These former
Debenture holders now own a majority of the Company, and gained this position
with the distribution of the new shares in April 2000. The majority owner was
notified as to his new majority position immediately after the end of the final
subscription period, in April 2000.
The following table states certain information concerning stock ownership of all
persons known by the Company to beneficially own five percent or more of the
Company's outstanding Common Stock, as well as holdings of each current
director, and all current directors and
22
<PAGE>
executive officers of the Company as a group, as of June 26, 2000, when the
Company had outstanding 1,093,678 issued and issuable shares of Common Stock
(excluding treasury shares, and including 4,875 undistributed shares).
Amount and
Name and address nature of
of beneficial owner, beneficial Percent of
or identity of group ownership class owned
-------------------- ---------- -----------
entities associated with 687,500 62.9%
Smith Management, LLC
885 Third Ave., 34th Floor
New York, NY 10022
Vorarlberger Volksbank Reg. Gen. 262,500 24.0%
Bahnhofstrasse12
6900 Bregenz
Austria
All current directors and executive
officers as a group 0 0%
Beneficial Ownership Reporting Compliance. Section 16(a) of the Securities
Exchange Act of 1934, as amended, requires the Company's officers and directors,
as well as persons who own more than 10% of a registered class of the Company's
equity securities and certain other affiliated persons, to file reports of
ownership and changes in ownership with the SEC. Officers, directors, and
greater than 10% shareholders are required by SEC regulations to furnish the
Company with copies of all Section 16(a) forms they file.
Based solely on review of any copies of such forms furnished to the Company, or
any written representations that no forms were required to be filed, the Company
believes that two significant instances of filing with respect to acquisition of
greater than 10% ownership are presently delinquent, as follows:
# shares Approx.
Name of Common % Date
Benefical Party Stock Ownership Acquired
--------------- ------- --------- --------
Smith Management, LLC 687,500 63% April 20, 2000
Vorarlberger Volksbank 262,500 24% April 20, 2000
23
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Company's Chairman of the Board, President and Chief Executive Officer
(Nunzio P. DeSantis) had been the second largest holder of the Company's stock
(having directly owned approximately 534,000 shares of old Common Stock, or
approximately nine percent before the old shares were cancelled) and also owns a
controlling interest in NPD, Inc., with which the Company engaged in significant
transactions. At December 31, 1998, the Company owed NPD, Inc. $0.5 million
related to the ITB Option debt obligation, and NPD, Inc. owed $3.4 million for a
related loan made during the fiscal year ended March 31, 1998, including its
accrued interest. Both obligations accrued interest at 10 percent and were to be
payable in full, including accrued and unpaid interest, in July 1999. However,
these debt obligations were canceled as part of a larger, multi-faceted
settlement that was consummated in January 1999, wherein the Company received a
net total of $4.4 million in cash. In connection with this settlement and
receipt of cash, the Company recognized a loss of $1.4 million in the year ended
March 31, 1999. This loss, however, does not recognize the subsequent partial
offset realized in the year ended March 31, 2000, as a result of the resolution
and settlement (below) of the adversary claim against Mr. DeSantis.
On July 14, 1998, the Company filed an adversary claim against Nunzio P.
DeSantis to recover certain payments made to him and for indemnity. On January
7, 2000, the Bankruptcy Court entered an order resolving this adversary claim.
The order includes cancellation of debts owed by the Company to Mr. DeSantis of
$256,230; a transfer to the Company by Mr. DeSantis of $37,752 in furniture,
equipment and leasehold improvements, as well as the transfer by July 11, 2000
of equity securities with a value of at least $150,000 to the Company. The
financial effect of this settlement has been determined to be a net $0.5 million
increase to the Company's net equity.
24
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K.
The following financial statements have been filed with and are included in this
report:
(a) (1) Financial Statements
Independent Auditors' Reports
Consolidated Balance Sheets - March 31, 2000 and 1999
Consolidated Statements of Operations - Year ended March 31, 2000;
Twenty-six days ended March 31, 1999; Eleven-months-and-five
days ended March 5, 1999; and Year ended March 31, 1998.
Consolidated Statements of Stockholders' Equity / (Deficit) - Year
ended March 31, 2000; Twenty-six days ended March 31, 1999;
Eleven-months-and-five days ended March 5, 1999; and Year ended
March 31, 1998.
Consolidated Statements of Cash Flows - Year ended March 31, 2000;
Twenty-six days ended March 31, 1999; Eleven-months-and-five
days ended March 5, 1999; and Year ended March 31, 1998.
Notes to Consolidated Financial Statements
(a) (2) Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts - March 31, 2000,
1999, and 1998
All other schedules have been omitted because they are inapplicable
or the information is provided in the financial statements
(including the notes thereto) included in this annual report.
(b) Reports on Form 8-K
None filed during the fiscal year ended March 31, 2000.
3.1 Certificate of Incorporation of CAPX Corporation
(prior name of AutoLend Group, Inc.), dated October 29, 1991 *
25
<PAGE>
3.2 Certificate of Amendment to the Certificate of Incorporation of CAPX
Corporation, changing name to AutoLend Group, Inc., dated
February 6, 1995 *
3.3 By-Laws of CAPX Corporation (prior name of AutoLend Group, Inc.) *
10.1 Lease Agreement for Registrant's Offices at 600 Central SW, Third Floor,
Albuquerque, New Mexico *
10.2 Assignment to, and Assumption by, Registrant of Lease Agreement for
Offices at 600 Central SW, Third Floor, Albuquerque, New Mexico *
10.3 Compensatory Letter dated March 30, 1999 from the Registrant to Jeffrey
Ovington *
21 Subsidiaries of the Registrant *
* Filed as a corresponding exhibit to Registrant's Annual Report on Form 10-K
for the year ended March 31, 1999.
26
<PAGE>
SIGNATURES
Pursuant to the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereto duly
authorized.
AUTOLEND GROUP, INC
Date: June 29, 2000 By: /s/ Nunzio P. DeSantis
------------------------------
Nunzio P. DeSantis
Chief Executive Officer
Pursuant to the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant in the capacities and
on the dates indicated.
SIGNATURE TITLE DATE
/s/ Nunzio P. DeSantis Chief Executive Officer June 29, 2000
-------------------------- (principal executive officer)
Nunzio P. DeSantis
/s/ Jeffrey Ovington Executive Vice President June 29, 2000
-------------------------- (principal accounting and
Jeffrey Ovington financial officer)
/s/ Philip J. Vitale, M.D. Director and Secretary June 29, 2000
--------------------------
Philip J. Vitale, M.D.
27
<PAGE>
AUTOLEND GROUP, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Annual Financial Statements: Pages
Independent Auditors' Reports......................................... F-2
Consolidated Balance Sheets as of March 31, 2000, and March 31, 1999.. F-3
Consolidated Statements of Operations for the Year ended March 31, 2000;
Twenty-six days ended March 31, 1999; Eleven-months-and-five
days ended March 5, 1999; and Year ended March 31, 1998........... F-4
Consolidated Statements of Stockholders' Equity/(Deficit) for the Year
ended March 31, 2000; Twenty-six days ended March 31, 1999;
Eleven-months-and-five days ended March 5, 1999; and Year ended
March 31, 1998....................................................... F-6
Consolidated Statements of Cash Flows for the Year ended March 31, 2000;
Twenty-six days ended March 31, 1999; Eleven-months-and-five
days ended March 5, 1999; and Year ended March 31, 1998........... F-7
Notes to Consolidated Financial Statements............................ F-10
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts at
March 31, 2000, 1999, and 1998.................................... S-1
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders of
AutoLend Group, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of AutoLend Group,
Inc. (a Delaware corporation) and subsidiaries (the "Company"), as of March 31,
2000 and 1999, and the related consolidated statements of operations,
stockholders' equity/(deficit), and cash flows for the year ended March 31,
2000, and for the twenty-six days ended March 31, 1999, and the eleven months
and five days ended March 5, 1999, and for the year ended March 31, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
March 31, 2000 and 1999, and the results of its operations and its cash flows
for the year ended March 31, 2000, and for the twenty-six days ended March 31,
1999, and the eleven months and five days ended March 5, 1999, and for the year
ended March 31, 1998, in conformity with generally accepted accounting
principles.
Our audits were conducted for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The related 2000 and 1999
financial statement schedule on page S.1 is presented for purposes of additional
analysis and is not a required part of the basic consolidated financial
statements. Such information has been subjected to the auditing procedures
applied in the audit of the basic consolidated financial statements, and in our
opinion, is fairly stated in all material respects in relation to the basic
consolidated financial statements taken as a whole.
The accompanying consolidated financial statements and related financial
statement schedule have been prepared assuming that the Company will continue as
a going concern. The Company has suffered recurring losses from operations and
as a result, its liquidity has been impaired. This raises substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are described in Note 3. The consolidated financial statements
and related financial statement schedule do not include any adjustments that
might result from the outcome of this uncertainty.
/s/ Meyners + Company, LLC
Meyners + Company, LLC
Albuquerque, New Mexico
May 31, 2000, except for
Notes 3 and 16, which are as of June 26, 2000
F-2
<PAGE>
AUTOLEND GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, 2000 and 1999
Registrant Registrant
2000 1999
--------- ----------
Assets:
Cash $ 373,184 $2,146,759
Restricted cash - 2,791,178
--------- ----------
Total cash & cash equivalents $ 373,184 $4,937,937
Receivable from officer 150,000 -
Stock issuance proceeds receivable 78,678 -
Installment contracts (Loans)/recoveries receivable 35,390 53,795
Other receivables 40,955 44,741
Prepaid expenses 21,456 16,669
Purchased insurance Policies, net 35,678 126,650
Fixed assets, net 36,840 17,489
Total assets $ 772,181 $5,197,281
========= ==========
Liabilities:
Accounts payable - Debenture holders $ - $3,043,250
Accounts payable - other 12,073 84,768
Accrued legal fees - 270,713
Accrued contingent payroll - 406,107
Accrued liabilities 31,888 55,814
Other contingent liabilities - 244,867
Notes payable - Debenture holders 510,733 523,300
Accrued interest - Note payable - Debentures 31,501 -
--------- ----------
Total liabilities $ 586,195 $4,628,819
--------- ----------
Stockholders' Equity:
Preferred stock, $.002 par value. Authorized
5,000,000 shares; no shares issued or outstanding
at March 31, 2000 or 1999 $ - $ -
Common stock, $.002 par value. Authorized
40,000,000 shares; issued and outstanding
1,088,803 shares at March 31, 2000;
no shares issued or outstanding at
March 31, 1999 2,177 -
issuable 4,875 shares at March 31, 2000, and
1,040,000 shares at March 31, 1999 10 2,080
Additional paid-in capital 673,446 690,033
Accumulated deficit (489,647) (123,651)
--------- ----------
Total stockholders' equity $ 185,986 $ 568,462
--------- ----------
Total liabilities and stockholders' equity $ 772,181 $5,197,281
========= ==========
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
AUTOLEND GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Registrant | Predecessor
--------------------------- | ----------------------------
Year ended 26 days | 11 months & Year ended
March 31, ended March | 5 days ended March 31,
2000 31, 1999 | March 5, 1999 1998
------------ ----------- | ------------- -----------
<S> <C> <C> | <C> <C>
Revenues: |
Finance charges on installment contracts (Loans) $ 9,672 $ 9,322 | $ 108,141 $ 587,616
Revenues from matured insurance policies 37,500 - | 940,228 69,109
------------ --------- | ---------- -----------
Gross revenues 47,172 9,322 | 1,048,369 656,725
Cost of matured insurance policies (32,625) - | (692,400) (60,125)
------------ --------- | ---------- -----------
Total net revenues $ 14,547 $ 9,322 | $ 355,969 $ 596,600
General and administrative expenses (1,510,324) (64,201) | (1,698,089) (2,106,636)
Loan loss recovery, net 273,954 24,000 | 375,000 41,000
------------ --------- | ---------- -----------
Operating loss $(1,221,823) $ (30,879) | $ (967,120) $(1,469,036)
------------ --------- | ---------- -----------
Other income/(expense): |
Interest income: |
Interest income on cash and cash equivalents 86,817 20,766 | 106,338 207,116
Interest on escrow - - | 84,712 -
NPD, Inc., note receivable interest income accrued - - | 278,235 219,215
Other income/(expense) 45,268 37,200 | (51,265) (204,128)
Realized (loss) on sale of securities - - | (25,440) -
Interest expense: |
Debentures - - | (638,710) (881,918)
NPD, Inc., note payable - - | (38,958) (25,667)
Other - - | - (27,082)
Cancellation of Florida tax claim 177,876 - | - -
(Write-down) / recapture - purchased insurance policies 106,213 - | 536,390 (131,772)
Gain / (expense) on lease termination - - | (64,725) 266,378
Write-down of AutoLend IAP, Inc., securities - - | - (160,000)
Write-off fixed assets - - | (4,570) (3,720)
Debenture conversion charge - - | - (6,261,052)
------------ --------- | ---------- -----------
Total net other income/(expense) $ 416,174 $ 57,966 | $ 182,007 $(7,002,630)
------------ --------- | ---------- -----------
Income/(loss) before reorganization costs, bankruptcy |
court settlements, and extraordinary items (805,649) 27,087 | (785,113) (8,471,666)
Reorganization costs incurred after |
Chapter 11 proceedings (189,841) (150,738) | (340,829) (211,667)
Gain on Adversary claim and (Loss) |
on settlement ITB / NPD 451,040 - | (1,368,117) -
------------ --------- | ---------- -----------
Loss before extraordinary items (544,450) (123,651) | (2,494,059) (8,683,333)
Extraordinary items: |
Gain as result of reorganization-debentures 178,454 - | 5,342,026 -
Gain on early extinguishment of debt, net of |
amortization of deferred costs of $57,000 - - | - 3,171,524
------------ --------- | ---------- -----------
Net income/(loss) $ (365,996) $(123,651) | $ 2,847,967 $(5,511,809)
=========== ========= | =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
AUTOLEND GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations - continued
<TABLE>
<CAPTION>
Registrant | Predecessor
------------------------------- | -------------------------------
Year ended 26 days ended | 11 months & Year ended
March 31 March 31, | 5 days ended March 31
2000 1999 | March 5, 1999 1998
---------- ------------- | ------------- ----------
<S> <C> <C> | <C> <C>
Loss per share before extraordinary items $ (0.52) $ (0.12) | $ (0.41) $ (1.44)
|
Extraordinary items: |
Gain as a result of reorganization-debentures 0.17 - | 0.88 -
Gain on early extinguishment of debt - - | - 0.53
---------- ---------- | ---------- ----------
|
Net income / (loss) per share $ (0.35) $ (0.12) | $ 0.47 $ (0.91)
========== ========== | ========== ==========
Weighted average number of common and common |
equivalent shares issued and outstanding 45,367 - | 6,079,530 6,039,391
|
|
Weighted average number of common and |
common equivalent shares issuable 996,870 1,040,000 | - -
|
Total weighted average number of common and |
common equivalent shares issued and |
outstanding, and issuable 1,042,237 1,040,000 | 6,079,530 6,039,391
========== ========== | ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
AUTOLEND GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity/(Deficit)
<TABLE>
<CAPTION>
Preferred Stock Common Stock
---------------- ------------------ Accumulated
Additional Other
# of $ # of $ Paid-in Comprehensive Accumulated
Shares Amount Shares Amount Capital Income Equity/(Deficit) Total
------ ------ ------ ------ ---------- ------------- ---------------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1997 0 $ - 4,634,530 $ 9,269 $ 5,946,904 $ - $(17,808,378) $(11,852,205)
Common and preferred shares
issued in exchange offer 57,800 116 1,445,000 2,889 14,513,042 - - 14,516,047
Unrealized holding loss - - - - - (590,000) - (590,000)
Net loss for fiscal year ended
March 31, 1998 - - - - - - (5,511,809) (5,511,809)
------ ----- --------- -------- ------------ --------- ------------ ------------
Balance at March 31, 1998 57,800 $ 116 6,079,530 $ 12,158 $ 20,459,946 $(590,000) $(23,320,187) $ (3,437,967)
Comprehensive income:
Net income eleven months and
five days ended March 5, 1999 - - - - - - 2,847,967 2,847,967
Other comprehensive income;
Unrealized loss on marketable
securities net of
reclassification adjustment - - - - - 590,000 - 590,000
------ ----- --------- -------- ------------ --------- ------------ ------------
Total Comprehensive income - - - - - 590,000 2,847,967 3,437,967
Retirement of old common and
preferred stock according
to the Plan of Reorganization (57,800) (116) (6,079,530) (12,158) (20,459,946) - - (20,472,220)
Application of fresh-start - - - - - - 20,472,220 20,472,220
Issuable new common stock
according to the Plan
of Reorganization - - 1,040,000 2,080 690,033 - - 692,113
------ ----- --------- -------- ------------ --------- ------------ ------------
Balance at March 5, 1999 - $ - 1,040,000 $ 2,080 $ 690,033 $ - $ - $ 692,113
Comprehensive income:
Net loss for the twenty-six
days ended March 31, 1999 - - - - - - (123,651) (123,651)
------ ----- --------- -------- ------------ --------- ------------ ------------
Balance at March 31, 1999 - $ - 1,040,000 $ 2,080 $ 690,033 $ - $ (123,651) $ 568,462
Issuable common stock not issued - - (25,000) (50) (16,587) - - (16,637)
Issuance of 78,678 shares of new
common stock at $1.00 per share - - 78,678 157 - - - 157
Comprehensive income:
Net loss for fiscal year
ended March 31, 2000 - - - - - - (365,996) (365,996)
------ ----- --------- -------- ------------ --------- ------------ ------------
Balance at March 31, 2000 - $ - 1,093,678 $ 2,187 $ 673,446 $ 0 $ (489,647) $ 185,986
====== ====== ========= ======== ============ ========= ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
AUTOLEND GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flow
<TABLE>
<CAPTION>
Registrant | Predecessor
-----------------------------| ---------------------------
Year ended Twenty-six | 11 months & Year ended
March 31 days ended | 5 days ended March 31
2000 March 31, 1999| March 5, 1999 1998
------------ --------------| --------------- ----------
<S> <C> <C> |<C> <C>
Cash flow from operating activities: |
Net income/(loss) $ (365,996) $ (123,651) | $ 2,847,967 $ (5,511,809)
Adjustments to reconcile net income / (loss) to net cash |
flow from operating activities: |
Amortization of intangible assets and debt issuance costs - - | - 56,443
Depreciation expense 19,454 1,603 | 18,449 24,464
(Gain) on early extinguishment of debt, net of amortization - - | - (3,171,524)
Charge for debenture conversion, net of amortization - - | - 6,261,052
(Gain) on adversary claim, loss on |
ITB / NPD settlement (451,040) - | 1,368,117 -
(Gain) as a result of reorganization-debentures (178,454) - | (5,342,026) -
(Gain) on lease termination - - | - (266,378)
(Gain) on cancellation of Florida tax claim (177,876) - | - -
Loan loss recovery, net (273,954) (24,000) | (375,000) (41,000)
Amortization of note discount 31,501 - | - -
S-1 Registration costs currently expensed 78,141 - | - -
(Gain) on relief of liability (27,950) - | - -
Write-off of fixed assets - - | 4,570 3,720
Write-down / (recapture) - purchased insurance policies (106,213) - | (536,390) 131,772
Write-down of AutoLend IAP, Inc. securities - - | - 160,000
Realized loss on sale of IAP, Inc. securities - - | 25,440 -
Provision for estimated legal fees and settlement costs - - | - 200,000
Changes in assets and liabilities: |
Prepaid expenses (4,787) - | 150,712 (100,567)
Accounts receivable-matured insurance policies - (203) | 739,136 -
Installment contracts/recoveries receivable (car loans) 292,359 29,376 | 612,038 1,839,844
Other receivables 3,786 - | - -
Interest on escrow deposit - - | - (62,060)
Interest receivable on note receivable - NPD, Inc. - - | (216,175) (219,215)
Purchased insurance policies 197,185 - | - 52,425
Consulting agreement - - | - 140,000
Other assets - (38,430) | 39,700 33,101
Accounts payable and accrued liabilities (549,192) (1,567,500) | 964,740 (1,719,080)
Accrued interest expense - - | 677,668 907,585
Other liabilities - - | - 578,402
------------ ----------- | ----------- ------------
Cash provided (used) by operating activities $ (1,513,036) $(1,722,805) | $ 978,946 $ (702,825)
------------ ----------- | ----------- ------------
Cash flow from investing activities: |
IAP, Inc. securities $ - $ - | $ 614,560 $ -
Funding of escrow - - | - (2,000,000)
Proceeds from escrow - - | 2,000,000 -
Proceeds from ITB/NPD settlement - - | 2,300,000 -
Loan to NPD - - | - (3,035,292)
Purchase ITB stock option - - | - (200,000)
Purchase of fixed assets (1,053) - | (2,500) -
------------ ----------- | ----------- ------------
Cash provided (used) by investing activities $ (1,053) $ - | $ 4,912,060 $ (5,235,292)
------------ ----------- | ----------- ------------
Cash flow from financing activities: |
Payments to Debenture holders $ (2,894,000) $ - | $ - $ -
S-1 Registration costs (156,664) - | - -
Early extinguishment of debt - - | - (5,692,079)
------------ ----------- | ----------- ------------
Cash (used) by financing activities $ (3,050,664) $ - | $ - $ (5,692,079)
------------ ----------- | ----------- ------------
Net increase (decrease) in cash and cash equivalents $ (4,564,753) $(1,722,805) | $ 5,891,006 $(11,630,196)
Cash and cash equivalents at beginning of period 4,937,937 6,660,742 | 769,736 12,399,932
------------ ----------- | ----------- ------------
Cash and cash equivalents at end of period $ 373,184 $ 4,937,937 | $ 6,660,742 $ 769,736
============ =========== | =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
During the year ended March 31, 2000, the following non-cash investing and
financing activities occurred:
As the result of the settlement of the adversary claim against Nunzio P.
DeSantis, the Company cancelled accrued payroll and expenses owed by the
Company to Mr. DeSantis in the amount of $256,230, and cancelled $7,058 in
accrued payroll taxes. The Company also acquired from Mr. DeSantis furniture
and fixtures with an estimated market value of $37,752. Additionally, a
receivable in the amount of $150,000 was recorded to account for the
outstanding value of equity securities due to the Company by Mr. DeSantis;
the transfer of these securities is to be completed by July 11, 2000. The
net total of the above resulted in a gain on the adversary settlement of
$451,040.
At March 31, 2000, the Company had 78,678 shares of Common Stock issued or
issuable, for which a related receivable of $78,678 was due from the transfer
agent.
The Company's counsel determined that certain debenture claims as reported at
March 31, 1999 were unable to be substantiated by the respective claimants.
As a result of the Company's relief from this obligation, the Company's
accounts payable to debenture holders was reduced by $149,250, the notes
payable to debenture holders was reduced by $12,567, and a corresponding
extraordinary gain of $178,454 was recognized. Additionally, Common Stock
and paid-in capital were reduced by $50 and $16,587, respectively.
There were no non-cash investing or financing activities during the twenty-six
days ended March 31, 1999.
During the eleven months and five days ended March 5, 1999, the following non-
cash investing and financing activities occurred:
The Company converted debentures with a face value of $7,225,000 and
outstanding interest of $2,375,689 for $3,043,250 cash; uncollateralized
notes payable at a discounted aggregate value of $523,300; 1,040,000 issuable
shares of Common Stock with an aggregate par value of $2,080; and additional
paid-in capital of $690,033. This resulted in an extraordinary gain as a
result of reorganization of $5,342,026.
The ITB/NPD, Inc. settlement was consummated and the Company received
$4,446,771 in cash in exchange for the escrow deposit of $2,000,000 and
interest of $146,771; the note receivable - NPD, Inc. of $3,035,292 and
interest of $497,450; the ITB Option net of $200,000 holding losses, for
$425,000; and the note payable - NPD, Inc. of $425,000 and interest of
$64,625. This resulted in a loss of $1,368,117.
As of March 5, 1999, pursuant to the plan of reorganization, all outstanding
Common Stock and Preferred Stock, Class A and B Warrants, and Options were
canceled.
F-8
<PAGE>
During the year ended March 31, 1998, the following non-cash investing and
financing activities occurred:
The Company purchased an option to acquire stock in exchange for $200,000
cash and a note payable with an obligation of $425,000. Additionally, the
Company converted debentures with a face value of $7,225,000 and outstanding
accrued interest of $1,065,575 for 57,800 shares of Preferred Stock and
1,445,000 shares of Common Stock, with aggregate par values of $116 and
$2,889, respectively. This resulted in a non-cash conversion charge of
$6,261,052.
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
During the fiscal year ended March 31, 1998, the Company paid $27,082 in
interest. There were no cash payments of interest made during the years ended
March 31, 2000 or 1999.
On March 9, 1999, the Company paid $1,525,000 as a result of the Living Benefits
litigation settlement, as approved by the Bankruptcy Court. This payment was
included in the change in accounts payable and accrued liabilities for the
twenty-six days ended March 31, 1999.
F-9
<PAGE>
AUTOLEND GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
MARCH 31, 2000, 1999, AND 1998
The accompanying consolidated financial statements include the accounts of
AutoLend Group, Inc. and its wholly owned subsidiaries, Autolend
Corporation, American Life Resources Group, Inc., and LB NM, Inc.
(collectively, the "Company").
AutoLend Group, Inc. maintains a residual portfolio of sub-prime, consumer
used-car loans (also referred to as installment contract receivables, or
the "Loans") through its wholly owned subsidiary, AutoLend Corporation.
AutoLend Group, Inc. ceased purchasing these Loans in December 1995, and
effective April 1, 2000, the Company adopted a plan to sell this portfolio
(see Note 18). 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"). Policies were no longer purchased after
September 1994.
For over two years, the Company's activities have been concentrated on
resolving the recently-concluded bankruptcy, and in its attempt to develop
and obtain licensure as a distributor for a new gaming business (which has
been a division of AutoLend Group, Inc., under the name of Kachina Gaming),
which attempt was terminated subsequent to year-end. Additionally, during
the last year, much of the Company's efforts were focused on its
Registration Statement (as required by the Plan of Reorganization, and
which was made effective by the SEC January 19, 2000). The Company has also
continued to collect amounts due from the residual Loan portfolio as well
as the residual Policy portfolio.
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation
The accompanying consolidated financial statements of the Company have been
prepared on a going-concern basis, which contemplates the realization of
assets and the satisfaction of liabilities and commitments in the normal
course of business (see Note 3).
As a result of the Company's inability to make repayment on, and resultant
default on, its Convertible Subordinated Debentures due September 19, 1997
(the "Debentures"), the Company filed for protection under Chapter 11 of
the United States Bankruptcy Code in the United States Bankruptcy Court for
the District of New Mexico (the "Bankruptcy Court") on September 22, 1997.
The Bankruptcy Court confirmed a Plan of Reorganization (the "Plan"), which
became effective on March 5, 1999, at which time the Company attained a
positive net equity, and was no longer classified as a "debtor-in-
possession." On January 13, 2000, the Bankruptcy Court entered its final
decree, thereby closing the Company's Chapter 11 case.
F-10
<PAGE>
The Company's audited consolidated financial statements as of March 31,
2000, and the accompanying audited consolidated financial statements as of
March 31, 1999 and 1998, have been presented in conformity with the
American Institute of Certified Public Accountants' Statement of Position
90-7. While it was in Chapter 11, the Company (the "Predecessor") adopted
fresh-start reporting and gave effect to its emergence as of March 5, 1999.
Under fresh-start accounting, all assets and liabilities are restated to
reflect their reorganized value, which approximates fair value. Since
fresh-start reporting has been reflected in the accompanying consolidated
financial statements as of March 31, 1999, and are those of a reorganized
entity certain material aspects of these financial statements are not
comparable to such statements of any prior period. A "black line" has been
drawn between the Registrant's financial statements and those of the
Predecessor.
The following journal entries record the provisions of the Plan and
adoption of fresh-start accounting:
<TABLE>
<CAPTION>
Debit Credit
----- ------
<S> <C> <C>
a) Entry to record ITB and NPD settlement:
Cash and cash equivalents $ 4,446,771 $ -
Escrow deposit - 2,000,000
Interest on escrow deposit - 146,771
Note receivable-NPD, Inc. - 3,035,292
Interest receivable on note receivable-NPD, Inc. - 497,450
ITB Option - 425,000
NPD note 425,000 -
Accrued interest-NPD, Inc. 64,625 -
Unrealized holding loss - 200,000
Loss on settlement ITB/NPD, Inc. 1,368,117 -
b) Entry to record debt forgiveness:
Convertible subordinated debentures 7,225,000 -
Accrued interest expense on debentures (pre-petition) 1,372,819 -
Accrued interest expense on debentures (post-petition) 1,002,870 -
Accounts payable-debenture holders - 3,043,250
Note to debenture holders - 523,300
Common stock (.002) par 1,040,000 shares issuable - 2,080
Additional paid-in capital - 690,033
Gain as result of reorganization-debentures - 5,342,026
c) Entry to record fresh-start accounting:
Common stock (.002) par 6,079,500 shares 12,158 -
Preferred stock (.002) par 57,800 shares 116 -
Additional paid-in capital 20,459,946 -
Accumulated deficit - 20,472,220
d) Reclassification of confirmed liabilities:
Accrued liabilities subject to compromise 162,876 -
Accrued liabilities not subject to compromise - 162,876
</TABLE>
F-11
<PAGE>
The effect of the Plan on the Company's balance sheet as of March 5, 1999 is as
follows:
REORGANIZED AUTOLEND GROUP, INC. AND SUBSIDIARIES
Proforma Consolidated Balance Sheet
March 5, 1999
<TABLE>
<CAPTION>
Precon- Reorganization Fresh Reorganized
firmation Adjustments Start Company
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 2,213,971 $ 4,446,771 (a) $ - $ 6,660,742
Prepaid expenses 16,669 - - 16,669
Installment contracts receivable (Loans) 59,171 - - 59,171
ITB Option, net 425,000 (425,000) (a) - -
Escrow deposit 2,000,000 (2,000,000) (a) - -
Interest on escrow deposit 146,771 (146,771) (a) - -
Note receivable - NPD, Inc. 3,035,292 (3,035,292) (a) - -
Interest receivable on note receivable - NPD, Inc. 497,450 (497,450) (a) - -
Purchased insurance policies, net 126,447 - - 126,447
Fixed assets, net 19,092 - - 19,092
Other receivables 6,311 - - 6,311
------------ ------------ ----------- -----------
Total assets $ 8,546,174 $ (1,657,742) $ - $ 6,888,432
============ ============ =========== ===========
Liabilities:
Liabilities subject to compromise:
Accounts payable $ 97,079 $ - $ - $ 97,079
Accrued liabilities 162,876 (162,876) (d) - -
Accrued interest expensed on debentures (pre-petition) 1,372,819 (1,372,819) (b) - -
Convertible subordinated debentures at face value 7,225,000 (7,225,000) (b) - -
Allowance for estimated legal fees and settlement costs 1,525,000 - - 1,525,000
------------ ------------ ----------- -----------
Total liabilities subject to compromise 10,382,774 (8,760,695) - 1,622,079
------------ ------------ ----------- -----------
Liabilities not subject to compromise:
Accounts payable 159,685 - - 159,685
Accounts payable - debenture holders - 3,043,250 (b) - 3,043,250
Contingent liabilities - reorganization 205,304 - - 205,304
Accrued liabilities 479,825 162,876 (d) - 642,701
Accrued interest expense on debentures (post-petition) 1,002,870 (1,002,870) (b) - -
Note to debenture holders - 523,300 (b) - 523,300
NPD, Inc. note 425,000 (425,000) (a) - -
Accrued interest - NPD, Inc. 64,625 (64,625) (a) - -
------------ ------------ ----------- -----------
Total liabilities not subject to compromise 2,337,309 2,236,931 - 4,574,240
------------ ------------ ----------- -----------
Total liabilities $ 12,720,083 $ (6,523,764) $ - $ 6,196,319
============ ============ =========== ===========
Stockholders' Equity/(Deficit):
Preferred stock, $.002 par value. Authorized 5,000,000 shares;
57,800 issued and outstanding $ 116 $ - $ (116) (c) $ -
Common stock, $.002 par value. Authorized 40,000,000 shares;
6,079,530 issued 12,158 - (12,158) (c) -
Common stock $.002 par value. Authorized 40,000,000 shares;
1,040,000 issuable - 2,080 (b) - 2,080
Additional paid-in capital 20,459,946 690,033 (b) (20,459,946) (c) 690,033
Unrealized holding loss (200,000) 200,000 (a) - -
Accumulated deficit (24,446,129) 3,973,909 (a)(b) 20,472,220 (c) -
------------ ------------ ----------- -----------
Total stockholders' equity/(deficit) $ (4,173,909) $ 4,866,022 $ - $ 692,113
------------ ------------ ----------- -----------
Total liabilities and stockholders' equity/(deficit) $ 8,546,174 $ (1,657,742) $ - $ 6,888,432
============ ============ =========== ===========
</TABLE>
F-12
<PAGE>
(b) Basis of Accounting, Balance Sheet Classification, and Consolidation
Policy
The Company's consolidated financial statements have been prepared on the
accrual basis of accounting. The accompanying consolidated balance sheets
have been presented as nonclassified. However, assets and liabilities are
presented in order of liquidity. Intercompany transactions and balances
have been eliminated in consolidation.
(c) Cash and Cash Equivalents
Cash and cash equivalents include debt securities, which mature in 90 days
or less from the date of acquisition.
(d) Revenue Recognition
Installment Contract Receivables: Revenues from finance charges on
installment contract receivables (used-car Loans) were recognized when
earned and were based on the difference between gross cash flow from an
installment contract receivable and the total amount paid by the Company to
acquire the contracts. Loan discounts were recorded as unearned income at
the time of initial investment in a loan contract and were amortized over
the life of the loan to revenue. Loan costs were amortized against revenue
as an adjustment of yield. The accrual of interest revenue on receivable
balances (recognition of revenue) was suspended when a loan was delinquent
for 30 days or more. The accrual was resumed when the loan became
contractually current and past-due interest revenue was then recognized.
The Company initially performed, in house, all functions associated with
origination, servicing, and collection of the contracts; however, since
January 1996, the Company has used an outside contractor to service the
Loans.
Allowance for Credit Losses - Installment Contract Receivables: Due to
fresh-start accounting, there is no allowance for credit losses at March
31, 1999. As of March 31, 2000, management believes that the value of the
receivables as presented is fully collectable, and has, accordingly, not
provided for an allowance against the amounts. Prior to March 5, 1999 (the
date of the adoption of fresh start accounting), an allowance for credit
losses was maintained at a level which, in management's judgment, was
adequate to absorb credit losses inherent in the Loan portfolio. The amount
of the allowance was based on management's evaluation of the collectibility
of the Loan portfolio, including the nature of the portfolio and specific
impaired Loans. Allowances for impaired Loans were generally determined
based on aging, collateral values, or present value of estimated cash
flows. The allowance for credit losses was established through provisions
charged to income and was based on management's evaluation of potential
losses after considering such factors as current delinquency data, changes
in the Loan portfolio, and other pertinent factors. Charge-offs were
recorded against the allowance when management believed that the
collectibility of the principal was unlikely.
Purchased Insurance Policies: Revenue and cost of revenue are recognized
upon the maturity of a policy (death of the insured). Unmatured Policies
are carried, at estimated market value, as an investment asset. The cost of
a Policy includes the initial purchase price, insurance premiums, and other
direct expenditures paid by the Company for the
F-13
<PAGE>
purchase and maintenance of the Policy. Revenues are accounted for as
"Gross Revenues" (i.e., before deduction of costs) and as "Net Revenues"
(after deduction of costs). Net Revenues are combined with revenues from
other business operations in calculating the Company's "Total Net
Revenues." The ability to recognize matured policy revenue during the
period in which a Policy matures depends on the Company's receiving
notification of its maturity from a representative of the insured. In some
instances, notification may not occur until significantly after the
insured's death and after the consolidated financial statements have been
finalized for the period in which the Policy matured. To the extent Policy
maturities cannot be recorded in the period the Policy matures, the revenue
and cost related to the maturity are recognized in the consolidated
statement of operations after the maturity of the Policy.
Allowance for Credit Losses - Purchased Insurance Policies: Due to fresh-
start accounting, there is no allowance for credit losses at
March 31, 1999. As of March 31, 2000, management believes that the value
reflected for the outstanding Policies is fully collectable, and has,
accordingly, not provided for an allowance against these amounts. Prior to
March 5, 1999 (the date of the adoption of fresh start accounting), an
allowance was established through provisions charged to income and was
based on management's evaluation of potential losses after consideration of
present value of the face value of the Policy less the present value of any
future obligations relating to the Policy. Charge-offs were recorded
against the allowance when management believed that the collectibility of
the Policy was unlikely.
(e) Income Taxes
The Company calculates income taxes using the asset and liability method
prescribed by Financial Accounting Standards Board Statement No. 109 -
Accounting for Income Taxes. Under the asset and liability method, deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The Company, based on
the weight of the available evidence, provides an offsetting valuation
allowance against deferred tax assets to the extent it determines it is
highly possible that any such deferred tax assets will not be usable.
(f) Fair Value of Financial Instruments
The Company's financial instruments include cash, accounts receivable,
Installment Contract Receivables, purchased Policies, accounts payable,
accrued liabilities, and the note payable to the Debenture holders. The
fair values of these financial instruments have been determined using
available market information and interest rates as of March 31, 2000. All
of the Company's financial instruments are held for non-trading purposes.
F-14
<PAGE>
(g) Earnings per Share
Primary earnings per share amounts are computed based on: the weighted
average number of shares issuable and outstanding for the fiscal year ended
March 31, 2000, which were 1,042,237, on the weighted average number of
shares issuable for the twenty-six days ended March 31, 1999, which were
1,040,000; on the weighted average number of shares outstanding for the
eleven months and five days ended March 5, 1999, which were 6,079,530; and
on the weighted average number of shares outstanding for 1998, which were
6,039,391 shares. There were no Options or Warrants outstanding at March
31, 2000 or 1999. At March 31, 1998, Options and Warrants outstanding
totaled 6,323,500, the effects of which were anti-dilutive. Fully diluted
earnings per share amounts computed based on the weighted average number of
shares issuable, subscribed for, and outstanding for the fiscal year ended
March 31, 2000 were 1,042,847. Fully diluted earnings per share amounts for
2000, 1999 and 1998 are not presented because they do not differ
significantly from primary earnings per share.
(h) Use of Estimates
The preparation of the Company's consolidated financial statements conforms
with generally accepted accounting principles, and requires management to
make estimates and assumptions that affect the reported amounts of assets
and liabilities, the disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
(2) VOLUNTARY BANKRUPTCY AND PLAN OF REORGANIZATION
As a result of the Company's inability to make repayment on, and resultant
default on, its outstanding Debentures due September 19, 1997, the Company filed
for protection under Chapter 11 of the United States Bankruptcy Code in the
United States Bankruptcy Court for the District of New Mexico (the "Bankruptcy
Court") on September 22, 1997. The Company's Disclosure Statement was approved
by the Bankruptcy Court in September 1998 and, together with its Plan of
Reorganization (jointly, the "Plan"), was mailed to creditors and other interest
holders in October 1998. They approved the Plan and the Bankruptcy Court
confirmed the Plan, which became effective on March 5, 1999. Under Chapter 11,
claims against the Company in existence before the filing of the bankruptcy
petition have now been resolved. On the Plan's effective date of March 5, 1999,
the Company attained a positive net equity, and was no longer classified as a
"debtor-in-possession." The Plan becoming effective also resulted in the
cancellation (effective on the same day) of the Company's debts and common
stock, and giving certain substitute rights under the Plan to creditors and to
the Company's cancelled shares of stock.
Over two years after the filing of the voluntary reorganization petition, on
January 13, 2000, the Bankruptcy Court entered its final decree, thereby closing
the Company's Chapter 11 case. In connection with the resolution of the
bankruptcy, unsecured creditors have received payments for 100 percent of their
allowed claims. Qualified former Debenture holders have received, in
F-15
<PAGE>
aggregate, $2.9 million in cash payments, as well as stock in the reorganized
Company, and other consideration. When the old common stock was cancelled as
required by the creditor-approved Plan of Reorganization, holders of the old
common stock were provided an opportunity to subscribe in the offering of new
stock which formed the new ownership of the Company. Since this offering was not
open to anyone not holding old cancelled shares, outsiders had to purchase
cancelled shares if they wished to participate; this feature allowed holders of
the cancelled shares the opportunity to sell the shares if they did not wish to
subscribe. The subscription was concluded on April 18, 2000, thereby
establishing the new ownership of the Company.
(3) GOING CONCERN
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles, which contemplates
continuation of the Company as a going concern. Realization of a major portion
of the assets is dependent upon the Company's ability to meet its future capital
and financing requirements and the success of future operations. During the
fiscal year ended March 31, 2000, the Company suffered recurring losses from
operations that has raised substantial doubt about its ability to continue as a
going concern. As a result of the Company's economic condition and the legal
opinion of the Company's counsel, the first $0.1 million payment to certain
former debenture holders was not made as originally scheduled, and as of the
date of this filing, has not been made. The Company's immediate viability as a
going concern depends upon the successful installation of a new line of business
and the attainment of profitability.
The Company's Plan proposed developing a new business, which consisted primarily
of providing gaming devices and machines to certain non-profit organizations in
New Mexico. The attempt to develop the Company's new gaming business was
dependant in part on licensing approval by the New Mexico Gaming Control Board,
which had informed the Company that its licensing review was being held-up
pending the outcome of the SEC investigation. On June 13, 2000, the Company was
informed by the staff of the SEC that the staff intends to recommend that the
Commission bring a civil injunctive action against the Company and an officer
for alleged violations of securities laws. The Company believes it has defenses
against this staff recommendation, and plans a formal submission to the
Commission under SEC procedures. Nonetheless, on or about June 15, 2000, the
Company decided to terminate its attempt to become licensed by the NM Gaming
Control Board. Thus, the Company must now find some other business to enter, or
else be acquired, merge, or possibly liquidate and close.
At March 31, 2000, the Company had cash and cash equivalents of $373,000, and a
positive net equity of $186,000. The equity is exclusive of any remaining
amounts due pursuant to the Albuquerque office lease obligation which
approximated $300,000 at March 31, 2000. The Company believes that it presently
has insufficient cash necessary to meet its daily operating requirements without
regard to obligations currently due the debenture holders, through the fiscal
year ending March 31, 2001. The Company is not likely to be able to secure and
install a new, profitable line of business before it runs out of cash. Thus,
the Company will likely have to either be acquired, merge, or liquidate.
Without either an infusion of capital, and / or the sale
F-16
<PAGE>
or realization of assets for cash at greater than net book value, the Company
may not be able to meet all its present obligations.
These factors raise substantial doubt about the Company's ability to continue as
a going concern.
(4) DEBENTURES AND EXCHANGE OFFER
On October 22, 1996, the Company initiated its offer to exchange Common Stock,
$.002 par value per share ("Common Stock"), and 14 percent cumulative
convertible Preferred Stock, $.002 par value per share ("Preferred Stock"), for
its outstanding Debentures ("Exchange Offer"). On April 8, 1997, the Exchange
Offer expired, and the Company issued an aggregate of 1.4 million shares of its
Common Stock and 57,800 shares of its Preferred Stock in exchange for
$7.2 million in principal amount of Debentures. Pursuant to the Exchange Offer,
the Company issued 855,205 shares of Common Stock valued at $0.5625 per share
and 57,800 shares of its Preferred Stock valued at $100 per share in excess of
the original conversion privilege offered by these Debentures. As a result,
during the year ended March 31, 1998, the Company recorded a non-cash
transaction: a conversion charge of $6.3 million, an increase to additional
paid-in capital of $14.5 million, and an increase in the Common Stock of $2,889
and Preferred Stock of $116. In addition, accrued interest on the Debentures,
totaling $1.1 million, was canceled.
During the 12 months ended March 31, 1998, and excluding the Exchange Offer, the
Company repurchased Debentures representing $8.9 million in combined principal
amount and accrued interest for $5.7 million in cash, which resulted in a gain
of $3.2 million.
As a result of the Exchange Offer and the subsequent Debenture repurchases, the
balance of Debentures and interest on March 31, 1998, were $7.2 million in
principal and $1.7 million in interest. All outstanding principal became due on
the remaining Debentures on September 19, 1997; however, this payment was not
made. Effective March 5, 1999, in conjunction with the Company's Plan, all
remaining Debentures, and any interest accrued thereon, were canceled.
(5) RELATED PARTY TRANSACTIONS
Termination of Option to Purchase ITB Shares. In January 1999, the Company
settled litigation (which settlement was approved by the Bankruptcy Court) that
involved an option the Company had purchased pursuant to a related loan
transaction. The option was for the potential acquisition of up to
approximately 25 percent ownership equity in International Thoroughbred
Breeders, Inc. ("ITB"). In consideration for this option the Company paid
$0.2 million in cash and issued a contingent promissory note payable. The
Company acquired this option in 1997 from NPD, Inc. ("NPD"), which is majority-
owned by Nunzio DeSantis, the Company's Chief Executive Officer and former
Chairman of the Board (who was also Chairman of NPD). Also covered in the
settlement were transactions related to the option purchase, wherein the Company
had loaned $3.0 million to NPD, and had deposited $2.0 million in an escrow
account.
F-17
<PAGE>
On January 29, 1999, in connection with the settlement, the Company received
$4,446,771 in cash from third parties (including ITB), and the option was
cancelled, as were the contingent note payable to NPD and the loan receivable
from NPD. The Company also assumed an office lease pursuant to this settlement
(see Note 16). The Company's receipt of these funds represents the return of
the escrow deposit (plus interest) and repayment to the Company of $2.3 million
against the Company's $3.0 million (principal) loan to NPD (which loan had
accrued interest outstanding of $0.5 million). The option itself, which the
Company held for approximately a year, was then expensed for $0.2 million. In
total, the Company recognized a loss associated with these events of
approximately $1.4 million for the fiscal year ended March 31, 1999. This loss
was later partially offset by a $0.5 million gain from the settlement of a
related adversary litigation (see below).
AutoLend Group, Inc. v. Nunzio P. DeSantis. On July 14, 1998, the Company filed
an adversary claim against Nunzio P. DeSantis to recover certain payments made
to him and for indemnity. The Bankruptcy Court approved a Motion to Approve
Compromise to resolve the adversary claim, and the Court's order became final on
July 26, 1999. However, on September 27, 1999, a motion was filed to set aside
the Court's approval of this previously finalized settlement. A hearing on the
motion was held, and then on December 15, 1999, the court granted the motion.
Thereafter, the Company, the US Trustee, and Mr. DeSantis reached an agreement
to settle the adversary proceeding, which was then approved by a Court order
dated January 7, 2000. The final agreement contained most of the same terms and
had the same total net effect to the Company as the earlier agreement.
Management has determined that the total net effect of this adversary settlement
results in an approximate $0.5 million increase in the Company's net equity.
The settlement provides for cancellation of debts owed by the Company to
Mr. DeSantis of $256,230; the contribution to the Company by Mr. DeSantis of
substantial furniture, equipment, and leasehold improvements; the transfer, by
July 11, 2000, of equity securities with a value of at least $150,000 by
Mr. DeSantis to the Company; and the agreement by Mr. DeSantis to convey any
proceeds received by him under any sale of the former El Rancho Hotel property
in Las Vegas, Nevada, to the Company. (See Note 16 regarding the sale of this
property by ITB on May 22, 2000).
(6) PREFERRED STOCK
Under the Plan of Reorganization, the Preferred Stock and any associated
dividends were cancelled in exchange for certain rights to purchase new Common
Stock in the reorganized Company (see Note 2), which rights expired on
March 18, 2000. There are five million shares of Preferred Stock authorized in
the Company's Bylaws, but none of these are presently outstanding. Dividends
must be paid on any Preferred Stock before any dividends can be paid on Common
Stock.
F-18
<PAGE>
(7) CASH
Restricted Cash. As of March 31, 2000, none of the Company's cash balance was
restricted. As of March 31, 1999, $2,791,178 of the Company's cash balance was
restricted pursuant to the terms of the Company's Plan, for payment to certain
qualified former Debenture holders.
Concentration of Credit Risk. At March 31, 2000, the Company had approximately
$33,640 in excess of the FDIC insurable limit deposited in a financial
institution.
(8) INSTALLMENT CONTRACT RECEIVABLES
At March 31, 2000 and 1999, installment contract receivables (used-car Loans)
consisted of the following:
2000 1999 (1)
-------- -------
Installment contracts/recoveries receivable $ 35,390 $55,531
Unearned finance charges - (1,736)
-------- -------
Installment contracts receivable, net of
unearned finance charges 35,390 53,795
Collateral owned - -
Allowance for credit losses - -
-------- -------
Installment contracts receivable, net $ 35,390 $53,795
======== =======
A summary of the allowance for credit losses on the installment contract
receivable (Loans) is as follows:
<TABLE>
<CAPTION>
Twenty-six | 11 months &
Year ended days ended | 5 days ended Year ended
March 31, March 31, | March 5, March 31,
2000 1999 (1) | 1999 1998
---------- ---------- | ----------- -----------
<S> <C> <C> | <C> <C>
Balance - beginning of period $ - $ - | $ 187,669 $ 1,068,545
Provision for losses, net of recoveries (273,954) (24,000) | (375,000) (41,000)
Charge offs and adjustments 273,954 24,000 | 264,748 (839,876)
--------- -------- | --------- -----------
Balance - end of period $ - $ - | $ 77,417 $ 187,669
========= ======== | ========= ===========
</TABLE>
(1) In connection with the adoption of fresh-start accounting, the allowance
for credit losses of $77,417 was reduced to zero at March 5, 1999.
(9) PURCHASED INSURANCE POLICIES
At March 31, 2000 and 1999, the face values of the policies held were $366,044
and $800,919, respectively. The book value of these policies at March 31, 2000
and 1999 was $35,678 and
F-19
<PAGE>
$126,650, respectively. A summary of the allowance for credit losses on the
purchased insurance policies is as follows:
<TABLE>
<CAPTION>
Allowance for credit losses Twenty-six | 11 months &
on purchased insurance policies Year ended days ended | 5 days ended Year ended
------------------------------- March 31, March 31, | March 5, March 31,
2000 1999 (1) | 1999 1998
----------- ---------- | ------------ -----------
<S> <C> <C> |<C> <C>
Balance - beginning of period $ - $ - | $ 1,057,072 $ 925,300
Provision for recoveries, write-downs |
and valuation allowance - - | (544,511) 131,772
------------ ---------- | ------------ -----------
Balance - end of period $ - $ - | $ 512,561 $ 1,057,072
============ ========== | ============ ===========
</TABLE>
(1) In connection with the adoption of fresh-start accounting, the allowance
for credit losses of $512,561 was reduced, against the carrying cost of the
purchased insurance policies, to zero at March 5, 1999.
(10) SECURITIES
At March 31, 1998, certain securities classified as available-for-sale were
written down to their estimated realizable values, because, in the opinion of
management, the decline in market value of those securities is considered to be
other than temporary.
No securities were classified as trading or held-to-maturity at March 31, 2000,
1999 or 1998, nor were there any securities held as available-for-sale at
March 31, 2000 or 1999. Investments held as available-for-sale securities at
March 31, 1998 are summarized as follows :
1998
--------------------------------
Corporate
Stock Option Debt
(ITB) (IAP Stock)
------------ -----------
Fair market value, beginning of period $ 625,000 $ 800,000
Permanent impairment - (160,000)
Unrealized losses (200,000) (390,000)
--------- ---------
Fair market value, end of period $ 425,000 $ 250,000
========= =========
The stock option was cancelled on March 5, 1999 (see Note 5), resulting in a
realized loss of $200,000. On September 30, 1998, the IAP stock was redeemed
for $614,560 resulting in a realized loss of $25,440. There were no realized
gains or losses on securities for the year ended March 31, 1998.
F-20
<PAGE>
(11) COMPREHENSIVE INCOME
Comprehensive income is the total of net income plus all other changes in net
assets arising from non-owner sources. "All other changes in net assets arising
from non-owner sources" are referred to as "other comprehensive income." The
Company's "other comprehensive income" is specifically comprised of the
following:
<TABLE>
<CAPTION>
Year ended Twenty-six | 11 months & Year ended
March 31, days ended | 5 days ended March 31
2000 March 31, 1999 | March 5, 1999 1998
---------- -------------- | -------------- -------------
<S> <C> <C> | <C> <C>
Unrealized loss on securities: |
Loss arising during year $ - $ - | $ - $ (590,000)
Less reclassification adjustment for |
losses included in net income - - | 590,000 -
---------- -------------- | ------------- ----------
Net loss recognized in other |
comprehensive income - - | 590,000 (590,000)
---------- -------------- | ------------- ----------
Other comprehensive income $ - $ - | $ 590,000 $ (590,000)
========== ============== | ============= ==========
</TABLE>
An analysis of changes in components of accumulated other comprehensive income
is presented in the consolidated statement of stockholders' equity/(deficit).
(12) FIXED ASSETS
In conjunction with fresh-start accounting, furniture and fixtures as well as
computers and software were stated at their estimated fair value at March 5,
1999, and therefore, accumulated depreciation was reduced to zero at that time.
Depreciation is computed by using the straight-line method over five years, the
estimated useful life of the asset(s). A summary of fixed assets and
accumulated depreciation recorded for the fiscal years ended March 31, 2000 and
1999 is as follows:
2000 1999
-------- -------
Furniture and fixtures $ 41,406 $ 2,601
Computers and software 16,491 16,491
-------- -------
Gross book value 57,897 19,092
Less: accumulated depreciation (21,057) (1,603)
-------- -------
Total net book value $ 36,840 $ 17,489
======== ========
F-21
<PAGE>
(13) INCOME TAXES
A reconciliation of the Company's actual income tax (benefit) / expense to that
computed using the United States federal statutory rate of 34 percent is as
follows:
<TABLE>
<CAPTION>
Year ended Twenty-six | 11 months and Year ended
March 31, days ended | 5 days ended March 31,
2000 March 31, 1999 | March 5, 1999 1998
---------- -------------- | ------------- ----------
<S> <C> <C> | <C> <C>
Computed "expected" tax (benefit) expense $ 124,439 $ (42,042) | $ 1,023,687 $ (1,874,012)
Increase (decrease) in income taxes resulting from: |
Non-deductible (includable) debt to stock conversion - - | (1,816,289) 2,131,472
Change in valulation allowances (200,593) (15,500) | (207,119) -
Other (51,978) 4,035 | 53,615 -
Net operating loss carryforward 128,132 53,507 | 946,106 (257,460)
--------- ------------- | ----------- ------------
Total income tax expense $ - $ - | $ - $ -
========= ============= | =========== ============
</TABLE>
The tax effects of temporary differences that give rise to deferred tax
liabilities at March 31, 2000 and 1999 are presented as follows:
2000 1999
----------- -----------
Deferred tax assets:
Bad debt reserve $ - $ 29,883
Capital loss carryover 395,211 920,148
Net operating loss 3,761,911 3,565,402
Deferred compensation - 62,075
Valuation reserve on investment
and insurance policies - 197,849
Other 1,200 -
----------- -----------
Subtotal: gross deferred tax assets $ 4,158,322 $ 4,775,357
----------- -----------
Deferred tax liabilities:
Other - 1,700
----------- -----------
Subtotal: gross deferred tax liabilities$ - $ 1,700
----------- -----------
Net deferred tax asset, before valuation
allowance $ 4,158,322 $ 4,773,657
Valuation allowance for deferred tax assets (4,158,322) (4,773,657)
----------- -----------
Total net deferred tax asset $ - $ -
=========== ===========
(14) STOCKHOLDERS' EQUITY
On July 31, 1990, the Company made an initial public offering which raised net
proceeds of approximately $7.6 million. During the year ended March 31, 1993,
Warrants were exercised which brought in an additional $0.9 million; as a
partial offset, the Company repurchased certain Warrants at a cost of
$0.2 million. At April 6, 1997, 4.6 million shares of Common Stock were
outstanding. On April 8th, 1997, the Company issued an additional 1.4 million
shares in
F-22
<PAGE>
conjunction with the Debenture Exchange Offer. At March 4, 1999, a total of
6,079,530 shares of Common Stock were outstanding; all these shares were
cancelled effective March 5, 1999, the effective date of the Company's Plan of
Reorganization. When the old common stock was canceled, holders of the old
common stock were provided an opportunity to subscribe in the offering of new
stock which formed the new ownership of the Company. Since this offering was
not open to anyone not holding old cancelled shares, outsiders had to purchase
cancelled shares if they wished to participate; this feature allowed holders of
the cancelled shares the opportunity to sell the shares if they did not wish to
subscribe. The subscription was concluded on April 18, 2000, thereby
establishing the new ownership. This included a distribution of 1,015,000
shares to approximately five former debenture holders, who, in aggregate, now
own 93% of the Company. The new shares also included 73,803 shares to
subscribers who paid $1.00 per share. As of March 31, 2000, 1,088,803 shares
were issued and 4,875 equivalent shares were subscribed-for, but were not
outstanding. These equivalent shares represent the 25% payment received on
19,500 shares which were purchased under the subscription on the 25% per quarter
payment method. At March 31, 2000, the number of shares purchased pursuant to
this subscription were accounted for as issuable and outstanding equal to the
equivalent shares actually 100% paid for. As there are no requirements binding
a subscriber to continue making future payments towards the subscription, an
accrual for the unpaid amounts was not recorded at March 31, 2000. Registration
costs associated with the issuance of the 1.1 million shares totaled
approximately $157,000.
The Company has paid no dividends on its Common Stock. The Company presently
intends to retain any earnings to finance the development of its future
business.
The Company has had a stock option plan under which both incentive and non-
qualified stock Options may be granted to purchase up to 4,500,000 shares of
Common Stock. For Options granted as incentive stock options under the Plan,
the exercise price must be at least equal to the fair market value on the date
of the grant. The exercise price for non-qualified Options may be less than
fair market value. All presently outstanding Options expired as of
March 4, 2000. The options are summarized as follows:
<TABLE>
<CAPTION>
Stockholders' Equity: Options Outstanding
2000 1999 | 1998
-------------------------- ------------------------------- | -----------------------------
Weighted- Weighted- | Weighted-
# of Average # of Average | # of Average
Shares Exercise Price Shares Exercise Price | Shares Exercise Price
--------- -------------- ------------ -------------- | ---------- --------------
<S> <C> <C> <C> <C> | <C> <C>
Outstanding at beginning of year - - 3,660,000 $ 0.74 | 1,100,000 $ 2.47
Granted - - - - | 2,720,000 0.19
Plan of reorganization (1) - - (3,660,000) (0.74) | - -
Forfeited - - - - | (160,000) 3.25
--------- ------------ ----------- ------------ | --------- -----------
Outstanding at end of year - - - - | 3,660,000 0.74
|
Options exercisable at year end - - - - | 3,660,000 -
</TABLE>
(1) Under the Plan of Reorganization options outstanding as of the effective
date, March 5, 1999, have been cancelled. However, option holders had the right
to purchase the same number of shares of new Common Stock at a price of $4.00
per share. The right to purchase new shares ended March 4, 2000.
F-23
<PAGE>
(15) NET OPERATING LOSS CARRYFORWARDS
As of March 31, 2000, the Company had available unused capital loss carry-
forwards and operating loss carry-forwards that may provide future tax benefits,
which expire as follows:
Unused Capital Federal Unused Net State Unused Net
Year of Loss Operating Loss Operating Loss
Expiration Carryforwards Carryforwards Carryforwards
---------- -------------- ------------------ ----------------
2002 $ 1,023,000 $0 $ 6,116,000
2003 - - 220,000
2004 - - 3,072,000
2005 - - 377,000
2012 - 6,078,000 -
2013 - 220,000 -
2019 - 3,072,000 -
2020 - 377,000 -
-------------- ------------------ ----------------
Total $ 1,023,000 $ 9,747,000 $ 9,785,000
============== ================== ================
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, tax benefits
could be reduced or lost. Other limiting factors may also apply.
At a combined federal and state corporate statutory tax rate of 38.6 percent,
the remaining losses can, in a valid situation, result in the cancellation of a
requirement to pay approximately $3.7 million in federal and state income taxes,
either immediately in one year or spread out over many years. The requirements
to utilize such loss carryforwards are strict and the possibilities for usage
are limited.
(16) COMMITMENTS AND CONTINGENCIES
Note Payable Debenture Holders. As a result of the Debenture debt forgiveness,
uncollateralized, non-interest-bearing notes aggregating $609,000 (undiscounted)
were received by former Debenture holders who elected Option A under the Plan.
For financial statement presentation, these notes have been discounted based on
an imputed interest rate of 6%,
F-24
<PAGE>
resulting in an unamortized discount of $98,267; thus, these notes have been
recorded at their discounted value of $510,733. During the year ended March 31,
2000, $31,501 of the discount has been amortized.
These notes are payable in five equal annual payments of $121,800. The first
annual payment was originally scheduled for March 5, 2000; however, on advice
of counsel, a payment was not made according to that original schedule. The
Company's management presently plans to put the issue forth to the Company's new
shareholders and directors for resolution. The payments that are due are, at
this point, due primarily to controlling shareholders (but not to management).
Management is seeking appropriate guidance with respect to this issue.
SEC Investigation. On February 16, 1999, the Company was notified by its
counsel that it was subject to an investigation by the SEC. The Company
cooperated fully with the staff of the SEC to aid their understanding of the
matters of concern. Management believes that the investigation is now complete.
SEC Recommendation. On June 13, 2000, the Company was informed by the staff of
the SEC that the staff intends to recommend that the Commission bring a civil
injunctive action against the Company, as well as one against its chief
executive officer, for alleged violations of federal securities laws. The SEC
staff has informed the Company that it does not intend to recommend civil
penalties, fines, or disgorgement from the Company, but does intend to recommend
civil penalties against the officer as an individual. Management believes that
the SEC staff recommendations are based on activities that took place prior to
October, 1997 in connection with the Company's tender offer for the Company's
debentures, the adequacy of the Company's disclosure related to the tender
offer, the purchase of debentures at a discount from face value, and previously
reported transactions in connection with International Thoroughbred Breeders,
Inc.
Under SEC procedures, the Company plans to respond to the SEC staff's
recommendation in a formal submission to the Commission, and then enter into
discussion with the SEC. Thereafter, the Commission may follow the SEC staff
recommendations, or decline to follow them, or take other action. If the
Commission follows the staff recommendations, an extensive legal process could
proceed in Federal Court. Should an injunction ultimately be issued against the
Company, the Company would be prohibited from engaging in acts similar to the
ones that led to the recommendation for the injunction, and from violations of
federal securities laws. Such an injunction against the Company would have to
be disclosed in any future filings or registrations of Company securities, and
may have other ramifications as well.
The Company believes that it has defenses with respect to the SEC staff
allegations against it, but is unable to predict the outcome of the process.
Albuquerque Office Lease. On August 8, 1997, the Company relocated its
principal executive offices from 215 Central NW to 600 Central SW, Albuquerque,
New Mexico. This space was being leased from ITB on a month-to-month basis. In
February 1999, the Company assumed the ITB lease (pursuant to a legal settlement
involving the return of substantial funds to the
F-25
<PAGE>
Company; see Note 5), which resulted in scheduled lease payments of
approximately $123,000, $128,000, and $44,000 for the fiscal years ending 2001,
2002, and 2003. The lease terminates on July 31, 2002, and the lease payments
are presently $10,130 per month. Each August 1, the lease payments may be
adjusted according to any changes in the Consumer Price Index (which estimated
adjustments are included above). The Company has in the past subleased a portion
of its space on a month-to-month basis, and has been trying during the past year
to sublease approximately half of its space. At May 31, 2000, the remaining
obligation under the lease totaled approximately $275,000.
Miami Office Lease. The Company had previously leased approximately 17,000
square feet of office space in Miami Beach, Florida, under a six-year non-
cancelable lease, effective May 1994. In February 1996, the Company moved out
of these premises. At September 30, 1997, approximately 35 months of the lease
remained at a cost of $341,250 per year. On January 28, 1998, the Bankruptcy
Court approved a settlement with the landlord, dated October 31, 1997, which
released the Company from its obligations under the lease. The Company paid the
landlord $105,850 (including funds already on deposit) in complete satisfaction
of all claims. The Company had provided a lease loss accrual of $516,000 during
fiscal year 1997 for the rent payments and other lease-related expenses called
for under the lease. Because of the Bankruptcy Court-approved settlement with
the landlord, a gain on settlement of the Miami lease of $266,378 was recorded
for the fiscal year ended March 31, 1998. In September 1998, the Bankruptcy
Court approved a settlement with the sublessee for $64,725.
Rent expense for operating leases was approximately $123,000 (which was
partially offset by rental income of $16,500) for the fiscal year ended March
31, 2000, $28,000 for the year ended March 31, 1999, and $14,000 for the fiscal
year ended March 31, 1998.
AutoLend Group, Inc. v. Vincent Villanueva. On July 14, 1998, the Company filed
an adversary claim against Vincent Villanueva to recover certain pre-petition
payments made to him. The complaint sought the possible return of up to
$39,647. On April 21, 1999, a motion to dismiss this claim was filed. A Court
order approving dismissal of the claim against Mr. Villanueva was entered on
July 6, 1999. After the bankruptcy case was closed effective January 13, 2000,
Mr. Villanueva's attorney filed a motion for payment by the Company to Mr.
Villanueva of associated legal fees estimated at between $7,000 and $15,000. A
Court hearing was held June 21, 2000 regarding this claim made by Mr.
Villanueva; the Court has taken the matter under advisement.
Florida Tax Claim. On November 24, 1998, the State of Florida Department of
Revenue asserted a tax claim under Chapter 199 of the Florida Statutes for the
period June 30, 1994 through June 30, 1998 for intangible tax of $668,531, and a
claim under Chapter 220 for the period March 31, 1993 through March 31, 1997 for
corporate income tax of $42,751. A court order was entered on August 20, 1999,
dismissing the claim subject to a seven-day appeal period; the court order
became effective on August 27, 1999.
Closing of the Bankruptcy Case. On July 2, 1999, the Company filed a Motion for
Final Decree to close the bankruptcy estate. On September 28, 1999, a Court
hearing was held on the
F-26
<PAGE>
Motion, and on January 13, 2000, the Bankruptcy Court entered its final decree,
thereby closing the bankruptcy.
El Rancho property. In connection with NPD, Inc.'s participation in the
Delaware ITB Chancery Court litigation (which was settled effective
November 6, 1998), and in connection with the Company's adversary proceeding
against NPD, Inc. (the terms of which were finalized as part of the NM
Bankruptcy Court ITB settlement approved in September 1998 and consummated in
January 1999, and which was administratively closed by Court order on
June 26, 2000), and furthermore in connection with the Company's adversary
proceeding against Nunzio DeSantis (which was settled effective
January 7, 2000), the Company received certain contingent rights. [See Note 5,
Related Party Transactions.] The contingent rights which the Company received
are with respect to possible proceeds receivable in the event that International
Thoroughbred Breeders' real estate holding in Las Vegas, Nevada sold above a
certain threshold amount, under certain conditions. The Company's rights
thereunder may be up to $2.0 million. According to a Form 8-K filed with the SEC
by ITB on June 7, 2000, the former El Rancho Hotel property sold on
May 22, 2000. The Company is presently investigating its legal options necessary
to realize any potential benefit which may be due from this sale as disclosed by
the ITB Form 8-K filing.
(17) FOURTH QUARTER ADJUSTMENTS AND SIGNIFICANT TRANSACTIONS
Loan revenues from finance charges on installment contracts for the nine months
ended December 31, 1999 were previously reported as $24,868, and for the full
twelve months ended March 31, 2000, were $9,672. In the fourth quarter ended
March 31, 2000, an adjustment of $24,868 was made to reduce recognized revenues
and income during the first nine months which were attributed to the accrual of
interest income on Loans which had been more than six months in arrears, and had
therefore been written-off. Such written-off Loans represent obligations on the
part of borrowers, which is still owed to the Company, and which the Company
generally still pursues for possible collection.
Net revenues from matured insurance Policies for the nine months ended
December 31, 1999, were previously reported at $106,213. These insurance
Policies were sold during the period, and resulted in cash being received by the
Company. In the fourth quarter an adjustment was made to properly reflect the
sale of these Policies as a receipt of income, rather than as a recognition of
revenue (which reflects the difference between a Policy being sold, as opposed
to maturing). Thus, an adjustment of $106,213 was made during the fourth quarter
to reduce previously reported revenues, reclassing them to "other income." This
adjustment had no impact on total net income reported, net equity balances, or
cash balances.
During the fourth quarter ended March 31, 2000, one insurance policy did mature,
with a face value of $37,500 and a cost of $32,625, resulting in a net revenue
of $4,875.
(18) SUBSEQUENT EVENTS: DISCONTINUED OPERATIONS
On April 1, 2000, the Company adopted a plan to sell the consumer used-car Loan
portfolio business. The anticipated disposal date is approximately September
30, 2000. The assets of the Loan portfolio to be sold consist primarily of
approximately 3,900 car loans which have been
F-27
<PAGE>
more than six months in arrears, and have been written-off. These Loans have an
aggregate face value of approximately $15 million, and currently produce a net
cash flow to the Company of approximately $11,000 per month (after collection
expenses). A portion of these Loans are presently out of statute (i.e., no
longer legally enforceable). The monthly cash flow from the loans has been
decreasing over time, and the decrease would be expected to continue if the
portfolio were not sold. The Company has used an outside servicing agent for
these Loans since approximately December 1995. The Company has held discussions
with a third party regarding a potential sale. Any such sale would result in a
small increase in net equity to the Company, an immediate increase in the
Company's total cash on hand, and a decrease in the Company's subsequent monthly
cash inflows.
F-28
<PAGE>
Schedule II
AUTOLEND GROUP, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
March 31, 2000, 1999, and 1998
<TABLE>
<CAPTION>
Balance at Charged to Amount on
Beginning Costs and Fresh-start Balance
of Period Expenses Adjustment Sheet
------------------------------------------------------
<S> <C> <C> <C> <C>
Description:
Year ended March 31, 2000:
Intangible assets - accumulated amortization $ - $ - $ - $ -
Goodwill - accumulated amortization - - - -
Debt issuance costs - accumulated amortization - - - -
Year ended March 31, 1999:
Intangible assets - accumulated amortization $ 600,000 $ - $ (600,000) $ -
Goodwill - accumulated amortization 2,708,278 - (2,708,278) -
Debt issuance costs - accumulated amortization 3,575,944 - (3,575,944) -
Year ended March 31, 1998:
Intangible assets - accumulated amortization $ 600,000 $ - $ - $ 600,000
Goodwill - accumulated amortization 2,708,278 - - 2,708,278
Debt issuance costs - accumulated amortization 3,519,501 56,443 - 3,575,944
</TABLE>
S-1
