FORM 10-QSB
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: SEPTEMBER 30, 1997
Commission File Number: 0-18819
MONACO FINANCE, INC.
(Exact Name of Registrant as Specified in its Charter)
Colorado
(State or Other Jurisdiction of Incorporation or Organization)
84-1088131
(I.R.S. Employer Identification No.)
370 Seventeenth Street, Suite 5060 Denver, Colorado 80202
(Address of Principal Executive Offices)
(303) 592-9411
(Registrant's Telephone Number, Including Area Code)
N/A
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the issuer was required to file such
reports),
Yes X No
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
Number of shares outstanding of the Issuer's Common Stock, as of September 30,
1997:
Class A Common Stock, $.01 par value: 7,173,379 shares
Class B Common Stock, $.01 par value: 1,303,715 shares
Exhibit index is located on page 27.
Total number of pages is 30.
<PAGE>
MONACO FINANCE, INC. AND SUBSIDIARIES
FORM 10-QSB
QUARTER ENDED SEPTEMBER 30, 1997
INDEX
PAGE NO.
PART I - FINANCIAL INFORMATION
Consolidated Statements of Operations for the three
months ended September 30, 1997 and 1996 (unaudited) 3
Consolidated Statements of Operations for the nine
months ended September 30, 1997 and 1996 (unaudited) 4
Consolidated Balance Sheets at September 30, 1997
(unaudited) and December 31, 1996 5
Consolidated Statement of Shareholders' Equity for the
nine months ended September 30, 1997(unaudited) 6
Consolidated Statements of Cash Flows for the nine
months ended September 30, 1997 and 1996 (unaudited) 7
Notes to Consolidated Financial Statements (unaudited) 8-16
Management's Discussion and Analysis of Financial
Condition and Results of Operations 17-26
PART II - OTHER INFORMATION 27
EXHIBIT 11 - Computation of Net Earnings (Loss) per
Common and Common Equivalent Share 28
EXHIBIT 27 - Financial Data Schedule 29
SIGNATURES 30
2
<PAGE>
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
ITEM 1. FINANCIAL STATEMENTS
MONACO FINANCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30,
<S> <C> <C>
1997 1996
------------ ------------
REVENUES:
Interest $ 2,923,353 $ 3,526,382
Other income 4,510 1,273
------------ ------------
Total revenues 2,927,863 3,527,655
COSTS AND EXPENSES:
Provision for credit losses (Note 2) 51,701 207,691
Operating expenses 3,137,194 3,144,104
Interest expense (Note 4) 1,371,912 1,231,859
------------ ------------
Total costs and expenses 4,560,807 4,583,654
------------ ------------
(Loss) before income taxes (1,632,944) (1,055,999)
Income tax (benefit) (Note 6) - (394,944)
------------ ------------
Net (loss) $(1,632,944) $ (661,055)
============ ============
Earnings (loss) per share (Notes 1 AND 5):
Net (loss) per common and common equivalent share ($0.19) ($0.09)
============ ============
Weighted average number of shares outstanding 8,477,094 6,961,737
<FN>
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
MONACO FINANCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
<S> <C> <C>
1997 1996
------------- -------------
REVENUES:
Interest $ 9,279,909 $ 9,951,985
Other income 126,510 34,696
------------- -------------
Total revenues 9,406,419 9,986,681
COSTS AND EXPENSES:
Provision for credit losses (Note 2) 245,950 756,215
Operating expenses 9,025,178 8,393,480
Interest expense (Note 4) 4,126,422 3,354,288
------------- -------------
Total costs and expenses 13,397,550 12,503,983
------------- -------------
(Loss) from continuing operations before income taxes (3,991,131) (2,517,302)
Income tax (benefit) (Note 6) - (941,471)
------------- -------------
(Loss) from continuing operations (3,991,131) (1,575,831)
(Loss) on disposal of discontinued business, net of
applicable income taxes (Note 7) - (301,451)
------------- -------------
Net (loss) ($3,991,131) ($1,877,282)
============= =============
EARNINGS (LOSS) PER SHARE (NOTES 1 AND 5):
(Loss) from continuing operations ($0.52) ($0.23)
(Loss) on disposal of discontinued business - (0.04)
------------- -------------
Net (loss) per common and common equivalent share ($0.52) ($0.27)
============= =============
Weighted average number of shares outstanding 7,724,594 6,963,282
<FN>
See notes to consolidated financial statements.
4
<PAGE>
</TABLE>
MONACO FINANCE, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
SEPT. 30, 1997 DECEMBER 31,
(UNAUDITED) 1996
---------------- --------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 632,112 $ 1,227,441
Restricted cash 3,636,517 4,463,744
Automobile receivables - net (Notes 2 and 4) 76,000,107 81,890,935
Repossessed vehicles held for sale 2,200,474 2,314,869
Income tax receivable (Note 6) - 350,000
Deferred income taxes (Note 6) 1,579,779 1,581,651
Furniture and equipment, net of accumulated
depreciation of $1,996,856 (1997) and $1,326,215 (1996) 2,084,682 2,055,902
Other assets 1,590,675 1,379,526
---------------- --------------
Total assets $ 87,724,346 $ 95,264,068
================ ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 621,093 $ 851,838
Accrued expenses and other liabilities 723,467 619,125
Notes payable (Note 4) 7,950,000 5,250,000
Promissory note payable (Note 4) 1,996,084 -
Installment note payable (Note 4) - 3,000,000
Convertible subordinated debt (Note 4) 1,385,000 1,385,000
Senior subordinated debt (Note 4) 3,749,999 5,000,000
Convertible senior subordinated debt (Note 4) 5,000,000 5,000,000
Automobile receivables-backed notes (Note 4) 52,413,455 59,156,101
---------------- --------------
Total liabilities 73,839,098 80,262,064
Commitments and contingencies (Note 3)
Stockholders' equity (Note 5)
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, 7,173,379 shares (1997) and
5,648,379 shares (1996) issued 71,734 56,484
Class B common stock, $.01 par value; 2,250,000
shares authorized, 1,303,715 shares (1997) and
1,323,715 shares (1996) issued 13,037 13,237
Additional paid-in capital 24,925,414 22,066,089
Retained earnings (deficit) (11,124,937) (7,133,806)
---------------- --------------
Total stockholders' equity 13,885,248 15,002,004
---------------- --------------
Total liabilities and stockholders' equity $ 87,724,346 $ 95,264,068
================ ==============
<FN>
See notes to consolidated financial statements.
</TABLE>
5
<PAGE>
MONACO FINANCE, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(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, 1996 5,648,379 $56,484 1,323,715 $13,237 $22,066,089 ($7,133,806) $15,002,004
Exercise of stock options 5,000 50 - - 9,325 - 9,375
Conversion of shares 20,000 200 (20,000) (200) - - 0
Conversion of installment note payable 1,500,000 15,000 - - 2,850,000 - 2,865,000
Net (loss) for the nine months - - - - - (3,991,131) (3,991,131)
--------- ------- ---------- -------- ----------- ------------- ------------
Balance - September 30, 1997 7,173,379 $71,734 1,303,715 $13,037 $24,925,414 ($11,124,937) $13,885,248
========= ======= ========== ======== =========== ============= ============
<FN>
See notes to consolidated financial statements.
</TABLE>
6
<PAGE>
MONACO FINANCE, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(unaudited)
Nine Months ended September 30,
1997 1996
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
- ---------------------------------------------------------------------
Loss from continuing operations ($3,991,131) ($1,575,831)
Adjustments to reconcile loss from continuing operations to
net cash provided by operating activities:
Depreciation 690,976 415,731
Provision for credit losses 245,950 756,215
Amortization of excess interest 3,510,372 2,433,827
Amortization of other assets 711,986 559,670
Deferred tax asset 1,872 (587,932)
Other (2,792) 28,474
------------- -------------
1,167,233 2,030,154
Change in assets and liabilities:
Receivables (658,685) (1,007,265)
Prepaid expenses (164,277) (227,847)
Accounts payable (230,745) 499,256
Accrued liabilities and other 386,408 (56,930)
------------- -------------
Net cash flows from continuing operations 499,934 1,237,368
Net cash flows from discontinued operations - 1,022,939
------------- -------------
Net cash provided by operating activities 499,934 2,260,307
------------- -------------
Cash flows from investing activities:
- ---------------------------------------------------------------------
Retail installment sales contracts - purchased (26,423,798) (52,535,178)
Retail installment sales contracts - originated - (1,519,376)
Proceeds from payments on contracts - purchased 28,052,587 24,715,293
Proceeds from payments on contracts - originated 1,170,199 4,001,449
Purchase of furniture and equipment (706,402) (757,241)
Equipment deposits and other 726 -
------------- -------------
Net cash provided by (used in) investing activities 2,093,312 (26,095,053)
------------- -------------
Cash flows from financing activities:
- ---------------------------------------------------------------------
Net borrowings under line of credit 2,700,000 3,000,000
Net decrease (increase) in restricted cash 827,227 (1,259,918)
Borrowings on asset-backed notes 58,079,887 37,746,134
Repayments on asset-backed notes (64,822,533) (25,236,491)
Repayments on senior subordinated debentures (1,250,001) -
Proceeds from issuance of convertible senior subordinated notes - 5,000,000
Purchases of treasury stock - (59,042)
Proceeds from exercise of stock options 9,375 -
Proceeds from issuance of promissory note 2,525,000 -
Repayments on promissory note (528,916) -
Increase in debt issue and conversion costs (728,614) (265,055)
------------- -------------
Net cash (used in) provided by financing activities (3,188,575) 18,925,628
------------- -------------
Net decrease in cash and cash equivalents (595,329) (4,909,118)
Cash and cash equivalents, January 1 1,227,441 7,247,670
------------- -------------
Cash and cash equivalents, September 30 $ 632,112 $ 2,338,552
============= =============
<FN>
See notes to consolidated financial statements.
</TABLE>
7
<PAGE>
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 22 states ("Dealer Network") . The contracts are acquired by the
Company through automobile financing programs it sponsors. In February
1996, the Company announced that it intended to discontinue its CarMart retail
used car sales and associated financing operations. The CarMart business
ceased operations on May 31, 1996.
The consolidated financial statements included herein are presented in
accordance with the requirements of Form 10-QSB and consequently do not
include all of the disclosures normally made in the registrant's annual Form
10-KSB filing. These financial statements should be read in conjunction with
the financial statements and notes thereto included in Monaco Finance, Inc.'s
latest annual report on Form 10-KSB.
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, MF Receivables Corp. I, MF Receivables Corp. II and
Monaco Funding Corp. (the "Subsidiaries"). All intercompany accounts and
transactions have been eliminated in consolidation.
INTERIM UNAUDITED FINANCIAL STATEMENTS
Information with respect to September 30, 1997 and 1996, and the periods
then ended, have not been audited by the Company's independent auditors, but
in the opinion of management, reflect all adjustments (which include only
normal recurring adjustments) necessary for the fair presentation of the
operations of the Company. The results of operations for the three and nine
months ended September 30, 1997 and 1996 are not necessarily indicative of
the results of the entire year.
REPOSSESSED VEHICLES HELD FOR RESALE
At September 30, 1997 and December 31, 1996, 626 and 651 repossessed
vehicles, respectively, were held for resale. Included in vehicles held for
resale are 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 1996 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
8
<PAGE>
accounting treatment for acquired stock to conform to applicable state law. As
such, 26,900 shares of Class A Common Stock purchased in 1996 have been
reported as a reduction to Class A Common Stock and Additional
Paid-in-Capital.
TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF
LIABILITIES
In June 1996, the Financial Accounting Standards Board issued SFAS No. 125,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities (subsequently amended by SFAS No. 127). SFAS No. 125 is
effective for transfers and servicing of financial assets and extinguishments
of liabilities occurring after December 31, 1996 and is to be applied
prospectively. This Statement provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of liabilities
based on consistent application of a financial-components approach that
focuses on control. It distinguishes transfers of financial assets that are
sales from transfers that are secured borrowings. Management of the Company
does not expect that adoption of SFAS No. 125 will have a material impact on
the Company's financial position, results of operations, or liquidity.
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
<S> <C> <C>
1997 1996
---------- ----------
Cash Payments for
Interest $4,207,666 $3,213,576
Income Taxes $ 3,108 $ 1,455
<FN>
</TABLE>
Non-cash investing and financing activities:
In May 1996, the Company issued a note for $107,407 for the sale of
furniture and equipment.
In April 1997, Pacific USA Holdings Corp. ("Pacific") converted the
entire $3,000,000 outstanding principal amount of an installment note payable
made by Pacific to the Company into 1.5 million shares of the Company's Class
A Common Stock. See Note 4.
<TABLE>
<CAPTION>
NOTE 2 - AUTOMOBILE RECEIVABLES
Automobile Receivables consist of the following:
September 30, December 31,
<S> <C> <C>
1997 1996
------------ ------------
Automobile Receivables
Retail installment sales contracts $10,943,377 $11,777,343
Retail installment sales contracts-Trust (Note 4) 62,476,942 71,129,192
Excess interest receivable 5,168,854 6,555,682
Other 857,249 616,230
Accrued interest 1,059,606 1,331,450
------------ ------------
Total finance receivables 80,506,028 91,409,897
Allowance for credit losses (4,505,921) (9,518,962)
------------ ------------
Automobile receivables - net $76,000,107 $81,890,935
============ ============
<FN>
</TABLE>
At September 30, 1997, the accrual of interest income was suspended on
$0 of principal amount of retail installment sales contracts.
At the time installment sales contracts ("Contracts") are originated or
purchased, the Company estimates future losses of principal based on the type
and terms of the contract, the credit quality of the borrower and the
underlying value of the vehicle financed. This estimate of loss is based on
the Company's risk model, which takes into account historical data from
similar contracts originated or purchased by the Company since its inception
in 1988. However, since the risk model uses past history to predict the
future, changes in national and regional economic conditions, borrower mix and
other factors could result in actual losses differing from initially predicted
losses.
The allowance for credit losses, as presented below, has been established
utilizing data obtained from the Company's risk models and is continually
reviewed and adjusted in order to maintain the allowance at a level which, in
the opinion of management, provides adequately for current and 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.
9
<PAGE>
<TABLE>
<CAPTION>
Allowance for
Credit Losses
---------------
<S> <C>
Balance as of December 31, 1996 $ 9,518,962
Provision for credit losses 245,950
Unearned interest income 2,123,536
Unearned discounts 1,632,840
Retail installment sale contracts charged off (17,810,263)
Recoveries 8,794,896
---------------
Balance as of September 30, 1997 $ 4,505,921
===============
<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 and
nine months ended September 30, 1997, $1,126,217 and $3,510,372,
respectively, 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.
Effective October 1, 1996, the Company adopted a new methodology for
reserving for and analyzing its loan losses. This accounting method is
commonly referred to as static pooling. The static pooling reserve methodology
allows the Company to stratify its Automobile Receivables portfolio, and the
related components of its Allowance for Credit Losses (i.e. discounts, excess
interest, charge offs and recoveries) into separate and identifiable quarterly
pools. These quarterly pools, along with the Company's estimate of future
principal losses and recoveries, are analyzed quarterly to determine the
adequacy of the Allowance for Credit Losses. The method previously used by the
Company to analyze the Allowance for Credit Losses was based on the total
Automobile Receivables portfolio. In management's opinion, the static pool
reserve method provides a more sophisticated and comprehensive analysis of the
adequacy of the Allowance for Credit Losses and is preferable to the method
previously used. With the adoption of the static pooling reserve method, the
Company increased its Allowance for Credit Losses by $4,912,790 in the fourth
quarter of 1996. This amount was included in the Consolidated Statements of
Operations under the caption "Cumulative effect of a change in accounting
principle".
As part of its adoption of the static pooling reserve method, where
necessary, the Company adjusted its quarterly pool allowances to a level
necessary to cover all anticipated future losses (i.e. life of loan) for each
related quarterly pool of loans.
Under static pooling, excess interest and discounts are used to increase
the Allowance for Credit Losses and represent the Company's primary reserve
for future losses on its portfolio. To the extent that any quarterly pool's
excess interest and discount reserves are insufficient to absorb future
estimated losses, net of recoveries, adjusted for the impact of current
delinquencies, collection efforts, and other economic indicators including
analysis of the Company's historical data, the Company will provide for such
deficiency through a charge to the Provision for Credit Losses and the
establishment of an additional Allowance for Credit Losses. To the extent that
any excess interest and discount reserves are determined to be sufficient to
absorb future estimated losses, net of recoveries, the difference will be
accreted into interest income on an effective yield method over the estimated
remaining life of the related quarterly static pool.
NOTE 3 - COMMITMENTS & CONTINGENCIES
CONTINGENCIES
Although not subject to any material litigation at this time, the Company
and its Subsidiaries at times are subject to various legal proceedings and
claims that arise in the ordinary course of business. In the opinion of
management of the Company, based in part on the advice of counsel, the amount
of any ultimate liability with respect to these actions will not materially
affect the results of operations, cash flows or financial position of the
10
<PAGE>
Company. It is the Company's and its Subsidiaries' policy to vigorously defend
litigation, however, the Company and its Subsidiaries have, and may in the
future, enter into settlements of claims where management deems appropriate.
NOTE 4 - 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, July 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 I"), a wholly owned special
purpose subsidiary of the Company, sold, in a private placement, $23,861,823
of 7.6% automobile receivables-backed notes ("Series 1994-A Notes"). The
Series 1994-A Notes accrued interest at a fixed rate of 7.6% per annum.
On July 24, 1997, the Company redeemed the outstanding principal balance
of its Series 1994-A Notes. The bonds were redeemed at their principal amount
of $1,220,665.33 plus accrued interest to July 24, 1997. Upon redemption of
the Series 1994-A Notes, the underlying automobile receivables of
approximately $2.5 million were pledged under the terms of the Revolving Note.
In May of 1995, MF I 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 I 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,
1998. 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 I maintain certain financial ratios,
as well as other representations, warranties and covenants. The Indenture
11
<PAGE>
requires MF I 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 I.
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, 1998. 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.
In June 1997, MF Receivables Corp. II ("MF II"), a wholly owned special
purpose subsidiary of the Company, sold, in a private placement, $42,646,534
of Class A automobile receivables-backed notes ("Series 1997-1A Notes" or
"Term Note") to an outside investor and $2,569,068 of Class B automobile
receivables-backed notes ("Class B Notes") to Monaco Funding Corp., a
wholly-owned special purpose subsidiary of the Company. The Series 1997-1A
Notes accrue interest at a fixed rate of 6.71% per annum and are expected to
be fully amortized by December 2002; however, the debt maturities are based on
principal payments received on the underlying receivables, which may result in
a different final maturity. An Indenture and Servicing Agreement require that
the Company and MF II maintain certain financial ratios, as well as other
representations, warranties and covenants.
In connection with the purchase of the Class B Notes, Monaco Funding
Corp. borrowed $2,525,000 from a financial institution ("Promissory Note").
The Promissory Note accrues interest at a fixed rate of 16% per annum and is
collateralized by the proceeds from the Class B Notes. The Class B Notes are
expected to be fully amortized by December 2002; however, the debt maturities
are based on principal payments received on the underlying receivables, which
may result in a different final maturity. Monaco Funding Corp. is required to
maintain certain covenants and warranties under the Pledge Agreement.
Under the Trust and Security Agreement, MF II shall have the option to
redeem all of the Series 1997-1A Notes at any time after the balance of the
Series 1997-1A Notes is less than or equal to 20% of the initial balance of
the Series 1997-1A Notes. MF II also has the option to redeem the Class B
Notes at any time after the balance of the Series 1997-1A Notes has been
reduced to zero or has been redeemed. The proceeds from the issuance of the
Series 1997-1A Notes and the Promissory Note were used to retire, in full, the
1995-A Note, which can be used to accumulate an additional $114.4 million in
$40 million increments.
The assets of MF I, MF II and Monaco Funding Corp. 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 1995-A Note, Series 1995-B Notes, and
Series 1997-1A 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
1995-A, Series 1995-B, Series 1997-1A and Promissory Note noteholders and
other general disbursements are paid to MF I and MF II on a monthly basis.
As of September 30, 1997, the Series 1995-A Note, Series 1995-B Notes
and the Series 1997-1A Notes and underlying receivables backing those notes
were as follows:
<TABLE>
<CAPTION>
Underlying
Receivable
Note Balance Balance
------------- -----------
<S> <C> <C> <C>
Series 1995-A Note $ 8,161,991 $ 9,578,448
Series 1995-B Notes 6,993,106 8,515,766
Series 1997-1 Notes 37,258,358 42,769,151 (also collateralizes the Promissory Note)
------------- -----------
TOTAL $ 52,413,455 $60,863,365
=============
<FN>
</TABLE>
12
<PAGE>
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"). This agreement was
subsequently amended and passed by the Company's Board of Directors on
September, 10, 1996. 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 $4.00 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 September 10, 1998,
with an initial conversion price of $3.00 per share.
REVOLVING LINE OF CREDIT - LASALLE NATIONAL BANK
In January 1996, the Company entered into a revolving line of credit
agreement with LaSalle National Bank ("LaSalle")providing a line of credit of
up to $15 million, not to exceed a borrowing base consisting of eligible
accounts receivable to be acquired. The scheduled maturity date of the line of
credit is January 1, 1998. At the option of the Company, the interest rate
charged on the loans shall be either .5% in excess of the prime rate charged
by lender or 2.75% over the applicable LIBOR rate. The Company is obligated to
pay the lender a fee equal to .25% per annum of the average daily unused
portion of the credit commitment. The obligation of the lender to make
advances is subject to standard conditions. The collateral securing payment
consists of all Contracts pledged and all other assets of the Company. The
Company has agreed to maintain certain restrictive financial covenants. As of
September 30, 1997, the Company had borrowed $7,950,000 against this line of
credit.
INSTALLMENT NOTE PAYABLE - PACIFIC USA HOLDINGS CORP.
On October 9, 1996, the Company entered into a Securities Purchase
Agreement with Pacific USA Holdings Corp. ("Pacific") whereby, among other
things, Pacific agreed to acquire certain shares of the Company's Class A
Common Stock. On November 1, 1996, the Company entered into a Loan Agreement
with Pacific whereby Pacific loaned the Company $3 million ("Pacific Loan").
On February 7, 1997, the Securities Purchase Agreement was terminated by the
parties; however, the Pacific Loan and its corresponding Installment Note
remained in effect.
On April 25, 1997, the Company executed a Conversion and Rights Agreement
(the "Conversion Agreement") with Pacific. The Conversion Agreement
converted the entire $3,000,000 outstanding principal amount of the
installment note made by Pacific to the Company into 1.5 million restricted
shares of the Company's Class A Common Stock. The Conversion Agreement also
released the Company from all liability under the Loan Agreement executed on
October 29, 1996 between the Company and Pacific pursuant to which the $3
million loan was made.
NOTE 5 - STOCKHOLDERS' EQUITY
COMMON STOCK
The Company has two classes of common stock. The two classes are the same
except for the voting rights of each. Each share of Class B common stock is
entitled to three votes while each share of Class A common stock is entitled
to one vote.
STOCK OPTION PLANS
During the nine months ended September 30, 1997, stock options to acquire
691,700 shares at market prices ranging from $0.53 to $2.44 were granted to
certain officers and employees of the Company under the Company's stock option
plan. During this same period, 5,000 options were exercised and options
to acquire 89,400 shares were canceled.
Prior to January 1, 1996, the Company accounted for its stock option plan
in accordance with the provisions of Accounting Principles Board ("APB")
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. As such, compensation expense would be recorded on the date
13
<PAGE>
of grant only if the current market price of the underlying stock exceeded the
exercise price. On January 1, 1996, the Company adopted SFAS No. 123,
Accounting for Stock-Based Compensation, which permits entities to recognize
as expense over the vesting period the fair value of all stock-based awards on
the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net earnings and pro
forma earnings per share disclosures for employee stock option grants made in
1995 and future years as if the fair-value-based method defined in SFAS No.
123 had been applied. The Company has elected to continue to apply the
provisions of APB Opinion No. 25 and provide the pro forma disclosure
provisions of SFAS No. 123.
The Company uses one of the most widely used option pricing models, the
Black-Scholes model (the Model), for purposes of valuing its stock options
grants. The Model was developed for use in estimating the fair value of traded
options which have no vesting restrictions and are fully transferable. In
addition, it requires the input of highly subjective assumptions including
the expected stock price volatility, expected dividend yields, the risk free
interest rate, and the expected life. Because the Company's stock options have
characteristics significantly different from those of traded options, and
because changes in subjective input assumptions can materially affect the fair
value estimate, in management's opinion, the value determined by the Model is
not necessarily indicative of the ultimate value of the granted options.
ADOPTION OF NEW ACCOUNTING RULES
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement No. 128, Earnings per Share, ("SFAS 128") which requires the
presentation of basic and diluted earnings per share on the face of the income
statement for entities with a complex capital structure. SFAS 128 also
requires a reconciliation of the numerator and denominator of the basic
earnings per share computation to the numerator and denominator of diluted
earnings per share computation. SFAS is effective for financial statements
issued for periods ending after December 15, 1997, and requires restatement of
all prior-period earnings per share data presented. Management of the Company
does not expect that adoption of SFAS 128 will have a material impact on the
Company's financial position, results of operation or liquidity.
OTHER
On April 25, 1997, Morris Ginsburg, the Company's President, and Irwin L.
Sandler, the Company's Executive Vice President and Secretary/Treasurer,
agreed to grant an option (the "Option") to purchase all shares of the
Company's common stock owned by them to SPGC, LLC ("SPGC") at $4.00 per share.
The Option is subject to execution of a definitive option agreement
acceptable to the parties. The option agreement also will provide that
Messrs. Ginsburg and Sandler may "put" 50% of the shares owned or controlled
by them to SPGC on the second anniversary of the effectiveness of the Option
and the other 50% on the third anniversary of the Option at $4.00 per share.
Messrs. Ginsburg and Sandler have agreed to deliver to SPGC irrevocable
proxies for all shares owned or controlled by them upon effective of the
Option. The Option will become effective, if and when, SPGC provides
security, on or before November 25, 1997, for the prompt payment of the "put"
price in the form of cash, letter of credit or other collateral satisfactory
to Messrs. Ginsburg and Sandler. SPGC is a limited liability corporation
controlled by The Stone Pine Companies, a privately held group of financial
services companies. Subject to termination provisions, Pacific USA Holdings
Corp. has delivered irrevocable proxies to Messrs. Ginsburg and Sandler for
the 1.5 million shares of Class A Common Stock acquired through the Conversion
Agreement (See Note 4).
NOTE 6 - 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.
14
<PAGE>
A reconciliation of the statutory federal income tax to the effective
anticipated tax is as follows:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Pretax income (loss) - continuing and
discontinued operations $(1,632,944) $(1,055,999) $(3,991,131) $(3,022,302)
============ ============ ============ ============
Federal tax expense (benefit)
at statutory rate - 34% $ (555,201) $ (359,040) $(1,356,985) $(1,027,583)
State income tax expense (benefit) (55,520) (35,904) (135,698) (117,437)
------------ ------------ ------------
(610,721) (394,944) (1,492,683) (1,145,020)
Less valuation allowance (610,721) - (1,492,683) -
------------ ------------ ------------ ------------
Income tax expense (benefit) $ 0 $ (394,944) $ 0 $(1,145,020)
============ ============ ============ ============
<FN>
</TABLE>
Deferred taxes are recorded based upon differences between the financial
statements and tax basis of assets and liabilities and available tax credit
carryforwards. Temporary differences and carryforwards which give rise to a
significant portion of deferred tax assets and liabilities as of September
30, 1997, were as follows:
<TABLE>
<CAPTION>
<S> <C>
Deferred tax assets:
Federal and State NOL tax carry-forward $ 7,847,990
Other 48,935
------------
7,896,925
Less: Valuation Allowance (3,330,066)
------------
Total deferred tax assets 4,566,859
Deferred tax liabilities:
Depreciation (68,057)
Allowances (2,919,023)
------------
Total deferred tax liability (2,987,080)
------------
Net deferred tax asset $ 1,579,779
============
<FN>
</TABLE>
The net deferred asset disclosed above equals the deferred income taxes
on the balance sheet. The valuation allowance relates to those deferred tax
assets that may not be fully utilized.
As of September 30, 1997, the Company had a net operating loss
carryforward of approximately $21.0 million for income tax reporting purposes
which, if unused, will expire in 2011 and 2012.
The Company's ability to generate future taxable income will depend upon
its ability to implement its growth strategy. At September 30, 1997,
management has estimated that it is more likely than not that the Company will
have some future net taxable income within the net operating loss carryforward
period. Accordingly, a valuation allowance against the deferred tax asset has
been established such that operating loss carryforwards will be utilized
primarily to the extent of estimated future taxable income. The need for this
allowance is subject to periodic review. Should the allowance be increased in
a future period, the tax benefits of the carryforwards will be recorded at the
time as an increase to the Company's income tax expense. Should the allowance
be reduced in a future period, the tax benefits of the carryforwards will be
recorded at the time as an reduction to the Company's income tax expense.
15
<PAGE>
The increase of approximately $1.5 million in the valuation allowance
during the first nine months of 1997 was primarily due to a $2.7 million
increase in net operating loss carryforward partially offset by a $1.2 million
increase in deferred tax liabilities related to Allowances and Loan
Origination Fees.
NOTE 7 - 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.
Effective May 31, 1996, the Company entered into a sublease agreement on
all of its former CarMart properties for the entire lease terms at an amount
approximately equal to the Company's obligation.
16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
This quarterly report on form 10-QSB for the period ended September 30,
1997 contains forward looking statements. Additional written or oral forward
looking statements may be made by the company from time to time in filings
with the Securities and Exchange Commission or otherwise. Such forward
looking statements are within the meaning of that term in section 27 A of the
Securities Act of 1933, as amended, and section 21 E of the Securities
Exchange Act of 1934, as amended. Such statements may include, but are not
limited to, projections of revenues, income, or loss, capital expenditures,
plans for future operations, financing needs or plans, objectives related to
the Automobile Receivables and the related allowance, and plans related to
products or services of the Company, as well as assumptions related to the
foregoing.
Forward looking statements are inherently subject to risks and
uncertainties some of which cannot be predicted or quantified. Future events
and actual results could differ materially from those set forth in,
contemplated by, or underlying the forward looking statements. Statements in
this quarterly report included in the "Notes to Consolidated Financial
Statements" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations," describe factors, among others, that could
contribute to or cause such differences. Additional factors that could cause
actual results to differ from materially from those expressed in such forward
looking statements are set forth in Exhibit 99 to the Company's annual report
filed on form 10-KSB for December 31, 1996.
SUMMARY
The Company's revenues and (loss) from continuing operations primarily are
derived from the Company's Loan Portfolio consisting of Contracts purchased
from the Dealer Network, Contracts purchased from third party originators,
Contracts purchased from vehicle sales at the Companies Dealerships and
Contracts purchased through portfolio purchases.
In February 1996 the Company announced that it intended to discontinue
its CarMart retail used car sales and its associated financing operations
related to its CarMart business. The CarMart business ceased operations on
May 31, 1996. The results of operations of the CarMart business for 1996 were
included in the loss on disposal.
The average discount on all Contracts purchased pursuant to discounted
Finance Programs during the nine months ended September 30, 1997 and 1996 was
approximately 7.1% for both periods. The Company services all of the loans
that it owns. The loan portfolio at September 30, 1997 carries a contract
annual percentage rate of interest that approximates 22.7%, before discounts,
and has an original weighted average term of approximately 52 months. The
average amount financed per Contract for the nine months ended September 30,
1997 and 1996 was approximately $9,852 and $10,175, respectively.
RESULTS OF OPERATION
OVERVIEW
<TABLE>
<CAPTION>
INCOME STATEMENT DATA
Three Months Nine Months
Ended September 30, Ended September 30,
<S> <C> <C> <C> <C>
(dollars in thousands, except per share amounts) 1997 1996 1997 1996
----------- ----------- ----------- -----------
Total revenues $ 2,928 $ 3,528 $ 9,407 $ 9,987
Total costs and expenses $ 4,561 $ 4,584 $ 13,398 $ 12,504
(Loss) from continuing operations before income taxes $ (1,633) $ (1,056) $ (3,991) $ (2,517)
Income tax (benefit) - $ (395) - $ (941)
(Loss) from continuing operations $ (1,633) $ (661) $ (3,991) $ (1,576)
(Loss) on disposal of discontinued business, net of income taxes - - - $ (301)
Net (loss) $ (1,633) $ (661) $ (3,991) $ (1,877)
Net (loss) per share $ (0.19) $ (0.09) $ (0.52) $ (0.27)
Weighted average number of shares outstanding 8,477,094 6,961,737 7,724,594 6,963,282
<FN>
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
INCOME STATEMENT DATA
AS A % OF OUTSTANDING LOAN PORTFOLIO
Three Months Nine Months
Ended September 30, Ended September 30,
<S> <C> <C> <C> <C>
1997 1996 1997 1996
------------ ------------ ------------ ------------
Average Interest Bearing Loan Portfolio Balance $74,094,439 $75,002,911 $77,548,675 $67,994,869
============ ============ ============ ============
Interest Income 15.8% 18.8% 15.9% 19.5%
Interest Expense 7.4% 6.5% 7.1% 6.6%
------------ ------------ ------------ ------------
8.4% 12.3% 8.8% 12.9%
Operating Expenses 16.9% 16.8% 15.5% 16.4%
Provision for Credit Losses 0.3% 1.1% 0.4% 1.5%
Other Income - - -0.2% -0.1%
------------ ------------ ------------ ------------
17.2% 17.9% 15.7% 17.8%
Loss from continuing operations before income taxes -8.8% -5.6% -6.9% -4.9%
Income Tax Benefit - -2.1% - -1.8%
------------ ------------ ------------ ------------
Loss from continuing operations -8.8% -3.5% -6.9% -3.1%
Loss on disposal of discontinued business, net of taxes - - - -0.6%
------------ ------------ ------------ ------------
Net Loss -8.8% -3.5% -6.9% -3.7%
============ ============ ============ ============
<FN>
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET DATA
<S> <C> <C>
September 30, 1997 December 31, 1996
------------------- ------------------
(dollars in thousands)
Total assets $ 87,724 $ 95,264
Total liabilities $ 73,839 $ 80,262
Stockholders' equity $ 13,885 $ 15,002
<FN>
</TABLE>
The Company's revenues decreased 17% from $3.5 million in the third
quarter of 1996 to $2.9 million in the comparable 1997 period. Net (loss)
increased from $(0.7) million in 1996 to $(1.6) million in 1997. (Loss) per
share for 1997 was $(0.19), based on 8.5 million weighted average shares
outstanding, compared with $(0.09) per share, based on 7.0 million weighted
average shares outstanding, for 1996.
For the nine months ended September 30, the Company's net revenues
decreased 6% from $10.0 million in 1996 to $9.4 million in the comparable 1997
period. Net loss increased from $(1.9) million in 1996 to $(4.0) million in
1997. (Loss) per share for 1997 was $(0.52), based on 7.7 million weighted
average shares outstanding, compared with $(0.27) per share, based on 7.0
million weighted average shares outstanding, for 1996.
18
<PAGE>
CONTINUING OPERATIONS
<TABLE>
<CAPTION>
SELECTED OPERATING DATA
Three Months Ended Nine Months Ended
September 30, September 30,
<S> <C> <C> <C> <C>
(dollars in thousands, except where noted) 1997 1996 1997 1996
------- -------- ------- --------
Interest income $2,923 $ 3,527 $9,280 $ 9,952
Other income $ 5 $ 1 $ 127 $ 35
Provision for credit losses $ 52 $ 208 $ 246 $ 756
Operating expenses $3,137 $ 3,144 $9,025 $ 8,394
Interest expense $1,372 $ 1,232 $4,127 $ 3,354
Operating expenses as a % of Average
Gross Receivables 4.2% 4.2% 11.6% 12.3%
Contracts from Dealer Network 1,033 2,353 2,349 5,059
Contracts from Company Dealerships - - - 148
------- -------- ------- --------
Total contracts 1,033 2,353 2,349 5,207
Average amount financed (dollars) $8,893 $11,055 $9,852 $10,175
<FN>
</TABLE>
REVENUES
Total revenues for the quarter ended September 30, 1997 decreased $0.6
million when compared to the same period in 1996 primarily due to a decrease
of $0.6 million in interest income when compared to the same period in 1996.
The rate of interest income earned for the quarter ended September 30, 1997
was 15.8% based on an average interest bearing portfolio balance of
$74,094,439 as compared to a rate of interest income earned of 18.8% based on
an average interest bearing portfolio balance of $75,002,911 for the quarter
ended September 30, 1996. Total revenues for the nine months ended September
30, 1997 decreased $0.6 million when compared to the same period in 1996
primarily due to a $0.7 million decrease in interest income partially offset
by a one-time other income credit of $.1 million from the Company's forced
place insurance provider in 1997. The rate of interest income earned for the
nine months ended September 30, 1997 was 15.9% based on an average interest
bearing portfolio balance of $77,548,675 as compared to a rate of interest
income earned of 19.5% based on an average interest bearing portfolio balance
of $67,994,869 for the nine months ended September 30, 1996. The decrease in
effective yield reported by the Company for the three and nine months ended
September 30, 1997 when compared to the prior year's comparable period was due
primarily to the Company's use of the excess interest method of
accounting and a change in the Company's portfolio mix, resulting in somewhat
lower contract interest rates and lower purchase discounts. Acquisition of
Contracts with lower interest rates and discounts was due to increased
competition in the sub-prime automobile finance industry and the Company's
strategy to acquire loans with perceived higher credit quality. The Company's
management believes the yields for the first nine months of 1997, should be
representative of loans purchased for the balance of the year using similar
programs and buying criteria which are subject to change based on the
Company's future business plans.
The lower reported interest rate - when compared to the contract annual
percentage rate of interest (22.7% at September 30, 1997 and 24.0% at
September 30, 1996) - results from the Company's use of the excess interest
method of accounting. Under this method the Company uses part of its interest
income as well as contract discounts and a provision for credit losses to
establish its allowance for credit losses on its portfolio over their entire
life.
The most significant aspect of the growth of the Company's loan portfolio
is attributable to loans generated from the Dealer Network during 1996.
During 1996, the Company's loan portfolio increased 34% from $62.2 million at
December 31, 1995 to $82.9 million at December 31, 1996. The number of
contracts generated from the Dealer Network increased 25% during 1996 and the
dollar value of contracts acquired increased $21.5 million or 51%. The
increase in contracts mainly was due to the expansion of the Dealer Network
during 1996.
During the first nine months of 1997, the Company's net Automobile
Receivables decreased from $81.9 million at December 31, 1996 to $76.0 million
at September 30, 1997. During the three months period ended September 30,
1997, the Company originated 1,033 loans totaling $9.2 million with an average
amount financed of $8,893 as compared to loan originations of 2,353 totaling
$26.0 million with an average amount financed of $11,055 for the three months
ended September 30, 1996. During the nine months ended September 30, 1997,
the Company originated 2,349 loans totaling $23.1 million with an average
amount financed of $9,852 as compared with loan originations of 5,207
19
<PAGE>
totaling $53.0 million with an average amount financed of $10,175 for the
nine months ended September 30, 1996. The average discount on all contracts
purchased was 7% for the nine months ended September 30, 1996 and 1997.
The decline in the number and dollar value of loan originations during
the first nine months of 1997 as compared to the first nine months of 1996 of
55% and 56%, respectively, resulted from a change in the Company's business
philosophy in the latter part of 1996 which carried over into 1997. This
change resulted from the completion of the Company's proprietary credit
scoring system, the closing its CarMart retail sales and financing operations
and the ceasing of its deep discount loan acquisition programs. All of these
measures were in accordance with the Company's loan acquisition strategy to
acquire loans which the Company believes have increased credit quality.
At September 30, 1997, only $1.9 million of the Company's Auto
Receivable Loan Portfolio was generated from the discontinued CarMart
operations as compared to $6.1 million of its portfolio at September 30,
1996.
COSTS AND EXPENSES
The provision for credit losses decreased $156,000 from $208,000 in the
quarter ended September 30, 1996 to $52,000 in the comparable 1997 period. For
the nine months ended September 30, the provision for credit losses
decreased $510,000 from $756,000 in 1996 to $246,000 in 1997. The provision
for credit losses represents estimated current losses based on the Company's
risk analysis of historical trends and expected future results. The decreases
in the provisions for credit losses primarily were 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 decreased
from 14.2% in the first nine months of 1996 to 11.5% in the comparable 1997
period. Although the Company believes that its allowance for credit losses is
sufficient for the life of its current portfolio, a provision for credit
losses may be charged to future earnings in an amount sufficient to maintain
the allowance. The Company had 2.2% of its loan portfolio over 60 days past
due at December 31, 1996 compared with 1.2% at September 30, 1997.
The Company believes that the decrease in net charge-offs as a percentage
of Average Net Automobile Receivables is due to the following factors:
1. Portfolio mix; Changes in the composition of the Company's portfolio,
due specifically to closing the CarMart retail stores and elimination of the
high interest rate, deep-discount programs, may reduce charge-offs as a
percentage of average automobile receivables.
2. Credit quality; All originations subsequent to August 31, 1996, were
acquired using the Company's credit scorecard including more stringent credit
criteria. These Contracts may result in lower net charge-offs and higher risk
adjusted yields in the future than for comparable periods in 1996.
3. Collections and recoveries; In February 1997, the Company upgraded its
collection and recovery departments. Currently, the top three people in charge
of these departments have many years of experience in collecting sub-prime
automobile contracts.
It is too soon to determine whether the above factors will result in
significant long-term reductions in net charge-offs.
Effective October 1, 1996, the Company adopted a new methodology for
reserving for and analyzing its loan losses. This accounting method is
commonly referred to as static pooling. The static pooling reserve methodology
allows the Company to stratify its Automobile Receivables portfolio, and the
related components of its Allowance for Credit Losses (i.e. discounts, excess
interest, charge offs and recoveries) into separate and identifiable quarterly
pools. These quarterly pools, along with the Company's estimate of future
principle losses and recoveries, are analyzed quarterly to determine the
adequacy of the Allowance for Credit Losses. The method previously used by the
Company to analyze the Allowance for Credit Losses was based on the total
Automobile Receivables portfolio.
As part of its adoption of the static pooling reserve method, where
necessary, the Company adjusted its quarterly pool allowances to a level
necessary to cover all anticipated future losses (i.e. life of loan) for each
related quarterly pool of loans.
Under static pooling, excess interest and discounts are used to increase
the Allowance for Credit Losses and represent the Company's primary reserve
for future losses on its portfolio. To the extent that any quarterly pool's
excess interest and discount reserves are insufficient to absorb future
estimated losses, net of recoveries, adjusted for the impact of current
delinquencies, collection efforts, and other economic indicators including
analysis of the Company's historical data, the Company will provide for such
deficiency through a charge to the Provision for Credit Losses and the
establishment of an additional Allowance for Credit Losses. To the extent that
any excess interest and discount reserves are determined to be sufficient to
absorb future estimated losses, net of recoveries, the difference will be
accreted into interest income on an effective yield method over the estimated
remaining life of the related quarterly static pool.
20
<PAGE>
Operating expenses decreased $7,000 from $3,144,000 in the third quarter
of 1996 to $3,137,000 in the comparable 1997 period. This decrease primarily
was due to a decrease in salaries and benefits of $520,000 offset by a
$341,000 increase due to lower loan origination fees and an $271,000 increase
in depreciation and amortization. For the nine months ended September 30,
operating expenses increased $0.6 million, or 8%, from $8.4 million in 1996 to
$9.0 million in 1997. This increase primarily was due to an increase of $.8
million as a result of lower loan origination fees, an increase in
depreciation and amortization of $.4 million and an increase in consulting and
professional fees of $.1 million, partially offset by a decrease in salaries
and benefits of $.7 million and travel and entertainment of $.1 million. The
major components of the increase in operating expenses are as follows:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
<S> <C> <C> <C> <C> <C> <C>
(dollars in thousands) 1997 1996 Increase (Decr.) 1997 1996 Increase (Decr.)
------- ------- ----------------- ------- ------- -----------------
Salaries and benefits $1,219 $1,739 $ (520) $3,947 $4,692 $ (745)
Depreciation and amortization 597 326 271 1,403 975 428
Consulting and professional fees 706 719 (13) 1,820 1,711 109
Telephone 115 148 (33) 390 365 25
Travel and entertainment 42 124 (82) 163 298 (135)
Loan origination fees (57) (398) 341 (229) (989) 760
Rent/Office Supplies/Postage 275 284 (9) 803 795 8
All other 240 202 38 728 546 182
------- ------- ----------------- ------- ------- -----------------
$3,137 $3,144 $ (7) $9,025 $8,393 $ 632
======= ======= ================= ======= ======= =================
<FN>
</TABLE>
Interest expense increased $0.1 million, or 11%, from $1.2 million in the
third quarter of 1996 to $1.3 million in the third quarter of 1997. For the
nine months ended September 30, interest expense increased $0.8 million, or
23%, from $3.3 million in 1996 to $4.1 million in 1997. These increases
primarily were due to an increase in borrowings on the LaSalle Revolving Line
of Credit at an interest rate of 2.75% over LIBOR and a paydown of the
Company's automobile receivables-backed notes at interest rates between 6.45%
and 7.6%. Since September 30, 1996, net increases (decreases) in the
Company's debt were as follows:
<TABLE>
<CAPTION>
(dollars in thousands)
<S> <C>
Notes payable - LaSalle $ 4,950
Promissory note payable 1,996
Convertible senior subordinated debt (1,250)
Automobile receivables-backed notes (9,767)
--------
Total $(4,071)
========
<FN>
</TABLE>
The average annualized interest rate on the Company's debt was 7.5% for
the third quarter of 1997 and 7.0% for the comparable 1996 period. For the
nine months ended September 30 1997, the average annualized interest rate
was 7.3% versus 7.0% for the comparable 1996 period.
The annualized net interest margin percentage, representing the
difference between interest income and interest expense divided by average
finance receivables, decreased from 12.0% in the third quarter of 1996 to 8.1%
in the third quarter of 1997. For the nine months ended September 30, the
annualized net interest margin percentage decreased from 13.1% in 1996 to 8.8%
in 1997. These decreases were due primarily to the amortization of excess
interest receivable as described in Note 2 of the Notes to Consolidated
Financial Statements.
NET INCOME (LOSS)
Net loss from continuing operations increased $1.0 million from $(0.6)
million in the third quarter of 1996 to $(1.6) million in the third quarter of
1997. For the nine months ended September 30, net loss from continuing
operations increased $2.4 million from $(1.6) million in 1996 to $(4.0)
million in 1997. These increases in loss were primarily due to the following
changes on the Consolidated Statements of Operations:
21
<PAGE>
<TABLE>
<CAPTION>
(INCREASE) TO NET (LOSS) FROM CONT. OPERATIONS
Three Months Nine Months
Ended September 30, Ended September 30,
--------------------- -------------------
<S> <C> <C> <C>
(in millions of dollars)
Interest and other income $ (0.6) $(0.6)
Provision for credit losses 0.1 0.5
Operating expenses - (0.6)
Interest expense (0.1) (0.8)
Income tax expense (0.4) (0.9)
--------------------- ------
Net (increase) to net (loss)
from continuing operations $ (1.0) $(2.4)
===================== ======
<FN>
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash flows for the nine months ended September 30, 1997 and
1996 are summarized as follows:
<TABLE>
<CAPTION>
CASH FLOW DATA
Nine Months
Ended September 30,
<S> <C> <C>
(dollars in thousands) 1997 1996
-------- ---------
Cash flows provided by (used in):
Operating activities $ 500 $ 2,260
Investing activities 2,093 (26,095)
Financing activities (3,188) 18,926
-------- ---------
Net (decrease) in cash and cash equivalents $ (595) $ (4,909)
======== =========
<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 and to third-party originators in connection with purchases of
installment contracts and the purchase of existing loan portfolios. These
purchases have been financed through the Company's capital, private placement
borrowings and cash flows from operations. It is the Company's intent to use
its Revolving Note and revolving line of credit, as described in detail below,
to provide the liquidity to finance the purchase of installment Contracts.
In order to further insure the Company's ability to finance the purchase
of installment contracts and thereby continue to grow, the Company is seeking
to obtain an additional warehouse credit facility on terms more favorable than
the Revolving Note described in Note 4 to the Company's Consolidated Financial
Statements. If the Company is successful in obtaining such a credit facility,
it will provide the Company with additional working capital to the extent that
the new cash advance terms are more favorable than the Revolving Note.
Although the Company believes it will be able to consummate such a new credit
facility, no assurance can be given that it will be consummated.
In addition to its efforts to obtain a new credit facility, as described
above, the Company on November 1, 1996, obtained a $3 million term loan from
Pacific USA Holdings Corp., which was converted to 1,500,000 shares of Class
A Common Stock as of April 25, 1997, as described in Note 4 to the Company's
Consolidated Financial Statements.
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 Net Charge-Offs increase in the future, the
Company's liquidity and its ability to increase its loan portfolio may be
impacted negatively. Under the terms of the Revolving Note, approximately 80%
of the face amount of Contracts, in the aggregate, is advanced to the Company
for purchasing qualifying Contracts. The balance must be financed through
capital.
During 1993, the Company completed the Note Offering described in Note 4
of the Notes to Consolidated Financial Statements. In the Note Offering, the
Company sold 7% Convertible Subordinated Notes in the aggregate principal
22
<PAGE>
amount of $2,000,000. The purchasers of the Notes exercised an option to
purchase an additional $1,000,000 aggregate principal amount on September 15,
1993. The principal amount of the Notes, plus accrued interest thereon, is due
March 1, 1998. The Notes are convertible into Class A Common Stock of the
Company at any time prior to maturity at a conversion price of $3.42 per
share, subject to adjustment for dilution. Certain of these Notes with an
aggregate principal amount of $1,615,000 were converted in 1994 and 1995,
resulting in the issuance of 472,219 shares of Class A Common Stock.
On November 1, 1994, the Company sold in a private placement unsecured
Senior Subordinated Notes (Senior Notes") in the principal amount of
$5,000,000 to Rothschild North America, Inc. Interest is due and payable the
first day of each quarter commencing on January 1, 1995. Principal payments in
the amount of $416,667 are due and payable the first day of January, April,
July and October of each year, commencing January 1, 1997. The unpaid
principal amount of the Notes, plus accrued and unpaid interest, are due
October 1, 1999.
In November 1994 MF Receivables Corp. I. ("MF I"), a wholly owned special
purpose subsidiary of the Company, sold, in a private placement, $23,861,823
of 7.6% automobile receivables-backed notes ("Series 1994-A Notes"). The
Series 1994-A Notes accrued interest at a fixed rate of 7.6% per annum. On
July 24, 1997, the Company redeemed the outstanding principal balance of its
Series 1994-A Notes at their principal amount of $1,220,665 plus accrued
interest.
In May of 1995, MF I 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 I 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,
1998. 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 I maintain certain financial ratios,
as well as other representations, warranties and covenants. The Indenture
requires MF I 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 I.
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.
In June 1997, MF Receivables Corp. II ("MF II"), a wholly owned special
purpose subsidiary of the Company, sold, in a private placement, $42,646,534
of Class A automobile receivables-backed notes ("Series 1997-1A Notes" or
"Term Note") to an outside investor and $2,569,068 of Class B automobile
receivables-backed notes ("Class B Notes") to Monaco Funding Corp., a
wholly-owned special purpose subsidiary of the Company. The Series 1997-1A
Notes accrue interest at a fixed rate of 6.71% per annum and are expected to
be fully amortized by December 2002; however, the debt maturities are based on
principal payments received on the underlying receivables, which may result in
a different final maturity. An Indenture and Servicing Agreement require that
the Company and MF II maintain certain financial ratios, as well as other
representations, warranties and covenants.
In connection with the purchase of the Class B Notes, Monaco Funding
Corp. borrowed $2,525,000 from a financial institution ("Promissory Note").
The Promissory Note accrues interest at a fixed rate of 16% per annum and is
collateralized by the proceeds from the Class B Notes. The Class B Notes are
expected to be fully amortized by December 2002; however, the debt maturities
are based on principal payments received on the underlying receivables, which
may result in a different final maturity. Monaco Funding Corp. is required to
maintain certain covenants and warranties under the Pledge Agreement.
Under the Trust and Security Agreement, MF II shall have the option to
redeem all of the Series 1997-1A Notes at any time after the balance of the
Series 1997-1A Notes is less than or equal to 20% of the initial balance of
the Series 1997-1A Notes. MF II also has the option to redeem the Class B
Notes at an time after the balance of the Series 1997-1A Notes has been
reduced to zero or has been redeemed. The proceeds from the issuance of the
Series 1997-1A Notes and the Promissory Note were used to retire, in full, the
1995-A Note, which can be used to accumulate an additional $114.4 million in
$40 million increments.
The assets of MF I, MF II and Monaco Funding Corp. 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
23
<PAGE>
repayment. The MBIA insured Series 1995-A Note, Series 1995-B Notes, and
Series 1997-1A 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
1995-A, Series 1995-B, Series 1997-1A and Promissory Note noteholders and
other general disbursements are paid to MF I and MF II on a monthly basis.
As of September 30, 1997, Series 1995-A Note, Series 1995-B Notes and
the Series 1997-1A Notes and underlying receivables backing those notes were
as follows:
<TABLE>
<CAPTION>
Underlying
Receivable
Note Balance Balance
------------- -----------
<S> <C> <C> <C>
Series 1995-A Note $ 8,161,991 $ 9,578,448
Series 1995-B Notes 6,993,106 8,515,766
Series 1997-1 Notes 37,258,358 42,769,151 (also collateralizes the Promissory Note)
------------- -----------
TOTAL $ 52,413,455 $60,863,365
============= ===========
<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"). This agreement was
subsequently amended and passed by the Company's Board of Directors on
September, 10, 1996. 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 $4.000 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 September 10, 1998,
with an initial conversion price of $3.00 per share.
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 the
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. The Company has agreed to maintain certain restrictive loan
covenants. As of September 30, 1997, the Company had borrowed $7,950,000
against this line of credit.
On October 9, 1996, the Company entered into a Securities Purchase
Agreement with Pacific USA Holdings Corp. ("Pacific") whereby, amongst other
things, Pacific agreed to acquire certain shares of the Company's Class A
Common Stock. On November 1, 1996, the Company entered into a Loan Agreement
with Pacific whereby Pacific loaned the Company $3 million ("Pacific Loan").
On February 7, 1997, the Securities Purchase Agreement was terminated by the
parties; however, the Pacific Loan and its corresponding Installment Note
remained in effect.
On April 25, 1997, the Company executed a Conversion and Rights Agreement
(the "Conversion Agreement") with Pacific. The Conversion Agreement
converted the entire $3,000,000 outstanding principal amount of the
installment note made by Pacific to the Company into 1.5 million restricted
shares of the Company's Class A Common Stock. The Conversion Agreement also
released the Company from all liability under the Loan Agreement executed on
October 29, 1996 between the Company and Pacific pursuant to which the $3
million loan was made.
In March 1996, the Company announced that its Board of Directors had
authorized the purchase of up to 500,000 shares of Class A Common Stock,
representing approximately 10% of its Class A Common Stock outstanding.
Subject to applicable securities laws, repurchases may be made at such times,
and in such amounts, as the Company's management deems appropriate. As of
September 30, 1997, the Company had repurchased 26,900 shares of Class A
Common Stock.
24
<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 and could, in the future, require the Company to
sell certain of the Loans in its Portfolio to meet its liquidity
requirements.
OTHER
ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement No. 128, Earnings per Share, ("SFAS 128") which requires the
presentation of basic and diluted earnings per share on the face of the income
statement for entities with a complex capital structure. SFAS 128 also
requires a reconciliation of the numerator and denominator of the basic
earnings per share computation to the numerator and denominator of diluted
earnings per share computation. SFAS is effective for financial statements
issued for periods ending after December 15, 1997, and requires restatement of
all prior-period earnings per share data presented. Management of the Company
does not expect that adoption of SFAS 128 will have a material impact on the
Company's financial position, results of operation or liquidity.
INFLATION
Inflation was not a material factor in either the sales or the operating
expenses of the Company from inception to September 30, 1997.
FUTURE EXPANSION AND STRATEGY
The Company's strategy is to increase the size of its loan portfolio
while maintaining the integrity of the credit quality of auto loans acquired.
The Company plans to implement its growth strategy by: (1) expanding its
Dealer Network; (2) increasing the number and amount of loans purchased from
third-party originators; (3) purchasing portfolios of loans originated by
other sub-prime automobile contract originators; (4) continuing its efforts
to increase the credit quality of its portfolio and reduce credit losses and
charge-offs; and (5) decreasing the percentage of operating expenses to
average gross receivables by increasing the portfolio while decreasing
operating expenses.
During 1996, the Company acquired Contracts from approximately 425
Dealers in 22 states, the majority of which were purchased in five
states ("Primary States"). In order to increase efficiency and reduce
operating expenses, in the first half of 1997, the Company temporarily
reduced its marketing representatives from 16 to six in the Primary States.
In August 1997, the Company initiated its strategy to increase its Dealer Net-
work by hiring two regional marketing managers. By October 31, 1997, the
Company had increased its marketing representatives to 20.
Between July 1, 1997, and October 31, 1997, the Company entered into
agreements with six independent marketing agents who market the Company's
finance program in 16 states.
The Company also plans to pursue the purchase of loan portfolios
previously originated by other finance companies or originators. In September
and October of 1997, the Company acquired, at a discount, two such portfolios
with a face value of approximately $13 million. The Company is actively
negotiating to acquire other portfolios, including certain loans owned by
Pacific USA Holdings Corp. as disclosed in its Form 8-K filed with the
Securities and Exchange Commission on October 3, 1997.
Other strategies for the future include acquiring, merging with or
forming a strategic alliance with another company, either currently engaged in
or interested in entering the sub-prime automobile finance industry. A
transaction of this nature, if consummated, may result in additional capital
and warehouse lines of credit as well as increased loan volume and cost
efficiencies obtained by combining operations.
Implementation of the foregoing strategy will be dependent upon a number
of factors including, but not limited to: i) competition; ii) marketing
efficiency; iii) ability of the Company to acquire Contracts at prices
commensurate with estimated risk; and, iv) maintaining and increasing capital
and warehouse lines of credit, of which no assurance is given.
25
<PAGE>
MONACO FINANCE, INC. AND SUBSIDIARIES
FORM 10-QSB
QUARTER ENDED SEPTEMBER 30, 1997
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
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:
11 - Computation of Net Earnings per Common and Common Equivalent
Share. Page 28.
27 - Financial Data Schedule. Page 29.
(b) Reports on Form 8 - K:
A Form 8-K Dated August 22,1997 was filed announcing that Craig L. Caukin
had resigned as an officer and director of the Company due to health reasons.
A Form 8-K dated October 3, 1997 was filed announcing the execution of an
Asset Purchase Agreement to acquire certain assets from affiliates of
Dallas-based Pacific USA Holdings Corp.
26
<PAGE>
EXHIBIT 11
<TABLE>
<CAPTION>
MONACO FINANCE, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS (LOSS) PER SHARE
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
1997 1996 1997 1996
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
EARNINGS (LOSS) PER SHARE - PRIMARY AND FULLY DILUTED
NET EARNINGS (LOSS)
- -----------------------------------------------------------
(Loss) from continuing operations $(1,632,944) $ (661,055) $(3,991,131) $(1,575,831)
(Loss) on disposal of discontinued business - - - (301,451)
------------ ----------- ------------ ------------
Net (loss) $(1,632,944) $ (661,055) $(3,991,131) $(1,877,282)
============ =========== ============ ============
AVERAGE SHARES OUTSTANDING
- -----------------------------------------------------------
Weighted average shares outstanding 8,477,094 6,961,737 7,724,594 6,963,282
Shares issuable from assumed exercise of stock options (a) (b) (b) (b) (b)
Shares issuable from assumed exercise of underwriters'
units (a) (b) (b) (b) (b)
Shares issuable from assumed exercise of stock
warrants (a) (b) (b) (b) (b)
------------ ----------- ------------ ------------
Common stock and common stock equivalents - primary 8,477,094 6,961,737 7,724,594 6,963,282
Shares issuable from assumed conversion of 7% subordinated
debt (c) (b) (b) (b) (b)
------------ ----------- ------------ ------------
Common stock and common stock equivalents - fully
diluted 8,477,094 6,961,737 7,724,594 6,963,282
============ =========== ============ ============
EARNINGS (LOSS)PER SHARE - PRIMARY AND FULLY DILUTED
- -----------------------------------------------------------
(Loss) from continuing operations $ (0.19) $ (0.09) $ (0.52) $ (0.23)
(Loss) on disposal of discontinued business - - - (0.04)
------------ ----------- ------------ ------------
Net (loss) per share $ (0.19) $ (0.09) $ (0.52) $ (0.27)
============ =========== ============ ============
<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>
27
<PAGE>
EXHIBIT 27
<TABLE>
<CAPTION>
MONACO FINANCE, INC. AND SUBSIDIARIES
FINANCIAL DATA SCHEDULE
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997
[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]
Item 3 -mos Year-to-date
- ---------------------------------------------------------- ------------ --------------
<S> <C> <C>
Fiscal year end 31-Dec-97 31-Dec-97
Period end 30-Sep-97 30-Sep-97
Period type 3 month 9 month
Cash and cash items $ 4,268,629 $ 4,268,629
Marketable securities $ 0 $ 0
Notes and accounts receivable trade $ 80,506,028 $ 80,506,028
Allowance for doubtful accounts ($4,505,921) ($4,505,921)
Inventory $ 0 $ 0
Total current assets $ 0 $ 0
Property, plant and equipment $ 4,081,538 $ 4,081,538
Accumulated depreciation $ 1,996,856 $ 1,996,856
Total assets $ 87,724,346 $ 87,724,346
Total current liabilities $ 0 $ 0
Bonds, mortgages and similar debt $ 72,494,538 $ 72,494,538
Preferred stock-mandatory redemption $ 0 $ 0
Preferred stock no-mandatory redemption $ 0 $ 0
Common stock $ 84,771 $ 84,771
Other stockholders' equity $ 13,800,477 $ 13,800,477
Total liabilities and stockholders' equity $ 87,724,346 $ 87,724,346
Net sales of tangible products $ 0 $ 0
Total revenues $ 2,927,863 $ 9,406,419
Cost of tangible goods sold $ 0 $ 0
Total costs and expenses applicable to sales and revenues $ 3,137,194 $ 9,025,178
Other costs and expenses $ 0 $ 0
Provision for doubtful accounts and notes $ 51,701 $ 245,950
Interest and amortization of debt discount $ 1,371,912 $ 4,126,422
Income before taxes and other items ($1,632,944) ($3,991,131)
Income tax expense $ 0 $ 0
Income/(loss) continuing operations ($1,632,944) ($3,991,131)
Discontinued operations $ 0 $ 0
Extraordinary items $ 0 $ 0
Cumulative effect-changes in accounting principals $ 0 $ 0
Net income (loss) ($1,632,944) ($3,991,131)
Earnings per share-primary ($0.19) ($0.52)
Earnings per share-fully diluted ($0.19) ($0.52)
<FN>
</TABLE>
28
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MONACO FINANCE, INC.
Date: November 14, 1997
By: /s/ Morris Ginsburg
---------------------
Morris Ginsburg
President,
By: /s/ Michael H. Feinstein
---------------------------
Michael H. Feinstein,
Chief Financial Officer
29
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND THE CONSOLIDATED STATEMENTS OF OPERATIONS AN DIS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-END> SEP-30-1997 SEP-30-1997
<CASH> 4,268,629 4,268,629
<SECURITIES> 0 0
<RECEIVABLES> 80,506,028 80,506,028
<ALLOWANCES> (4,505,921) (4,505,921)
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 0
<PP&E> 4,081,538 4,081,538
<DEPRECIATION> 1,996,856 1,996,856
<TOTAL-ASSETS> 87,724,346 87,724,346
<CURRENT-LIABILITIES> 0 0
<BONDS> 72,494,538 72,464,538
0 0
0 0
<COMMON> 84,771 84,771
<OTHER-SE> 13,800,477 13,800,477
<TOTAL-LIABILITY-AND-EQUITY> 87,724,346 87,724,346
<SALES> 0 0
<TOTAL-REVENUES> 2,927,863 9,406,419
<CGS> 0 0
<TOTAL-COSTS> 3,137,194 9,025,178
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 51,701 245,950
<INTEREST-EXPENSE> 1,371,912 4,126,422
<INCOME-PRETAX> (1,632,944) (3,991,131)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (1,632,944) (3,991,131)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,632,944) (3,991,131)
<EPS-PRIMARY> (0.19) (0.52)
<EPS-DILUTED> (0.19) (0.52)
</TABLE>
