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: SEPTEMBER 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 September 30,
1996:
Class A Common Stock, $.01 par value: 5,648,379 shares
Class B Common Stock, $.01 par value: 1,323,715 shares
Total number of pages is 34.
<1>
<PAGE>
MONACO FINANCE, INC. AND SUBSIDIARIES
FORM 10-QSB
QUARTER ENDED SEPTEMBER 30, 1996
INDEX
PAGE NO.
PART I - FINANCIAL INFORMATION
Consolidated Statements of Operations for the three months
ended September 30, 1996 and 1995 (unaudited) 3
Consolidated Statements of Operations for the nine months
ended September 30, 1996 and 1995 (unaudited) 4
Consolidated Balance Sheets at September 30, 1996
(unaudited) and December 31, 1995 5
Consolidated Statement of Stockholders' Equity for the
nine months ended September 30, 1996 (unaudited) 6
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1996 and 1995 (unaudited) 7
Notes to Consolidated Financial Statements (unaudited) 8-18
Management's Discussion and Analysis of Financial
Condition and Results of Operations 19-29
PART II - OTHER INFORMATION 30-31
EXHIBIT 11 - Computation of Net Earnings (Loss) per
Common and Common Equivalent Share 32
EXHIBIT 27 - Financial Data Schedule 33
SIGNATURE 34
<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 SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)
Three months ended September 30,
1996 1995
------------ -----------
<S> <C> <C>
REVENUES:
Interest $ 3,526,382 $3,439,802
Other income 1,273 51,139
------------ -----------
Total revenues 3,527,655 3,490,941
COSTS AND EXPENSES:
Provision for credit losses (Note 2) 207,691 406,107
Operating expenses 3,144,104 1,720,188
Interest expense (Notes 3 and 5) 1,231,859 1,008,935
Total costs and expenses 4,583,654 3,135,230
------------ -----------
Income (loss) from continuing operations before taxes (1,055,999) 355,711
Income tax expense (benefit) (Note 7) (394,944) 133,035
------------ -----------
Income (loss) from continuing operations (661,055) 222,676
(Loss) from discontinued operations,
net of applicable income taxes (Notes 7 and 8) - (86,273)
------------ -----------
Net income (loss) ($661,055) $ 136,403
============ ===========
EARNINGS (LOSS) PER SHARE (NOTES 1 AND 6):
Income (loss) from continuing operations ($0.09) $ 0.04
(Loss) from discontinued operations - (0.02)
------------ -----------
Net income (loss) per common and common equivalent
share ($0.09) $ 0.02
============ ===========
Weighted average number of shares outstanding 6,961,737 5,549,154
<FN>
See notes to consolidated financial statements.
</TABLE>
<3>
<PAGE>
<TABLE>
<CAPTION>
MONACO FINANCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)
Nine months ended September 30,
---------------------------------
1996 1995
--------------------------------- -----------
<S> <C> <C>
REVENUES:
Interest $ 9,951,985 $9,224,571
Other income 34,696 95,415
--------------------------------- -----------
Total revenues 9,986,681 9,319,986
COSTS AND EXPENSES:
Provision for credit losses (Note 2) 756,215 1,290,496
Operating expenses 8,393,480 4,229,649
Interest expense (Notes 3 and 5) 3,354,288 2,651,024
--------------------------------- -----------
Total costs and expenses 12,503,983 8,171,169
--------------------------------- -----------
Income (loss) from continuing operations before taxes (2,517,302) 1,148,817
Income tax expense (benefit) (Note 7) (941,471) 429,657
--------------------------------- -----------
Income (loss) from continuing operations (1,575,831) 719,160
(Loss) from discontinued operations,
net of applicable income taxes (Notes 7 and 8) - (244,069)
(Loss) on disposal of discontinued business,
net of applicable income taxes (Notes 7 and 8) (301,451) -
--------------------------------- -----------
Net income (loss) ($1,877,282) $ 475,091
================================= ===========
EARNINGS (LOSS) PER SHARE (NOTES 1 AND 6):
Income (loss) from continuing operations ($0.23) $ 0.14
(Loss) from discontinued operations - (0.05)
(Loss) on disposal of discontinued business (0.04) -
--------------------------------- -----------
Net income (loss) per common and common equivalent
share ($0.27) $ 0.09
================================= ===========
Weighted average number of shares outstanding 6,963,282 5,304,498
<FN>
See notes to consolidated financial statements.
</TABLE>
<4>
<PAGE>
MONACO FINANCE, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
September 30, 1996
(unaudited) December 31, 1995
-------------------- ------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 2,338,552 $ 7,247,670
Restricted cash 4,954,804 3,694,886
Automobile receivables - net (Notes 2 and 5) 84,078,768 60,668,324
Repossessed vehicles held for sale (Note 1) 2,187,648 2,460,782
Income tax receivable (Note 7) 377,147 23,608
Deferred income taxes (Note 7) 630,690 42,758
Furniture and equipment, net of accumulated depreciation
of $1,227,119 (1996) and $701,487 (1995) 2,035,307 1,615,428
Net assets of discontinued operations (Note 8) 437,498 1,838,392
Other assets 1,679,698 1,759,253
-------------------- ------------------
Total assets $ 98,720,112 $ 79,351,101
==================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 937,470 $ 453,240
Accrued expenses and other liabilities 407,485 93,151
Notes payable (Note5) 3,000,000 -
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) 62,179,770 49,670,127
-------------------- ------------------
Total liabilities 77,909,725 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,
5,648,379 shares (1996) and 5,672,279 shares (1995) issued 56,484 56,723
Class B common stock, $.01 par value; 2,250,000 shares authorized,
1,323,715 shares (1996) and 1,306,000 shares (1995) issued 13,237 13,060
Additional paid-in capital 22,066,089 22,127,941
Retained earnings (deficit) (1,325,423) 551,859
Total stockholders' equity 20,810,387 22,749,583
-------------------- ------------------
Total liabilities and stockholders' equity $ 98,720,112 $ 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 NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
Class A Class B Additional Retained
Common Stock Common Stock Paid-in- Earnings
Shares Amount Shares Amount Capital (Deficit) 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 3,000 30 (3,000) (30) - - 0
Treasury stock adjustment - - 20,715 207 22,993 - 23,200
Net (loss) for the year - - - - - (1,877,282) (1,877,282)
---------- -------- ---------- -------- ------------ ------------- ------------
Balance - September 30, 1996 5,648,379 $56,484 1,323,715 $13,237 $22,066,089 ($1,325,423) $20,810,387
========== ======== ========== ======== ============ ============= ============
<FN>
See notes to consolidated financial statements.
</TABLE>
<6>
<PAGE>
MONACO FINANCE, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(unaudited)
Nine Months ended September 30,
-----------------------------------
<S> <C> <C>
Cash flows from operating activities: 1996 1995
- ------------------------------------------------------------------- ------------- -------------
Net income (loss) ($1,575,831) $ 719,160
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation 415,731 238,344
Provision for credit losses 756,215 1,290,496
Amortization of excess interest 2,433,827 938,410
Amortization of other assets 559,670 346,300
Other 28,474 55,799
------------- -------------
2,618,086 3,588,509
Changes in assets and liabilities:
Receivables (1,007,265) (1,009,358)
Prepaid expenses (227,847) (152,054)
Accounts payable 499,256 (102,018)
Accrued liabilities and other (644,862) (315,905)
Income taxes payable - (307,673)
------------- -------------
Net cash flows provided by continuing operations 1,237,368 1,701,501
Net cash flows provided by discontinued operations 1,022,939 3,019,363
------------- -------------
Net cash provided by operating activities 2,260,307 4,720,864
------------- -------------
Cash flows from investing activities:
- -------------------------------------------------------------------
Retail installment sales contracts - purchased (52,535,178) (34,427,543)
Retail installment sales contracts - originated (1,519,376) (9,316,859)
Proceeds from payments on contracts - purchased 24,715,293 13,365,319
Proceeds from payments on contracts - originated 4,001,449 4,629,701
Purchase of furniture and equipment (757,241) (854,506)
------------- -------------
Net cash (used in) investing activities (26,095,053) (26,603,888)
------------- -------------
Cash flows from financing activities:
- -------------------------------------------------------------------
Net borrowings under line of credit 3,000,000 (3,090,000)
Net (increase) in restricted cash (1,259,918) (1,919,622)
Borrowings on asset-backed notes 37,746,134 42,326,219
(Repayments) on asset-backed notes (25,236,491) (12,794,979)
Proceeds from issuance of convertible senior subordinated notes 5,000,000 -
Proceeds from exercise of warrants - 12,000
Increase in debt issue and conversion costs (265,055) (1,295,716)
Purchase of treasury stock and other adjustments (59,042) -
------------- -------------
Net cash provided by financing activities 18,925,628 23,237,902
------------- -------------
Net increase (decrease) in cash and cash equivalents (4,909,118) 1,354,878
Cash and cash equivalents, January 1 7,247,670 26,587
------------- -------------
Cash and cash equivalents, September 30 $ 2,338,552 $ 1,381,465
============= =============
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 3,213,576 $ 2,501,680
============= =============
Cash paid during the year for income taxes $ 1,455 $ 1,006,641
============= =============
<FN>
Non-cash investing and financing activities:
In the first and third quarters of 1995, $770,000 and $460,000, respectively, (net of debt
issue costs) of 7%
Convertible Subordinated Notes (see Note 5) were converted into 225,147 and 134,500,
respectively, shares of
Class A Common 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 September 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 nine
months ended September 30, 1996 and 1995 are not necessarily indicative of the
results of the entire year.
REPOSSESSED VEHICLES HELD FOR RESALE
At September 30, 1996 and December 31, 1995, the approximate number of
repossessed vehicles held for resale was 617 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:
September 30, December 31,
1996 1995
--------------- ------------
<S> <C> <C>
Automobile Receivables
Retail installment sales contracts $ 82,357,891 $ 62,202,136
Other 931,599 795,304
Excess interest receivable 6,422,332 3,312,635
Accrued interest 1,091,112 1,020,166
--------------- -------------
Total finance receivables 90,802,934 67,330,241
Allowance for credit losses (6,724,166) (6,661,917)
--------------- -------------
Automobile receivables - net $ 84,078,768 $ 60,668,324
=============== =============
<FN>
</TABLE>
At September 30, 1996, the accrual of interest income was suspended on
$213,420 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,
certain 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 for
Credit Losses
---------------
<S> <C>
Balance as of December 31, 1995 $ 6,661,917
Provision for credit losses 1,029,846
Unearned interest income 5,543,524
Unearned discounts 3,227,718
Retail installment sale contracts charged off (18,087,456)
Recoveries 8,348,617
---------------
Balance as of September 30, 1996 $ 6,724,166
===============
<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
nine months ended September 30, 1996, $1,111,321 and $2,433,827 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 alleged
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 claimed that
he sustained approximately $450,000 in damages. The defendants denied the
material allegations of the complaint, set forth several affirmative defenses,
alleged that the complaint was frivolous and filed a counterclaim against the
plaintiff alleging breach of contract. Mediation had been set for August 14,
1996.
In August 1996, the parties settled the above lawsuit. Under the settlement,
the Company agreed to retain the plaintiff as a consultant for the period of
three years, to reimburse the plaintiff's attorney fees and to release and
abandon any claim to ownership or option to acquire 20,715 shares of Class B
Common Stock owned by the plaintiff.
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.
LOANS IN FUNDING
As of September 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 September 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 $ 6,072,545 $ 6,296,868
Series 1995-A Note 39,220,419 51,363,299
Series 1995-B Notes 16,886,806 19,100,595
------------- -----------
TOTAL $ 62,179,770 $76,760,762
============= ===========
<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.
Accordingly, the expiration date of the option is September 10, 1998.
At the Annual Shareholders' Meeting held on September 10,1996, the
shareholders voted to so ratify the amended Purchase Agreement and Indenture
dated January 9, 1996.
REVOLVING LINE OF CREDIT - LASALLE NATIONAL BANK
In January 1996, the Company entered into a revolving line of credit
agreement with LaSalle National Bank ("LaSalle")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. At September 30,
1996, the Company was in violation of a loan covenant which LaSalle has
agreed to amend. As of September 30, 1996, the Company had borrowed $3.0
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 nine months ended September 30, 1996, there were 272,500 stock
options granted at an exercise price of $1.875, 98,000 stock options were
cancelled and no stock options were exercised under the Company's stock option
plan.
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,
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.
<13>
<PAGE>
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 Nine Months
Ended September 30, Ended September 30,
1996 1995 1996 1995
------------ -------- ------------ --------
<S> <C> <C> <C> <C>
Pretax income (loss) - continuing and
discontinued operations $(1,055,999) $217,896 $(3,022,302) $758,931
============ ======== ============ ========
Federal tax expense (benefit)
at statutory rate - 34% $ (359,040) $ 74,085 $(1,027,583) $258,037
State income tax expense (benefit) (35,904) 7,408 (117,437) 25,803
------------ -------- ------------ --------
Income tax expense (benefit) $ (394,944) $ 81,493 $(1,145,020) $283,840
============ ======== ============ ========
<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 September 30,
1996, were as follows:
<TABLE>
<CAPTION>
<S> <C>
Deferred tax assets:
Loss on disposal of CarMart $ 10,660
Federal and State NOL tax carry-forward 3,619,998
Other 60,082
------------
Total deferred tax assets 3,690,740
------------
Deferred tax liabilities:
Depreciation (86,094)
Allowances and Loan Origination Fees (2,589,811)
Other (6,447)
------------
Total deferred tax liability (2,682,352)
------------
Net deferred tax asset $ 1,008,388
============
<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. As of October 17, 1996, the remaining inventory at the
Aurora, Colorado store had been liquidated.
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 Nine Months
Ended September 30, 1995 Ended September 30, 1995
-------------------------- --------------------------
Revenues $ 2,820,905 $ 9,096,438
Total costs and expenses 2,958,720 9,486,324
-------------------------- --------------------------
(Loss) from discontinued operations before income taxes (137,815) (389,886)
Income tax (benefit) (51,542) (145,817)
-------------------------- --------------------------
(Loss) from discontinued operations $ (86,273) $ (244,069)
========================== ==========================
<FN>
</TABLE>
The Company allocated interest expense and associated direct costs of $9,083
and $27,253 to discontinued operations in the three and nine months ended
September 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 September 30, 1996, the Company
recorded additional pretax charges of $150,000 and $355,000 ($93,900 and
$207,551 after tax), 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>
September 30, December 31,
1996 1995
-------------- -------------
Assets
- -------------------------------------
Vehicles held for sale $ 41,175 $ 966,830
Income tax receivable 11,050 948,150
Deferred tax asset 377,698 174,148
Furniture and equipment, net - 269,563
Other receivables 12,067 83,710
Other assets - 58,746
-------------- -------------
Total assets $ 441,990 $ 2,501,147
============== =============
Liabilities
- -------------------------------------
Accounts payable and accrued expenses $ 4,492 $ 662,755
-------------- -------------
Total liabilities $ 4,492 $ 662,755
============== =============
Net assets of discontinued operations $ 437,498 $ 1,838,392
============== =============
<FN>
</TABLE>
NOTE 9 - SUBSEQUENT EVENTS
On October 29, 1996, the Company entered into a Securities Purchase Agreement
with Pacific USA Holdings Corp. ("Pacific") whereby Pacific agreed to purchase
a total of 3,800,000 shares of the Company's Class A Common Stock for a cash
purchase price of $3.25 per share, or total consideration of $12,350,000. In
connection with the purchase of Class A Common Stock, Pacific received for no
additional consideration a five-year warrant to purchase 6,000,000 additional
shares of Class A Common Stock at exercise prices ranging from $4.50 to $7.00
per share, which warrant will be effective as of the closing of the
transaction contemplated by the Securities Purchase Agreement. For financial
reporting purposes, the Company will be required to allocate a portion of the
purchase price for the Class A Common Stock to the warrant. Pacific or its
affiliates are entitled to receive a 3.0% commission in connection with the
purchase of the 3,800,000 shares of Class A Common Stock pursuant to the
Securities Purchase Agreement.
In connection with the Securities Purchase Agreement, Pacific received a
three-year option to purchase a total of 830,000 shares of the Company's
outstanding Class B Common Stock beneficially owned by Morris Ginsburg and
Irwin Sandler, executive officers of the Company, at an exercise price of
$4.00 per share. Pursuant to the Option Agreement, which is effective as of
the closing under the Securities Purchase Agreement, Messrs. Ginsburg and
Sandler have the right to require Pacific to purchase such shares in two equal
installments on the first and second anniversaries of closing and have granted
to Pacific an irrevocable proxy with respect to such shares. Also, in
connection with the Securities Purchase Agreement, Messrs. Ginsburg and
Sandler entered into new employment agreements with the Company, which
agreements will replace such officers' existing employment agreements
effective as of the closing.
Concurrently with the execution of the Securities Purchase Agreement, the
Company entered into a Loan Agreement with Pacific whereby Pacific loaned the
Company $3.0 million on November 1, 1996. The loan is required to be repaid
with the proceeds of the issuance of Class A Common Stock under the Securities
Purchase Agreement.
Pursuant to the Securities Purchase Agreement, the Company has agreed, among
other things, to elect designees of Pacific to a majority of the seats on
the Company's Board of Directors effective as of the closing. Consummation of
the transactions contemplated by the Securities Purchase Agreement may be
deemed to result in a change in control of the Company.
<17>
<PAGE>
Consummation of the transactions contemplated by the Securities Purchase
Agreement is subject to numerous conditions customary in transactions of this
type, including approval by a special committee of the Company's Board of
Directors comprised of non-employee directors, receipt of a fairness opinion
from an independent financial advisor and the approval of the Company's
stockholders at a special meeting expected to be held in December 1996.
Messrs. Ginsburg and Sandler have agreed to vote all shares beneficially owned
by them in favor of approval of the Securities Purchase Agreement.
The foregoing description of the Securities Purchase Agreement, Stock Purchase
Warrant, Shareholder Option Agreement, Executive Employment Agreements and
Loan Agreement is qualified in its entirety by the texts of such agreements.
<18>
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
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 nine months ended September 30, 1996 and 1995 was
approximately 7% 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 24%, before discounts, and has an
original weighted average term of approximately 48 months. The average amount
financed per Contract for the nine months ended September 30, 1996 and 1995
was approximately $10,175 and $8,437, respectively.
RESULTS OF OPERATIONS
OVERVIEW
<TABLE>
<CAPTION>
INCOME STATEMENT DATA
Three Months Nine Months
Ended September 30, Ended September 30,
<S> <C> <C> <C> <C>
(dollars in thousands, except per share amounts) 1996 1995 1996 1995
----------- ----------- ---------- -----------
Total revenues $ 3,528 $ 3,491 $ 9,987 $ 9,320
Total costs and expenses $ 4,584 $ 3,135 $ 12,504 $ 8,171
Income (loss) from continuing operations before income taxes $ (1,056) $ 356 $ (2,517) $ 1,149
Income tax expense (benefit) $ (395) $ 133 $ (941) $ 430
Income (loss) from continuing operations $ (661) $ 223 $ (1,576) $ 719
(Loss) from discontinued operations, net of income taxes - $ (87) - $ (244)
(Loss) on disposal of discontinued business, net of income taxes - - $ (301) -
Net income (loss) $ (661) $ 136 $ (1,877) $ 475
Net income (loss) per share $ (0.09) $ 0.02 $ (0.27) $ 0.09
Weighted average number of shares outstanding 6,961,737 5,549,154 6,963,282 5,304,498
<FN>
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET DATA
<S> <C> <C>
September 30, 1996 December 31, 1995
-------------------- ------------------
(dollars in thousands)
Total assets $ 98,720 $ 79,351
Total liabilities $ 77,910 $ 56,601
Retained earnings (deficit) $ (1,325) $ 552
Stockholders' equity $ 20,810 $ 22,750
<FN>
</TABLE>
<19>
<PAGE>
The Company's revenues increased 1% from just under $3.5 million in the third
quarter of 1995 to just over $3.5 million in the comparable 1996 period. Net
income (loss) from continuing operations for the quarter decreased from $.2
million in 1995 to $(.7) million in 1996. Earnings (loss) per share from
continuing operations for the 1996 quarter were $ (0.09), based on 7.0 million
weighted average shares outstanding, compared with $0.04 per share, based on
5.5 million weighted average shares outstanding, for 1995. Net income (loss)
for the quarter decreased from $.1 million in 1995 to $(0.7) million in 1996,
while net income (loss) per share decreased from $0.02 in 1995 to $(0.09) in
1996, primarily due to a $.9 million decrease in income from continuing
operations.
For the nine months ended September 30, the Company's revenues increased 7%
from $9.3 million in 1995 to $10.0 million in 1996. Net income (loss) from
continuing operations for the nine months ended September 30, decreased from
$.7 million in 1995 to $(1.6) million in 1996. Earnings (loss) per share from
continuing operations for 1996 were $(0.23), based on 7.0 million weighted
average shares outstanding, compared with $0.14 per share, based on 5.3
million weighted average shares outstanding, for 1995. Net income (loss) for
the nine months ended September 30, decreased from $.5 million in 1995 to
$(1.9) million in 1996, while net income (loss) per share decreased from $0.09
in 1995 to $(0.27) in 1996, primarily due to a $2.3 million decrease in income
from continuing operations.
CONTINUING OPERATIONS
<TABLE>
<CAPTION>
SELECTED OPERATING DATA
Three Months Ended Nine months Ended
September 30, September 30,
<S> <C> <C> <C> <C>
(dollars in thousands, except where noted) 1996 1995 1996 1995
-------- ------- -------- -------
Interest income $ 3,527 $3,440 $ 9,952 $9,225
Other income $ 1 $ 51 $ 35 $ 95
Provision for credit losses $ 208 $ 406 $ 756 $1,290
Operating expenses $ 3,144 $1,720 $ 8,394 $4,230
Interest expense $ 1,232 $1,009 $ 3,354 $2,651
Operating expenses as a % of
average gross receivables 4.2% 2.8% 12.3% 7.8%
Contracts from Dealer Network 2,353 1,281 5,059 4,012
Contracts from Company Dealerships - 353 148 1,178
-------- ------- -------- -------
Total contracts 2,353 1,634 5,207 5,190
Average amount financed (dollars) $11,055 $8,209 $10,175 $8,437
<FN>
</TABLE>
REVENUES
Total revenues for the quarter ended September 30, 1996 increased $37,000
when compared to the same period in 1995, primarily due to the increase in
interest income, which increased 3%, or $87,000, from 1995 to 1996. Total
revenues for the nine months ended September 30, 1996 increased $.7 million
when compared to the same period in 1995 primarily due to the increase in
interest income, which increased 8% from $9.2 million in 1995 to $10.0 million
in 1996. This increase was due to greater interest income generated from
the 29% increase in the Company's loan portfolio from $63.7 million at
September 30, 1995, to $82.4 million at September 30, 1996, offset by the
amortization of excess interest as explained in Note 2 of the Notes to
Consolidated Financial Statements.
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 84% from 1,281 in the
third quarter of 1995 to 2,353 in the comparable 1996 period. The dollar value
of the Dealer Contracts generated increased $15.2 million, or 142%, from $10.8
million in the third quarter of 1995 to $26.0 million in the comparable 1996
period. The number of contracts generated from the Dealer Network increased
26% from 4,012 for the nine months ended September 30, 1995 to 5,059 in the
comparable 1996 period. The dollar value of the Dealer Contracts generated
increased $16.8 million, or 48%, from $35.1 million in the first nine months
of 1995 to $51.9 million in the comparable 1996 period.
<20>
<PAGE>
The number of loan originations from the CarMart operations decreased 100%
from 353 in the third quarter of 1995 to 0 in the comparable 1996 period, due
to the closing of the CarMart operations on May 31, 1996. The dollar value of
the Contracts generated in the third quarter of 1995 was $2.6 million. For the
nine months ended September 30, the number of loan originations from the
CarMart operations decreased 87% from 1,178 in 1995 to 148 in the comparable
1996 period. The dollar value of these Contracts decreased $7.5 million, or
88%, from $8.6 million in the first nine 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 increased 44% from
1,634 in the third quarter of 1995 to 2,353 in the comparable 1996 period. The
dollar value of these Contracts increased $12.6 million, or 94%, from $13.4
million in the third quarter of 1995 to $26.0 million in the comparable 1996
period. The average amount financed increased 35% from $8,209 in the third
quarter of 1995 to $11,055 in the comparable 1996 period. For the nine months
ended September 30, the total number of Contracts generated by the Company
increased 0.3% from 5,190 in 1995 to 5,207 in the comparable 1996 period. The
dollar value of these Contracts increased $9.2 million, or 21%, from $43.8
million in the first nine months of 1995 to $53.0 million in the comparable
1996 period. The average amount financed increased 21% from $8,437 in the
first nine months of 1995 to $10,175 in the comparable 1996 period. The
average discount on all Contracts purchased pursuant to the discounted Finance
Programs decreased from 20% in the third quarter of 1995 to 8% in the
comparable 1996 period and from 21% in the first nine months of 1995 to 9% in
the comparable 1996 period. The increase in the average amount financed and
the decrease in the purchase discount were primarily due to new Finance
Programs introduced in 1995 and 1996 and more selective buying, with the
intent to reduce credit loses, beginning in the third quarter of 1996.
At September 30, 1995 and September 30, 1996, approximately $13.7 million, or
22%, and $6.1 million, or 7%, of the Automobile Receivables loan portfolio
were generated from the CarMart operations, respectively.
Other income decreased $50,000 from $51,000 in the third quarter of 1995 to
$1,000 in the comparable 1996 period and decreased $60,000 from $95,000 for
the first nine months of 1995 to $35,000 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 49%, from $.4
million in the quarter ended September 30, 1995 to $.2 million in the
comparable 1996 period. For the nine months ended September 30, the provision
for credit losses decreased $.5 million, or 41%, from $1.3 million in the
first nine months of 1995 to $.8 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
Contracts purchased prior to January 1, 1995. 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 9.9% in the first nine months of 1995 to 14.2% in the
comparable 1996 period. The company anticipates that net charge-offs as a
percentage of average net automobile receivables will decrease in the future.
However, 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 1.9 % at September 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 addition, certain Contracts purchased in 1995 have
contributed to the increase in charge-offs in 1996. In the first nine months
of 1996, the number of loans purchased at less than face value increased by
313% 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.
<21>
<PAGE>
In an attempt to improve the credit quality of Contracts purchased, and reduce
charge-offs, the Company implemented an internally developed credit scorecard
during the third quarter of 1996 to assist in the evaluation of credit quality
and lower future charge-offs.
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,
certain 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 83%, from $1.7 million in the
third quarter of 1995 to $3.1 million in the comparable 1996 period. This
increase primarily was due to an increase in salaries and benefits of $0.6
million, consulting and professional fees of $0.2 million , depreciation and
amortization of $0.1 million, telephone costs of $0.1 million and travel costs
of $0.1 million. For the nine months ended September 30, operating expenses
increased $4.2 million, or 98%, from $4.2 million in the first nine months of
1995 to $8.4 million in the comparable 1996 period. This increase primarily
was due to an increase in salaries and benefits of $1.7 million, consulting
and professional fees of $0.7 million, depreciation and amortization of $0.4
million, telephone costs of $0.2 million and travel costs of $0.2 million.
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, from the fourth quarter of
1995 through the second quarter of 1996, the Company 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 third 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 the third quarter of 1996, this pattern was reversed and the
Company acquired 2,353 loans for the quarter versus 1,634 in the comparable
1995 quarter.
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 September 30, 1996, the Company
had 12 full time and contract sales representatives. From October 1, 1995,
through September 30, 1996, the Company increased its market penetration into
six additional states. As a result of its expanded marketing efforts, the
Company expects to increase its loan acquisition volume for the last quarter
of 1996 over the comparable 1995 period, when the Company purchased 880 loans
totalling $7.4 million. However, the Company does not anticipate that loan
purchases during the fourth quarter of 1996 will equal its third quarter of
1996 volume. The Company also intends to evaluate other marketing strategies
intended to increase loan originations.
Operating expenses as a percentage of average gross receivables increased from
2.8% in the third quarter of 1995 to 4.2% in the comparable 1996 period and
from 7.8% in the first nine months of 1995 to 12.3% in the comparable 1996
period. The Company anticipates that, as its loan portfolio grows, it may be
able to achieve further operating efficiencies. 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 average gross receivables.
<22>
<PAGE>
Interest expense increased $.2 million, or 22%, from $1.0 million in the third
quarter of 1995 to $1.2 million in the comparable 1996 period. For the nine
months ended September 30, interest expense increased $0.7 million, or 27%,
from $2.7 million in 1995 to $3.4 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
$63.7 million at September 30, 1995 to $82.4 million at September 30, 1996.
Since September 30, 1995, net increases (decreases) in the Company's debt were
as follows:
<TABLE>
<CAPTION>
<S> <C>
(dollars in thousands)
Notes payable - LaSalle $ 3,000
Convertible senior subordinated debt 5,000
Automobile receivables-backed notes 10,443
-------
Total $18,443
=======
<FN>
</TABLE>
The average annualized interest rate on the Company's debt was 7.0% in the
third quarter of 1996 versus 7.2% in the comparable 1995 period. For the nine
months ended September 30, the average annualized interest rate on the
Company's debt was 7.0% in 1996 versus 7.7% 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 16.3% in the third quarter of 1995 to 12.0% in the
comparable 1996 period. For the nine months ended September 30, the annualized
net interest margin percentage decreased from 16.7% in 1995 to 13.1% 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 $.9 million from $.2
in the third quarter of 1995 to $(0.7) million in the comparable 1996 period.
For the nine months ended September 30, net income (loss) from continuing
operations decreased $2.3 million from $0.7 in 1995 to $(1.6) 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 and other income $ 0.0 $ 0.7
Provision for credit losses 0.2 0.5
Operating expenses (1.4) (4.2)
Interest expense (0.2) (0.7)
Income tax expense 0.5 1.4
--------- --------------
Net (decrease) to net income
from continuing operations $ (0.9) $ (2.3)
========= ==============
<FN>
</TABLE>
<23>
<PAGE>
<TABLE>
<CAPTION>
DISCONTINUED OPERATIONS
SELECTED OPERATING DATA
Three Months Ended Nine months Ended
September 30, September 30,
<S> <C> <C> <C> <C>
(dollars in thousands, except where noted) 1996 1995 1996 1995
----- ------- ------ -------
Sale of vehicles - $2,806 $1,301 $9,059
Other income - $ 15 $ 15 $ 37
Cost of vehicles sold - $1,519 $1,085 $4,926
Provision for credit losses - $ 714 $ 274 $2,230
Operating expenses $ 49 $ 718 $ 793 $2,307
Interest expense - $ 8 - $ 23
Gross margin % on vehicle sales - 46% 17% 46%
Operating expenses as a % of revenues - 25% 60% 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
nine months ended September 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 September 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.
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. As of October 17, 1996, the remaining retail inventory had been
liquidated. 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 $2.8 million, or 100%, from
$2.8 million in the third quarter of 1995 to $0 in the comparable 1996 period.
For the nine months ended September 30, revenues from the sale of
vehicles decreased $7.8 million, or 86%, from $9.1 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 $15,000 and $23,000 for the
three and nine months ended September 30 1996, respectively, when compared to
the same periods in the prior year.
COSTS AND EXPENSES
The cost of vehicles sold decreased $1.5 million, or 100%, from $1.5 million
in the third quarter of 1995 to $0 million in the comparable 1996 period.
As a percentage of corresponding vehicle sales, the cost was 54% in 1995. For
the nine months ended September 30, 1996, the cost of vehicles sold decreased
<24>
<PAGE>
$3.8 million, or 78%, from $4.9 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 $.7 million, or 100%, from $.7
million in the third quarter of 1995 to $0 in the comparable 1996 period. For
the nine months ended September 30, the provision for credit losses decreased
$1.9 million, or 88%, from $2.2 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 $.7 million, or 93%, from $.7 million in the
third quarter of 1995 to $49,000 in the comparable 1996 period. For the nine
months ended September 30, operating expenses decreased $1.5 million, or 66%,
from $2.3 million in 1995 to $.8 million in the comparable 1996 period. As a
percentage of revenues, operating expenses for the three months ended
September 30, 1995 were 25% and, for the nine months ended September 30,
increased from 25% in 1995 to 60% in 1996. This increase was 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 was $23,000 to
discontinued operations in the three and nine months ended September 30, 1995,
respectively. The allocation was based on the ratio of discontinued net assets
to consolidated net assets plus consolidated debt.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash flows for the nine months ended September 30, 1996 and
1995 are summarized as follows:
<TABLE>
<CAPTION>
CASH FLOW DATA
Nine months Ended September 30,
<S> <C> <C>
(dollars in thousands) 1996 1995
--------- ---------
Cash flows provided by (used in):
Operating activities $ 2,260 $ 4,721
Investing activities (26,095) (26,604)
Financing activities 18,926 23,238
--------- ---------
Net increase (decrease) in cash and cash equivalents $ (4,909) $ 1,355
========= =========
<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 Installment
Note proceeds and related capital (See Note 9), Revolving Note and revolving
line of credit, as described in detail below, to provide the liquidity to
finance the purchase of installment Contracts.
In order to further insure the Company's ability to finance the purchase of
installment contracts and thereby continue to grow, the Company is seeking to
obtain an additional warehouse credit facility on terms more favorable than
the Revolving Note described in Note 5 to the Company's Consolidated Financial
Statements. If the Company is successful in obtaining such a credit facility,
it will provide the Company with additional working capital to the extent that
the new cash advance terms are more favorable than the Revolving Note.
Although the Company believes it will be able to consummate such a new credit
facility, no assurance can be given that it will be consummated.
In addition to its efforts to obtain a new credit facility, as described
above, the Company on November 1, 1996, obtained a $3 million term loan from
Pacific USA Holdings Corp. as described in Note 9 to the Company's
Consolidated Financial Statements. Additional capital is expected to be
provided through the issuance of approximately $12 million of the Company's
Class A Common Stock to Pacific USA Holdings Corp. pursuant to the Securities
<25>
<PAGE>
Purchase Agreement described in Note 9 to the Company's Consolidated Financial
Statements. The obligations of Pacific USA Holdings Corp. under the
Securities Purchase Agreement are subject to various conditions, and no
assurance can be given that the transactions contemplated will be consummated.
Failure to consummate such transactions could have a material adverse effect
on the Company's financial condition and could require the Company to seek
other sources of capital to fund its operations.
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. 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.
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 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.
<26>
<PAGE>
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 September 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 $ 6,073 $ 6,297
Series 1995-A Note 39,220 51,363
Series 1995-B Notes 16,887 19,101
------------- -------------------
Total $ 62,180 $ 76,761
============= ===================
<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.
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.
Accordingly, the expiration date of the option is September 10, 1998.
At the Annual Shareholders' Meeting held on September 10, 1996, the
shareholders voted to so ratify the amended Purchase Agreement and Indenture
dated January 9, 1996.
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
<27>
<PAGE>
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. As of September
30, 1996, the Company had borrowed $3.0 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
September 30, 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.
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 ("FASB")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 non-employees. 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.
<28>
<PAGE>
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.
In June 1996, the FASB issued SFAS No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities. The Company
intends to adopt SFAS No. 125. effective January 1, 1997. Under SFAS No. 125,
future asset securitization in which control of the securitized financial
assets is transferred would be accounted for by recognizing all assets sold
and recognizing in earnings any gain or loss on the sale.
INFLATION
Inflation was not a material factor in either the sales or the operating
expenses of the Company from inception to September 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. However, the third quarter 1996
implementation of an internally-generated scorecard system designed to
evaluate and improve the credit quality of loans purchased will lead to
substantially fewer Contracts purchased in the fourth quarter of 1996 when
compared to the third quarter of 1996. Fourth quarter Contract purchases,
however, will substantially exceed the 880 Contract purchases in the fourth
quarter of 1995.
At September 30, 1996 the Company purchased Contracts in twenty-one states
from approximately 425 active automobile dealers and was being serviced by 12
sales representatives.
With the anticipated closing of the Securities Purchase Agreement with
Pacific, the Company believes that it has adequate capital and warehouse lines
of credit to finance its strategic plan for Dealer growth through 1996 and
into 1997. The Company's Stockholders' Equity at September 30, 1996, exceeded
$20.8 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 $75 million of AAA rated warehouse lines and a $15 million line of credit
from a national bank in place at September 30, 1996, and the $3.0 million of
proceeds received November 1, 1996, from the Installment Note, 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 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.
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.
<29>
<PAGE>
MONACO FINANCE, INC. AND SUBSIDIARIES
FORM 10-QSB
QUARTER ENDED SEPTEMBER 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 alleged
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 claimed that
he sustained approximately $450,000 in damages. The defendants denied the
material allegations of the complaint, set forth several affirmative defenses,
alleged that the complaint was frivolous and filed a counterclaim against the
plaintiff alleging breach of contract. Mediation had been set for August 14,
1996.
In August 1996, the parties settled the above lawsuit. Under the settlement,
the Company agreed to retain the plaintiff as a consultant for the period of
three years, to reimburse the plaintiff's attorney fees and to release and
abandon any claim to ownership or option to acquire 20,715 shares of Class B
Common Stock owned by the plaintiff.
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.
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
I. The annual meeting of shareholders of Monaco Finance, Inc. was held
on September 10, 1996.
II. Morris Ginsburg, Irwin L. Sandler, David M. Ickovic, Brian O'Meara and
Craig L. Caukin were elected as Directors of the Company to serve until the
next annual meeting of the shareholders or until their successors are elected
or qualified (8,211,500 for, 0 withheld, 61,844 against and 0 abstain).
<30>
<PAGE>
III. Also, at the annual meeting, shareholders voted to:
A. ratify the amended Purchase Agreement and Indenture dated January 9,
1996, between the Company and Black Diamond Advisors, Inc. one of the initial
purchasers, relating to the conversion price and conversion period of
$10,000,000 in principal amount of 12% Convertible Senior Subordinated Notes
due 2001 (8,132,571 for, 86,374 against, and 54,399 abstained).
B. ratify the appointment of Ehrhardt, Keefe, Steiner & Hottman, P.C. as
the Company's independent certified public accountants for the current fiscal
year and until such time as its successor is approved by the Company's Board
of Directors (8,212,421 for, 35,049 against, and 25,874 abstained).
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 October 31, 1996 was filed announcing the signing of a
Securities Purchase Agreement, a Stock Purchase Warrant, a Shareholder Option
Agreement and a Loan Agreement with Pacific USA Holdings Corp.
<31>
<PAGE>
EXHIBIT 11
<TABLE>
<CAPTION>
MONACO FINANCE, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS (LOSS) PER SHARE
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 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 $ (661,055) $ 222,676 $(1,575,831) $ 719,160
(Loss) from discontinued operations - (86,273) - (244,069)
(Loss) on disposal of discontinued business - - (301,451) -
----------- ----------- ------------ -----------
Net income (loss) $ (661,055) $ 136,403 $(1,877,282) $ 475,091
=========== =========== ============ ===========
AVERAGE SHARES OUTSTANDING
- ----------------------------------------------------------
Weighted average shares outstanding 6,961,737 5,012,059 6,963,282 4,929,035
Shares issuable from assumed exercise of stock options (a) (b) 317,732 (b) 272,384
Shares issuable from assumed exercise of underwriters'
units (a) (b) 113,017 (b) 67,630
Shares issuable from assumed exercise of stock
warrants (a) (b) 106,346 (b) 35,449
----------- ----------- ------------ -----------
Common stock and common stock equivalents - primary 6,961,737 5,549,154 6,963,282 5,304,498
Additional dilutive effect of assumed exercise of
stock options (b) 33,391 (b) 25,296
Additional dilutive effect of assumed exercise of
stock warrants (b) 144,563 (b) 59,011
Additional dilutive effect of assumed exercise of
underwriters' units (b) 29,930 (b) 28,650
Shares issuable from assumed conversion of 7%
subordinated debt (c) (b) (b) (b) (b)
----------- ----------- ------------ -----------
Common stock and common stock equivalents - fully
diluted 6,961,737 5,757,038 6,963,282 5,417,455
=========== =========== ============ ===========
EARNINGS (LOSS)PER SHARE - PRIMARY
- ----------------------------------------------------------
Income (loss) from continuing operations $ (0.09) $ 0.04 $ (0.23) $ 0.14
(Loss) from discontinued operations - (0.02) - (0.05)
(Loss) on disposal of discontinued business - - (0.04) -
----------- ----------- ------------ -----------
Net income (loss) per share $ (0.09) $ 0.02 $ (0.27) $ 0.09
=========== =========== ============ ===========
EARNINGS (LOSS)PER SHARE - FULLY DILUTED
- ----------------------------------------------------------
Income (loss) from continuing operations $ (0.09) $ 0.04 $ (0.23) $ 0.14
(Loss) from discontinued operations - (0.02) - (0.05)
(Loss) on disposal of discontinued business - - (0.04) -
----------- ----------- ------------ -----------
Net income (loss) per share $ (0.09) $ 0.02 $ (0.27) $ 0.09
=========== =========== ============ ===========
<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>
<32>
<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: November 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
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACED FROM THE
CONSOLIDATED BALANCE SHEETS AND THE CONSOLIDATED STATEMENTS OF OPERATIONS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 9-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-END> SEP-30-1996 SEP-30-1996
<CASH> 7,293,356 7,293,356
<SECURITIES> 0 0
<RECEIVABLES> 90,802,934 90,802,934
<ALLOWANCES> 6,724,166 6,724,166
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 0
<PP&E> 3,262,426 3,262,426
<DEPRECIATION> 1,227,119 1,227,119
<TOTAL-ASSETS> 98,720,112 98,720,112
<CURRENT-LIABILITIES> 0 0
<BONDS> 76,564,770 76,564,770
0 0
0 0
<COMMON> 69,721 69,721
<OTHER-SE> 20,740,666 20,740,666
<TOTAL-LIABILITY-AND-EQUITY> 98,720,112 98,720,112
<SALES> 0 0
<TOTAL-REVENUES> 3,527,655 9,986,681
<CGS> 0 0
<TOTAL-COSTS> 3,144,104 8,393,480
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 207,691 756,215
<INTEREST-EXPENSE> 1,231,859 3,354,288
<INCOME-PRETAX> (1,055,999) (2,517,302)
<INCOME-TAX> (394,944) (941,471)
<INCOME-CONTINUING> (661,055) (1,575,831)
<DISCONTINUED> 0 (301,451)
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (661,055) (1,877,282)
<EPS-PRIMARY> (0.09) (0.27)
<EPS-DILUTED> (0.09) (0.27)
</TABLE>
