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: MARCH 31, 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 March 31,
1996:
Class A Common Stock, $.01 par value: 5,657,279 shares
Class B Common Stock, $.01 par value: 1,306,000 shares
Exhibit index is located on page 25.
Total number of pages is 28.
MONACO FINANCE, INC. AND SUBSIDIARIES
FORM 10-QSB
QUARTER ENDED MARCH 31, 1996
INDEX
PAGE NO.
PART I - FINANCIAL INFORMATION
Consolidated Statements of Operations for the three
months ended March 31, 1996 and 1995 (unaudited) 3
Consolidated Balance Sheets at March 31, 1996
(unaudited) and December 31, 1995 4
Consolidated Statement of Shareholders' Equity for the
three months ended March 31, 1996 (unaudited) 5
Consolidated Statements of Cash Flows for the three
months ended March 31, 1996 and 1995 (unaudited) 6
Notes to Consolidated Financial Statements (unaudited) 7-15
Management's Discussion and Analysis of Financial
Condition and Results of Operations 16-24
PART II - OTHER INFORMATION 25
EXHIBIT 11 - Computation of Net Earnings (Loss) per
Common and Common Equivalent Share 26
EXHIBIT 27 - Financial Data Schedule 27
SIGNATURE 28
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
ITEM 1. FINANCIAL STATEMENTS
MONACO FINANCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
1996 1995
----------- -----------
<S> <C> <C>
REVENUES:
Interest $3,192,832 $2,620,163
Other income 29,303 23,872
----------- -----------
Total revenues 3,222,135 2,644,035
COSTS AND EXPENSES:
Provision for credit losses (Note 2) 301,263 434,796
Operating expenses 2,498,787 1,196,319
Interest expense (Notes 3 and 5) 1,051,150 738,055
----------- -----------
Total costs and expenses 3,851,200 2,369,170
----------- -----------
Income (loss) from continuing operations before taxes (629,065) 274,865
Income tax expense (benefit) (Note 7) (235,270) 102,799
----------- -----------
Income (loss) from continuing operations (393,795) 172,066
(Loss) from discontinued operations,
net of applicable income taxes (Notes 7 and 8) - (48,643)
(Loss) on disposal of discontinued business,
net of applicable income taxes (Notes 7 and 8) (93,900) -
Net income (loss) ($487,695) $ 123,423
=========== ===========
EARNINGS (LOSS) PER SHARE (NOTES 1 AND 6):
Income (loss) from continuing operations ($0.06) $ 0.03
(Loss) from discontinued operations - (0.01)
(Loss) on disposal of discontinued business (0.01) -
----------- -----------
Net income (loss) per common and common equivalent
share ($0.07) $ 0.02
=========== ===========
Weighted average number of shares outstanding 6,895,779 5,130,823
<FN>
See notes to consolidated financial statements.
</TABLE>
MONACO FINANCE, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1996 AND DECEMBER 31, 1995
March 31, 1996
(unaudited) Dec. 31, 1995
---------------- --------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 9,539,005 $ 7,247,670
Restricted cash 4,175,826 3,694,886
Automobile receivables - net (Notes 2 and 5) 60,304,023 60,668,324
Repossessed vehicles held for sale (Note 1) 2,427,887 2,460,782
Income tax receivable (Note 7) 23,608 23,608
Deferred income taxes (Note 7) 278,028 42,758
Furniture and equipment, net of accumulated depreciation
of $822,772 (1996) and $701,487 (1995) 1,773,508 1,615,428
Net assets of discontinued operations (Note 8) 1,375,226 1,838,392
Other assets 1,820,833 1,759,253
---------------- --------------
Total assets $ 81,717,944 $ 79,351,101
================ ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 347,008 $ 453,240
Accrued expenses and other liabilities 292,642 93,151
Convertible subordinated debt (Note 5) 1,385,000 1,385,000
Senior subordinated debt (Note 5) 5,000,000 5,000,000
Convertible senior subordinated debt (Note 5) 5,000,000 -
Automobile receivables-backed notes (Note 5) 47,480,304 49,670,127
---------------- --------------
Total liabilities 59,504,954 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,
5,657,279 shares (1996) and 5,672,279 shares (1995) issued 56,573 56,723
Class B common stock, $.01 par value; 2,250,000 shares authorized,
1,306,000 shares (1996) and 1,306,000 shares (1995) issued 13,060 13,060
Additional paid-in capital 22,079,193 22,127,941
Retained earnings 64,164 551,859
---------------- --------------
Total stockholders' equity 22,212,990 22,749,583
---------------- --------------
Total liabilities and stockholders' equity $ 81,717,944 $ 79,351,101
================ ==============
<FN>
See notes to consolidated financial statements.
</TABLE>
MONACO FINANCE, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(UNAUDITED)
Class A Class B Additional
Common Stock Common Stock Paid-in- Retained
Shares Amount Shares Amount Capital Earnings Total
---------- -------- --------- -------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance - December 31, 1995 5,672,279 $56,723 1,306,000 $ 13,060 $22,127,941 $ 551,859 $22,749,583
Purchase of treasury stock (15,000) ($150) - - ($48,748) - (48,898)
Net (loss) for the year - - - - - (487,695) (487,695)
Balance - March 31, 1996 5,657,279 $56,573 1,306,000 $ 13,060 $22,079,193 $ 64,164 $22,212,990
========== ======== ========= ======== ============ ========== ============
<FN>
See notes to consolidated financial statements.
</TABLE>
MONACO FINANCE, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(UNAUDITED)
Three Months ended March 31,
<S> <C> <C>
Cash flows from operating activities: 1996 1995
- - ------------------------------------------------------------- ------------ -------------
Net income (loss) ($393,795) $ 172,066
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation 135,054 62,536
Provision for credit losses 301,263 434,796
Amortization of excess interest 601,506 115,905
Amortization of other assets 192,943 63,613
Other 14,881 20,998
------------ -------------
851,852 869,914
Changes in assets and liabilities:
Receivables 212,433 801,046
Prepaid expenses (32,234) (45,785)
Accounts payable (103,833) (144,791)
Accrued liabilities and other (17,792) (44,012)
Income taxes payable - (644,242)
------------ -------------
Net cash flows provided by continuing operations 910,426 792,130
Net cash flows provided by discontinued operations 389,394 1,777,203
------------ -------------
Net cash provided by operating activities 1,299,820 2,569,333
------------ -------------
Cash flows from investing activities:
- - -------------------------------------------------------------
Retail installment sales contracts - purchased (8,466,710) (10,324,666)
Retail installment sales contracts - originated (1,093,350) (3,507,566)
Proceeds from payments on installment contracts 8,802,315 4,593,952
Purchase of furniture and equipment (273,524) (122,857)
------------ -------------
Net cash (used in) investing activities (1,031,269) (9,361,137)
------------ -------------
Cash flows from financing activities:
- - -------------------------------------------------------------
Net borrowings under line of credit - 10,306,000
Net (increase) in restricted cash (480,940) (312,838)
Net (repayments) on asset-backed notes (2,189,823) (3,218,809)
Proceeds from issuance of convertible senior
subordinated notes 5,000,000 -
Increase in debt issue and conversion costs (257,555) (9,136)
Purchase of treasury stock (48,898) -
------------ -------------
Net cash provided by financing activities 2,022,784 6,765,217
------------ -------------
Net increase (decrease) in cash and cash equivalents 2,291,335 (26,587)
Cash and cash equivalents, January 1 7,247,670 26,587
------------ -------------
Cash and cash equivalents, March 31 $ 9,539,005 $ 0
============ =============
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 1,066,240 $ 800,059
============ =============
Cash paid during the year for income taxes $ 645 $ 747,041
============ =============
<FN>
</TABLE>
Non-cash investing and financing activities:
In 1995, $770,000 (net of debt issue costs) of 7% Convertible
Subordinated Notes (See Note 5)
was converted into 225,147 shares of Class A Stock.
See notes to consolidated financial statements.
MONACO FINANCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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. It is expected that the CarMart
business will cease 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.
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.
INTERIM UNAUDITED FINANCIAL STATEMENTS
Information with respect to March 31, 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 months ended March 31,
1996 and 1995 are not necessarily indicative of the results of the entire
year.
REPOSSESSED VEHICLES HELD FOR RESALE
At March 31, 1996 and December 31, 1995, the approximate number of
repossessed vehicles held for resale was 678 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.
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, 15,000 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:
March 31, December 31,
1996 1995
------------ --------------
<S> <C> <C>
Automobile Receivables
Retail installment sales contracts $59,771,516 $ 62,202,136
Other 882,157 795,304
Excess interest receivable 3,217,916 3,312,635
Accrued interest 898,888 1,020,166
------------ --------------
Total finance receivables 64,770,477 67,330,241
Allowance for credit losses (4,466,454) (6,661,917)
------------ --------------
Automobile receivables - net $60,304,023 $ 60,668,324
============ ==============
<FN>
</TABLE>
At March 31, 1996, the accrual of interest income was suspended on
$95,819 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 Company programs, national and regional economic
conditions, borrower mix and other factors will result in actual losses
varying from predictions.
The allowance for credit losses, as presented below, has been established
utilizing data obtained from the Company's risk models and is continually
reviewed and adjusted in order to maintain the allowance at a level which, in
the opinion of management, provides adequately for current, and possibly,
future losses that may develop in the present portfolio. A provision for
credit losses is charged to earnings in an amount sufficient to maintain the
allowance. This allowance is reported as a reduction to Automobile
Receivables.
<TABLE>
<CAPTION>
Allowance
Credit Losses
----------------
<S> <C>
Balance as of December 31, 1995 $ 6,661,917
Provision for credit losses 503,639
Unearned interest income 506,787
Unearned discounts 518,847
Retail installment sale contracts charged off (6,760,515)
Recoveries 3,035,779
Balance as of March 31, 1996 $ 4,466,454
================
<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.
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
months ended March 31, 1996, $601,506 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.
NOTE 3 - NOTE PAYABLE - CITICORP
In May 1995 the Company repaid, in full, the then outstanding balance on
its $25 million revolving line of credit with Citicorp Leasing, Inc. and
terminated the facility.
NOTE 4 - COMMITMENTS & CONTINGENCIES
CONTINGENCIES
On May 8, 1995, Milton Karsh filed a civil suit in the District Court in
and for the City and County of Denver, State of Colorado against the Company,
its President, Morris Ginsburg, and its Executive Vice President, Irwin L.
Sandler, both of whom are Directors of the Company. The plaintiff alleges
breach of contract, breach of fiduciary duty and conversion in connection with
the plaintiff's proposed sale of the Class A Common Stock of the Company
pursuant to Rule 144 under the Securities Act of 1933. Plaintiff now claims
that he sustained approximately $450,000 in damages. The defendants have
denied the material allegations of the complaint, have set forth several
affirmative defenses, have alleged that the complaint is frivolous and have
filed a counterclaim against the plaintiff alleging breach of contract. Trial
is scheduled for October 15, 1996, and discovery is in process. The claims are
without merit in the opinion of management and will be vigorously defended.
The Company has agreed to pay all litigation costs, including fees, and
to indemnify the directors to the maximum extent provided by Colorado law, as
stated in the Company's By-laws, the exact extent of which will be determined
when the lawsuit, including appeals, is resolved or settled.
LOANS IN FUNDING
As of March 31, 1996 there were $41,440 in open commitments to extend
credit through the normal course of business.
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.
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 March 31, 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
Recievable
Note Balance Balance
------------- -----------
<S> <C> <C>
Series 1994-A Notes $ 9,855,206 $10,361,516
Series 1995-A Note 13,230,462 17,450,976
Series 1995-B Notes 24,394,636 28,249,188
-----------
TOTAL $ 47,480,304 $56,061,680
============= ===========
<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 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 May, 10, 1996, the
Company has not drawn 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 three months ended March 31, 1996, there were no stock options
granted, canceled or 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.
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 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.
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 Ended March 31,
1996 1995
---------- --------
<S> <C> <C>
Pretax income (loss) - continuing and
discontinued operations $(779,065) $197,161
========== ========
Federal tax expense (benefit)
at statutory rate - 34% $(264,882) $ 67,034
State income tax expense (benefit) (26,488) 6,704
---------- --------
Income tax expense (benefit) $(291,370) $ 73,738
========== ========
<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 March 31,
1996, were as follows:
<TABLE>
<CAPTION>
<S> <C>
Deferred tax assets:
Loss on disposal of CarMart $ 111,336
Federal and State NOL tax carry-forward 1,634,696
Other 66,660
------------
Total deferred tax assets 1,812,692
Deferred tax liabilities:
Depreciation (79,390)
Allowances (1,056,950)
Other (6,424)
------------
Total deferred tax liability (1,142,764)
------------
Net deferred tax asset $ 669,928
============
<FN>
</TABLE>
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. In
April 1996, the Company extended the expected disposal date of the CarMart
business from April 30, 1996 to 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. The Company intends to liquidate the remaining inventory at the Aurora,
Colorado store by May 31, 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 for 1995 are included
in the Consolidated Statements of Operations under the caption "(Loss) from
discontinued operations" and includes:
<TABLE>
<CAPTION>
<S> <C>
For the Three Months
Ended March 31, 1995
----------------------
Revenues $ 3,434,067
Total costs and expenses 3,511,771
----------------------
(Loss) from discontinued operations before income taxes (77,704)
Income tax (benefit) (29,061)
----------------------
(Loss) from discontinued operations $ (48,643)
======================
<FN>
</TABLE>
The Company allocated interest expense and associated direct costs of
$9,085 to discontinued operations in the three months ended March 31, 1995.
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, the Company recorded an
additional pretax charge of $150,000 ($93,900 aftertax) related to the
estimated 1996 loss from operations of CarMart through May 31, 1996.
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>
<S> <C> <C>
March 31, December 31,
1996 1995
---------- -------------
Assets
- - --------------------------------------
Vehicles held for sale $ 461,609 $ 966,830
Income tax receivable 703,674 948,150
Deferred tax asset 391,900 174,148
Furniture and equipment, net 183,276 269,563
Other receivables 101,186 83,710
Other assets 65,473 58,746
---------- -------------
Total assets $1,907,118 $ 2,501,147
========== =============
Liabilities
- - --------------------------------------
Accounts payable and accrued expenses $ 531,892 $ 662,755
========== =============
Total liabilities $ 531,892 $ 662,755
========== =============
Net assets of discontinued operations $1,375,226 $ 1,838,392
========== =============
<FN>
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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. In April 1996, the Company extended the expected
disposal date of the CarMart business from April 30, 1996 to 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 quarters ended March 31, 1996 and 1995
was approximately 10% and 19%, respectively. The Company services all of the
loans that it owns. The loan portfolio carries an original annual percentage
rate of interest that averages approximately 25%, before discounts, and has an
original weighted average term of approximately 45 months. The average amount
financed per Contract for the quarters ended March 31, 1996 and 1995 was
approximately $8,621 and $8,534, respectively.
RESULTS OF OPERATION
OVERVIEW
<TABLE>
<CAPTION>
INCOME STATEMENT DATA
Quarter Ended March 31,
<S> <C> <C>
(dollars in thousands, except per share amounts) 1996 1995
----------- -----------
Total revenues $ 3,222 $ 2,644
Total costs and expenses $ 3,851 $ 2,369
Income (loss) from continuing operations before income taxes $ (629) $ 275
Income tax expense (benefit) $ (235) $ 103
Income (loss) from continuing operations $ (394) $ 172
(Loss) from discontinued operations, net of income taxes - $ (49)
(Loss) on disposal of discontinued business, net of income taxes. $ (94) -
Net income (loss) $ (488) $ 123
Net income (loss) per share $ (0.07) $ 0.02
Weighted average number of shares outstanding 6,895,779 5,130,823
<FN>
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET DATA
<S> <C> <C>
March 31, 1996 December 31, 1995
--------------- ------------------
(dollars in thousands)
Total assets $ 81,718 $ 79,351
Total liabilities $ 59,505 $ 56,601
Retained earnings $ 64 $ 552
Stockholders' equity $ 22,213 $ 22,750
<FN>
</TABLE>
The Company's revenues increased 22% from $2.6 million in the first
quarter of 1995 to $3.2 million in the comparable 1996 period. Net income
(loss) from continuing operations decreased from $.2 million in 1995 to $
(.4) million in 1996. Earnings (loss) per share from continuing operations for
1996 were $ (0.06), based on 6.9 million weighted average shares outstanding,
compared with $0.03 per share, based on 5.1 million weighted average shares
outstanding, for 1995. Net income (loss) decreased from $.1 million in 1995 to
$ (0.5) million in 1996, while net income (loss) per share decreased from
$0.02 in 1995 to $ (0.07) in 1996, primarily due to a $.6 million decrease in
income from continuing operations.
CONTINUING OPERATIONS
<TABLE>
<CAPTION>
SELECTED OPERATING DATA
Quarter Ended March 31,
<S> <C> <C>
(dollars in thousands, except where noted) 1996 1995
------- -------
Interest income $3,193 $2,620
Other income $ 29 $ 24
Provision for credit losses $ 301 $ 435
Operating expenses $2,499 $1,196
Interest expense $1,051 $ 738
Operating expenses as a % of revenues 78% 45%
Contracts from Dealer Network 948 1,254
Contracts from Company Dealerships 104 452
------- -------
Total contracts 1,052 1,706
Average amount financed (dollars) $8,621 $8,534
<FN>
</TABLE>
Total revenues for the quarter ended March 31, 1996 increased $.6 million
when compared to the same period in 1995 primarily due to the increase in
interest income, which increased 22% from $2.6 million in 1995 to $3.2 million
in 1996. This increase was due to the 18% increase in the Company's loan
portfolio from $50.8 million at March 31, 1995, to $59.8 million at March 31,
1996.
The most significant aspect of the growth in the Company's loan portfolio
is attributable to loans generated from the Dealer Network. Although the
number of contracts generated from the Dealer Network decreased 24% from 1,254
in the first quarter of 1995 to 948 in the comparable 1996 period, the
Company's strategic plan for 1996 continues to include increasing its
portfolio of outstanding Contracts through the growth of its Dealer Network.
The dollar value of the Contracts generated decreased $2.9 million, or 26%,
from $11.3 million in the first quarter of 1995 to $8.4 million in the
comparable 1996 period.
The number of loan originations from the CarMart operations decreased 77%
from 452 in the first quarter of 1995 to 104 in the comparable 1996 period.
The dollar value of these Contracts decreased $2.6 million, or 78%, from $3.3
million in 1994 to $.7 million in 1996. 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, and the Company's continued focus in 1996 on
the expansion of the Dealer Network.
The total number of Contracts generated by the Company decreased 38% from
1,706 in the first quarter of 1995 to 1,052 in the comparable 1996 period. The
dollar value of these Contracts decreased $5.5 million, or 38%, from $14.6
million in 1995 to $9.1 million in 1996. The average amount financed increased
1% from $8,534 in 1995 to $8,621 in 1996. The average discount on all
Contracts purchased pursuant to the discounted Finance Programs decreased from
19% in 1995 to 10% in 1996 primarily due to new Finance Programs introduced in
1995 and 1996.
Other income, which primarily represents insurance servicer income
remained relatively flat at $24,000 and $29,000 for the quarters ended March
31, 1995 and 1996, respectively.
The provision for credit losses decreased $.1 million, or 31%, from $.4
million in the quarter ended March 31, 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. 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 2.9% in 1995 to 6.2% in
1996. 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 1.1% at March 31, 1996. Certain of the
increase in charge-offs are a result in the change in the mix of loan program
type purchased by the Company and a general increase in the age of the
portfolio. In the first quarter of 1996, the number of loans purchased at less
than face value increased by 188% 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 anticipated 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 which,
in the opinion of management, provides adequately for existing, and possibly,
future losses that may develop in the present portfolio. A provision for
credit losses is charged to earnings in an amount sufficient to maintain the
allowance. However, since the risk model uses past history to predict the
future, changes in Company programs, national and regional economic
conditions, borrower mix and other factors will result in actual losses
differing from predicted losses.
Operating expenses increased $1.3 million, or 109%, from $1.2 million in
the first quarter of 1995 to $2.5 million in the comparable 1996 period. 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 45% in the first quarter 1995 to 78% in the comparable 1996
period. The Company anticipates that, in the future, as interest income
increases from its expanding portfolio of Automobile Receivables, operating
expenses as a percentage of revenue may begin to decline, although there can
be no assurances that if interest income increases, such increase will be
faster than any operating expense increase.
Interest expense increased $.3 million, or 42%, from $.7 million in the
first quarter of 1995 to $1.0 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
$50.8 million at March 31, 1995 to $59.8 million at March 31, 1996. Since
March 31, 1995, net increases (decreases) in the Company's debt were as
follows:
<TABLE>
<CAPTION>
<S> <C>
(dollars in thousands)
Notes payable - Citicorp $(13,396)
Convertible subordinated debt (460)
Convertible senior subordinated debt 5,000
Automobile receivables-backed notes 28,494
---------
Total $ 19,638
=========
<FN>
</TABLE>
The average annualized interest rate on the Company's debt was 7.3% in
the first quarter of 1996 versus 8.3% in the comparable 1995 period. 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.
Net interest margin percentage, representing the difference between
interest income and interest expense divided by average finance receivables,
decreased from 16.8% in the first quarter of 1995 to 14.2% 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 (loss) from continuing operations decreased $.6 million, or
329%, from $.2 in the first quarter of 1995 to $(.4) million in the comparable
1996 period. This decrease was primarily due to the following changes on the
Consolidated Statement of Operations:
<TABLE>
<CAPTION>
<S> <C>
Increase
(Decrease)
(in millions of dollars) to Net Income
---------------
Interest income $ 0.6
Provision for credit losses 0.1
Operating expenses (1.3)
Interest expense (0.3)
Income tax expense 0.3
Net (decrease) to net income
from continuing operations $ (0.6)
===============
<FN>
</TABLE>
DISCONTINUED OPERATIONS
<TABLE>
<CAPTION>
SELECTED OPERATING DATA
Quarter Ended March 31,
<S> <C> <C>
(dollars in thousands, except where noted) 1996 1995
-------
Sale of vehicles $ 903 $3,423
Other income $ 8 $ 11
Cost of vehicles sold $ 694 $1,883
Provision for credit losses $ 202 $ 811
Operating expenses $ 596 $ 810
Interest expense - $ 8
Gross margin % on vehicle sales 23% 45%
Operating expenses as a % of revenues 65% 24%
<FN>
</TABLE>
In February 1996, the Company announced that it intends 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 results of operations of the CarMart
business for the first quarter of 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
recorded at December 31, 1995. At March 31, 1996, the Company recorded an
additional loss on disposal of $150,000 pretax $(93,900 after tax) related to
the extension of the expected disposal date of the CarMart business to May 31,
1996.
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 May 31, 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 previously 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 from the sale of vehicles decreased $2.5 million, or 74%, from
$3.4 million in the first quarter of 1995 to $.9 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 and the January 1996 closings
of the Englewood, Colorado, and Colorado Springs, Colorado, retail car lots.
Other income, which represents primarily revenue derived from customer
repairs performed by the Company's repair shop, remained relatively constant
at $11,000 and $8,000 for the quarters ended March 31, 1995 and 1996,
respectively.
The cost of vehicles sold decreased $1.2 million, or 63%, from $1.9
million in the first quarter of 1995 to $.7 million in the comparable 1996
period. As a percentage of corresponding vehicle sales, the cost increased
from 55% in 1995 to 77% in 1996.
The provision for credit losses decreased $.6 million, or 75%, from $.8
million in the first quarter of 1995 to $.2 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 $.2 million, or 26%, from $.8 million in the
first quarter of 1995 to $.6 million in the comparable 1996 period. As a
percentage of revenues, operating expenses increased from 24% in 1995 to 65%
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 $8,000 to discontinued
operations in the first quarter of 1995. 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 quarters ended March 31, 1996 and 1995
are summarized as follows:
<TABLE>
<CAPTION>
CASH FLOW DATA
Quarter Ended March 31,
<S> <C> <C>
(dollars in thousands) 1996 1995
--------
Cash flows provided by (used in):
Operating activities $ 1,300 $ 2,569
Investing activities (1,031) (9,361)
Financing activities 2,022 6,765
-------- --------
Net increase (decrease) in cash and cash equivalents $ 2,291 $ (27)
======== ========
<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.
The Agreements underlying the terms of the Company's Automobile
Receivable - Backed Securitization Program ("Securitization Program") and the
corresponding Revolving Notes and Warehouse Notes, described below, contain
certain covenants which if not complied with, could materially restrict the
Company's liquidity. Although the Company endeavors to comply with these
covenants, no assurance is given that the Company will continue to be in
compliance. Furthermore, if the Net Charge-Off Increase continues to grow
substantially in future reporting periods, it negatively will impact the
Company's liquidity and could impair its ability to increase its loan
portfolio.
During 1993, the Company completed the Note Offering described in Note 5
of the Notes to Consolidated Financial Statements. In the Note Offering, the
Company sold 7% Convertible Subordinated Notes in the aggregate principal
amount of $2,000,000. The purchasers of the Notes exercised an option to
purchase an additional $1,000,000 aggregate principal amount on September 15,
1993. The principal amount of the Notes, plus accrued interest thereon, is due
March 1, 1998. The Notes are convertible into Class A Common Stock of the
Company at any time prior to maturity at a conversion price of $3.42 per
share, subject to adjustment for dilution. Certain of these Notes with an
aggregate principal amount of $1,615,000 were converted in 1994 and 1995,
resulting in the issuance of 472,219 shares of Class A Common Stock.
On November 1, 1994, 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 covenants. The Indenture requires MF
Receivables to pledge all Contracts owned by it for repayment of the Revolving
Note or Term Notes, including Contracts pledged as collateral for Series
1994-A Term Notes and the Series 1995-B Term Notes, as well as all future
Contracts acquired by MF Receivables.
The Series 1995-A Note bears interest at LIBOR plus 75 basis points. The
initial funding of this Note was $26,966,489 on May 16, 1995. The Company, as
servicer, provides customary collection and servicing activities for the
Contracts. The Revolving Note has a stated maturity of October 16, 2002 and an
expected termination date of May 16, 1997. The maximum limit for the Series
1995-A Note is $40 million. On September 15, 1995, MF Receivables issued the
Series 1995-B Term Notes ("Series 1995-B Notes") in the amount of $35,552,602.
The Series 1995-B Notes accrue interest at a fixed note rate of 6.45% per
annum. The Series 1995-B Notes are expected to be fully amortized by June
1999; however, the debt maturities are based on principal payments received on
the underlying receivables which may result in a different final maturity. The
proceeds from the issuance of the Series 1995-B Notes were used to retire, in
full, the 1995-A Note, which will be used to accumulate an additional $114.4
million in $40 million increments.
The assets of MF Receivables are not available to pay general creditors
of the Company. In the event there is insufficient cash flow from the
Contracts (principal and interest) to service the Revolving Note and Term
Notes, a nationally recognized insurance company (MBIA) has guaranteed to
repay. The MBIA insured Series 1994-A Notes, Series 1995-A Note and Series
1995-B Notes received a corresponding AAA rating by Standard and Poor's and an
Aaa rating by Moody's and were purchased by institutional investors. The
underlying Contracts accrue interest at rates of approximately 21% to 29%. All
cash collections in excess of disbursements to the Series 1994-A, Series
1995-A and Series 1995-B noteholders and other general disbursements are paid
to MF Receivables monthly.
As of March 31, 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 $ 9,855 $ 10,362
Series 1995-A Note 13,230 17,451
Series 1995-B Notes 24,395 28,249
------------- -------------------
Total $ 47,480 $ 56,062
============= ===================
<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 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 May
10, 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 May
10, 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 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 March 31, 1996.
FUTURE EXPANSION AND STRATEGY
With the closing of the CarMart operations, the Company is now
emphasizing the purchase of Contracts from its Dealer Network. The Company's
strategic plan for 1996 includes increasing its portfolio of outstanding
Contracts through the growth of its Dealer Network.
At March 31, 1996 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 March 31, 1996, exceeded $22.2 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 $101
million of AAA rated warehouse lines and a $15 million line of credit from a
national bank in place at March 31, 1996, the Company believes it has the
financial resources to increase its portfolio of Contracts.
In addition to increasing its portfolio from Dealer purchases, the
Company is actively pursuing the purchase of portfolios of already originated
sub-prime automobile Contracts through investment bankers and other such
sources. The Company does not know, at this time, if such portfolios can be
acquired at prices which provide a risk adjusted yield to the Company
sufficiently high to meet the Company's criteria.
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.
MONACO FINANCE, INC. AND SUBSIDIARIES
FORM 10-QSB
QUARTER ENDED MARCH 31, 1996
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On May 8, 1995, Milton Karsh filed a civil suit in the District Court in
and for the City and County of Denver, State of Colorado against the Company,
its President, Morris Ginsburg, and its Executive Vice President, Irwin L.
Sandler, both of whom are Directors of the Company. The plaintiff alleges
breach of contract, breach of fiduciary duty and conversion in connection with
the plaintiff's proposed sale of the Class A Common Stock of the Company
pursuant to Rule 144 under the Securities Act of 1933. Plaintiff now claims
that he sustained approximately $450,000 in damages. The defendants have
denied the material allegations of the complaint, have set forth several
affirmative defenses, have alleged that the complaint is frivolous and have
filed a counterclaim against the plaintiff alleging breach of contract. Trial
is scheduled for October 15, 1996, and discovery is in process. The claims are
without merit in the opinion of management and will be vigorously defended.
The Company has agreed to pay all litigation costs, including fees, and
to indemnify the directors to the maximum extent provided by Colorado law, as
stated in the Company's By-laws, the exact extent of which will be determined
when the lawsuit, including appeals, is resolved or settled.
ITEM 2. CHANGES IN SECURITIES
(b.) Certain of the Company's loan agreements, including loan agreements
entered into in the first quarter of 1996, contain covenants that restrict the
payment of cash dividends.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 11 - Computation of Net Earnings per Common and Common Equivalent
Share
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8 - K:
A Form 8-K dated January 9, 1996 was filed announcing (1) the Company's
intent to discontinue its CarMart retail used car sales and associated
financing operations as of March 31, 1996; (2) 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; and, (3) the
Company entered into a Revolving Credit Agreement with LaSalle National Bank
providing a line of credit up to $15 million.
A Form 8-K dated March 5, 1996 was filed announcing that the Board of
Directors had authorized the purchase of up to 500,000 shares of its Class A
Common Stock on the open market or in block transactions from time to time.
EXHIBIT 11
<TABLE>
<CAPTION>
MONACO FINANCE, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS (LOSS) PER SHARE
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
THREE MONTHS ENDED MARCH 31,
1996 1995
----------- -----------
<S> <C> <C>
EARNINGS (LOSS) PER SHARE - PRIMARY AND FULLY DILUTED
NET EARNINGS (LOSS)
- - -----------------------------------------------------------
Income (loss) from continuing operations $ (393,795) $ 172,066
(Loss) from discontinued operations - (48,643)
(Loss) on disposal of discontinued business (93,900) -
----------- -----------
Net income (loss) $ (487,695) $ 123,423
=========== ===========
AVERAGE SHARES OUTSTANDING
- - -----------------------------------------------------------
Weighted average shares outstanding 6,895,779 4,831,236
Shares issuable from assumed exercise of stock options (a) (b) 251,408
Shares issuable from assumed exercise of underwriters'
units (a) (b) 48,179
Shares issuable from assumed exercise of stock
warrants (a) (b) (b)
----------- -----------
Common stock and common stock equivalents - primary 6,895,779 5,130,823
Shares issuable from assumed conversion of 7% subordinated
debt (c) (b) (b)
----------- -----------
Common stock and common stock equivalents - fully
diluted 6,895,779 5,130,823
=========== ===========
EARNINGS (LOSS)PER SHARE - PRIMARY AND FULLY DILUTED
- - -----------------------------------------------------------
Income (loss) from continuing operations $ (0.06) $ 0.03
(Loss) from discontinued operations - (0.01)
(Loss) on disposal of discontinued business (0.01) -
----------- -----------
Net income (loss) per share $ (0.07) $ 0.02
=========== ===========
<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>
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: May 15, 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 EXTRACTED 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> 3-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-END> MAR-31-1996 MAR-31-1996
<CASH> 13,714,831 13,714,831
<SECURITIES> 0 0
<RECEIVABLES> 64,770,477 64,770,477
<ALLOWANCES> 4,466,454 4,466,454
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 0
<PP&E> 2,596,280 2,596,280
<DEPRECIATION> 822,772 822,772
<TOTAL-ASSETS> 81,717,944 81,717,944
<CURRENT-LIABILITIES> 0 0
<BONDS> 58,865,304 58,865,304
0 0
0 0
<COMMON> 69,633 69,633
<OTHER-SE> 22,143,357 22,143,357
<TOTAL-LIABILITY-AND-EQUITY> 81,717,944 81,717,944
<SALES> 0 0
<TOTAL-REVENUES> 3,222,135 3,222,135
<CGS> 0 0
<TOTAL-COSTS> 2,498,787 2,498,787
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 301,263 301,263
<INTEREST-EXPENSE> 1,051,150 1,051,150
<INCOME-PRETAX> (629,065) (629,065)
<INCOME-TAX> (235,270) (235,270)
<INCOME-CONTINUING> (393,795) (393,795)
<DISCONTINUED> (93,900) (93,900)
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (487,695) (487,695)
<EPS-PRIMARY> (0.07) (0.07)
<EPS-DILUTED> (0.07) (0.07)
</TABLE>
