-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QynRf1XEteosQXw2sEM0QZrEPJzrphLvDZC+6UL4iK/RKkYrrSwZoZ5rqExk2mv6 W8k7pzd63AjNB/XzJf0TTw== 0001005477-96-000122.txt : 19960515 0001005477-96-000122.hdr.sgml : 19960515 ACCESSION NUMBER: 0001005477-96-000122 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960514 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: AUTOINFO INC CENTRAL INDEX KEY: 0000351017 STANDARD INDUSTRIAL CLASSIFICATION: COMMUNICATION SERVICES, NEC [4899] IRS NUMBER: 132867481 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-11497 FILM NUMBER: 96562875 BUSINESS ADDRESS: STREET 1: 1600 ROUTE 208 CITY: FAIR LAWN STATE: NJ ZIP: 07410 BUSINESS PHONE: 2017030500 MAIL ADDRESS: STREET 1: 1600 ROUTE 208 CITY: FAIR LAWN STATE: NJ ZIP: 07410 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- FORM 10-K ---------------- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period From June 1, 1995 Commission through December 31, 1995 File No. 0-14786 - ------------------------------------------- ---------------- AUTOINFO, INC. ------------------------------------------------------------------- (Exact name of Registrant as specified in its charter) Delaware 13-2867481 -------- ---------- (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 1600 Route 208, Fair Lawn, New Jersey 07410 ------------------------------------- ---------- (Address of Principal Executive Officer) (Zip Code) (Registrant's telephone number including area code) (201) 703-0500 -------------- Securities registered under Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value ---------------------------- (Title of Class) 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 of information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. YES |_| NO |X| As of May 7, 1996, the Registrant had outstanding 7,954,752 shares of Common Stock. The aggregate market value of the Registrant's Common Stock held by nonaffiliates as of May 7, 1996 was approximately $23,215,000. DOCUMENTS INCORPORATED BY REFERENCE Part IV Certain exhibits listed in response to Item 14(a)(3) have been included in prior filings made by the Registrant under the Securities Act of 1933 and the Securities Exchange Act of 1934. 1 PART I Item 1: BUSINESS General During 1995, AutoInfo, Inc. (the "Company") sold substantially all of its operating assets for $34,100,000 in cash in two separate transactions. As a result, the Company's sole operating business which remained provides long distance telephone communications services. The long distance telephone communication service is marketed to over 1,400 customers through an independent commissioned sales force. During 1995, the Company commenced an active search for acquisition candidates and expansion opportunities in industries which management believed would provide significant shareholder value and growth potential. On December 6, 1995, the Company, through a wholly owned subsidiary, acquired the operating assets of FALK Finance Company (FFC), a Norfolk, Virginia based specialized financial services company, for $5,125,000 in cash and the assumption of liabilities and debt approximating $34,000,000. As a result of this acquisition, the Company is primarily engaged in the non-prime automobile finance business which encompasses the purchase of automobile retail installment contracts from new and used automobile dealers. The Company services these dealers by providing specialized financing programs for buyers who typically have impaired credit histories and are unable to access traditional sources of available consumer credit. The Non-Prime Auto Finance Industry The automobile finance industry was estimated to be in excess of $300 billion in 1994 (1995 data is not yet available). The market is generally divided by the types of automobiles sold (new versus used) and the credit worthiness of the borrower. Generally, banks, savings and loan associations, credit unions, large independent finance companies and captive finance companies such as Ford Motor Credit, GMAC, Chrysler Credit tend to provide financing for new automobiles purchased by prime customers. The non-prime segment of this overall market is believed to be approximately $60 billion and is comprised of both private and publicly traded companies providing credit availability to consumers who are higher financial risks and who have limited access to traditional financing sources. These independent finance companies tend to provide financing for used automobiles sold through new and used automobile dealerships at higher interest rates commensurate with the higher risk associated with the non-prime consumer. The non-prime market has been fueled by the significant increase in the sale of used automobiles. In 1994, the sale of new automobiles increased merely 1% while the sale of used vehicles increased over 5% to in excess of 31 million automobiles. This increase resulted from a number of factors including, (i) the high price of new cars, which increased in 1994 to over 51% of the median U.S. family income, (ii) the increased availability of newer late model used automobiles related, to some extent, to the trend toward leasing rather than buying of new vehicles, and (iii) availability of financing alternatives as provided by the growth in the number of independent finance companies servicing the non-prime segment of the market. Operations and Markets The Company, through its acquisition of FFC in December 1995, entered the non-prime automobile finance industry. FFC had been purchasing and servicing automobile retail installment contracts since 1992. The business was formed by an operator of eleven used automobile dealerships in the Norfolk / Richmond / Newport News area of Virginia and began operating as a captive finance affiliate. In 1994 FFC began purchasing installment contracts from other independent used automobile dealers in the same marketplace. The management and operating staff of FFC joined AutoInfo in conjunction with the acquisition. The management group brings to the Company significant expertise in the non-prime automobile finance business 2 with experience in consumer credit and collection, the development and implementation of proven credit underwriting criteria and management information systems vital to the support of the portfolio. Since its entrance into the non-prime automobile finance industry in December 1995, the Company has made notable strides in expanding its dealer relations, increasing contract originations and adding several industry professionals with significant expertise in marketing, operations and financial management. The Company's strategy is to build a super regional service center catering to Virginia and the surrounding states, providing a complete range of services including sales and marketing, credit, servicing and collection. It is management's belief that this approach, as compared to the branch network utilized by a number of other non-prime finance companies, provides a necessary presence in the local market and thereby maximizes the knowledge and needs of the local market, both from the consumers' and dealers' perspectives. Dealer Network The Company purchases automobile retail installment contracts from new and used automobile dealers pursuant to dealer agreements. The agreements generally set forth the terms and conditions upon which contracts generated by the dealer will be purchased by the Company. The agreements do not obligate either the dealer to sell or the Company to buy any individual contract. The agreements contain certain warranties by the dealer, including the compliance with certain laws and regulations, and provide for the indemnification of the Company in the event of a breach by the dealer. In conjunction with the acquisition of FFC, the Company entered into a ten year agreement with Charlie Falk Auto Wholesale, Incorporated ("CFAW") . This agreement provides and establishes the basis for conducting business and the criteria under which the Company may purchase contracts from CFAW. The agreement provides that CFAW shall present to the Company at least 90% of all retail installment contracts generated by CFAW for resale. The Company evaluates these contracts based upon established underwriting criteria and makes a determination whether to purchase each contract. The Company is under no obligation to purchase any individual contract. As of December 31, 1995, approximately 80% of all contracts funded by the Company were purchased from CFAW. The Company presently has dealer agreements with 209 independent dealers in Virginia, Maryland and North Carolina. Purchase of Installment Contracts and Underwriting Guidelines The Company purchases automobile retail installment contracts from both independent and franchised used car dealers at a discount on a non-recourse basis. Discounts presently range from 10% to 20% depending upon the risk factors associated with a specific contract. Dealers fax contract applications to the Company's credit / underwriting department. The application is evaluated based upon established criteria including the customer's credit history, available disposable income, job status, stability of residence and value of the collateral. Based upon this evaluation, the dealer is given either an initial approval or rejection. Once an application is approved and the dealer agrees to sell the contract to the Company and supplies the Company with a signed contract together with a complete package of required supporting documentation, the credit verification department conducts a thorough credit investigation. This process includes direct contact with the applicant. Once this process is completed and the application data is verified, the Company purchases the contract and the appropriate payment, net of the agreed upon discount, is made to the dealer. Contract Servicing The terms of each contract provide for the monthly payment of principal and interest. If the payment is not received by the due date, the next day a collection specialist attempts to contact the customer to 3 arrange for payment. The collection department will take a number of available actions depending upon whether initial contact was made with the customer, payment is received or other acceptable arrangements are made. These actions include contacting employers or family members. If the Company is not successful in collecting the amount due or resolving the matter to the collection specialist's satisfaction, repossession action is initiated. Customers are given an opportunity to redeem repossessed vehicles. However, after the lapse of the redemption period, the vehicles are sold at dealer auction. Sales and Marketing The Company markets its dealer financing program through a staff of trained field sales representatives under the direct supervision of the Company's Vice President of Sales and Marketing. The main duties of a field representative are to solicit and enroll new dealers into the program, train the dealers regarding the specific aspect of the Company's loan acquisition program, encourage additional contract volume and provide a direct hands on customer contact on a regular basis. Presently, the Company concentrates its marketing effort in Virginia, Maryland and North Carolina. Competition The non-prime automotive consumer finance market is both highly competitive and fragmented. As such, the Company encounters competition in the Virginia market from other local, regional and national consumer finance companies, many of whom have raised significant capital through initial public offerings of common stock during the past several years. Other more traditional finance sources, such as banks and captive automobile finance companies, have not generally serviced the non-prime segment of the market. The major competitive factors leading to the dealer's choice of financing source are the consistency of the application of underwriting guidelines, the competitiveness of financing terms and dealer fees, the timeliness of application approval and funding and the financial stability of the source. The Company believes that it competes favorably on these factors. The Company's long distance telephone communications service competes with numerous companies that provide long distance telephone communication services on the basis of price and service. Regulation The Company's business is subject to regulation and licensing under various federal, state and local statutes and regulations businesses. Federal and state consumer protection laws and related regulations require significant disclosures by lenders and companies providing automobile financing. These regulations include, among other items, a) limitations on interest rates and other charges that may be imposed by or the terms of the installment contracts purchased by the Company; b) regulations concerning other products, such as insurance and the insurers the Company represents as an agent; and c) the rights of the Company to repossess and sell collateral. The Company believes that it is in substantial compliance with all applicable material laws and regulations affecting its business. Any adverse changes in the laws or regulations relating to the Company's business, such as the limitation of interest rates, could have a material adverse effect on the Company's results of operations. Patents, Trademarks and Copyrights "AUTOINFO" is a registered trademark and service mark of the Company. 4 Employees The Company currently has 80 full-time employees. None of the Company's employees are represented by a labor union. The Company considers its relationship with its employees to be good. Item 2: PROPERTIES AutoInfo Finance of Virginia, Inc., the Company's newly formed subsidiary, leases approximately 8,000 square feet of space at 863 Glenrock Road, Norfolk, Virginia. The lease runs through April 2001 and provides for an annual rental of $96,000. The Company maintains an operational facility of approximately 800 square feet at 6818 Grover St., Omaha, Nebraska. The lease for such facility runs through June 1996 at an annual rental of $10,000. AutoInfo Insurance Inspection Services, which was sold on July 20, 1995, rents approximately 5,100 square feet of space at 1600 Route 208, Fair Lawn, New Jersey. The lease runs through May 1997 at an annual rental of approximately $76,000. The Company intends to sublet this space. The Company rents approximately 2,900 square feet of space at 1600 Route 208, Fair Lawn, New Jersey where it maintains its executive offices. The lease runs through November 1997 at an annual rental of approximately $44,000, subject to certain rent escalation provisions. The Company believes that its present facilities are suitable and adequate for its reasonably foreseeable growth. Item 3: LEGAL PROCEEDINGS The Company is not a party to any material legal proceedings. Item 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None 5 PART II Item 5: PRICE RANGE OF COMMON STOCK The Company's Common Stock is traded in the over-the-counter market and is quoted through the National Association of Securities Dealers Automated Quotation System ("NASDAQ") on the National Market System under the symbol AUTO. The following table sets forth, for the periods indicated, the high and low closing bid quotations per share for the Company's Common Stock as reported by NASDAQ. High Low ---- --- Fiscal year ended May 31, 1994 First quarter ............................................. 4 3 11/16 Second quarter ............................................ 4 5/8 3 1/4 Third quarter ............................................. 4 5/8 3 7/8 Fourth quarter ............................................ 4 1/8 3 5/8 Fiscal year ended May 31, 1995 First quarter ............................................. 4 2 3/4 Second quarter ............................................ 3 1/8 2 1/2 Third quarter ............................................. 3 1/2 3 3/16 Fourth quarter ............................................ 3 59/64 3 1/4 Seven Months ended December 31, 1995 Three months ended August 31, 1995 ........................ 3 1/2 3 1/16 Three months ended November 30, 1995 ..................... 3 1/2 3 1/8 Month ended December 31, 1995 ............................. 3 1/2 3 1/8 As of May 8, 1996, the closing bid price per share for the Company's Common Stock, as reported by NASDAQ was $3.125. As of May 8, 1996, the Company had approximately 400 stockholders of record. Dividend Policy The Company has never declared or paid a cash dividend on its Common Stock. It has been the policy of the Company's Board of Directors to retain all available funds to finance the development and growth of the Company's business. The payment of cash dividends in the future will be dependent upon the earnings and financial requirements of the Company and other factors deemed relevant by the Board of Directors. 6 Item 6: SELECTED CONSOLIDATED FINANCIAL DATA The following is a summary of selected consolidated financial data relating to the Company. This summary has been restated to present the businesses sold as discontinued operations. Seven Months Ended December 31, Year Ended May 31, ------------ ------------------------------------- (In Thousands, Except Per Share Data) 1995 1995 1994 1993 1992 ---- ---- ---- ---- ---- Statement of Operations Data: Revenues $ 2,232 $ 1,598 $ 2,075 $ 1,903 $ 1,033 Income (loss) from continuing operations before income tax benefit 385 (2,410) (208) (338) (412) Benefit from income taxes (176) (332) (64) (121) (121) Income (loss) from continuing operations 561 (2,078) (143) (217) (291) Income (loss) from discontinued operations (28) 1,519 2,164 1,953 1,512 Gain on sale of discontinued operations 297 8,885 -- -- -- Net income 829 8,326 2,021 1,736 1,221 Net income (loss) per share: From continuing operations .07 (.28) (.02) (.03) (.04) From discontinued operations -- .21 .29 .27 .21 From gain on sale of discontinued operations .04 1.19 -- -- -- ------- -------- ------- ------- ------- Net income per share .11 1.12 .27 .24 .17 ------- -------- ------- ------- ------- Balance Sheet Data: Total assets $65,795 42,357 $26,387 $19,975 $18,611 Total debt 32,746 4,161 4,784 216 753 Retained earnings 14,029 13,199 4,873 2,852 1,116 Stockholders' equity 31,018 30,121 20,857 18,625 16,872 7 Item 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital Resources The Company's liquid assets amounted to $24.9 million as of December 31, 1995. The Company has sufficient liquid assets to meet its short and long term capital requirements. The total amount of debt outstanding as of December 31, 1995 was $32,746,000, of which $267,000 is due in less than one year. This debt is primarily comprised of a senior credit facility of approximately $21 million and subordinated notes of $9.8 million included in the liabilities assumed with the acquisition of the assets of FALK Finance Company, Inc. ("FFC") in December 1995, and $2 million of 7.55% subordinated notes issued by the Company in January 1994. The Company has adequate resources to meet these obligations. Inflation and changing prices had no material impact on revenues or the results of operations for the seven month period ended December 31, 1995. There are no trends or commitments which may have an impact on the Company's liquidity. Changes in various asset and liability categories are directly related to the acquisition of FFC in December 1995 (See Note 2 to the Consolidated Financial Statements). Income taxes payable decreased by $6,563,000 directly related to taxes paid on the gain on sale of assets of discontinued operations in April 1995 (See Note 3 to the Consolidated Financial Statements). Results of Operations On April 1, 1995, the Company consummated the sale of certain assets, net of certain liabilities, constituting the operating assets of the Orion Network, Compass Network, Checkmate Computer Systems, and Insurance Parts Locator businesses. On July 20, 1995, the Company consummated the sale of the operating assets of its insurance inspection services business. The Results of Operations of these businesses have been classified as discontinued operations for all periods presented. On December 6, 1995, the Company, through a newly formed wholly owned subsidiary, acquired the operating assets of FALK Finance Company (FFC), a Norfolk, Virginia based specialized financial services company, for $5,125,000 in cash and the assumption of liabilities and debt approximating $34,000,000. As a result of this acquisition, the Company's primary business is to purchase automobile retail installment contracts from independent used vehicle dealers. The Company services these dealers by providing specialized financing programs for buyers who typically have impaired credit histories and are unable to access traditional sources of available consumer credit. Except as otherwise noted, the following discussion of the results of operations is with respect to the Company's continuing operations consisting of its long distance services business and its non-prime auto finance business acquired in December 1995. SEVEN MONTHS ENDED DECEMBER 31, 1995 On February 28 , 1996, the Company elected to change its year end to December 31. This decision is directly related to the acquisition of FFC and the entry by the Company into the non-prime automobile finance industry. It is the belief of management that the ability to compare the performance of the Company against numerous other publicly traded non-prime companies reporting the results of operations on a calendar year will provide for more meaningful dissemination of financial information and is in the best interest of the public and the Company's shareholders. Operations for the seven months ended December 31, 1995 include the operating results of the 8 Company's non-prime auto finance business since December 6, 1995, the acquisition date. Revenues Revenues of $2,232,000 for the seven month period ended December 31, 1995 were derived from the non-prime auto finance business for the month of December ($772,000), the Company's long distance telephone services business ($440,000) and investment income ($1,020,000). Costs and Expenses Interest expense for the seven month period ended December 31, 1995 was $416,000 and relates to the debt assumed relating to the acquisition of FFC in December 1995 of approximately $34,000,000 and to the $4,000,000 subordinated notes issued by the Company in January 1994 and notes payable issued in connection with an acquisition in January 1994. In September 1995, the Company elected to prepay $2,000,000 of the subordinated notes. Operating expenses for the seven month period ended December 31, 1995 were $1,346,000 and consisted primarily of corporate office costs and the operating expenses of the non-prime auto finance business acquired in December 1995. Depreciation and amortization expense for the seven month period ended December 31, 1995 was $85,000 and consisted primarily of the amortization of goodwill and other intangible assets associated with the acquisition of FFC in December 1995. Income from Continuing Operations and Income Tax Benefit Income from continuing operations before taxes for the seven month period ended December 31, 1995 was $385,000. The income tax benefit for the seven month period ended December 31, 1995 was $176,000. The Company recorded a tax benefit as a result of a substantial portion of its investment income being derived from instruments exempt from federal taxation. Loss From Discontinued Operations Loss from discontinued operations for the seven month period ended December 31, 1995 was $28,000 and was related solely to the operations of the Company's insurance inspection services business sold in July 1995. Gain on Sale of Discontinued Operations The gain on sale of discontinued operations for the period ended December 31, 1995 was $297,000 and was related solely to the sale of the Company's insurance inspection services business in July 1995. YEARS ENDED MAY 31, 1995 AND 1994 Revenues For the years ended May 31, 1995 and 1994, the Company's revenues were derived from the sale of long distance telephone services ($1,030,000) and investment income ($568,000). Total revenues for the year ended May 31, 1995 were $1,599,000 a decrease of 23% or $477,000 compared with total revenues of $2,076,000 for the prior year. The Company's telephone reseller division experienced a decline in revenue of $771,000 due primarily to reduced network usage levels and volume rebates from AT&T ($200,000) received in the prior fiscal year in connection with the achievement of certain network usage levels. Investment income increased by $294,000 as a direct result of the investment of the proceeds in April 1995 from the sale of the assets of the Orion Network, Compass Network, Checkmate Computer Systems, and Insurance Parts Locator businesses. 9 Costs and Expenses Interest expense was $316,000, an increase of $185,000 over $131,000 for the prior year. This was directly related to the $4,000,000 subordinated notes issued by the Company in January 1994 and notes payable issued in connection with an acquisition in January 1994. Operating expenses for the year ended May 31, 1995 decreased by 12% to $1,864,000 from $2,118,000 for the prior year. The decrease was primarily related to the reduction in direct costs associated with providing the Company's long distance telephone services and was directly related to the decline in revenues. Depreciation and amortization expense for the year ended May 31, 1995 decreased by 25% to $25,000 from $34,000 for the prior year. Preferred stock investment write-off for the year ended May 31, 1995 was $1,804,000. As a result of the sale of the Company's businesses providing computerization and communication services to the automotive industry, the lack of synergistic business opportunity and the inability to remit management fees and preferred stock dividends as they became due, the Company has written off its preferred stock investment in ComputerLogic, Inc. (See Note 6 to the Consolidated Financial Statements.) Loss from Continuing Operations and Income Tax Benefit Loss from continuing operations before taxes for the year ended May 31, 1995 was $2,410,000 compared to $207,000 in the prior year, an increase of $2,203,000. This increase is attributable to the write-off of the Company's Preferred Stock investment ($1,804,000) and the impact of the decline in revenue in the Company's Telephone Reseller Division. The income tax benefit for the year ended May 31, 1995 was $332,000, or 14% of the loss before income taxes compared to $64,000, or 31% in the prior year. The decrease in percentage was the result of the write-off of the Company's Preferred Stock investment with no current tax benefit. The net loss from continuing operations was $2,078,000 for the year ended May 31, 1995 an increase of $1,935,000 as compared to $143,000 in the prior year. Income From Discontinued Operations Income from discontinued operations for the year ended May 31, 1995 was $1,519,000 as compared to $2,164,000 in the prior year, a decrease of $645,000. The income for fiscal year 1995 reflects the ten month period up to the date of sale. In addition, the decrease was caused by lower margins on the sale of computer systems ($200,000) and the impact of reduced revenues from the sale of automotive supplies ($60,000). Gain on Sale of Discontinued Operations The gain on the sale of discontinued operations for the year ended May 31, 1995 relates solely to the sale of the operating assets of the Company's Orion Network, Compass Network, Checkmate Computer Systems and Insurance Parts Locator businesses on April 1, 1995 to ADP Claims Solutions Group, Inc. The gross proceeds of $30,350,000 in cash resulted in a gain of $8,886,000 after applicable taxes of $7,659,000. Trends And Uncertainties During the year ended May 31, 1995, increased competition had an adverse impact on the sale of computer systems and the results of operations. Item 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The response to this item is submitted as a separate section of this Report beginning on page F-1. 10 Item 9: DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III Item 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following table provides certain information with respect to the directors and executive officers of the Company: Name Age Position - ---- --- -------- Andrew Gaspar 48 Director, Chairman of the Board Scott Zecher 37 Director, President, Chief Operating Officer William Wunderlich 48 Chief Financial Officer, Secretary, Treasurer Jason Bacher 57 Director Robert Fagenson 47 Director Howard Nusbaum 48 Director Jerome Stengel 59 Director Directors of the Company are elected annually by the stockholders of the Company to serve one year terms and until their successors have been elected and qualified. All officers serve at the discretion of the Board of Directors. No director or executive officer has any family relationship with any other director or executive officer. ANDREW GASPAR, age 48, was named Chairman of the Board on March 29, 1995. Mr. Gaspar has, since March 1991, been President of the general partner of R.S. Lauder, Gaspar & Co. and Vice-Chairman of The Central European Development Corporation, venture capital firms conducting business in the United States and Eastern Europe. Prior thereto, Mr. Gaspar was a Managing Director of E.M. Warburg Pincus & Co., a venture banking and investment advisory firm, a position he held from 1982 through March 1991. He holds a B.S. degree from Columbia University, an M.S. degree from Northeastern University and an M.B.A. degree from Harvard Business School. He has been a director of the Company since 1978. Mr. Gaspar serves as a director of Central European Media Enterprises., Nova TV and General Banking & Trust. SCOTT ZECHER, age 37, joined the Company in January 1984 and was named its President and Chief Operating Officer in January 1993. Prior to becoming President, he held the position of Executive Vice President and Chief Financial Officer. He became a director of the Company in 1989. From 1980 to 1984, he was with the accounting firm of KPMG Peat Marwick. Mr. Zecher is a Certified Public Accountant with a B.A. degree in Accounting and Economics from the City University of New York at Queens College. WILLIAM WUNDERLICH, age 48, joined the Company in October 1992 as its Vice President-Finance and became Chief Financial Officer in January 1993. From 1990 to 1992, he served as Vice President of Goldstein Affiliates, Inc., a public insurance adjusting company. From 1981 to 1990, he served as Executive Vice President, Chief Financial Officer and a Director of Novo Corporation, a manufacturer of consumer products. Mr. Wunderlich is a Certified Public Accountant with a B.A. degree in Accounting and 11 Economics from the City University of New York at Queens College. JASON BACHER, age 57, has been a Director of the Company since its inception in 1976. From its inception in 1976 through March 29, 1995, Mr. Bacher was Chairman of the Board and the Chief Executive Officer of the Company. Mr. Bacher has been associated with the automobile salvage industry since 1961 as a principal of Bacher Tire Company, Inc., an automobile recycler located in the New York metropolitan area. In connection with the sale by the Company of a substantial portion of its operating assets to ADP on April 1, 1995, Mr. Bacher became an employee of ADP. ROBERT FAGENSON, age 47, has been an officer and director of Fagenson & Co., Inc., a registered broker-dealer, for more than five years. Mr. Fagenson is a member of the Board of Directors of the New York Stock Exchange. Since April 1983, Mr. Fagenson has also served as the Secretary and a director of Starr Securities, Inc., a registered broker-dealer, which was the underwriter of the Company's initial public offering in May 1986. Mr. Fagenson has been a director of the Company since June 1986. Mr. Fagenson is also a director of Healthy Planet Products, Inc., Microtel Franchise and Development Corp., Rentway, Inc. and Nu-Tech Biomed, Inc. Mr. Fagenson has a B.S. degree in Business Administration from Syracuse University. HOWARD NUSBAUM, age 48, has been a director of the Company from its inception in 1976. Mr. Nusbaum, who earned a B.A. degree from Brooklyn College, has been a consultant to the automobile recycling industry since 1976. Mr. Nusbaum is President and Chief Executive Office of SWZ Engineering, a corporation which holds patents on advanced electronic display technologies. JEROME STENGEL, age 59, has been a Vice President, Treasurer and Chief Financial Officer of Genovese Drug Stores, Inc., an American Stock Exchange company, for more than five years. Mr. Stengel is a Certified Public Accountant with a B.B.A. degree from the City University of New York. He has been a director of the Company since 1987. Item 11: EXECUTIVE COMPENSATION The Summary Compensation Table below includes, for the seven month period ended December 31, 1995 and for each of the fiscal years ended May 31, 1995 and 1994, individual compensation for services to the Company and its subsidiaries paid to: (1) the Chief Executive Officer; and (2) the other most highly paid executive officers of the Company in Fiscal 1995 whose salary and bonus exceeded $100,000 (together, the "Named Executives").
Annual Long-Term All Compensation Compensation Other Name and Principal Position Year Salary Bonus Options Compensation(2) ---- ------ ----- ------- --------------- Scott Zecher 1995(1) $ 87,500 $ 50,000 - $2,625 President and 1995 $ 145,000 $235,000(3) 80,000 $4,230 Chief Operating Officer 1994 $ 144,000 $ 50,000 - $3,240 William Wunderlich 1995(1) $ 70,000 $ 15,000 - $1,320 Treasurer and Chief 1995 $ 103,333 $ 80,000(3) 40,000 $5,500 Financial Officer 1994 $ 91,250 $ 19,000 35,000 $3,068
- ---------- (1) Represents the seven month period ended December 31, 1995. 12 (2) Represents amounts contributed to the Company's 401(k) deferred compensation plan. (3) Includes a one-time bonus relating to the ADP transaction in the amount of $150,000 to Scott Zecher and $50,000 to William Wunderlich. Employment Agreements Messrs. Zecher and Wunderlich are employed by the Company pursuant to employment agreements which expire in April 1998 and April 1997, respectively. These agreements provide for minimum annual compensation of $150,000 and $120,000, respectively, and provide for annual review by the Board of Directors. The Company has entered into supplemental employment agreements (the "Supplemental Employment Agreements") with Messrs. Zecher and Wunderlich (the "Covered Executives"), which provide that if there is a Change in Control of the Company (as defined therein) during the Protected Period (described below), the terms of the Supplemental Employment Agreements will supersede the Covered Executives' existing employment agreements and will govern the terms of the Covered Executives' employment following the Change in Control for a three-year term, in the case of Mr. Zecher, and a two-year term, in the case of Mr. Wunderlich (the "Employment Term"). For these purposes, the Protected Period is a three-year period which commenced on April 10, 1995 and is automatically extended for one year on April 10, 1996 and each April 10 thereafter, unless the Company otherwise notifies the Covered Executive at least 90 days prior thereto. The Supplemental Employment Agreements provide that during the Employment Term the Covered Executives will remain employed in their capacities with the Company as of the Change in Control and will continue to receive an annual salary (the "Base Salary") and benefits at least equal to that which they received prior to the Change in Control and an annual bonus at least equal to the Covered Executive's average annual bonus during the three years prior to the Change in Control. The Supplemental Employment Agreements provide that if, during the Employment Term, the Covered Executive's employment is terminated by the Company other than for Cause or Disability or by the Executive either for Good Reason or during the 60-day Window Period commencing on the anniversary of the Change in Control (as each of the foregoing terms are defined in the applicable Supplemental Employment Agreement), the Covered Executive would receive a severance payment equal to the sum of his Base Salary and the higher of his annual bonus for the then most recent year or his average annual bonus during the three years preceding the Change in Control (the "Highest Annual Bonus") multiplied by two, in the case of Mr. Zecher, and one and one-half, in the case of Mr. Wunderlich. In addition, the restrictions on any stock-related incentive awards held by the Covered Executive would lapse and he would be entitled to continued coverage under the Company's life, health and disability benefits for two years following termination of his employment (three years in the case of Mr. Zecher) or until he receives similar benefits from a new employer. Mr. Zecher's Supplemental Employment Agreement also provides that if he is subject to excise taxes under Section 4999 of the Internal Revenue Code on any payments or benefits triggered by a Change in Control, he will be entitled to receive an additional amount such that after the payment of all applicable taxes he will retain an amount equal to that which he would have retained absent the excise taxes. In connection with the Supplemental Employment Agreements, the Company also approved the creation and funding of an Employee Protection Trust, which is a form of grantor trust under which the assets of the trust remain subject to the satisfaction of the general claims of the Company's creditors, to provide for the payment of all benefits payable under the Supplemental Employment Agreements. The Supplemental Employment Agreements were entered into on April 10, 1995, after Steel Partners II LP acquired 14.9% of the Company's Common Stock. In the opinion of the Board, it was necessary and desirable to enter into the Supplemental Employment Agreements and to implement the Employee Protection Trust so that the Covered Executives would concentrate on performing their duties and promoting the best interests of the Company and its stockholders without being concerned about the possibility of a Change in Control. In the opinion of the Board of Directors, the provisions of the Supplemental Employment Agreements and the Employee Protection Trust would not have any significant impact on the decision of any person or entity relating to whether or not to acquire the Company or effect a Change in Control although a person or entity interested in acquiring, or effecting a Change in Control, of the Company may view the provisions of the Supplemental Employment Agreement and the funding of the Employee Protection Trust as making it more difficult to consummate an acquisition, or effect a 13 Change in Control, of the Company. In addition, in the opinion of the Board of Directors, entering into the Supplemental Employment Agreements and implementing the Employee Protection Trust and the funding thereof would not have an adverse impact on the Company's ability to execute its business strategy in pursuing value for the benefit of all stockholders. Restricted Stock Grants In November 1987, the Company issued 410,000 shares of Common Stock pursuant to restricted stock bonus grants to key executives, directors and consultants. In January 1994, the Company issued 15,000 shares of Common Stock pursuant to a restricted stock bonus grant to a non-employee director. Such shares vest ratably over a period of 30 years. The unvested portion is subject, upon the occurrence of certain events, to either forfeiture or accelerated vesting. 401(k) Cash or Deferred Compensation The Company maintains a tax-qualified 401(k) cash or deferred compensation plan that covers all employees who have completed 90 days of service with the Company and have attained age 21. Participants are permitted, within the limitations imposed by the Internal Revenue Code, to make pre-tax contributions to the plan pursuant to salary reduction agreements. The Company makes a 50% matching cash contribution on up to a 6% contribution by the employee. In addition, the Company may, in its discretion, make additional contributions as permitted by the Internal Revenue Code. Participants' contributions are always fully vested. The Company's contributions vest proportionally over a five year period commencing on the employee's date of employment. Stock Option Plans In February 1986, the Company's stockholders approved the AutoInfo 1985 Stock Option Plan (the "1985 Plan") which provides that a total of 555,000 shares of Common Stock are subject to options granted thereunder. In November 1986, the Company's stockholders approved the AutoInfo 1986 Stock Option Plan (the "1986 Plan") which provides that a total of 637,500 shares of Common Stock are subject to options granted thereunder. In October 1989, the Company's stockholders approved the AutoInfo 1989 Stock Plan (the "1989 Plan") which provides that a total of 300,000 shares of Common Stock are subject to options granted thereunder. In November 1992, the Company's stockholders approved the AutoInfo 1992 Stock Option Plan (the "1992 Plan") which provides that a total of 350,000 shares of Common Stock are subject to options granted thereunder. (The 1985 Plan, 1986 Plan, 1989 Plan and 1992 Plan are sometimes referred to herein as the "Option Plans".) Under the Option Plans, the Company may grant options to purchase Common Stock to its officers, key employees, directors, and, in the case of the 1985 and 1992 Plans, to non-employees performing services for the Company. Payment of the option exercise price is to be made (i) in cash, (ii) by delivery of Common Stock already owned by and in the possession of the option holder, or (iii) if so provided for in the option being exercised, by delivery of the option holder's promissory note in favor of the Company. If an option granted under an Option Plan expires, terminates or is canceled without being exercised in full, the unpurchased shares subject to such options will again be available for options to be granted under such Plan. Options may be granted in the form of incentive stock options ("Incentive Option") or options which do not qualify for the favorable tax treatment of Incentive Options which are known as non-qualified options. The Option Plans are administered by a committee of the Board of Directors consisting of Messrs. Fagenson and Stengel who are ineligible to participate in the Plans. No options may be exercised more than ten years from the date of grant, and no options may be granted after December 16, 1996, December 31, 1996, December 31, 1999 and December 31, 2002 under the 14 1985 Plan, 1986 Plan, 1989 Plan, and 1992 Plan, respectively. The option price of each Incentive Option granted under the Option Plans shall be not less than 100% of the fair market value of the Common Stock as of the date the option is granted (110% of the fair market value if the grant is to an employee holding 10% or more of the Company's outstanding Common Stock). Options other than Incentive Options may be granted at an exercise price as determined by the Board. The exercise prices of such non-qualified options must be at least 85% of the fair market value of the underlying shares of Common Stock at the date of grant. Options granted are not transferable and are subject to various other conditions and restrictions. All Incentive Options granted before December 31, 1986 must be exercised in the order in which they were granted regardless of the differences in the exercise prices. Option Grants in the Seven Month Period Ended December 31, 1995 During the seven month period ended December 31, 1995, there were no options granted to the Named Executives who are reflected in the Summary Compensation Table. On September 7, 1995, the Company granted to Andrew Gaspar, its Chairman of the Board, a non-qualified option to purchase 100,000 shares of the Company's Common Stock at $3.575 per share. The options vest ratably over the three year period commencing one year following issuance. Aggregate Options Exercised in the Seven Month Period Ended December 31, 1995 Shown below is information with respect to unexercised options granted in prior fiscal years under the Option Plans and held by them at December 31, 1995. Number of Unexercised Value of Unexercised In-the-Money Options at 12/31/95 Options at 12/31/95(1) Name Exercisable/Unexercisable Exercisable/Unexercisable ---- ------------------------- ------------------------- Scott Zecher 33,333/80,000 $0/$0 William Wunderlich 73,345/51,655 $37,500/$0 - ---------- (1) Based on the closing price as quoted by NASDAQ/NMS on the date. Director Compensation The Company pays a Directors fee of $750 for each meeting attended by a non-employee director. Item 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table, together with the accompanying footnotes, sets forth information, as of May 7, 1996, regarding stock ownership of all persons known by the Company to own beneficially 5% or more of the Company's outstanding Common Stock, all directors and nominees, and all directors and officers of the Company as a group. Shares of Common Stock Percentage Name of Beneficial Owner Beneficially Owned(1) of Ownership - ------------------------ ------------------- ------------ (i) Directors: Jason Bacher 356,272(2) 4.5%(5) Robert Fagenson 30,750(3) *5 Andrew Gaspar 75,000 1.0% Howard Nusbaum 171,531 2.2% 15 Jerome Stengel 30,000 * Scott Zecher 365,079(4) 4.6%(5) All executive officers 1,115,310(6) 13.6%(7) and directors as a group (7 persons) (ii) 5% Stockholders: Ashford Capital Management, Inc. (8) P.O. Box 4172 Greenville, Delaware 19807 403,200 5.1% Dimensional Fund Advisors, Inc.8 1299 Ocean Avenue Santa Monica, CA 90401 436,200 5.5% William Harris Investors, Inc.(8) 2 North LaSalle Street Suite 505 Chicago, IL 60602 399,028 5.0% Ryback Management Corporation(9) 7711 Corondelet Avenue St. Louis, Missouri 63105 900,850 11.3% Steel Partners II L.P.(9) 750 Lexington Avenue New York, New York 10022 1,133,500 14.2% - ---------- * Less than 1% (1) Unless otherwise indicated below, each director, executive officer and each 5% stockholder has sole voting and investment power with respect to all shares beneficially owned. (2) Includes 50,000 shares subject to currently exercisable options. (3) Includes (i) 1,500 shares owned by the Fagenson & Co. Profit Sharing Plan and Employee Pension Plan, of which Mr. Fagenson is a trustee, and (ii) 29,250 shares issuable upon exercise of a Common Stock purchase warrant held by Mr. Fagenson which is currently exercisable. (4) Includes 60,000 shares subject to currently exercisable options. (5) Assumes that all currently exercisable options or warrants owned by this individual have been exercised. (6) Includes 225,928 shares subject to currently exercisable options or warrants. (7) Assumes that all currently exercisable options or warrants owned by members of the group have been exercised. (8) Information with respect to this stockholder has been derived from the Schedule 13G filed by such stockholder with the Securities and Exchange Commission. (9) Information with respect to this stockholder has been derived from the Schedule 13D filed by such stockholder with the Securities and Exchange Commission. 16 Item 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS On April 28, 1995 the Company entered into a Promissory Note and Security and Pledge Agreement with Scott Zecher, its President, Chief Operating Officer and a Director, pursuant to which the Company lent to Mr. Zecher, consistent with the Company's past practice, the sum of $466,797, in connection with Mr. Zecher's exercise of options to acquire 216,799 shares of the Company's Common Stock (the "Shares") under the Company's 1985 and 1986 Stock Option Plans. The Note, which is non-interest bearing, is secured by the Shares and is payable on the earlier of May 31, 1996 or out of proceeds of the underlying collateral. As a result of such exercise, the percentage of outstanding shares of common stock owned by executive officers and directors of the Company increased from approximately 8.7% to approximately 11.5%. This increase may discourage a party from instituting a take-over attempt with regard to the Company. The purpose of the Company granting an interest free loan for the purpose of exercising in-the money stock options is the same as the purpose of the Company for granting stock options to key employees and officers; namely, to encourage such key employees and officers to acquire an increased personal interest in the success and progress of the Company. The granting of the stock options provides the key employee or officer with the potential to benefit from the success and growth of the Company and the interest free loan enables such key employee or officer to actually realize the benefit when the stock option becomes in-the-money. On June 22, 1995, the Company entered into a Settlement Agreement with Ryback Management Corporation ("Ryback"), Eric C. Ryback and Lawrence Callahan (the "Agreement"; Ryback together with Eric C. Ryback and Lawrence Callahan, collectively, the "Ryback Parties"). As more fully described below, the Settlement provides that, for a period of five (5) years, Ryback, the holder of approximately 14.8% of the Company's outstanding shares at the time the Agreement was entered into, will vote such shares on all matters in accordance with the recommendation of the Company's Board of Directors (the "Board"), unless, as a result of the recommendation, the Board's "outside directors" (as such term is hereinafter defined) would not continue to constitute a majority, in which case, the shares would be voted in the same proportion as the vote of other stockholders. The Agreement also provided for the dismissal of the Company's litigation against the Ryback Parties and for mutual releases from the Company to the Ryback Parties and from the Ryback Parties to the Company. Pursuant to the Agreement, Ryback agreed that during the term of the Agreement, unless specifically requested in writing in advance by the Board, Ryback will not, and will cause its affiliates and associates (as such terms are used within Rule 126-2 (as such rule is currently in effect) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) not to, alone or in concert with others (and neither Ryback nor any affiliate or associate of Ryback will advise, assist or encourage others to), directly or indirectly: (i) by purchase or otherwise, acquire, or agree to acquire, ownership (including, but not limited to, beneficial ownership) of any shares of Common Stock of the Company (the "Common Stock"), including securities convertible into Common Stock, or direct or indirect rights or options to acquire such ownership; (ii) make any public announcement with respect to, or submit any proposal for, the acquisition of beneficial ownership of Common Stock (or securities convertible into Common Stock or direct or indirect rights or options to acquire such beneficial ownership), or for or with respect to any extraordinary transaction or merger, consolidation, sale of substantial assets or business combination involving the Company or any of its affiliates, (iii) make, or in any way participate in, any "solicitation" of "proxies" (as such terms are defined or used in Regulation 14A under the Exchange Act (the "Exchange Act")) or become a "participant" in any "election contest" (as such terms are defined or used in Rule 14a-11 under the Exchange Act) to vote, or seek to advise or influence any person or entity with respect to the voting of, any voting securities of the Company or any of its affiliates; (iv) form, join or in any way participate in a "group" (as such term is used in Section 1 3d(3) of the Exchange Act) to take any action otherwise prohibited by the terms of the Agreement; (v) initiate or propose any stockholder proposals for submission to a vote of stockholders, whether by action at a stockholder meeting or by written consent, with respect to the Company or any of its affiliates or propose any person for election to the Board of the Company or any of its affiliates or propose the removal of any member of the Board of the Company or any of its affiliates; (vi) otherwise seek to control the management or policies of the Company or any of its affiliates, including, without limitation, taking any action to seek to obtain representation on the Board of the Company or any of its affiliates;(vii) institute, prosecute or pursue against the Company (or any of its officers, directors, representatives, trustees, employees, attorneys, advisors, agents, affiliates or associates) (a) any claim with respect to any action hereafter duly approved the Board or (b) any claim on behalf of a class of the Company's security holders; (viii) disclose to any third party, or make any filing under the Exchange Act (including, without limitation, under Section 13(d) thereof) disclosing, any intention, plan or arrangement inconsistent with the foregoing; (ix)publicly oppose any duly authorized Board action or recommendation; (x) initiate any communication with any customer or supplier of the Company or any other person which does or is contemplating doing business or entering into a transaction with the Company with a view interfering or otherwise adversely affecting the relationship between the Company and or the applicable customer, 17 supplier or other person; (xi) enter into any discussions, negotiations, arrangements or understandings with any third party with respect to any of the foregoing; or (xii) request the Company (or its directors, officers, employees or agents) to amend or waive any provision of the Agreement or otherwise seek any modification to or waiver of any of the agreements or obligations of Ryback, or any of its affiliates or associates, under the Agreement. The Agreement also provides that during the term of the Agreement, Ryback will not and will cause its associates and affiliates not to, transfer, assign, pledge, sell, hypothecate or otherwise dispose (a "disposition") of any capital stock of the Company owned by it, except if all of the following conditions are satisfied with respect to such disposition: (I) the applicable disposition together with all other dispositions for the account of Ryback and its associates and affiliates during the one month period immediately preceding the date of such disposition does not exceed one percent of the outstanding Common Stock, as shown on the most recent applicable report or statement published by the Company; (ii) such disposition shall be by means of a "broker's transaction" within the meaning of rule 144(g) under the Securities Act of 1933, as amended; and (iii) with respect to any such disposition, the seller shall instruct its broker that such broker shall make due inquiry and shall not make the disposition to any person (including any agent of such person) if Ryback and/or its affiliates or associates or such broker knows, or has reason to believe, that such person, together with such persons, affiliates and associates, owns, collectively (with its associates and affiliates), or, will own, collectively (with its associates and affiliates), upon consummation of the disposition, 3% or more of the outstanding Common Stock as shown on the most recent applicable report or statement published by the Company. The Agreement also provides that during its term, with respect to each matter submitted to the stockholders of the Company for a vote, whether at a meeting or pursuant to any consent of stockholders, including, without limitation, any matter submitted to the stockholders of the Company relating to the election or removal of directors, Ryback agrees to, and agrees to cause its affiliates and associates to, vote (whether by proxy or otherwise) all shares of Common Stock owned by Ryback and/or any of its affiliates and associates in accordance with the applicable duly authorized recommendation of the Board; provided, however, that, with respect to any recommendation relating to the election or removal of directors, if, assuming such recommendation were adopted by the stockholders of the Company, less than a majority of all directors constituting the Board would be "outside directors" (as such term is hereinafter defined), Ryback and its associates and affiliates shall vote their shares in the same proportion as the votes of all other outstanding voting securities of the Company voting on such applicable matter. As used in the Agreement, the term "outside directors" refer to directors who are not also officers or employees of the Company. 18 PART IV Item 14: EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K Financial Statements The financial statements listed in the accompanying index to financial statements on Page F-1 are filed as part of this report. Exhibits The Exhibits listed below are filed as part of this Report. No. 2A Agreement and Plan of Merger between AutoInfo, Inc. (New York) and AutoInfo, Inc. (Delaware), January 20, 1987. (2) No. 3A Certificate of Incorporation of the Company. (3) No. 3B Amended and restated By-Laws of the Company. (11) No. 4A Specimen Stock Certificate. (4) No. 4B Form of Warrant Agreement and form of Warrant issued to Starr Securities, Inc., Martin Vegh and Robert Fagenson, May 20, 1986. (1) No. 4C Rights Agreement, dated as of March 30, 1995, between AutoInfo, Inc. and American Stock Transfer & Trust Company, as Rights Agent.(5) No. 9A Settlement Agreement, dated June 22, 1995, between AutoInfo, Inc. and Ryback Management Corporation, et al.(12) No. 10A 1985 Stock Option Plan. (1) No. 10B 1986 Stock Option Plan. (3) No. 10C 1989 Stock Option Plan. (7) No. 10D 1992 Stock Option Plan. (10) No. 10E Employment Agreement between AutoInfo, Inc. and Scott Zecher dated as of January 1, 1994, as amended by Agreement dated April 10, 1995.(12) No. 10F Supplemental Employment Agreement between AutoInfo, Inc. and Scott Zecher dated as of April 10, 1995.(12) No. 10G Employment Agreement between AutoInfo, Inc. and William Wunderlich dated as of April 10, 1995.(12) No. 10H Supplemental Employment Agreement between AutoInfo, Inc. and William Wunderlich dated as of April 10, 1995.(12) No. 10I Form of AutoInfo, Inc. Employee Protection Trust Agreement dated August 17, 1995.(12) 19 No. 10J Form of Restricted Stock Grant Agreement between AutoInfo, Inc. and certain executive officers, directors and consultants. (4) No. 10K Series A Convertible Preferred Stock Purchase Agreement dated as of December 19, 1991 between ComputerLogic, Inc., Richard A. Palmer and AutoInfo, Inc. (8) No. 10L Series B Preferred Stock Purchase Option Agreement dated as of December 19, 1991 between ComputerLogic, Inc., Richard A. Palmer and AutoInfo, Inc. (8) No. 10M Outstanding Stock Purchase Option Agreement dated as of December 19, 1991 between ComputerLogic, Inc., Richard Palmer and AutoInfo, Inc. (8) No. 10N Note Agreement dated January 10, 1994 between AutoInfo, Inc. and certain investors with respect to issuance of $4 million of 7.55% Subordinated Notes due January 9, 2000 and 533,333 Common Stock Purchase Warrants.(6) No. 10O Asset Purchase Agreement dated January 31, 1995 between ADP Claims Solutions Group, Inc. and AutoInfo, Inc.(9) No. 10P Promissory Note and Security and Pledge Agreement dated April 28, 1995 between AutoInfo, Inc. and Scott Zecher.(12) No. 10Q Loan and Security Agreement, Promissory Note and Guaranty dated December 19, 1995 among Finova Capital Corporation and AutoInfo Finance of Virginia, Inc. No. 10R Asset Purchase Agreement dated December 6, 1995 between AutoInfo, Inc. and AutoInfo Finance of Virginia, Inc. on the one hand and Falk Holding Company, Inc., et al, on the other hand. (13) No. 10S Purchase Agreement dated December 6, 1995 between AutoInfo Finance of Virginia, Inc. and Charlie Falk's Auto Wholesaler, Incorporated.* No. 10T Employment Agreement dated December 6, 1995 between AutoInfo Finance of Virginia, Inc. and Robert E. Upton, Jr. * No. 10U Non-Qualified Stock Option Agreement dated December 6, 1995 between AutoInfo Finance of Virginia, Inc. and Robert E. Upton, Jr. * No. 11A Calculation of earnings per share.* No. 21 Subsidiaries of the Registrant. * No. 24A Consent of Arthur Andersen LLP, independent public accountants.* - ---------- *Filed as an Exhibit hereto. (1) This Exhibit was filed as an Exhibit to the Company's Registration Statement on Form S-18 (File No. 33-3526-NY) and is incorporated herein by reference. (2) This Exhibit was filed as an Exhibit to the Company's Current Report on Form 8-K dated January 6, 1987 and is incorporated herein by reference. (3) These Exhibits were filed as Exhibits to the Company's definitive proxy statement dated October 20, 1986 and are incorporated herein by reference. (4) These Exhibits were filed as Exhibits to the Company's Registration Statement on Form S-1 (File No. 33-15465) and are incorporated herein by reference. (5) This Exhibit was filed as an Exhibit to the Company's Registration Statement on Form 8-A filed April 13, 1995, and is incorporated herein by reference. (6) This Exhibit was filed as an Exhibit to the Company's Annual Report on Form 10-K for the year 20 ended May 31, 1994 and is incorporated herein by reference. (7) This Exhibit was filed as an Exhibit to the Company's definitive proxy statement dated September 25, 1989 and is incorporated herein by reference. (8) These Exhibits were filed as Exhibits to the Company's Current Report on Form 8-K dated December 19, 1991 and are incorporated herein by reference. (9) This Exhibit was filed as an Exhibit to the Company's definitive proxy statement dated March 1, 1995 and is incorporated herein by reference. (10) This Exhibit was filed as an Exhibit to the Company's definitive proxy statement dated October 2, 1992 and is incorporated herein by reference. (11) This Exhibit was filed as an Exhibit to the Company's Current Report on Form 8-K dated March 30, 1995 and is incorporated herein by reference. (12) This Exhibit was filed as an Exhibit to the Company's Annual Report on Form 10-K dated May 31, 1995 and is incorporated herein by reference. (13) This Exhibit was filed as an Exhibit to the Company's Current Report on Form 8-K dated December 6, 1995 and is incorporated herein by reference. 21 SIGNATURES Pursuant to the requirements of Section 13 or 15(d), the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on May 10, 1996 on its behalf by the undersigned, thereunto duly authorized. AUTOINFO, INC. By:/s/Scott Zecher ------------------------ Scott Zecher, President and Chief Operating Officer Pursuant to the requirements of the Securities Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities indicated. /s/Andrew Gaspar Director and Chairman May 10, 1996 - ------------------------ Andrew Gaspar /s/Scott Zecher Director, President and May 10, 1996 - ------------------------ Chief Operating Officer Scott Zecher /s/William Wunderlich Chief Financial Officer, May 10, 1996 - ------------------------ Secretary and Treasurer William Wunderlich /s/Jason Bacher Director May 10, 1996 - ------------------------ Jason Bacher /s/Robert Fagenson Director May 10, 1996 - ------------------------ Robert Fagenson /s/Howard Nusbaum Director May 10, 1996 - ------------------------ Howard Nusbaum /s/Jerome Stengel Director May 10, 1996 - ------------------------ Jerome Stengel 22 AUTOINFO, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page ---- Report of Independent Public Accountants.......................... F-2 Consolidated Balance Sheets - as of December 31, 1995 and May 31, 1995 ................................................ F-3 Consolidated Statements of Operations for the Seven Months Ended December 31, 1995 and Years Ended May 31, 1995 and 1994..................................................... F-4 Consolidated Statements of Stockholders' Equity for the Seven Months Ended December 31, 1995 and Years Ended May 31, 1995 and 1994........................................ F-5 Consolidated Statements of Cash Flows for the Seven Months Ended December 31, 1995 and Years Ended May 31, 1995 and 1994........................................ F-6 Notes to Consolidated Financial Statements........................ F-7 Information required by schedules called for under Regulation S-X is either not applicable or is included in the consolidated financial statements or notes thereto. F - 1 ARTHUR ANDERSEN ARTHUR ANDERSEN & CO. SC REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To AutoInfo, Inc. We have audited the accompanying consolidated balance sheets of AutoInfo, Inc. (a Delaware Corporation) and subsidiaries as of December 31, 1995 and May 31, 1995, and the related consolidated statements of operations, stockholders' equity and cash flows for the seven month period ended December 31, 1995 and each of the two years in the period ended May 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these 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 audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of AutoInfo, Inc. and subsidiaries as of December 31, 1995 and May 31, 1995 and the results of their operations and their cash flows for the seven month period ended December 31, 1995 and each of the two years in the period ended May 31, 1995, in conformity with generally accepted accounting principles. /s/Arthur Andersen LLP New York, New York May 6, 1996 F - 2 AUTOINFO, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1995 AND MAY 31, 1995 December 31, May 31, ASSETS 1995 1995 ------------ ----------- Cash $ 964,842 $ 521,868 Short-term investments 23,906,459 38,314,489 Installment contracts receivable, net 25,073,858 -- Fixed assets, net 256,269 692,784 Goodwill and other intangibles, net 14,302,274 1,766,503 Other assets 1,291,674 1,061,455 ----------- ----------- $65,795,376 $42,357,099 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Revolving line of credit $20,679,024 $ -- Subordinated notes and other debt 12,067,166 4,160,869 Accounts payable 566,734 400,544 Income taxes payable 568,278 7,131,543 Accrued liabilities 895,821 543,357 ----------- ----------- Total liabilities 34,777,023 12,236,313 ----------- ----------- Commitments and contingencies (Note 11) Stockholders' equity: Common Stock - authorized 20,000,000 shares $.01 par value; issued and outstanding - 7,777,752 at December 31, 1995 and 7,756,252 at May 31, 1995 77,778 77,563 Additional paid-in capital 17,782,677 17,725,267 Officer note receivable (Note 12) (466,797) (466,797) Deferred compensation under stock bonus plan (404,092) (414,686) Retained earnings 14,028,787 13,199,439 ----------- ----------- Total stockholders' equity 31,018,353 30,120,786 ----------- ----------- $65,795,376 $42,357,099 =========== =========== See Accompanying Notes To Consolidated Financial Statements F - 3 AUTOINFO, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE SEVEN MONTHS ENDED DECEMBER 31, 1995 AND YEARS ENDED MAY 31, 1995 AND 1994
December 31, May 31, 1995 1995 1994 ----------- ---------- ---------- REVENUES Interest and other finance revenue $ 771,502 $ - $ - Investment income 1,020,382 568,267 273,915 Long distance telephone services 439,839 1,030,428 1,801,497 ---------- ---------- ---------- Total revenues 2,231,723 1,598,695 2,075,412 COSTS AND EXPENSES Interest expense 415,904 315,908 131,087 Operating expenses 1,346,218 1,863,779 2,118,251 Depreciation and amortization 84,889 25,158 33,646 Preferred stock investment write-off - 1,804,256 - ---------- ---------- ---------- Total operating expenses 1,847,011 4,009,101 2,282,984 ---------- ---------- ---------- Income (loss) from operations 384,712 (2,410,406) (207,572) Income tax benefit (175,960) (332,280) (64,336) ---------- ---------- ---------- Income (loss) from continuing operations 560,672 (2,078,126) (143,236) Income (loss) from discontinued operations, net of income tax benefit of $ 14,522 for the seven months ended December 31, 1995 and income taxes of $502,535 and $971,979 for the years ended May 31, 1995 and 1994, respectively (Note 4) (28,163) 1,518,659 2,163,984 Gain on sale of discontinued operations, net of income taxes of $152,917 and $7,658,641, for the seven months ended December 31, 1995 and the year ended May 31, 1995 respectively (Note 4) 296,839 8,885,688 - ---------- ---------- ---------- Net income $ 829,348 $8,326,221 $2,020,748 ========== ========== ========== Per share data: Income (loss) from continuing operations $.07 ($ .28) ($ .02) Income from discontinued operations - .21 .29 Gain on sale of discontinued operations .04 1.19 - ---------- ---------- ---------- Net income per share $ .11 $1.12 $ .27 ========== ========== ========== Weighted average number of common and common equivalent shares 7,770,917 7,410,548 7,416,721 ---------- ---------- ----------
See Accompanying Notes To Consolidated Financial Statements F - 4 AUTOINFO, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE SEVEN MONTHS ENDED DECEMBER 31, 1995 AND YEARS ENDED MAY 31, 1995 AND 1994
Shares of Deferred Common Additional Officer Compensation Stock Common Paid-In Note Under Stock Retained Outstanding Stock Capital Receivable Bonus Plan Earnings ----------- ----- ------- ---------- ---------- -------- Balance, June 1, 1993 7,119,336 $71,193 $16,118,428 -- $(417,118) $ 2,852,470 Common Stock Pursuant to Stock Bonus Plan 15,000 150 32,662 -- (32,812) -- Exercise of Stock Option 118,950 1,190 193,104 -- -- -- Amortization of Deferred Compensation -- -- -- 17,083 -- Net Income -- -- -- -- -- 2,020,748 ---------- ------- ----------- --------- --------- ----------- Balance, May 31, 1994 7,253,286 72,533 16,344,194 -- (432,847) 4,873,218 Exercise of Stock Options 502,966 5,030 1,234,365 -- -- -- Amortization of Deferred Compensation -- -- -- -- 18,161 -- Acceleration of Vesting Rights of Employee Stock Options -- -- 146,708 -- -- -- Loan to Officer for the Exercise of Stock Options (466,797) Net Income -- -- -- -- -- 8,326,221 ---------- ------- ----------- --------- --------- ----------- Balance, May 31, 1995 7,756,252 77,563 17,725,267 (466,797) (414,686) 13,199,439 Exercise of Stock Options 21,500 215 57,410 -- -- -- Amortization of Deferred Compensation -- -- -- -- 10,594 -- Net Income -- -- -- -- -- 829,348 ---------- ------- ----------- --------- --------- ----------- Balance, December 31, 1995 7,777,752 $77,778 $17,782,677 $(466,797) $(404,092) $14,028,787 ========== ======= =========== ========= ========= ===========
See Accompanying Notes To Consolidated Financial Statements F - 5 AUTOINFO, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SEVEN MONTHS ENDED DECEMBER 31, 1995 AND YEARS ENDED MAY 31, 1995 AND 1994
December 31, May 31, 1995 1995 1994 ------------ ------------ ------------ Cash Flows from Operating Activities: Net income $ 829,348 $ 8,326,221 $ 2,020,748 Adjustments to reconcile net income to net cash from operating activities: Depreciation and amortization expenses 84,889 413,926 249,759 Amortization of deferred compensation 10,594 18,161 17,083 Gain on sale of discontinued operations (449,756) (16,544,329) -- Preferred stock investment write-off -- 1,637,199 -- Changes in assets and liabilities: Installment contracts receivable, net (986,632) 238,860 (253,901) Other assets (573,645) (44,100) (119,061) Income taxes payable (6,563,265) 7,059,396 5,468 Accounts payable and accrued liabilities (62,539) 269,687 287,006 ------------- ------------ ----------- Net cash provided by (used for) continuing operations (7,711,006) 1,375,021 2,207,102 ------------- ------------ ----------- Net cash (used for) discontinued operations and non-cash charges (105,141) (205,480) (965,257) ------------- ------------ ----------- Cash Flows from Investing Activities: Proceeds from the sale of discontinued operations 3,750,000 30,350,000 -- Officer note receivable -- (466,797) -- Acquisitions (4,912,333) -- (948,639) Capital expenditures (497,661) (341,861) (173,635) Proceeds from redemptions of short-term investments 103,294,353 23,644,168 -- Purchases of short-term investments (88,886,323) (54,894,966) (3,743,031) ------------- ------------ ----------- Net cash provided by (used for) investing activities 12,748,036 (1,709,456) (4,865,305) ------------- ------------ ----------- Cash Flows from Financing Activities: Issuance of notes -- -- 4,000,000 Reduction of borrowings (4,546,540) (623,096) (277,406) Exercise of stock options 57,625 1,239,395 194,294 ------------- ------------ ----------- Net cash provided by (used for) financing activities (4,488,915) 616,299 3,916,888 ------------- ------------ ----------- Net increase in cash 442,974 76,384 293,428 Cash at beginning of year 521,868 445,484 152,056 ------------- ------------ ----------- Cash at end of year $ 964,842 $ 521,868 $ 445,484 ============= ============ ===========
Supplemental Disclosures of Non-cash Investing and Financing Activities: In connection with acquisitions during the year ended May 31, 1994, the Company entered into Notes payable of $844,759. See Accompanying Notes To Consolidated Financial Statements F - 6 AUTOINFO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 AND MAY 31, 1995 AND 1994 Note 1 - Business and Summary of Significant Accounting Policies Business During the fiscal year ended May 31,1995 and on July 20, 1995, AutoInfo, Inc. (the "Company") sold substantially all of its operating assets for $34,100,000 in cash in two separate transactions. As a result, the Company's sole operating business which remained provides long distance telephone communications services. The long distance telephone communication service is marketed to over 1,400 customers through an independent commissioned sales force. The Company commenced an active search for acquisition candidates and expansion opportunities in industries which would provide significant shareholder value and growth potential. On December 6, 1995, the Company, through a newly formed wholly owned subsidiary, acquired the operating assets of FALK Finance Company (FFC), a Norfolk, Virginia based specialized financial services company, for $5,125,000 in cash and the assumption of liabilities and debt approximating $34,000,000. As a result of this acquisition, the Company's primary business is to purchase non-prime automobile retail installment contracts from independent and franchised used vehicle dealers. The Company services these dealers by providing specialized financing programs for buyers who typically have impaired credit histories and are unable to access traditional sources of available consumer credit. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly-owned. All significant intercompany balances and transactions have been eliminated in consolidation. Installment Contracts Receivable Installment contracts receivable represent retail installment sales contracts purchased from independent automobile dealers at discounts ranging from 10% to 20%. Allowance for Credit Losses The Company established an allowance for credit losses in the acquired portfolio as of the date of acquisition based upon an evaluation of a number of factors including prior loss experience, contractual delinquencies, the value of underlying collateral and other factors. All discounts on the purchase of installment contracts from dealers are added to the allowance. The allowance is evaluated for adequacy based upon estimated future losses inherent in the existing finance receivable portfolio. A provision for losses, if any, is charged to income in order to maintain the allowance at an adequate level. Repossessed Vehicles Held for Sale The Company repossesses the collateral when the determination is made that collection efforts are unlikely to be successful. The value of a repossessed vehicle is based upon an estimate of the net realizable amount upon liquidation. As of December 31, 1995, there were 246 vehicles held for sale with an aggregate value of $408,467. F - 7 Revenue Recognition The Company recognizes interest income from installment contracts receivable on the interest method. The accrual of interest income is suspended when a loan is ninety days contractually delinquent. All discounts on the purchase of installment contracts from dealers are held in reserve and are considered to cover future anticipated credit losses. The Company recognizes revenue from long distance telephone communications services as services are rendered. Short-Term Investments Short-term investments include common stock and bond funds, money market instruments and municipal bonds. Investments are carried at cost which approximates market value. (See Note 5). Fixed Assets Depreciation of fixed assets is provided on the straight-line method over the estimated useful lives of the related assets which range from three to five years. Goodwill and Other Intangibles The excess of cost over the fair value of net assets acquired is allocated to goodwill and other intangibles and is being amortized using the straight-line method over periods of up to twenty years. In March 1995, the Financial Accounting Standards Board issued SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets to Be Disposed Of." This statement requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company currently uses methods that are consistent with SFAS No.121 to evaluate the carrying amount of Goodwill and at December 31, 1995 no impairment of Goodwill existed. The pronouncement is effective for fiscal years beginning after December 15, 1995. In management's opinion, when adopted, SFAS No.121 will not have a material effect on the Company's financial position or results of operations. Net Income Per Share Net income per share of common stock is based on the weighted average number of shares of common stock and common stock equivalents outstanding during the period. The net income per share and the weighted average number of common and common equivalent shares represent primary earnings per share data. Fully diluted earnings per share is not presented since its effect is not significant. Use of Estimates The preparation of these financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts of assets, liabilities and contingent liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the periods presented. Management estimates that are particularly sensitive to change relate to the determination of the adequacy of the allowance for credit losses on installment contracts. The Company believes that all such assumptions are reasonable and that all estimates are adequate, however, actual results could differ from those estimates. F - 8 Income Taxes The Company follows the liability method for income taxes. Under this method, deferred income taxes are recognized for the tax consequences of "temporary differences" by applying enacted Statutory Tax Rates to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. Deferred income taxes have not been provided for as the net effect of temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities are immaterial. Fiscal Year On February 28, 1996, the Company made an election to change its fiscal year-end from May 31 to December 31. The Company believes that this change will provide shareholders with information on a basis more comparable to other public entities in the specialized automobile finance industry. Accordingly, the accompanying financial statements reflect the Company's financial position and results of operations as of and for the seven month period ended December 31, 1995. Reclassifications Certain reclassifications have been made to the financial statements for the years ended May 31, 1995 and 1994 to conform to the December 31, 1995 presentation. (See Note 2). Note 2 - Change in Fiscal Year On February 28, 1996, the Company changed its fiscal year-end to December 31 from May 31. Accordingly, the accompanying financial statements reflect the Company's financial position and results of operations as of and for the seven month period ended December 31, 1995. Following are selected financial data for the seven month periods ended December 31, 1995 and 1994: 1995 1994 ----------- ----------- (Unaudited) Revenues $ 2,231,723 $ 641,227 ----------- ----------- Income (loss) from continuing operations 560,672 (186,225) Income (loss) from discontinued operations (28,163) 1,072,913 Gain on sale of discontinued operations 296,839 -- ----------- ----------- Net Income $ 829,348 $ 886,688 ----------- ----------- Per share data: From continuing operations $ .07 $ (.03) From discontinued operations -- .15 From gain on sale .04 -- ----------- ----------- Net Income $ .11 $ .02 ----------- ----------- Note 3 - Business Acquisitions On December 6, 1995, the Company, through a newly formed wholly owned subsidiary, acquired the operating assets of FALK Finance Company (FFC), a Norfolk, Virginia based specialized financial services company, for $5,125,000 in cash and the assumption of F - 9 liabilities and debt approximating $34,000,000. The results of operations of this business has been consolidated with the Company since December 6, 1995. In January and April 1994, the Company acquired the automotive photo inspection business of D.B. Kelley Associates, Inc., and Equifax Services, Inc., respectively. The aggregate purchase price consisted of approximately $1,500,000 in cash and notes. The results of operations of these businesses have been consolidated with the Company since January 31, 1994 and April 16, 1994, respectively. The acquisitions have been accounted for under the purchase method of accounting and, accordingly, the purchase price was allocated to assets acquired based upon their estimated fair market value at the date of acquisition. The excess of the purchase price over the fair market value of net assets acquired has been recorded as goodwill. The following unaudited pro-forma results of operations for the seven month period ended December 31, 1995 and for the year ended May 31, 1995 is presented as though the Company's business acquisition during the seven month period ended December 31, 1995 had occurred at the beginning of the prior fiscal year ended May 31, 1995: (Unaudited) For the seven For the year month period ended ended December 31, 1995 May 31, 1995 ----------------- ------------ Revenues $ 5,957,662 $ 8,141,980 Net Income $ 601,400 $ 6,840,548 Net income per share $ .08 $ .92 Note 4 - Discontinued Operations On July 20, 1995, the Company sold the assets relating to its Insurance Inspection Services business for $3,750,000 in cash. The gain on the sale was $296,839 after applicable taxes of $152,917. On April 1, 1995, the Company sold the assets relating to its Orion Network, Compass Network, Checkmate Computer Systems, and Insurance Parts Locator businesses to ADP Claims Solutions Group, Inc., for $30,350,000 in cash. The gain of the sale was $8,885,688 after applicable taxes of $7,658,641. Prior years have been restated to present the businesses sold as discontinued operations. Summarized results of operations and financial position data of the discontinued operations were as follows: Seven Months Ended December 31, Years Ended May 31, ------------ ----------------------- 1995 1995 1994 ---- ---- ---- Results of Operations: Revenues $ 533,318 $17,490,757 $18,765,900 --------- ----------- ----------- Income (loss) before income taxes (42,685) 2,021,194 3,135,963 Income taxes (benefit) (14,522) 502,535 971,979 --------- ----------- ----------- Net income (loss) from discontinued operations $ (28,163) $ 1,518,659 $ 2,163,984 ========= =========== =========== As of May 31, 1995 ------------------ Balance Sheet: Current assets $ 437,067 Net property, equipment and furniture 663,533 Net goodwill and other intangibles 1,766,503 Other assets 327,950 ----------- Net book value of assets of discontinued operations $ 3,195,053 =========== F - 10 Note 5 - Short-Term Investments Effective June 1, 1994, the Company, as required, adopted SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities". This pronouncement establishes the accounting and reporting for investments in equity securities that have readily determinable fair values and for all investments in debt securities. This statement supersedes Statement No. 12 "Accounting for Certain Marketable Securities". The effect of the adoption of this pronouncement was not material. In connection with the adoption of SFAS No. 115, debt and equity securities used as part of the Company's investment management that may be sold in response to cash needs, changes in interest rates, and other factors have been classified as securities available for sale. Such securities are reported at cost which approximates fair value and have maturities of less than one year and included common stock and bond funds ($3,613,394 as of December 31, 1995 and $3,520,041 as of May 31, 1995), money market instruments ($4,585,558 as of December 31, 1995 and $3,159,808 as of May 31, 1995) and municipal bonds ($15,727,507 as of December 31, 1995 and $31,634,640 as of May 31, 1995). As of December 31, 1995 unrealized gains and losses were not material. Unrealized gains and losses, if material, would be excluded from earnings and reported as a separate component of stockholders' equity (on an after tax basis). During the seven month period ended December 31, 1995 and the years ended May 31, 1995 and 1994, gains or losses arising from the disposition of marketable securities were not material. Gains and losses on disposition of securities are recognized on the specific identification method in the period in which they occur. Note 6 - Installment Contracts Receivable As of December 31, 1995, installment contracts receivable consists of the following: Gross installment contracts receivable $ 44,070,860 Less: Unearned finance charges and fees (12,178,807) Less: Allowance for credit losses (6,818,195) ------------ Installment contracts receivable, net $ 25,073,858 ============ Note 7 - Accrued Liabilities The components of accrued liabilities at December 31 and May 31, 1995 were as follows: December 31, May 31, 1995 1995 ------------ ------- Payroll and related costs $ 136,583 $ 76,856 Professional fees 74,499 196,431 Interest 309,920 126,243 Other 374,819 143,827 --------- --------- $ 895,821 $ 543,357 ========= ========= Note 8 - Investment In December 1991, the Company acquired a Preferred Stock Investment (3,293 shares of $500 par value, 7% cumulative convertible preferred stock) in ComputerLogic, Inc., a Georgia corporation, which offers computer based products to the automobile parts and repair industries. The Preferred Stock elects not less than 40% of the ComputerLogic board of directors. The Company's Preferred Stock Investment is convertible into 38% of the outstanding capital stock of ComputerLogic, Inc. The Company also has the option to increase its investment for additional consideration as described in the purchase F - 11 agreement. The purchase price consisted of cash of $1,250,000 and 101,667 shares of the Company's Common Stock. The investment was being carried at the lower of cost or net realizable value. As a result of the sale of the Company's businesses providing computerization and communications services to the automotive industry and the resulting lack of synergistic business opportunities, the Company has no intention of exercising its option to increase its investment. The Company therefore wrote off its preferred stock investments totaling $1,804,256 which included unpaid management fees and unpaid preferred stock dividends of $155,460 as of May 31, 1995. Note 9 - Debt In conjunction with the acquisition of FFC on December 6, 1995, the Company entered into a revolving credit facility maturing on September 30, 1999, with Finova Capital Corporation which provides for borrowings of up to $42 million. Advances under the agreement amounted to $20,679,024 as of December 31, 1995 and are secured by all of the Company's installment contracts receivable. Interest is payable monthly at the prime rate (8.75% at December 31, 1995) plus 1.50%. The weighted average interest rate on borrowings under this facility for the month of December 1995 was 10.25%. On December 6, 1995 and as part of the acquisition of FFC, the Company assumed unsecured subordinated notes in the amount of $9,800,000. These notes bear interest at the rate of 12% per annum, payable monthly. $4,900,000 Series A notes mature on May 1, 1999 and $4,900,000 Series B notes mature on December 31, 2000. Other notes consist of the following: December 31, May 31, 1995 1995 ------------ ------- Subordinated notes due January 2000 payable in equal annual installments in January 1998, 1999 and 2000 with interest at 7.55% paid semi-annually $2,000,000 $4,000,000 Note payable to former owner of acquired business, due in January 1996 with interest at 4% payable in equal monthly installments 36,166 160,869 Debt incurred in connection with the acquisition, of FFC payable in January 1996 231,000 - ---------- ---------- Total other notes $2,267,166 $4,160,869 ---------- ---------- The Company paid interest of approximately $231,000 for the seven month period ended December 31, 1995 and $308,000 and $14,000 during fiscal years ended May 31, 1995 and 1994, respectively. Note 10 - Income Taxes For the seven months ended December 31, 1995 and for the years ended May 31, 1995 and 1994, the provision (benefit) for income taxes consists of the following: Seven Months Years Ended Ended May 31, December 31, 1995 1995 1994 ------------ ----------- ---------- Federal $ (184,882) $ (320,331) $ (56,253) State 8,922 (11,949) (8,083) ---------- ---------- --------- Income tax benefit on loss from continuing operations $ (175,960) $ (332,280) $ (64,336) ---------- ---------- --------- F - 12 Income taxes on income from discontinued operations: Federal $ (14,522) $ 593,093 $ 849,861 State - (90,558) 122,118 ---------- ----------- --------- $ (14,522) $ 502,535 $ 971,979 ---------- ---------- --------- Income taxes on gain on sale of discontinued operations: Federal $ 152,917 $7,148,753 $ - State - 509,888 - ---------- ---------- --------- $ 152,917 $7,658,641 $ - ========== ========== ========= The following table reconciles the Company's effective income tax rate on income (loss) from continuing operations to the Federal Statutory Rate for the seven month period ended December 31, 1995 and for the years ended May 31, 1995 and 1994: Seven Months Years Ended Ended May 31, December 31, 1995 1995 1994 ---- ---- ---- Federal Statutory Rate 34.0 % (34.0)% (34.0)% Effect of: State and local taxes, net of federal benefit (.8) (.2) (3.9) Benefit from tax exempt income (81.4) (7.0) -- Preferred stock investment write-off -- 23.1 -- Credits resulting from amendments to and refunds from prior year returns -- -- 5.7 Other, net 2.5 4.3 1.2 ----- ----- ----- (45.7)% (13.8)% (31.0)% ===== ===== ===== The Company paid income taxes of approximately $884,000, $1,119,000 and $1,178,000 for the seven month period ended December 31, 1995 and for the fiscal years ended May 31, 1995 and 1994, respectively. Note 11 - Commitments and Contingencies Leases The Company is obligated under noncancellable operating leases for premises and equipment expiring at various dates through 1999. Future minimum lease payments are $225,825, $145,727, $95,753, $95,753 and $95,753 for each of the five year periods ended December 31, 2000 and $31,918 thereafter. Lease expense for the seven month period ended December 31, 1995 and the years ended May 31, 1995 and 1994 was approximately $ 68,000, $384,000 and $434,000, respectively. 401(k) Plan The Company is obligated under its 401(k) Plan to match fifty percent of employee contributions up to a maximum of three percent of eligible compensation. 401(k) Plan expense for the seven month period ended December 31, 1995 and the years ended May 31, 1995 and 1994 was approximately $ 3,000, $72,000 and $73,000, respectively. F - 13 Other Agreements The Company has employment agreements with Messrs. Zecher and Wunderlich, two officers of the Company, one of whom is also a stockholder. The agreements expire in 1997 and 1998 and provide for a minimum annual compensation of approximately $400,000, $300,000 and $83,333 for the years ended December 31, 1996, 1997 and 1998, respectively. In addition, the Company has an employment agreements with a non-officer employee. This agreement expires in November 2000 and provides for an aggregate minimum annual compensation of $140,000 plus a bonus equal to one-eighth of one percent (1/8%) of the outstanding net performing installment contract receivable portfolio of the Company's non-prime auto finance business located in Norfolk, Virginia. The Company has entered into supplemental employment agreements (the "Supplemental Employment Agreements") with Messrs. Zecher and Wunderlich (the "Covered Executives"), which provide that if there is a Change in Control of the Company (as defined therein) during the Protected Period (described below), the terms of the Supplemental Employment Agreements will supersede the Covered Executives' existing employment agreements and will govern the terms of the Covered Executives' employment following the Change in Control for a three-year term, in the case of Mr. Zecher, and a two-year term, in the case of Mr. Wunderlich (the "Employment Term"). The Supplemental Employment Agreements provide that during the Employment Term, the Covered Executives will remain employed in their capacities with the Company as of the Change in Control and will continue to receive an annual salary (the "Base Salary") and benefits at least equal to that which they received prior to the Change in Control and an annual bonus at least equal to the Covered Executive's average annual bonus during the three years prior to the Change in Control. The Supplemental Employment Agreements provide that if, during the Employment Term, the Covered Executive's employment is terminated by the Company other than for Cause or Disability or by the Executive either for Good Reason or during the 60-day Window Period commencing on the anniversary of the Change in Control (as each of the foregoing terms are defined in the applicable Supplemental Employment Agreement), the Covered Executive would receive a severance payment equal to the sum of his Base Salary and the higher of his annual bonus for the then most recent year or his average annual bonus during the three years preceding the Change in Control (the "Highest Annual Bonus") multiplied by two, in the case of Mr. Zecher, and one and one-half, in the case of Mr. Wunderlich. In addition, the restrictions on any stock-related incentive awards held by the Covered Executive would lapse and he would be entitled to continued coverage under the Company's life, health and disability benefits for two years following termination of his employment (three years in the case of Mr. Zecher) or until he receives similar benefits from a new employer. Mr. Zecher's Supplemental Employment Agreement also provides that if he is subject to excise taxes under Section 4999 of the Internal Revenue Code on any payments or benefits triggered by a Change in Control, he will be entitled to receive an additional amount such that after the payment of all applicable taxes, he will retain an amount equal to that which he would have retained absent the excise taxes. In connection with the Supplemental Employment Agreements, the Company also approved the creation of an Employment Protection Trust Agreement which is a form of a grantor trust under which the assets of the trust remain subject to the satisfaction of the general claims of the Company's creditors, to provide for the payment of all benefits payable under the Supplemental Employment Agreements. F - 14 Note 12 - Stockholders' Equity Stock Bonus Plan In January 1994, the Company issued 15,000 shares of Common Stock pursuant to a restricted stock bonus plan to a Director. In June 1987 and November 1987, the Company issued 410,000 shares of Common Stock pursuant to a restricted stock bonus plan to key executives and consultants. These shares will vest ratably every two years over a period of 30 years. The unvested portion is subject, upon the occurrence of certain events, to either forfeiture or accelerated vesting. Such shares are recorded at their estimated fair market value as determined by the Board of Directors and are charged as compensation expense ratably over the vesting period. Warrants In connection with the $4,000,000 7.55% subordinated long-term notes issued in January 1994, the Company issued six year warrants to purchase 533,333 shares of Common Stock at a per share price of $4.00. In September 1995, the Company prepaid $2,000,000 of the notes. In conjunction with the prepayment, 196,296 of these warrants were canceled. The Company has reserved 337,037 shares of Common Stock for issuance upon the exercise of the remaining warrants. No such warrants have been exercised to date. In connection with a May 1986 public offering of Common Stock, the Company issued warrants to the underwriter for the purchase of 96,000 shares of its Common Stock at a per share price of $4.80. During fiscal 1992, 66,750 warrants to purchase shares of the Company's Common Stock expired. The remaining 29,250 warrants are exercisable through May 1998. The Company has reserved 29,250 shares of Common Stock for issuance upon the exercise of these warrants. Stock Option Plans The Company has four stock option plans under which officers and other key employees may acquire shares of Common Stock. Options have been granted at not less than fair market value on the date of grant and expire ten years from that date. Options are exercisable immediately after the granting date except where exercise is otherwise limited at the time of granting. Option information for the seven month period ended December 31, 1995 and the years ended May 31, 1995 and 1994 are as follows: Number of Option Price Shares Per Share --------- ------------ Outstanding at June 1, 1993 920,749 $1.625 to $4.125 Granted during the year 165,000 $3.75 to $4.00 Exercised during the year (118,950) $1.625 to $1.75 Forfeited during the year (269,000) $3.00 to $4.00 -------- -------------- Outstanding at May 31, 1994 697,799 $1.625 to $4.125 Granted during the year 270,000 $2.75 to $4.125 Exercised during the year (502,966) $1.625 to $3.375 Forfeited during the year (30,000) $3.00 to $3.75 -------- -------------- F - 15 Outstanding at May 31, 1995 434,833 $1.75 to $4.125 Exercised during the period (21,500) $1.75 to $2.75 -------- -------------- Outstanding at December 31, 1995 413,333 $3.00 to $4.125 -------- --------------- Options exercisable at December 31, 1995 were 145,603 and at May 31, 1995 and 1994 were 177,055 and 380,799 shares, respectively. At December 31, 1995, 413,333 shares of the Company's authorized Common Stock were reserved to cover future exercise of options, and 280,751 shares were available for future grants. In connection with the sale of discontinued operations in April 1995, the Company accelerated the vesting provisions relating to outstanding options held by employees of the businesses sold. As of May 31, 1995, the vesting of options to purchase 175,333 shares was accelerated resulting in a charge against the gain on sale of discontinued operations of $146,708. On April 10, 1995, an officer of the Company exercised options to acquire 216,799 shares. In connection with this exercise, the Company received a full recourse, non-interest bearing note due in May 1996, secured by a pledge of the acquired shares in the amount of $466,797. Other Options The Company issued a non-qualified performance stock option to a non-officer employee to purchase an aggregate of 375,000 shares of the Company's Common Stock at an average exercise price of $3.00 per share. These shares will vest over a five year period based upon the performance of the Company's non-prime auto finance business in Norfolk, Virginia. Note 13 - Subsequent Event On April 24, 1996, the Company entered into an employment agreement with a non-officer relating to the anticipated expansion of the Company's non-prime auto finance business in the New England states. This agreement expires in April 2000 and provides for an aggregate minimum annual compensation of $140,000 plus a bonus equal to one-tenth of one percent (1/10%) of the outstanding net performing installment contract receivable portfolio generated in the New England region, a restricted stock grant of 100,000 shares of the Company's Common Stock and non-qualified options to purchase 400,000 shares of the Company's Common Stock at an exercise price of $3.125 per share. These options will vest over a four year period based upon in part the performance of the Company's non-prime auto finance business in the New England region. F - 16 EX-10.Q 2 LOAN AND SECURITY AGREEMENT - -------------------------------------------------------------------------------- FINOVA Capital Corporation Rediscount Finance FIRST AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT Borrower: AutoInfo Finance of Virginia, Inc. Address: 536 West 21st Street Norfolk, Virginia 23517 Date: December 19, 1995 ================================================================================ THIS FIRST AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT is entered into on the above date between FINOVA CAPITAL CORPORATION, a Delaware corporation ("Lender"), whose corporate address is Dial Tower, Dial Corporate Center, Phoenix, Arizona 85077 and whose Rediscount Finance Office address is 13355 Noel Road, Suite 800, Dallas, Texas 75240 and the borrower named above (the "Borrower"), whose chief executive office is located at the above address ("Borrower's Address"). Borrower has purchased certain assets and certain assumed the obligations of Falk Finance Company, Inc.'s, including the indebtedness to Lender pursuant to that certain Loan and Security Agreement, dated September 30, 1994, ("Prior Agreement"). This First Amemded and Restated Loan and Security Agreement is an amendment and restatement of the Prior Agreement. 1. DEFINITIONS 1.1. ACCOUNT DEBTOR. The term "Account Debtor" shall mean any person or persons that are an obligor in any contractual arrangement with Borrower or any co-signor in respect of any Receivable. 1.2. AGREEMENT. The term "Agreement" shall mean this Loan and Security Agreement and any amendment, modifications or extension hereof. 1.3. BUSINESS DAY. The term "Business Day" shall mean a day, other than a Saturday or Sunday, on which commercial banks are open for business to the public in Phoenix, Arizona and New York, New York. 1.4. CHARGE OFFS. The term "Charge Offs" shall mean the amount due (including the principal balance plus all earned fees and charges) pursuant to a Receivable on the date that Borrower charges off such Receivable as uncollectible, pursuant to Borrower's policies and/or procedures. 1.5. CODE. The term "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. -1- 1.6. COLLATERAL. The term "Collateral" shall have the meaning set forth in Section 3.1. hereof. 1.7. COLLATERAL RECOVERY RATE. The term "Collateral Recovery Rate" shall mean, for any period of determination, (i) the total cash collected from all Receivables (including but not limited to all cash proceeds from charge off recoveries, but excluding recoveries from Charlie Falk Auto Wholesale, Inc., or its affiliates, (collectively referred to herein as "CFAW") pursuant to any recourse agreement or agreements between Borrower and CFAW ["Recourse Agreement"]), divided by (ii) the sum of (a) the Rebates plus (b) the total cash collected from all Receivables (excluding all cash proceeds from charge off recoveries) plus (c) the aggregate of all Charge Offs for that period. 1.8. COMMONLY CONTROLLED ENTITY. The term "Commonly Controlled Entity" shall mean an entity, whether or not incorporated, which is under common control with Borrower within the meaning of Section 414(b) or (c) of the Code. 1.9. DEFAULT. The term "Default" shall mean an event which with the passage of time or notice or both would constitute an Event of Default (as defined in Section 7.1). 1.10. DISTRIBUTIONS. The term "Distributions" shall mean any dividends or other distribution of earnings to Borrower's shareholders, loans to officers, directors, affiliates or shareholders (excluding salaries). 1.11. ELIGIBLE RECEIVABLES. The term "Eligible Receivables" shall mean those Receivables of Borrower that are acceptable to Lender, in its reasonable discretion, and, in each case, that meet, at a minimum, all of the following requirements: (i) arise from the extension of credit, the sale and delivery of goods or the rendering of services in the ordinary course of Borrower's business; (ii) represent a valid and binding obligation enforceable in accordance with its terms for the amount outstanding thereof without offset, counterclaim or defense (whether actual or alleged); (iii) comply in all respects with all applicable laws and regulations, including, but not limited to, truth in lending and credit disclosure laws and regulations; (iv) all amounts and information appearing thereon or furnished to Lender in connection therewith are true and correct and undisputed by the Account Debtor thereon or any guarantor thereof; (v) Borrower and the Account Debtor are not engaged in any litigation regarding nonpayment of the Receivable; (vi) to the best knowledge of Borrower neither the Account Debtor thereon nor any guarantor thereof is subject to any receivership, insolvency or bankruptcy proceeding, is insolvent or has failed to meet its debts as they mature; (vii) Borrower has good and sufficient right to pledge, assign and deliver the Receivables free from all liens, claims, encumbrances or security interests whatsoever; (viii) neither the Account Debtor thereon nor any guarantor thereof is employed by, related to or affiliated with Borrower; (ix) to the best knowledge of Borrower no condition exists that materially or adversely affects the value of the Receivables or jeopardizes any security therefor; (x) if the Receivables arise from the sale of goods, such goods have been delivered and accepted by the Account Debtor and are still subject to the lawful possession and control of the Account Debtor and have not been otherwise returned to or repossessed by Borrower; (xi) is not a renewal of any Receivable or an extension of any Receivable previously ineligible hereunder; (xii) the original principal amount thereof does not exceed the Maximum Amount of an Eligible Receivable (Schedule Sections 1.11.A.) and the original term thereof does not exceed the Maximum Term of an Eligible Receivable (Schedule Section 1.11.B.); (xiii) meets the Eligibility Test and has been reported to Lender in compliance with the Aging Procedures (Schedule Section 1.11.C.); (xiv) is not evidenced by a judgment or has not been reduced to judgment; (xv) is not an open account; (xvi) is evidenced by a written payment agreement, bearing interest or containing a time price differential, which has been executed by the Account Debtor; (xvii) the Account Debtor thereunder is a legal resident of the United States; (xviii) payments under the Receivable are to be made in United States dollars; and (xix) is not solely for the financing of a deferred down payment and/or tax, title costs and license tag fees. 1.12. ERISA. The term "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time. 1.13. GAAP. The term "GAAP" shall mean generally accepted accounting principles and other standards as promulgated by the American Institute of Certified Public Accounts. 1.14. GUARANTOR. The term "Guarantor" shall mean any person or persons who execute a guaranty agreement in favor of Lender guaranteeing the repayment of the Borrower's Indebtedness to Lender (Schedule Section 4.5). 1.15. GUARANTY AGREEMENT. The term "Guaranty Agreement" shall mean that certain agreement executed by the Guarantor, in a form and substance approved by Lender. 1.16. GOVERNING RATE. The term "Governing Rate" shall mean the "Prime" rate publicly announced by Citibank N.A., New York, New York (or such other "money center" bank as Lender, in its sole discretion, may select from time to time, but shall not be more than the highest rate of the five largest banks in the Continental United States as their respective corporate base, reference, prime or similar benchmark rate), provided however, that such rate may not be the lowest rate charged to such bank's customers. 1.17. INDEBTEDNESS. The term "Indebtedness" shall mean all amounts advanced hereunder by Lender to Borrower together with all other amounts owing or becoming owing to Lender by Borrower, direct or indirect, absolute or contingent, now or hereafter existing, whether pursuant to the terms of this Agreement or any document or instrument evidencing or securing the transaction contemplated hereby. -2- 1.18. LEVERAGE RATIO. The term "Leverage Ratio" shall mean, at any date of determination, total liabilities of Borrower excluding all Subordinated Debt, but including the outstanding balance of the Indebtedness, divided by the sum of the amount of Borrower's Tangible Net Worth plus all Subordinated Debt. 1.19. LOAN DOCUMENTS. The term "Loan Documents" shall mean this Agreement, the Note, the Schedule, the Guaranty, Subordination Agreements, Agency and Custodian Agreements and all other documents executed in connection with this Agreement, together with any and all renewals, amendments, restatements or replacements of such documents. 1.20. MAXIMUM RATE. The term "Maximum Rate" shall mean the highest lawful and nonusurious rate of interest applicable to the Note made and delivered by Borrower to Lender in connection herewith, that at any time or from time to time may be contracted for, taken, reserved, charged, or received on the Note and the Indebtedness under the laws of the United States and the laws of such states as may be applicable thereto, that are in effect or, to the extent allowed by such laws, that may be hereafter in effect and that allow a higher maximum nonusurious and lawful interest rate than would any applicable laws now allow. 1.21. NET INCOME. The term "Net Income" shall mean with respect to any fiscal period, the net earnings of Borrower (excluding all extraordinary gains or nonrecurring income) before provision for income taxes for such fiscal period of Borrower, all as reflected on the financial statements of Borrower supplied to Lender pursuant to Sections 4.4(A) and 4.4(B) hereof. 1.22. NOTE. The term "Note" shall mean the promissory note of even date herewith, executed by Borrower and payable to the order of Lender. 1.23. PLAN. The term "Plan" shall mean any pension plan that is covered by Title IV of ERISA and with respect to which Borrower or a Commonly Controlled Entity is an "Employer" as defined in section 3(5) of ERISA. 1.24. REBATES. The term "Rebates" shall mean, for any period of determination, the aggregate of all rebates of interest and insurance fees for that period. 1.25. RECEIVABLES. The term "Receivables" shall mean all accounts of Borrower and any other right of Borrower to receive payment, including, without limitation, all loans, extensions of credit or Borrower's right to payment for goods sold or services rendered by Borrower. 1.26. REQUEST FOR ADVANCE. The term "Request for Advance" shall mean a written request for an advance in the form of Exhibit "A" attached hereto and made a part hereof. 1.27. SCHEDULE. The term "Schedule" shall mean the schedule executed in conjunction with this Agreement of even date herewith, as may be amended from time to time, upon written agreement of Lender and Borrower. 1.28. SUBORDINATED DEBT. The term "Subordinated Debt" shall mean the aggregate amount of any indebtedness of Borrower to persons other than Lender that by its terms is subordinated in all respects, including, but not limited to, the right of payment, to the prior payment in full of the Indebtedness. A subordination and standstill agreement, in a form and substance satisfactory to Lender, shall be entered into by all holders of Subordinated Debt. 1.29. TANGIBLE NET WORTH. The term "Tangible Net Worth" shall mean, at any time of determination, the shareholder's equity of Borrower determined in accordance with GAAP minus the aggregate amount of all intangible assets and all assets consisting of obligations due to Borrower from shareholders, directors, officers, or any affiliate of Borrower, any shareholder of Borrower or any Guarantor hereunder. Notwithstanding the foregoing, up to an aggregate outstanding balance of Two Million Five Hundred Thousand of obligations due to Borrower from shareholder, directors, officers, or any affiliate of Borrower, any shareholder of Borrower or any Guarantor may be included in Tangible Net Worth, provided that all such obligations are adequately collateralized by an automobile or automobiles. 1.30. 30-DAY RECEIVABLES PERCENTAGE. The term "30-Day Receivables Percentage" shall mean, at any date of determination, the percentage determined by the aggregate unmatured and unpaid amount due to Borrower from all Account Debtors named thereon, including all unearned finance charges, time price differentials, insurance fees and other fees and charges pursuant to the Receivables that are thirty (30) days or less past due, divided by the aggregate unmatured and unpaid amount due to Borrower from all Account Debtors named thereon, including all unearned finance charges, time price differentials, insurance fees and other fees and charges pursuant to all the Receivables. 2. LOAN 2.1. AMOUNT OF LOAN. Subject to the terms, covenants and conditions hereinafter set forth, Lender agrees upon the Borrower's request from time to time, until the Maturity Date, to make advances to Borrower (collectively, the "Loan"), in an aggregate amount not to exceed at any time outstanding the lesser of the following: (a) the Amount of Revolving Credit Line (Schedule Section 2.1.A.) or (b) the Availability on Eligible Receivables (Schedule Section 2.1.B.). Within the limits of this Section 2.1, Borrower may borrow, repay and reborrow the advances. The Loan shall be evidenced by the Note. -3- 2.2. INTEREST RATE. The outstanding principal balance of Loan shall bear interest at the Stated Interest Rate (Schedule Section 2.2). If Lender is ever prevented from charging or collecting interest at the rate set forth in Stated Interest Rate Section (i) because interest at such rate would exceed interest at the Maximum Rate, then the rate set forth in Stated Interest Rate Section (i) shall continue to be the Maximum Rate until Lender has charged and collected the full amount of interest chargeable and collectable had interest at the rate set forth in Stated Interest Rate Section (i) always been lawfully chargeable and collectible. As the Governing Rate changes, the rate set forth in Stated Interest Rate Section (i) shall be increased or decreased (subject to the Maximum Rate) on the first day of each calendar month to correspond with the change in the Governing Rate then in effect and shall remain fixed at such rate until the first day of the next succeeding calendar month, notwithstanding fluctuations in the Governing Rate during the month. All changes in the Governing Rate shall be made without notice to Borrower. The monthly interest due on the principal balance of the Loan outstanding shall be computed for the actual number of days elapsed during the month in question on the basis of a year consisting of three hundred sixty (360) days and shall be calculated by determining the average daily principal balance outstanding for each day of the month in question. The daily rate shall be equal to 1/360th times the Stated Interest Rate (but shall not exceed the Maximum Rate). 2.3. PAYMENTS. All payments to Lender shall be payable at FINOVA Capital Corporation, File No. 96425, P. O. Box 668100, Charlotte, NC 28266-8100. All payments received pursuant to this Agreement shall be applied to Borrower's Indebtedness three (3) Business Days after the actual receipt of such payment by Lender's depository bank if such payment is credited to Lender's account. The Indebtedness shall be due and payable as follows: A. Accrued but unpaid interest for each calendar month during the term hereof shall be due and payable, in arrears, on or before the fifteenth (15th) day of the immediately succeeding calendar month; if such accrued but unpaid interest for the preceding month is not received by the fifteenth (15th) of the month, such unpaid interest shall be added to the Indebtedness. B. Costs, fees and expenses payable pursuant to this Agreement shall be due and payable by Borrower to Lender or to such other person(s) designated by Lender in writing on demand; and C. The entire outstanding balance of the Indebtedness shall be due and payable, if not prepaid, on the Maturity Date (Schedule Section 2.3.). 2.4. PAYMENT DUE ON A NON-BUSINESS DAY. If any payment of the Indebtedness falls due on a day other than a Business Day, then such due date shall be extended to the next succeeding Business Day. 2.5. MANDATORY PAYMENTS. Provided that Borrower is not otherwise in Default hereunder, if at any time the amount advanced by Lender to Borrower exceeds the maximum amount of the Loan allowed pursuant to Section 2.1, Borrower shall immediately and without notice, repay to Lender an amount sufficient to eliminate such excess, or, at Lender's option, assign and deliver additional Eligible Receivables sufficient for such purpose. In the event Borrower sells, transfers, assigns or otherwise disposes of all or any portion of its Receivables, other than in the ordinary course of business, Borrower shall apply all proceeds of any such sale, transfer, assignment or other disposition to reduce the outstanding balance of the Indebtedness. 2.6. VOLUNTARY PREPAYMENTS. Borrower may, at its option, voluntarily prepay the Indebtedness in full at any time, provided, however, that Borrower has given Lender ninety (90) days written notice of any such intention to prepay the Indebtedness in full. Borrower may not make such prepayment prior to the expiration of such ninety (90) day period. Upon written notice of prepayment of the Indebtedness in full, the commitment by Lender to advance funds to Borrower and all the obligations of Lender shall terminate on the expiration of said ninety (90) day notice period, and the entire amount of the Indebtedness shall be due and payable on such date. 2.7. MAXIMUM INTEREST; CONTROLLING AGREEMENT. The contracted for rate of interest of the Loan without limitation, shall consist of the following: (i) the Stated Interest Rate, calculated and applied to the principal balance of the Note in accordance with the provisions of the Note and this Agreement; (ii) Interest After Event of Default or Due Date, calculated and applied to the amounts due under the Note in accordance with the provisions thereof; and (iii) all Additional Sums (as herein defined), if any. Borrower agrees to pay an effective contracted for rate of interest which is the sum of the above-referenced elements. All fees, charges, goods, things in action or any other sums or things of value (other than amounts described in the immediately previous paragraph), paid or payable by Borrower (collectively, the "Additional Sums"), whether pursuant to the Note, this Agreement or any other documents or instruments in any way pertaining to this lending transaction, or otherwise with respect to this lending transaction, that under any applicable law may be deemed to be interest with respect to this lending transaction, for the purpose of any applicable law that may limit the maximum amount of interest to be charged with respect to this lending transaction, shall be payable by Borrower as, and shall be deemed to be, additional interest and for such purposes only, the agreed upon and "contracted for rate of interest" of this lending transaction shall be deemed to be increased by the rate of interest resulting from the inclusion of the Additional Sums. -4- It is the intent of the parties to comply with the usury law ("Applicable Usury Law") applicable pursuant to the terms of the preceding paragraph or such other usury law which is applicable if the law chosen by the parties is not applicable. Accordingly, it is agreed that notwithstanding any provisions to the contrary in the Loan Documents, or in any of the documents securing payment hereof or otherwise relating hereto, in no event shall the Loan Documents or such documents require the payment or permit the collection of interest in excess of the maximum contract rate permitted by the Applicable Usury Law. In the event (a) any such excess of interest otherwise would be contracted for, charged or received from Borrower or otherwise in connection with the loan evidenced hereby, or (b) the maturity of the indebtedness evidenced by the Loan Documents is accelerated in whole or in part, or (c) all or part of the principal or interest of the Loan Documents shall be prepaid, so that under any of such circumstances the amount of interest contracted for, shared or received in connection with the loan evidenced hereby, would exceed the maximum contract rate permitted by the Applicable Usury Law, then in any such event (1) the provisions of this paragraph shall govern and control, (2) neither Borrower nor any other person or entity now or hereafter liable for the payment hereof will be obligated to pay the amount of such interest to the extent that it is in excess of the maximum contract rate permitted by the Applicable Usury Law, (3) any such excess which may have been collected shall be either applied as a credit against the then unpaid principal amount hereof or refunded to Borrower, at Lender's option, and (4) the effective rate of interest will be automatically reduced to the maximum amount of interest permitted by the Applicable Usury Law. It is further agreed, without limiting the generality of the foregoing, that to the extent permitted by the Applicable Usury Law; (x) all calculations of interest which are made for the purpose of determining whether such rate would exceed the maximum contract rate permitted by the Applicable Usury Law shall be made by amortizing, prorating, allocating and spreading during the period of the full stated term of the loan evidenced hereby, all interest at any time contracted for, charged or received from Borrower or otherwise in connection with such loan; and (y) in the event that the effective rate of interest on the loan should at any time exceed the maximum contract rate allowed under the Applicable Usury Law, such excess interest that would otherwise have been collected had there been no ceiling imposed by the Applicable Usury Law shall be paid to Lender from time to time, if and when the effective interest rate on the loan otherwise falls below the maximum amount permitted by the Applicable Usury Law, to the extent that interest paid to the date of calculation does not exceed the maximum contract rate permitted by the Applicable Usury Law, until the entire amount of interest which would have otherwise been collected had there been no ceiling imposed by the Applicable Usury Law has been paid in full. Borrower further agrees that should the maximum contract rate permitted by the Applicable Usury Law be increased at any time hereafter because of a change in the law, then to the extent not prohibited by the Applicable Usury Law, such increases shall apply to all indebtedness evidenced hereby regardless of when incurred; but, again to the extent not prohibited by the Applicable Usury Law, should the maximum contract rate permitted by the Applicable Usury Law be decreased because of a change in the law, such decreases shall not apply to the indebtedness evidenced hereby regardless of when incurred. 2.8. STATEMENT OF ACCOUNT. Lender shall provide Borrower, each month, with a statement of Borrower's account, prepared from Lender's records, which shall conclusively be deemed correct and accepted by Borrower, unless Borrower gives Lender a written statement of exceptions within ten (10) days after receipt of such statement. 2.9. CONDITIONS PRECEDENT TO ADVANCES. The obligation of Lender to make advances is subject to the following conditions: (i) no Default, except to the extent that Borrower is diligently pursuing the cure of such Default in good faith within the cure period set forth in Section 7.1 hereof, or Event of Default shall have occurred; (ii) all actions to be taken by Borrower in connection with the transactions contemplated hereby shall be reasonably satisfactory in form and substance to Lender; (iii) the warranties and representations of Borrower contained herein shall be true and correct on the date hereof and shall be deemed to have been made again on the date of each advance and shall then also be true and correct; (iv) Borrower shall have performed and complied with all obligations or conditions required by this Agreement to be performed or complied with prior to each advance and Borrower shall not then be in default under any document or instrument evidencing or securing the Indebtedness; (v) Borrower shall submit to Lender a completed Request for Advance Report in the form and substance of Exhibit "A" attached hereto, on the date such advance is requested or shall have complied with the provisions concerning oral advances hereunder as set forth in Section 2.10 hereof; (vi) prior to the initial advance hereunder, Borrower shall submit to Lender the initial Availability Report and all other documents, instruments, financing statements, evidence of authority, evidence of compliance with applicable laws, opinions of counsel and other information which Lender may reasonably request; and (vii) Borrower shall submit to Lender resolutions of its Board of Directors designating personnel authorized by Borrower to execute Availability Reports on behalf of Borrower and each specific request for advance shall be executed by one such person. 2.10. ORAL REQUEST FOR ADVANCE. All oral requests for advances shall be made only by an authorized agent of Borrower designated by or acting under the authority of a resolution of the Board of Directors of Borrower, a duly certified or executed copy of which shall be furnished to Lender prior to any oral request. Lender shall be entitled to rely upon such authorization until written notice to the contrary is received by Lender. Borrower covenants and agrees to furnish to Lender written confirmation of any such oral request within two (2) days after such oral request, in a form set forth on Exhibit "A" attached hereto and incorporated herein, but any such loan or advance shall be deemed to be made under and entitled to the benefits of this -5- Agreement and any other documents or instruments executed in connection herewith irrespective of any failure by Borrower to furnish such written confirmation. Any loan or advance shall be conclusively presumed to have been made under the terms of this Agreement, to or for the benefit of Borrower, when made pursuant to the terms of any written agreement executed in connection herewith; or in accordance with such requests and directions; or when an advance is deposited to the credit of the account of any person or persons, corporation or corporations comprising Borrower, regardless of the fact that persons other than those authorized hereunder may have authority to draw against such account or regardless of the fact that the advance was not made or deposited for the benefit of all persons or corporations comprising Borrower. 2.11. ALL ADVANCES TO CONSTITUTE ONE LOAN. All evidences of credit, loans and advances made by Lender to Borrower under this Agreement and any other documents or instruments executed in connection herewith shall constitute one loan, and all indebtedness and obligations of Borrower to Lender under this Agreement and all other such documents and instruments shall constitute one general obligation secured by Lender's security interest in all of the Collateral and by all other security interests, liens, claims and encumbrances heretofore, now, or at any time or times hereafter granted by Borrower to Lender. Borrower agrees that all of the rights of Lender set forth in this Agreement shall apply to any modification of or supplement to this Agreement and any other such documents and instruments. 2.12. ADVANCES. Lender shall have the right in Lender's discretion, subject to availability hereunder on behalf of and without notice to Borrower, to make and use advances to pay Lender for any amounts due to Lender pursuant to this Agreement or otherwise, to cure any default hereunder, notwithstanding the expiration of any applicable cure period. 2.13. APPLICATION OF PAYMENTS. Borrower does hereby irrevocably agree that Lender shall have the continuing exclusive right to apply and reapply any and all payments and collections at any time or times hereafter received by Lender against the Indebtedness, in such manner as Lender may determine. 3. SECURITY AGREEMENT 3.1. SECURITY INTEREST. To secure the prompt payment to Lender of the Indebtedness and any and all other obligations now existing or hereinafter arising owed by Borrower to Lender, Borrower hereby irrevocably grants to Lender a first and continuing security interest in the following property and interests in property of Borrower, whether now owned or existing or hereafter acquired or arising and wheresoever located: A. All Receivables and all accounts, chattel paper, instruments, contract rights and general intangibles, all of Borrower's right, remedies, security, liens, guaranties, or other contracts of suretyship with respect thereto, all deposits or other security or support for the obligation of any Account Debtor thereunder and credit and other insurance acquired by Account Debtor or the Borrower in connection therewith.; B. All bank accounts of Borrower, except for such bank's right of offset; C. All monies, securities and property, now or hereafter held, received by, or intrusted to, in the possession or under the control of Lender or a bailee of Lender; D. All accessions to, substitutions for and all replacements, products and proceeds of the foregoing, including, without limitation, proceeds of insurance policies referenced in Section 3.1.A above (including but not limited to claims paid and premium refunds); and E. All books and records (including, without limitation, customer lists, credit files, tapes, ledger cards, computer software and hardware, electronic data processing software, computer printouts and other computer materials and records) of Borrower evidencing or containing information regarding any of the foregoing. 3.2. FINANCING STATEMENTS AND FURTHER ASSURANCES. Borrower hereby agrees to execute UCC-1 Financing Statements, in the form and substance of Exhibit "B" hereto, and any other instruments or documents reasonably necessary to evidence, preserve or protect Lender's security interest in the Collateral. Borrower agrees that financing statements shall be filed covering all of Borrower's locations (Schedule Section 3.2.). Upon Lender's request, Borrower agrees to deliver to Lender, at such places as Lender may reasonably designate, schedules executed by Borrower, listing the Receivables and fully and correctly specifying in adequate detail the aggregate unmatured unpaid face amount of each Receivable and the amount of the deferred installments thereof falling due each month. These schedules shall be in form and tenor satisfactory to or supplied by Lender. All schedules of delivered Collateral pledged to Lender shall be assigned to Lender pursuant to the "Schedule of Receivables and Assignment" in the form and substance of Exhibit "E" attached hereto. Borrower further warrants and agrees that in each case where the terms of any Receivable require the Borrower or the Account Debtor named in such Receivable to place or carry fire insurance or other insurance in respect of the merchandise or property to which such Receivable relates, the Borrower shall or shall cause the Account Debtor to maintain such insurance until the full amount of such Receivable is collected and if not, Lender, at its option, may place and maintain such insurance, charging the cost thereof to Borrower. -6- 3.3. FAILURE TO DELIVER. Failure to deliver physical possession of any instruments, documents or writings in respect of any Receivable to Lender shall not invalidate Lender's security interest therein. To the extent that possession may be required by applicable law for the perfection of Lender's security interest, the original chattel paper and instruments representing the Receivables shall be deemed to be held by Lender, although kept by the Borrower as the custodial agent of Lender. 3.4. NOTICE OF COLLATERAL ASSIGNMENT. All contracts, documents or instruments representing or evidencing a Receivable shall contain (by way of stamp or other method satisfactory to Lender) the following language: "Assigned to FINOVA Capital Corporation as Collateral". 3.5. LOCATION OF RECEIVABLES. Borrower shall, at any reasonable time and at Borrower's own expense, physically deliver to Lender all Receivables (including any instruments, documents or writings in respect of any Receivable together with all instruments, documents or writings in respect of any collateral securing each Receivable, except to the extent Borrower is required by applicable law to retain possession of such instruments, documents or writings) assigned to Lender to any reasonable place or places designated by Lender. All Receivables shall, regardless of their location, be deemed to be under Lender's domination and control (with files so labeled) and deemed to be in Lender's possession. 3.6. RECORDS AND INSPECTIONS. Borrower shall at all times keep complete and accurate records pertaining to the Collateral, which records shall be current on a daily basis and located only at the locations (Schedule Section 3.2.). Lender by or through any of its officers, agents, employees, attorneys or accountants, shall have the right to enter any such locations, at any reasonable time or times during regular business hours, for so long as Lender may desire, to inspect the Collateral and to inspect, audit and make extractions or copies from the books, records, journals, orders, receipts, correspondence or other data relating to the Collateral or this Agreement. 3.7. ADDITIONAL DOCUMENTS. Borrower hereby agrees to execute any additional documents or financing statements which Lender deems necessary in its reasonable discretion in order to evidence Lender's security interest in the Collateral. Borrower shall not allow any financing statement or notice of assignment of accounts receivable, other than those executed in connection with this Agreement, to be on file in any public office covering any Collateral, proceeds thereof or other matters subject to the security interest granted to Lender. 3.8. COLLECTION. Borrower agrees at its own expense to promptly and diligently collect each installment of all Receivables in trust for the exclusive account of Lender, to hold Lender harmless from any and all loss, damage, penalty, liability, fine or expense arising from such collection by Borrower or its agents and to faithfully account therefor to Lender. Upon the occurrence of a Default, Lender expressly retains the unqualified right at any time it so elects to take over the collection of the Receivables. 3.9. BLOCKED ACCOUNTS. Upon the occurrence of a Default, except to the extent that Borrower is diligently pursuing the cure of such Default in good faith within the cure period set forth in Section 7.1 hereof, or an Event of Default, at Lender's request, any checks, notes, drafts or any other payment upon and/or proceeds of the Collateral received by Borrower (or any subsidiaries, divisions, affiliates, proprietorships, shareholders, directors, officers, employees, agents or those persons acting for or in concert with Borrower), shall no later than the next Business Day following receipt thereof, be delivered to Lender, at Lender's address set forth above, for application on account of the Indebtedness and shall be reflected in the Statement of Account as provided in Section 2.8 herein, until such time as Lender has established a depository account at a bank for the deposit of such payments, made arrangements for such deposits to be transferred to Lender daily and thereafter established a lock-box arrangement or otherwise. Borrower shall (i) deposit or cause all Items, as defined below, to be deposited in the special account so established by Lender or transfer all Items to Lender for application on account of the Indebtedness and to be reflected in the Statement of Account as provided in Section 2.8 herein and (ii) maintain copies of all checks or other items of payment and deposit slips related thereto, together with a collection report in a form satisfactory to Lender. All cash payments, checks, drafts, or similar items of payment upon and/or proceeds of the Receivables (collectively "Items") by or for the account of Borrower shall be the sole and exclusive property of Lender immediately upon the earlier of the receipt of such Items by Lender or the receipt of such Items by Borrower; provided, however, that no such item received by Lender shall constitute payment to Lender and be applied to reduce the Indebtedness until the later of: (i) three (3) Business Days from collection of such Item by Lender's depository bank, or (ii) such Item being actually collected by Lender's depository bank and such collection being credited to Lender's account. Notwithstanding anything to the contrary herein, all such items of payment shall be deemed not received if the same is subsequently dishonored or not duly credited to Lender's depository account for any reason whatsoever. 3.10. PROTECTION OF RECEIVABLE RECORDS. Borrower hereby agrees to take the following protective actions to prevent destruction of Borrower's Collateral and records pertaining to such Collateral: (i) if Borrower maintains its Collateral records on a manual system such records shall be kept in a fire proof cabinet or on no less than a monthly basis, a record of all payments on Receivables and all other matters relating to the Collateral shall be placed in an off site safety deposit box (and Lender shall have access to such safety deposit box); or (ii) if the Collateral records are computerized, Borrower agrees to create a tape or diskette "back-up" of the computerized information and upon the request of Lender, provide Lender with a tape or diskette copy of such "back-up" information. -7- 3.11. USE OF COLLECTIONS AND MODIFICATION OF RECEIVABLES. Provided that Lender has not required that Borrower remit all collections or proceeds of Collateral to Lender, Borrower may use or dispose of the funds received on the Receivables in the ordinary course of business (including returned or repossessed goods), collect or compromise accounts or obligations and accept returned goods or make repossessions, as Borrower shall determine based upon its reasonable discretion. 3.12. USE OF PROCEEDS. Borrower shall use the initial advance of the Loan to pay in full all debt or obligations which are secured by the Collateral immediately prior to the execution of this Agreement, and thereafter to use the proceeds of the Loan in the ordinary course of business, solely in its operations for costs incurred in the acquisition and financing of Receivables, or for payments to Lender pursuant to Section 2.12 hereof. 3.13. RETURN OF COLLATERAL. Upon the payment in full or renewal of any Receivable to which the written documents evidencing such Receivable are held by Lender, Borrower shall submit all requests for the return of such documents pursuant to the "Request For Return of Collateral" form, a copy of which is attached hereto as Exhibit "C". 3.14. LENDER'S PAYMENT OF CLAIMS. Lender may, in its sole discretion, discharge or obtain the release of any security interest, lien, claim or encumbrance asserted by any person against the Collateral. All sums paid by Lender in respect thereof shall be payable, on demand, by Borrower to Lender and shall be a part of the Indebtedness. 4. REPORTING REQUIREMENTS 4.1. ACCOUNTING PRACTICES. Borrower shall maintain (i) a modern system of accounting in accordance with GAAP or other systems of accounting acceptable to Lender and (ii) standard operating procedures applicable to all of its locations with respect to the handling and disposition of cash receipts and other proceeds of Collateral on a daily basis, including the depositing thereof, aging of account receivables, record keeping and such other matters as Lender may reasonably request. For the purpose of determining compliance with the covenants and representations in the Loan Documents, Lender shall have the right to recast any financial statement or report presented to Lender by or on behalf of Borrower to comply with GAAP. 4.2. PLEDGE OF RECEIVABLES. Borrower hereby agrees to pledge all Receivables and deliver documentation evidencing such Receivables to Lender, no less often than on the fifteenth (15th) day of each calendar month during the term of this Agreement. If the evidence of title of the collateral securing the pledged Receivables is not delivered to Lender with the original Receivable documentation, such evidence of title shall be delivered to Lender not later than fifteen (15) days after such evidence of title is received by Borrower. Borrower shall deliver monthly to Lender, with the delivery of the documentation evidencing the Receivables above, a "Vehicle Title Exception Report" listing all vehicle titles which have not been received by Lender or are due from the appropriate state motor vehicle department. 4.3. ACCOUNT DEBTORS' ADDRESSES. Borrower agrees to furnish to Lender from time to time, promptly upon request, a list of all Account Debtors' names and their most current addresses. Borrower agrees that Lender may from time to time, consistent with standard or generally accepted auditing practices, verify the validity, amount and any other matters relating to the Receivables by means of mail, telephone or otherwise, in the name of Borrower and upon the occurrence of an Event of Default in the name of Lender or such other name as Lender may choose. 4.4. FINANCIAL REPORTS. Borrower shall furnish to Lender the following financial statements and reports, in a form satisfactory to Lender: A. As soon as practicable and in any event mailed within fifteen (15) days after the end of each fiscal month, an Availability Report for the immediately preceding month, reflecting information for each Contractual Life Category of Receivables (Schedule Section 1.9.C.) and a summary Availability Report for all Receivables, in the form and substance of Exhibits "D" and "D-1" attached hereto; B. As soon as practicable and in any event mailed within fifteen (15) days after the end of each fiscal month for the immediately preceding month: (i) Statement of Accounts Receivable showing the detailed aging of each Receivable categorized by contractual life according to the procedures (Schedule Section 1.9.C.); (ii) a Dilution Analysis of the Receivables acquired during each fiscal year, reflecting the aging, cumulative losses and cumulative charge-offs with respect to such Receivables; (iii) a Collection Report, reflecting the contractual payment obligations due to Borrower for the month of reporting from the Receivables, the actual payments received from the Receivables and all collections received from all sources, including payments, from the Receivables; (iv) a monthly Profit and Loss Statement and Balance Sheet, certified by Borrower's chief financial officer or equivalent duly elected officer of Borrower; and (v) Schedule of Receivables and Assignment in the form and substance of Exhibit "E" attached hereto. C. Within ninety (90) days after the end of each of Borrower's fiscal years, annual financial statements, or consolidated statements, as the case may be, of Borrower prepared in accordance with GAAP, consistently applied and certified by its chief financial officer or equivalent duly elected officer. The financial statements shall be prepared in accordance with GAAP and shall consist of a balance sheet as of the end of such fiscal year and comparative statements of earnings, cash flows, and change in stockholders' equity for such fiscal year (Schedule Section 4.4.). -8- D. With reasonable promptness, such other financial data as Lender may reasonably request, including but not limited to tax returns, business plans and reports. Together with each delivery of financial statements required by subsections A, B and C above, Borrower shall deliver to Lender and shall cause each of its subsidiaries to deliver to Lender, if requested by Lender, a certificate in form satisfactory to Lender, certifying that no Default or Event of Default exists under this Agreement as of the date of such certificate, or if a Default or an Event of Default exists, specifying the nature and period of existence thereof and what action Borrower proposes to take with respect thereto. 4.5. FINANCIAL STATEMENTS OF GUARANTORS. Guarantor (Schedule Section 4.5.) shall furnish to Lender all form 10-Qs and 10-Ks, with all financial exhibits (and others as requested by Lender), filed by the Guarantor with the Securities and Exchange Commission, within thirty (30) days of the filing of the same. 4.6. NOTICE OF CHANGES. Borrower shall promptly notify Lender in writing of any change of its officers, directors or key employees; change of location of its principal offices, change of location of any of its principal assets; any acquisition, disposition or reorganization of any corporate subsidiary, affiliate or parent of Borrower; change of Borrower's name; death or withdrawal of any partner (if Borrower is a partnership); any sale or purchase out of the regular course of Borrower's business; litigation of which Borrower or a Guarantor is a party; and any other material change in the business or financial affairs of Borrower. 5. REPRESENTATIONS AND WARRANTIES OF BORROWERS AND GUARANTOR. 5.1. REPRESENTATIONS AND WARRANTIES. Borrower and Guarantor hereby continuously represent and warrant to Lender as follows: A. Borrower is a corporation duly incorporated, validly existing and in good standing under the laws of the state of its incorporation, is duly qualified to do business and is in good standing as a foreign corporation in all states where such qualification is required, has all necessary corporate power and authority to enter into this Agreement and each of the documents and instruments relating hereto and to perform all of its obligations hereunder and thereunder. B. Borrower operates its business only under the assumed names (Schedule Section 5.1.) and has not used any other assumed name for the operation of its business activities for the previous seven (7) years. C. Borrower has all requisite corporate right and power and is duly authorized and empowered to enter into, execute, deliver and perform this Agreement and all documents and instruments relating hereto and this Agreement and all documents and instruments relating hereto are the legal, valid and binding obligations of Borrower and are enforceable against Borrower in accordance with their terms. D. Each Guarantor is competent to enter into this Agreement and the Guaranty and to perform all of Guarantor's obligations thereunder. E. The execution, delivery and performance by Borrower of this Agreement does not and shall not (i) violate any provision of any law, rule, regulation, order, writ, judgment, injunction, decree, determination or award presently in effect having applicability to Borrower; (ii) violate any provision of its Articles of Incorporation or Bylaws; or (iii) result in a breach of or constitute a default under any indenture or loan or credit agreement or any other agreement, lease or instrument to which Borrower is a party or by which it or any of its assets or properties may be bound or affected; and Borrower is not in default of any such law, rule, regulation, order, writ, judgment, injunction, decree, determination or award or any such indenture, agreement, lease or instrument. F. No consent, approval, license, exemption of or filing or registration with, giving of notice to, or other authorization of or by, any court, administrative agency or other governmental authority is or shall be required in connection with the execution, delivery or performance by Borrower for the valid consummation of the transactions contemplated by this Agreement. G. No event has occurred and is continuing which constitutes a Default or an Event of Default, as defined in this Agreement. There is no action, suit, proceeding or investigation pending or threatened against or affecting Borrower before or by any court, administrative agency or other governmental authority that brings into question the validity of the transactions contemplated hereby, or that might result in any material adverse change in the businesses, assets, properties or financial conditions of Borrower or Guarantor. H. Borrower and/or Guarantor are not in default in the payment of any taxes levied or assessed against either of them or any of their assets or properties, except for taxes being contested in good faith and by appropriate proceedings. I. Borrower and Guarantor have good and marketable title to their assets and properties as reflected in their financial statements furnished to Lender. -9- J. Each of the financial statements furnished to Lender by the Borrower and Guarantor was prepared in accordance with GAAP and fairly and accurately reflects in all material respects their financial condition as of the date thereof; and each hereby certifies that there have been no material adverse changes in their condition, financial or otherwise, since the date of such statements, and there are no contingent liabilities not provided for or disclosed in such statements. K. Neither this Agreement, any Availability Report or any statement or document referred to herein or delivered to Lender by Borrower and/or Guarantor contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements made herein or therein not misleading. L. Borrower has good, indefeasible and merchantable title to and ownership of the Collateral, free and clear of all liens, claims, security interests and encumbrances, except those of Lender and except where such liens, claims, charges, security interests and encumbrances are removed contemporaneously with the execution of this Agreement or are subordinate to those of Lender, in a form and substance acceptable to Lender. M. All books, records and documents relating to the Collateral are and shall be genuine and in all respects what they purport to be; the original amount and the unpaid balance of each Receivable shown on the books and records of Borrower and in the schedules represented as owing by each Account Debtor is and shall be the correct amount actually owing or to be owing by such Account Debtor at maturity; each Account Debtor liable upon the Receivables has and shall have capacity to contract; Borrower has no knowledge of any fact which would impair the validity or collectibility of any of the Receivables; and the payments shown to have been made by each Account Debtor on the books and records of Borrower shall reflect the amounts of and dates on which said payments were actually made. N. Borrower has places of business only at the locations (Schedule Section 3.2.). Borrower shall not begin or do business (either directly or through subsidiaries) at other locations or cease to do business at any of the above locations or at Borrower's principal place of business without first notifying Lender. O. The present value of all benefits vested under all Plans of Borrower or any Commonly Controlled Entity (based on the assumptions used to fund the Plans) did not, as of the last annual valuation date (which in case of any Plan was not earlier than December 31, 1982) exceed the value of the assets of the Plans applicable to such vested benefits. P. The liability to which Borrower or any Commonly Controlled Entity would become subject under Sections 4063 or 4064 of ERISA if Borrower or any Commonly Controlled Entity were to withdraw from all Multi-employer Plans or if such Multi- employer Plans were to be terminated as of the valuation date most closely preceding the date hereof, is not in excess of One Thousand Dollars ($1,000.00); Q. Borrower is not engaged nor shall it engage, principally or as one of its important activities, in a business of extending credit for the purpose of "purchasing" or "carrying" any "margin stock" within the respective meanings of each of the quoted terms under Regulations G or X of the Board of Governors of the Federal Reserve System as now and from time to time hereafter in effect. No part of the proceeds of any advances hereunder shall be used for "purchasing" or "carrying" "margin stock" as so defined or for any purpose which violates, or which would be inconsistent with, the provisions of the Regulations of such Board of Governors. If requested by Lender, Borrower shall furnish to Lender a statement in conformity with the requirement of Federal Reserve Form G-3 referred to in said Regulation G to the foregoing effect. All of the outstanding securities of Borrower have been offered, issued, sold and delivered in compliance with, or are exempt from, all federal and state laws and rules and regulations of federal and state regulatory bodies governing the offering, issuance, sale and delivery of securities. R. Borrower is not an "investment company" or a company "controlled" by an "investment company," within the meaning of the Investment Company Act of 1940, as amended. S. Each of the Exhibits and Schedules to this Agreement contain true, complete and correct information. T. To the best of Borrower's knowledge, the land and improvements owned or leased by Borrower for use in its business operations are free of dangerous levels of contaminates, oils, asbestos, radon, PCB's, hazardous substances or waste as defined by federal, state or local environmental laws, regulations or administrative orders or other materials, the removal of which is required or the maintenance of which is prohibited, regulated or penalized by any federal, state or local governmental authority. U. Borrower is solvent, generally able to pay its obligations as they become due, has sufficient capital to carry on its business and transactions and all businesses and transactions in which it intends to engage, and the current value of Borrower's assets, at fair saleable valuation, exceeds the sum of its liabilities. Borrower shall not be rendered insolvent by the execution and delivery of the Loan Documents and the consummation of the transactions contemplated thereby and the capital remaining in Borrower is not now and shall not foreseeably become unreasonably small to permit Borrower to carry on its business and transactions and all businesses and transactions in which it is about to engage. Borrower does not intend to, nor does it reasonably believe it shall, incur debts beyond its ability to repay the same as they mature. V. Lender has a perfected security interest in favor of Lender in all of Borrower's right, title and interest in the Collateral, prior and superior to any other security interest or lien, except any statutory or constitutional lien for taxes not yet due and payable. -10- W. There are no material actions, suits or proceedings pending, or threatened against or affecting the assets of Borrower or the consummation of the transactions contemplated hereby, at law, or in equity, or before or by any governmental authority or instrumentality or before any arbitrator of any kind. Neither Borrower nor Guarantor is subject to any judgment, order, writ, injunction or decree of any court or governmental agency. There is not a reasonable likelihood of an adverse determination of any pending proceeding which would, individually or in the aggregate, have a material adverse effect on the business operations or financial condition of Borrower or Guarantor. 5.2. WARRANTIES AND REPRESENTATIONS AS TO ELIGIBLE RECEIVABLES. With respect to Eligible Receivables, Borrower and Guarantor continuously warrant and represent to Lender that during the term of this Agreement and so long as any of the Indebtedness remains unpaid: (i) in determining which Receivables are "Eligible Receivables," Lender may rely upon all statements or representations made by Borrower; and (ii) those Receivables designated as Eligible Receivables meet each requirement set forth below at the time any request for advance is provided to Lender. A. The Eligible Receivables are genuine; are in all respects what they purport to be; and are evidenced by at least one executed original instrument, agreement, contract or document which has been or shall be delivered to Lender; B. The Eligible Receivables represent undisputed, bona fide transactions completed in accordance with the terms and provisions contained in any documents related thereto; C. The amounts of the face value shown on any schedule of Receivables provided to Lender, and/or all invoices or statements delivered to Lender with respect to any Eligible Receivables, are actually and absolutely owing to Borrower and are not contingent for any reason; D. No set-offs, counterclaims or disputes as to payments or liability thereon exist or have been asserted with respect thereto and Borrower has not made any agreement with any Account Debtor thereunder for any deduction therefrom, except a discount or allowance allowed by Borrower in the ordinary course of its business for prompt payment, all of which discounts or allowances are reflected in the calculation of the outstanding amount of the Receivable; E. No facts, events or occurrences exist that, in any way, impair the validity or enforcement thereof or tend to reduce the amount payable thereunder from the amount of the Receivable shown on any schedule, or on all contracts, invoices or statements delivered to Lender with respect thereto; F. All Account Debtors in connection with Eligible Receivables: (i) had the capacity to contract at the time any contract or other document giving rise to the Receivable was executed; and (ii) generally have the ability to pay their debts as become due; G. Within Borrower's knowledge, no proceedings or actions are threatened or pending against any Account Debtor that might result in any material adverse change in the Account Debtor's financial condition; H. The Eligible Receivables have not been assigned or pledged to any other person or entity; I. The goods giving rise to the Eligible Receivables are not, and were not at the time of the sale, rental and/or lease thereof, subject to any lien, claim, encumbrance or security interest except those of Lender, those removed or terminated prior to the date hereof or those subordinated to Lender's security interest, by a subordination and standstill agreement acceptable to Lender; J. The End of Month Delinquency set forth in Section 14 of the Availability Report shall be delivered to Lender by Borrower hereunder as determined pursuant to the Aging Procedures and Eligibility Test (Schedule Section 1.9.C.). 6. COVENANTS AND OTHER AGREEMENTS 6.1. AFFIRMATIVE COVENANTS. During the term of this Agreement and so long as any of the Indebtedness remains unpaid, Borrower and Guarantor agree and covenant, jointly and severally, that they shall: A. Pay or cause to be paid currently all of their expenses, including all payments on their obligations whenever due, as well as all payments of any and all taxes of whatever nature when due. This provision shall not apply to taxes or expenses which are due, but which are challenged in good faith. B. Maintain, preserve, and protect the Collateral, including, but not limited to, keeping documents, instruments or other written records otherwise evidencing the Collateral in a fire proof cabinet. C. Furnish to Lender written notice as to the occurrence of any Default or Event of Default hereunder. D. Furnish to Lender notice of: (i) any development related to the business, financial condition, properties or assets of Borrower or Guarantor, that would have or has a materially adverse affect on such business, financial condition, properties or assets, or ability to perform their obligations under this Agreement and (ii) any material and adverse litigation or investigation to which either of them may be a party. -11- E. With respect to the Borrower only, carry on and conduct its business in the same manner and in the same fields of enterprise as it is presently engaged, and shall preserve its corporate existence, licenses or qualifications as a domestic corporation in the jurisdiction of its incorporation and as a foreign corporation in every jurisdiction in which the character of its assets or properties or the nature of the business transacted by it at any time makes qualification as a foreign corporation necessary, and to maintain all other material corporate rights and franchises, provided, however, nothing herein shall be construed to prevent Borrower from closing any retail location in the good faith exercise of its business judgment. F. Comply, and cause each affiliate to comply, with all statutes, governmental rules and regulations applicable to them. G. Permit and authorize Lender, without notifying Borrower or Guarantor, to make such inquiries through business credit or other credit reporting services concerning Borrower or Guarantor as Lender shall deem appropriate. H. With respect to the Borrower, provide Lender with evidence of insurance that insures loss or damage to all tangible Collateral issued by a reputable carrier, as reasonably required by Lender. This insurance shall reflect Lender as the loss payee or additional insured, as required by Lender, and contain a provision that Lender shall be notified by the carrier thirty (30) days prior to the termination or cancellation of any such insurance. 6.2. NEGATIVE COVENANTS. During the term of this Agreement and until the Indebtedness secured hereby has been paid in full, Borrower and Guarantor covenant and agree that they shall not, without Lender's prior written consent, which consent shall not be unreasonably withheld, do any of the following: A. Incur or permit to exist any mortgage, pledge, title retention lien or other lien, encumbrance or security interest with respect to the Collateral now owned or hereafter acquired by Borrower, except liens in favor of Lender. B. Delegate, transfer or assign any of their obligations or liabilities under this Agreement, or any part thereof, to any other person or entity. C. With respect to the Borrower only, be a party to or participate in: (i) any merger or consolidation; (ii) any purchase or other acquisition of all or substantially all of the assets or properties or shares of any class of, or any partnership or joint venture interest in, any other corporation or entity; (iii) any sale, transfer, conveyance or lease of all or substantially all of Borrower's assets or properties; or (iv) any sale or assignment with or without recourse of any Receivables, provided however, Borrower may sell part or all of the Receivables upon the conditions that the sales price for such Receivables is equal to or greater than the Availability on Eligible Receivable applicable to such Receivables being sold and the proceeds of such sale are applied to the balance of the Indebtedness. D. Cause or take any of the following actions with respect to Borrower: (i) redeem, retire, purchase or otherwise acquire, directly or indirectly, any of Borrower's outstanding securities; or (ii) purchase or acquire, directly or indirectly, any shares of capital stock, evidences of indebtedness or other securities of any person or entity, except in the Borrower's ordinary course of business. E. Amend, supplement or otherwise modify Borrower's Articles of Incorporation or Bylaws which would have a material adverse affect on the condition and operations, prospects or financial condition of the Borrower. F. With respect to the Borrower only, incur, assume or suffer to exist any debt (including capitalized leases) other than (i) the Indebtedness, (ii) accounts payable incurred in the ordinary course of business, (iii) Subordinated Debt, or (iv) other Debt consented to in writing by Lender. G. With respect to the Borrower only, directly or indirectly make loans to, invest in, extend credit to, or guaranty the debt of any person or entity, other than in the ordinary course of Borrower's business. H. Amend, modify, or otherwise change in any respect any material agreement, instrument, or arrangement (written or oral) by which Borrower, or any of its assets, are bound. I. Allow Borrower to be owned and controlled by any person or entity other than the Guarantor, with such ownership by Guarantor being either direct or indirect. J. Allow the monthly cash receipts from Receivables, from all sources, including but not limited to, liquidation and/or foreclosure of the collateral securing a Receivable, to be less than the amount determined by dividing the balance due on all Receivables (including all unearned fees and charges), as of the last day of the previous fiscal month, by thirty (30). K. Allow Borrower to collect less than an average of ninety percent (90%) of all contractual payments due pursuant to the Receivables (specifically excluding proceeds received from the liquidation of and/or foreclosure of a lien on collateral securing a Receivable), for any one hundred and eighty (180) day period from any date of determination. L. Permit the Leverage Ratio to be more than the Leverage Ratio Limit (Schedule Section 6.2.A.). M. Permit the Net Income to be less than the Minimum Net Income requirement (Schedule Section 6.2.B.). -12- N. With respect to Borrower only, make or allow Distributions, in the aggregate, to exceed the distributions limitation (Schedule Section 6.2.C.); provided, however, that no Distribution shall be made if a Default or an Event of Default shall exist. O. Allow the 30-Day Receivables Percentage, on any calendar month end, to be less than the Minimum 30-Day Receivables Percentage (Schedule Section 6.2.D.). 7. EVENTS OF DEFAULT AND REMEDIES 7.1. EVENTS OF DEFAULT. The occurrence of any one or more of the following events shall constitute an "Event of Default": A. If any payment of principal or interest or any other amount due Lender is not paid within five (5) days after the same shall be due and payable. B. If Borrower or Guarantor fails or neglects to perform, keep or observe any of the terms, provisions, conditions or covenants, contained in this Agreement, any of the other Loan Documents or any other agreement or document executed in connection with the transactions contemplated by this Agreement or if any representation, warranty or certification made by Borrower herein or in any certificate or other writing delivered pursuant hereto shall prove to be untrue in any material respect as of the date upon which the same was made or at any time thereafter, and the same is not cured to Lender's satisfaction within fifteen (15) days after Lender has given written notice to Borrower identifying such default. C. If the validity or enforceability of any lien, charge, security interest, mortgage, pledge or other encumbrance granted to Lender to secure the Indebtedness shall be impaired in any respect or to any degree, for any reason, or if any other lien, charge, security interest, mortgage, pledge or other encumbrance shall be created or imposed upon the Collateral unless such lien, charge, security interest, mortgage, pledge or other encumbrance is subordinate to that of Lender, pursuant to a subordination and standstill agreement in a form and substance acceptable to Lender. D. If any judgment against Borrower not covered by insurance in an amount in excess of Twenty-Five Thousand Dollars ($25,000.00), or any attachment or other levy against the properties or assets of Borrower with respect to a claim for any amount in excess of Twenty-Five Thousand Dollars ($25,000.00), remains unpaid, unstayed on appeal, undischarged, unbonded, undismissed or otherwise contested in good faith for a period of thirty (30) days. E. Default in the payment of any sum due under any instrument of indebtedness for borrowed money owed by Borrower or any Guarantor to any person (with respect to the Guarantor only on indebtedness in excess of One Hundred Thousand Dollars ($100,000.00), or any other default under such instrument of indebtedness for borrowed money that permits such indebtedness for borrowed money to become due prior to its stated maturity or permits the holders of such indebtedness for borrowed money to elect a majority of the board of directors or manage the business of Borrower or any Guarantor. F. If a court or governmental authority of competent jurisdiction shall enter an order, judgment or decree appointing, with or without Borrower's or Guarantor's consent or acquiescence, a receiver, custodian, liquidator, trustee or other officer with similar powers of Borrower or Guarantor or of the whole or any substantial part of its properties or assets, or approving a petition filed against Borrower or Guarantor seeking reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under the federal bankruptcy laws or any other applicable law, and such order, judgment or decree shall remain unvacated, unstayed or not set aside for an aggregate of thirty (30) days (whether or not consecutive) from the date of the entry thereof or if any petition seeking such relief shall be filed against Borrower or Guarantor and such petition shall not be dismissed within thirty (30) days. G. An event shall occur which shall have a material adverse affect on the condition and operations, prospects or financial condition of the Borrower or Guarantor. H. If either Borrower or Guarantor shall: (i) be generally not paying their respective debts as they become due; (ii) file a petition in bankruptcy or a petition to take advantage of any insolvency act or other act for the relief or aid of debtors; (iii) make an assignment for the benefit of their creditors; (iv) consent to or acquiesce in the appointment of a receiver, custodian, liquidator, trustee or other officer with similar powers of either of their properties or assets; (v) file a petition or answer seeking reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under the federal bankruptcy laws or any other applicable law; (vi) be adjudicated insolvent or be liquidated; (vii) admit in writing either of their inability to pay debts as they become due; (viii) voluntarily suspend transaction of usual business; or (ix) take any action, corporate or otherwise, for the purpose of any of the foregoing. I. Any of the following shall occur: (i) entry of a court order that enjoins, restrains or in any way prevents Borrower from conducting all or any material part of its business affairs in the ordinary course of business or (ii) withdrawal or suspension of any license or authority required for the conduct of any material part of Borrower's business. J. If any Guarantor gives notice of termination or terminates his liability pursuant to the Guaranty Agreement executed in conjunction with this Agreement. -13- 7.2. ACCELERATION OF THE INDEBTEDNESS. Upon and after an Event of Default, the outstanding principal balance together with all accrued but unpaid interest on the Indebtedness and all other sums due and payable by Borrower to Lender may, at the option of Lender and without demand, presentment, notice of dishonor, notice of intent to demand or accelerate payment, diligence in collecting, grace, notice and protest or a legal process of any kind, all of which are hereby expressly waived, be declared, and immediately shall become due and payable. 7.3. LOUISIANA CONFESSION OF JUDGMENT. In the event that Borrower is domiciled in, or Collateral is located in, Louisiana, and to the extent of such domicile or location where Louisiana law is applicable to this Agreement: A. Borrower hereby confesses judgment, up to the full amount of principal, interest and attorney's fees and for any sums that Lender may advance during the life of this Agreement for the payment of premiums of insurance, taxes and assessments or for the protection and preservation of this Agreement as authorized elsewhere in this Agreement, and does by these presents, consent, agree and stipulate that, in the event of any payment of principal or interest due hereunder not being promptly and fully paid when the same becomes due and payable, or in the event of failure to comply with any of the obligations set forth herein, the Indebtedness shall, at the option of Lender become due and payable, and it shall be lawful for Lender, without making a demand and without notice or putting in default, the same being hereby expressly waived, to cause all and singular the Collateral herein secured to be seized and sold by executory process issued by any competent court or to proceed with enforcement of its security interest in any other manner provided by law; and B. Borrower hereby expressly waives: (a) the benefit of appraisement, as provided in Articles 2332, 2336, 2723, and 2724, Louisiana Code of Civil Procedure, and all other laws conferring the same; (b) the demand and three (3) days delay according by Articles 2639 and 2721, Louisiana Code of Civil Procedure, and all other laws conferring the same; (c) the notice of seizure required by Articles 2293 and 2721, Louisiana Code of Civil Procedure, and all other laws conferring the same; (d) the three (3) days delay provided by Articles 2331 and 2722, Louisiana Code of Civil Procedure, and all other laws conferring the same; and (e) the benefit of the other provisions of Articles 2331, 2722 and 2723, Louisiana Code of Civil Procedure, and all other Articles not specifically mentioned above; and Borrower expressly agrees to the immediate seizure of the Collateral in the event of suit thereon. 7.4. REMEDIES. Upon and after an Event of Default, Lender shall have the following rights and remedies, which individual remedies shall be non-exclusive, cumulative and in addition to each and every other remedy set forth in the Loan Documents or in this Agreement: A. All of the rights and remedies of a secured party under the Uniform Commercial Code as enacted in the State of Arizona, as amended, or other applicable law. B. The right, to the fullest extent permissible by law, to: (i) enter upon the premises of Borrower, or any other place or places where the Collateral is located and kept, without any obligation to pay rent to Borrower, through self-help and without judicial process, without first obtaining a final judgment or giving Borrower notice and opportunity for a hearing on the validity of Lender's claim, and remove the Collateral therefrom to the premises of Lender or any agent of Lender, for such time as Lender may desire, in order to effectively collect and liquidate the Collateral; and/or (ii) require Borrower to assemble the Collateral and make it available to Lender at a place to be designated by Lender, in Lender's reasonable discretion. C. The right to sell or otherwise dispose of any or all Collateral in its then condition at public or private sale or sales, in lots or in bulk, for cash or on credit, all as Lender, in its discretion, may deem advisable; provided that such sales may be adjourned from time to time with or without notice. The requirement of reasonable notice to Borrower of the time and place of any public sale of the Collateral or of the time after which any private sale either by Lender or at its option, a broker, or any other intended disposition thereof is to be made, shall be met if such notice is mailed, postage prepaid, to Borrower at the address of Borrower designated herein at least ten (10) Business Days before the date of any public sale or at least ten (10) Business Days before the time after which any private sale or other disposition is to be made unless applicable law requires otherwise. Lender shall have the right to conduct such sales on Borrower's premises or elsewhere and shall have the right to use Borrower's premises without charge for such sales for such time or times as Lender may see fit. Lender is hereby granted a license or other right to use, without charge, Borrower's labels, copyrights, rights of use of any name, trade secrets, trade names, trademarks and advertising matter, or any property of a similar nature, as it pertains to the Collateral, in advertising for sale and selling any Collateral and Borrower's rights under all licenses and all franchise agreements shall inure to Lender's benefit. Lender agrees to hold Borrower harmless from any liability arising out of Lender's use of Borrower's premises, labels, copyrights, rights of use of any name, trade secrets, trade names, trademarks and advertising matter, or any property of a similar nature as it pertains to advertising for sale, marshalling or selling the Collateral. Lender shall have the right to sell, lease or otherwise dispose of the Collateral, or any part thereof, for cash, credit or any combination thereof, and Lender may purchase all or part of the Collateral at public or, if permitted by law, private sale and, in lieu of actual payment of such purchase price, may set off the amount of such price against the Indebtedness owing by Borrower to Lender. The proceeds realized from the sale of any Collateral shall -14- be applied first to reasonable costs and expenses, attorney's fees, expert witness fees incurred by Lender for collection and for acquisition, completion, protection, removal, storage, sale and delivery of the Collateral; second to all payments, other than principal and interest, due under this Agreement; third to interest due upon any of the Indebtedness; fourth to the principal balance owing on the Indebtedness; and fifth the remainder, if any, to Borrower, its successors or assigns, or to whomsoever may be lawfully entitled to receive the same. If any deficiency shall arise, Borrower shall remain liable to Lender therefor. D. In the event that Borrower is domiciled in, or Collateral is located in, Louisiana, and to the extent of such domicile or location where Louisiana law is applicable to this Agreement, the right to cause all and singular the hereinabove described Collateral to be seized and sold under executory process without appraisement, appraisement being hereby expressly waived, as an entirety or in parcels, as Lender may determine, to the highest bidder for cash. E. The right to appoint or seek appointment of a receiver, custodian or trustee of Borrower or any of its properties or assets pursuant to court order. F. The right to cease all advances hereunder. G. All other rights and remedies that Lender may have at law or in equity. 7.5. NO WAIVER. No delay, failure or omission of Lender to exercise any right upon the occurrence of any Default or Event of Default shall impair any such right or shall be construed to be a waiver of any such Default or Event of Default or an acquiescence therein. Lender may, from time to time, in a writing waive compliance by the other parties with any of the terms of this Agreement and its rights and remedies upon any Default or Event of Default, and, Borrower agrees that no waiver by Lender shall ever be legally effective unless such waiver shall be acknowledged and agreed in writing by Lender. No waiver of any Default or Event of Default shall impair any right or remedy of Lender not specifically waived. No single, partial or full exercise of any right of Lender shall preclude any other or further exercise thereof. No modification or amendment of or supplement to this Agreement or any other written agreement between the parties hereto shall be valid or effective (or serve as a basis of reliance by way of estoppel) unless the same is in writing and signed by the party against whom it is sought to be enforced. The acceptance by Lender at any time and from to time of a partial payment or partial performance of any of Borrower's obligations set forth herein shall not be deemed a waiver, reduction, modification or release from any Default or Event of Default then existing. No waiver by Lender of any Default or Event of Default shall be deemed to be a waiver of any other existing or any subsequent Default or Event of Default. 7.6. GENERAL INDEMNIFICATION. Borrower hereby agrees to indemnify and hold Lender harmless from and against any and all claims, liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements (collectively "Claim" or "Claims") of any kind or nature whatsoever, asserted by any party other than Borrower, or with respect to Borrower only as otherwise provided in this Agreement or pursuant to applicable law regarding Lender's obligations to Borrower, which may be imposed on, incurred by or asserted against Lender, or any of its officers, directors, employees or agents (including accountants, attorneys or other professionals hired by Lender) in any way relating to or arising out of the Loan Documents or any action taken or omitted by Lender, or any of its officers, directors, employees or agents (including accountants, attorneys or other professionals hired by Lender) under the Loan Documents, except to the extent such indemnified matters are finally found by a court to be caused by Lender's gross negligence or wilful misconduct. 7.7. APPLICATION OF PROCEEDS. After an Event of Default shall have occurred and is continuing, all amounts received by Lender on account of any Indebtedness and realized by Lender with respect to the Collateral, including any sums which may be held by Lender, or the proceeds of any thereof, shall be applied in the same manner as proceeds of Collateral as set forth in Section 7.4.C. hereof. 7.8. APPOINTMENT OF LENDER AS ATTORNEY-IN-FACT. Borrower irrevocably designates, makes, constitutes and appoints Lender (and all persons reasonably designated by Lender), with full power of substitution, as Borrower's true and lawful attorney-in-fact (and not agent-in-fact) and Lender, or Lender's agent, may, without notice to Borrower, and at such time or times thereafter as Lender or said agent, in its discretion, may determine, in Borrower's or Lender's name, at no duty or obligation on Lender, do the following: A. All acts and things necessary to fulfill Borrower's administrative duties pursuant to this Agreement, including, but not limited to, the execution of financing statements; B. Upon the occurrence of any Default, all acts and things necessary to fulfill Borrower's obligations under this Agreement and the Loan Documents, except as set forth in Section 7.8.C below, at the cost and expense of Borrower. C. In addition to, but not in limitation of the foregoing, at any time or times upon the occurrence of an Event of Default, Lender shall have the right: (i) to enter upon Borrower's premises and to receive and open all mail directed to Borrower and remove all payments to Borrower on the Receivables; however, Lender shall turn over to Borrower all of such mail not relating to Receivables; (ii) in the name of Borrower, to notify the Post Office authorities to change the address for the delivery of mail addressed to Borrower to such address as Lender may designate (notwithstanding the -15- foregoing, for the purposes of notice and service of process to or upon Borrower as set forth in this Agreement, Lender's rights to change the address for the delivery of mail shall not give Lender the right to change the address for notice and service of process to or upon Borrower in this Agreement); (iii) demand, collect, receive for and give renewals, extensions, discharges and releases of any Receivable; (iv) institute and prosecute legal and equitable proceedings to realize upon the Receivables; (v) settle, compromise, compound or adjust claims in respect of any Receivable or any legal proceedings brought in respect thereof; (vi) generally, sell in whole or in part for cash, credit or property to others or to itself at any public or private sale, assign, make any agreement with respect to or otherwise deal with any of the Receivables as fully and completely as though Lender were the absolute owner thereof for all purposes, except to the extent limited by any applicable laws and subject to any requirements of notice to Borrower or other persons under applicable laws; (vii) take possession and control in any manner and in any place of any cash or non-cash items of payment or proceeds of Receivables; (viii) endorse the name of Borrower upon any notes, acceptances, checks, drafts, money orders, chattel paper or other evidences of payment of Receivables that may come into Lender's possession; and (vii) sign Borrower's name on any instruments or documents relating to any of the Collateral, or on drafts against Account Debtors; . The appointment of Lender as attorney-in-fact for Borrower is coupled with an interest and is irrevocable. 8. MISCELLANEOUS 8.1. REIMBURSEMENT FOR EXPENSES. Upon the occurrence of a Default, except as set forth in the Schedule Section 8.1., Borrower agrees to reimburse Lender, upon demand, for all reasonable out-of-pocket expenses (including costs of establishing and maintaining accounts or arrangements set forth in Section 3.9, attorney's fees, expert witness fees and legal expenses) incurred in connection with the evaluation of collateral, preservation of collateral, or collection of the indebtedness. 8.2. NOTICES. All notices, demands, billings, requests and other written communications hereunder shall be deemed to have been properly given: (i) upon personal delivery; (ii) on the third Business Day following the day sent, if sent by registered or certified mail; (iii) on the next Business Day following the day sent, if sent by overnight express courier; or (iv) on the day sent or if such day is not a Business Day on the next Business Day after the day sent if sent by telecopy providing the receiving party has acknowledged receipt by return telecopy, in each case, to Lender, Borrower or Guarantors at its address and/or telecopy number as set forth in this Agreement or Schedule Section 8.2, or at such other address and/or telecopy number as either party may designate for such purpose in a written notice given to the other party. Lender shall have the right, on or after initial funding pursuant to the terms of this Agreement, to issue a press release or other brochure announcing the consummation of the Loan Documents and to distribute that information to third parties in the normal course of Lender's business, at no cost to Borrower. 8.3. PARTICIPATIONS. Borrower and Guarantors acknowledge and agree that Lender may from time to time sell or offer to sell interests in the Indebtedness and the Loan Documents to one or more participants. Borrower and Guarantors authorize Lender to disseminate any information it has pertaining to the Indebtedness, including without limitation, complete and current credit information on Borrower and any of its principals and Guarantors, to any such participant or prospective participant. Nothwithstanding any provision contained herein to the contrary, if Lender requests information that is not available to the public from Borrower or Guarantor for the purposes of providing that information to a participant or prospective participant, upon Borrower's or Guarantor's request, Lender shall obtain a written agreement from such participant that it will not trade in the securities of Borrower or Guarantor unless or until such non-public information provided to such participant has been made available to the public. 8.4. SURVIVAL OF AGREEMENTS. All of the various representations, warranties, covenants and agreements of Borrower (including without limitation, any agreements to pay costs and expenses and to indemnify Lender) in the Loan Documents shall survive the execution and delivery of the Loan Documents and the performance under such Loan Documents, and shall further survive until one (1) year and one (1) month after all of the Indebtedness is paid in full to Lender and all of Lender's obligations to Borrower under the Loan Documents are terminated. 8.5. NO OBLIGATION BEYOND MATURITY. Borrower agrees and acknowledges that upon the Maturity Date, Lender shall have no obligation to renew, extend, modify or rearrange the Loan and shall have the right to require all amounts due and owing under the Loan to be paid in full upon such date. 8.6. PRIOR AGREEMENTS SUPERSEDED. This Agreement constitutes the sole and only agreement of the parties hereto and supersedes any prior understandings or written or oral agreements between the parties respecting the subject matter of this Agreement. No provision of this Agreement or other document or instrument relating hereto may be modified, waived or terminated except by instrument in writing executed by the party against whom a modification, waiver or termination is sought to be enforced. 8.7. PARTIES BOUND. This Agreement shall be binding on and inure to the benefit of the parties hereto and their respective heirs, executors, administrators, legal representatives, successors and assigns, except as otherwise expressly provided for herein. Borrower and Guarantor shall not assign any of their respective rights or obligations pursuant this Agreement. -16- 8.8. NUMBER AND GENDER. Whenever used herein, the singular number shall include the plural and the plural the singular, and the use of any gender shall be applicable to all genders. The duties, covenants, obligations and warranties of Borrower in this Agreement shall be joint and several obligations of Borrower and of each Borrower if more than one. 8.9. NO THIRD PARTY BENEFICIARY. This Agreement is for the sole benefit of Lender and Borrower and is not for the benefit of any third party. 8.10. EXECUTION IN COUNTERPARTS. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original, and all of which taken together shall constitute but one and the same instrument. 8.11. SEVERABILITY OF PROVISIONS. Any provision which is determined to be unconscionable, against public policy or any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof or affecting the validity or enforceability of such provision in any other jurisdiction. 8.12. HEADINGS. The Article and Section headings used in this Agreement are for convenience only and shall not affect the construction of this Agreement. 8.13. SCHEDULES AND EXHIBITS. Any and all exhibits hereto are hereby expressly incorporated by reference as though fully set forth at that point verbatim. All terms and provisions as defined or set forth in Article 1 and in any Schedule are hereby incorporated into and made a part of this Agreement. Each reference in this Agreement and the Schedule hereto to any information or definitions contained in Article 1 or the Schedule shall mean and refer to the information or definitions as set forth in Article 1 and the Schedule unless the context specifically requires otherwise. Any terms used in Article 1 and in the Schedule which are not defined shall have the meanings ascribed to such terms, as of the date of this Agreement, by the Uniform Commercial Code as enacted in the State of Arizona to the extent the same are defined therein. 8.14. FURTHER INSTRUMENTS. Borrower and Guarantors shall from time to time execute and deliver, and shall cause each of Borrower's subsidiaries to execute and deliver, all such amendments, supplements and other modifications hereto and to the other Loan Documents and all such financing statements or continuation statements, instruments of further assurance and any other instruments, and shall take such other actions, as Lender reasonably requests and deems necessary or advisable in furtherance of the agreements contained herein. 8.15. LENDER'S EXPENSES AND ATTORNEY'S FEES. UPON AND AFTER AN EVENT OF DEFAULT, LENDER SHALL BE ENTITLED TO RECOVER FROM BORROWER AND GUARANTORS ALL OF LENDER'S ATTORNEY'S FEES AND REASONABLE COSTS AND EXPENSES INCURRED IN THE EXERCISE OF LENDER'S RIGHTS SET FORTH IN THIS AGREEMENT, AND ALL DAMAGES SUSTAINED BY LENDER BY REASON OF MISREPRESENTATION, BREACH OF WARRANTY OR BREACH OF COVENANT OF BORROWER HEREIN, EXPRESSED OR IMPLIED, WHETHER CAUSED BY THE ACTS OR DEFAULTS OF BORROWER, ACCOUNT DEBTORS OR OTHERS; INCLUDING WITHOUT LIMITATION, ALL ATTORNEY'S FEES ARISING FROM SUCH SERVICES, EXPERT WITNESS FEES AND ANY EXPENSES, COSTS AND CHARGES RELATING THERETO, AND ALL OF THE FOREGOING SHALL CONSTITUTE PART OF THE INDEBTEDNESS SECURED BY THE COLLATERAL AND SHALL BE PAYABLE ON DEMAND. 8.16. GOVERNING LAW. THIS AGREEMENT HAS BEEN EXECUTED AND DELIVERED BY BORROWER AND GUARANTOR AND ACCEPTED BY LENDER IN MARICOPA COUNTY, ARIZONA AND SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS (AS OPPOSED TO THE CONFLICTS OF LAWS PROVISIONS) OF THE STATE OF ARIZONA. 8.17. JURISDICTION AND VENUE. TO INDUCE THE LENDER TO ENTER INTO THIS AGREEMENT, BORROWER, GUARANTORS AND LENDER IRREVOCABLY AGREE THAT, SUBJECT TO THE LENDER'S ELECTION, ALL ACTIONS OR PROCEEDINGS IN ANY WAY, MANNER OR RESPECT, ARISING OUT OF OR FROM OR RELATED TO THIS AGREEMENT, THE OTHER LOAN DOCUMENTS OR THE COLLATERAL SHALL BE LITIGATED IN COURTS HAVING SITUS WITHIN THE COUNTY OF MARICOPA, STATE OF ARIZONA. BORROWER, GUARANTORS AND LENDER HEREBY CONSENT AND SUBMIT TO THE JURISDICTION OF ANY LOCAL, STATE OR FEDERAL COURT LOCATED WITHIN SAID COUNTY AND STATE AND WAIVE PERSONAL SERVICE OF ANY AND ALL PROCESS UPON BORROWER, AND AGREE THAT ALL SUCH SERVICE OF PROCESS MAY BE MADE BY REGISTERED MAIL DIRECTED TO BORROWER AT THE ADDRESS SET FORTH IN SCHEDULE SECTION 8.17 AND SERVICE SO MADE SHALL BE DEEMED TO BE COMPLETED UPON ACTUAL RECEIPT THEREOF. 8.18. WAIVER. EXCEPT AS OTHERWISE PROVIDED FOR IN THIS AGREEMENT AND TO THE EXTENT NOT PROHIBITED BY APPLICABLE LAW, BORROWER AND -17- EACH GUARANTOR HEREBY WAIVES (i) PRESENTMENT, DEMAND AND PROTEST AND NOTICE OF PRESENTMENT, PROTEST, DEFAULT, NON-PAYMENT, MATURITY, RELEASE, COMPROMISE, SETTLEMENT, AND ONE OR MORE EXTENSIONS OR RENEWALS OF ANY OR ALL ACCOUNTS, CONTRACT RIGHTS, DOCUMENTS, INSTRUMENTS, CHATTEL PAPER AND GUARANTIES AT ANY TIME HELD BY THE LENDER ON WHICH BORROWER MAY IN ANY WAY BE LIABLE AND HEREBY RATIFIES AND CONFIRMS WHATEVER THE LENDER MAY DO IN THIS REGARD; (ii) ALL RIGHTS TO NOTICE AND HEARING PRIOR TO THE LENDER'S TAKING POSSESSION OR CONTROL OF, OR THE LENDER'S REPLEVIN, ATTACHMENT OR LEVY ON OR OF THE COLLATERAL OR ANY BOND OR SECURITY WHICH MIGHT BE REQUIRED BY ANY COURT PRIOR TO ALLOWING THE LENDER TO EXERCISE ANY OF THE LENDER'S REMEDIES; AND (iii) THE BENEFIT OF ALL VALUATION, APPRAISEMENT OR EXEMPTION LAWS. 8.19. ADVICE OF COUNSEL. BORROWER AND EACH GUARANTOR ACKNOWLEDGES THAT THEY HAVE BEEN REPRESENTED AND ADVISED BY INDEPENDENT LEGAL COUNSEL WITH RESPECT TO THE NEGOTIATION, EXECUTION AND ACCEPTANCE OF THIS AGREEMENT AND THE TRANSACTION GOVERNED BY THIS AGREEMENT AND SPECIFICALLY WITH RESPECT TO THE PROVISIONS CONTAINED IN SECTIONS 7.3, 8.15, 8.16, 8.17, 8.18, 8.19 and 8.20 HEREOF AND HAS RELIED UPON THE ADVICE OF ITS INDEPENDENT LEGAL COUNSEL IN AGREEING TO THE TERMS AND CONDITIONS HEREIN AND IN EXECUTING AND DELIVERING THIS AGREEMENT, AND THAT THEY HAVE FREELY AND VOLUNTARILY ENTERED INTO THIS AGREEMENT AS THE PRODUCT OF ARMS' LENGTH NEGOTIATIONS. 8.20. WAIVER OF RIGHT TO TRIAL BY JURY. LENDER, BORROWER AND GUARANTORS HEREBY COVENANT AND AGREE THAT IN ANY SUIT, ACTION OR PROCEEDING IN RESPECT OF ANY MATTER ARISING OUT OF THIS AGREEMENT, THE DOCUMENTS EXECUTED IN CONNECTION HEREWITH, ANY WRITTEN AGREEMENT BETWEEN THE PARTIES HERETO, WHETHER NOW EXISTING OR HEREAFTER ARISING OR IN ANY WAY RELATED TO, CONNECTED WITH OR INCIDENTAL TO THE DEALINGS OF THE PARTIES HERETO OR TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE, TRIAL SHALL BE TO A COURT OF COMPETENT JURISDICTION AND NOT TO A JURY; LENDER, BORROWER AND EACH GUARANTOR HEREBY EXPRESSLY WAIVE ANY RIGHT THEY MAY HAVE TO A TRIAL BY JURY. ANY PARTY MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS AGREEMENT WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE PARTIES HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY. 8.21. TIME OF ESSENCE Time is of the essence for the performance the obligations set forth in this Agreement and the Loan Documents. (Intentionally Left Blank) -18- IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year first set forth above. BORROWER: AUTOINFO FINANCE OF VIRGINIA, INC. a Virginia corporation By: --------------------------------------------- Jason Bacher, Vice President (Date) GUARANTOR: AUTOINFO, INC. a Delaware corporation - -------------------------------------------- Jason Bacher, Vice President (Date) LENDER: FINOVA CAPITAL CORPORATION a Delaware corporation By: ----------------------------------------------- J. Steven Cammack, Vice President (Date) -19- - -------------------------------------------------------------------------------- FINOVA Capital Corporation Rediscount Finance PROMISSORY NOTE $42,000,000.00 PHOENIX, ARIZONA December 19, 1995 FOR VALUE RECEIVED, the undersigned ("MAKER"), hereby unconditionally promises to pay to the order of FINOVA CAPITAL CORPORATION, a Delaware corporation ("HOLDER"), at HOLDER's branch address at 13355 Noel Road, Suite 800, Dallas, Texas 75240, or at such other place as HOLDER may designate in writing, the principal sum of Forty-Two Million Dollars ($42,000,000.00) or so much thereof as shall be advanced or readvanced, with interest thereon at the Stated Interest Rate calculated on the average daily balance outstanding, as follows: 1. DEFINITIONS. When used herein, the following terms have the meanings given in this paragraph: A. Loan Agreement. The term "Loan Agreement" shall mean that certain Loan and Security Agreement of even date herewith, entered into by and between FINOVA CAPITAL CORPORATION, as Lender, and MAKER, as Borrower, and all amendments, substitutions, renewals and extensions thereof. All terms used herein which are not expressly defined herein shall have the meanings ascribed to them in the Loan Agreement. B. Maximum Rate. The term "Maximum Rate" shall mean the highest lawful rate of interest applicable to this NOTE. In determining the Maximum Rate, due regard shall be given to all payments, fees, charges, deposits, balances and agreements which may constitute interest or be deducted from principal when calculating interest. 2. PAYMENT. The principal and interest of this NOTE are payable as follows: A. Accrued but unpaid interest for each calendar month during the term hereof shall be due and payable monthly, in arrears, on the fifteenth (15th) day of the immediately succeeding calendar month commencing January 15, 1996. All outstanding principal together with all accrued and unpaid interest shall be due and payable, if not sooner paid on September 30, 1999. All payments received hereunder shall be applied as set forth in the Loan Agreement. B. Notwithstanding the foregoing, principal shall be immediately due and payable without written notice and demand from Lender in such amounts so that the outstanding balance hereunder does not, at anytime, exceed the amount of the Loan as determined pursuant to Section 2.1 of the Loan Agreement. The amount of such payments shall be determined by HOLDER pursuant to the terms of the Loan Agreement and based upon the principal balance of this NOTE then outstanding as determined pursuant to the Loan Agreement and as shown on the books and records of HOLDER, maintained in accordance with its usual practice, the entries of which being conclusive evidence of the existence and amounts as therein recorded. C. All of the principal hereunder may be prepaid in full at any time; however, such voluntary prepayments shall be subject to the voluntary prepayment provisions set forth in Article 2.6 of the Loan Agreement. 3. PRINCIPAL BALANCE. The unpaid principal balance of this NOTE at any time shall be the total amounts loaned or advanced hereunder by HOLDER, less the amount of payments or prepayments of principal made hereon by or for the account of MAKER. It is contemplated that by reason of payments or prepayments hereon there may be times when no indebtedness is owing hereunder; but notwithstanding such occurrences, this NOTE shall remain valid and shall be in force and effect as to loans or advances -1- made pursuant to and under the terms of this NOTE subsequent to each such occurrence. All loans or advances and all payments or prepayments made hereunder on account of principal or interest may be evidenced by HOLDER, or any subsequent holder, maintaining in accordance with its usual practice an account or accounts evidencing the indebtedness of MAKER resulting from all loans or advances and all payments or prepayments hereunder from time to time in the amounts of principal and interest payable and paid from time to time hereunder, in which event, in any legal action or proceeding in respect of this NOTE, subject to Section 2.8 of the Loan Agreement, the entries made in such account or accounts shall be conclusive evidence of the existence and amounts of the obligations of MAKER therein recorded. In the event that the unpaid principal amount hereof, at any time and for any reason, exceeds the maximum amount hereinabove specified, MAKER covenants and agrees to pay the excess principal amount immediately without notice or demand; such excess principal amount shall in all respects be deemed to be included among the loans or advances made pursuant to the other terms of this NOTE and shall bear interest at the rate hereinabove stated. 4. ADVANCES. This Promissory Note is the "Note" referred to in the Loan Agreement and the Holder is entitled to all the rights, remedies and benefits of the Lender thereunder. Reference is hereby made to the Loan Agreement for the terms and conditions under which this Note is to be made and to be repaid. 5. DEFAULT, REMEDIES. Upon the occurrence of any one or more of the Events of Default set forth in the Loan Agreement, at the option of the holder of this NOTE, the entire unpaid principal balance and accrued and unpaid interest hereon shall at once become due and payable without notice or demand and the Holder may foreclose and enforce all liens and security interests securing this NOTE. If this NOTE is not paid when due, whether at maturity or by acceleration, or if it is collected through a bankruptcy, probate, or other judicial proceeding, whether before or after maturity, MAKER agrees to pay attorney's fees, together with all actual expenses of collection and litigation and costs of court incurred by the Holder, whether or not suit is actually filed or not. 6. WAIVER. MAKER and all other makers, signers, sureties, guarantors and endorsers of this NOTE waive demand, presentment, notice of dishonor, notice of intent to demand or accelerate payment hereof, diligence in the collecting, grace, notice and protest, and agree to one or more extensions for any period or periods of time and partial payments, before or after maturity, without prejudice to HOLDER. 7. SECURITY. This NOTE is secured by certain security interests as set forth in the Loan Agreement. 8. CONTROLLING AGREEMENT. The contracted for rate of interest of the Loan without limitation, shall consist of the following: (i) the Stated Interest Rate, calculated and applied to the principal balance of the Note in accordance with the provisions of this Note and the Loan Agreement; (ii) interest after event of default or due date, calculated and applied to the amounts due under this Note in accordance with the provisions thereof; and (iii) all Additional Sums (as herein defined), if any. Borrower agrees to pay an effective contracted for rate of interest which is the sum of the above-referenced elements. All fees, charges, goods, things in action or any other sums or things of value (other than amounts described in the immediately previous paragraph), paid or payable by Borrower (collectively, the "Additional Sums"), whether pursuant to this Note, the Loan Agreement or any other documents or instruments in any way pertaining to this lending transaction, or otherwise with respect to this lending transaction, that under any applicable law may be deemed to be interest with respect to this lending transaction, for the purpose of any applicable law that may limit the maximum amount of interest to be charged with respect to this lending transaction, shall be payable by Borrower as, and shall be deemed to be, additional interest and for such purposes only, the agreed upon and "contracted for rate of interest" of this lending transaction shall be deemed to be increased by the rate of interest resulting from the inclusion of the Additional Sums. It is the intent of the parties to comply with the usury law ("Applicable Usury Law") applicable pursuant to the terms of the preceding paragraph or such other usury law which is applicable if the law chosen by the parties is not applicable. Accordingly, it is agreed that notwithstanding any provisions to the contrary in this NOTE, or in any of the documents securing payment hereof or otherwise relating hereto, in no event shall this NOTE or such documents require the payment or permit the collection of interest in excess of the maximum contract rate permitted by the Applicable Usury Law. In the event (a) any such excess of interest otherwise would be contracted for, charged or received from Maker or otherwise in connection with the loan evidenced hereby, or (b) the maturity of the indebtedness evidenced by this NOTE is accelerated in whole or in part, or (c) all or part of the principal or interest of -2- this NOTE shall be prepaid, so that under any of such circumstances the amount of interest contracted for, shared or received in connection with the loan evidenced hereby, would exceed the maximum contract rate permitted by the Applicable Usury Law, then in any such event (1) the provisions of this paragraph shall govern and control, (2) neither Maker nor any other person or entity now or hereafter liable for the payment hereof will be obligated to pay the amount of such interest to the extent that it is in excess of the maximum contract rate permitted by the Applicable Usury Law, (3) any such excess which may have been collected shall be either applied as a credit against the then unpaid principal amount hereof or refunded to Maker, at Holder's option, and (4) the effective rate of interest will be automatically reduced to the maximum amount of interest permitted by the Applicable Usury Law. It is further agreed, without limiting the generality of the foregoing, that to the extent permitted by the Applicable Usury Law; (x) all calculations of interest which are made for the purpose of determining whether such rate would exceed the maximum contract rate permitted by the Applicable Usury Law shall be made by amortizing, prorating, allocating and spreading during the period of the full stated term of the loan evidenced hereby, all interest at any time contracted for, charged or received from Maker or otherwise in connection with such loan; and (y) in the event that the effective rate of interest on the loan should at any time exceed the maximum contract rate allowed under the Applicable Usury Law, such excess interest that would otherwise have been collected had there been no ceiling imposed by the Applicable Usury Law shall be paid to Holder from time to time, if and when the effective interest rate on the loan otherwise falls below the maximum amount permitted by the Applicable Usury Law, to the extent that interest paid to the date of calculation does not exceed the maximum contract rate permitted by the Applicable Usury Law, until the entire amount of interest which would have otherwise been collected had there been no ceiling imposed by the Applicable Usury Law has been paid in full. Maker further agrees that should the maximum contract rate permitted by the Applicable Usury Law be increased at any time hereafter because of a change in the law, then to the extent not prohibited by the Applicable Usury Law, such increases shall apply to all indebtedness evidenced hereby regardless of when incurred; but, again to the extent not prohibited by the Applicable Usury Law, should the maximum contract rate permitted by the Applicable Usury Law be decreased because of a change in the law, such decreases shall not apply to the indebtedness evidenced hereby regardless of when incurred. 9. APPLICABLE LAW. This NOTE shall be construed in accordance with the laws of the State of Arizona and the laws of the United States applicable to transactions in the State of Arizona. 10. NO WAIVER. No delay on the part of the HOLDER in the exercise of any power or right under this NOTE, or under the LOAN AGREEMENT or any other instrument executed in connection herewith, shall operate as a waiver thereof, nor shall a single or partial exercise of any power or right preclude other or further exercise thereof or exercise of any other power or right. Enforcement by HOLDER of any security for the payment hereof shall not constitute any election by it of remedies so as to preclude the exercise of any other remedy available to it. 11. SUCCESSORS, ASSIGNS. The term "HOLDER" shall include all of HOLDER's successors and assigns to whom the benefits of this NOTE shall inure. MAKER: AutoInfo Finance of Virginia, Inc., a Virginia corporation By:_________________________________ Jason Bacher, Vice President -3- - -------------------------------------------------------------------------------- FINOVA Capital Corporation Rediscount Finance GUARANTY (Continuing/Unlimited) TO: FINOVA CAPITAL CORPORATION Ladies/Gentlemen: 1. THE GUARANTEED DEBT. In consideration of any and all loans, advances, acceptances and extensions of credit made by FINOVA CAPITAL CORPORATION, a Delaware corporation, ("FINOVA") to, for the account of, or on behalf of AutoInfo Finance of Virginia, Inc., a Virginia corporation, ("Borrower") and as an inducement for FINOVA to make future loans, advances, acceptances and extensions of credit to, for the account of, or on behalf of Borrower, the undersigned (the "Guarantor"), absolutely and unconditionally, guarantees to FINOVA the punctual payment in full at maturity, whether due pursuant to acceleration or otherwise, of the principal, interest and other sums due or to become due from Borrower to FINOVA at any time and from time to time from the date of this Guaranty until termination. The guaranteed debt includes, without limitation, all obligations, indebtedness and liability of Borrower to FINOVA, whether now existing or hereafter incurred; whether direct, indirect or contingent; and whether otherwise guaranteed or secured. All of these obligations, indebtedness and liability are hereinafter referred to as the "debt". Guarantor hereby acknowledges that it will receive a materially financial and economic benefit from the extension of credit by FINOVA to Borrower. 2. DURATION. This Guaranty shall operate as a continuing guaranty and shall terminate as to the Guarantor only upon written notice signed by such Guarantor and actually received by FINOVA, effective as of the opening of business on the day following the date of receipt. Such termination shall be effective only as to that portion of the debt incurred after such termination date, and this Guaranty shall remain in full force and effect as to all debt incurred before that time. Regardless of when a renewal or extension of pre-termination debt occurs (with or without adjustment of interest rate or other terms), the debt is deemed to have been incurred prior to termination to the extent of the renewal or extension, and to be fully covered by this Guaranty. This Guaranty shall be binding upon the undersigned Guarantor and its successors and assigns and shall inure to the benefit of FINOVA and its successors and assigns. 3. NO CONDITIONS. This is an unconditional Guaranty; it is unlimited as to time, until termination. The Guarantor warrants that there are no conditions, oral or otherwise, on the effectiveness of this Guaranty. This writing constitutes the entire agreement of the parties regarding the Guaranty. 4. DISCLOSURE OF CONDITION OF BORROWER. The Guarantor warrants and represents to FINOVA that: (a) this Guaranty is executed at the Borrower's request; (b) the Guarantor has established adequate means of obtaining from the Borrower on a continuing basis financial and other information pertaining to the Borrower's affairs or business; and (c) the Guarantor is now and will be familiar with the affairs, business, operation and condition of the Borrower and its assets. The Guarantor hereby waives any duty on the part of FINOVA to disclose to the Guarantor any matter relating to the affairs, business, operation or condition of the Borrower and its assets now known or hereafter known to FINOVA during the life of this continuing Guaranty. With respect to any debt of the Borrower to FINOVA, FINOVA need not inquire into the powers of the Borrower or the officers, directors or agents acting or purporting to act on its behalf, and any debt created in reliance upon the professed exercise of such powers shall be guaranteed hereunder. -1- 5. WAIVERS REGARDING THE GUARANTEED DEBT. The Guarantor expressly waives the following: notice of the incurring of debt by the Borrower; notice of default on the debt or intent to accelerate; notice of acceleration; notice of intent to accelerate; the acceptance of this Guaranty by FINOVA; presentment and demand for payment, protest, notice of protest and notice of dishonor or nonpayment of any instrument evidencing debt of the Borrower; any right to require the pursuit of any remedies against the Borrower or any other Guarantor, including commencement of suit, before enforcing this Guaranty (this is a guaranty of payment, not a guaranty of collection); any right to have security or the right of setoff applied before enforcing this Guaranty; and any and all right of subrogation to FINOVA's rights against the Borrower, other guarantors or any other person or entity; all diligence in collection and failure or delay by FINOVA in protection or exercise of FINOVA's rights against Borrower; and any other action or any other encumbrance whatsoever which might constitute a defense to the enforcement of this Guaranty. The Guarantor hereby consents and agrees that renewals and extensions of time of payment (including interest rate adjustments), surrender, release, exchange, substitution, dealing with or taking of additional collateral, modifying any obligations of, taking or release of other guarantors, abstaining from taking advantage of or realizing upon any collateral security or other guaranty and any and all other forbearances or indulgences granted by FINOVA to the Borrower or any other party may be made, granted or effected by FINOVA without notice to the Guarantor and without affecting in any manner Guarantor's liability hereunder. The Guarantor hereby expressly consents to any impairment of collateral including, but not limited to, failure to perfect a security interest and release of collateral. Any adjustment or compromise may be made by FINOVA with the Borrower or any other party to the debt, and a lesser sum than the face amount thereof may be accepted in full payment and discharge. Any of the collateral or other security granted by the Borrower or any other party which FINOVA may hold or which may come to it or its possession may be released or otherwise dealt with by FINOVA in all respects as if this Guaranty were not in existence and the obligation of the Guarantor shall in no way be affected thereby. The Guarantor hereby waives and forgoes any right in respect of any such action by FINOVA. 6. FINOVA'S COLLECTION RIGHTS AGAINST GUARANTOR. The Guarantor agrees to pay to FINOVA any and all costs, expenses and reasonable attorney's fees paid or incurred by FINOVA in collecting or endeavoring to collect the debt of the Borrower or in enforcing or endeavoring to enforce this Guaranty, unless recovery of attorney's fees is invalid under applicable state or federal law. In addition to its other rights and remedies under this Guaranty, FINOVA may require, at FINOVA's option, collateral security to support the Guarantor's obligations upon Borrower's default of any loan agreement with FINOVA and that FINOVA reasonably deems itself insecure; if such a requirement is imposed, now or in the future, FINOVA shall have any rights and remedies contained in any mortgage, security agreement or other document executed by the Guarantor. If the Guarantor refuses to execute such documents, the debt of the Borrower shall, for the purposes of this Guaranty, be deemed to have matured. 7. BANKRUPTCY OF BORROWER. Guarantor agrees that this Guaranty shall not be discharged except (subject to the limitations expressly contained herein) by complete performance of Borrower's obligations to FINOVA and further agree that the obligations of the Guarantor hereunder shall not be discharged, reduced or affected in any way by any receivership, insolvency, bankruptcy or other proceedings affecting the Borrower or any of its assets or the release or discharge of the Borrower from the performance of any obligations to FINOVA, whether by operation of law or otherwise or any other cause, whether similar or dissimilar to the foregoing. 8. ASSIGNMENT. FINOVA may assign its rights hereunder in whole or in part and upon any such assignment all the terms and provisions of this Guaranty shall inure to the benefit of such assignee, to the extent so assigned. 9. MATURITY, PAYMENT. The Guarantor agrees that if the maturity of any of the debt is accelerated by bankruptcy or otherwise, such maturity shall also be deemed accelerated for the purpose of this Guaranty without demand or notice of any kind to the Guarantor. Guarantor further agrees that, to the extent that the Borrower or any other Person makes a payment to FINOVA on account of the Indebtedness, or FINOVA receives any proceeds of collateral, which payment or any part thereof is subsequently invalidated, declared to be fraudulent or preferential, set aside, or otherwise required to be repaid to the Borrower or any other party, including without limitation, it's estate, trustee or receiver, under any bankruptcy, insolvency, or other similar law, whether state or federal or under any common law or equitable claim; then to the extent of such payment or repayment, the obligation or part thereof which has been paid, reduced or satisfied by such amount shall be reinstated and continued in full force and effect as of the date such initial payment, reduction or satisfaction occurred. The Guarantor shall defend and indemnify FINOVA of and from any claim or loss under this paragraph including FINOVA's attorneys' fees and expenses in the defense of any such action or suit. The Guarantor will, -2- forthwith upon notice from FINOVA of the Borrower's failure to pay any debt at maturity, pay to FINOVA at FINOVA's principal offices the amount due and unpaid by the Borrower and guaranteed hereby. The failure of FINOVA to give this or any notice shall not in any way release the Guarantor hereunder. 10. NO ORAL MODIFICATIONS. This Guaranty Agreement shall not be suspended, amended, released, terminated or modified in any manner except by an instrument in writing signed by all parties to be bound. 11. WAIVER OF DEFAULT. No wavier by FINOVA of any default of any provision of this Guaranty Agreement shall be deemed a waiver of any other pre-existing or subsequently existing default, nor shall any such waiver by FINOVA be deemed a continuing waiver. No delay or omission by FINOVA in exercising any right hereunder, at any law or in equity, or otherwise, shall impair any such right or be construed as a waiver thereof, acquiescence therein, nor shall any single or partial exercise of any right preclude other or further exercise of any other right that may exist or that may thereafter exist. 12. INDEMNIFICATION. In the event of the breach of this Guaranty Agreement, by Guarantor, Guarantor hereby agrees to indemnify and hold FINOVA harmless from any and all resulting claims and damages, including attorney's fees, and all other costs. 13. GOVERNING LAW. This Guaranty is executed and delivered by Guarantor and is performable in Maricopa County, Arizona, and shall be governed by and construed in accordance with the laws of the State of Arizona. 14. JURISDICTION AND VENUE. Any suit, action or proceeding against Guarantor with respect to this Agreement, the Loan Documents or any judgment entered by any court in respect thereof, may be brought in any local, state or federal court in the State of Arizona located in Maricopa County and Guarantor hereby submits to the nonexclusive jurisdiction of such courts for the purpose of any such suit, action or proceeding. Guarantor hereby further irrevocably consents to the service of process in any suit, action or proceeding in said court by the mailing thereof by Lender by registered or certified mail, postage thereon prepaid, to Guarantor at the following address, 536 West 21st Street, Norfolk, Virginia 23517. Guarantor hereby irrevocably waives any objections which they may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement or the Loan Documents brought in any local, state or federal court of the State of Arizona located in Maricopa County and hereby further irrevocably waive any claim that any such suit, action or proceeding brought in any such court has been brought in any inconvenient forum. 15. WAIVER OF RIGHT TO TRIAL BY JURY. GUARANTOR AND FINOVA HEREBY COVENANT AND AGREE THAT IN ANY SUIT, ACTION OR PROCEEDING IN RESPECT OF ANY MATTER ARISING OUT OF THIS AGREEMENT, THE LOAN DOCUMENTS OR TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE, TRIAL SHALL BE TO A COURT OF COMPETENT JURISDICTION AND NOT TO A JURY; GUARANTOR HEREBY EXPRESSLY WAIVES ANY RIGHT THEY MAY HAVE TO A TRIAL BY JURY. ANY PARTY MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS AGREEMENT WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE PARTIES HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY. -3- 16. ADVICE OF COUNSEL. Guarantor acknowledges that it has been advised by counsel with respect to the transaction governed by this Agreement and specifically with respect to the terms of Sections 13, 14 and 15. IN WITNESS WHEREOF, this Guaranty has been executed and delivered to FINOVA by the undersigned Guarantor on this 19th day of December, 1995. AutoInfo, Inc. By:____________________________________ Jason Bacher, Vice President THE STATE OF ARIZONA ) ) COUNTY OF MARICOPA ) BE IT REMEMBERED, that on this 19th day of December, 1995, before me, the undersigned, a Notary Public within and for the County and State aforesaid, came Jason Bacher, who is personally known to me to be the same person who executed the within instrument of writing, and duly acknowledged the execution of the same. IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal, the day and year last above written. __________________________________________ NOTARY PUBLIC, STATE OF ARIZONA My commission expires:____________________ -4- EX-10.S 3 PURCHASE AGREEMENT PURCHASE AGREEMENT THIS PURCHASE AGREEMENT made this 6th day of December, 1995, by and between CHARLIE FALK'S AUTO WHOLESALE, INCORPORATED (hereinafter referred to as "CFAW"), a Virginia corporation, and AUTOINFO FINANCE OF VIRGINIA, INC., a Virginia corporation (hereinafter referred to as "AI FINANCE"). WITNESSETH: WHEREAS, CFAW is in the business of selling automobiles and other vehicles (collectively, the "Vehicles") to retail customers; and WHEREAS, AI FINANCE is in the business of purchasing retail installment contracts secured by Vehicles; and WHEREAS, CFAW desires to offer to sell to AI FINANCE, upon the terms and conditions set forth in this Agreement, retail installment sale contracts, security agreements, chattel mortgages and/or other such title retention and lien instruments (hereinafter collectively referred to as "Contracts" or, singularly, as a "Contract") which relate to the sale by CFAW at retail of Vehicles; and WHEREAS, AI FINANCE desires to purchase from time to time certain of the Contracts acceptable to it in its sole discretion as set forth in this Agreement; and WHEREAS, CFAW and AI FINANCE wish to set forth the terms and conditions upon which CFAW will offer and sell certain of the Contracts and AI FINANCE will purchase certain of the Contracts, all as set forth herein. NOW, THEREFORE, it is hereby agreed as follows: 1. Term. The term of this Agreement shall be for a period of ten (10) years commencing on the date first written above (the "Term"). 2. Fee. In consideration for CFAW entering into this Agreement AI Finance shall pay to CFAW on the date hereof the sum of One Million Five Hundred Thousand ($1,500,000) Dollars. 3. Obligation to Offer Contracts to AI FINANCE. During the Term of this Agreement, CFAW shall exclusively offer at least ninety (90%) percent of the Contracts it enters into or acquires to AI FINANCE for purchase. CFAW shall provide AI FINANCE with all reasonable documentation necessary for AI FINANCE to evaluate each such Contract in accordance with the "Credit Criteria" annexed hereto as Exhibit A (the "Credit Criteria"). In the event that AI FINANCE elects not to purchase any Contract, CFAW shall have the right to offer such Contract for purchase by third parties; provided, however, that AI FINANCE shall have a right of first refusal to purchase any such Contract it previously elected not to purchase, on the same terms and conditions that a third party has proposed to purchase such Contract, upon two (2) business days notice to it in writing of CFAW's intent to sell such Contract. CFAW shall provide AI FINANCE with a copy of its monthly sales log, in arrears, on or before the fifteenth day of each month during the Term. 4. Obligation of AI FINANCE. AI FINANCE shall consider and evaluate each Contract presented to it by CFAW in a commercially reasonable manner consistent with past practice, and AI FINANCE shall advise CFAW within two (2) business days from its receipt of all reasonable documentation necessary to evaluate a Contract whether it elects to purchase such Contract. AI FINANCE shall purchase at least eighty-five (85%) percent of the Contracts presented by CFAW which are in strict compliance with the Credit Criteria (a "Conforming Contract"). AI FINANCE shall provide CFAW with an aging report of Down-Payment Notes (as herein defined) on the first and fifteenth day of each month during the Term. 5. Terms of Purchase. (a) Upon the acceptance by AI FINANCE of a Contract, CFAW shall sell, transfer and assign to AI FINANCE all of its rights, title and interest in and to such Contract together with any notes, guarantees, security agreements, chattel mortgages and other instruments associated with the Contract, all moneys due under the Contract and all of CFAW's rights and remedies under or in connection with the Contract. The assignment and transfer hereunder shall not constitute an assignment of CFAW's obligations as a seller of the automobiles. (b) The Purchase Price for each Contract purchasable by AI FINANCE hereunder shall be the lesser of (i) the sum of (a) eighty (80%) percent of the face value of such Contract after deducting any fees charged for taxes, title and transfer (the 2 "TTT Charges") and (b) 100% of the TTT Charges; or (ii) the sum of (a) five hundred fifty-two ($552.00) dollars above the clean wholesale Black Book value of the Vehicle underlying the Contract and (b) 100% of the amount paid for a CFAW warranty product on the Vehicle, if any. The face value of the Contract may include warranty products included in the Contract based upon a schedule of retail prices for such products to be agreed upon by the parties hereto on a periodic basis (the present retail price for the CFAW warranty is $690.00); provided, however that the value of the CFAW warranty shall be excluded from the Purchase Price under (i) and (ii) above if, in AI FINANCE's reasonable opinion, CFAW is not providing adequate warranty service. All conveyances of the Contracts and Documents (as herein defined), as contemplated herein, shall be effective upon payment of the Purchase Price. (c) In the event that AI FINANCE purchases a Contract for which a down-payment was tendered in the form of a promissory note (a "Down-Payment Note"), then AI FINANCE shall, in addition to purchasing the Contract, purchase the Down-Payment Note for eighty (80%) percent of its face value. CFAW may never hold any commercial paper or other debt instruments of any nature whatsoever (including but not limited to warranty and TTT notes) on a Vehicle with respect to which AI FINANCE purchased the Contract. No Down-Payment Note which CFAW enters into shall (a) be for a term greater than ninety (90) days; (b) be in a principal amount greater than $1,000.00; or (c) bear interest. All late fees and other charges due pursuant to a Down-Payment Note transaction shall be due to and for the benefit of AI FINANCE. 6. Purchase Documentation. The Contracts purchased by AI FINANCE shall be evidenced by the documents (the "Documents") set forth in Exhibit B attached hereto. The Documents shall be executed and delivered and otherwise be in form and content satisfactory to AI FINANCE and CFAW. The assignment and conveyance of the Contracts shall be in the form of Exhibit C attached hereto. 7. Repurchase Obligations of CFAW. All Conforming Contracts purchased by AI FINANCE hereunder, or purchased by Falk Finance Company, Inc. ("FFC") prior to the date hereof, shall be subject to a full repurchase obligation by CFAW (the "Repurchase Obligation") at all times prior the payment by the borrower of ten (10%) percent of the cash price of the Vehicle (as set forth on line 1 of the Buyer Sheet) (i.e., if a ten (10%) percent cash down-payment is made, there shall be no Repurchase Obligations pursuant to thisParagraph, but if less than ten (10%) percent is tendered as a down-payment in either (i) cash, (ii) actual cash value of a trade-in, or (iii) as a result of payments made pursuant to Down-Payment Notes, then the Contract shall be subject to the Repurchase Obligation until the full ten (10%) percent has been actually paid). Pursuant to its Repurchase Obligation, CFAW shall repurchase each and every Contract subject thereto for a price equal to one hundred (100%) percent of the outstanding principal balance due pursuant to (a) the Contract, and (b) the Down-Payment Note, if applicable; plus eighty (80%) percent of the prorated portion of any 3 warranty product included in such Contract (collectively, the "Repurchase Price"); provided, however, that the Repurchase Price shall never exceed the amount originally paid to CFAW by AI FINANCE (or FFC) in connection with such Contract. All Contracts subject to the Repurchase Obligation shall be repurchased for cash by CFAW immediately upon presentation of the transfer documentation set forth on Exhibit D hereto by AI FINANCE and physical receipt of the Vehicle underlying the Contract, following a default under such Contract. For the purposes of this Agreement "actual cash value" shall mean the amount actually realizable upon the disposition of a Vehicle. From and after the date hereof, the Repurchase Obligation with respect to any Contract shall be evidenced by CFAW's acknowledgment thereof on the Contract. 8. Recourse Obligations of CFAW. All Contracts purchased by AI FINANCE which do not strictly conform to the Credit Criteria (a "Non-Conforming Contract") shall be full recourse to CFAW during any period in which an outstanding balance remains due and owing under such Contract (a "Recourse Obligation"). Additionally, CFAW acknowledges that certain Contracts purchased by FFC prior to the date hereof are recourse to CFAW as evidenced by CFAW's acknowledgment thereof on such Contracts. Pursuant to its Recourse Obligation, CFAW shall, upon a default under each such Contract subject thereto, pay to AI FINANCE an amount equal to one hundred (100%) percent of the outstanding principal balance due pursuant to (a) the Contract, and (b) the Down-Payment Note, if applicable, plus eighty (80%) percent of the prorated portion of any warranty product included in such Contract (collectively, the "Recourse Amount"); provided, however, that the Recourse Amount shall never exceed the amount originally paid to CFAW by AI FINANCE (or FFC) in connection with such Contract. The payment of a Recourse Amount shall be made in cash by CFAW immediately upon presentation of the transfer documentation set forth on Exhibit D hereto by AI FINANCE, following a default under such Contract. If AI FINANCE is willing to purchase a Non-Conforming Contract pursuant to the provisions of this Paragraph it shall advise CFAW thereof. In such event CFAW may either (a) accept the recourse nature of the transaction, or (b) withdraw the Contract for purchase consideration by AI FINANCE and offer it to unaffiliated third parties for purchase; provided, however, that AI FINANCE shall have a right of first refusal to purchase any such Contract on the same terms and conditions that a third party has proposed to purchase such Contract, upon two (2) business days notice to it in writing of CFAW's intent to sell such Contract. From and after the date hereof, CFAW's recourse obligation with respect to a Contract purchased shall be evidenced by CFAW's acknowledgment thereof on the face of the Contract. 9. Remarketing Services. AI FINANCE may offer to CFAW the option to purchase any Vehicle repossessed by AI FINANCE which relates to a Contract purchased by FFC or AI FINANCE. Upon repossession, AI FINANCE shall make the repossessed Vehicle available to CFAW for inspection. CFAW shall have seven (7) business days in which to advise AI FINANCE whether it elects to purchase such Vehicle. If CFAW elects not to purchase the Vehicle, and such Vehicle is stored on a CFAW lot, then AI FINANCE shall have seven (7) business days to remove the 4 Vehicle from CFAW's lot, during which time it shall be stored without charge. In the event CFAW elects to purchase the Vehicle, it shall pay to AI FINANCE for each Vehicle purchased by it one hundred (100%) percent of the average wholesale Black Book value, mileage adjusted, as of the date of repossession. Such payment shall be made on the earlier of (i) the date the Vehicle is actually sold, or (ii) the seventy-fifth (75th) day following CFAW's acceptance of the Vehicle for purchase. Each of AI FINANCE and CFAW acknowledge that as the date hereof there is an inventory of automobiles of AI FINANCE (or FFC) which are located on CFAW lots. CFAW shall have ten (10) business days from the date of this Agreement in which to advise AI FINANCE whether it elects to purchase each such Vehicle. If CFAW elects not to purchase any such Vehicle, and such Vehicle is stored on a CFAW lot, then AI FINANCE shall have ten (10) business days to remove the Vehicle from CFAW's lot, during which time it shall be stored without charge. With respect to each Vehicle CFAW elects to purchase, it shall pay to AI FINANCE with respect to such Vehicle one hundred (100%) percent of the average wholesale November 1995 Black Book value, mileage adjusted. Such payment shall be made on the earlier of (i) the date the Vehicle is actually sold, or (ii) the one-hundred twentieth (120th) day following CFAW's acceptance of the Vehicle for purchase. CFAW shall provide AI Finance on a weekly basis during the Term hereof with a list reflecting all Vehicles held by CFAW for resale. In the event that AI FINANCE elects to have CFAW sell for AI FINANCE a vehicle at the CFAW auction, then AI FINANCE shall pay to CFAW $120.00 in connection with the storage of such vehicle. In the event that AI FINANCE elects to have CFAW sell a Vehicle for AI FINANACE at an auction other then the CFAW auction then AI FINANCE shall pay to CFAW ten (10%) percent of the strike price at such auction as a handling and commission fee, plus $25.00 for local transportation of the Vehicle. No other fees or amounts shall be due from AI FINANCE to CFAW (or any affiliated party) in connection with the remarketing of Vehicles. 10. Collection Agent. CFAW shall during the Term hereof, upon the reasonable request of AI FINANCE, without charge, accept payments on AI FINANCE's behalf on account of Contracts purchased hereunder or purchased by FFC. AI FINANCE shall provide CFAW with all forms, logs and other documentation necessary to perform this service. CFAW's sole obligation shall be to accept such payments and use reasonable commercial efforts to safeguard the payments until they are collected daily by AI FINANCE. Except upon written instruction for AI FINANCE, CFAW shall not deposit any such payments. 11. Modification of Credit Criteria. AI FINANCE shall have the right, from time to time during the Term, upon written notice to CFAW, to reasonably amend the Credit Criteria if AI FINANCE's first lien loss ratio exceeds 22.39%. 12. Representations of CFAW. CFAW represents and warrants to AI FINANCE as follows: 5 (a) CFAW is a corporation duly organized, validly existing and in good standing under the laws of the Commonwealth of Virginia and has the corporate power and is duly qualified to carry on its business as it is now conducted. (b) The execution, delivery and performance of this Agreement and all documents related thereto by CFAW and the consummation of the transactions contemplated herein have been duly and validly authorized by CFAW. (c) This Agreement is a valid, binding and enforceable obligation of CFAW enforceable against CFAW in accordance with its terms except to the extent such enforceability may be limited by applicable bankruptcy or insolvency laws, or creditor rights generally. The consummation of the transaction contemplated by this Agreement will not result in a breach of any term or provision of the Articles of Incorporation or Bylaws of CFAW or result in the breach of any term or provision of, or conflict with or constitute an event of default under, any agreement, document or instrument to which CFAW or its property is subject. The execution and delivery of this Agreement and the performance of the transaction contemplated by this Agreement will not result in the violation of any law, rule, regulation, order, judgment or decree to which CFAW or its property is subject. (d) There is no action, suit, proceeding or investigation pending or, to the knowledge of CFAW, threatened against or affecting CFAW before any court, arbitrator or administrator of a government body which would or may result in any material adverse change in the business, properties or condition of CFAW, or which might otherwise affect the collectibility of any of the Contracts or the Documents. (e) With regard to each Contract sold hereunder, the Contract, including the related Documents, is, and will be, legal, valid, binding and enforceable in accordance with its terms (except as such enforceability may be limited by bankruptcy, insolvency or similar laws affecting the enforceability of creditors' rights generally and by equitable principles of general applicability) and is and will remain free of all claims, counterclaims, disputes and offsets; the Contract and related Documents delivered to AI FINANCE will contain the entire agreement of the parties thereto; to the best of CFAW's knowledge, the Contract and the property and/or services therein described will comply with all applicable laws and regulations; AI FINANCE's security interest in the property specified in the Contract will be a duly perfected, valid and enforceable first priority security interest in such property; and the insurance covering the property specified in the Contract is, and will be, in full force and effect. (f) CFAW has full title and right to sell and assign the Contracts and Documents and such Contracts and Documents are, and will be, conveyed free and clear of all liens and encumbrances whatsoever. 6 13. Indemnification. CFAW will indemnify, defend and hold harmless AI FINANCE from any and all losses (including, without limitation, inability to collect the amount outstanding under any contract), damages, costs, fines and expenses, including reasonably attorneys' fees arising out of whether incurred in connection with third party claims and defenses or in connection with enforcing this Agreement),arising out of (i) any claim, defense, counterclaim, dispute, action or proceeding brought or alleged on account of any warranty, express or implied, agreement or undertaking either made or alleged to have been made by CFAW or any other person or firm in connection with the sale, servicing or repair of the subject matter of any Contract, or (ii) any failure (whether or not known to CFAW) of any Contract or the property or services therein described to comply with all applicable laws ad regulations; and (iii) any breach of any agreement, representation or warranty made by CFAW herein or in the form of Assignment attached hereto in Exhibit C. The indemnification provided for herein shall not be limited to the outstanding balance under the Contracts, but shall include all losses, damages, costs, fines and expenses incurred by AI FINANCE and shall be entitled to assume the defense of any claim for which indemnification is provided under this Agreement, using counsel selected by CFAW and approved by AI FINANCE, which approval shall not be unreasonably withheld. These indemnification rights shall be in addition to all other rights and remedies under this Agreement including without limitation any right of AI FINANCE to require that CFAW repurchase a Contract. 14. Covenant Relaxation Provisions. In the event AI FINANCE fails to purchase eighty-five (85%) percent of the Conforming Contracts offered to it in any calendar month during the Term hereof, and fails to purchase eighty-five (85%) of the Conforming Contracts in each of the following two (2) calendar months (a "AI FINANCE Non-Performance Event"), then the covenant not to compete (the "Covenant") contained in the Asset Purchase Agreement of even date herewith between, inter alia, AI FINANCE and FFC (the "Asset Purchase Agreement") shall be modified and reformed as follows. If the AI FINANCE Non-Performance Event occurs during a period when Charles E. Falk, Sr. is a guarantor of the "Finova Debt" (as defined in the Asset Purchase Agreement) (the "Guarantee Obligation") then the Covenant shall terminate with respect to Charles E. Falk, Sr., Charles E. Falk, Jr., and any entity controlled by either of them (collectively, a "Related Party"). If the AI FINANCE Non-Performance Event occurs during the first five (5) years of the Term hereof and the Guarantee Obligation has ceased, then the Covenant shall be modified to permit CFAW to offer Conforming Contracts to a Related Party without first offering such Contracts to AI FINANCE as required pursuant to the terms of this Agreement (provided, however, that all other provisions of the Covenant shall continue in full force and effect except to the extent necessary to permit the foregoing). If the AI FINANCE Non-Performing Event occurs after the fifth year of the Term hereof, then the Covenant shall terminate with respect to any Related Party. 15. Set-Off. AI FINANCE shall have the right to set-off against the purchase price of any Contract any amounts then due and owing from CFAW to AI FINANCE 7 hereunder. Notwithstanding the foregoing, prior to setting off any amount due to it, AI Finance shall request in writing from CFAW any amount then due and owing to AI Finance, which shall be paid by CFAW within five (5) days of such notice. AI Finance shall have the absolute right to withhold payment to CFAW on account of any Contract as long as CFAW owes AI FINANCE any amounts hereunder. 16. Miscellaneous. (a) This Agreement and the Exhibits referred to herein constitute the entire Agreement between the parties with respect to the subject matter hereof, and all prior understandings, whether written or oral, with respect to such subject matter are superseded by this Agreement. No modification or variation of this Agreement shall be deemed valid unless made in writing and signed by both CFAW and AI FINANCE. The terms of this Agreement shall control in the event of any inconsistency between the term of this Agreement and any preprinted terms of assignment that may appear on a Contract form. (b) This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Virginia. (c) This Agreement shall be binding upon any successor or assignee of CFAW or any successor or assignee of any significant portion of CFAW's business whether by stock purchase, asset transfer, joint venture, or otherwise. (d) Each obligation of CFAW hereunder which exists as of the date that the Term expires shall survive such termination until each such obligation is performed or terminates as a matter of fact. (e) For the purposes of this Agreement, any obligation of CFAW shall be deemed to be an obligation of CFAW and any company controlled by, controlling or under common control with CFAW. WITNESS the following signatures: CHARLIE FALK'S AUTO WHOLESALE INCORPORATED By: ----------------------------------- AUTOINFO FINANCE OF VIRGINIA,INC. By: ----------------------------------- 8 EXHIBIT A Newco Credit Criteria October 1995 SECTION I - GENERAL TERMS Contracts financed by Newco must meet the following conditions: 1. Rate: All contracts must be written with a target interest rate of twenty-four (24%) percent. Newco will earn interest using the Rule of 78's as it relates to customer accounts. 2. Eligible: Newco will finance cars, vans, and trucks that are no older than eight model years and Warranty Contracts. Currently this includes 1988 and newer models. 3. Terms: The maximum term for the current model year and four prior years will be 48 months. Currently 1994 is one year old, 1993 is two years old, 1992 is three years old and 1991 is four years old. The maximum term for model years five years old or greater shall be 42 months. 4. Minimum Down Payment: The minimum down payment is 10% of the Cash Price of the vehicle, but not less than $500 (as reflected on line one of the Buyers Order Sheet). However, Newco may require an additional down payment depending upon the strength of the individual transaction. The Downpayment may consist of: - Cash. - Trade - Ins: Newco will use Black Book Used Car Market Guide or appraisal report (ACV), whichever is less, to determine the acceptable value for a trade-in. The appraisal report (ACV) must be realizable by CFAW. - Downpayment Notes: With a term no longer than 90 days from sale of car and not to exceed $1,000.00. 5. Payment Due Date: A maximum of 45 days from Date of Contract is acceptable. 6. Casualty Insurance: Casualty insurance cannot be financed in the contract. The borrower must provide evidence of insurance coverage to Newco, Newco will accept a maximum of $250.00 comprehensive and collision deductible. The borrower must provide: 1. A signed agreement to provide insurance and evidence of a pre- existing policy on which the new vehicle is to be added; or 2. A signed agreement to provide insurance which lists: insurance company name, company agent, address, and phone number; and 3. All casualty insurance will be verified prior to delivery of the vehicle. Vehicle must be covered by Physical Damage Insurance at the time of contract funding. 7. Warranty Contracts: Warranty Contracts are an approved product that can be financed in the contract. The maximum amount financed will be $690.00. If an approved Warranty Contract is written in the contract, the cost of that Warranty Contract will be deducted from the contract proceeds and forwarded to the Carrier unless the premium is verified by the Carrier as paid. 8. LA&H Insurance: LA&H Insurance is an approved product that can be financed in the contract. If LA&H is written in the contract, Newco will either deduct the Premium from the proceeds and forward the premium to the Carrier or directly verify with the Carrier that the premium has been paid. 9. Certificates of Ownership: Newco will hold the original titles to vehicles and immediately return them upon the account being paid off. 2 SECTION II BORROWERS' PROFILE Newco will consider potential borrowers including: 1. First Time Borrowers. 2. Military (Must be on allotment) (Officers no allotment). 3. Borrowers with some derogatory credit. 4. Borrowers with a prior bankruptcy. 5. Borrowers with a prior repossession and foreclosures. Borrowers must meet the following minimum requirements: 1. Residence: Minimum one (1) year at residence or three (3) years in the area. 2. Employment: Minimum one (1) with employer or three (3) years employment history. Will consider the following exceptions: 1. Recent college graduates. 2. Transferees. 3. Military. 3. Expense Ratio: Expense ratio must be 70% or less of verified take-home pay. There must be at least $300 in disposable income after the payment of the auto payment and family expenses. Include as expenses: 1. Anticipated auto payment. 2. Auto insurance. 3. Rent and utilities. 4. $150 for each adult dependent and $75 for each child. 5. Bills on credit bureaus and other disclosed debts which have scheduled monthly payments. Payment on credit card balances are estimated at 5% of the account balance. 3 4. Minimum Take Home Pay: Non-Military Military Unmarried Living ------------ -------- ---------------- with Parent ----------- Single Person $900.00 $1,000 $800.00 Married Couple $1,200.00 $1,300 The borrowers car payment cannot exceed 25% of their combined take home pay with discretion used for first time borrowers and unmarried living at home. 5. Co-borrowers/Co-signers: For those who apply for joint credit or individual credit, with a co-signer, both borrowers and/or co-signer must sign the credit application and the sales contract. Co-signers are acceptable to offset weak credit characteristics, however, primary borrower must have sufficient income to service the loan being requested. Co-signers must have an established credit history in order to qualify as a co-signer. Co-signers must sign Federal co-signer letter if not spouse. 6. Credit History: (a) A borrower with prior negative credit may be considered if: (i) Current delinquencies are justified. (ii) Outstanding liens, judgments and charge-offs are older than five (5) years and less than $500. (iii)Medical and other collections under $500 or older than 5 years which are currently in dispute will be excluded provided there is a reasonable explanation written and signed by the Buyer. * Justifiable exceptions will be considered and are defined as: an account where there has been a legitimate dispute or where there is evidence to indicate that the creditor is in error or it has been verified that customer has made and kept arrangements with creditor. When a borrower's profile does not strictly adhere to the Credit Criteria, Newco will require recourse to the dealer. 4 (b) Prior Bankruptcies. (i) Must be discharged. (ii) No borrowers currently in bankruptcy, without trustee approval. (iii)No derogatory credit since date of discharge of bankruptcy. (c) Tax Liens. Consideration will be given to applicant with State and/or Federal Tax Liens over $500; will require review and management sign off. 7. Military: Allotment is Mandatory (Officers excepted). A copy of the executed Allotment Authorization form and the first payment must accompany the contract package submitted for contract funding. (Borrower's check post-dated to the contractual payment date is acceptable). 8. Self-Employed: One of the major considerations in analyzing the credit profile of our borrowers is the stability of employment and the stability of the borrowers income. For self-employed the following information should be submitted with the credit application: A. Copy of last years business tax returns (full and completed returns including Schedule "C" or K-l's). B. Copy of the Business License. C. Income must be verifiable. 5 EX-10.T 4 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT AGREEMENT dated as of December 6, 1995 by and between AutoInfo Finance of Virginia, Inc., a Virginia corporation ("AI Finance") and Robert E. Upton, Jr. residing at 421 West Bute Street, Unit 402, Norfolk, Virginia 23510 ("Upton"). WHEREAS, Upton is currently a shareholder in and the President and Chief Operating Officer of Falk Finance Company, Inc. ("FFC"); and WHEREAS, in connection with its acquisition of the business of FFC, AI Finance desires to assure itself of the benefit of Upton's services and experience for a period of time; and WHEREAS, Upton is willing to enter into an agreement to that end with the Company upon the terms and conditions herein set forth. NOW THEREFORE, in consideration of the premises and covenants herein contained, the parties hereto agree as follows: 1. Employment. AI Finance hereby employs Upton as its President and Chief Operating Officer and Upton hereby accepts such employment and agrees to perform his duties and responsibilities hereunder in accordance with the terms and conditions hereinafter set forth. 2. Duties and Responsibilities. Upton shall be the Chief Operating Officer of AI Finance during the Employment Term (as defined below). Upton shall report to and be subject to the direction of the President of AutoInfo, Inc. and Upton shall perform such duties as may be assigned to him from time to time by the President of AutoInfo, Inc. During the Employment Term Upton shall, subject to the Company's vacation policy, devote substantially all of his normal business time and attention to the businesses of AI Finance and its subsidiaries and affiliates and shall perform such duties in a diligent, trustworthy, loyal, businesslike and efficient manner, all for the purpose of advancing the business of AI Finance and its subsidiaries and affiliates. Nothing contained in this Agreement shall be deemed to prohibit Upton from devoting a nominal amount of his time to his (and his family's) personal investments, provided, however, that, in case of conflict, the performance of Upton's duties under this Agreement shall take precedence over his activities with respect to such investments. 3. Term. The Term of this Agreement shall commence on the date hereof and shall continue until November 30, 2000, unless terminated prior thereto in accordance with the terms and provisions hereof (the "Employment Term"). 4. Compensation. AI Finance shall pay to Upton a salary at the rate of $140,000 per year, payable in such manner as AI Finance shall determine, but in no event any less often than monthly, less withholding required by law and other deductions agreed to by Upton. Upton's annual salary may be increased during the Employment Term in the sole discretion of the Board of Directors of the Company (the "Board"). In addition, on the date hereof, or as soon thereafter as practicable, AutoInfo, Inc. ("Auto") shall grant to you a non-qualified stock option to purchase up to 375,000 shares of Auto Common Stock at $3.00 per share, pursuant to the terms and conditions of the Stock Option Agreement annexed hereto as Exhibit A, which provides, inter alia, for performance related vesting. 5. Bonus. In addition to the compensation provided for in Paragraph 4 of this Agreement, Upton shall during the Employment Term on an annual basis receive as a bonus a payment equal to one-eighth (1/8) of one percent of the outstanding performing net receivable portfolio (as hereinafter defined) computed on an annualized basis. This bonus, if any, shall be paid quarterly in arrears. For the purposes of this provision the outstanding "net receivable portfolio" shall mean all interest bearing finance receivables not greater than ninety (90) days in contractual arrears. Furthermore Upton shall receive such other bonuses as determined in the sole discretion of the Board. 6. Expenses and Benefits. (a) AI Finance shall, consistent with AI Finance's policy of reporting and reimbursement of business expenses, reimburse Upton for such other ordinary and necessary entertainment and business related expenses as shall be incurred by Upton in the course of the performance of his duties under this Agreement. 2 (b) AI Finance recognizes that Upton will be required to incur significant travel in rendering services to AI Finance hereunder and in connection therewith AI Finance shall during the Employment Term provide Upton with an automobile, consistent with Upton's current vehicle, and AI Finance shall reimburse Upton for all of the reasonable expenses associated with the operation of such automobile including, without limitation, fuel, maintenance, repair and insurance costs. (c) Upton shall be entitled to participate, to the extent he qualifies, in such life insurance, hospitalization, disability and other medical insurance plans or programs as are generally made available to executive officers of AI Finance which shall be consistent with the programs and benefits currently offered to Upton. 7. Termination. (a) AI Finance shall have the right to terminate this Agreement for disability in the event Upton suffers any illness or incapacity of such character as to substantially disable him from performing his duties hereunder for a period of more than sixty (60) consecutive business days in any one calendar year upon AI Finance giving at least five (5) days written notice of its intention to so terminate. If Upton shall resume his duties hereunder within ten (10) days following the receipt of such notice and shall perform such duties for fifty (50) days of the next sixty (60) consecutive days thereafter, the Employment Term shall continue without interruption and such notice of intention to terminate shall have no further force or validity. In the event of a termination of this Agreement, AI Finance shall pay to Upton his salary as provided for in Section 9 hereof for a ninety day period following such termination. (b) This Agreement shall terminate upon the death of Upton. (c) AI Finance may terminate this Agreement at any time with Reasonable Cause upon five (5) days written notice to Upton. "Reasonable Cause" means (i) conviction of a crime involving moral turpitude; (ii) Upton having engaged in any activity in competition with AI Finance, without AI Finance's consent; (iii) Upton having divulged any secret or confidential information of a material nature belonging to AI Finance, without AI Finance's consent, except as required by law; (iv) Upton's dishonesty or misconduct that is damaging or detrimental to AI 3 Finance in any material respect; or (v) Upton's breach of any material term of this Agreement; provided, however, that notice under this provision shall not be effective unless Upton shall have first received written notice from AI Finance of the specific acts or omissions alleged to constitute a breach of any material term of this Agreement, and such breach continues unremedied for a period of ten (10) days after such notice. (d) AI Finance may terminate this Agreement for Non-performance upon two-hundred seventy (270) days notice to Upton on or before any March 31 during the Employment Term commencing with March 31, 1997. "Non-performance" means AI Finance's failure to achieve sixty (60%) percent of its "projected net income" during the calendar year preceding any such termination notice. 8. Non-Competition. Upton covenants and agrees that during his employment hereunder and for a period of two years after his employment hereunder is terminated, he will not, without the prior written consent of AI Finance, (a) compete with the business of AI Finance or any of its subsidiaries or affiliates and, in particular, he will not without such consent, directly or indirectly, own, manage, operate, finance, join, control or participate in the ownership, management, operation, financing or control of, or be connected as a director, officer, employee, partner, consultant or agent with, any business in competition with or similar to the business of AI Finance or any of its subsidiaries or affiliates; provided, however, that Upton may own up to two percent of the capital stock of any publicly traded corporation in competition with the business of AI Finance or any of its subsidiaries or affiliates, and (b) divert, take away, interfere with or attempt to take away any present or former employee or customer of AI Finance or any of its subsidiaries or affiliates. Notwithstanding the foregoing, in the event that AI Finance terminates this Agreement pursuant to Section 7(d) hereof, then the covenant and agreement contained in (i) subparagraph (a) of this Section 8 shall be applicable for a period of one year from such termination and (ii) subparagraph (b) shall be applicable for a period of one year from such termination as it relates to customers of AI Finance other than Charlie Falk's Auto Wholesale, Inc. or any other entity affiliated with Charles E. Falk, Sr. or Charles E. Falk, Jr.; 4 provided however that the remaining revisions of this Section 8 shall continue in full force and effect without modification In the event that the provisions of this Section 8 should ever be deemed to exceed the time or geographic limitations or any other limitations permitted by applicable law, then such provisions shall be deemed reformed to the maximum permitted by applicable law. Upton acknowledges and agrees that the foregoing covenant is an essential element of this Agreement and that, but for the agreement of Upton to comply with the covenant, the Company would not have entered into this Agreement, and that the remedy at law for any breach of the covenant will be inadequate and the Company, in addition to any other relief available to it, shall be entitled to temporary and permanent injunctive relief without the necessity of proving actual damage. 9. Confidential Information. Upton recognizes and acknowledges that the customer lists, patents, inventions, copyrights, methods of doing business, trade secrets and proprietary information of AI Finance including, without limitation, as the same may exist from time to time, are valuable, special and unique assets of the business of AI Finance. Except in the ordinary course of business or as required by law, Upton shall not, during or after the Employment Term, disclose any such list of customers or any part thereof, any such patents, inventions, copyrights, methods of doing business, trade secrets or proprietary information which are not otherwise in the public domain to any person, firm, corporation or other entity for any reason whatsoever. In addition, Upton specifically acknowledges and agrees that the remedy at law for any breach of the foregoing shall be inadequate and that AI Finance and the Company, in addition to any other relief available to them, shall be entitled to temporary and permanent injunctive relief without the necessity of proving actual damage. 10. Opportunities. During his employment with AI Finance, Upton shall not take any action which might divert from AI Finance or any of its subsidiaries or affiliates any opportunity which would be within the scope of any of the present or future businesses of AI Finance or any of its subsidiaries or affiliates. 11. Contents of Agreement, Parties in Interest, Assignment, etc. This Agreement sets forth the entire understanding of the parties hereto with respect to the subject matter hereof. All 5 of the terms and provisions of this Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective heirs, representatives, successors and assigns of the parties hereto, except that the duties and responsibilities of Upton hereunder which are of a personal nature shall neither be assigned nor transferred in whole or in party by Upton. This Agreement shall not be amended except by a written instrument duly executed by AI Finance and Upton. 12. Severability. If any term or provision of this Agreement shall be held to be invalid or unenforceable for any reason, such term or provision shall be ineffective to the extend of such invalidity or unenforceability without invalidating the remaining terms and provisions hereof, and this Agreement shall be construed as if such invalid or unenforceable term or provision had not been contained herein. 13. Notices. Any notice, request, instruction or other document to be given hereunder by any party to the other party shall be in writing and shall be deemed to have been duly given when delivered personally or five (5) days after dispatch by registered or certified mail, postage prepaid, return receipt requested, to the party to whom the same is so given or made: If to AI Finance addressed to: AutoInfo Finance of Virginia , Inc. 1600 Route 208 Fair Lawn, New Jersey 07410 Attn: Chief Executive Officer with a copy to: Morse, Zelnick, Rose & Lander, LLP 450 Park Avenue, Suite 902 New York, New York 10178 Attn: Kenneth S. Rose, Esq. If to Upton addressed to: Mr. Robert E. Upton, Jr. 421 West Bute Street Unit 402 Norfolk, Virginia 23510 or at such other address as the one party shall specify to the other party in writing. 14. Counterparts and Headings. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and all which together shall constitute one and the same instrument. All headings are inserted for convenience of reference only and shall not affect the meaning or interpretation of this Agreement. 6 15. Governing Law. This Agreement shall be construed in accordance with the laws of the State of Virginia. 16. Arbitration. Any disputes arising hereunder shall be submitted to arbitration before a single arbitrator in New York City under the rules and regulations of the American Arbitration Association. Any award in such arbitration proceeding may be enforced in any court of competent jurisdiction. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered as of the day and year first above written. AUTOINFO FINANCE OF VIRGINIA , INC. By: /s/ Scott Zecher ------------------------------------- Scott Zecher, Chief Executive Officer /s/ Robert E. Upton, Jr. ------------------------------------- Robert E. Upton, Jr. 7 EX-10.U 5 NON-QUALIFIED STOCK OPTION AGREEMENT AUTOINFO, INC. Non-Qualified Stock Option Agreement December 6, 1995 AutoInfo, Inc., a Delaware corporation (the "Company") hereby grants to Robert E. Upton, Jr. (the "Optionee"), a non-qualified stock option to purchase a total of 375,000 shares of the Company's Common Stock, par value $.01 per share, at the price of $3.00 per share on the terms and conditions set forth herein. As used herein, the term "Company" includes any affiliates of the Company. 1. Exercisability; Term. This option shall become effective on the date of grant and shall be exercisable as follows: (a) If the net income before income taxes of AutoInfo Finance of Virginia, Inc. ("AFV") as determined by the independent accountants who audit the books of AFV (hereinafter called "Net Income") for 1996 shall equal or exceed the "Target Amount" for 1996 as set forth on Exhibit A hereto, then, thereafter this option shall be exercisable as to 75,000 shares. If the Net Income for 1996 shall be between 75% of the Target Amount (the "Minimum Amount") for 1996 and the Target Amount for 1996, then, thereafter this option shall be exercisable as to that number of shares as shall equal (A) 56,250 plus (B) 18,750 multiplied by a fraction the numerator of which shall be the Net Income for 1996 and the denominator of which shall be the Target Amount for 1996. (b) If the Net Income for 1997 shall equal or exceed the Target Amount for 1997, then, thereafter this option shall be exercisable as to 75,000 additional shares. If the 1 Net Income for 1997 shall be between the Minimum Amount for 1997 and the Target Amount for 1997, then, thereafter this option shall be exercisable as to that additional number of shares as shall be equal to (A) 56,250 plus (B) 18,750 multiplied by a fraction the numerator of which shall be the Net Income for 1997 and the denominator of which shall be the Target Amount for 1997. (c) If the Net Income for 1998 shall equal or exceed the Target Amount for 1998, then, thereafter this option shall be exercisable as to 75,000 additional shares. If the Net Income for 1998 shall be between the Minimum Amount for 1998 and the Target Amount for 1998, then, thereafter this option shall be exercisable as to that additional number of shares as shall be equal to (A) 56,250 plus (B) 18,750 multiplied by a fraction the numerator of which shall be the Net Income for 1998 and the denominator of which shall be the Target Amount for 1998. (d) If the Net Income for 1999 shall equal or exceed the Target Amount for 1999, then, thereafter this option shall be exercisable as to 75,000 additional shares. If the Net Income for 1999 shall be between the Minimum Amount for 1999 and the Target Amount for 1999, then, thereafter this option shall (i) be exercisable as to that additional number of shares as shall be equal to (A) 56,250 plus (B) 18,750 multiplied by a fraction the numerator of which shall be the Net Income for 1999 and the denominator of which shall be the Target Amount for 1999. (e) If the Net Income for 2000 shall equal or exceed the Target Amount for 2000, then, thereafter this option shall be exercisable as to 75,000 additional shares. If the Net Income for 2000 shall be between the Minimum Amount for 2000 and the Target Amount for 2000, then, thereafter this option shall be exercisable as to that additional number of shares 2 as shall be equal to (A) 56,250 plus (B) 18,750 multiplied by a fraction the numerator of which shall be the Net Income for 2000 and the denominator of which shall be the Target Amount for 2000. (f) This option shall be exercisable with respect to all of the shares covered hereby on and after April 15, 2001. (g) This option shall expire ten years from the date hereof (the "Termination Date"). 2. Written Notice of Exercise. This option may be exercised only by the delivery to the Secretary or Treasurer of the Company at its principal office within the time specified in paragraph l, of a written notice of exercise substantially in the form described in paragraph 8. 3. Anti-Dilution Provisions. (a) If there is any stock dividend, stock split, or combination of shares of Common Stock of the Company, the number and amount of shares then subject to this option shall be proportionately and appropriately adjusted; no change shall be made in the aggregate purchase price to be paid for all shares subject to this option, but the aggregate purchase price shall be allocated among all shares subject to this option after giving effect to the adjustment. (b) If there is any other change in the Common Stock of the Company, including recapitalization, reorganization, sale or exchange of assets, exchange of shares, offering of subscription rights, or a merger or consolidation in which the Company is the surviving corporation, an adjustment, if any, shall be made in the shares then subject to this option as the Board of Directors may deem equitable. Failure of the Board of Directors to provide for an adjustment pursuant to this subparagraph prior to the effective date of any Company action referred to herein shall be conclusive evidence that no adjustment is required in consequence of such action. 3 (c) If the Company is merged into or consolidated with any other corporation, or if it sells all or substantially all of its assets to any other corporation, then either (i) the Company shall cause provisions to be made for the continuance of this option after such event, or for the substitution for this option of an option covering the number and class of securities which the Optionee would have been entitled to receive in such merger or consolidation by virtue of such sale if the Optionee had been the holder of record of a number of shares of Common Stock of the Company equal to the number of shares covered by the unexercised portion of this option, or (ii) the Company shall give to the Optionee written notice of its election not to cause such provision to be made and this option shall become exercisable in full (or, at the election of the Optionee, in part) at any time during a period of 20 days, to be designated by the Company, ending not more than 10 days prior to the effective date of the merger, consolidation or sale, in which case this option shall not be exercisable to any extent after the expiration of such 20-day period. In no event, however, shall this option be exercisable after the Termination Date. 4. Investment Representation; Legend on Certificates; Special Restriction on Resale. The Optionee agrees that until such time as a registration statement under the Securities Act of 1933 becomes effective with respect to this option and/or the stock underlying this option, the Optionee is taking this option and will take the stock underlying this option, for investment and not for resale or distribution. The Company shall have the right to place upon the face of any stock certificate or certificates evidencing shares issuable upon the exercise of this option such legend as the Board of Directors may prescribe for the purpose of preventing disposition of such shares in violation of the Securities Act of 1933, as now or hereafter provided. 4 5. Non-Transferability. This option shall not be transferable by the Optionee other than by will or by the laws of descent or distribution, and is exercisable during the lifetime of the Optionee only by the Optionee. 6. Certain Rights Not Conferred by Option. The Optionee shall not, by virtue of holding this option, be entitled to any rights of a stockholder in the Company. 7. Expenses. The Company shall pay all original issue and transfer taxes with respect to the issuance and transfer of shares of Common Stock of the Company pursuant hereto and all other fees and expenses necessarily incurred by the Company in connection therewith. 8. Exercise of Options. (a) This option shall become exercisable, in accordance with its terms. (b) An option shall be exercisable by written notice of such exercise, in the form prescribed by the Board of Directors to the Secretary or Treasurer of the Company, at its principal office. The notice shall specify the number of shares for which the option is being exercised (which number, if less than all of the shares then subject to exercise, shall be 50 or a multiple thereof) and shall be accompanied by payment in full of the purchase price of such shares. No shares shall be delivered upon exercise of any option until all laws, rules and regulations which the Board of Directors may deem applicable have been complied with. If a registration statement under the Securities Act of 1933 is not then in effect with respect to the shares issuable upon such exercise, it shall be a condition precedent that the person exercising the option give to the Company a written representation and undertaking, satisfactory in form and substance to the Board of Directors, that he is acquiring the shares for his own account for investment and not with a view to the distribution thereof. 5 (c) The person exercising an option shall not be considered a record holder of the stock so purchased for any purpose until the date on which he is actually recorded as the holder of such stock in the records of the Company. (d) This option shall be exercisable only so long as the Optionee shall continue to be an employee of the Company and for thirty (30) days after termination of such employment. If the Optionee shall have been an employee of the Company at the time of his death or permanent disability then this option shall be exercisable by his personal representative or him, as the case may be, for a period ending one year from the date of death or permanent disability. In no event, however, shall this option be exercisable after the Termination Date. 9. Covenant not to Compete or Otherwise Injure the Company; Work Product. The acceptance by the Optionee of this option shall constitute the acceptance of and agreement to all of the terms and conditions contained herein and in the Plan, and shall further constitute a covenant and agreement on the part of the Optionee to the effect that, without any additional compensation: (a) The Optionee shall, so long as he is employed by the Company, devote his full business time to the business of the Company, and for a period of 24 months after the termination of his employment with the Company, he will not engage in any competitive activities as herein defined: Activities competitive with the activities of the Company shall mean the following: (i) Hiring, offering to hire, enticing away or in any other manner persuading or attempting to persuade any officer, employee or agent of the Company to discontinue his relationship with the Company without the written permission of the Company unless the Optionee clearly establishes that the relationship was initiated by the other party thereto; 6 (ii) Directly or indirectly soliciting, diverting, taking away or attempting to solicit, divert, or take away any business of the Company of which the Optionee has any knowledge during the term of his employment, unless the Optionee clearly establishes that the relationship was initiated by the other party thereto. The term "business" shall mean actual or proposed contracts or arrangements for products or services of the Company and any reasonable extension or continuation of the business of the Company as constituted upon the termination of Optionee's employment. (b) The Optionee shall not make or permit to be made, except in pursuance of his duties and for the sole use and account of the Company or its nominees, any copies, abstracts or summaries of any Company reports, papers, documents or programs, whether made by him or by others. (c) The Optionee cedes and grants and agrees to cede and grant to the Company, all rights to possession, copying, and title in and to, any Company reports, papers, documents or programs, or copies, abstracts or summaries thereof, in any form, coming into possession of the Optionee during and because of his employment by the Company, whether made or prepared by him or by others. (d) The Optionee shall keep confidential and not disclose to others, except as required by his service as an employee or by law, any matter or thing ascertained by him through his association with the Company, not otherwise publicly known, the disclosure of which might possibly be contrary to the best interests of any person, firm or corporation doing business with the Company, or of the Company. (e) If any product, invention, discovery, patent, patented item, formula, improvement or process relating to the business of the Company (the "Work Product") is created, conceived, developed and discovered by the Optionee either solely or jointly with others during the period of his service as an employee of the Company, he shall forthwith disclose the same to the Company and does hereby assign to it any and all such Work Product and all of his rights thereto. At any time, whether during the period of service as an employee 7 or thereafter, upon request by the Company, Optionee will execute and deliver to the Company an instrument assigning to the Company his entire right, title and interest in and to any or all such Work Product, and applications for letters patent therefor, or reissues thereof; he will execute and deliver application papers for letters patent in any country for any and all such Work Product, as may be required by the Company; he will execute and similarly deliver any and all other papers and do such other acts as may in the opinion of the Company be desirable to more effectively convey to the Company the rights intended hereby to be conveyed; he will aid and assist the Company in the prosecution or defense of any claim or litigation involving any and all of said Work Products; provided, however, that the foregoing services which Optionee agrees to render shall be rendered at no expense to him. Notwithstanding anything to the contrary contained in this Section 9, in the event that the Company terminates Upton's employment agreement pursuant to Section 7(d) of the Employment Agreement of even date herewith (the "Employment Agreement"), then the covenant and agreement contained in subparagraph (a) of this Section 9 shall be modified as provided in Section 8 of the Employment Agreement. 10. Continued Employment. Nothing herein shall be deemed to create any employment agreement or guaranty of continued employment or limit in any way the Company's right to terminate Optionee's employment at any time. AUTOINFO, INC. By:/s/ Scott Zecher -------------------------------- Accepted as of the date first set forth above. /s/ Robert E. Upton, Jr. - ---------------------------------- Optionee 8 EXHIBIT A Year Target Amount ---- ------------- 1996 $ 3,983,000 1997 $ 7,147,000 1998 $ 10,462,000 1999 $ 14,998,000 2000 $ 21,304,000 EX-11 6 EXHIBIT 11 - CALCULATION OF EARNINGS PRE SHARE Exhibit 11 AUTOINFO, INC. AND SUBSIDIARIES Calculation of Earnings Per Share
Seven Months Ended December 31, Years ended May 31, ------------ ------------------- 1995 1995 1994 ------------ ------------ ------------ Primary and Fully Diluted Earnings (Loss): Income (loss) from continuing operations $ 560,672 $(2,078,126) $ (143,236) Income (loss) from discontinued operations (28,163) 1,518,659 2,163,984 Gain on sale of discontinued operations 296,839 8,885,688 -- ----------- ----------- ----------- Earnings from operations applicable to Common Stock $ 829,348 $ 8,326,221 $ 2,020,748 ----------- ----------- ----------- Shares: Weighted average number of common shares outstanding 7,765,261 7,307,657 7,177,564 Added shares issuable from assumed exercise of options 5,656 102,891 239,157 ----------- ----------- ----------- Weighted average number of common shares as adjusted 7,770,917 7,410,548 7,416,721 ----------- ----------- ----------- Primary and Fully Diluted Earnings (Loss): From continuing operations $ .07 $ (.28) $ (.02) From discontinued operations -- .21 .29 From gain on sale of discontinued operations .04 1.19 -- ----------- ----------- ----------- Earnings per common share $ .11 $ 1.12 $ .27 =========== =========== ===========
EX-21 7 EXHIBIT 21 - SUBSIDIARIES OF AUTOINFO, INC. Exhibit 21 AUTOINFO, INC. AND SUBSIDIARIES Subsidiaries of AutoInfo, Inc. AutoInfo Finance of Virginia, Inc. CarLoanCo, Inc. EX-24.A 8 EXHIBIT 24-A EXHIBIT 24A CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-K, into AutoInfo, Inc.'s previously filed Registration Statement File No. 33-34443. /s/Arthur Andersen LLP New York, New York May 10, 1996 EX-27 9 FDS -- AUTOINFO
5 7-MOS DEC-31-1995 JUN-01-1995 DEC-31-1995 964,842 23,906,459 31,946,727 (6,872,869) 0 51,236,833 369,488 (113,219) 65,795,376 2,297,999 32,479,024 0 0 77,778 30,940,575 65,795,376 2,231,723 2,231,723 0 1,431,107 0 0 415,904 384,712 175,960 560,672 (28,163) 296,839 0 829,348 0.110 0.110
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