FORM 10-QSB
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: JUNE 30, 1996
Commission File Number: 0-18819
MONACO FINANCE, INC.
(Exact Name of Registrant as Specified in its Charter)
Colorado
(State or Other Jurisdiction of Incorporation or Organization)
84-1088131
(I.R.S. Employer Identification No.)
370 Seventeenth Street, Suite 5060 Denver, Colorado 80202
(Address of Principal Executive Offices)
(303) 592-9411
(Registrant's Telephone Number, Including Area Code)
N/A
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the issuer was required to file such
reports),
Yes X No
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
Number of shares outstanding of the Issuer's Common Stock, as of June 30,
1996:
Class A Common Stock, $.01 par value: 5,640,379 shares
Class B Common Stock, $.01 par value: 1,311,000 shares
Total number of pages is 32.
<PAGE>
MONACO FINANCE, INC. AND SUBSIDIARIES
FORM 10-QSB
QUARTER ENDED JUNE 30, 1996
INDEX
PAGE NO.
PART I - FINANCIAL INFORMATION
Consolidated Statements of Operations for the three
months ended June 30, 1996 and 1995 (unaudited) 3
Consolidated Statements of Operations for the six
months ended June 30, 1996 and 1995 (unaudited) 4
Consolidated Balance Sheets at June 30, 1996
(unaudited) and December 31, 1995 5
Consolidated Statement of Shareholders' Equity for the
six months ended June 30, 1996 (unaudited) 6
Consolidated Statements of Cash Flows for the six
months ended June 30, 1996 and 1995 (unaudited) 7
Notes to Consolidated Financial Statements (unaudited) 8-17
Management's Discussion and Analysis of Financial
Condition and Results of Operations 18-28
PART II - OTHER INFORMATION 29
EXHIBIT 11 - Computation of Net Earnings (Loss) per
Common and Common Equivalent Share 30
EXHIBIT 27 - Financial Data Schedule 31
SIGNATURE 32
2
<PAGE>
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
ITEM 1. FINANCIAL STATEMENTS
MONACO FINANCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1996 AND 1995
(UNAUDITED)
Three months ended June 30,
1996 1995
----------- -----------
<S> <C> <C>
REVENUES:
Interest $3,232,771 $3,164,606
Other income 4,120 20,404
----------- -----------
Total revenues 3,236,891 3,185,010
COSTS AND EXPENSES:
Provision for credit losses (Note 2) 247,261 449,593
Operating expenses 2,750,589 1,313,142
Interest expense (Notes 3 and 5) 1,071,279 904,034
Total costs and expenses 4,069,129 2,666,769
----------- -----------
Income (loss) from continuing operations before taxes (832,238) 518,241
Income tax expense (benefit) (Note 7) (311,257) 193,823
----------- -----------
Income (loss) from continuing operations (520,981) 324,418
(Loss) from discontinued operations,
net of applicable income taxes (Notes 7 and 8) - (109,153)
(Loss) on disposal of discontinued business,
net of applicable income taxes (Notes 7 and 8) (207,551) -
----------- -----------
Net income (loss) ($728,532) $ 215,265
=========== ===========
EARNINGS (LOSS) PER SHARE (NOTES 1 AND 6):
Income (loss) from continuing operations ($0.07) $ 0.06
(Loss) from discontinued operations - (0.02)
(Loss) on disposal of discontinued business (0.03) -
----------- -----------
Net income (loss) per common and common equivalent
share ($0.10) $ 0.04
=========== ===========
Weighted average number of shares outstanding 6,957,329 5,233,516
<FN>
See notes to consolidated financial statements.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
MONACO FINANCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
1996 1995
------------- -----------
<S> <C> <C>
REVENUES:
Interest $ 6,425,603 $5,784,769
Other income 33,423 44,276
------------- -----------
Total revenues 6,459,026 5,829,045
COSTS AND EXPENSES:
Provision for credit losses (Note 2) 548,524 884,389
Operating expenses 5,249,376 2,509,461
Interest expense (Notes 3 and 5) 2,122,429 1,642,089
Total costs and expenses 7,920,329 5,035,939
------------- -----------
Income (loss) from continuing operations before taxes (1,461,303) 793,106
Income tax expense (benefit) (Note 7) (546,527) 296,622
------------- -----------
Income (loss) from continuing operations (914,776) 496,484
(Loss) from discontinued operations,
net of applicable income taxes (Notes 7 and 8) - (157,796)
(Loss) on disposal of discontinued business,
net of applicable income taxes (Notes 7 and 8) (301,451) -
------------- -----------
Net income (loss) ($1,216,227) $ 338,688
============= ===========
EARNINGS (LOSS) PER SHARE (NOTES 1 AND 6):
Income (loss) from continuing operations ($0.13) $ 0.10
(Loss) from discontinued operations - (0.03)
(Loss) on disposal of discontinued business (0.04) -
------------- -----------
Net income (loss) per common and common equivalent
share ($0.17) $ 0.07
============= ===========
Weighted average number of shares outstanding 6,964,054 5,182,171
<FN>
See notes to consolidated financial statements.
</TABLE>
4
<PAGE>
MONACO FINANCE, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1996 AND DECEMBER 31, 1995
June 30, 1996
(unaudited) December 31, 1995
--------------- ------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 5,478,706 $ 7,247,670
Restricted cash 4,032,546 3,694,886
Automobile receivables - net (Notes 2 and 5) 68,519,122 60,668,324
Repossessed vehicles held for sale (Note 1) 2,048,081 2,460,782
Income tax receivable (Note 7) 377,147 23,608
Deferred income taxes (Note 7) 235,746 42,758
Furniture and equipment, net of accumulated depreciation
of $971,884 (1996) and $701,487 (1995) 1,896,235 1,615,428
Net assets of discontinued operations (Note 8) 1,364,345 1,838,392
Other assets 1,792,008 1,759,253
--------------- ------------------
Total assets $ 85,743,936 $ 79,351,101
=============== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 580,605 $ 453,240
Accrued expenses and other liabilities 416,342 93,151
Convertible subordinated debt (Note 5) 1,385,000 1,385,000
Senior subordinated debt (Note 5) 5,000,000 5,000,000
Convertible senior subordinated debt (Note 5) 5,000,000 -
Automobile receivables-backed notes (Note 5) 51,913,747 49,670,127
--------------- ------------------
Total liabilities 64,295,694 56,601,518
Commitments and contingencies (Note 4)
Stockholders' equity (Note 6)
Preferred stock; no par value, 5,000,000 shares authorized,
none issued or outstanding - -
Class A common stock, $.01 par value; 17,750,000 shares authorized,
5,640,379 shares (1996) and 5,672,279 shares (1995) issued 56,404 56,723
Class B common stock, $.01 par value; 2,250,000 shares authorized,
1,311,000 shares (1996) and 1,306,000 shares (1995) issued 13,110 13,060
Additional paid-in capital 22,043,096 22,127,941
Retained earnings (664,368) 551,859
--------------- ------------------
Total stockholders' equity 21,448,242 22,749,583
--------------- ------------------
Total liabilities and stockholders' equity $ 85,743,936 $ 79,351,101
=============== ==================
<FN>
See notes to consolidated financial statements.
</TABLE>
5
<PAGE>
MONACO FINANCE, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(UNAUDITED)
Class A Class B Additional
Common Stock Common Stock Paid-in- Retained
Shares Amount Shares Amount Capital Earnings Total
---------- -------- --------- ------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance - December 31, 1995 5,672,279 $56,723 1,306,000 $13,060 $22,127,941 $ 551,859 $22,749,583
Purchase of treasury stock (26,900) (269) - - (84,845) - (85,114)
Conversion of shares (5,000) (50) 5,000 50 - - 0
Net (loss) for the year - - - - - (1,216,227) (1,216,227)
---------- -------- --------- ------- ----------- ------------ ------------
Balance - June 30, 1996 5,640,379 $56,404 1,311,000 $13,110 $22,043,096 ($664,368) $21,448,242
========== ======== ========= ======= ============ ============ ============
<FN>
See notes to consolidated financial statements.
6
<PAGE>
</TABLE>
MONACO FINANCE, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(unaudited)
Six Months ended June 30,
<S> <C> <C>
Cash flows from operating activities: 1996 1995
- ------------------------------------------------------------------ ------------- -------------
Net income (loss) ($914,776) $ 496,484
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation 271,660 144,160
Provision for credit losses 548,524 884,389
Amortization of excess interest 1,322,506 446,246
Amortization of other assets 377,363 171,497
Other 23,294 37,918
------------- -------------
1,628,571 2,180,694
Changes in assets and liabilities:
Receivables (339,115) (514,577)
Prepaid expenses (158,678) (181,275)
Accounts payable 127,365 (236,580)
Accrued liabilities and other (213,716) 42,932
Income taxes payable - (648,579)
------------- -------------
Net cash flows provided by continuing operations 1,044,427 642,615
Net cash flows provided by discontinued operations 102,115 2,195,648
------------- -------------
Net cash provided by operating activities 1,146,542 2,838,263
------------- -------------
Cash flows from investing activities:
- ------------------------------------------------------------------
Retail installment sales contracts - purchased (26,251,091) (23,635,200)
Retail installment sales contracts - originated (1,519,376) (6,345,731)
Proceeds from payments on contracts - purchased 15,644,544 8,114,382
Proceeds from payments on contracts - originated 3,123,058 3,092,230
Purchase of furniture and equipment (474,098) (569,054)
------------- -------------
Net cash (used in) investing activities (9,476,963) (19,343,373)
------------- -------------
Cash flows from financing activities:
- ------------------------------------------------------------------
Net borrowings under line of credit - (3,090,000)
Net (increase) in restricted cash (337,660) (3,652,955)
Borrowings on asset-backed notes 18,998,420 30,700,945
Repayments on asset-backed notes (16,754,800) (4,444,349)
Proceeds from issuance of convertible senior subordinated notes 5,000,000 -
Increase in debt issue and conversion costs (259,389) (838,628)
Purchase of treasury stock (85,114) -
Net cash provided by financing activities 6,561,457 18,675,013
------------- -------------
Net increase (decrease) in cash and cash equivalents (1,768,964) 2,169,903
Cash and cash equivalents, January 1 7,247,670 26,587
Cash and cash equivalents, June 30 $ 5,478,706 $ 2,196,490
============= =============
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 1,991,788 $ 1,463,801
============= =============
Cash paid during the year for income taxes $ 655 $ 984,441
============= =============
<FN>
Non-cash investing and financing activities:
In March 1995, $770,000 (net of debt issue costs) of 7% Convertible Subordinated Notes (See Note
5) was converted into 225,147 shares of Class A Stock.
In May 1996, the Company issued a note for $107,407 for the sale of furniture and equipment.
See notes to consolidated financial statements.
</TABLE>
7
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Monaco Finance, Inc. (the "Company"), is engaged in the business of
providing alternative financing programs primarily to purchasers of used
vehicles. The Company commenced operations in June 1988. The Company provides
such automobile financing programs by acquiring retail installment sale
contracts (the "Contracts") from certain selected automobile dealers in
approximately 21 states ("Dealer Network") . The contracts are acquired by the
Company through automobile financing programs it sponsors. In February
1996, the Company announced that it intended to discontinue its CarMart retail
used car sales and associated financing operations. The CarMart business
ceased operations on May 31, 1996.
The consolidated financial statements included herein are presented in
accordance with the requirements of Form 10-QSB and consequently do not
include all of the disclosures normally made in the registrant's annual Form
10-KSB filing. These financial statements should be read in conjunction with
the financial statements and notes thereto included in Monaco Finance, Inc.'s
latest annual report on Form 10-KSB and Amendments on Form 10-KSB/A.
PRINCIPLES OF CONSOLIDATION
The Company's consolidated financial statements include the accounts of
Monaco Finance, Inc. and its wholly-owned special purpose financing
subsidiaries, CarMart Auto Receivables Company and MF Receivables Corp. I (the
"Subsidiaries"). All intercompany accounts and transactions have been
eliminated in consolidation.
INTERIM UNAUDITED FINANCIAL STATEMENTS
Information with respect to June 30, 1996 and 1995, and the periods then
ended, have not been audited by the Company's independent auditors, but in the
opinion of management, reflect all adjustments (which include only normal
recurring adjustments) necessary for the fair presentation of the operations
of the Company. The results of operations for the three and six months ended
June 30, 1996 and 1995 are not necessarily indicative of the results of the
entire year.
REPOSSESSED VEHICLES HELD FOR RESALE
At June 30, 1996 and December 31, 1995, the approximate number of
repossessed vehicles held for resale was 634 and 658, respectively. Included
are vehicles held for resale, vehicles which have been sold for which payment
has not been received and unlocated vehicles (skips), the value for which may
be reimbursed from insurance.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1995 financial statements to
conform to the classifications used in the current year.
EARNINGS PER SHARE
Earnings per share is computed by dividing net income (loss) by the weighted
average number of common and common equivalent shares outstanding during
the period. Common stock equivalents are determined using the treasury stock
method. The computation of weighted average common and common equivalent
shares outstanding excludes anti-dilutive common equivalent shares.
USE OF ESTIMATES
The preparation of financial statements in conformity with general accepted
accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of financial statements and the reported amounts of revenues and expenses
during the reporting period. Management believes that such estimates have
been based on reasonable assumptions and that such estimates are adequate,
however, actual results could differ from those estimates.
8
<PAGE>
TREASURY STOCK
In accordance with Section 7-106-302 of the Colorado Business Corporation
Act, shares of its own capital stock acquired by a Colorado corporation are
deemed to be authorized but unissued shares. APB Opinion No. 6 requires the
accounting treatment for acquired stock to conform to applicable state law. As
such, 26,900 shares of Class A Common Stock purchased in 1996 have been
reported as a reduction to Class A Common Stock and Additional
Paid-in-Capital.
<TABLE>
<CAPTION>
NOTE 2 - AUTOMOBILE RECEIVABLES
Automobile Receivables consist of the following:
June 30, December 31,
1996 1995
------------ --------------
<S> <C> <C>
Automobile Receivables
Retail installment sales contracts $67,647,931 $ 62,202,136
Other 1,038,972 795,304
Excess interest receivable 4,173,774 3,312,635
Accrued interest 953,638 1,020,166
------------ --------------
Total finance receivables 73,814,315 67,330,241
Allowance for credit losses (5,295,193) (6,661,917)
------------ --------------
Automobile receivables - net $68,519,122 $ 60,668,324
============ ==============
<FN>
</TABLE>
At June 30, 1996, the accrual of interest income was suspended on
$167,399 of principal amount of retail installment sales contracts that were
contractually delinquent for ninety days or more.
At the time installment sales contracts ("Contracts") are originated or
purchased, the Company estimates future losses of principal based on the type
and terms of the contract, the credit quality of the borrower and the
underlying value of the vehicle financed. This estimate of loss is based on
the Company's risk model, which takes into account historical data from
similar contracts originated or purchased by the Company since its inception
in 1988. However, since the risk model uses past history to predict the
future, changes in national and regional economic conditions, borrower mix and
other factors could result in actual losses differing from initially predicted
losses.
The allowance for credit losses, as presented below, has been established
utilizing data obtained from the Company's risk models and is continually
reviewed and adjusted in order to maintain the allowance at a level which, in
the opinion of management, provides adequately for current, and possibly,
future losses that may develop in the present portfolio. A provision for
credit losses is charged to earnings in an amount sufficient to maintain the
allowance. This allowance is reported as a reduction to Automobile
Receivables.
<TABLE>
<CAPTION>
Allowance
Credit Losses
---------------
<S> <C>
Balance as of December 31, 1995 $ 6,661,917
Provision for credit losses 822,155
Unearned interest income 2,183,645
Unearned discounts 1,824,599
Retail installment sale contracts charged off (11,780,947)
Recoveries 5,583,824
---------------
Balance as of June 30, 1996 $ 5,295,193
===============
<FN>
</TABLE>
The provision for credit losses is based on estimated losses on all
Contracts purchased prior to January 1, 1995 with zero discounts ("100%
Contracts") and for all Contracts originated by CarMart which have been and
will continue to be provided for by additions to the Company's allowance for
credit losses as determined by the Company's risk analysis.
9
<PAGE>
Effective January 1, 1995, upon the acquisition of certain Contracts from
its Dealer Network, a portion of future interest income, as determined by the
Company's risk analysis, was capitalized into Automobile Receivables (excess
interest receivable) and correspondingly used to increase the allowance for
credit losses (unearned interest income). Subsequent receipts of excess
interest are applied to reduce excess interest receivable. For the three and
six months ended June 30, 1996, $721,000 and $1,322,506 of excess interest
income, respectively, was amortized against excess interest receivable.
Unearned discounts result from the purchase of Contracts from the Dealer
Network at less than 100% of the face amount of the note. All such discounts
are used to increase the allowance for credit losses. In the event certain of
such discounts are not used to offset credit losses, the balance will be
accreted into income over the remaining life of the Contracts.
NOTE 3 - NOTE PAYABLE - CITICORP
In May 1995 the Company repaid, in full, the then outstanding balance on its
$25 million revolving line of credit with Citicorp Leasing, Inc. and
terminated the facility.
NOTE 4 - COMMITMENTS & CONTINGENCIES
CONTINGENCIES
On May 8, 1995, Milton Karsh filed a civil suit in the District Court in and
for the City and County of Denver, State of Colorado against the Company,
its President, Morris Ginsburg, and its Executive Vice President, Irwin L.
Sandler, both of whom are Directors of the Company. The plaintiff alleges
breach of contract, breach of fiduciary duty and conversion in connection with
the plaintiff's proposed sale of the Class A Common Stock of the Company
pursuant to Rule 144 under the Securities Act of 1933. Plaintiff now claims
that he sustained approximately $450,000 in damages. The defendants have
denied the material allegations of the complaint, have set forth several
affirmative defenses, have alleged that the complaint is frivolous and have
filed a counterclaim against the plaintiff alleging breach of contract.
Mediation has been set for August 14, 1996. If a resolution is not reached at
the mediation, the case will proceed to trial. Trial is scheduled for October
15, 1996, and discovery is in process. The claims are without merit in the
opinion of management and will be vigorously defended.
The Company has agreed to pay all litigation costs, including fees, and
to indemnify the directors to the maximum extent provided by Colorado law, as
stated in the Company's By-laws, the exact extent of which will be determined
when the lawsuit, including appeals, is resolved or settled.
LOANS IN FUNDING
As of June 30, 1996 there were no open commitments to extend credit through
the normal course of business.
10
<PAGE>
NOTE 5 - DEBT
CONVERTIBLE SUBORDINATED DEBENTURES
On March 15, 1993, the Company completed a private placement of $2,000,000,
7% Convertible Subordinated Notes (the "Notes") with interest payable
semiannually commencing September 1, 1993. The principal amount of the Notes,
plus accrued and unpaid interest, is due on March 1, 1998. Additionally, the
purchasers of the Notes exercised an option to purchase an additional
$1,000,000 aggregate principal amount of the Notes on September 15, 1993. The
Notes are convertible into the Class A Common Stock of the Company at any time
prior to maturity at a conversion price of $3.42 per share, subject to
adjustment for dilution. As detailed below, Notes with an aggregate principal
amount of $1,615,000 have been converted resulting in the issuance of 472,219
shares of Class A Common Stock. Commencing March 15, 1996, the Company has the
option to pre-pay up to one-third of the outstanding Notes at par.
<TABLE>
<CAPTION>
Class A
Common Stock
Conversion Date Notes Converted Issued
- --------------- ---------------- ------------
<S> <C> <C>
September 1994 $ 385,000 112,572
March 1995 770,000 225,147
August 1995 85,000 24,853
September 1995 375,000 109,647
---------------- ------------
$ 1,615,000 472,219
================ ============
<FN>
</TABLE>
SENIOR SUBORDINATED DEBENTURES
On November 1, 1994 the Company sold, in a private placement, unsecured
Senior Subordinated Notes ("Senior Notes") in the principal amount of
$5,000,000 to Rothschild North America, Inc. The Senior Notes accrue interest
at a fixed rate per annum of 9.5% through October 1, 1997, and for each month
thereafter, a fluctuating rate per annum equal to the lesser of (a) 11.5% or
(b) 3.5% above the London Interbank Offered Rate ("LIBOR").
Interest is due and payable the first day of each quarter commencing on
January 1, 1995. Principal payments in the amount of $416,667 are due and
payable the first day of January, April, August and October of each year
commencing January 1, 1997. The unpaid principal amount of the Senior Notes,
plus accrued and unpaid interest, are due October 1, 1999.
AUTOMOBILE RECEIVABLES - BACKED NOTES
In November 1994 MF Receivables Corp I. ("MF Receivables"), the Company's
wholly owned special purpose subsidiary, sold, in a private placement,
$23,861,823 of 7.6% automobile receivables-backed notes ("Series 1994-A
Notes"). The Series 1994-A Notes accrue interest at a fixed rate of 7.6% per
annum. The Series 1994-A Notes are expected to be fully amortized by March
1998; however, the debt maturities are based on principal payments received on
the underlying receivables, which may result in a different final
maturity.
In May of 1995, MF Receivables issued its Floating Rate Auto
Receivable-Backed Note ("Revolving Note" or "Series 1995-A Note"). The
Revolving Note has a stated maturity of October 16, 2002. MF Receivables
acquires Contracts from the Company which are pledged under the terms of the
Revolving Note and Indenture for up to $40 million in borrowing. Subsequently,
the Revolving Note is repaid by the proceeds from the issuance of secured Term
Notes or repaid from collection of principal payments and interest on the
underlying Contracts. The Revolving Note can be used to borrow up to an
aggregate of $150 million through May 16, 1997. The Term Notes have a fixed
rate of interest and likewise are repaid from collections on the underlying
Contracts. An Indenture and Servicing Agreement require that the Company and
MF Receivables maintain certain financial ratios, as well as other
representations, warranties and covenants. The Indenture requires MF
Receivables to pledge all Contracts owned by it for repayment of the Revolving
Note or Term Notes, including Contracts pledged as collateral for Series
1994-A Term Notes, the Series 1995-B Term Notes, as well as all future
Contracts acquired by MF Receivables.
11
<PAGE>
The Series 1995-A Note bears interest at LIBOR plus 75 basis points. The
initial funding of this Note was $26,966,489 on May 16, 1995. The Company, as
servicer, provides customary collection and servicing activities for the
Contracts. The Revolving Note has a stated maturity of October 16, 2002 and an
expected termination date of May 16, 1997. The maximum limit for the Series
1995-A Note is $40 million. On September 15, 1995, MF Receivables issued its
Series 1995-B Term Notes ("Series 1995-B Notes") in the amount of $35,552,602.
The Series 1995-B Notes accrue interest at a fixed note rate of 6.45% per
annum. The Series 1995-B Notes are expected to be fully amortized by June
1999; however, the debt maturities are based on principal payments received on
the underlying receivables which may result in a different final maturity. The
proceeds from the issuance of the Series 1995-B Notes were used to retire, in
full, the 1995-A Note, which will be used to accumulate an additional $114.4
million in $40 million increments.
The assets of MF Receivables are not available to pay general creditors
of the Company. In the event there is insufficient cash flow from the
Contracts (principal and interest) to service the Revolving Note and Term
Notes a nationally recognized insurance company (MBIA) has guaranteed
repayment. The MBIA insured Series 1994-A Notes, Series 1995-A Note and Series
1995-B Notes received a corresponding AAA rating by Standard and Poor's and an
Aaa rating by Moody's and were purchased by institutional investors. The
underlying Contracts accrue interest at rates of approximately 21% to 29%. All
cash collections in excess of disbursements to the Series 1994-A, Series
1995-A and Series 1995-B noteholders and other general disbursements are paid
to MF Receivables on a monthly basis.
As of June 30, 1996, the Series 1994-A Notes, Series 1995-A Note and the
Series 1995-B Notes and underlying receivables backing those notes were as
follows:
<TABLE>
<CAPTION>
Underlying
Receivable
Note Balance Balance
------------- -----------
<S> <C> <C>
Series 1994-A Notes $ 7,828,505 $ 8,149,451
Series 1995-A Note 23,714,818 34,493,956
Series 1995-B Notes 20,370,424 23,756,896
------------- -----------
TOTAL $ 51,913,747 $66,400,303
============= ===========
<FN>
</TABLE>
CONVERTIBLE SENIOR SUBORDINATED NOTE OFFERING
On January 9, 1996, the Company entered into a Purchase Agreement for the
sale of an aggregate of $5 million in principal amount of 12% Convertible
Senior Subordinated Notes due 2001 (the "12% Notes"). Interest on the 12%
Notes is payable monthly at the rate of 12% per annum and the 12% Notes are
convertible, subject to certain terms contained in the Indenture, into shares
of the Company's Class A Common Stock, par value $.01 per share, at a
conversion price of $4.625 per share, subject to adjustment under certain
circumstances. The 12% Notes were issued pursuant to an Indenture dated
January 9, 1996, between the Company and Norwest Bank Minnesota, N.A., as
trustee. The Company agreed to register, for public sale, the shares of
restricted Common Stock issuable upon conversion of the 12% Notes. The 12%
Notes were sold pursuant to an exemption from the registration requirements
under the Securities Act of 1933, as amended.
Provisions have been made for the issuance of up to an additional $5
million in principal amount of the 12% Notes ("Additional 12% Notes") on or
before January 9, 1998, upon such terms and conditions as shall be agreed to
between the Company and Black Diamond Advisors, Inc. ("Black Diamond"), one of
the initial purchasers.
On or about June 28, 1996, the Company and Black Diamond entered into a
letter agreement conditionally amending their rights and obligations with
respect to the Purchase Agreement and Indenture dated January 9, 1996. Subject
to shareholder approval, Black Diamond and the Company agreed as follows:
1. The conversion price of the $5,000,000 in principal amount of 12% Notes
issued on or about January 9, 1996, shall be fixed at $4.00 per share.
12
<PAGE>
2. The initial conversion price for up to $5,000,000 in principal amount
of any Additional 12% Notes which hereafter may be issued shall be $3.00 per
share.
3. The period of time during which Black Diamond may exercise the option
shall be extended to the later of the date which is 24 months after the
Company receives the requisite shareholder approval of the transactions or 24
months after the Company's registration statement relating to its shares of
Class A Common Stock issuable upon conversion of the notes becomes effective.
Presently, the expiration date of the option is January 9, 1998.
If the shareholders do not ratify, confirm and approve the transactions,
then (i) the option to purchase $5,000,000 in principal amount of Additional
12% Notes by Black Diamond or its designees shall be deemed to have been
exercised on June 28, 1996, and the conversion price shall be $2 7/16 per
share, the closing price of the Class A Common Stock on the preceding trading
day, and (ii) the conversion price of the 12% Notes shall be determined as
described herein. However, if Black Diamond fails to actually exercise the
option to purchase the Additional 12% Notes within 15 days of the receipt of
written notice of the disapproval by the shareholders, then the exercise of
the option as of June 28, 1996, is deemed to have been revoked and the
conversion price of any Additional 12% Notes which may be issued shall be
determined as provided in the Indenture. The Company and Black Diamond agreed
to diligently and in good faith seek shareholder approval of the transactions
and to amend the notes, Purchase Agreement and Indenture to accomplish the
intent of the letter agreement.
REVOLVING LINE OF CREDIT - LASALLE NATIONAL BANK
In January 1996, the Company entered into a revolving line of credit
agreement with LaSalle National Bank providing a line of credit of up to $15
million, not to exceed a borrowing base consisting of eligible accounts
receivable to be acquired. The scheduled maturity date of the line of credit
is January 1, 1998. At the option of the Company, the interest rate charged on
the loans shall be either .5% in excess of the prime rate charged by
lender or 2.75% over the applicable LIBOR rate. The Company is obligated to
pay the lender a fee equal to .25% per annum of the average daily unused
portion of the credit commitment. The obligation of the lender to make
advances is subject to standard conditions. The collateral securing payment
consists of all Contracts pledged and all other assets of the Company. Among
numerous other loan covenants, the Company generally has agreed to maintain
its ratio of liabilities to tangible assets at not more than 3 to 1; that its
tangible net worth shall not be less than $19 million; and that its interest
coverage ratio (earnings before interest and taxes divided by interest
expense) and cash flow ratio (unrestricted cash divided by interest expense)
shall not be less than 1.5 to 1 and 2.0 to 1, respectively. On August 7, 1996,
the Company borrowed $1.0 million against this line of credit.
NOTE 6 - STOCKHOLDERS' EQUITY
COMMON STOCK
The Company has two classes of common stock. The two classes are the same
except for the voting rights of each. Each share of Class B common stock is
entitled to three votes while each share of Class A common stock is entitled
to one vote.
STOCK OPTION PLANS
During the six months ended June 30, 1996, there were no stock options
granted or exercised under the Company's stock option plan, while 600 stock
options were cancelled.
ADOPTION OF NEW ACCOUNTING RULES
In 1995, the Financial Accounting Standards Board issued Statement No.
123, "Accounting for Stock Based Compensation," ("FAS 123") which encourages,
but does not require, companies to recognize compensation expense for grants
of stock, stock options and other equity instruments to employees. FAS 123 is
required for such grants, described above, to acquire goods or services from
non-employees. Additionally, although expense recognition is not mandatory,
13
<PAGE>
FAS 123 requires companies that choose not to adopt the new fair value
accounting rules to disclose pro forma net income and earnings per share
information using the new method. The Company adopted FAS 123 in the fourth
quarter of fiscal 1995.
PUBLIC OFFERING
In December 1990, the Company completed its initial public offering of
securities. The offering consisted of 1,400,000 shares of Class A Common Stock
and 1,400,000 redeemable Class A warrants offered in $6 units, consisting of
two Class A common shares and two Class A common share purchase warrants. The
Class A purchase warrants were immediately exercisable. Each Class A warrant
entitled the holder to purchase one share of Class A Common Stock and one
Class B warrant for $4.50 until December 1994. Each Class B warrant entitled
the holder to purchase one share of Class A Common Stock for $6.00 through
December 11, 1995.
The exercise prices and number of shares issuable upon exercise of the
warrants were subject to adjustment in certain circumstances. In January 1991,
the underwriter exercised its option to purchase an additional 105,000 units
with net proceed to the Company of approximately $540,000. In connection with
the public offering, the three founding Stockholders agreed to deposit 800,000
shares of Class B Common Stock into escrow. These shares were subject to
forfeiture if the Company did not attain certain earnings levels or the market
price of the Company's Class A Common Stock did not reach certain targets over
the next three years. As of December 31, 1993, these shares were forfeited as
the required targets were not met.
In December 1993, Class A warrants were exercised resulting in the
issuance of 1,602,990 shares of Class A Common Stock and net proceeds to the
Company of $6,924,917. In January 1994, Class A warrants were exercised
resulting in the issuance of 600 shares of Class A Common Stock and net
proceeds to the Company of $10,500. The remaining 6,533 Class A warrants were
unexercised and have terminated.
In 1994, Class B warrants were exercised resulting in the issuance of
12,500 shares of Class A Common Stock and net proceeds to the Company of
$72,000.
On or about November 8, 1995, the Company, in an effort to encourage their
exercise and thereby raise capital, reduced the exercise price of its then
outstanding Class B Common Stock purchase warrants from $6.00 per warrant to
$4.90 per warrant through their expiration date, December 11, 1995. As a
result of the Class B warrant exercises, 1,622,970 shares of the Company's
Class A Common Stock were issued. The Company received net proceeds of
$7,602,606 after deduction of a 4% solicitation fee payable to D.H. Blair &
Co., Inc. A total of 108,120 Class B warrants were not exercised and have
expired.
In 1990, as part of the initial public stock offering and as partially
underwriter's compensation, the Company issued options to the underwriter for
the purchase of 70,000 units. Each unit, exercisable at $7.20, consisted of
two shares of Class A Common Stock and two Class A warrants. Each Class A
warrant was exercisable, at an exercise price of $4.50 per Class A warrant,
for one share of Class A Common Stock and one Class B warrant. By late 1995,
all the units were exercised resulting in the issuance of 137,000 shares of
Class A Common Stock in 1995 and 3,000 shares of Class A Common Stock in 1994,
for net proceeds to the Company of $493,200 and $10,800, respectively. All
Class A warrants, which were issued as a result of the units, were exercised
in 1995 resulting in the issuance of 140,000 shares of Class A Common Stock
for net proceeds to the Company of $630,000.
14
<PAGE>
NOTE 7 - INCOME TAXES
The Company is required to measure current and deferred tax consequences of
all events recognized in the financial statements by applying the provisions
of enacted tax laws to determine the amount of taxes payable or refundable
currently or in future years. The measurement of deferred tax assets is
reduced, if necessary, by the amount of any tax benefits that, based on
available evidence, are not expected to be realized. The major and primary
source of any differences is due to the Company accounting for income and
expense items differently for financial reporting and income tax purposes.
A reconciliation of the statutory federal income tax to the effective
anticipated tax is as follows:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1996 1995 1996 1995
------------ -------- ------------ --------
<S> <C> <C> <C> <C>
Pretax income (loss) - continuing and
discontinued operations $(1,187,238) $343,874 $(1,966,303) $541,035
============ ======== ============ ========
Federal tax expense (benefit)
at statutory rate - 34% $ (403,661) $116,917 $ (668,543) $183,952
State income tax expense (benefit) (55,045) 11,692 (81,533) 18,395
------------ -------- ------------ --------
Income tax expense (benefit) $ (458,706) $128,609 $ (750,076) $202,347
============ ======== ============ ========
<FN>
</TABLE>
Deferred taxes are recorded based upon differences between the financial
statements and tax basis of assets and liabilities and available tax credit
carryforwards. Temporary differences and carryforwards which give rise to a
significant portion of deferred tax assets and liabilities as of June 30,
1996, were as follows:
<TABLE>
<CAPTION>
<S> <C>
Deferred tax assets:
Loss on disposal of CarMart $ 132,719
Federal and State NOL tax carry-forward 2,316,531
Other 59,552
------------
Total deferred tax assets 2,508,802
------------
Deferred tax liabilities:
Depreciation (81,419)
Allowances and Loan Origination Fees (1,792,510)
Other (21,429)
------------
Total deferred tax liability (1,895,358)
------------
Net deferred tax asset $ 613,444
============
<FN>
</TABLE>
15
<PAGE>
NOTE 8 - DISCONTINUED OPERATIONS
In February 1996, the Company announced that it intended to discontinue its
CarMart retail used car sales and associated financing operations. In April
1996, the Company extended the expected disposal date of the CarMart business
from April 30, 1996 to May 31, 1996. The CarMart business ceased operations on
May 31, 1996.
On January 15, 1996 and January 31, 1996, the Company closed its retail
car lot in Englewood, Colorado and Colorado Springs, Colorado, respectively,
and transferred the remaining retail inventory to its Aurora, Colorado retail
store. Effective March 15, 1996, the Company entered into a sublease agreement
on both properties for the entire lease terms at an amount approximately equal
to the Company's obligation. On May 31, 1996, the Company closed its retail
car lot in Aurora, Colorado and entered into a sublease agreement for the
entire lease term. The Company intends to liquidate the remaining inventory at
the Aurora, Colorado store by August 31, 1996.
On March 31, 1995, the Company closed its retail car lot in Lakewood,
Colorado. The Company made monthly rental payments of $4,000 through the end
of the lease term on October 15, 1995.
All personnel associated with the CarMart operations have been reassigned
to other positions within the Company or have been released.
The results of operations of the CarMart business for 1995 are included
in the Consolidated Statements of Operations under the caption "(Loss) from
discontinued operations" and includes:
<TABLE>
<CAPTION>
<S> <C> <C>
For the Three Months For the Six Months
Ended June 30, 1995 Ended June 30, 1995
---------------------- ---------------------
Revenues $ 2,841,466 $ 6,275,533
Total costs and expenses 3,015,833 6,527,604
---------------------- ---------------------
(Loss) from discontinued operations before income taxes (174,367) (252,071)
Income tax (benefit) (65,214) (94,275)
---------------------- ---------------------
(Loss) from discontinued operations $ (109,153) $ (157,796)
====================== =====================
<FN>
</TABLE>
The Company allocated interest expense and associated direct costs of
$9,085 and $18,170 to discontinued operations in the three and six months
ended June 30, 1995, respectively. The allocations were based on the ratio of
discontinued net assets to consolidated net assets plus consolidated debt.
The loss on the disposition of the CarMart business has been accounted
for as discontinued operations. In March 1996 and June 30, 1996, the Company
recorded additional pretax charges of $150,000 and $355,000 ($93,900 and
$207,551 aftertax), respectively, related to the estimated 1996 loss from
operations of CarMart.
The components of the loss on disposal of the CarMart business were based
on reasonable estimates and assumptions that Management believes are adequate,
however, actual amounts may differ from these estimates.
16
<PAGE>
Summarized balance sheet data for the discontinued CarMart operations is
as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
June 30, December 31,
1996 1995
---------- -------------
Assets
- -------------------------------------
Vehicles held for sale $ 399,427 $ 966,830
Income tax receivable 703,674 948,150
Deferred tax asset 377,698 174,148
Furniture and equipment, net - 269,563
Other receivables 3,674 83,710
Other assets 29,385 58,746
-------------
Total assets $1,513,858 $ 2,501,147
========== =============
Liabilities
- -------------------------------------
Accounts payable and accrued expenses $ 149,513 $ 662,755
---------- =============
Total liabilities $ 149,513 $ 662,755
========== =============
Net assets of discontinued operations $1,364,345 $ 1,838,392
========== =============
<FN>
</TABLE>
17
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
SUMMARY
In February 1996, the Company announced that it intended to discontinue its
CarMart retail used car sales and associated financing operations related to
its CarMart business. In April 1996, the Company extended the expected
disposal date of the CarMart business from April 30, 1996 to May 31, 1996. The
CarMart business ceased operations on May 31, 1996. The results of
operations of the CarMart business for 1995 are included in the Consolidated
Statements of Operations under the caption "(Loss) from discontinued
operations". The loss on disposal of the CarMart business has also been
accounted for as discontinued operations.
The Company's revenues and net income from continuing operations
primarily are derived from interest income generated from its loan portfolio.
The Company's loan portfolio consists of Contracts purchased from the Dealer
Network as well as Contracts financed from vehicle sales at the Company's
Dealerships. The average discount on all Contracts purchased pursuant to
discounted Finance Programs during the six months ended June 30, 1996 and 1995
was approximately 9% and 21%, respectively. The Company services all of the
loans that it owns. The loan portfolio carries a contract annual percentage
rate of interest that averages approximately 25%, before discounts, and has an
original weighted average term of approximately 46 months. The average amount
financed per Contract for the six months ended June 30, 1996 and 1995 was
approximately $9,449 and $8,542, respectively.
RESULTS OF OPERATIONS
OVERVIEW
<TABLE>
<CAPTION>
INCOME STATEMENT DATA
Three Months Six Months
Ended June 30, Ended June 30,
<S> <C> <C> <C> <C>
(dollars in thousands, except per share amounts) 1996 1995 1996 1995
------------ ----------- ----------- -----------
Total revenues $ 3,237 $ 3,185 $ 6,459 $ 5,829
Total costs and expenses $ 4,069 $ 2,667 $ 7,920 $ 5,036
Income (loss) from continuing operations before income taxes $ (832) $ 518 $ (1,461) $ 793
Income tax expense (benefit) $ (311) $ 194 $ (546) $ 296
Income (loss) from continuing operations $ (521) $ 324 $ (915) $ 497
(Loss) from discontinued operations, net of income taxes - $ (109) - $ (158)
(Loss) on disposal of discontinued business, net of income taxes $ (208) - $ (301) -
Net income (loss) $ (729) $ 215 $ (1,216) $ 339
Net income (loss) per share $ (0.10) $ 0.04 $ (0.17) $ 0.07
Weighted average number of shares outstanding 6, 957,329 5,233,516 6,964,054 5,182,171
<FN>
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET DATA
<S> <C> <C>
June 30, 1996 December 31, 1995
--------------- ------------------
(dollars in thousands)
Total assets $ 85,744 $ 79,351
Total liabilities $ 64,296 $ 56,601
Retained earnings (deficit) $ (664) $ 552
Stockholders' equity $ 21,448 $ 22,750
<FN>
</TABLE>
18
<PAGE>
The Company's revenues increased 2% from just under $3.2 million in the second
quarter of 1995 to just over $3.2 million in the comparable 1996 period. Net
income (loss) from continuing operations for the quarter decreased from $.3
million in 1995 to $(.5) million in 1996. Earnings (loss) per share from
continuing operations for the 1996 quarter were $ (0.07), based on 7.0 million
weighted average shares outstanding, compared with $0.06 per share, based on
5.2 million weighted average shares outstanding, for 1995. Net income (loss)
for the quarter decreased from $.2 million in 1995 to $(0.7) million in 1996,
while net income (loss) per share decreased from $0.04 in 1995 to $(0.10) in
1996, primarily due to a $.8 million decrease in income from continuing
operations.
For the six months ended June 30, the Company's revenues increased 11%
from $5.8 million in 1995 to $6.5 million in 1996. Net income (loss) from
continuing operations for the six months ended June 30, decreased from $.5
million in 1995 to $(.9) million in 1996. Earnings (loss) per share from
continuing operations for 1996 were $(0.13), based on 7.0 million weighted
average shares outstanding, compared with $0.10 per share, based on 5.2
million weighted average shares outstanding, for 1995. Net income (loss) for
the six months ended June 30, decreased from $.3 million in 1995 to $(1.2)
million in 1996, while net income (loss) per share decreased from $0.07 in
1995 to $(0.17) in 1996, primarily due to a $1.4 million decrease in income
from continuing operations.
CONTINUING OPERATIONS
<TABLE>
<CAPTION>
SELECTED OPERATING DATA
Three Months Six Months
Ended June 30, Ended June 30,
--------------- ----------------
<S> <C> <C> <C> <C>
(dollars in thousands, except where noted) 1996 1995 1996 1995
------- ------- ------- -------
Interest income $3,233 $3,165 $6,426 $5,785
Other income $ 4 $ 20 $ 33 $ 44
Provision for credit losses $ 247 $ 450 $ 549 $ 884
Operating expenses $2,751 $1,313 $5,249 $2,510
Interest expense $1,071 $ 904 $2,122 $1,642
Operating expenses as a % of revenues 85% 41% 81% 43%
Contracts from Dealer Network 1,758 1,477 2,706 2,731
Contracts from Company Dealerships 44 373 148 825
------- ------- ------- -------
Total contracts 1,802 1,850 2,854 3,556
Average amount financed (dollars) $9,932 $8,549 $9,449 $8,542
<FN>
</TABLE>
REVENUES
Total revenues for the quarter ended June 30, 1996 increased $.1 million
when compared to the same period in 1995, primarily due to the increase in
interest income, which increased 2%, or $68,000, from 1995 to 1996. Total
revenues for the six months ended June 30, 1996 increased $.6 million when
compared to the same period in 1995 primarily due to the increase in interest
income, which increased 11% from $5.8 million in 1995 to $6.4 million in 1996.
This increase was due to the 14% increase in the Company's loan portfolio
from $59.4 million at June 30, 1995, to $67.6 million at June 30, 1996.
The most significant aspect of the growth in the Company's loan portfolio
is attributable to loans generated from the Dealer Network. The number of
contracts generated from the Dealer Network increased 19% from 1,477 in the
second quarter of 1995 to 1,758 in the comparable 1996 period. The dollar
value of the Dealer Contracts generated increased $4.5 million, or 34%, from
$13.1 million in the second quarter of 1995 to $17.6 million in the comparable
1996 period. Although the number of contracts generated from the Dealer
Network decreased 1% from 2,731 for the six months ended June 30, 1995 to
2,706 in the comparable 1996 period, the Company's strategic plan for 1996
continues to include increasing its portfolio of outstanding Contracts through
the growth of its Dealer Network. The dollar value of the Dealer Contracts
generated increased $1.5 million, or 6%, from $24.4 million in the first six
months of 1995 to $25.9 million in the comparable 1996 period.
19
<PAGE>
The number of loan originations from the CarMart operations decreased 88% from
373 in the second quarter of 1995 to 44 in the comparable 1996 period. The
dollar value of these Contracts decreased $2.4 million, or 88%, from $2.7
million in the second quarter of 1995 to $.3 million in the comparable 1996
period. For the six months ended June 30, the number of loan originations from
the CarMart operations decreased 82% from 825 in 1995 to 148 in the comparable
1996 period. The dollar value of these Contracts decreased $4.9 million, or
82%, from $6.0 million in the first six months of 1995 to $1.1 million in the
comparable 1996 period. The decrease in Contacts mainly was due to the March
31, 1995 closing of the Company's Lakewood, Colorado, retail store, the
January 1996 closings of the Englewood, Colorado, and Colorado Springs,
Colorado, retail stores, the May 31, 1996 closing of the Aurora, Colorado,
retail store and the Company's continued focus in 1996 on the expansion of the
Dealer Network.
The total number of Contracts generated by the Company decreased 3% from
1,850 in the second quarter of 1995 to 1,802 in the comparable 1996 period.
The dollar value of these Contracts increased $2.1 million, or 13%, from $15.8
million in the second quarter of 1995 to $17.9 million in the comparable 1996
period. The average amount financed increased 16% from $8,549 in the second
quarter of 1995 to $9,932 in the comparable 1996 period. For the six months
ended June 30, the total number of Contracts generated by the Company
decreased 20% from 3,556 in 1995 to 2,854 in the comparable 1996 period. The
dollar value of these Contracts decreased $3.4 million, or 11%, from $30.4
million in the first six months of 1995 to $27.0 million in the comparable
1996 period. The average amount financed increased 11% from $8,542 in the
first six months of 1995 to $9,449 in the comparable 1996 period. The average
discount on all Contracts purchased pursuant to the discounted Finance
Programs decreased from 23% in the second quarter of 1995 to 8% in the
comparable 1996 period and from 21% in the first six months of 1995 to 9% in
the comparable 1996 period primarily due to new Finance Programs introduced in
1995 and 1996.
At June 30, 1995 and June 30, 1996, approximately $12.8 million, or 21%,
and $8.4 million, or 13%, of the Automobile Receivables loan portfolio were
generated from the CarMart operations.
Other income decreased $16,000 from $20,000 in the second quarter of 1995
to $4,000 in the comparable 1996 period and decreased $11,000 from $44,000 for
the first six months of 1995 to $33,000 in the comparable 1996 period due
primarily to a decrease in insurance servicer income.
COSTS AND EXPENSES
The provision for credit losses decreased $.2 million, or 45%, from $.4
million in the quarter ended June 30, 1995 to $.2 million in the comparable
1996 period. For the six months ended June 30, the provision for credit losses
decreased $.3 million, or 38%, from $.9 million in the first six months
of 1995 to $.6 million in the comparable 1996 period. The provision for credit
losses represents estimated current losses based on the Company's risk
analysis of historical trends and expected future results. The decrease in the
provision for credit losses primarily was due to the introduction of the
excess interest method to record allowances effective January 1, 1995 (see
Note 2), as well as changes in certain of the Company's programs. Net
charge-offs as a percentage of average net automobile receivables increased
("Net Charge-off Increase") from 5.5% in the first six months of 1995 to 9.8%
in the comparable 1996 period. If net charge-offs continue at the current
level, a provision for credit losses may be charged to future earnings in an
amount sufficient to maintain the allowance. The Company had 2.9% of its loan
portfolio over 60 days past due at December 31, 1995 compared with 2.2% at
June 30, 1996.
Certain of the increase in charge-offs are a result in the change in the
mix of loan program type purchased by the Company and a general increase in
the age of the portfolio. In the first six months of 1996, the number of loans
purchased at less than face value increased by 289% when compared to the same
period in 1995. The risk model for these loans anticipates a higher percentage
of charge-offs and delinquencies, the cost of which is intended to be off-set
by the discount in the purchase of these loans. The risk adjusted yields (net
yield on amounts paid for Contracts based on Contract cash flows calculated at
the note interest rate and adjusted for prepayments, defaults and recoveries)
in these programs is estimated to be as good as, or better than, the Company's
loan programs which have lower anticipated charge-offs and delinquencies.
In addition, certain Contracts purchased in 1995 have contributed to the
increase in charge-offs during the first quarter of 1996. The Company is
evaluating whether this increase in charge-offs is a result of a decrease in
credit quality or a change in timing of losses originally predicted. In an
attempt to improve the credit quality of Contracts purchased, and reduce
charge-offs, the Company implemented an internally developed credit scorecard
at the end of the second quarter of 1996 to assist in the evaluation of credit
quality.
20
<PAGE>
The allowance for credit losses, which anticipates losses also based on
the Company's risk analysis of historical trends and expected future results,
is continually reviewed and adjusted to maintain the allowance at a level
which, in the opinion of management, provides adequately for existing, and
possibly, future losses that may develop in the present portfolio. A provision
for credit losses is charged to earnings in an amount sufficient to maintain
the allowance. However, since the risk model uses past history to predict the
future, changes in national and regional economic conditions, borrower mix and
other factors could result in actual losses differing from initially predicted
losses.
Operating expenses increased $1.4 million, or 109%, from $1.3 million in
the second quarter of 1995 to $2.7 million in the comparable 1996 period. This
increase primarily was due to an increase in salaries and benefits of
$574,000, consulting and professional fees of $240,000 and depreciation and
amortization of $133,000. For the six months ended June 30, operating expenses
increased $2.7 million, or 109%, from $2.5 million in the fist six months of
1995 to $5.2 million in the comparable 1996 period. This increase primarily
was due to an increase in salaries and benefits of $1,097,000, consulting and
professional fees of $469,000, depreciation and amortization of $332,000,
telephone costs of $103,000 and travel costs of $102,000.
In 1995, the Company significantly expanded its operating infrastructure
in order to process the 42% increase in loan acquisitions from 1994 to 1995,
to service the Company's increased loan portfolio and in anticipation of
additional increases in loan acquisitions. However, beginning in the fourth
quarter of 1995, the Company has experienced a decrease in quarter-to-quarter
loan acquisition volume (1,182 loans were acquired in the fourth quarter of
1995 versus 1,233 in the comparable 1994 quarter, 1,052 loans were acquired in
the first quarter of 1996 versus 1,706 in the comparable 1995 quarter and
1,802 in the second quarter of 1996 versus 1,850 in the comparable 1995
quarter). These decreases primarily were due to increased competition in the
sub-prime automobile financing industry and the Company's decision to
discontinue CarMart retail used car sales and associated financing operations.
In order to increase volume from loan acquisitions, and thereby more
efficiently utilize its existing operating infrastructure, the Company has
increased its Dealer Network significantly. At June 30, 1996, the Company had
17 full time and contract sales representatives. From October 1, 1995, through
June 30, 1996, the Company increased its market penetration into four
additional states. As a result of its expanded marketing efforts, the Company
expects to increase its loan acquisition volume for the last two quarters of
1996 over the comparable 1995 period. Furthermore, the Company intends to
expand into additional states to market its Finance Programs. The Company also
intends to evaluate the purchase of third-party originated loan portfolios as
well as other marketing strategies intended to increase loan originations.
Operating expenses as a percentage of revenue increased from 41% in the
second quarter of 1995 to 85% in the comparable 1996 period and from 43% in
the first six months of 1995 to 81% in the comparable 1996 period. The company
anticipates that, as its loan portfolio grows, interest income will increase.
No assurance is given that the portfolio of Automobile Receivables will
increase, and if it does increase, that such increase will be sufficient to
reduce the percentage of operating expenses to revenue.
Interest expense increased $.2 million, or 18%, from $.9 million in the
second quarter of 1995 to $1.1 million in the comparable 1996 period. For the
six months ended June 30, interest expense increased $.5 million, or 29%, from
$1.6 million in 1995 to $2.1 million in the comparable 1996 period. This
increase primarily was due to an increase in borrowings that provided the
necessary working capital for the Company to increase its loan portfolio from
$59.4 million at June 30, 1995 to $67.6 million at June 30, 1996. Since June
30, 1995, net increases (decreases) in the Company's debt were as follows:
<TABLE>
<CAPTION>
<S> <C>
(dollars in thousands)
Convertible subordinated debt $ (460)
Convertible senior subordinated debt 5,000
Automobile receivables-backed notes 3,452
-------
Total $7,992
=======
<FN>
</TABLE>
21
<PAGE>
The average annualized interest rate on the Company's debt was 7.0% in the
second quarter of 1996 versus 7.7% in the comparable 1995 period. For the six
months ended June 30, the average annualized interest rate on the Company's
debt was 7.1% in 1996 versus 7.8% in the comparable 1995 period. These
decreases were primarily due to lower interest rates associated with the
Company's Series 1994-A, Series 1995-A and Series 1995-B Notes as compared to
those charged under the Company's prior credit facility with Citicorp.
The annualized net interest margin percentage, representing the
difference between interest income and interest expense divided by average
finance receivables, decreased from 17.2% in the second quarter of 1995 to
13.4% in the comparable 1996 period. For the six months ended June 30, the
annualized net interest margin percentage decreased from 17.0% in 1995 to
13.8% in the comparable 1996 period. The decrease was due primarily to the
amortization of excess interest receivable as described in Note 2 of Notes to
Consolidated Financial Statements.
NET INCOME
Net income (loss) from continuing operations decreased $.8 million, or 260%,
from $.3 in the second quarter of 1995 to $(.5) million in the comparable
1996 period. For the six months ended June 30, net income (loss) from
continuing operations decreased $1.4 million, or 284%, from $.5 in 1995 to
$(.9) million in the comparable 1996 period. These decreases were primarily
due to the following changes on the Consolidated Statement of Operations:
<TABLE>
<CAPTION>
INCREASE(DECREASE) TO NET INCOME
<S> <C> <C>
(in millions of dollars) Quarter Year-to-Date
--------- --------------
Interest income $ 0.1 $ 0.6
Provision for credit losses 0.2 0.3
Operating expenses (1.4) (2.7)
Interest expense (0.2) (0.5)
Income tax expense 0.5 0.9
--------- --------------
Net (decrease) to net income
from continuing operations $ (0.8) $ (1.4)
========= ==============
<FN>
</TABLE>
DISCONTINUED OPERATIONS
<TABLE>
<CAPTION>
SELECTED OPERATING DATA
Three Months Ended Six Months Ended
-------------------- ------------------
June 30, June 30,
<S> <C> <C> <C> <C>
(dollars in thousands, except where noted) 1996 1995 1996 1995
------ ------- -------
Sale of vehicles $ 399 $2,830 $1,301 $6,253
Other income $ 6 $ 11 $ 15 $ 23
Cost of vehicles sold $ 390 $1,524 $1,085 $3,407
Provision for credit losses $ 71 $ 705 $ 274 $1,516
Operating expenses $ 299 $ 779 $ 745 $1,589
Interest expense - $ 8 - $ 15
Gross margin % on vehicle sales 2% 46% 17% 46%
Operating expenses as a % of revenues 74% 27% 57% 25%
<FN>
</TABLE>
In February 1996, the Company announced that it intended to discontinue
its CarMart retail used car sales and associated financing operations. In
April 1996, the Company extended the disposal date of the CarMart business
from April 30, 1996 to May 31, 1996. The CarMart business ceased operations on
May 31, 1996. The results of operations of the CarMart business for the three
and six months ended June 30, 1995 are included in the Consolidated Statement
of Operations under the caption (Loss) from discontinued operations. The
results of operations for 1996 were included in the loss on disposal. At March
31, 1996 and June 30, 1996, the Company recorded additional losses on disposal
of $150,000 and $355,000 pretax ($93,900 and $207,551 after tax),
respectively, related to the disposal of the CarMart business.
22
<PAGE>
On January 15, 1996 and January 31, 1996, the Company closed its retail
car lots located in Englewood, Colorado, and Colorado Springs, Colorado,
respectively, and transferred the remaining retail inventory to its Aurora,
Colorado retail store. Effective March 15, 1996, the Company entered into a
sublease agreement on the Englewood, Colorado, and Colorado Springs, Colorado,
properties, for the entire lease terms, at an amount approximately equal to
the Company's obligation. On May 31, 1996, the Company closed its retail car
lot in Aurora, Colorado and entered into a sublease agreement for the entire
lease term. The Company intends to liquidate the remaining retail inventory by
August 31, 1996. The Company had previously closed its retail car lot in
Lakewood, Colorado, on March 15, 1995. All personnel associated with the
CarMart operations have been reassigned to other positions within the Company
or have been released.
REVENUES
Revenues from the sale of vehicles decreased $2.4 million, or 86%, from $2.8
million in the second quarter of 1995 to $.4 million in the comparable
1996 period. For the six months ended June 30, revenues from the sale of
vehicles decreased $5.0 million, or 79%, from $6.3 million in 1995 to $1.3
million in the comparable 1996 period. This decrease was primarily due to the
March 15, 1995 closing of the Company's Lakewood, Colorado, retail car lot,
the January 1996 closings of the Englewood, Colorado, and Colorado Springs,
Colorado, retail car lots and the May 31, 1996 closing of the Aurora, Colorado
retail lot.
Other income, which represents primarily revenue derived from customer
repairs performed by the Company's repair shop, decreased $5,000 and $8,000
for the three and six months ended June 30 1996, when compared to the same
periods in the prior year.
COSTS AND EXPENSES
The cost of vehicles sold decreased $1.1 million, or 74%, from $1.5 million
in the second quarter of 1995 to $.4 million in the comparable 1996 period. As
a percentage of corresponding vehicle sales, the cost increased from 54%
in 1995 to 98% in 1996. For the six months ended June 30, 1996, the cost of
vehicles sold decreased $2.3 million, or 68%, from $3.4 million in 1995 to
$1.1 million in the comparable 1996 period. As a percentage of corresponding
vehicle sales, the cost increased from 54% in 1995 to 83% in 1996.
The provision for credit losses decreased $.6 million, or 90%, from $.7
million in the second quarter of 1995 to $.1 million in the comparable 1996
period. For the six months ended June 30, the provision for credit losses
decreased $1.2 million, or 82%, from $1.5 million in 1995 to $.3 million in
the comparable 1996 period. The provision for credit losses represents
estimated current losses based on the Company's risk analysis of historical
trends and expected future results for its CarMart portfolio. The decrease in
the provision for credit losses was due primarily to the decrease in CarMart
sales and associated financing over this period. See the discussion above in
Continuing Operations regarding the provision and allowance for credit losses
for additional analysis and explanation of the Company's charge-offs,
delinquencies and risk model.
Operating expenses decreased $.5 million, or 62%, from $.8 million in the
second quarter of 1995 to $.3 million in the comparable 1996 period. For the
six months ended June 30, operating expenses decreased $.8 million, or 53%,
from $1.6 million in 1995 to $.8 million in the comparable 1996 period. As a
percentage of revenues, operating expenses for the three months ended June 30,
increased from 27% in 1995 to 74% in 1996 and for the six months ended June
30, increased from 25% in 1995 to 57% in 1996 These increases were due
primarily to the relatively high percentage of fixed to variable overhead
costs associated with operating the CarMart business and the general decrease
in CarMart sales from 1995 to 1996.
The Company allocated interest expense of $7,700 and $15,300 to
discontinued operations in the three and six months of 1995, respectively. The
allocation was based on the ratio of discontinued net assets to consolidated
net assets plus consolidated debt.
23
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash flows for the six months ended June 30, 1996 and 1995 are
summarized as follows:
<TABLE>
<CAPTION>
CASH FLOW DATA
Six Months Ended June 30,
<S> <C> <C>
(dollars in thousands) 1996 1995
-------- ---------
Cash flows provided by (used in):
Operating activities $ 1,147 $ 2,838
Investing activities (9,477) (19,343)
Financing activities 6,561 18,675
-------- ---------
Net increase (decrease) in cash and cash equivalents $(1,769) $ 2,170
======== =========
<FN>
</TABLE>
The Company's business has been and will continue to be cash intensive.
The Company's principal need for capital is to fund cash payments made to
Dealers in connection with purchases of installment contracts. These purchases
have been financed through the Company's capital, private placement borrowings
and cash flows from operations. It is the Company's intent to use its
Revolving Note and revolving line of credit, as described in detail below, to
provide the liquidity to finance the purchase of installment Contracts. Under
the terms of the Revolving Note, approximately 75% to 80% of the face amount
of Contracts, in the aggregate, is advanced to the Company for purchasing
qualifying Contracts. The balance must be financed through capital.
The Agreements underlying the terms of the Company's Automobile
Receivable - Backed Securitization Program ("Securitization Program") and the
corresponding Revolving Notes and Warehouse Notes, described below, contain
certain covenants which if not complied with, could materially restrict the
Company's liquidity. Although the Company endeavors to comply with these
covenants, no assurance is given that the Company will continue to be in
compliance. Furthermore, if the Net Charge-Off Increase continues to grow
substantially in future reporting periods, it negatively will impact the
Company's liquidity and could impair its ability to increase its loan
portfolio.
During 1993, the Company completed the Note Offering described in Note 5
of the Notes to Consolidated Financial Statements. In the Note Offering, the
Company sold 7% Convertible Subordinated Notes in the aggregate principal
amount of $2,000,000. The purchasers of the Notes exercised an option to
purchase an additional $1,000,000 aggregate principal amount on September 15,
1993. The principal amount of the Notes, plus accrued interest thereon, is due
March 1, 1998. The Notes are convertible into Class A Common Stock of the
Company at any time prior to maturity at a conversion price of $3.42 per
share, subject to adjustment for dilution. Certain of these Notes with an
aggregate principal amount of $1,615,000 were converted in 1994 and 1995,
resulting in the issuance of 472,219 shares of Class A Common Stock.
On November 1, 1994, the Company sold in a private placement unsecured
Senior Subordinated Notes (Senior Notes") in the principal amount of
$5,000,000 to Rothschild North America, Inc. Interest is due and payable the
first day of each quarter commencing on January 1, 1995. Principal payments in
the amount of $416,667 are due and payable the first day of January, April,
August and October of each year, commencing January 1, 1997. The unpaid
principal amount of the Notes, plus accrued and unpaid interest, are due
October 1, 1999.
In November 1994, MF Receivables Corp. I ("MF Receivables") sold, in a
private placement, $23,861,823 of 7.6% automobile receivables- backed notes
("Series 1994-A Notes"). The Series 1994-A Notes accrue interest at a fixed
rate of 7.6% per annum. The Series 1994-A Notes are expected to be fully
amortized by March 1998; however, the debt maturities are based on principal
payments received on the underlying receivables, which may result in a
different final maturity.
In May of 1995, MF Receivables issued its Floating Rate Auto
Receivable-Backed Note ("Revolving Note" or "Series 1995-A Note"). The
Revolving Note has a stated maturity of October 16, 2002. MF Receivables
acquires Contracts from the Company which are pledged under the terms of the
Revolving Note and Indenture for up to $40 million in borrowing. Subsequently,
the Revolving Note is repaid by the proceeds from the issuance of secured Term
Notes or repaid from collection of principal payments and interest, on the
underlying Contracts. The Revolving Note can be used to borrow up to an
aggregate of $150 million through May 16, 1997. The Term Notes have a fixed
24
<PAGE>
rate of interest and likewise are repaid from collections on the underlying
Contracts. An Indenture and Servicing Agreement require that the Company and
MF Receivables maintain certain financial ratios, as well as other
representations, warranties and covenants. The Indenture requires MF
Receivables to pledge all Contracts owned by it for repayment of the Revolving
Note or Term Notes, including Contracts pledged as collateral for Series
1994-A Term Notes and the Series 1995-B Term Notes, as well as all future
Contracts acquired by MF Receivables.
The Series 1995-A Note bears interest at LIBOR plus 75 basis points. The
initial funding of this Note was $26,966,489 on May 16, 1995. The Company, as
servicer, provides customary collection and servicing activities for the
Contracts. The Revolving Note has a stated maturity of October 16, 2002 and an
expected termination date of May 16, 1997. The maximum limit for the Series
1995-A Note is $40 million. On September 15, 1995, MF Receivables issued the
Series 1995-B Term Notes ("Series 1995-B Notes") in the amount of $35,552,602.
The Series 1995-B Notes accrue interest at a fixed note rate of 6.45% per
annum. The Series 1995-B Notes are expected to be fully amortized by June
1999; however, the debt maturities are based on principal payments received on
the underlying receivables which may result in a different final maturity. The
proceeds from the issuance of the Series 1995-B Notes were used to retire, in
full, the 1995-A Note, which will be used to accumulate an additional $114.4
million in $40 million increments.
The assets of MF Receivables are not available to pay general creditors
of the Company. In the event there is insufficient cash flow from the
Contracts (principal and interest) to service the Revolving Note and Term
Notes, a nationally recognized insurance company (MBIA) has guaranteed to
repay. The MBIA insured Series 1994-A Notes, Series 1995-A Note and Series
1995-B Notes received a corresponding AAA rating by Standard and Poor's and an
Aaa rating by Moody's and were purchased by institutional investors. The
underlying Contracts accrue interest at rates of approximately 21% to 29%. All
cash collections in excess of disbursements to the Series 1994-A, Series
1995-A and Series 1995-B noteholders and other general disbursements are paid
to MF Receivables monthly.
As of June 30, 1996, the Series 1994-A Notes, Series 1995-A Note and
Series 1995-B Notes and underlying receivables backing those notes were as
follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Underlying
(dollars in thousands) Note Balance Receivable Balance
------------- -------------------
Series 1994-A Notes $ 7,829 $ 8,149
Series 1995-A Note 23,715 34,494
Series 1995-B Notes 20,370 23,757
------------- -------------------
Total $ 51,914 $ 66,400
============= ===================
<FN>
</TABLE>
On January 9, 1996, the Company entered into a Purchase Agreement for the
sale of an aggregate of $5 million in principal amount of 12% Convertible
Senior Subordinated Notes due 2001 (the "12% Notes"). Interest on the 12%
Notes is payable monthly at the rate of 12% per annum and the 12% Notes are
convertible, subject to certain terms contained in the Indenture, into shares
of the Company's Class A Common Stock, par value $.01 per share, at a
conversion price of $4.625 per share, subject to adjustment under certain
circumstances. The 12% Notes were issued pursuant to an Indenture dated
January 9, 1996, between the Company and Norwest Bank Minnesota, N.A., as
trustee. The Company agreed to register, for public sale, the shares of
restricted Common Stock issuable upon conversion of the 12% Notes. The 12%
Notes were sold pursuant to an exemption from the registration requirements
under the Securities Act of 1933, as amended.
Provision has been made for the issuance of up to an additional $5
million in principal amount of the 12% Notes ("Additional 12% Notes") on or
before January 9, 1998, upon such terms and conditions as shall be agreed to
between the Company and Black Diamond Advisors, Inc. ("Black Diamond"), one of
the initial purchasers.
On or about June 28, 1996, the Company and Black Diamond entered into a
letter agreement conditionally amending their rights and obligations with
respect to the Purchase Agreement and Indenture dated January 9, 1996. Subject
to shareholder approval, Black Diamond and the Company agreed as follows:
1. The conversion price of the $5,000,000 in principal amount of 12% Notes
issued on or about January 9, 1996, shall be fixed at $4.00 per share.
25
<PAGE>
2. The initial conversion price for up to $5,000,000 in principal amount
of any Additional 12% Notes which hereafter may be issued shall be $3.00 per
share.
3. The period of time during which Black Diamond may exercise the option
shall be extended to the later of the date which is 24 months after the
Company receives the requisite shareholder approval of the transactions or 24
months after the Company's registration statement relating to its shares of
Class A Common Stock issuable upon conversion of the notes becomes effective.
Presently, the expiration date of the option is January 9, 1998.
If the shareholders do not ratify, confirm and approve the transactions, then
(i) the option to purchase $5,000,000 in principal amount of Additional 12%
Notes by Black Diamond or its designees shall be deemed to have been exercised
on June 28, 1996, and the conversion price shall be $2 7/16 per share, the
closing price of the Class A Common Stock on the preceding trading day, and
(ii) the conversion price of the 12% Notes shall be determined as described
herein. However, if Black Diamond fails to actually exercise the option to
purchase the Additional 12% Notes within 15 days of the receipt of written
notice of the disapproval by the shareholders, then the exercise of the option
as of June 28, 1996, is deemed to have been revoked and the conversion price
of any Additional 12% Notes which may be issued shall be determined as
provided in the Indenture. The Company and Black Diamond agreed to diligently
and in good faith seek shareholder approval of the transactions and to amend
the notes, Purchase Agreement and Indenture to accomplish the intent of the
letter agreement.
In January 1996, the Company entered into a revolving line of credit
agreement with LaSalle National Bank providing a line of credit of up to $15
million, not to exceed a borrowing base consisting of eligible accounts
receivable to be acquired. The scheduled maturity date of the line of credit
is January 1, 1998. At the option of the Company, the interest rate charged on
the loans shall be either .5% in excess of the prime rate charged by lender or
2.75% over the applicable LIBOR rate. The Company is obligated to pay the
lender a fee equal to .25% per annum of the average daily unused portion of
the credit commitment. The obligation of the lender to make advances is
subject to standard conditions. The collateral securing payment of the line of
credit consists of all Contracts pledged and all other assets of the Company.
Among numerous other loan covenants, the Company generally has agreed to
maintain its ratio of liabilities to tangible assets at not more than 3 to 1;
that its tangible net worth shall not be less than $19 million; and that its
interest coverage ratio (earnings before interest and taxes divided by
interest expense) and cash flow ratio (unrestricted cash divided by interest
expense) shall not be less than 1.5 to 1 and 2.0 to 1, respectively. On August
7, 1996, the Company borrowed $1.0 million against this line of credit.
On or about November 8, 1995, the Company reduced the exercise price of
its then outstanding Class B Common Stock purchase warrants from $6.00 per
warrant to $4.90 per warrant through their expiration date, December 11, 1995.
As a result of the Class B warrant exercises, 1,622,970 shares of the
Company's Class A Common Stock were issued. The Company received net proceeds
of $7,602,606 after deduction of a 4% solicitation fee payable to D.H. Blair &
Co., Inc. A total of 108,120 Class B warrants were not exercised and have
expired.
In 1990, as part of its initial public stock offering and as partial
underwriter's compensation, the Company issued options to the underwriter for
the purchase of 70,000 units. Each unit, exercisable at $7.20, consisted of
two shares of Class A Common Stock and two Class A warrants. Each Class A
warrant was exercisable, at an exercise price of $4.50 per Class A warrant,
for one share of Class A Common Stock and one Class B warrant. By late 1995,
all the units were exercised resulting in the issuance of 137,000 shares of
Class A Common Stock in 1995 and 3,000 shares of Class A Common Stock in 1994,
for net proceeds to the Company of $493,200 and $10,800, respectively. All
Class A warrants which were issued as a result of the units were exercised in
1995 resulting in the issuance of 140,000 shares of Class A Common Stock for
net proceeds to the Company of $630,000.
In March 1996, the Company announced that its Board of Directors had
authorized the purchase of up to 500,000 shares of Class A Common Stock,
representing approximately 10% of its Class A Common Stock outstanding.
Subject to applicable securities laws, repurchases may be made at such times,
and in such amounts, as the Company's management deems appropriate. As of
August 13, 1996, the Company had repurchased 26,900 shares of Class A Common
Stock.
The Company has never paid cash dividends on its Common Stock and does
not anticipate a change in this policy in the foreseeable future. Certain of
the Company's loan agreements contain covenants that restrict the payment of
cash dividends.
26
<PAGE>
The Company's cash needs will, in part, continue to be funded through a
combination of earnings and cash flow from operations and its existing
warehouse credit facility and line of credit. In addition, the Company
continues to pursue additional sources of funds including, but not limited to,
various forms of debt and/or equity. The ability of the Company to maintain
past growth levels will, in large part, be dependent upon obtaining such
additional sources of funding, of which no assurance can be given. Failure to
obtain additional funding sources will materially restrict the Company's
future business activities.
OTHER
ACCOUNTING PRONOUNCEMENTS
In 1995, the Financial Accounting Standards Board issued Statement No. 123,
Accounting for Stock Based Compensation, (SFAS 123) which encourages, but does
not require, companies to recognize compensation expense for grants of
stock, stock options and other equity instruments to employees. SFAS 123 is
required for such grants, described above, to acquire goods and services from
nonemployees. Additionally, although expense recognition is not mandatory,
SFAS 123 requires companies that choose not to adopt the new fair value
accounting rules to disclose pro forma net income and earnings per share
information using the new method. The Company has adopted SFAS 123 in the
fourth quarter of fiscal 1995 and will disclose pro forma net income and
earnings per share information where applicable.
SFAS No. 114 and No. 118 "Accounting by Creditors for Impairment of a
Loan" is not applicable to the Company as the Company has a large group of
smaller homogeneous loans that are collectively evaluated for impairment.
INFLATION
Inflation was not a material factor in either the sales or the operating
expenses of the Company from inception to June 30, 1996.
FUTURE EXPANSION AND STRATEGY
With the closing of the CarMart operations, the Company is now emphasizing
the purchase of Contracts from its Dealer Network. The Company's strategic
plan for 1996 includes increasing its portfolio of outstanding Contracts
through the growth of its Dealer Network.
At June 30, 1996 the Company purchased Contracts in twenty-one states
from approximately 425 active automobile dealers and was being serviced by 17
sales representatives. In 1996, the Company plans to significantly increase
its Dealer Network into additional states as well as states within which it
currently operates.
The Company believes that it has adequate capital and warehouse lines of
credit to finance its strategic plan for Dealer growth through 1996. The
Company's Stockholders' Equity at June 30, 1996, exceeded $21.4 million. In
addition, the $5 million of Senior Subordinated Debt issued in early 1996
increased total subordinated debt to over $11.3 million. With over $90 million
of AAA rated warehouse lines and a $15 million line of credit from a national
bank in place at June 30, 1996, the Company believes it has the financial
resources to increase its portfolio of Contracts.
In addition to increasing its portfolio from Dealer purchases, the
Company is evaluating the purchase of third-party originated loan portfolios
as well as other marketing strategies intended to increase loan originations.
FORWARD-LOOKING STATEMENTS
The foregoing discussion contains certain forward-looking statements within
the meaning of 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, which are intended to be covered by the safe
harbors created thereby. These statements include the plans and objectives of
management for future operation, including plans and objectives relating to
the Automobile Receivables and the related allowance.
27
<PAGE>
The forward-looking statements included herein are based on current
expectations that involve numerous risks and uncertainties. Assumptions
relating to the foregoing involve judgments with respect to, among other
things, future economic, competitive and market conditions and future business
decisions, all of which are difficult or impossible to predict accurately and
many of which are beyond the control of the Company. Although the company
believes that the assumptions underlying the forward-looking statements are
reasonable, any of the assumptions could be inaccurate, and therefore, there
can be no assurance that the forward-looking statements including in this Form
10-QSB will prove to be accurate. In light of the significant uncertainties
inherent in the forward-looking statement included herein, the inclusion of
such information should not be regarded as a representation by the Company or
any other person that the objectives and plans of the company will be
achieved.
28
<PAGE>
MONACO FINANCE, INC. AND SUBSIDIARIES
FORM 10-QSB
QUARTER ENDED JUNE 30, 1996
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On May 8, 1995, Milton Karsh filed a civil suit in the District Court in
and for the City and County of Denver, State of Colorado against the Company,
its President, Morris Ginsburg, and its Executive Vice President, Irwin L.
Sandler, both of whom are Directors of the Company. The plaintiff alleges
breach of contract, breach of fiduciary duty and conversion in connection with
the plaintiff's proposed sale of the Class A Common Stock of the Company
pursuant to Rule 144 under the Securities Act of 1933. Plaintiff now claims
that he sustained approximately $450,000 in damages. The defendants have
denied the material allegations of the complaint, have set forth several
affirmative defenses, have alleged that the complaint is frivolous and have
filed a counterclaim against the plaintiff alleging breach of contract.
Mediation has been set for August 14, 1996. If a resoluition is not reached at
the mediation, the case will proceed to trial. Trial is scheduled for October
15, 1996, and discovery is in process. The claims are without merit in the
opinion of management and will be vigorously defended.
The Company has agreed to pay all litigation costs, including fees, and
to indemnify the directors to the maximum extent provided by Colorado law, as
stated in the Company's By-laws, the exact extent of which will be determined
when the lawsuit, including appeals, is resolved or settled.
ITEM 2. CHANGES IN SECURITIES
(b.) Certain of the Company's loan agreements, including loan agreements
entered into in the first quarter of 1996, contain covenants that restrict the
payment of cash dividends.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 11 - Computation of Net Earnings per Common and Common Equivalent
Share
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8 - K:
A Form 8-K dated June 28, 1996 was filed announcing (1) the signing of a
letter agreement amending, subject to shareholder approval, the rights and
obligations of the Company and Black Diamond Advisors, Inc. with respect to
the Purchase Agreement and Indenture dated January 9, 1996; and, (2) the
appointment of David M. Ickovic to the Company's Board of Directors.
29
<PAGE>
EXHIBIT 11
<TABLE>
<CAPTION>
MONACO FINANCE, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS (LOSS) PER SHARE
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1996 AND 1995
THREE MONTHS SIX MONTHS 1996
ENDED JUNE 30, ENDED JUNE 30,
1996 1995 1996 1995
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
EARNINGS (LOSS) PER SHARE - PRIMARY AND FULLY DILUTED
NET EARNINGS (LOSS)
- ----------------------------------------------------------
Income (loss) from continuing operations $ (520,981) $ 324,418 $ (914,776) $ 496,484
(Loss) from discontinued operations - (109,153) - (157,796)
(Loss) on disposal of discontinued business (207,551) - (301,451) -
----------- ----------- ------------ -----------
Net income (loss) $ (728,532) $ 215,265 $(1,216,227) $ 338,688
=========== =========== ============ ===========
AVERAGE SHARES OUTSTANDING
- ----------------------------------------------------------
Weighted average shares outstanding 6,957,329 4,943,809 6,964,054 4,887,523
Shares issuable from assumed exercise of stock options (a) (b) 248,013 (b) 249,711
Shares issuable from assumed exercise of underwriters'
units (a) (b) 41,694 (b) 44,937
Shares issuable from assumed exercise of stock
warrants (a) (b) (b) (b) (b)
----------- ----------- ------------ -----------
Common stock and common stock equivalents - primary 6,957,329 5,233,516 6,964,054 5,182,171
Additional dilutive effect of assumed exercise of
stock options (b) 42,497 (b) 21,248
Additional dilutive effect of assumed exercise of
stock warrants (b) 32,471 (b) 16,236
Additional dilutive effect of assumed exercise of
underwriters' units (b) 56,020 (b) 28,010
Shares issuable from assumed conversion of 7%
subordinated debt (c) (b) (b) (b) (b)
----------- ----------- ------------ -----------
Common stock and common stock equivalents - fully
diluted 6,957,329 5,364,504 6,964,054 5,247,665
=========== =========== ============ ===========
EARNINGS (LOSS)PER SHARE - PRIMARY
- ----------------------------------------------------------
Income (loss) from continuing operations $ (0.07) $ 0.06 $ (0.13) $ 0.10
(Loss) from discontinued operations - (0.02) - (0.03)
(Loss) on disposal of discontinued business (0.03) - (0.04) -
----------- ----------- ------------ -----------
Net income (loss) per share $ (0.10) $ 0.04 $ (0.17) $ 0.07
=========== =========== ============ ===========
EARNINGS (LOSS)PER SHARE - FULLY DILUTED
- ----------------------------------------------------------
Income (loss) from continuing operations $ (0.07) $ 0.06 $ (0.13) $ 0.09
(Loss) from discontinued operations - (0.02) - (0.03)
(Loss) on disposal of discontinued business (0.03) - (0.04) -
----------- ----------- ------------ -----------
Net income (loss) per share $ (0.10) $ 0.04 $ (0.17) $ 0.06
=========== =========== ============ ===========
<FN>
Notes:
(a) Common Stock equivalents are calculated using the treasury stock method.
(b) The computation of average number of common stock and common stock equivalent shares
outstanding excludes anti-dilutive common equivalent shares.
(c) Subordinated debentures were not included in the calculation of primary earnings per share in
accordance with paragraph 33 of APB Opinion No. 15.
</TABLE>
30
<PAGE>
31
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MONACO FINANCE, INC.
Date: August 14, 1996
By: /s/ Morris Ginsburg
--------------------------
Morris Ginsburg
President
By: /s/ Craig L. Caukin
---------------------------
Craig L. Caukin,
Executive Vice President
By: /s/ Michael H. Feinstein
--------------------------------
Michael H. Feinstein,
Chief Financial Officer
32
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND THE CONSOLIDATED STATEMENTS OF OPERATIONS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-END> JUN-30-1996 JUN-30-1996
<CASH> 9,511,252 9,511,252
<SECURITIES> 0 0
<RECEIVABLES> 73,814,315 73,814,315
<ALLOWANCES> 5,295,193 5,295,193
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 0
<PP&E> 2,868,119 2,868,119
<DEPRECIATION> 971,884 971,884
<TOTAL-ASSETS> 85,743,936 85,743,936
<CURRENT-LIABILITIES> 0 0
<BONDS> 63,298,747 63,298,747
0 0
0 0
<COMMON> 69,514 69,514
<OTHER-SE> 21,378,728 21,378,728
<TOTAL-LIABILITY-AND-EQUITY> 85,743,936 85,743,936
<SALES> 0 0
<TOTAL-REVENUES> 3,236,891 6,459,026
<CGS> 0 0
<TOTAL-COSTS> 2,750,589 5,249,376
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 247,261 548,524
<INTEREST-EXPENSE> 1,071,279 2,122,429
<INCOME-PRETAX> (832,238) (1,461,303)
<INCOME-TAX> (311,257) (546,527)
<INCOME-CONTINUING> (520,981) (914,776)
<DISCONTINUED> (207,551) (301,451)
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (728,532) (1,216,227)
<EPS-PRIMARY> (0.10) (0.17)
<EPS-DILUTED> (0.10) (0.17)
</TABLE>
