FORM 10-KSB/A
AMENDMENT 2
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
Commission file number 0-18819
MONACO FINANCE, INC.
(Name of small business issuer in its charter)
Colorado 84-1088131
(State or other jurisdiction (IRS Employer
of incorporation or organization) identification number)
370 17th Street, Suite 5060
Denver, Colorado 80202
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (303) 592-9411
SECURITIES REGISTERED UNDER SECTION 12(B) OF THE EXCHANGE ACT:
Class A Common Stock, $.01 Par Value
Title of Class
SECURITIES REGISTERED UNDER SECTION 12(G) OF THE EXCHANGE ACT:
Class A Common Stock, $.01 Par Value
Title of Class
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
X Yes _____ No
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendments to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year. $14,024,284.
State the aggregate market value of the voting stock held by
non-affiliates (based on the average bid and asked prices of such stock) of
the Registrant:
As of February 29, 1996: Approximately $25,735,401.
As of February 29, 1996, there were 5,672,279 shares of Class A Common
Stock, $.01 par value and 1,306,000 shares of Class B Common Stock, $.01 par
value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for the 1996 Annual Meeting to be filed within 120 days
after the fiscal year (Part III).
Transitional Small Business Disclosure Format: Yes No X
Total number of pages: 36
<PAGE>
MONACO FINANCE, INC.
1995 FORM 10-KSB/A ANNUAL REPORT
TABLE OF CONTENTS
PAGE NUMBER
PART II
Item 6. Management's Discussion
and Analysis or Plan
of Operation 3-10
Item 7. Financial Statements 11-35
Signatures 36
2
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
SUMMARY
In February 1996, the Company announced that it intends to discontinue its
CarMart retail used car sales and associated financing operations related to
its CarMart business. The CarMart business will cease operations on April 30,
1996. The results of operations of the CarMart business are included in the
Consolidated Statement of Operations under the caption "Income (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 fiscal years ended December 31, 1995
and 1994 was approximately 17.1% and 17.3%, respectively. The Company services
all of the loans that it owns. The loan portfolio carries a contract annual
percentage rate of interest that averages approximately 25%, before discounts,
and has an original weighted average term of approximately 44 months. The
average amount financed per Contract for the years ended December 31, 1995 and
1994 was approximately $8,407 and $8,607, respectively.
RESULTS OF OPERATION
<TABLE>
<CAPTION>
OVERVIEW
INCOME STATEMENT DATA
Years ended December 31,
<S> <C> <C>
(dollars in thousands, except per share amounts) 1995 1994
----------- ----------
Total revenues $ 14,024 $ 8,093
Total costs and expenses $ 13,166 $ 6,926
Income from continuing operations before income taxes $ 858 $ 1,167
Income tax expense $ 321 $ 437
Income from continuing operation $ 537 $ 731
Income (loss) from discontinued operations, net of income taxes ($721) $ 331
(Loss) on disposal of discontinued business, net of income taxes ($1,158) -
Net income (loss) ($1,342) $ 1,062
Net income (loss) per share ($0.24) $ 0.19
Weighted average number of shares outstanding 5,603,689 5,467,586
<FN>
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET DATA
December 31,
<S> <C> <C>
(dollars in thousands) 1995 1994
------- -------
Total assets $79,351 $48,251
Total liabilities $56,601 $34,079
Retained earnings $ 552 $ 1,893
Stockholders' equity $22,750 $14,172
<FN>
</TABLE>
The Company's revenues increased 73% from $8.1 million in 1994 to $14.0
million in 1995. Net income from continuing operations decreased 26% from $.7
million in 1994 to $.5 million in 1995. Earnings per share from continuing
operations for 1995 were $0.10, based on 5.6 million weighted average shares
outstanding, compared with $0.13 per share, based on 5.5 million weighted
average shares outstanding, for 1994.
3
<PAGE>
Net income decreased from income of $1.1
million in 1994 to a loss of $1.3 million in 1995 while net income (loss) per
share decreased from $0.19 in 1994 to ($0.24) in 1995 primarily due to a 1995
loss from the discontinued operations of the CarMart business of $.7 million
compared with income of $.3 million in 1994 and a 1995 loss on disposal of the
CarMart business of $1.2 million.
<TABLE>
<CAPTION>
CONTINUING OPERATIONS
SELECTED OPERATING DATA
Years ended December 31,
<S> <C> <C>
(dollars in thousands, except where noted) 1995 1994
-------- -------
Interest income $12,501 $7,144
Other income $ 1,523 $ 949
Provision for credit losses $ 1,635 $1,094
Operating expenses $ 7,845 $4,337
Interest expense $ 3,686 $1,495
Operating expenses as a % of revenues 56% 54%
Contracts from Dealer Network 4,892 2,880
Contracts from Company Dealerships 1,480 1,606
-------- -------
Total contracts 6,372 4,486
Average amount financed (dollars) $ 8,407 $8,607
<FN>
</TABLE>
REVENUES
Total revenues for the year ended December 31, 1995 increased $5.9 million
when compared to the same period in 1994. Interest income comprised $5.4
million of the above increase, increasing 75% from $7.1 million in 1994 to
$12.5 million in 1995. This increase was due to the 45% increase in the
Company's loan portfolio from $42.9 million in 1994 to $62.2 million in 1995.
The most significant aspect of the growth in the Company's loan portfolio is
attributable to the increased number of loans generated from the Dealer
Network. The number of contracts generated from the Dealer Network increased
70% from 2,880 in 1994 to 4,892 in 1995. The dollar value of these Contracts
increased $17.0 million, or 66%, from $25.6 million in 1994 to $42.6 million
in 1995. The increase in Contracts mainly was due to the expansion of the
Dealer Network in 1995.
The number of loan originations from the CarMart operations decreased 8%
from 1,606 in 1994 to 1,480 in 1995. The dollar value of these Contracts
decreased $2.0 million, or 15%, from $13.0 million to $11.0 million in 1995.
The decrease in Contracts mainly was due to the March 31, 1995 closing of the
Company's Lakewood, Colorado retail store and the Company's focus in 1995 on
the expansion of the Dealer Network.
The total number of Contracts generated by the Company increased 42% from
4,486 in 1994 to 6,372 in 1995. The dollar value of these Contracts increased
$15.0 million, or 39%, from $38.6 million in 1994 to $53.6 million in 1995.
The average amount financed decreased 2% from $8,607 in 1994 to $8,407 in
1995. The average discount on all Contracts purchased pursuant to the
discounted Finance Programs remained relatively constant at 17.3% for 1994
compared to 17.1% for 1995.
At December 31, 1994 and 1995, approximately $13.7 million, or 32%, and
$12.8 million, or 21%, of the Automobile Receivables loan portfolio were
generated from the CarMart operations.
Other income increased $.6 million, or 60%, from $.9 million in 1994 to
$1.5 million in 1994. Processing fees paid by dealers increased $.7 million
from $.7 million in 1994 to $1.4 million in 1995 due to the increase in
Contracts generated from the Dealer Network in 1995. Insurance servicer income
remained relatively flat at $.1 million for 1994 and 1995.
4
<PAGE>
COSTS AND EXPENSES
The provision for credit losses increased $.5 million, or 49%, from $1.1
million in 1994 to $1.6 million in 1995. The provision for credit losses
represents estimated current losses based on the Company's risk analysis of
historical trends and expected future results. The increase in the provision
for credit losses primarily was due to the increase in the Company's loan
portfolio, as well as a result of 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 11.4% in 1994 to 17.3%
in 1995. The Company had 2.9% of its loan portfolio over 60 days past due at
December 31, 1995 compared with 2.5% at December 31, 1994. Certain of the
increases in charge-offs and delinquencies are a result in the change in the
mix of loan program type purchased by the Company. In 1995 the number of loans
purchased at less than face value increased by 215% when compared to
1994. 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. 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
considered adequate to cover losses in the existing portfolio. 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 $3.5 million, or 81%, from $4.3 million in
1994 to $7.8 million in 1995. This increase primarily was due to an increase
in staffing and operating costs required to process the increase in loan
originations from 1994 to 1995 and to service the Company's increased loan
portfolio. As the Company continued to expand its Dealer Network, operating
expenses as a percentage of revenues increased from 54% in 1994 to 56% in
1995. The Company anticipates that, as its loan portfolio grows, interest
income will increase. No assurance is given that the portfolio of Automobile
Receivables will increase, and that if it does increase, that such increase
will be sufficient to reduce the percentage of operating expenses to revenue.
The major components of the increase in operating expenses are as
follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(dollars in thousands) 1995 1994 Increase
------ ------ ---------
Salaries and benefits $3,729 $2,248 $ 1,481
Depreciation and amortization 918 201 717
Consulting and professional fees 1,269 561 708
Rent 478 188 290
Office supplies 410 266 144
Telephone 226 160 66
All other 815 713 102
------ ------ ---------
$7,845 $4,337 $ 3,508
====== ====== =========
<FN>
</TABLE>
Interest expense increased $2.2 million, or 147%, from $1.5 million in
1994 to $3.7 million in 1995. 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 $42.9 million at December 31, 1994 to $62.2
million at December 31, 1995. Since December 31, 1994, net increases
(decreases) in the Company's debt were as follows:
<TABLE>
<CAPTION>
(dollars in thousands)
<S> <C>
Notes payable - Citicorp ($3,090)
Convertible subordinated debt (1,230)
Automobile receivables-backed notes 27,465
---------
Total $ 23,145
=========
<FN>
</TABLE>
The average annualized interest rate on the Company's debt was 7.7% in
1995 versus 8.0% in 1994. This decrease was 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.
5
<PAGE>
Net interest margin percentage, representing the difference between
interest income and interest expense divided by average finance receivables,
decreased from 17.1% in 1994 to 16.2% in 1995. 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 from continuing operations decreased $.2 million, or 27%, from $.7
in 1994 to $.5 million in 1995. This decrease was primarily due to (1)
the increase in interest expense and operating expenses associated with the
Company's growth over the last year; and (2) the increase in the provision for
credit losses. Partially offsetting the above decreases to income were
increases to income from continuing operations related to (1) the increase in
interest income as a result of the increase in the Company's loan portfolio;
(2) the increase in other income related to the increase in loan processing
fees; and (3) the decrease in income tax expense of $.1 million, or 26%,
associated with the decrease in income from continuing operations before
income taxes.
<TABLE>
<CAPTION>
DISCONTINUED OPERATIONS
SELECTED OPERATING DATA
Years ended December 31,
<S> <C> <C>
(dollars in thousands, except where noted) 1995 1994
--------- --------
Sale of vehicles $ 11,307 $13,334
Other income $ 55 $ 15
Cost of vehicles sold $ 6,576 $ 7,335
Provision for credit losses $ 2,893 $ 2,517
Operating expenses $ 3,013 $ 2,870
Interest expense $ 31 $ 98
Loss on disposal of discontinued business ($1,158) -
Gross margin % on vehicle sales 42% 45%
Operating expenses as a % of revenues 27% 21%
<FN>
</TABLE>
In February 1996, the Company announced that it intends to discontinue
its CarMart retail used car sales and associated financing operations. The
CarMart business will cease operations on April 30, 1996. The results of
operations of the CarMart business and the related loss on disposition, as
detailed above, are included in the Consolidated Statement of Operations under
the captions "Income (loss) from discontinued operations" and "Loss on
disposal of discontinued business", respectively.
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. The Company intends to liquidate the remaining retail
inventory at the Aurora, Colorado store by April 30, 1996. 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. The Company had closed
its retail car lot in Lakewood, Colorado on March 15, 1995. All personnel
associated with the CarMart operations have been, or will be, reassigned to
other positions within the Company or have been released.
REVENUES
Revenues from the sale of vehicles decreased $2.0 million, or 15%, from $13.3
million in 1994 to $11.3 million in 1995. This decrease was primarily due
to the March 15, 1995 closing of the Company's Lakewood, Colorado retail car
lot and a general decrease in car sales.
Other income, which represents primarily revenue derived from customer
repairs performed by the Company's repair shop, increased by $40,000 from 1994
to 1995.
6
<PAGE>
COSTS AND EXPENSES
The cost of vehicles sold decreased $.8 million, or 10%, from $7.3 million in
1994 to $6.5 million in 1995. As a percentage of corresponding vehicle
sales, the cost increased slightly, from 55% in 1994 to 58% in 1995.
The provision for credit losses increased $.4 million, or 15%, from $2.5
million in 1994 to $2.9 million in 1995. 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
increase in the provision for credit losses was due primarily to the changes
in the Company's CarMart program mix. 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 increased $.1 million, or 5%, from $2.9 million in
1994 to $3.0 million in 1995. As a percentage of revenues, operating expenses
increased from 21% in 1994 to 27% in 1995. 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 vehicle sales
from 1994 to 1995.
The major components of the increase in operating expenses are as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(dollars in thousands) 1995 1994 Increase
------ ------ ----------
Salaries and benefits $1,611 $1,637 ($26)
Advertising 678 563 115
Rent 334 271 63
All other 390 399 (9)
------ ------ ----------
$3,013 $2,870 $ 143
====== ====== ==========
<FN>
</TABLE>
The Company allocated interest expense of $31,000 and $98,000 to
discontinued operations in 1995 and 1994, respectively. The allocations were
based on the ratio of discontinued net assets to consolidated net assets plus
consolidated debt.
LOSS ON DISPOSAL
The loss on disposal of the CarMart business of $1.8 million ($1.2 million
after tax) was comprised primarily of a provision of $1.2 million (pre-tax)
for estimated future losses on Contracts originated through the CarMart retail
stores. Also, included in the loss on disposal was $.5 million (pre-tax)
for estimated 1996 losses from the operations of the CarMart business through
the disposal date of April 30, 1996 and $.1 million (pre-tax) related to
estimated CarMart closing costs.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash flows for the years ended December 31, 1995 and 1994
are summarized as follows:
<TABLE>
<CAPTION>
CASH FLOW DATA
(dollars in thousands) Years ended December 31,
<S> <C> <C>
1995 1994
--------- ---------
Cash flows from:
Operating activities $ 5,937 $ 2,991
Investing activities (28,306) (24,509)
Financing activities 29,590 20,755
--------- ---------
Net increase (decrease) in cash and cash equivalents $ 7,221 ($763)
========= =========
<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 new
Revolving Note, as described in detail below, to provide the liquidity to
finance the purchase of installment Contracts. Under the terms of the
Revolving Note, approximately 75% to 80% of the face amount of Contracts, in
the aggregate, is advanced to the Company for purchasing qualifying Contracts.
The balance must be financed through capital.
7
<PAGE>
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-offs as a percentage of average net
automobile receivables continues to grow substantially in future reporting
periods, it negatively will impact the Company's liquidity and could impair
its ability to increase its loan portfolio.
During 1993 the Company completed the Note Offering described in Note 5
of the Notes to Consolidated Financial Statements. In the Note Offering, the
Company sold 7% Convertible Subordinated Notes in the aggregate principal
amount of $2,000,000. The purchasers of the Notes exercised an option to
purchase an additional $1,000,000 aggregate principal amount on September 15,
1993. The principal amount of the Notes, plus accrued interest thereon, is due
March 1, 1998. The Notes are convertible into Class A Common Stock of the
Company at any time prior to maturity at a conversion price of $3.42 per
share, subject to adjustment for dilution. Certain of these Notes with an
aggregate principal amount of $1,615,000 were converted in 1994 and 1995
resulting in the issuance of 472,219 shares of Class A Common Stock.
On November 1, 1994, MF Receivables Corp. I ("MF Receivables") 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 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 convenants. The Indenture requires MF
Receivables to pledge all Contracts owned by it for repayment of the Revolving
Note or Term Notes, including Contracts pledged as collateral for Series
1994-A Term Notes and the Series 1995-B Term Notes, as well as all future
Contracts acquired by MF Receivables.
The Series 1995-A Note bears interest at LIBOR plus 75 basis points. The
initial funding of this Note was $26,966,489 on May 16, 1995. The Company, as
servicer, provides customary collection and servicing activities for the
Contracts. The Revolving Note has a stated maturity of October 16, 2002 and an
expected termination date of May 16, 1997. The maximum limit for the Series
1995-A Note is $40 million. On September 15, 1995, MF Receivables issued the
Series 1995-B Term Notes ("Series 1995-B Notes") in the amount of $35,552,602.
The Series 1995-B Notes accrue interest at a fixed note rate of 6.45% per
annum. The Series 1995-B Notes are expected to be fully amortized by June
1999; however, the debt maturities are based on principal payments received on
the underlying receivables which may result in a different final maturity. The
proceeds from the issuance of the Series 1995-B Notes were used to retire, in
full, the 1995-A Note, which will be used to accumulate an additional $114.4
million in $40 million increments.
The assets of MF Receivables are not available to pay general creditors
of the Company. In the event there is insufficient cash flow from the
Contracts (principal and interest) to service the Revolving Note and Term
Notes, a nationally recognized insurance company (MBIA) has guaranteed to
repay. The MBIA insured Series 1994- A Notes, Series 1995-A Note and Series
1995-B Notes received a corresponding AAA rating by Standard and Poor's and an
Aaa rating by Moody's and were purchased by institutional investors. The
underlying Contracts accrue interest at rates of approximately 21% to 29%. All
cash collections in excess of disbursements to the Series 1994-A, Series
1995-A and Series 1995-B noteholders and other general disbursements are paid
to MF Receivables monthly.
8
<PAGE>
As of December 31, 1995, 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 $ 12,511 $ 13,244
Series 1995-A Note 7,446 11,152
Series 1995-B Notes 29,713 33,963
------------- -------------------
TOTAL $ 49,670 $ 58,359
============= ===================
<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 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 on or before January 9, 1998,
upon such terms and conditions as shall be agreed to between the Company and
one of the initial purchasers.
In January 1996, the Company entered into a revolving line of credit
agreement with LaSalle National Bank providing a line of credit of up to $15
million, not to exceed a borrowing base consisting of eligible accounts
receivable to be acquired. The scheduled maturity date of the line of credit
is January 1, 1998. At the option of the Company, the interest rate charged on
the loans shall be either .5% in excess of the prime rate charged by lender or
2.75% over the applicable LIBOR rate. The Company is obligated to pay the
lender a fee equal to .25% per annum of the average daily unused portion of
the credit commitment. The obligation of the lender to make advances is
subject to standard conditions. The collateral securing payment of the line of
credit consists of all Contracts pledged and all other assets of the Company.
Among numerous other loan covenants, the Company generally has agreed to
maintain its ratio of liabilities to tangible assets at not more than 3 to 1;
that its tangible net worth shall not be less than $19 million; and that its
interest coverage ratio (earnings before interest and taxes divided by
interest expense) and cash flow ratio (unrestricted cash divided by interest
expense) shall not be less than 1.5 to 1 and 2.0 to 1, respectively. As of
March 29, 1996 the Company has not drawn 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
March 20, 1996, the Company had repurchased 15,000 shares of Class A Common
Stock.
9
<PAGE>
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 issued Statement No.
123, "Accounting for Stock Based Compensation," ("SFAS 123") which encourages,
but does not require, companies to recognize compensation expense for grants
of stock, stock options and other equity instruments to employees. SFAS 123 is
required for such grants, described above, to acquire goods and services from
nonemployees. Additionally, although expense recognition is not mandatory,
SFAS 123 requires companies that choose not to adopt the new fair value
accounting rules to disclose pro forma net income and earnings per share
information using the new method. The Company has adopted SFAS 123 in the
fourth quarter of fiscal 1995 and will disclose pro forma net income and
earnings per share information where applicable.
SFAS No. 114 and No. 118 "Accounting by Creditors for Impairment of a
Loan" is not applicable to the Company as the Company has a large group of
smaller homogeneous loans that are collectively evaluated for impairment.
INFLATION
Inflation was not a material factor in either the sales or the operating
expenses of the Company from inception to December 31, 1995.
FUTURE EXPANSION & STRATEGY
With the closing of the CarMart operations, the Company is now
emphasizing the purchase of Contracts from its Dealer Network. The Company's
strategic plan for 1996 includes increasing its portfolio of outstanding
Contracts through the growth of its Dealer Network.
At December 31, 1995 the Company purchased Contracts in twenty-one states
from approximately 425 active automobile dealers and was being serviced by 13
sales representatives. In 1996, the Company plans to significantly increase
its Dealer Network into additional states as well as states within which it
currently operates.
The Company believes that it has adequate capital and warehouse lines of
credit to finance its strategic plan for Dealer growth through 1996. The
Company's Stockholders' Equity at the end of 1995 exceeded $22.7 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 $105
million of AAA rated warehouse lines and a $15 million line of credit from a
national bank in place at February 29, 1996, the Company believes it has the
financial resources to significantly increase its portfolio of Contracts.
Copies of documents relating to certain of the Company's credit
facilities have been filed with the Securities and Exchange Commission (see
Item 13).
In addition to increasing its portfolio from Dealer purchases, the
Company is evaluating the purchase of third-party originated loan portfolios
as well as other marketing strategies intended to increase loan originations.
10
<PAGE>
ITEM 7. FINANCIAL STATEMENTS.
MONACO FINANCE, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page
Independent Auditors' Report 12
Consolidated Balance Sheets - December 31, 1995 and 1994 13
Consolidated Statements of Operations -
For the Years Ended December 31, 1995 and 1994 14
Consolidated Statements of Stockholders' Equity -
For the Years Ended December 31, 1995 and 1994 15
Consolidated Statements of Cash Flows -
For the Years Ended December 31, 1995 and 1994 16
Notes to the Consolidated Financial Statements 17-35
11
<PAGE>
Ehrhardt
Keefe
Steiner &
Hottman PC
Certified Public Accountant
and Consultants
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Monaco Finance, Inc. and Subsidiaries
Denver, Colorado
We have audited the accompanying consolidated balance sheets of Monaco
Finance, Inc. and Subsidiaries as of December 31, 1995 and 1994, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Monaco
Finance, Inc. and Subsidiaries at December 31, 1995 and 1994, and the results
of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
/s/ Ehrhardt Keefe Steiner & Hottman PC
-----------------------------------------
Ehrhardt Keefe Steiner & Hottman PC
March 12, 1996
Denver, Colorado
12
<PAGE>
MONACO FINANCE, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
December 31,
1995 1994
----------- -----------
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 7,247,670 $ 26,587
Restricted cash 3,694,886 1,594,004
Automobile receivables - net (Notes 2 and 5) 60,668,324 41,323,758
Repossessed vehicles held for sale (Note 2) 2,460,782 407,660
Income tax receivable (Note 7) 23,608 -
Deferred income taxes (Note 7) 42,758 123,447
Furniture and equipment, net of accumulated
depreciation of $701,487 (1995) and $356,325 (1994) 1,615,428 944,849
Net assets of discontinued operations (Note 8) 1,838,392 2,912,305
Other assets 1,759,253 918,278
----------- -----------
Total assets $79,351,101 $48,250,888
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable - Citicorp (Note 3) - $ 3,090,000
Accounts payable 453,240 533,216
Accrued expenses and other liabilities 93,151 87,301
Income taxes payable (Note 7) - 548,418
Convertible subordinated debt (Note 5) 1,385,000 2,615,000
Senior subordinated debt (Note 5) 5,000,000 5,000,000
Automobile receivables-backed notes (Note 5) 49,670,127 22,205,054
----------- -----------
Total liabilities 56,601,518 34,078,989
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, 5,672,279 shares (1995) and
3,363,662 shares (1994) issued 56,723 33,637
Class B common stock, $.01 par value; 2,250,000
shares authorized, 1,306,000 shares (1995) and
1,355,000 shares (1994) issued 13,060 13,550
Additional paid-in capital 22,127,941 12,231,758
Retained earnings 551,859 1,892,954
----------- -----------
Total Stockholder's Equity 22,749,583 14,171,899
----------- -----------
Total Liabilities and Stockholder's Equity $79,351,101 $48,250,888
=========== ===========
<FN>
See notes to consolidated financial statements.
</TABLE>
13
<PAGE>
MONACO FINANCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
<S> <C> <C>
1995 1994
------------- ----------
REVENUES:
Interest $ 12,500,879 $7,143,782
Fee and other income 1,523,405 949,291
------------- ----------
Total revenues 14,024,284 8,093,073
COSTS AND EXPENSES:
Provision for credit losses (Note 2) 1,634,698 1,093,631
Operating expenses 7,845,408 4,337,411
Interest expense (Notes 3 and 5) 3,685,707 1,494,678
------------- ----------
Total costs and expenses 13,165,813 6,925,720
------------- ----------
Income from continuing operations before taxes 858,471 1,167,353
Income tax expense (Note 7) 321,068 436,730
------------- ----------
Income from continuing operations 537,403 730,623
Income (loss) from discontinued operations, net of
applicable income taxes (Notes 7 and 8) (720,607) 330,931
(Loss) on disposal of discontinued business, net of
applicable income taxes (Notes 7 and 8) (1,157,891) -
------------- ----------
Net income (loss) ($1,341,095) $1,061,554
============= ==========
EARNINGS PER SHARE (NOTES 1 AND 6):
Income from continuing operations $ 0.10 $ 0.13
Income (loss) from discontinued operations (0.13) 0.06
(Loss) on disposal of discontinued business (0.21) -
------------- ----------
Net income (loss) per common and common equivalent share ($0.24) $ 0.19
============= ==========
Weighted average number of shares outstanding 5,603,689 5,467,586
<FN>
See notes to consolidated financial statements.
</TABLE>
14
<PAGE>
MONACO FINANCE, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
Class A Class B Additional
Common Stock Common Stock Paid-in- Retained
Shares Amount Shares Amount Capital Earnings Total
--------- ------- ---------- ------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance - December 31, 1993 3,223,990 $32,240 1,384,154 $13,842 $11,792,157 $ 831,400 $12,669,639
Exercise of B warrants 12,500 125 - - 71,875 - 72,000
Exercise of A warrants 600 6 - - 2,694 - 2,700
Exercise of underwriter's units 3,000 30 - - 10,770 - 10,800
Conversion of shares 10,000 100 (10,000) (100) - - 0
Purchase of treasury stock - - (19,154) (192) (21,261) - (21,453)
Conversion of debentures 112,572 1,126 - - 369,533 - 370,659
Shares issued for services 1,000 10 - - 5,990 - 6,000
Net income for the year - - - - - 1,061,554 1,061,554
--------- ---------- ------------ ------------ ------------
Balance - December 31, 1994 3,363,662 33,637 1,355,000 13,550 12,231,758 1,892,954 14,171,899
Conversion of shares 49,000 490 (49,000) (490) - - 0
Exercise of A warrants 140,000 1,400 - - 631,600 - 633,000
Exercise of B warrants 1,622,970 16,230 - - 7,586,376 - 7,602,606
Exercise of underwriter's units 137,000 1,370 - - 491,830 - 493,200
Conversion of debentures 359,647 3,596 - - 1,186,377 - 1,189,973
Net (loss) for the year - - - - - (1,341,095) (1,341,095)
--------- ------- ---------- -------- ------------ ------------ ------------
Balance - December 31, 1995 5,672,279 $56,723 1,306,000 $13,060 $22,127,941 $ 551,859 $22,749,583
========= ======= ========== ======== ============ ============ ============
<FN>
See notes to consolidated financial statements.
</TABLE>
15
<PAGE>
MONACO FINANCE, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
Years ended December 31,
1995 1994
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
- -----------------------------------------------------
Net income $ 537,403 $ 730,623
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 345,162 181,081
Provision for credit losses 1,634,698 1,093,511
Amortization of excess interest 1,523,998 -
Amortization of other assets 575,969 24,662
Deferred income taxes - (375,447)
Other 70,679 6,000
------------- -------------
4,687,909 1,660,430
Change in assets and liabilities:
Receivables (1,379,060) (402,165)
Prepaid expenses (43,318) 4,072
Accounts payable (76,976) 319,985
Accrued liabilities and other 5,249 17,248
Income taxes payable (548,418) 300,379
------------- -------------
Net cash flows from continuing operations 2,645,386 1,899,949
Net cash flows from discontinued operations 3,291,175 1,091,460
------------- -------------
Net cash provided by operating activities 5,936,561 2,991,409
------------- -------------
Cash flows from investing activities:
- -----------------------------------------------------
Retail installment sales contracts - purchased (41,485,949) (23,794,540)
Retail installment sales contracts - originated (11,699,374) (12,765,921)
Proceeds from payments on contracts - purchased 19,579,396 7,848,792
Proceeds from payments on contracts - originated 6,323,846 4,924,084
Purchase of furniture and equipment (1,023,694) (683,427)
Equipment deposits and other - (37,625)
------------- -------------
Net cash (used in) investing activities (28,305,775) (24,508,637)
------------- -------------
Cash flows from financing activities:
- -----------------------------------------------------
Net (repayments) under line of credit (3,090,000) (4,260,000)
Net (increase) in restricted cash (2,100,883) (1,594,004)
Issuance of 9.5% senior debenture - 5,000,000
Borrowings on asset-backed notes 49,242,379 23,861,823
Repayments on asset-backed notes (21,777,306) (1,656,769)
Purchases of treasury stock - (21,453)
Proceeds from exercise of warrants 8,718,613 85,500
Increase in debt issue and conversion costs (1,402,506) (660,547)
------------- -------------
Net cash provided by financing activities 29,590,297 20,754,550
------------- -------------
Net increase (decrease) in cash and cash equivalents 7,221,083 (762,678)
Cash and cash equivalents, beginning of year 26,587 789,265
------------- -------------
Cash and cash equivalents, end of year $ 7,247,670 $ 26,587
============= =============
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 3,514,255 $ 1,558,204
============= =============
Cash paid during the year for income taxes $ 1,006,641 $ 260,955
============= =============
<FN>
Non-cash investing and financing activities:
In 1995, $1,230,000 (net of debt issue costs) of 7% Convertible Subordinated
Notes (Note 5) were converted into 359,647 shares of Class A Common Stock.
In 1994, $385,000 (net of debt issue costs) of 7% Convertible Subordinated
Notes (Note 5) were converted into 112,572 shares of Class A Common Stock.
</TABLE>
See notes to consolidated financial statements.
16
<PAGE>
MONACO FINANCE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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 intends to discontinue its CarMart retail used car sales and
associated financing operations. The CarMart business will cease operations on
April 30, 1996.
PRINCIPLES OF CONSOLIDATION
The Company's consolidated financial statements include the accounts of
Monaco Finance, Inc. and its wholly-owned subsidiaries, CarMart Auto
Receivables Company and MF Receivables Corp. I (the Subsidiaries). All
intercompany accounts and transactions have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
For purposes of cash flow reporting, cash and cash equivalents include cash,
money market funds, government securities, and certificates of deposit with
maturities of less than three months.
RESTRICTED CASH
Restricted cash represents cash collections related to the Automobile
Receivables-Backed Notes (Note 5). On a monthly basis, all cash collections in
excess of disbursements to the noteholders of the Automobile
Receivables-Backed Notes and other general disbursements are paid to MF
Receivables Corp. I. At December 31, 1995 and 1994, the Company had $2,911,582
and $1,251,386, respectively, of its restricted cash balances invested in U.S.
government securities.
FINANCE RECEIVABLES
Finance receivables primarily represent receivables generated from Contracts
purchased from the Dealer Network and from Contracts from the retail sale of
automobiles at the Company's CarMart stores.
REPOSSESSED VEHICLES HELD FOR RESALE
Repossessed vehicles held for resale consists of only repossessed vehicles
awaiting liquidation. At December 31, 1995 and 1994, approximately 658 and 75
repossessed vehicles, respectively, were awaiting liquidation. Included
are vehicles held for resale, vehicles which have been sold for which payment
has not been received and unlocated vehicles (skips), the value of which may
be reimbursed from insurance.
Included in net assets of discontinued operations (Note 8), as of December
31, 1995 and 1994 is inventory at the Company's CarMart locations of $966,830
and $2,598,341, respectively.
17
<PAGE>
At December 31, 1995, the CarMart inventory was recorded at net
realizable value. Net realizable value was based on
reasonable estimates and assumptions that Management believes are adequate,
however, actual proceeds received upon liquidation or sale of these vehicles
will differ from these estimates.
FURNITURE AND EQUIPMENT
Furniture and equipment are stated at acquisition cost. Major additions are
capitalized, whereas maintenance, replacements and repairs are expensed.
Depreciation is provided for in amounts sufficient to allocate the cost of
depreciable assets to operations over their estimated service lives using the
straight-line method.
REVENUE RECOGNITION
At Company owned CarMart stores, the Company recognizes revenues on the sales
of vehicles at the point the sales contract is completed. Interest
income from finance receivables is recognized using the interest (actuarial)
method. Accrual of interest income on finance receivables is suspended when a
loan is contractually delinquent for ninety days or more. The accrual is
resumed when the loan is less than ninety days delinquent, and collectible
past-due interest income is recognized at that time. Any discounts recognized
from the purchase of installment contracts are added to the allowance for
credit losses. Insurance servicer income is recognized as earned.
CREDIT LOSSES
Provisions for credit losses are continually reviewed and adjusted to
maintain the allowance at a level considered adequate to cover losses in the
existing portfolio. The Company's charge-off policy is to automatically
charge-off any installment contract that is 100 days contractually past due.
EXCESS INTEREST
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). Excess interest receivable is
subsequently reduced based upon the amortization of excess interest income
from the related Contracts. For the year ended December 31, 1995, $1,523,998
of excess interest was amortized against excess interest receivable.
LOAN ORIGINATION FEES AND COSTS
Fees received and direct costs incurred for the origination of Contracts are
offset and any excess fees are deferred and amortized to interest income over
the contractual lives of the Contracts using the interest method. Unamortized
amounts, if any, are recognized in income at the time Contracts are sold
or paid in full.
18
<PAGE>
CONCENTRATION OF CREDIT RISKS
The Company's customers are not concentrated in any specific geographic
region. However, their primary concentration of credit risk relates to
lending to individuals who cannot obtain traditional bank financing. The
Company places its temporary cash investments with high quality institutions,
and by policy, limits the amount of credit exposure to any one institution.
The Company does, however, on occasion exceed the FDIC federally insured
limits and at December 31, 1995 and 1994 exceeded the amount by $8,100,788 and
$923,591, respectively.
ADVERTISING COSTS
All costs associated with advertising are expensed as incurred.
EARNINGS PER SHARE
Earnings per share is computed by dividing net income 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.
INCOME TAXES
The Company recognizes deferred tax liabilities and assets based on
differences between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
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.
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, 55,846 shares and 19,154 shares of Class B Common Stock purchased in
1993 and 1994, respectively, have been reported as a reduction to Class B
Common Stock and Additional Paid-in-Capital.
19
<PAGE>
RECLASSIFICATIONS
Certain prior year balances have been reclassified in order to conform with
the current year presentation.
<TABLE>
<CAPTION>
NOTE 2 - AUTOMOBILE RECEIVABLES
Automobile receivables consist of the following:
December 31,
--------------
<S> <C> <C>
1995 1994
-------------- ------------
Automobile Receivables
Retail installment sales contracts $ 3,843,301 $12,249,605
Retail installment sales contracts-Trust (Note 5) 58,358,835 30,678,940
Excess interest receivable 3,312,635 -
Other 795,304 325,604
Accrued interest 1,020,166 629,372
-------------- ------------
Total finance receivables 67,330,241 43,883,521
Allowance for credit losses (6,661,917) (2,559,763)
-------------- ------------
Automobile receivables - net $ 60,668,324 $41,323,758
============== ============
<FN>
</TABLE>
At December 31, 1995, the accrual of interest income was suspended on
$59,044 of retail installment sale contracts.
At the time installments sale 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 prediced
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 considered
adequate to cover losses of principal in the existing Contracts. This
allowance is reported as a reduction to Automobile Receivables.
20
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Allowance for
Credit Losses
---------------
Balance as of December 31, 1993 $ 1,583,296
Provisions for credit losses 3,610,989
Unearned discounts 934,548
Retail installment sale contracts charged off (6,379,305)
Recoveries 2,810,235
---------------
Balance as of December 31, 1994 2,559,763
Provisions for credit losses (Note 8) 5,739,454
Unearned interest income 4,836,633
Unearned discounts 2,368,127
Retail installment sale contracts charged off (17,978,277)
Recoveries 9,136,217
---------------
Balance as of December 31, 1995 $ 6,661,917
===============
<FN>
</TABLE>
The provisions 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
provided for by additions to the Company's allowance for credit losses as
determined by the Company's risk analysis.
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). Excess interest receivable is
subsequently reduced based upon the amortization of excess interest income
from the related Contracts. For the year ended December 31, 1995, $1,523,998
of excess interest income 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.
21
<PAGE>
NOTE 3 - NOTE PAYABLE - CITICORP
In July 1994, the Company completed negotiations with Citicorp Leasing,
Inc. increasing its $20 million revolving line of credit to $25 million. In
addition to various financial covenants, the line of credit was secured by
eligible finance receivables and other assets of the Company. Interest was
charged using a dual interest method. The Company designated a balance that
would remain outstanding for the month and interest was charged at 3.75% above
the London Interbank Offered Rate ("LIBOR"). The remaining portion was
charged interest at 1.75% over the base rate announced publicly by Citibank,
N.A. in New York. Prior to June 1, 1994 the Company was charged rate premiums
of 4.1% and 2%, respectively. As a result of negotiations with Citicorp
Leasing, Inc., the Company secured a reduction in the above interest rate
premiums effective June 1, 1994 and extended the maturity date of the line of
credit to March 31, 1996. At December 31, 1994, the interest rates (base rate
plus rate premium) were 9.88% and 10.25%, respectively. 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 AND CONTINGENCIES
OPERATING LEASES
The Company leases office space, car lot facilities, computer and office
equipment for varying periods. Leases that expire generally are expected to
be renewed or replaced by other leases, or in the case of car lot facilities,
the Company has options to extend the leases.
On March 31, 1994, the Company's lease at 1319 S. Havana, Aurora,
Colorado 80010 was terminated and the operations of the retail CarMart
Dealership at that location were transferred to 890 S. Havana, Aurora,
Colorado 80010. This property is owned by a corporation all of whose
shareholders are officers of the Company. The Company entered into a
seven-year lease commencing March 24, 1994 and ending March 23, 2001. In
September 1995, the Company amended its seven-year lease to include the
property at 810 S. Havana, Aurora, Colorado 80010. The Company currently pays
$13,738 per month on a triple net basis. The lease calls for periodic rental
adjustments over the term. It is the Company's belief that the terms of the
related party lease are generally no less favorable than could have been
obtained from unrelated third party lessors for properties of similar size,
condition and location.
Effective January 15, 1996 and January 31, 1996, the Company closed its
retail CarMart Dealerships located at 4940 S. Broadway, Englewood, Colorado
and 1005 Motor City Drive, Colorado Springs, Colorado, respectively. The
Englewood, Colorado lease ends March 31, 1997. The Company may, at its sole
discretion, extend the Englewood, Colorado lease for additional 3-year periods
through March 2003. The Company currently pays $9,818 per month on a triple
net basis. The Company may, at its sole discretion, extend the Colorado
Springs, Colorado lease for additional yearly periods through May 31, 1998 if
written notice of intent to do so is given the lessor prior to April 15 of
each year. The Company currently pays monthly rent of $1,550 on a triple net
basis.
22
<PAGE>
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.
At December 31, 1995, future minimum rental payments applicable to
noncancelable operating leases were as follows:
<TABLE>
<CAPTION>
<S> <C>
Year Ended
December 31,
- ------------
1996 $ 557,896
1997 537,821
1998 538,837
1999 460,267
2000 200,856
Thereafter 50,214
----------
$2,345,891
==========
<FN>
</TABLE>
Total lease expense for the years ended December 31, 1995 and 1994 was
$724,388 and $440,168, respectively.
CONTINGENCIES
On May 8, 1995, Milton Karsh, a former Officer and Director of the Company,
filed a civil suit in the District Court for the City and County of Denver,
State of Colorado against the Company, its President, Morris Ginsburg, and its
Executive Vice President, Irwin L. Sandler, both of whom are Directors of
the Company. The plaintiff alleges breach of contract, breach of fiduciary
duty and conversion in connection with the plaintiff's proposed sale of the
Class A Common Stock of the Company pursuant to Rule 144 under the Securities
Act of 1933. Plaintiff now claims he sustained approximately $450,000 in
damages. The defendants have denied the material allegations of the
complaint, have set forth several affirmative defenses, have alleged that the
complaint is frivolous and have filed a counterclaim against the plaintiff
alleging breach of contract. Trial is scheduled for October 15, 1996, and
discovery is in process. The claims are without merit in the opinion of
management and will be vigorously defended.
The Company has agreed to pay all litigation costs, including fees, and
to indemnify the Directors to the maximum extent provided by Colorado law, as
stated in the Company's By-Laws, the exact extent of which will be determined
when the lawsuit, including appeals, is resolved or settled.
EMPLOYMENT AGREEMENTS
The Company's two executive officers have entered into employment agreements
(the "Employment Agreements") with the Company.
23
<PAGE>
Messrs. Ginsburg and Sandler are paid annual salaries of $200,000 and
$150,000, respectively, under their Employment Agreements and are eligible to
receive discretionary bonuses, compensation increases, death benefits, life
insurance with premiums payable by the Company, and two years regular salary
in the event of certain business combinations or changes in control. The
Employment Agreements have five-year terms which began in December, 1990. The
Employment Agreements are automatically renewed for consecutive one year terms
unless terminated by either party. The Company or the employee may terminate
the Employment Agreement for cause upon 30 days prior written notice. Each of
these individuals has agreed not to compete with the Company for a period of
two years following the termination of his relationship with the Company under
this Employment Agreement.
LOANS IN FUNDING (COMMITMENTS)
As of December 31, 1995, there were $52,546 in open commitments to extend
credit through the normal course of business.
401(K) EMPLOYEE SAVINGS PLAN
The Company has a voluntary 401(k) savings plan pursuant to Section 401(k) of
the Internal Revenue Code, whereby participants may contribute a
percentage of compensation, but not in excess of the maximum allowed under the
code. The plan provides for a matching contribution by the Company which
amounted to $15,443 and $13,360 in 1995 and 1994, respectively.
24
<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>
<S> <C> <C>
Notes Class A Common
Conversion Date Converted Stock Issued
- --------------- ---------- --------------
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 gross 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 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
25
<PAGE>
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.
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 monthly.
26
<PAGE>
As of December 31, 1995, 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>
<S> <C> <C>
Underlying
Note Balance Receivable Balance
------------- -------------------
Series 1994-A Notes $ 12,510,534 $ 13,244,312
Series 1995-A Note 7,446,249 11,151,839
Series 1995-B Notes 29,713,344 33,962,684
------------- -------------------
TOTAL $ 49,670,127 $ 58,358,835
============= ===================
<FN>
</TABLE>
TOTAL DEBT MATURITIES
Estimated aggregate debt maturities for the years ending December 31, 1996
through 2000 are as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
1996 1997 1998 1999 2000
- ----------- ----------- ----------- ---------- -----
25,640,180 $16,593,300 $10,516,980 $3,304,667 $ -0-
<FN>
</TABLE>
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 stock retains
three votes while each share of Class A stock retains one vote per share.
STOCK OPTION PLANS
The Company has reserved 1,775,000 of its authorized but unissued Class A
Common Stock for a stock option plan (the "Plan") pursuant to which officers,
directors and employees of the Company are eligible to receive incentive and /
or non-qualified stock options. The Plan, which expires in the year
2000, is administered by a committee designated by the Board of Directors.
Incentive stock options granted under the Plan are exercisable for a period of
up to 10 years from the date of grant and at an exercisable price which is not
less than the fair market value of the Class A Common Stock on the date of
grant, except that the term of an incentive stock option granted under the
Plan to a stockholder owning more than 10% of the outstanding Class A Common
Stock of the Company must not exceed five years and the exercise price of an
incentive stock option granted to such a stockholder must not be less than
110% of the fair market value of the Class A Common Stock on the date of the
grant. The Plan also provides for issuance of stock appreciation rights. At
December 31, 1995 and 1994, the Company has granted options to acquire a total
of 666,200 and 673,000 shares, respectively, of the Company's Class A Common
Stock. These options are exercisable for a period of up to 10 years from the
date of grant and have exercise prices from $2.13 to $6.63 a share, which
represents bid prices of the Company's Common Stock at the date of grant.
Through December 31, 1995, none of these options have been exercised.
27
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Option Price
Per Share Options
------------- --------
Outstanding December 31, 1993 $2.13 - $6.63 601,000
Granted $ 6.13 75,000
Canceled $ 6.63 (3,000)
Exercised - -
------------- --------
Outstanding December 31, 1994 $2.13 - $6.63 673,000
Granted $ 4.50 10,000
Canceled $ 6.63 (16,800)
Exercised - -
------------- --------
Outstanding December 31, 1995 $2.13 - $6.63 666,200
========
<FN>
</TABLE>
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
nonemployees. 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 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.
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.
28
<PAGE>
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.
29
<PAGE>
NOTE 7 - INCOME TAXES
<TABLE>
<CAPTION>
The provision for income taxes is summarized as follows:
<S> <C> <C>
For the Years Ended
December 31,
---------------------
1995 1994
--------------------- -----------
Current expense (benefit)
Federal $ (672,383) $ 917,606
State (35,388) 92,283
--------------------- -----------
$ (707,771) $1,009,889
--------------------- -----------
Deferred expense (benefit)
Federal $ (88,786) $ (341,240)
State (4,673) (34,207)
--------------------- -----------
$ (93,459) $ (375,447)
--------------------- -----------
TOTAL $ (801,230) $ 634,442
===================== ===========
<FN>
</TABLE>
<TABLE>
<CAPTION>
The following is a reconciliation of income taxes at the Federal Statutory rate with income
taxes recorded by the Company.
For the Years Ended
December 31
---------------------
<S> <C> <C>
1995 1994
------------ --------
Computed income taxes (benefit) at statutory rate - 34% $ (728,390) $576,639
State income taxes (benefit), net of Federal income tax benefit (72,840) 57,803
------------- --------
$ (801,230) $634,442
============ ========
<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 were as follows:
30
<PAGE>
<TABLE>
<CAPTION>
December 31,
--------------
<S> <C> <C>
1995 1994
-------------- ----------
Deferred tax assets:
Allowances $ - $ 283,777
Loss on disposal of CarMart 238,627 -
State tax carryforward 101,000 -
Other 67,721 -
-------------- ----------
Total deferred tax assets 407,348 283,777
-------------- ----------
Deferred tax liabilities:
Depreciation (72,377) (43,900)
Cash basis accounting - (116,430)
Allowances (109,499) -
Other (8,566) -
-------------- ----------
Total deferred tax liability (190,442) (160,330)
-------------- ----------
Net deferred tax asset $ 216,906 $ 123,447
============== ==========
<FN>
</TABLE>
31
<PAGE>
NOTE 8 - DISCONTINUED OPERATIONS
In February 1996, the Company announced that it intends to discontinue
its CarMart retail used car sales and associated financing operations. The
CarMart business will cease operations on April 30, 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. The Company intends to liquidate the remaining inventory at the Aurora,
Colorado store by April 30, 1996. 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 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, or will
be, reassigned to other positions within the Company or have been released.
The results of operations of the CarMart business are included in the
Consolidated Statements of Operations under the caption "Income (loss) from
discontinued operations" and includes:
<TABLE>
<CAPTION>
For the Years Ended December 31,
<S> <C> <C>
1995 1994
------------ -----------
Revenues $11,361,642 $13,349,248
Total costs and expenses 12,512,772 12,820,605
------------ -----------
Income (loss) from discontinued operations before
income taxes (1,151,130) 528,643
Income tax expense (benefit) (430,523) 197,712
------------ -----------
Income (loss) from discontinued operations ($720,607) $ 330,931
============ ===========
<FN>
</TABLE>
The Company allocated interest expense and associated direct costs of
$36,337 and $105,001 to discontinued operations in 1995 and 1994,
respectively. The allocations were based on the ratio of discontinued net
assets to consolidated net assets plus consolidated debt.
The loss of the disposition of the CarMart business has been accounted
for as discontinued operations and includes:
32
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
(Loss) on Disposal
-------------------
Estimated losses on Contracts originated at CarMart ($1,211,627)
Estimated 1996 loss from operations of CarMart through April 30, 1996 (547,342)
Estimated closing costs ( 90,697)
-------------------
Total disposal costs before taxes (1,849,666)
Tax (benefit) (691,775)
-------------------
(Loss) on disposal of discontinued business ($1,157,891)
===================
<FN>
</TABLE>
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.
Summarized balance sheet data for the discontinued CarMart operations is as
follows:
<TABLE>
<CAPTION>
December 31,
-------------
<S> <C> <C>
1995 1994
------------- ----------
Assets
- -------------------------------------
Vehicles held for sale $ 966,830 $2,598,341
Income tax receivable 948,150 -
Deferred tax asset 174,148 -
Furniture and equipment, net 269,563 364,453
Other receivables 83,710 239,485
Other assets 58,746 77,786
------------- ----------
Total assets $ 2,501,147 $3,280,065
============= ==========
Liabilities
- -------------------------------------
Accounts payable and accrued expenses $ 662,755 $ 173,324
Income taxes payable - 194,436
------------- ----------
Total liabilities $ 662,755 $ 367,760
============= ==========
Net assets of discontinued operations $ 1,838,392 $2,912,305
============= ==========
<FN>
</TABLE>
33
<PAGE>
NOTE 9 - SUBSEQUENT EVENTS
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.
Provision has been made for the issuance of up to an additional $5
million in principal amount of the 12% Notes on or before January 9, 1998,
upon such terms and conditions as shall be agreed to between the Company and
one of the initial purchasers.
REVOLVING LINE OF CREDIT - LASALLE NATIONAL BANK
In January 1996, the Company entered into a revolving line of credit
agreement with LaSalle National Bank providing a line of credit of up to $15
million, not to exceed a borrowing base consisting of eligible accounts
receivable to be acquired. The scheduled maturity date of the line of credit
is January 1, 1998. At the option of the Company, the interest rate charged
on the loans shall be either .5% in excess of the prime rate charged by lender
or 2.75% over the applicable LIBOR rate. The Company is obligated to pay
the lender a fee equal to .25% per annum of the average daily unused portion
of the credit commitment. The obligation of the lender to make advances is
subject to standard conditions. The collateral securing payment consists of
all Contracts pledged and all other assets of the Company. Among numerous
other loan covenants, the Company generally has agreed to maintain its ratio
of liabilities to tangible assets at not more than 3 to 1; that its tangible
net worth shall not be less than $19 million; and that its interest coverage
ratio (earnings before interest and taxes divided by interest expense) and
cash flow ratio (unrestricted cash divided by interest expense) shall not be
less than 1.5 to 1 and 2.0 to 1, respectively. As of March 29, 1996, the
Company has not drawn against this line of credit.
NOTE 10 - DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
CASH AND CASH EQUIVALENTS. RESTRICTED CASH AND ACCRUED INTEREST PAYABLE
The carrying value approximates fair value due to its liquid or short-term
nature.
AUTOMOBILE RECEIVABLES - NET
The interest rates and credit ratings of the net Automobile Receivables
outstanding at December 31, 1995, are consistent with the interest rates and
credit ratings on current purchases by the Company of Contracts with the same
maturities and collateral; as such, the carrying value of the net Automobile
Recievables outstanding at December 31, 1995, approximates fair value at that
date.
34
<PAGE>
CONVERTIBLE SUBORDINATED DEBT, SENIOR SUBORDINATED DEBT AND AUTOMOBILE
RECEIVABLES-BACKED NOTES
Rates currently available to the Company for debt with similar terms and
maturities are used to estimate the fair value of existing debt.
The estimated fair value of the Company's financial instruments at
December 31, 1995 were as follows:
<TABLE>
<CAPTION>
December 31, 1995
------------------
<S> <C> <C>
Carrying Amount Fair Value
----------------- ------------
Financial Assets:
- ----------------------------------------------
Cash and Cash Equivalents and Restricted Cash $ 10,942,556 $10,942,556
Automobile Receivables 67,330,241 67,330,241
Less: Allowance for Credit Losses (6,661,917) (6,661,917)
----------------- ------------
Total $ 71,610,880 $71,610,880
================= ============
Financial Liabilities:
- ----------------------------------------------
Accrued Interest Payable (included in
Accrued expenses and other liablities) $ 172,537 $ 172,537
Convertible Subordinated Debt 1,385,000 1,385,000
Senior Subordinated Debt 5,000,000 5,000,000
Automobile Receivables-backed Notes 49,670,127 49,670,127
----------------- ------------
Total $ 56,227,664 $56,227,664
================= ============
<FN>
</TABLE>
35
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
(Registrant)
July 17, 1996 By: /s/ Morris Ginsburg
-----------------------
Morris Ginsburg, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
July 17, 1996 By: /s/ Morris Ginsburg
-----------------------
Morris Ginsburg, President,
Chief Executive Officer and
Director
July 17, 1996 By: /s/ Irwin L. Sandler
------------------------
Irwin L. Sandler
Executive Vice President,
Secretary/Treasurer and
Director
July 17, 1996
--------------------------
Brian M. O'Meara,
Director
July 17, 1996 By: /s/ Craig L. Caukin
-----------------------
Craig L. Caukin,
Executive Vice President,
Director
July 17, 1996 By: /s/ Michael Feinstein
-------------------------
Michael Feinstein,
Senior Vice President,
Chief Financial Officer
36
<PAGE>
