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FORM 10-KSB
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
Commission file number 0-18819
MONACO FINANCE, INC.
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(Name of small business issuer in its charter)
Colorado 84-1088131
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(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
370 17th Street, Suite 5060
Denver, Colorado 80202
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (303) 592-9411
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SECURITIES REGISTERED UNDER SECTION 12(B) OF THE EXCHANGE ACT:
Class A Common Stock, $.01 Par Value
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Title of Class
SECURITIES REGISTERED UNDER SECTION 12(G) OF THE EXCHANGE ACT:
Class A Common Stock, $.01 Par Value
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Title of Class
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
X Yes _____ No
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Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendments to this Form 10-KSB. [ ]
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State issuer's revenues for its most recent fiscal year. $12,638,907.
State the aggregate market value of the voting stock held by
non-affiliates (based on the average bid and asked prices of such stock) of
the Registrant:
As of February 27, 1998: Approximately $4,716,540.
As of March 30, 1998, there were 8,014,631 shares of Class A Common
Stock, $.01 par value and 1,273,715 shares of Class B Common Stock, $.01 par
value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for the 1998 Annual Meeting to be filed within 120 days
after the fiscal year (Part III).
Transitional Small Business Disclosure Format: Yes No X
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Total number of pages: 76
<PAGE>
MONACO FINANCE, INC.
1997 FORM 10-KSB ANNUAL REPORT
TABLE OF CONTENTS
PAGE NUMBER
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PART I
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Item 1. Description of Business 3-12
Item 2. Description of Property 12
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to
a Vote of Security Holders 12
PART II
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Item 5. Market for Common Equity and Related
Stockholder Matters 13-14
Item 6. Management's Discussion and Analysis of
Financial Condition and Results of Operation 15-28
Item 7. Financial Statements 29-57
Item 8. Changes In and Disagreements With Accountants
on Accounting and Financial Disclosure 58
PART III
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Item 9. Directors and Executive Officers, Promoters and
Control Persons, Compliance With Section 16(a)
of the Exchange Act 58
Item 10. Executive Compensation 58
Item 11. Security Ownership of Certain Beneficial Owners
and Management 58
Item 12. Certain Relationships and Related Transactions 58
PART IV
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Item 13. Exhibits and Reports on Form 8-K 58-75
Signatures 76
2
<PAGE>
PART I
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ITEM 1. DESCRIPTION OF BUSINESS.
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Monaco Finance, Inc. (the "Company") is a specialty consumer finance
company engaged in the business of underwriting, acquiring, servicing and
securitizing automobile retail installment contracts ("Contract(s)"). The
Company provides special finance programs (the "Program(s)") to purchasers of
vehicles who do not qualify for traditional sources of bank financing due to
their adverse credit history, or for other reasons which may indicate credit
or economic risk ("Sub-prime Customers"). The Company also purchases
portfolios of sub-prime loans from third parties other than dealers. In 1997,
the Company acquired Contracts in connection with the sale of used and, to a
limited extent, new vehicles, to customers, from automobile dealers (the
"Dealer(s)" or the "Dealer Network") located in twenty-eight states, the
majority of which were acquired from five states. At December 31, 1997 the
Company had sixteen full-time finance representatives to provide service to
current Dealers and to sign-up new Dealers for the Company's Programs. At
December 31, 1997, the Company's loan portfolio had an outstanding balance of
approximately $74 million.
In February 1996, the Company announced that it intended to discontinue
its Company owned retail used car dealerships, which conducted business under
the name "CarMart" (the "Company Dealerships" or "CarMart Dealerships"), and
the associated financing operations. The CarMart business ceased operations on
May 31, 1996.
AUTO FINANCE PROGRAM
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GENERAL
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The Company's automobile finance programs are conducted nationally under
the name Monaco Finance Auto Program ("MFAP"). At December 31, 1997, the
Company had agreements with Dealers located in twenty-eight states for the
purchase of Contracts which meet the Company's financing standards,
requirements and criteria. The Contracts are purchased without recourse and
are generally purchased for a processing fee and discount ranging from $150 to
$750 per contract. The purchase price primarily depends upon the particular
financing option used, the length of the Contract, and the model year and
mileage of the automobile financed. To date, the obligors under the Contracts
generally have made down payments ranging between 10% and 20% of the sales
price of the vehicle financed including the value of a trade-in, if any.
Generally, the remaining balance of the purchase price plus taxes, title fees
and insurance, where applicable, is financed over a period of 24 to 60 months
at annual interest rates ranging between 17% and 25%. At December 31, 1997 the
original annual percentage rate of interest of the Company's portfolio
averaged approximately 23% and the original weighted average term of the
portfolio was approximately 52 months. From inception through December 31,
1997, the Company originated and acquired 25,130 Contracts with an aggregate
principal balance of approximately $223 million. During this period, the
Company completed four securitizations though which it privately placed
approximately $133 million in Contracts.
PURCHASE AGREEMENTS (DEALERS)
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The Company acquires Contracts from franchised and independent Dealers
who have entered into dealer agreements with the Company. The dealer
agreements generally are in standard form requiring that Contracts be
originated in accordance with the Company's Program guidelines and that the
Contracts be secured by a perfected first lien on the vehicle financed. Each
Contract is underwritten by the Company prior to acceptance. The Contracts
are non-recourse to the selling Dealer except for certain representations and
warranties.
The Company markets its MFAP through Dealer representatives who are
either full time employees of the Company or independent contractors. The
Dealer representatives reside in those states where the Programs are marketed
or in certain cases in adjacent states. In addition to enlisting new Dealers
into the Company programs, the Dealer Representatives assist Dealers by
familiarizing them with Monaco's Programs and procedures.
LOAN PORTFOLIO ACQUISITIONS
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In order to more efficiently utilize its existing cost structure, the
Company has decided to grow its portfolio, in part, through acquisitions of
existing Contract portfolios.
In 1997, the Company acquired, at a discount, two portfolios of auto
loans with a face value of approximately $12 million from unrelated third
parties. Also, in January 1998, the Company completed the acquisition of
approximately $81 million in auto loans from certain affiliates of Pacific USA
Holdings Corp. and in February 1998, the Company acquired approximately $14
million of auto loans, at a discount, from an unrelated third party. The
Company is actively seeking to acquire other portfolios of auto loans
previously originated by third parties.
FINANCING SOURCES
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From inception through 1991, the Company financed the acquisition of
Contracts through loans from its principal stockholders and banks. In October
1991, the Company expanded its financing sources by completing its first
asset-backed automobile receivables securitization. In 1992, the Company
entered into a secured revolving line of credit with Citicorp Leasing Inc.
("Citicorp") to finance Contracts. In 1994, the Company securitized $34.1
million of its Contracts and in 1995 it obtained a $150 million revolving
secured warehouse line and securitized $43.1 million in Contracts. In 1997,
the Company securitized $51.4 million of its Contracts and entered into a $75
million warehouse line of credit. Since 1993, the Company has used revolving
lines of credit, private placement borrowings, common stock, warrant
exercises, and its Automobile Receivable-Backed Securitization Program and the
corresponding Revolving Notes and Warehouse Notes as its primary sources of
capital.
Reference is made to Management's Discussion and Analysis of Financial
Condition and Results of Operation and the Notes to the Consolidated Financial
Statements for details regarding the Company's financing sources.
OPERATIONS, COMPETITION AND REGULATION
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UNDERWRITING GUIDELINES
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The Company targets customers who do not qualify for traditional bank
financing primarily due to their adverse credit history or for other reasons
which may indicate credit or economic risk.
The Company has developed underwriting guidelines and standards based
upon many factors including, but not limited to the amount and terms of the
Contract, the customer's residence and employement stability, credit history,
ability to pay, discretionary income and debt ratio. In addition, the Company
uses a proprietary credit scoring system to evaluate the likeliness of default
and, in conjunction with the company's risk models, calculates the predicted
loss, if any, in the event of default. In reviewing a customer's credit, the
Company evaluates (i) the credit application; (ii) the customer's cash flow
statement of monthly cash receipts and expenses to determine debt ratios; and,
(iii) credit bureau reports as well as other information and verifies the
accuracy of all information with respect to the customer as well as the car
being financed.
RISK ADJUSTED YIELDS
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The Company reports interest income earned on its loan portfolio on the
accrual basis. Under this method, interest income represents the estimated
risk adjusted yield on the Company's Contracts. The estimated risk adjusted
yield for the Company's loan portfolio takes into account: (1) the face value
of the contracts in the portfolio; (2) the annual percentage rate of interest
on the Contracts; (3) the purchase discounts; (4) the estimated pre-payment
amount and timing; (5) the estimated frequency or occurrence of defaults; and
(6) the estimated severity of losses resulting from defaults. Since the
computation of risk adjusted yields uses estimates as well as actual data, the
risk adjusted yields as originally estimated may not equal the actual yield on
the monthly pools. Actual yield on the monthly pools can only be determined
when the Contract is repaid or defaulted. In the event the Company's estimate
of risk adjusted yield is less than actual, the difference is accreted to
income. Likewise, in the event the Company's estimate of risk adjusted yield
is greater than actual, the difference is charged to expense.
ANALYSIS OF CREDIT LOSSES
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At the time Contracts are purchased or originated, 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 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.
The provision for credit losses represents estimated current losses based
on the Company's risk analysis and static pooling reserve analysis of
historical trends and expected future results. The provision for credit losses
also represents estimated losses on all Contracts purchased prior to January
1, 1995 with zero discounts ("100% Contracts") and on 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, is 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.
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.
See Note 2 of Notes to Consolidated Financial Statements regarding a
change in 1996 in Accounting Principles for Credit Losses.
SERVICING AND MONITORING OF CONTRACTS
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The Company services all of the Contracts it purchases or originates.
However, from time to time, the Company may acquire loan portfolios under
short-term, third party interim servicing agreements. At December 31, 1997,
the Company's collections and asset recovery and remarketing department
employed 44 individuals to perform these functions. The collections department
uses internally developed software augmented by vendor provided systems. In
1996, the Company completed the installation of a predictive dialer. A
predictive dialer enhances the productivity of the Company's collection
efforts by making it possible to contact more customers in a shorter period of
time.
Upon the funding of a Contract, the accounting department boards the
Contract on its servicing system, which allows the Company to track payment
history from inception to final payoff or other disposition. The servicing
system also automatically sends a payment coupon book to the customer.
Contract payments, if sent by mail, go directly to a lock box and are fowarded
daily by a third-party servicer to a bank holding the Company's accounts.
Where required, Trust receipts are subsequently forwarded to the appropriate
Trust account. As payments are processed, the customer's account is
automatically updated.
A customer service representative calls each customer, greeting them and
welcoming them to the Company. The Company begins its collection process when
a customer is five days late in making a monthly or bi-weekly payment with a
friendly reminder telephone call and a past due mailing notice. At this time,
the collector assigned to the account attempts to obtain a promise to pay. If
successful, the collector will follow up to determine if the promise is met.
If the customer reneges on his or her promise, the collector again contacts
the customer in an effort to collect and, at this time, explains to the
customer his or her obligation under the contract to repay the Company and the
consequences if timely payment is not made. These consequences include, among
other things, repossession of the vehicle financed and a further damaging
credit history for the customer. In certain cases, if the failure to pay is
the result of unforeseen emergencies such as sickness or temporary layoff, the
collector will attempt to work out a new payment schedule to bring the
customer current.
In the event the customer is not willing or able to meet his or her
obligation to the Company under the terms of the contract, and an alternative
payment schedule cannot be agreed to, the collector turns the Contract over to
a credit supervisor for further action. At this time, the supervisor can
decide to continue to work with the customer to bring the Contract current or
can remit the Contract to the manager of the collections department for
repossession. A decision to repossess generally will be made any time up
until a contract is 90 days delinquent. All Contracts 100 days past due must
be must be charged off under Company policy as of December 31, 1997.
Generally, repossession action takes place as a last resort and when no other
arrangement can be made.
MARKETING AND ADVERTISING
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The Company utilizes its Dealer Representatives and corresponding sale
and informational brochures to market its Programs to its Dealer Network.
THE USED CAR INDUSTRY AND THE SUBPRIME FINANCING MARKET
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The used car industry in the United States can be characterized as a
mature and steady market. Industry estimates place the used-vehicle market in
1996 at approximately 40 million units sold annually. Since 1994, the
compounded annual growth rate of total used car sales was approximately 9% and
Management expects that growth to continue, although no such assurances can be
given for reasons including national and regional economic conditions. The
increase in new car leasing in recent years has flooded the used car market
with late-model, low-mileage used cars: According to Andersen Consulting, 3.1
million cars came to the used car market in 1997 when their leases expired.
That trend, coupled with the rising price tags for new cars - typically twice
that of a used car - has made purchasing a quality used car more attractive to
customers.
The typical automobile finance company generally classifies borrowers
into four general and subjective credit categories labeled A, B, C, and D. The
subprime financing market is characterized by lower quality credit lenders,
typically, C and D rated paper. Generally, C and D rated paper represents
borrowers who cannot qualify for financing through traditional sources, such
as banks, credit unions or captive finance companies, due primarily to their
adverse credit and employment history. Automobile finance companies often
purchase C and D credit paper at a discount to its face value. The discount is
designed to compensate the lender for the credit riskiness of these contracts.
In the past several years, discount percentages have been declining due to
increased price competition. The subprime market is also characterized by
higher charge-off and delinquency ratios than the "prime" segment of the
automobile finance market.
According to the Federal Reserve Board, total outstanding automobile
credit was approximately $416 billion in 1997. Industry analysts estimate
that the subprime automobile financing market comprises approximately 26% of
the automobile finance market. Industry analysts project this market growth to
continue, with estimated annual originations of approximately $70-$100
billion.
COMPUTERIZED INFORMATION SYSTEM
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Monaco Finance is investing significant time, money and human resources
in the enhancement of its information systems. The business requires Monaco
to timely respond to customer and dealer needs. The Company's network computer
and communication systems are undergoing major changes to increase efficiency.
In early 1996, the systems were upgraded with Pentium Servers, running the
latest release of Novell Netware. All front-office and back-office desktop
computers have been modified and enhanced to provide greater accessibility to
network information via 100-Base-T intelligent switching technology.
Protection and security have been built into the infrastructure utilizing
anti-virus software and audit compliant password utilities throughout the
entire network.
These enhancements and upgrades are a part of new and innovative
technology being employed at Monaco. The Company also implemented a new
predictive dialer system in 1996. In order to maximize its servicing
efficiencies, the Company intends to invest significant additional resources
to complete a fully integrated data base application. The software research
and development for this new system are currently in the design phase.
The "Year 2000" issue affects the Company's installed computer systems,
network elements, software applications and other business systems that have
time-sensitive programs that may not properly reflect or recognize the Year
2000. Because many computers and computer applications define dates by the
last two digits of the year, "00" may not be properly identified as the Year
2000. This error could result in miscalculations or system failures.
The Company is conducting a review of its computer systems to identify
those areas that could be affected by the "Year 2000" issue and is developing
an implementation plan to ensure compliance. The Company is using both
internal and external sources to identify, correct and reprogram, and test its
systems for Year 2000 compliance. Because third party failures could have a
material impact on the Company's ability to conduct business, confirmations
are being requested from our processing vendors and suppliers to certify that
plans are being developed to address the Year 2000 issue. The Company
presently believes that, with modification to existing software and investment
in new software, the Year 2000 problem will not pose significant operational
concerns nor have a material impact on the financial position or results of
operation in any given year. The total cost of modifications and conversions
is not expected to be material and will be expensed as incurred.
FUTURE EXPANSION AND STRATEGY
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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) increasing the
number of loans acquired from the Dealer Network; (2) purchasing portfolios of
loans originated by third parties; (3) continuing its efforts to increase the
credit quality of its portfolio and reduce credit losses and charge-offs; (4)
decreasing the percentage of operating expenses to average gross receivables
by increasing the portfolio while decreasing operating expenses; and (5)
securitizing portfolios of auto loans.
To further promote its growth and profitability, the Company will
continue to pursue its growth strategy based on the following:
MARKET FOCUS: The Company targets the middle range of the Sub-prime auto
finance market. Auto loans can be classified as follows: (A) Prime loans to
borrowers with no credit blemishes; (B) Almost prime loans to borrowers with
generally good credit and a few minor blemishes; (C+) The highest category of
sub-prime borrowers who have suffered reversals in the past but are current on
all obligations and have demonstrated the ability and willingness to
reestablish their credit in the higher categories; (C) Similar to (C+) but
present a slightly greater risk due to higher debt-to-income ratios, lower
salaries, prior bankruptcy etc.; (C-) Borrowers with substantially more
adverse credit history, but appear to have the wherewithal to meet their
credit obligations; (D) First time borrowers or borrowers with little or no
past credit history, borrowers with recent bankruptcies or those lacking
stability in employment etc., Monaco Finance Inc., is focusing on all
categories of (C) credit with the emphasis on obtaining more (C+) borrowers.
The Company will purchase few, if any, (D) loans.
The Company also targets late model used vehicles, which have lower
depreciation rates than either new vehicles or used vehicles that are over
three years old and have high mileage. In addition, the Company concentrates
on acquiring loans from new car franchised dealers because, generally, such
dealers are stronger financially and can better perform on their
representations and warranties, offer higher quality vehicles, and often
provide better repair service than independent used car dealers.
During 1997, the Company acquired contracts from approximately 375
dealers in 28 states, the majority of which were purchased in five 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 6. In August 1997, the Company initiated its strategy to increase its
Dealer Network by hiring two regional marketing managers. At December 31, 1997
the Company had increased its marketing representatives to 16.
PORTFOLIO ACQUISITIONS: The Company plans to continue the purchase of
loan portfolios previously originated by third parties. In 1997, the Company
acquired, at a discount, two such portfolios with a face value of $12 million.
In January 1998, the Company announced that it had completed the acquisition
of $81 million in auto loans from affiliates of Pacific USA and in February
1998 the Company acquired approximately $14 million of auto loans from another
third party. The Company actively is seeking to acquire other portfolios of
auto loans.
FUNDING AND FINANCING STRATEGIES: In December 1997, the Company entered
into a warehouse line with Daiwa Finance Corporation, under the terms of
which, up to 90% of the face amount of loans can be financed. This facility
allows the Company to acquire loans on a leveraged basis and increase the size
of its portfolio with its current capital. Periodic rated securitizations are
also part of the Company's financing strategies. Securitizations lock in low
interest rates and free up the Company's warehouse line and capital for new
loan acquisitions. The Company makes all efforts to obtain sufficient cash
from a securitization to repay all warehouse debt collateralized by the loans.
In the event funds obtained from a securitization are not sufficient to retire
the corresponding debt, the securitization may adversely affect liquidity.
RISK EVALUATION AND UNDERWRITING: As discussed in more detail elsewhere
herein, the Company has developed proprietary credit scoring and risk
evaluation systems which predicts the frequency of default and the resultant
predicted loss after repossession and sale of financed vehicles. This system
assists the Company's credit buyers and underwriters in pricing loans to be
acquired. Credit buyers can negotiate interest rates, loan term, purchase
discount and fees and terms of the deal, including such items as down payment,
in order to achieve a desired risk adjusted rate of return for each Contract.
CENTRALIZED OPERATING STRUCTURE: Management believes the centralization
of all operations in one location results in a consistent, cost effective
means of operating a sub-prime automobile loan business. Sales
representatives, of course, are disbursed throughout the country to deal
directly with dealers.
COLLECTIONS MANAGEMENT: Management believes that collections and recovery
are vital to the successful operation of the Company. The Company has invested
substantial amounts of time, money and resources in developing an efficient
collections department. The results of the Company's efforts are evidenced by
its percentage of delinquent contracts, which at February 28, 1998, was 6.95%
over 30 days past due. This percentage consisted of 5.84% 30 to 59 days past
due, 1.11% 60 to 89 days past due and 0.0% over 90 days past due. Further
additions and improvements to its collections department and systems, both in
personnel and automated equipment, would enable the Company, for the first
time, to seek out servicing and collections of sub-prime auto loans for others
in similar businesses which could result in creating a new revenue source for
the Company.
CONTROLLING INTEREST: As a result of the Asset Purchase Agreement dated
January 8, 1998, Pacific USA Holdings Corp. ("Pacific USA") increased its
voting power in the Company to 51.8%. Pacific USA is the beneficial owner of
38.6% of the Company's outstanding voting stock. Pacific USA is a diverse U.S.
holdings company, 100% owned by Pacific Electric Wire & Cable, Ltd. of Hong
Kong. Pacific USA is a multi-billion dollar company which owns various
business including but not limited to home building, home equity lending,
sub-prime auto finance, loan servicing and also is the 100% owner of Pacific
Southwest Bank. The various companies involved in this transaction currently
are reviewing the Company's business plan to determine whether the business
plan could be modified for additional opportunities which may be available as
a result of the association with Pacific USA.
Implementation of the foregoing strategy will be dependent upon a number
of factors including but not limited to: (i) competition; (ii) the ability of
the Company to acquire contracts at a price commensurate with estimated risk,
through its Dealer Network and portfolio purchases; (iii) maintain and
increase its capital and warehouse lines of credit; (iv) and, successfully
complete securitizations of its portfolio.
COMPETITION
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In connection with its business of financing vehicle purchases, the
Company competes with entities, many of whom may have significantly greater
financial resources and management experience than the Company. The Company's
target market consists of persons who are generally unable to obtain
traditional vehicle financing because of their prior credit history. Many
financial institutions, finance companies and lenders have entered into this
market. Their lending programs and marketing efforts are regularly monitored
by the Company. The Company has maintained its growth by implementing and
marketing Programs and providing prompt service to the Dealer Network.
However, as others continue to enter into this market, competition for the
Company's target customer continues to increase, all of which could adversely
affect the Company's business.
REGULATION
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The Company's operations are subject to regulation, supervision and
licensing under various federal, state and local statutes and ordinances. To
date, the Company's business operations are located in the States of Arizona,
California, Colorado, Delaware, Florida, Georgia, Illinois, Iowa, Maryland,
Michigan, Mississippi, Missouri, Nevada, New Mexico, North Carolina, Nebraska,
Oklahoma, Oregon, Pennsylvania, South Carolina, South Dakota, Tennessee,
Texas, Utah, Virginia, Washington, Wisconsin and Wyoming and, accordingly, the
laws of those states, as well as applicable federal laws, govern the Company's
operations. Compliance with existing laws and regulations applicable to the
Company has not had a material adverse effect on the Company's operations.
Management believes that the Company maintains all requisite licenses and
permits and is in substantial compliance with all applicable local, state and
federal regulations.
EMPLOYEES AND FACILITIES
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At December 31, 1997, the Company employed 137 persons on a full time
basis, including 7 executive officers, 35 in credit, funding and compliance,
44 in collections and asset recovery and remarketing, 12 in accounting and
human resources, 15 in marketing, 8 in MIS-computer department, 4 in risk and
12 in administrative functions.
In April 1994, the Company amended and restated its lease of office space
for its executive offices located at 370 17th Street, Suite 5060, Denver,
Colorado 80202, where it maintains approximately 24,716 square feet of space.
The Company currently pays $43,312 per month under a lease ending October 31,
1999, with adjustments for monthly payments on a periodic basis.
Effective December 1, 1996, the Company entered into a sublease agreement
for 6,571 square feet of office space located at 370 17th Street, Suite 4960,
Denver, Colorado, 80202. The Company pays $1,807 per month, plus occupancy
costs, under a sublease ending November 30, 2000. The office space will be
utilized as additional executive offices of the Company.
On March 31, 1994, the Company's lease at 1319 S. Havana, Aurora,
Colorado 80010 was terminated and the operations of the retail CarMart
Dealership at that location were transferred to 890 S. Havana, Aurora,
Colorado 80010. This property is owned by a corporation, certain of whose
shareholders are officers of the Company. The Company entered into a
seven-year lease commencing March 24, 1994 and ending March 23, 2001. In
September 1995, the Company amended the lease to include an additional
property at 894 S. Havana, Aurora, Colorado 80010. The Company currently pays
$15,238 per month on a triple net basis. The lease calls for periodic rental
adjustments over its term. It is the Company's belief that the terms of the
related party lease are generally no less favorable than could have been
obtained from unrelated third party lessors for properties of similar size ,
condition and location. Effective June 1, 1996, the Company entered into a
sublease agreement on the property located at 890 S. Havana for the entire
lease term at an amount approximately equal to the Company's obligation.
Through January 31, 1996, the Company operated a retail CarMart
Dealership located at 1005 Motor City Drive, Colorado Springs, Colorado
80906. The dealership began full operation on April 30, 1991. The Company
entered into a twelve-month lease (commencing April 30, 1991 and ending May 1,
1992). Rent was $1,200 per month. The Company extended the lease on this
property until May 31, 1998 with monthly rent of $1,800 on a triple net basis.
Effective March 15, 1996, the Company entered into a sublease agreement on the
property for the entire lease term at an amount approximately equal to the
Company's obligation.
The Company's third used car retail lot was located at 11085 West Colfax
Avenue, Lakewood, Colorado 80215 and began full operation on March 15, 1992.
The Company entered into a twelve-month lease (commencing March 15, 1992 and
ending February 28, 1993). Rent was $3,000 per month. The Company extended
the lease through October 31, 1995 at a monthly rental rate of $4,000. On
March 31, 1995, the Company closed this retail lot.
The Company opened a fourth used car retail lot located at 4940 South
Broadway, Englewood, Colorado 80110 and began full operation on May 1, 1994.
The Company entered a lease, commencing March 22, 1994 and ending March 31,
1997. In January 1997, the Company extended the lease for an additional
three-year period through March 2000. The Company may, at its sole discretion,
extend the lease for an additional 3-year period through March 2003. On
January 15, 1996, the Company closed this retail lot. The Company currently
pays $9,833 per month. The lease calls for periodic adjustments over the term.
Effective March 15, 1996, the Company entered into a sublease agreement on the
property for the entire lease term at an amount approximately equal to the
Company's obligation.
ITEM 2. DESCRIPTION OF PROPERTY.
- --------------------------------------
The Company does not own any real property. The Company leases its
office facilities and its closed Company Dealerships as described in Item 1.,
"Description of Business - Employees and Facilities," above.
ITEM 3. LEGAL PROCEEDINGS.
- -------------------------------
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
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- ------------------------------------------------------------------------
On March 4, 1998, a special meeting of shareholders of the Company was
held for the following purposes:
1. To consider and approve the issuance of (i) 2,433,457 shares of the
Company's 8% Cumulative Convertible Preferred Stock, Series 1998-1, (ii)
811,152 shares of the Company's Class A Common Stock and (iii) a presently
unknown number of shares of Class A Common Stock, the issuance of which is
contingent upon future operations, to NAFCO Holding Company LLC, Advantage
Funding Group, Inc., and/or Pacific Southwest Bank, or their respective
designees, all of which are subsidiaries of Pacific USA Holdings Corp.
("Pacific USA"), as partial consideration for certain of the transactions
under the Amended and Restated Asset Purchase Agreement among the Company and
Pacific USA and those and other of its affiliates dated January 8, 1998.
2. To consider and approve an amendment to the Company's Articles of
Incorporation to (i) increase the number of authorized shares of Class A
Common Stock to 30,000,000 shares, and (ii) increase the number of authorized
shares of Preferred Stock to 10,000,000 shares having preferences, limitations
and relative rights as may be determined by the Company's board of directors.
The aforementioned proposals were passed with the following votes,
respectively:
1. 7,016,151 FOR; 3,392,279 WITHHELD; 521,029 AGAINST; and 95,165 ABSTAIN.
2. 9,853,312 FOR; 466,881 WITHHELD; 612,846 AGAINST; and 91,585 ABSTAIN.
12
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
- ----------------------------------------------------------------------------
The following table sets forth the range of the high and low closing bid
prices of the Class A Common Stock as reported for the periods indicated. The
prices represent quotations between dealers without retail mark-ups,
mark-downs, or commissions and may not necessarily represent actual
transactions. The quotations were provided by the NASDAQ Stock Market and the
National Quotation Bureau.
<TABLE>
<CAPTION>
CLASS A COMMON STOCK
<S> <C> <C>
LOW BID HIGH BID
-------- ---------
Quarter Ending 03/31/96 $ 3.000 $ 5.000
Quarter Ending 06/30/96 $ 2.125 $ 3.625
Quarter Ending 09/30/96 $ 1.625 $ 4.000
Quarter Ending 12/31/96 $ 2.313 $ 3.375
Quarter Ending 03/31/97 $ 1.750 $ 2.500
Quarter Ending 06/30/97 $ 1.125 $ 2.063
Quarter Ending 09/30/97 $ 0.625 $ 1.250
Quarter Ending 12/31/97 $ 0.688 $ 1.938
<FN>
</TABLE>
As of February 3, 1998, there were approximately 295 record holders of
the Company's Class A Common Stock and 3 record holders of Company's Class B
Common Stock. The Company's Class A Common Stock is traded on the NASDAQ
National Market under the symbol "MONFA".
The Board of Directors currently intends to retain earnings to finance
the Company's operations. 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.
Commencing February 23, 1998, the requirements for continued trading of
securities on the NASDAQ National Market and on the NASDAQ Small Cap Market
were changed to include requirements that (i) the minimum bid price for common
stock must be $1.00 or more per share, and (ii) the market value of the public
float must be $5 million or more for a National Market security and $1 million
or more for a Small Cap Market security. If a deficiency exists for a period
of 30 consecutive business days, NASDAQ is required to promptly notify the
issuer, which will have a period of 90 calendar days from such notification to
achieve compliance. Compliance can be achieved by meeting the applicable
standard for a minimum of ten consecutive business days during the 90-day
compliance period.
The Company's Class A Common Stock is presently traded on the NASDAQ
National Market. The bid price of the Class A Common Stock has been less than
$1.00 per share since mid-December 1997. By letter dated Februay 27, 1998,
NASDAQ advised the Company that it was not in compliance with the new market
value of public float and bid price requirements and that the Company has
until May 28, 1998, to meet these requirements. Should the bid price of the
Class A Common Stock fail to reach $1.00 per share for ten consecutive trading
days by that date, then the Company will not meet the minimum bid price
requirements for either the National Market or the Small Cap Market and its
Class A Common Stock could be delisted from NASDAQ. In that event, the Class A
Common Stock probably would trade on the OTC Bulletin Board. Stocks which
trade on the OTC Bulletin Board generally are much less liquid than those
traded on certain other markets. In addition, stocks traded on the National
Market enjoy certain other benefits described below.
"Public float" is defined as outstanding shares other than those held by
officers, directors and beneficial owners of more than ten percent of the
total shares outstanding. From February 23, 1998 to March 30, 1998 the lowest
number of shares comprising the Company's public float has consisted of
approximately 5,677,109 shares of Class A Common Stock. To meet the National
Market requirement of $5 million in public float, the market price would have
to be approximately $.88 per share and to meet the Small Cap Market
requirement of $1 million in public float, the market price would have to be
approximately $.18 per share. Since February 22, 1998, the market value of the
public float has been less than $5 million, but greater than $1 million. If
the minimum bid price requirement is satisfied, the Company will meet the
public float requirement for the National Market. National Market securities
qualify for secondary trading exemptions in many states and states are
precluded from review of offerings of National Market securities. Small Cap
Market securities do not have these benefits.
Should the Company fail to timely meet NASDAQ's requirements, then NASDAQ
will issue a delisting letter, which will identify the review procedures
available to the Company. The Company may request review at that time, which
will generally stay delisting.
Management is considering various solutions, including a reverse stock
split and/or the sale of additional shares of Class A Common Stock to persons
other than officers, directors or more than 10% stockholders, both of which
could require shareholder approval. No assurance can be given, however, that
the Company will be able to maintain the listing of the Class A Common Stock
on either the NASDAQ National Market or the NASDAQ Small Cap Market.
13
<PAGE>
------
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
-----------------------------------------------------------------------
RESULTS OF OPERATION
--------------------
FORWARD-LOOKING STATEMENTS
- ---------------------------
This Annual Report on form 10-KSB contains forward-looking statements.
Statements that are not historical facts, including statements about
management's expectations for fiscal 1998 and beyond, are forward-looking
statements. Without limiting the foregoing, the words "believe," "expect,"
"anticipate," "intends," "forecast," "project" and similar expressions
generally identify forward-looking statments. 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 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Such statements may include, but are not
limited to, projections of revenues, income, or loss, adequacy of the
allowance for credit losses, availability of Contracts meeting the Company's
desired risk parameters, capital expenditures, plans for future operations,
financing needs, plans or availability, objectives relating to the Automobile
Receivables and the related allowance and plans relating to products or
services of the Company, as well as assumptions relating 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 Annual Report, including 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 materially from those expressed in such forward-looking statements are
set forth in Exhibit 99 to this Annual Report on Form 10-KSB. Such factors
include, but are not limited to, the Company's dependence upon additional
capital to expand operations, its reliance on debt financing, its recent
losses and the effect of the discontinuance of the CarMart operations, its
reliance on securitizations, its cost of capital and associated interest rate
risks, the risks of lending to higher-risk borrowers, the risk of adverse
economic changes, the risk associated with delayed repossessions, the
potential inadequacy of its loan loss reserves, the risk associated with
extensive regulation, supervision and licensing, the possibility of uninsured
losses, the risk associated with substantial competition, its dependence on
key personnel, insurance risks, "Year 2000" risks, the effect of outstanding
options and warrants, the fact that the Company has, to date, not paid cash
dividends on its Common Stock, the risk associated with not meeting the NASDAQ
maintenance requirements and the risk associated with one controlling
shareholder.
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 financed from vehicle sales at the Company's
Dealerships and Contracts purchased through portfolio acquisitions.
In February 1996, the Company announced that it intended to discontinue
its CarMart retail used car sales and associated financing operations related
to its CarMart business. In April 1996, the Company extended the expected
disposal date of the CarMart business from April 30, 1996 to May 31, 1996. The
CarMart business ceased operations on May 31, 1996. The loss on disposal of
the CarMart business has also been accounted for as discontinued operations.
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 fiscal years ended December 31, 1997 and 1996 was
approximately 6.8% and 6.6%, respectively. The Company services all of the
loans that it owns. However, from time to time, the Company may acquire loan
portfolios under short-term, third party interim servicing agreements. The
loan portfolio at December 31, 1997, carries a contract annual percentage
rate of interest that averages approximately 23%, before discounts, and has an
original weighted average term of approximately 52 months. The average amount
financed per Contract for the years ended December 31, 1997 and 1996 was
approximately $10,432 and $10,390, respectively.
15
<PAGE>
RESULTS OF OPERATION
- ----------------------
<TABLE>
<CAPTION>
OVERVIEW
- --------
INCOME STATEMENT DATA
Years ended December 31,
---------------------------
<S> <C> <C>
(dollars in thousands, except share amounts) . . . . . . . . . . 1997 1996
----------- -----------
Total revenues. . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,639 $ 13,501
Total costs and expenses. . . . . . . . . . . . . . . . . . . . . $ 21,994 $ 17,449
Income (loss) from continuing operations before income taxes
and cumulative effect of a change in accounting principle. . . ($9,355) ($3,948)
Income tax expense (benefit). . . . . . . . . . . . . . . . . . . - ($1,477)
Income (loss) from continuing operations before cumulative
effect of a change in accounting principle. . . . . . . . . . ($9,355) ($2,471)
(Loss) on disposal of discontinued business, net of income taxes. - ($302)
Cumulative effect of a change in accounting principle . . . . . . - ($4,913)
Net (loss). . . . . . . . . . . . . . . . . . . . . . . . . . . . ($9,355) ($7,686)
Net (loss) per common share - basic and assuming dilution . . . . ($1.18) ($1.10)
Weighted average number of common shares outstanding. . . . . . . 7,912,732 6,965,485
<FN>
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
INCOME STATEMENT DATA
AS A % OF OUTSTANDING LOAN PORTFOLIO
YEARS ENDED DECEMBER 31,
----------------------------
<S> <C> <C>
1997 1996
------------ ------------
Average Interest Bearing Loan Portfolio Balance . . . . $76,924,302 $70,977,202
============ ============
Interest Income . . . . . . . . . . . . . . . . . . . . 16.1% 19.0%
Interest Expense. . . . . . . . . . . . . . . . . . . . 7.4% 6.7%
------------ ------------
8.7% 12.3%
Operating Expenses. . . . . . . . . . . . . . . . . . . 16.2% 16.6%
Provision for Credit Losses . . . . . . . . . . . . . . 5.0% 1.3%
Other Income. . . . . . . . . . . . . . . . . . . . . . (0.3%) -
------------ ------------
20.9% 17.9%
Loss from continuing operations before income taxes . . (12.2%) (5.6%)
Income Tax Benefit. . . . . . . . . . . . . . . . . . . - (2.1%)
------------ ------------
Loss from continuing operations . . . . . . . . . . . . (12.2%) (3.5%)
Loss on disposal of discontinued business, net of taxes - (0.4%)
Cumulative effect of change in accounting principle . . - (6.9%)
------------ ------------
Net Loss. . . . . . . . . . . . . . . . . . . . . . . . (12.2%) (10.8%)
============ ============
<FN>
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET DATA
December 31,
-------------
<S> <C> <C> <C>
1997 PRO FORMA
(dollars in thousands) . . 1997 1996 (see Note 9)
---------- --------- -------------
Total assets. . . . . . . . $ 90,598 $ 95,264 $ 171,014
Total liabilities . . . . . $ 82,076 $ 80,262 $ 156,003
Retained earnings (deficit) ($16,489) ($7,134) ($16,489)
Stockholders' equity. . . . $ 8,522 $ 15,002 $ 15,011
<FN>
</TABLE>
The Company's revenues decreased 6% from $13.5 million in 1996 to $12.6
million in 1997. Net (loss) from continuing operations increased from ($2.5)
million in 1996 to ($9.4) million in 1997. (Loss) per common share from
continuing operations for 1996 were ($0.35), based on 7.0 million weighted
average common shares outstanding, compared with ($1.18) per common share,
based on 7.9 million weighted average common shares outstanding, for 1997. Net
(loss) increased from ($7.7) million in 1996 to a loss of ($9.4) million in
1997 while net (loss) per common share increased from ($1.10) in 1996 to
($1.18) in 1997 primarily due to a $6.9 million decrease in 1997 income from
continuing operations partially offset by a 1996 charge for the cumulative
effect of a change in accounting principle of $4.9 million.
17
<PAGE>
CONTINUING OPERATIONS
- ----------------------
<TABLE>
<CAPTION>
SELECTED OPERATING DATA
Years ended December 31,
---------------------------
<S> <C> <C>
(dollars in thousands, except where noted). . . . 1997 1996
-------- --------
Interest income . . . . . . . . . . . . . . . . . $12,394 $13,471
Other income. . . . . . . . . . . . . . . . . . . $ 245 $ 30
Provision for credit losses . . . . . . . . . . . $ 3,874 $ 911
Operating expenses. . . . . . . . . . . . . . . . $12,446 $11,801
Interest expense. . . . . . . . . . . . . . . . . $ 5,674 $ 4,737
Operating expenses as a % of average receivables. 16% 17%
Contracts from Dealer Network . . . . . . . . . . 3,189 6,126
Contracts from Company Dealerships. . . . . . . . - 147
-------- --------
Total contracts. . . . . . . . . . . . . . . . . 3,189 6,273
Average amount financed (dollars) . . . . . . . . $10,432 $10,390
<FN>
</TABLE>
REVENUES
- --------
Total revenues for the year ended December 31, 1997, decreased $0.9
million when compared to 1996 primarily due to a decrease of $1.1 million in
interest income. The rate of interest income earned for the year ended
December 31, 1997 was 16.1% based on an average interest bearing portfolio
balance of $76,924,302 as compared to a rate of interest income earned of
19.0% based on an average interest bearing portfolio balance of $70,977,202
for the year ended December 31, 1996. The decrease in effective yield
reported by the Company for the year ended December 31, 1997, when compared to
1996, was due primarily to changes in the Company's ability to more accurately
estimate risk adjusted yields as a result of the Company's implementation of
its credit scoring system in late 1996. Acquisition of Contracts with lower
interest rates and discounts due to increased competition in the sub-prime
automobile finance industry and the Company's strategy to acquire loans with
perceived higher credit quality also adversely affected risk adjusted yields
in 1997. The Company's management believes the yields for the year ended
December 31, 1997, should be representative of loans purchased for 1998 using
similar programs and buying criteria which are subject to change based on the
Company's future business plans. Other income for the year ended December 31,
1997 increased $0.2 million when compared to 1996 primarily due to a one-time
other income credit of $0.1 million from the Company's forced place insurance
provider in 1997.
The lower reported interest rate of 16.1% in 1997 and 19.0% in 1996, when
compared to the contract annual percentage rate of interest (22.6% at December
31, 1997 and 23.4% at December 31, 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.
During 1997, the Company's net Automobile Receivables decreased from
$81.9 million at December 31, 1996 to $74.3 million at December 31, 1997.
During 1997, the Company originated 3,189 loans totaling $33.3 million with an
average amount financed of $10,432 as compared to loan originations of 6,273
totaling $65.2 million with an average amount financed of $10,390 for 1996.
The average discount on all Contracts purchased was 6.8% and 6.6% for the
years ended December 31, 1997 and 1996, respectively.
The decline in the number and dollar value of loan originations during
1997, as compared to 1996, of 49% and 49%, respectively, resulted from a
change in the Company's business philosophy in the latter part of 1996 and for
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 that the Company believes have increased credit
quality.
At December 31, 1997, only $1.4 million of the Company's Auto Receivable
Loan Portfolio was generated from the discontinued CarMart operations as
compared to $4.7 million of its portfolio at December 31, 1996.
COSTS AND EXPENSES
- --------------------
The provision for credit losses increased $3.0 million from $0.9 million
in 1996 to $3.9 million in the comparable 1997 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 increase in the
provisions for credit losses primarily was due to the recording of a $3.6
million provision in the fourth quarter of 1997 related to the Company's
static pooling reserve analysis, partially offset by 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 19.5% in 1996 to 15.2% in 1997. 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 1.6% of its
loan portfolio over 60 days past due at December 31, 1997 compared with 2.2%
at December 31, 1996.
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 proprietary credit scoring system 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 and 1997.
3. Collections, recovery and remarketing: In February 1997, the Company
reorganized its collections, recovery and remarketing departments. These
changes included the hiring of new managers and upgrading of the Company's
collections, recovery and remarketing systems.
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.
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.
Operating expenses increased $0.6 million, or 5.4%, from $11.8 million in
1996 to $12.4 million in 1997. This increase primarily was due to an increase
of $869,000 due to lower loan origination fees and an increase in depreciation
and amortization of $662,000 partially offset by a decrease in salaries and
benefits of $925,000. The major components of the increase in operating
expenses are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
<S> <C> <C> <C>
(dollars in thousands). . . . . . INCREASE
1997 1996 (DECR.)
---------- -------- --------
Salaries and benefits . . . . . . $ 5,350 $ 6,275 ($925)
Depreciation and amortization . . 1,983 1,321 662
Consulting and professional fees. 2,591 2,539 52
Telephone . . . . . . . . . . . . 508 487 21
Travel and entertainment. . . . . 223 404 (181)
Loan origination fees . . . . . . (286) (1,155) 869
Rent/Office Supplies/Postage. . . 1,114 1,077 37
All other . . . . . . . . . . . . 963 853 110
---------- -------- --------
$ 12,446 $11,801 $ 645
========== ======== ========
<FN>
</TABLE>
Interest expense increased $0.9 million, or 20%, from $4.7 million in
1996 to $5.6 million in 1997. This increase primarily was due to an increase
in borrowings on the LaSalle Revolving Line of Credit at an interest rate of
2.75% over LIBOR, a paydown of the Company's automobile receivables-backed
notes at interest rates between 6.45% and 7.6% and borrowings on the warehouse
line of credit with Daiwa at interest rates of 2.5% over LIBOR on 85% of the
amount advanced and 12% on the remaining 15% of the amount advanced. From
December 31, 1996 through December 31, 1997, net increases (decreases) in the
Company's debt were as follows:
<TABLE>
<CAPTION>
(dollars in thousands)
<S> <C>
Notes payable - LaSalle. . . . . . . $ 1,126
Warehouse note payable - Daiwa . . . 30,000
Installment note payable . . . . . . (3,000)
Promissory note payable . . . . . . 1,135
Convertible senior subordinated debt (1,667)
Automobile receivables-backed notes. (26,735)
---------
Total . . . . . . . . . . . . . $ 859
=========
<FN>
</TABLE>
The average annualized interest rate on the Company's debt was 7.4% for
1997 versus 7.1% for 1996. This increase was primarily due to additional
borrowings on the Company's lines of credit at higher interest rates than the
Company's automobile receivables-backed notes that were redeemed or paid off
in 1997.
The annualized net interest margin percentage, representing the
difference between interest income and interest expense divided by average
finance receivables, decreased from 12.3% in 1996 to 8.7% in 1997. This
decrease was due primarily to the amortization of excess interest receivable
as described in Note 2 of the Notes to Consolidated Financial Statements and
an increase in the average annualized interest rate on the Company's debt.
NET INCOME (LOSS)
- -------------------
Net loss increased $1.7 million from $(7.7) million in 1996 to $(9.4)
million in 1997. This increase in loss was primarily due to the following
changes on the Consolidated Statements of Operations:
<TABLE>
<CAPTION>
(INCREASE) DECREASE TO NET (LOSS)
YEARS ENDED
DECEMBER 31,
-------------
<S> <C>
(in millions of dollars)
Interest and other income . . . . . . . . . . . . . . $(0.9)
Provision for credit losses. . . . . . . . . . . . . . (3.0)
Operating expenses . . . . . . . . . . . . . . . . . . (0.6)
Interest expense . . . . . . . . . . . . . . . . . . . (0.9)
Income tax expense . . . . . . . . . . . . . . . . . . (1.5)
Loss on disposal of discontinued business. . . . . . . 0.3
Cumulative effect of a change in accounting principle. 4.9
------
Net (increase) to net (loss). . . . . . . . . . . . . $(1.7)
======
<FN>
</TABLE>
DISCONTINUED OPERATIONS
- ------------------------
In February 1996, the Company announced that it intended to discontinue
its CarMart retail used car sales and associated financing operations. In
April 1996, the Company extended the expected disposal date of the CarMart
business from April 30, 1996 to May 31, 1996.
The loss on the disposition of the CarMart business has been accounted
for as discontinued operations. In March 1996, and June 1996, the Company
recorded additional pretax charges of $150,000 and $355,000 ($93,900 and
$207,551 after tax), respectively, related to the 1996 loss from operations of
CarMart.
LIQUIDITY AND CAPITAL RESOURCES
- ----------------------------------
The Company's cash flows for the years ended 1997 and 1996 are summarized
as follows:
<TABLE>
<CAPTION>
CASH FLOW DATA
YEARS ENDED DECEMBER 31,
<S> <C> <C>
(dollars in thousands). . . . . . . . . . . . 1997 1996
-------- ---------
Cash flows provided by (used in):
Operating activities. . . . . . . . . . . . . $ 1,055 $ 2,377
Investing activities. . . . . . . . . . . . . (309) (30,004)
Financing activities. . . . . . . . . . . . . (1,216) 21,607
-------- ---------
Net (decrease) in cash and cash equivalents. $ (470) $ (6,020)
======== =========
<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, warehouse lines of
credit, securitizations and cash flows from operations. It is the Company's
intent to use its warehouse lines of credit, as described in detail below,
together with periodic securitizations of Contracts, to provide the liquidity
to finance the purchase of additional 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 continues
to seek to obtain additional warehouse credit facilities on terms more
favorable than those currently in place as described in Note 4 to the
Company's Consolidated Financial Statements. If the Company is successful in
obtaining such facilties, they will provide the Company with additional
working capital to the extent that the new cash advance terms are more
favorable than those the Company currently has in place. No assurance can be
given as to if, or when, the Company would be able to consummate such
transactions.
The Company also is dependent upon securitizations, the proceeds from
which are used to pay down its warehouse lines, thereby creating availability
under such warehouse lines to purchase additional Contracts. The ability to
consummate securitizations is based on many factors, including ones out of the
Company's control. In the event the Company is unable to securitize its
Contracts, its ability to acquire new contracts will be limited.
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
Warehouse Line of Credit with Daiwa Finance Corp., described below, contain
certain covenants which, if not complied with, could materially restrict the
Company's liquidity. 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 and the Warehouse
Line of Credit approximately 80% and 90%, respectively, 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
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, was
due March 1, 1998. On March 1, 1998, the Company repaid $692,500 of principal
amount of the Notes. The maturity date of the remaining principal amount of
the Notes of $692,500 was extended to April 15, 1998, without penalty. 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"), 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 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 Receivables-Backed
Note (Revolving Note" or "Series 1995-A Note"). 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 Receivables to pledge all
Contracts owned by it for repayment of the Revolving Note or Term Notes,
including 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 maximum limit for the Series 1995-A Note is $40 million.
On December 4, 1997, the Company redeemed the outstanding principal
balance of its Series 1995-A Note. The bonds were redeemed at their principal
amount of $12,271,457 plus accrued interest to December 4, 1997. Upon
redemption of the Series 1995-A Note, the underlying automobile receivables
were pledged under the terms of the Warehouse Line of Credit. At December 31,
1997, the 1995-A Note did not have an outstanding principal balance.
On September 15, 1995, MF I issued the Series 1995-B Term Notes ("Series
1995-B Notes") in the amount of $35,552,602. The Series 1995-B Notes accrued
interest at a fixed note rate of 6.45% per annum.
On December 12, 1997, the Company redeemed the outstanding principal
balance of its Series 1995-B Notes. The bonds were redeemed at their
principal amount of $5,822,934 plus accrued interest to December 12, 1997.
Upon redemption of the Series 1995-B Notes, the underlying automobile
receivables were pledged under the terms of the Warehouse Line of Credit with
Daiwa Finance Corporation.
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.
As of December 31, 1997, the Series 1997-1A Notes and the Promissory Note
had a note balance of $32,421,076 and $1,135,232, respectively. The underlying
receivables backing the 1997-1A notes had a balance of $37,323,549 as of
December 31,1997.
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 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 1997-1A
and Promissory Note noteholders and other general disbursements are paid to MF
I and MF II on a monthly basis.
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.
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 was extended from January 1, 1998 to March 23, 1998, at which time the
outstanding balance on the line of credit was paid in full. At the option of
the Company, the interest rate charged on the loans was either .5% in excess
of the prime rate charged by lender or 2.75% over the applicable LIBOR rate.
The Company was 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 was subject to standard conditions. The collateral
securing payment consisted of all Contracts pledged and all other assets of
the Company. The Company had agreed to maintain certain restrictive financial
covenants. As of December 31, 1997, the Company had borrowed $6,375,549
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 December 1997, MF Receivables Corp. III ("MF III"), a wholly owned
special purpose subsidiary of the Company, entered into a $75 million
Warehouse Line of Credit with Daiwa Finance Corporation ("Daiwa"). All
advances received under the line of credit are secured by eligible loan
Contracts and all proceeds received from those Contracts. The scheduled
maturity date in respect to any advance under the line of credit is the
earlier of 364 days following the date of the advance or December 3, 1999.
Under the Credit Agreement, 85% of the amount advanced to the Company accrues
interest at a rate equal to LIBOR plus 2.5% per annum. The remaining 15% of
the amount advanced accrues interest at a rate of 12% per annum. The Company
is obligated to pay Daiwa an unused facility fee equal to .375% of the average
daily unused portion of the credit agreement. The Credit Agreement requires
the Company to maintain certain standard ratios and covenants. At December
31, 1997, the Company had borrowed $30.0 million against this line of credit.
The assets of MF III are not available to pay general creditors of the
Company. All cash collections in excess of disbursements to Daiwa and other
general disbursements are paid to MF III on a monthly basis.
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
December 31, 1997, 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 Class A Common Stock is traded on the NASDAQ National
Market. Commencing February 23, 1998, the requirements for the continued
trading of securities on the NASDAQ National Market were changed. The
Company's ability to raise capital, including, but not limited to, both debt
and/or equity, could be adversely affected should the Company fail to meet the
new requirements. See Item 5. - Market for Common Equity and Related
Stockholder Matters for further discussion of the new NASDAQ requirements and
the Company's status concerning such requirements.
The Company's cash needs will, in part, continue to be funded through a
combination of earnings and cash flow from operations, its existing Warehouse
Line of Credit and securitizations. 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.
SUBSEQUENT EVENTS
- ------------------
In connection with its portfolio acquisition strategy, the Company
entered into an Amended and Restated Asset Purchase Agreement dated as of
January 8, 1998 (the "Asset Purchase Agreement"), with Pacific USA Holdings
Corp. ("Pacific USA") and certain of its wholly-owned or partially-owned
subsidiaries - Pacific Southwest Bank ("PSB"), NAFCO Holding Company LLC
("NAFCO"), Advantage Funding Group, Inc. ("Advantage") and PCF Service, LLC -
providing for, among other things, the purchase by the Company of sub-prime
automobile loans from NAFCO and Advantage having an unpaid principal balance
of approximately $81,115,233 for a purchase price of $77,870,623 of which
$73,003,709 was paid in cash. Financing was provided by Daiwa Finance
Corporation. The Company also agreed to issue Daiwa warrants for the purchase
of 250,000 shares of Class A Common Stock. The balance of the purchase price
of $4,866,914 was paid through the issuance of 2,433,457 shares of the
Company's 8% Cumulative Convertible Preferred Stock, Series 1998-1 (the
"Preferred Stock") valued at $2.00 per share. Each share of Preferred Stock
will be convertible at any time into one-half share of Class A Common Stock,
or an aggregate of up to 1,216,728 shares of Class A Common Stock. Thus, the
effective cost to Pacific USA of the Class A Common Stock issuable upon
conversion of the Preferred Stock will be $4.00 per share.
As required by the Asset Purchase Agreement, PSB entered into a Loan Loss
Reimbursement Agreement whereby it agreed to reimburse the Company for up to
15% of any losses incurred by the Company in connection with the loans
acquired from NAFCO and Advantage. In consideration therefor, the Company
issued 811,152 shares of Class A Common Stock. The Company allocated
$1,622,304 to the cost of the purchased loans, which represents the value
assigned to the common shares.
Also, the Company may be obligated to make additional payments to NAFCO
based on the performance of certain potential relationships with loan
originators previously associated with NAFCO. If there are any pre-tax
earnings associated with these operations for calendar years 1998 and 1999,
the Company is obligated to pay NAFCO shares of the Company's Class A Common
Stock valued at the average daily closing price of such stock on the NASDAQ
Stock Market for the last ten days of such calendar year. The number of shares
of Class A Common Stock, if any, which the Company may be required to issue to
NAFCO pursuant to these agreements cannot be determined at present.
The Company filed the required documents under the Hart-Scott-Rodino Act
("HSR Act") on January 15, 1998, and received the necessary approvals under
the HSR Act on or about February 10, 1998.
Pacific USA was the record owner of 1,500,000 shares of Class A Common
Stock as of December 31, 1997. As a result of the Option Agreement, it was
granted the power to vote the 830,000 shares of Class B Common Stock
beneficially owned by the Messrs. Ginsburg and Sandler (President and
Executive Vice President, respectively, of the Company) ("the Shareholders")
and a limited power to direct the voting of shares subject to proxies held by
the Shareholders. Also, under the terms of the Asset Purchase Agreement dated
January 8, 1998, Pacific USA was issued 811,152 shares of the Company's Class
A Common Stock. As of the date of this report, 8,014,631 shares of Class A
Common Stock are issued and outstanding and 1,273,715 shares of Class B Common
Stock are issued and outstanding. The Class A Common Stock has one vote per
share while the Class B Common Stock has three votes per share. The Class A
and Class B Common Stock vote together as one class. Accordingly, Pacific USA
may be deemed to be the beneficial owner of approximately 38.6% of the Class A
and Class B Common Stock and controls approximately 51.8% of the total voting
power. Pacific USA has an option expiring in December 2000 to purchase 830,000
shares of Class B Common Stock, owned by the Shareholders, while the
Shareholders have an option, also expiring in December 2000, to require that
Pacific USA purchase all of such shares. Upon exercise of either the put
option or the call option, the Class B Common Stock purchased by CFH will
automatically convert into Class A Common Stock thereby reducing the voting
power of Pacific USA.
As a result of the Asset Purchase Agreement dated January 8, 1998,
Stockholders' Equity increased to $15.0 million.
OTHER
- -----
ACCOUNTING PRONOUNCEMENTS
- --------------------------
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.
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. Basic earnings per
share is calculated by dividing net income attributable to common shareholders
by the weighted average number of common shares outstanding. Dilutive
earnings per share is computed similarly, but also gives effect to the impact
convertible securities, such as convertible debt, stock options and warrants,
if dilutive, would have on net income and average common shares outstanding if
converted at the beginning of the year. 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. The Company implemented SFAS 128 effective with its
December 31, 1997, financial statements.
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information", both of which are not
applicable to the Company.
INFLATION
- ---------
Inflation was not a material factor in either the sales or the operating
expenses of the Company from inception to December 31, 1997.
YEAR 2000 ISSUE
- -----------------
The "Year 2000" issue affects the Company's installed computer systems,
network elements, software applications and other business systems that have
time-sensitive programs that may not properly reflect or recognize the Year
2000. Because many computers and computer applications define dates by the
last two digits of the year, "00" may not be properly identified as the Year
2000. This error could result in miscalculations or system failures.
The Company is conducting a review of its computer systems to identify
those areas that could be affected by the "Year 2000" issue and is developing
an implementation plan to ensure compliance. The Company is using both
internal and external sources to identify, correct and reprogram, and test its
systems for Year 2000 compliance. Because third party failures could have a
material impact on the Company's ability to conduct business, confirmations
are being requested from our processing vendors and suppliers to certify that
plans are being developed to address the Year 2000 issue. The Company
presently believes that, with modification to existing software and investment
in new software, the Year 2000 problem will not pose significant operational
concerns nor have a material impact on the financial position or results of
operation in any given year. The total cost of modifications and conversions
is not expected to be material and will be expensed as incurred.
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) increasing the
number of loans acquired from the Dealer Network; (2) purchasing portfolios of
loans originated by third parties; (3) continuing its efforts to increase the
credit quality of its portfolio and reduce credit losses and charge-offs; (4)
decreasing the percentage of operating expenses to average gross receivables
by increasing the portfolio while decreasing operating expenses; and (5)
securitizing portfolios of auto loans.
To further promote its growth and profitability, the Company will
continue to pursue its growth strategy based on the following:
MARKET FOCUS: The Company targets the middle range of the Sub-prime auto
finance market. Auto loans can be classified as follows: (A) Prime loans to
borrowers with no credit blemishes; (B) Almost prime loans to borrowers with
generally good credit and a few minor blemishes; (C+) The highest category of
sub-prime borrowers who have suffered reversals in the past but are current on
all obligations and have demonstrated the ability and willingness to
reestablish their credit in the higher categories; (C) Similar to (C+) but
present a slightly greater risk due to higher debt-to-income ratios, lower
salaries, prior bankruptcy etc.; (C-) Borrowers with substantially more
adverse credit history, but appear to have the wherewithal to meet their
credit obligations; (D) First time borrowers or borrowers with little or no
past credit history, borrowers with recent bankruptcies or those lacking
stability in employment etc., Monaco Finance Inc., is focusing on all
categories of (C) credit with the emphasis on obtaining more (C+) borrowers.
The Company will purchase few, if any, (D) loans.
The Company also targets late model used vehicles, which have lower
depreciation rates than either new vehicles or used vehicles that are over
three years old and have high mileage. In addition, the Company concentrates
on acquiring loans from new car franchised dealers because, generally, such
dealers are stronger financially and can better perform on their
representations and warranties, offer higher quality vehicles, and often
provide better repair service than independent used car dealers.
During 1997, the Company acquired contracts from approximately 375
dealers in 28 states, the majority of which were purchased in five 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 6. In August 1997, the Company initiated its strategy to increase its
Dealer Network by hiring two regional marketing managers. At December 31, 1997
the Company had increased its marketing representatives to 16.
PORTFOLIO ACQUISITIONS: The Company plans to continue the purchase of
loan portfolios previously originated by third parties. In 1997, the Company
acquired, at a discount, two such portfolios with a face value of $12 million.
In January 1998, the Company announced that it had completed the acquisition
of $81 million in auto loans from affiliates of Pacific USA and in February
1998 the Company acquired approximately $14 million of auto loans from another
third party. The Company actively is seeking to acquire other portfolios of
auto loans.
FUNDING AND FINANCING STRATEGIES: In December 1997, the Company entered
into a warehouse line with Daiwa Finance Corporation, under the terms of
which, up to 90% of the face amount of loans can be financed. This facility
allows the Company to acquire loans on a leveraged basis and increase the size
of its portfolio with its current capital. Periodic rated securitizations are
also part of the Company's financing strategies. Securitizations lock in low
interest rates and free up the Company's warehouse line and capital for new
loan acquisitions. The Company makes all efforts to obtain sufficient cash
from a securitization to repay all warehouse debt collateralized by the loans.
In the event funds obtained from a securitization are not sufficient to retire
the corresponding debt, the securitization may adversely affect liquidity.
RISK EVALUATION AND UNDERWRITING: As discussed in more detail elsewhere
herein, the Company has developed proprietary credit scoring and risk
evaluation systems which predicts the frequency of default and the resultant
predicted loss after repossession and sale of financed vehicles. This system
assists the Company's credit buyers and underwriters in pricing loans to be
acquired. Credit buyers can negotiate interest rates, loan term, purchase
discount and fees and terms of the deal, including such items as down payment,
in order to achieve a desired risk adjusted rate of return for each Contract.
CENTRALIZED OPERATING STRUCTURE: Management believes the centralization
of all operations in one location results in a consistent, cost effective
means of operating a sub-prime automobile loan business. Sales
representatives,of course, are disbursed throughout the country to deal
directly with dealers.
COLLECTIONS MANAGEMENT: Management believes that collections and recovery
are vital to the successful operation of the Company. The Company has invested
substantial amounts of time, money and resources in developing an efficient
collections department. The results of the Company's efforts are evidenced by
its percentage of delinquent contracts, which at February 28, 1998, was 6.95%
over 30 days past due. This percentage consisted of 5.84% 30 to 59 days past
due, 1.11% 60 to 89 days past due and 0.0% over 90 days past due. Further
additions and improvements to its collections department and systems, both in
personnel and automated equipment, would enable the Company, for the first
time, to seek out servicing and collections of Sub-prime auto loans for others
in similar businesses which could result in creating a new revenue source for
the Company.
CONTROLLING INTEREST: As a result of the Asset Purchase Agreement dated
January 8, 1998, Pacific USA Holdings Corp. ("Pacific USA") increased its
voting power in the Company to 51.8%. Pacific USA is the beneficial owner of
38.6% of the Company's outstanding voting stock. Pacific USA is a diverse U.S.
holdings company, 100% owned by Pacific Electric Wire & Cable, Ltd. of Hong
Kong. Pacific USA is a multi-billion dollar company which owns various
business including but not limited to home building, home equity lending,
sub-prime auto finance, loan servicing and also is the 100% owner of Pacific
Southwest Bank. The various companies involved in this transaction currently
are reviewing the Company's business plan to determine whether the business
plan could be modified for additional opportunities which may be available as
a result of the association with Pacific USA.
Implementation of the foregoing strategy will be dependent upon a number of
factors including but not limited to: (i) competition; (ii) the ability of the
Company to acquire contracts at a price commensurate with estimated risk,
through its Dealer Network and portfolio purchases; (iii) maintain and
increase its capital and warehouse lines of credit; (iv) and, successfully
complete securitizations of its portfolio.
<PAGE>
ITEM 7. FINANCIAL STATEMENTS.
- ----------------------------------
MONACO FINANCE, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PAGE
----
Independent Auditors' Report 30
Consolidated Balance Sheets - December 31, 1997 and 1996 31
Consolidated Statements of Operations - For the Years Ended
December 31, 1997 and 1996 32
Consolidated Statements of Stockholders' Equity - For the
Years Ended December 31, 1997 and 1996 33
Consolidated Statements of Cash Flows - For the Years Ended
December 31, 1997 and 1996 34
Notes to the Consolidated Financial Statements 35-57
29
<PAGE>
Ehrhardt
Keefe
Steiner &
Hottman PC
Certified Public Accountant
and Consultants
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Monaco Finance, Inc. and Subsidiaries
Denver, Colorado
We have audited the accompanying consolidated balance sheets of Monaco
Finance, Inc. and Subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Monaco
Finance, Inc. and Subsidiaries at December 31, 1997 and 1996, and the results
of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
As disclosed in Note 1 to the consolidated financial statements, the
Company changed its method of computing earnings per share.
/s/ Ehrhardt Keefe Steiner & Hottman PC
-------------------------------------------
Ehrhardt Keefe Steiner & Hottman PC
March 30, 1998
Denver, Colorado
30
<PAGE>
<TABLE>
<CAPTION>
MONACO FINANCE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
DECEMBER 31,
1997 1996
-------------- ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . $ 757,541 $ 1,227,441
Restricted cash . . . . . . . . . . . . . . . . . . . . . 8,080,033 4,463,744
Automobile receivables - net (Notes 2 and 4). . . . . . . 74,324,431 81,890,935
Repossessed vehicles held for sale. . . . . . . . . . . . 1,738,331 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 $2,095,450 (1997) and $1,326,215 (1996) 2,055,774 2,055,902
Other assets. . . . . . . . . . . . . . . . . . . . . . . 2,061,832 1,379,526
-------------- ------------
Total assets . . . . . . . . . . . . . . . . . . . . $ 90,597,721 $95,264,068
============== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable. . . . . . . . . . . . . . . . . . . . . $ 1,537,791 $ 851,838
Accrued expenses and other liabilities. . . . . . . . . . 888,309 619,125
Notes payable (Note 4). . . . . . . . . . . . . . . . . . 6,375,549 5,250,000
Warehouse note payable (Note 4) . . . . . . . . . . . . . 30,000,000 -
Promissory note payable (Note 4). . . . . . . . . . . . . 1,135,232 -
Installment note payable (Note 4) . . . . . . . . . . . . - 3,000,000
Convertible subordinated debt (Note 4). . . . . . . . . . 1,385,000 1,385,000
Senior subordinated debt (Note 4) . . . . . . . . . . . . 3,333,332 5,000,000
Convertible senior subordinated debt (Note 4) . . . . . . 5,000,000 5,000,000
Automobile receivables-backed notes (Note 4). . . . . . . 32,421,076 59,156,101
-------------- ------------
Total liabilities. . . . . . . . . . . . . . . . . . 82,076,289 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, 7,203,479 shares (1997) and
5,648,379 shares (1996) issued. . . . . . . . . . . . 72,035 56,484
Class B common stock, $.01 par value; 2,250,000
shares authorized, 1,273,715 shares (1997) and
1,323,715 shares (1996) issued. . . . . . . . . . . . 12,737 13,237
Additional paid-in capital. . . . . . . . . . . . . . . 24,925,466 22,066,089
Retained earnings (deficit) . . . . . . . . . . . . . . (16,488,806) (7,133,806)
-------------- ------------
Total stockholders' equity . . . . . . . . . . . . . . . . . . 8,521,432 15,002,004
-------------- ------------
Total liabilities and stockholders' equity . . . . . . . . . . $ 90,597,721 $95,264,068
============== ============
<FN>
See notes to consolidated financial statements.
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
MONACO FINANCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
YEARS ENDED DECEMBER 31,
<S> <C> <C>
1997 1996
------------- -------------
REVENUES:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,394,091 $ 13,470,631
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 244,816 30,122
------------- -------------
Total revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,638,907 13,500,753
COSTS AND EXPENSES:
Provision for credit losses (Note 2) . . . . . . . . . . . . . . . . . . . . . . 3,873,719 910,558
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,445,704 11,800,782
Interest expense (Note 4). . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,674,484 4,737,375
------------- -------------
Total costs and expenses. . . . . . . . . . . . . . . . . . . . . . . . . . 21,993,907 17,448,715
------------- -------------
(Loss) from continuing operations before income taxes. . . . . . . . . . . . . . (9,355,000) (3,947,962)
Income tax (benefit) (Note 6). . . . . . . . . . . . . . . . . . . . . . . . . . - (1,476,538)
------------- -------------
(Loss) from continuing operations. . . . . . . . . . . . . . . . . . . . . . . . (9,355,000) (2,471,424)
(Loss) on disposal of discontinued business, net of
applicable income taxes (Note 7). . . . . . . . . . . . . . . . . . . . . . . - (301,451)
Cumulative effect of a change in accounting principle (Note 2) . . . . . . . . . - (4,912,790)
------------- -------------
Net (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ($9,355,000) ($7,685,665)
============= =============
EARNINGS (LOSS) PER COMMON SHARE - BASIC AND ASSUMING DILUTION (NOTES 1 AND 5):
(Loss) from continuing operations. . . . . . . . . . . . . . . . . . . . . . . . ($1.18) ($0.35)
(Loss) on disposal of discontinued business. . . . . . . . . . . . . . . . . . . - (0.04)
Cumulative effect of a change in accounting principle. . . . . . . . . . . . . . - (0.71)
------------- -------------
Net (loss) per common share - basic and assuming dilution. . . . . . . . . . . . ($1.18) ($1.10)
============= =============
Weighted average number of common shares outstanding . . . . . . . . . . . . . . 7,912,732 6,965,485
<FN>
See notes to consolidated financial statements.
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
MONACO FINANCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
CLASS A CLASS B ADDITIONAL
COMMON STOCK COMMON STOCK PAID-IN- RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS TOTAL
---------- ------- ---------- ------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance - December 31, 1995. . . . . . 5,672,279 $56,723 1,306,000 $13,060 $22,127,941 $ 551,859 $22,749,583
Purchase of treasury stock . . . . . . (26,900) (269) - - (84,845) - (85,114)
Conversion of shares . . . . . . . . . 3,000 30 (3,000) (30) - - 0
Treasury stock adjustment. . . . . . . - - 20,715 207 22,993 - 23,200
Net (loss) for the year. . . . . . . . - - - - - (7,685,665) (7,685,665)
---------- ------- ---------- ------- ------------ -------------- ------------
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. . . . . . . 5,100 51 - - 9,377 - 9,428
Conversion of shares . . . . . . . . . 50,000 500 (50,000) (500) - - 0
Conversion of installment note payable 1,500,000 15,000 - - 2,850,000 - 2,865,000
Net (loss) for the year. . . . . . . . - - - - - (9,355,000) (9,355,000)
---------- ------- ---------- ------- ------------ -------------- ------------
Balance - December 31, 1997. . . . . . 7,203,479 $72,035 1,273,715 $12,737 $24,925,466 ($16,488,806) $ 8,521,432
========== ======= ========== ======= ============ ============== ============
<FN>
See notes to consolidated financial statements.
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
MONACO FINANCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
YEARS ENDED DECEMBER 31,
1997 1996
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
- ---------------------------------------------------------------------
Loss from continuing operations. . . . . . . . . . . . . . . . . ($9,355,000) ($7,384,214)
Adjustments to reconcile loss from continuing operations to
net cash provided by operating activities:
Depreciation. . . . . . . . . . . . . . . . . . . . . . . . 936,055 575,539
Provision for credit losses . . . . . . . . . . . . . . . . 3,873,719 910,558
Cumulative effect of a change in accounting principle . . . - 4,912,790
Amortization of excess interest . . . . . . . . . . . . . . 4,532,301 3,704,234
Amortization of other assets. . . . . . . . . . . . . . . . 1,046,693 745,258
Deferred tax asset. . . . . . . . . . . . . . . . . . . . . 1,872 (1,538,893)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . (8,611) 77,154
------------- -------------
1,027,029 2,002,426
Change in assets and liabilities:
Receivables . . . . . . . . . . . . . . . . . . . . . . . . (995,897) (1,570,892)
Prepaid expenses. . . . . . . . . . . . . . . . . . . . . . (175,180) (104,365)
Accounts payable. . . . . . . . . . . . . . . . . . . . . . 685,953 300,761
Accrued liabilities and other . . . . . . . . . . . . . . . 513,202 727,425
------------- -------------
Net cash flows from continuing operations. . . . . . . . . . . . 1,055,107 1,355,355
Net cash flows from discontinued operations. . . . . . . . . . . - 1,021,611
------------- -------------
Net cash provided by operating activities . . . . . . . . . . . . . . 1,055,107 2,376,966
------------- -------------
Cash flows from investing activities:
- ---------------------------------------------------------------------
Retail installment sales contracts - purchased . . . . . . . . . (37,458,258) (65,973,183)
Retail installment sales contracts - originated. . . . . . . . . - (1,519,376)
Proceeds from payments on contracts - purchased. . . . . . . . . 36,708,113 33,818,222
Proceeds from payments on contracts - originated . . . . . . . . 1,356,268 4,611,648
Purchase of furniture and equipment. . . . . . . . . . . . . . . (926,322) (937,644)
Equipment deposits and other . . . . . . . . . . . . . . . . . . 10,726 (3,614)
------------- -------------
Net cash (used in) investing activities . . . . . . . . . . . . . . . (309,473) (30,003,947)
------------- -------------
Cash flows from financing activities:
- ---------------------------------------------------------------------
Net borrowings under lines of credit . . . . . . . . . . . . . . 31,125,549 5,250,000
Net decrease (increase) in restricted cash . . . . . . . . . . . (3,616,289) (768,858)
Borrowings on asset-backed notes . . . . . . . . . . . . . . . . 62,496,526 42,348,989
Repayments on asset-backed notes . . . . . . . . . . . . . . . . (89,231,550) (32,863,015)
Repayments on senior subordinated debentures . . . . . . . . . . (1,666,668) -
Proceeds from issuance of convertible senior subordinated notes - 5,000,000
Proceeds from issuance of installment note. . . . . . . . . . . - 3,000,000
Purchases of treasury stock and other adjustments. . . . . . . . - (59,042)
Proceeds from exercise of stock options . . . . . . . . . . . . 9,428 -
Proceeds from issuance of promissory note . . . . . . . . . . . 2,525,000 -
Repayments on promissory note. . . . . . . . . . . . . . . . . . (1,389,768) -
Increase in debt issue and conversion costs. . . . . . . . . . . (1,467,762) (301,322)
------------- -------------
Net cash (used in) provided by financing activities . . . . . . . . . (1,215,534) 21,606,752
------------- -------------
Net decrease in cash and cash equivalents . . . . . . . . . . . . . . (469,900) (6,020,229)
Cash and cash equivalents, January 1. . . . . . . . . . . . . . . . . 1,227,441 7,247,670
------------- -------------
Cash and cash equivalents, December 31. . . . . . . . . . . . . . . . $ 757,541 $ 1,227,441
============= =============
<FN>
See notes to consolidated financial statements.
</TABLE>
34
<PAGE>
MONACO FINANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ----------------------------------------------------------
Monaco Finance, Inc. (the "Company") is a specialty consumer finance
company engaged in the business of underwriting, acquiring, servicing and
securitizing automobile retail installment contracts ("Contract(s)"). The
Company provides special finance programs (the "Program(s)") to purchasers of
vehicles who do not qualify for traditional sources of bank financing due to
their adverse credit history, or for other reasons which may indicate credit
or economic risk ("Sub-prime Customers). The Company also purchases portfolios
of sub-prime loans from third parties other than dealers. In 1997, the Company
acquired Contracts in connection with the sale of used and, to a limited
extent, new vehicles, to customers, from automobile dealers (the "Dealer(s)"
or the "Dealer Network") located in twenty-eight states, the majority of which
were acquired from five states. At December 31, 1997 the Company had sixteen
full-time finance representatives to provide service to current Dealers and to
sign-up new Dealers for the Company's Programs. At December 31, 1997, the
Company's loan portfolio had an outstanding balance of approximately $81
million.
In February 1996, the Company announced that it intended to discontinue
its Company owned retail used car dealerships, which conduct business under
the name "CarMart" (the "Company Dealerships" or "CarMart Dealerships"), and
the associated financing operations. The CarMart business ceased operations on
May 31, 1996.
PRINCIPLES OF CONSOLIDATION
- -----------------------------
The Company's consolidated financial statements include the accounts of
Monaco Finance, Inc. and its wholly-owned subsidiaries, CarMart Auto
Receivables Company and MF Receivables Corp. I ("MF I"), MF Receivables Corp.
II ("MF II"), and MF Receivables Corp. III ("MF III") (the "Subsidiaries").
All intercompany accounts and transactions have been eliminated in
consolidation.
CASH AND CASH EQUIVALENTS
- ----------------------------
For purposes of cash flow reporting, cash and cash equivalents include
cash, money market funds, government securities, and certificates of deposit
with maturities of less than three months.
RESTRICTED CASH
- ----------------
Restricted cash represents cash collections related to the Automobile
Receivables-Backed Notes and the Warehouse Line of Credit (Note 5). On a
monthly basis, all cash collections in excess of disbursements to the
noteholders of the Automobile Receivables-Backed Notes, or to Daiwa Finance
Corporation, and other general disbursements, are paid to MF I, MF II, and MF
III. At December 31, 1997 and 1996, the Company had $1,652,596 and $3,329,031,
respectively, of its restricted cash balances invested in overnight U.S.
government securities.
FINANCE RECEIVABLES
- --------------------
Finance receivables primarily represent receivables generated from
Contracts purchased from the Dealer Network and from Contracts from the retail
sale of automobiles at the Company's CarMart stores. In 1997, the Company
also purchased loan portfolios of previously originated automobiles. At
December 31, 1997 and 1996, approximately $1.4 million, or 2% , $4.7 million,
or 6%, of the Automobile Receivables loan portfolio were generated from the
CarMart operations.
REPOSSESSED VEHICLES HELD FOR RESALE
- ----------------------------------------
Repossessed vehicles held for resale consist of repossessed vehicles
awaiting liquidation. Repossessed vehicles are carried at estimated actual
cash value. At December 31, 1997 and 1996, approximately 484 and 651
repossessed vehicles, respectively, were awaiting liquidation. Included are
vehicles held for resale, vehicles which have been sold for which payment has
not been received and unlocated vehicles (skips), certain of the value of
which may be recovered from insurance proceeds.
FURNITURE AND EQUIPMENT
- -------------------------
Furniture and equipment are stated at acquisition cost. Major additions
are capitalized, whereas maintenance, replacements and repairs are expensed.
Depreciation is provided for in amounts sufficient to allocate the cost of
depreciable assets to operations over their estimated service lives using the
straight-line method.
REVENUE RECOGNITION
- --------------------
Interest income from finance receivables is recognized using the interest
(actuarial) method. Accrual of interest income on finance receivables is
suspended when a loan is contractually delinquent for ninety days or more.
The accrual is resumed when the loan is less than ninety days delinquent, and
collectible past-due interest income is recognized at that time. Any
discounts recognized from the purchase of installment contracts are added to
the allowance for credit losses. Insurance income was recognized as earned.
CREDIT LOSSES
- --------------
Provisions for credit losses are continually reviewed and adjusted to
maintain the allowance at a level considered adequate to cover losses over the
life of the loans in the existing portfolio. The Company's charge-off policy
is to automatically charge-off, net of estimated recoveries, all Contracts
over 100 days contractually past due.
EXCESS INTEREST
- ----------------
Effective January 1, 1995, upon the acquisition of certain Contracts from
its Dealer Network, a portion of future interest income, as determined by the
Company's risk analysis, was capitalized into Automobile Receivables (excess
interest receivable) and correspondingly used to increase the allowance for
credit losses (unearned interest income). Subsequent receipts of excess
interest are applied to reduce excess interest receivable.
LOAN ORIGINATION FEES AND COSTS
- -----------------------------------
Fees received and direct costs incurred for the origination of Contracts
are offset and any excess fees are deferred and amortized to interest income
over the contractual lives of the Contracts using the interest method.
Unamortized amounts, if any, are recognized in income at the time Contracts
are sold or paid in full. Direct costs incurred in excess of fees received are
expensed as incurred.
CONCENTRATION OF CREDIT RISKS
- --------------------------------
The Company's customers are not concentrated in any specific geographic
region. However, their primary concentration of credit risk relates to
lending to individuals who cannot obtain traditional bank financing. The
Company places its temporary cash investments with high quality institutions,
and by policy, limits the amount of credit exposure to any one institution.
The Company does, however, on occasion exceed the FDIC federally insured
limits and at December 31, 1997 and 1996 exceeded the amount by $9,840,730 and
$5,666,759, respectively.
EARNINGS PER SHARE
- --------------------
In February 1997, the Financial Accounting Standards Board 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. Basic earnings per
share is calculated by dividing net income attributable to common shareholders
by the weighted average number of common shares outstanding. Dilutive
earnings per share is computed similarly, but also gives effect to the impact
convertible securities, such as convertible debt, stock options and warrants,
if dilutive, would have on net income and average common shares outstanding if
converted at the beginning of the year. 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. The Company implemented SFAS 128 effective with its
December 31, 1997, financial statements. The Company has incurred losses in
each of the periods covered in these financial statements, thereby making the
inclusion of convertible securities in the 1996 primary and fully diluted
earnings per share computations and the 1997 dilutive earnings per share
computations antidilutive. Accordingly, convertible securities have already
been excluded from the previously reported primary and fully diluted earnings
per share amounts and do not require restatement. Basic and dilutive earnings
per share are the same for each period presented. See Note 9 - Subsequent
Events for a description of additional shares issued in 1998.
<TABLE>
<CAPTION>
ANTIDILUTIVE SECURITIES EXCLUDED FROM DILUTIVE EARNINGS PER SHARE
<S> <C> <C> <C>
EXERCISE OR POTENTIALLY
CONVERSION DILUTIVE
Security PRICE SHARES EXPIRATION DATE
--------------- ----------- --------------------
Stock Options. . . . . . . . . . . . $0.531 - $6.625 1,402,500 1/6/2002 - 8/25/2007
Warrants . . . . . . . . . . . . . . $ 1.00 - $6.00 244,000 3/15/98 -12/31/2000
Convertible Subordinated Debenture . $ 3.42 404,970 3/1/98
Convertible Senior Subordinated Note $ 4.00 1,250,000 1/9/2001
<FN>
</TABLE>
INCOME TAXES
- -------------
The Company recognizes deferred tax liabilities and assets based on
differences between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
USE OF ESTIMATES
- ------------------
The preparation of financial statements in conformity with general
accepted accounting principles requires management to make certain estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of financial statements and the reported amounts of revenues and
expenses during the reporting period. Management believes that such estimates
have been based on reasonable assumptions and that such estimates are
adequate, however, actual results could differ from those estimates.
In connection with the purchase of Contracts, the Company is required to
estimate the number and dollar amount of loans expected to result in defaults
and to estimate the amount of loss that will be incurred under each default.
The Company currently provides allowances for these losses based on the
historical performance of the Contracts which are tracked by the Company on a
static pool basis. The actual losses incurred could differ materially from the
amounts that the Company has estimated in preparing the historical
consolidated financial statements.
TREASURY STOCK
- ---------------
In accordance with Section 7-106-302 of the Colorado Business Corporation
Act, shares of its own capital stock acquired by a Colorado corporation are
deemed to be authorized but unissued shares. APB Opinion No. 6 requires the
accounting treatment for acquired stock to conform to applicable state law.
As such, 26,900 shares of Class A Common Stock purchased in 1996 has been
reported as a reduction to Class A Common Stock and Additional
Paid-in-Capital.
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
- ------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
1997 1996
---------- ----------
Cash Payments for:
Interest . . . . . $5,562,880 $4,535,614
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.
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.
RECENTLY ISSUED ACCOUNTING STANDARDS
- ---------------------------------------
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information", both of which are not
applicable to the Company.
RECLASSIFICATIONS
- -----------------
Certain prior year balances have been reclassified in order to conform
with the current year presentation.
NOTE 2 - AUTOMOBILE RECEIVABLES
- -----------------------------------
<TABLE>
<CAPTION>
Automobile receivables consist of the following:
DECEMBER 31,
<S> <C> <C>
1997 1996
-------------- ------------
Retail installment sales contracts. . . . . . . . $ 37,103,262 $11,777,343
Retail installment sales contracts-Trust (Note 4) 37,323,549 71,129,192
Excess interest receivable. . . . . . . . . . . . 4,849,209 6,555,682
Other . . . . . . . . . . . . . . . . . . . . . . 777,749 616,230
Accrued interest. . . . . . . . . . . . . . . . . 1,121,161 1,331,450
-------------- ------------
Total finance receivables . . . . . . . . . . . . 81,174,930 91,409,897
Allowance for credit losses . . . . . . . . . . . (6,850,499) (9,518,962)
--------------
Automobile receivables - net. . . . . . . . . . . $ 74,324,431 $81,890,935
============== ============
<FN>
</TABLE>
At December 31, 1997, the accrual of interest income was not suspended on
any Contracts.
At the time installments sale contracts ("Contracts") are originated or
purchased, the Company estimates future losses of principal based on the type
and terms of the Contract, the credit quality of the borrower and the
underlying value of the vehicle financed. This estimate of loss is based on
the Company's risk model, which takes into account historical data from
similar contracts originated or purchased by the Company since its inception
in 1988. However, since the risk model uses past history to predict the
future, changes in national and regional economic conditions, borrower mix and
other factors could result in actual losses differing from initially
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.
<TABLE>
<CAPTION>
<S> <C>
ALLOWANCE FOR
CREDIT LOSSES
---------------
Balance as of December 31, 1995 . . . . . . . . . . . $ 6,661,917
Provisions for credit losses. . . . . . . . . . . . . 1,184,189
Unearned interest income. . . . . . . . . . . . . . . 6,947,282
Unearned discounts. . . . . . . . . . . . . . . . . . 3,689,364
Cumulative effect of a change in accounting principle 4,912,790
Retail installment sale contracts charged off . . . . (24,819,803)
Recoveries. . . . . . . . . . . . . . . . . . . . . . 10,943,223
---------------
Balance as of December 31, 1996 . . . . . . . . . . . 9,518,962
Provisions for credit losses. . . . . . . . . . . . . 3,873,719
Unearned interest income. . . . . . . . . . . . . . . 2,825,819
Unearned discounts. . . . . . . . . . . . . . . . . . 2,354,792
Retail installment sale contracts charged off . . . . (22,643,864)
Recoveries. . . . . . . . . . . . . . . . . . . . . . 10,921,071
---------------
Balance as of December 31, 1997 . . . . . . . . . . . $ 6,850,499
===============
<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
provided for by additions to the Company's allowance for credit losses as
determined by the Company's risk analysis. Also, the 1997 provision for credit
losses includes a $3.6 million fourth quarter charge for a change in estimate
related to its static pooling reserve 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 years
ended December 31, 1997 and 1996, $4,532,301 and $3,704,234, respectively, of
excess interest income was amortized against interest receivable.
<PAGE>
The December 31, 1997, excess interest receivable balance of $4,849,209 will
be amortized as follows:
<TABLE>
<CAPTION>
<S> <C>
AMORTIZATION
-------------
1998 2,892,271
1999 1,302,242
2000 519,749
2001 125,072
2002 9,875
-------------
$4,849,209
=============
<FN>
</TABLE>
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.
CHANGE IN ACCOUNTING PRINCIPLE
- ---------------------------------
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 monthly static pool.
The pro forma effects of retroactive application of the above change in
accounting principle are as follows:
<TABLE>
<CAPTION>
<S> <C>
As Reported: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1996
- ---------------------------------------------------------------------------- ------------
Income (loss) from continuing operations
before cumulative effect of a change in accounting principle. . . . . . . ($2,471,424)
(Loss) on disposal of discontinued business (net of taxes) . . . . . . . . . (301,451)
Cumulative effect on prior years
of changing to a different reserve method. . . . . . . . . . . . . . . . (4,912,790)
------------
Net (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ($7,685,665)
============
EARNINGS (LOSS) PER COMMON SHARE (BASIC AND ASSUMING DILUTION):
- ----------------------------------------------------------------------------
Income (loss) from continuing operations
before cumulative effect of a change in accounting principle. . . . . . . ($0.35)
(Loss) on disposal of discontinued business (net of taxes) . . . . . . . . . (0.04)
Cumulative effect on prior years of changing
to a different reserve method . . . . . . . . . . . . . . . . . . . . . . (0.71)
------------
Net (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ($1.10)
============
PRO FORMA AMOUNTS ASSUMING THE NEW RESERVE METHOD IS APPLIED RETROACTIVELY:
- ----------------------------------------------------------------------------
(Loss) from continuing operations. . . . . . . . . . . . . . . . . . . . . . ($2,471,424)
(Loss) per common share-basic and assuming dilution . . . . . . . . . . . . ($0.35)
Net (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ($2,772,875)
(Loss) per common share-basic and assuming dilution . . . . . . . . . . . . ($0.40)
<FN>
</TABLE>
NOTE 3 - COMMITMENTS AND CONTINGENCIES
- -------------------------------------------
OPERATING LEASES
- -----------------
The Company leases office space, car lot facilities, computer and office
equipment for varying periods. Leases that expire generally are expected to
be renewed or replaced by other leases, or in the case of CarMart facilities,
the Company has options to extend the leases.
In April 1994, the Company amended and restated its lease of office space
for its executive offices located at 370 17th Street, Suite 5060, Denver,
Colorado 80202, where it maintains approximately 24,716 square feet of space.
The Company currently pays $43,312 per month under a lease ending October 31,
1999, with adjustments for monthly payments on a periodic basis.
Effective December 1, 1996, the Company entered into a sublease agreement
for 6,571 square feet of office space located at 370 17th Street, Suite 4960,
Denver, Colorado, 80202. The Company pays $1,807 per month, plus occupancy
costs, under a sublease ending November 30, 2000. This office space will be
utilized as additional executive offices of the Company.
On March 31, 1994, the Company's lease at 1319 S. Havana, Aurora,
Colorado 80010 was terminated and the operations of the retail CarMart
Dealership at that location were transferred to 890 S. Havana, Aurora,
Colorado 80010. This property is owned by a corporation all of whose
shareholders are officers of the Company. The Company entered into a
seven-year lease commencing March 24, 1994 and ending March 23, 2001. In
September 1995, the Company amended its seven-year lease to include the
property at 894 S. Havana, Aurora, Colorado 80010. The Company currently pays
$15,238 per month on a triple net basis. The lease calls for periodic rental
adjustments over the term. It is the Company's belief that the terms of the
related party lease are generally no less favorable than could have been
obtained from unrelated third party lessors for properties of similar size,
condition and location. Effective June 1, 1996, the Company entered into a
sublease agreement on the property located at 890 S. Havana for the entire
lease term at an amount approximately equal to the Company's obligation.
Effective January 15, 1996 and January 31, 1996, the Company closed its
retail CarMart Dealerships located at 4940 S. Broadway, Englewood, Colorado
and 1005 Motor City Drive, Colorado Springs, Colorado, respectively. The
Englewood, Colorado lease was extended for a three-year period through March
2000. The Company may, at its sole discretion, extend the Englewood, Colorado
lease for an additional three-year period through March 2003. The Company
currently pays $9,833 per month. The Company currently pays monthly rent of
$1,800 on a triple net basis on the Colorado Springs, Colorado lease.
Effective March 15, 1996, the Company entered into a sublease agreement on
both properties for the entire lease terms at an amount approximately equal to
the Company's obligation.
At December 31, 1997, future minimum rental payments applicable to
noncancelable operating leases were as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
YEAR ENDED. . GROSS RENTAL SUBLEASE NET RENTAL
DECEMBER 31,. PAYMENTS RECEIPTS PAYMENTS
- ------------- ------------- ---------- -----------
1998. . . . . $ 1,000,926 $ 277,240 $ 723,686
1999. . . . . 897,037 277,490 619,547
2000. . . . . 318,948 191,498 127,450
2001. . . . . 46,866 37,800 9,066
Thereafter. . - - -
------------- ---------- -----------
$ 2,263,777 $ 784,028 $ 1,479,749
============= ========== ===========
<FN>
</TABLE>
Total net lease expense for the years ended December 31, 1997 and 1996
was $697,080 and $631,931, respectively.
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
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.
EMPLOYMENT AGREEMENTS
- ----------------------
The Company's two executive officers have entered into employment
agreements (the "Employment Agreements") with the Company.
Messrs. Ginsburg and Sandler are paid annual salaries of $310,000 and
$290,000, respectively, under their Employment Agreements and are eligible to
receive medical and hospitalization insurance and other fringe benefits as
provided to the Company's other executive-level employees, including
participating in stock option grants by the Company. The Employment
Agreements have three-year terms which began in December, 1997. Upon written
notice, the Company may terminate the Employment Agreement for cause. Each of
these individuals has agreed not to compete with the Company for a period of
two years following the termination of his relationship with the Company under
this Employment Agreement. In exchange for the non-compete agreement, each
individual is to be paid a non-competition payment of $300,000, to be paid
equally in arrears at the end of each of the two years following the
individuals' employment.
LOANS IN FUNDING (COMMITMENTS)
- ---------------------------------
As of December 31, 1997, there were no open commitments to extend credit
through the normal course of business.
401(K) EMPLOYEE SAVINGS PLAN
- -------------------------------
The Company has a voluntary 401(k) savings plan pursuant to Section
401(k) of the Internal Revenue Code, whereby participants may contribute a
percentage of compensation, but not in excess of the maximum allowed under the
code. The plan provides for a matching contribution by the Company which
amounted to $24,728 and $26,239 in 1997 and 1996, respectively.
NOTE 4 - DEBT
- ----------------
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 was extended from January 1, 1998 to March 23, 1998, at which time the
outstanding balance on the line of credit was paid in full. At the option of
the Company, the interest rate charged on the loans was either .5% in excess
of the prime rate charged by lender or 2.75% over the applicable LIBOR rate.
The Company was 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 was subject to standard conditions. The collateral
securing payment consisted of all Contracts pledged and all other assets of
the Company. The Company had agreed to maintain certain restrictive financial
covenants. As of December 31, 1997, the Company had borrowed $6,375,549
against this line of credit.
WAREHOUSE LINE OF CREDIT - DAIWA FINANCE CORPORATION
- -----------------------------------------------------------
In December 1997, MF Receivables Corp. III ("MF III"), a wholly owned
special purpose subsidiary of the Company, entered into a $75 million
Warehouse Line of Credit with Daiwa Finance Corporation ("Daiwa"). All
advances received under the line of credit are secured by eligible loan
Contracts and all proceeds received from those Contracts. The scheduled
maturity date in respect to any advance under the line of credit is the
earlier of 364 days following the date of the advance or December 3, 1999.
Under the Credit Agreement, 85% of the amount advanced to the Company accrues
interest at a rate equal to LIBOR plus 2.5% per annum. The remaining 15% of
the amount advanced accrues interest at a rate of 12% per annum. The Company
is obligated to pay Daiwa an unused facility fee equal to .375% of the average
daily unused portion of the credit agreement. The Credit Agreement requires
the Company to maintain certain standard ratios and covenants. At December
31, 1997, the Company had borrowed $30.0 million against this line of credit.
The assets of MF III are not available to pay general creditors of the
Company. All cash collections in excess of disbursements to Daiwa and other
general disbursements are paid to MF III on a monthly basis.
PACIFIC USA HOLDINGS CORP. - INSTALLMENT NOTE
- ---------------------------------------------------
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.
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. 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
principal amount of the Notes, plus accrued and unpaid interest, was due on
March 1, 1998. On March 1, 1998, the Company repaid one-half, or $692,500, of
the then outstanding principal amount of the Notes. The maturity date of the
remaining principal amount of notes of $692,500 was extended to April 15,
1998, without penalty. The Notes are convertible into the Class A Common Stock
of the Company at any time prior to maturity at a conversion price of $3.42
per share, subject to adjustment for dilution. As detailed below, Notes with
an aggregate principal amount of $1,615,000 have been converted resulting in
the issuance of 472,219 shares of Class A Common Stock. Commencing March 15,
1996, the Company has the option to pre-pay up to one-third of the outstanding
Notes at par.
<TABLE>
<CAPTION>
<S> <C> <C>
NOTES CLASS A COMMON
CONVERSION DATE CONVERTED STOCK ISSUED
- --------------- ---------- --------------
September 1994. $ 385,000 112,572
March 1995. . . 770,000 225,147
August 1995 . . 85,000 24,853
September 1995. 375,000 109,647
---------- --------------
$1,615,000 472,219
========== ==============
<FN>
</TABLE>
SENIOR SUBORDINATED DEBENTURES
- --------------------------------
On November 1, 1994 the Company sold, in a private placement, unsecured
Senior Subordinated Notes ("Senior Notes") in the gross principal amount of
$5,000,000 to Rothschild North America, Inc. The Senior Notes accrue interest
at a fixed rate per annum of 9.5% through October 1, 1997, and for each month
thereafter, a fluctuating rate per annum equal to the lesser of (a) 11.5% or
(b) 3.5% above LIBOR.
Interest is due and payable the first day of each quarter commencing on
January 1, 1995. Principal payments in the amount of $416,667 are due and
payable the first day of January, April, 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.
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 approved by the Company's Board of Directors and
passed by the Company's Shareholders 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 ("Additional 12% Notes") on or
before September 10, 1998, between the Company and Black Diamond Advisors,
Inc. ("Black Diamond"), one of the initial purchasers, with an initial
conversion price of $3.00 per share.
AUTOMOBILE RECEIVABLES - BACKED NOTES
- -----------------------------------------
In November 1994, MF Receivables Corp. I. ("MF I"), 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 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 Receivables-Backed
Note (Revolving Note" or "Series 1995-A Note"). 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 Receivables to pledge all
Contracts owned by it for repayment of the Revolving Note or Term Notes,
including 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 maximum limit for the Series 1995-A Note is $40 million.
On December 4, 1997, the Company redeemed the outstanding principal
balance of its Series 1995-A Note. The bonds were redeemed at their principal
amount of $12,271,457 plus accrued interest to December 4, 1997. Upon
redemption of the Series 1995-A Note, the underlying automobile receivables
were pledged under the terms of the Warehouse Line of Credit. At December 31,
1997, the 1995-A Note did not have an outstanding principal balance.
On September 15, 1995, MF I issued the Series 1995-B Term Notes ("Series
1995-B Notes") in the amount of $35,552,602. The Series 1995-B Notes accrued
interest at a fixed note rate of 6.45% per annum.
On December 12, 1997, the Company redeemed the outstanding principal
balance of its Series 1995-B Notes. The bonds were redeemed at their
principal amount of $5,822,934 plus accrued interest to December 12, 1997.
Upon redemption of the Series 1995-B Notes, the underlying automobile
receivables were pledged under the terms of the Warehouse Line of Credit.
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.
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 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 1997-1A
and Promissory Note noteholders and other general disbursements are paid to MF
I and MF II on a monthly basis.
As of December 31, 1997, the Series 1997-1A Notes and the Promissory Note
had a note balance of $32,421,076 and $1,135,232, respectively. The underlying
receivables backing the 1997-1A notes had a balance of $37,323,549 as of
December 31,1997.
TOTAL DEBT MATURITIES
- -----------------------
Estimated aggregate debt maturities for the years ending December 31,
1998 through 2002 are as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
1998. . . . 1999 2000 2001 2002
- ----------- ----------- ---------- ---------- -----
$18,758,578 $10,851,303 $8,664,759 $5,000,000 $ 0
<FN>
</TABLE>
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 stock
retains three votes while each share of Class A stock retains one vote per
share.
STOCK OPTION PLANS
- --------------------
The Company has reserved 1,775,000 of its authorized but unissued Class A
Common Stock for a stock option plan (the "Plan") pursuant to which officers,
directors and employees of the Company are eligible to receive incentive
and/or non-qualified stock options. The Plan, which expires on June 30, 2002,
is administered by a committee designated by the Board of Directors.
Incentive stock options granted under the Plan are exercisable for a period of
up to 10 years from the date of grant and at an exercisable price which is not
less than the fair market value of the Class A Common Stock on the date of
grant, except that the term of an incentive stock option granted under the
Plan to a stockholder owning more than 10% of the outstanding Class A Common
Stock of the Company must not exceed five years and the exercise price of an
incentive stock option granted to such a stockholder must not be less than
110% of the fair market value of the Class A Common Stock on the date of the
grant. The Plan also provides for issuance of stock appreciation rights. At
December 31, 1997 and 1996, the Company has granted options to acquire a total
of 1,402,500 and 840,300 shares, respectively, of the Company's Class A Common
Stock. These options are exercisable for a period of up to 10 years from the
date of grant and have exercise prices from $0.53 to $6.63 a share, which
represents bid prices of the Company's Common Stock at the date of grant.
Through December 31, 1997, 5,100 of these options have been exercised.
<TABLE>
<CAPTION>
<S> <C> <C>
OPTION PRICE
PER SHARE OPTIONS
------------- ----------
Outstanding December 31, 1995 . . . . . $2.13 - $6.63 666,200
Granted . . . . . . . . . . . . . . . . $ 1.88 272,500
Canceled. . . . . . . . . . . . . . . . $2.50 - $6.63 (98,400)
Exercised . . . . . . . . . . . . . . . - -
------------- ----------
Outstanding December 31, 1996 . . . . . $1.88 - $6.63 840,300
Granted . . . . . . . . . . . . . . . . $0.53 - $2.44 691,700
Canceled. . . . . . . . . . . . . . . . $1.88 - $6.63 (124,400)
Exercised . . . . . . . . . . . . . . . $0.53 - $1.88 (5,100)
------------- ----------
Outstanding December 31, 1997 . . . . . $ 0.53-$6.63 1,402,500
==========
Weighted Average Option Price Per Share $ 1.71
==========
<FN>
</TABLE>
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
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.
Had compensation cost for the Company's stock option plan been determined
based on the fair value at the grant date for awards in 1997 consistent with
the provisions of FAS 123, the Company's 1997 net loss and basic and
dilutitive loss per common share would have been increased to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
<S> <C>
Net (loss) - as reported. . . . . . . ($9,355,000)
Net (loss) - pro forma. . . . . . . . ($9,604,329)
(Loss) per common share - as reported ($1.18)
(Loss) per common share - pro forma . ($1.21)
<FN>
</TABLE>
Of the 691,700 options granted in 1997, 327,396 options were vested as of
December 31, 1997.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted
average assumptions used for grants in 1997: dividend yield of 0.0%; expected
average annual volatility of 156.6%; average annual risk-free interest rate of
5.6%; and expected lives of 10 years.
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.
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.
OTHER
- -----
On or about December 4, 1997, Consumer Finance Holdings, Inc. ("CFH") and
Morris Ginsburg, the Company's President, Sandler Family Partners, Ltd., and
Irwin L. Sandler, the Company's Executive Vice President, (collectively the
"Shareholders") entered into an Option Agreement effective as of that date.
CFH is a wholly-owned subsidiary of Pacific USA Holdings Corp. ("Pacific
USA"). Pursuant to the Option Agreement, the Shareholders granted a three-year
option to CFH (the "Call Option") to purchase all, but not less than all, of
the 830,000 shares of Class B Common Stock owned by the Shareholders (the
"Option Shares") at a purchase price of $4.00 per share. Concurrently, CFH
granted to each Shareholder a three-year option (the "Put Option") to sell
that portion of the Option Shares held by each Shareholder at a price of $4.00
per share. The Put Option is exercisable with respect to 50% of the Option
Shares during the 30-day period following the second anniversary of the
effective date and 50% during the 30-day period following the third
anniversary of the effective date. The Call Option and Put Option both expire
on the third anniversary date of the effective date, or on December 4, 2000.
In the event that CFH or any of its affiliates exercises the Call Option, and
within 180 days after closing thereof, sells or agrees to sell any portion of
the Option Shares to a person who is not an affiliate of CFH for a price
greater than $4.00 per share, the seller shall be obligated to pay the
Shareholders 50% of such excess. The Shareholders agreed not to pledge, sell
or otherwise transfer the Option Shares at any time during the term of the
Call Option except to the extent of exercise of the Put Option. The obligation
of CFH under the Put Option is secured by funds in a segregated bank account.
Pursuant to the Option Agreement, each Shareholder granted CFH the right
to vote all Option Shares and to direct the exercise of all consensual or
other voting rights with respect to any additional shares of the Company's
capital stock as to which any Shareholder holds a proxy granted by a third
party, subject to any fiduciary duty owed to the grantor of any such proxy.
The Shareholders retain all other incidents of ownership with respect to the
Option Shares, including, but not limited to, the right to receive dividends.
The Option Agreement further provides that CFH shall vote or cause to be
voted shares of the Company's capital stock, including the Option Shares, to
maintain Messrs. Ginsburg and Sandler as directors of the Company. The
Shareholders agree to use their best efforts to provide CFH with the right to
designate four directors to the Company's board or such larger number as shall
then be sufficient to provide CFH with effective control of the board. As of
the date hereof, the board consists of four members.
Pacific USA is the record owner of 1,500,000 shares of Class A Common
Stock. As a result of the Option Agreement, it was granted the power to vote
the 830,000 shares of Class B Common Stock owned by the Shareholders and a
limited power to direct the voting of shares subject to proxies held by the
Shareholders. As of December 31, 1997, 7,203,479 shares of Class A Common
Stock are issued and outstanding and 1,273,715 shares of Class B Common Stock
are issued and outstanding. The Class A Common Stock has one vote per share
while the Class B Common Stock has three votes per share. The Class A and
Class B Common Stock vote together as one class. Accordingly, Pacific USA may
be deemed to be the beneficial owner of approximately 32.7% of the Class A and
Class B Common Stock and controls approximately 48.3% of the total voting
power. Upon exercise of either the Put Option or the Call Option, the Class B
Common Stock purchased by CFH will automatically convert into Class A Common
Stock thereby reducing the voting power of Pacific USA.
On or about May 14, 1993, the Company, Sandler Family Partners, and
Messrs. Ginsburg and Sandler entered into a Buy-Sell Agreement giving the
Company the right to buy all shares of its capital stock owned by Mr. Ginsburg
upon his death and all shares of its capital stock beneficially owned by Mr.
Sandler upon his death. In addition, the Company had a right of first refusal
to purchase any such stock desired to be sold by Mr. Ginsburg or Sandler
Family Partners. This right of first refusal was exercisable by either the
Issuer or the non-selling Shareholder. The parties to the Buy-Sell Agreement
have agreed that the purchase rights and obligations under the Option
Agreement shall supersede the purchase and right of first refusal provisions
contained in the Buy-Sell Agreement during the term of the Option Agreement.
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.
<TABLE>
<CAPTION>
The provision for income taxes is summarized as follows:
FOR THE YEARS ENDED
DECEMBER 31,
--------------------
1997 1996
-------------------- ------------
<S> <C> <C>
Current expense (benefit)
Federal. . . . . . . . . . $ - $ (350,000)
State. . . . . . . . . . . - -
-------------------- ------------
$ - $ (350,000)
--------------------
Deferred expense (benefit)
Federal. . . . . . . . . . $ - $(1,164,007)
State. . . . . . . . . . . - (166,080)
-------------------- ------------
$ - $(1,330,087)
-------------------- ------------
TOTAL. . . . . . . . . . . $ - $(1,680,087)
==================== ============
<FN>
</TABLE>
<TABLE>
<CAPTION>
The following is a reconciliation of income taxes at the Federal Statutory rate with income
taxes recorded by the Company.
FOR THE YEARS ENDED
DECEMBER 31,
---------------------------
<S> <C> <C>
1997 1996
------------ ------------
Computed income taxes (benefit) at statutory rate - 34%. . . . . $ (3,180,700) $(3,184,356)
State income taxes (benefit), net of Federal income tax benefit. (318,070) (333,114)
Change in valuation allowance. . . . . . . . . . . . . . . . . . 3,498,770 1,837,383
------------- ------------
$ - $(1,680,087)
============= ============
<FN>
</TABLE>
Deferred taxes are recorded based upon differences between the financial
statements and tax basis of assets and liabilities and available tax credit
carryforwards. Temporary differences and carryforwards which give rise to a
significant portion of deferred tax assets and liabilities were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
<S> <C> <C>
1997 1996
-------------- ------------
Deferred tax assets:
- ---------------------------------------
Federal and State NOL tax carry-forward $ 8,460,033 $ 5,143,530
Other . . . . . . . . . . . . . . . . . 45,931 48,296
-------------- ------------
8,505,964 5,191,826
Valuation allowance . . . . . . . . (5,336,154) (1,837,383)
-------------- ------------
Total deferred tax assets . . . . . . . 3,169,810 3,354,443
-------------- ------------
Deferred tax liabilities:
- ---------------------------------------
Depreciation. . . . . . . . . . . . . . (68,057) (90,768)
Allowances and loan origination fees. . (1,521,974) (1,682,024)
-------------- ------------
Total deferred tax liability. . . . . . (1,590,031) (1,772,792)
-------------- ------------
Net deferred tax asset. . . . . . . . . $ 1,579,779 $ 1,581,651
============== ============
<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 December 31, 1997, the Company had a net operating loss
carryforward of approximately $22.1 million for federal 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.
The increase of approximately $3.5 million in the valuation allowance in
1997 was primarily due to a $3.3 million increase in net operating loss tax
carryforward and a $0.1 million decrease in deferred tax liabilities related
to Allowances and Loan Origination Fees.
NOTE 7 - DISCONTINUED OPERATIONS
- ------------------------------------
In February 1996, the Company announced that it intended to discontinue
its CarMart retail used car sales and associated financing operations. In
April 1996, the Company extended the expected disposal date of the CarMart
business from April 30, 1996 to May 31, 1996.
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.
The loss on the disposition of the CarMart business has been accounted
for as discontinued operations. In March 1996, and June 1996, the Company
recorded additional pretax charges of $150,000 and $355,000 ($93,900 and
$207,551 after tax), respectively, related to the 1996 loss from operations of
CarMart.
NOTE 8- DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
- --------------------------------------------------------------------
CASH AND CASH EQUIVALENTS. RESTRICTED CASH AND ACCRUED INTEREST PAYABLE
- ------------------------------------------------------------------------------
The carrying value approximates fair value due to its liquid or
short-term nature.
AUTOMOBILE RECEIVABLES - NET
- -------------------------------
The interest rates and credit ratings of the net Automobile Receivables
outstanding at December 31, 1997 are consistent with the interest rates and
credit ratings on current purchases by the Company of Contracts with the same
maturities and collateral; as such, the carrying value of the net Automobile
Recievables outstanding at December 31, 1997 approximates fair value at that
date.
PROMISSORY NOTE PAYABLE, CONVERTIBLE SUBORDINATED DEBT, SENIOR SUBORDINATED
- ------------------------------------------------------------------------------
DEBT, CONVERTIBLE SENIOR SUBORDINATED DEBT AND AUTOMOBILE RECEIVABLES-BACKED
- ------------------------------------------------------------------------------
NOTES
- -----
Rates currently available to the Company for debt with similar terms and
maturities are used to estimate the fair value of existing debt.
The estimated fair value of the Company's financial instruments at
December 31, 1997 were as follows:
<TABLE>
<CAPTION>
December 31, 1997
-------------------
<S> <C> <C>
CARRYING AMOUNT FAIR VALUE
----------------- ------------
Financial Assets:
- ----------------------------------------------
Cash and Cash Equivalents and Restricted Cash. $ 8,837,574 $ 8,837,574
Automobile Receivables . . . . . . . . . . . . 81,174,930 81,174,930
Less: Allowance for Credit Losses. . . . . . . (6,850,499) (6,850,499)
----------------- ------------
Total . . . . . . . . . . . . . . . . . . $ 83,162,005 $83,162,005
================= ============
Financial Liabilities:
- ----------------------------------------------
Accrued Interest Payable (included in
Accrued expenses and other liablities). . . $ 462,265 $ 462,265
Promissory Note Payable. . . . . . . . . . . . 1,135,232 1,135,232
Convertible Subordinated Debt. . . . . . . . . 1,385,000 1,385,000
Senior Subordinated Debt . . . . . . . . . . . 3,333,332 3,333,332
Convertible Senior Subordinated Debt . . . . . 5,000,000 5,000,000
Automobile Receivables-backed Notes. . . . . . 32,421,076 32,421,076
----------------- ------------
Total . . . . . . . . . . . . . . . . . . $ 43,736,905 $43,736,905
================= ============
<FN>
</TABLE>
NOTE 9 - SUBSEQUENT EVENTS
- ------------------------------
In connection with its portfolio acquisition strategy, the Company
entered into an Amended and Restated Asset Purchase Agreement dated as of
January 8, 1998 (the "Asset Purchase Agreement"), with Pacific USA Holdings
Corp. ("Pacific USA") and certain of its wholly-owned or partially-owned
subsidiaries - Pacific Southwest Bank ("PSB"), NAFCO Holding Company LLC
("NAFCO"), Advantage Funding Group, Inc. ("Advantage") and PCF Service, LLC -
providing for, among other things, the purchase by the Company of sub-prime
automobile loans from NAFCO and Advantage having an unpaid principal balance
of approximately $81,115,233 for a purchase price of $77,870,623 of which
$73,003,709 was paid in cash. Financing was provided by Daiwa Finance
Corporation. The Company also agreed to issue Daiwa warrants for the purchase
of 250,000 shares of Class A Common Stock. The balance of the purchase price
of $4,866,914 was paid through the issuance of 2,433,457 shares of the
Company's 8% Cumulative Convertible Preferred Stock, Series 1998-1 (the
"Preferred Stock") valued at $2.00 per share. Each share of Preferred Stock
will be convertible at any time into one-half share of Class A Common Stock,
or an aggregate of up to 1,216,728 shares of Class A Common Stock. Thus, the
effective cost to Pacific USA of the Class A Common Stock issuable upon
conversion of the Preferred Stock will be $4.00 per share.
As required by the Asset Purchase Agreement, PSB entered into a Loan Loss
Reimbursement Agreement whereby it agreed to reimburse the Company for up to
15% of any losses incurred by the Company in connection with the loans
acquired from NAFCO and Advantage. In consideration therefor, the Company
issued 811,152 shares of Class A Common Stock. The Company allocated
$1,622,304 to the cost of the purchased loans, which represents the value
assigned to the common shares.
Also, the Company may be obligated to make additional payments to NAFCO
based on the performance of certain potential relationships with loan
originators previously associated with NAFCO. If there are any pre-tax
earnings associated with these operations for calendar years 1998 and 1999,
the Company is obligated to pay NAFCO shares of the Company's Class A Common
Stock valued at the average daily closing price of such stock on the NASDAQ
Stock Market for the last ten days of such calendar year. The number of shares
of Class A Common Stock, if any, which the Company may be required to issue to
NAFCO pursuant to these agreements cannot be determined at present.
The Company filed the required documents under the Hart-Scott-Rodino Act
("HSR Act") on January 15, 1998, and received the necessary approvals under
the HSR Act on or about February 10, 1998.
Pacific USA was the record owner of 1,500,000 shares of Class A Common
Stock as of December 31, 1997. As a result of the Option Agreement, it was
granted the power to vote the 830,000 shares of Class B Common Stock
beneficially owned by the Messrs. Ginsburg and Sandler (President and
Executive Vice President, respectively, of the Company) ("the Shareholders")
and a limited power to direct the voting of shares subject to proxies held by
the Shareholders. Also, under the terms of the Asset Purchase Agreement dated
January 8, 1998, Pacific USA was issued 811,152 shares of the Company's Class
A Common Stock. As of the date of this report, 8,014,631 shares of Class A
Common Stock are issued and outstanding and 1,273,715 shares of Class B Common
Stock are issued and outstanding. The Class A Common Stock has one vote per
share while the Class B Common Stock has three votes per share. The Class A
and Class B Common Stock vote together as one class. Accordingly, Pacific USA
may be deemed to be the beneficial owner of approximately 38.6% of the Class A
and Class B Common Stock and controls approximately 51.8% of the total voting
power. Pacific USA has an option expiring in December 2000 to purchase 830,000
shares of Class B Common Stock, owned by the Shareholders, while the
Shareholders have an option, also expiring in December 2000, to require that
Pacific USA purchase all of such shares. Upon exercise of either the put
option or the call option, the Class B Common Stock purchased by CFH will
automatically convert into Class A Common Stock thereby reducing the voting
power of Pacific USA.
On a pro forma basis, Stockholders' Equity increased to approximately
$15.0 million as a result of the Asset Purchase Agreement dated January 8,
1998.
57
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------------------------------------------------------------------------------
FINANCIAL DISCLOSURE.
- ----------------------
NONE
PART III
Part III, including the following items, is incorporated by reference to
the Company's Proxy Statement which will be filed with the Securities and
Exchange Commission and mailed to shareholders on or before April 30, 1998:
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS,
- ------------------------------------------------------------------------------
COMPLIANCE WITH THE SECTION 16(A) OF THE EXCHANGE ACT.
- --------------------------------------------------------------
ITEM 10. EXECUTIVE COMPENSATION.
- -----------------------------------
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
- ------------------------------------------------------------------------------
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- --------------------------------------------------------------
PART IV
ITEM 13.EXHIBITS AND REPORTS ON FORM 8-K
- ----------------------------------------------
(a) The following documents are filed as part of this Report:
1 Financial Statements PAGE OF THIS
-------------------- REPORT
------
Independent Auditors' Report 30
Consolidated Balance Sheets December 31, 1997 and 1996 31
Consolidated Statements of Operations For the Years Ended December 31,
1997 and 1996 32
Consolidated Statements of Stockholders' Equity For The Years Ended
December 31, 1997 and 1996 33
Consolidated Statements of Cash Flows For The Years Ended December 31,
1997 and 1996 34
Notes to Consolidated Financial Statements 35-57
58
<PAGE>
2.FINANCIAL STATEMENT SCHEDULES:
- ----------------------------------
All other statements or schedules for which provision is made in the
applicable regulation of the Securities and Exchange Commission have been
omitted because they are not required under related instructions or are
inapplicable, or the information is shown in the financial statements and
related notes.
3.(a) Exhibits
3.1 Articles of Incorporation, dated August 12, 1986, and Articles of
amendment, dated July 2, 1990 and August 31, 1990 (1)
3.2 Bylaws (1)
3.3 Articles of Amendment to the Articles of Incorporation increasing the
number of authorized shares of Class A Common Stock and Preferred
Stock (19)
4.4 Form of Mergers and Acquisitions Agreement with the Underwriter (1)
4.5 Preferences, Limitations and Relative Rights of 8% Cumulative
Convertible Preferred Stock, Series 1998-1 (19)
10.1 Employment Agreement between the Registrant and Morris Ginsburg dated
July 9, 1990 (1)
10.2 Employment Agreement between the Registrant and Irwin L. Sandler
dated July 9,1990 (1)
10.3 Lease with BCE Development Properties, Inc., dated December 23, 1988
(1)
10.4 Key-man Insurance Policies on the lives of Messrs.Ginsburg and
Sandler (1)
10.5 Form of Purchase Agreement (re: Dealers) (1)
10.6 Agreement - Guaranty Bank and Trust Company (1)
10.7 Agreement - Central Bank of Denver (1)
10.8 Agreement - First National Bank of Southeast Denver (1)
10.9 Agreement - Arapahoe Bank and Trust (1)
10.9 (A) First Amendment to Arapahoe Bank/Monaco Finance Agreement dated
February 22, 1991 with Assignment of Savings Account and
Security Agreement (2)
10.10 Agreement - Southwest State Bank (1)
10.11 Agreement - Lakeside National Bank (2)
10.12 Agreement - Western Funding, Inc. (2)
10.13 Form of Agreement - First Eagle (2)
10.14 Form of Financing Agreement (re: Floorplan Financing) (1)
10.15 Stock Option Plan (1)
10.16 Single Interest Blanket Insurance Policy (1)
10.17 Lease with Richard A. Boddicker dated September 4, 1990, as amended,
re: South Havana Lot (1)
10.18 Financing Agreement, Promissory Note and Security Agreement (re:
wholesale floorplan financing) (1)
10.19 Lease re: Colorado Springs Lot (3)
10.21 Lease re: West Colfax Lot (3)
10.22 Financing Agreement with Citicorp Leasing, Inc., including three
Amendments (4)
10.23 7% Subordinated Note Agreement (4)
10.24 Consent of Independent Certified Public Accountants (9)
10.25 Sixth Amendment to Financing Agreement with Citicorp Leasing, Inc.
dated June 1, 1994 (5)
10.26 Lease Agreement between the Registrant and GSC Ltd. Liability
Company, a related party owned company(5)
10.27 Note Purchase Agreement for Senior Subordinated Notes to Rothschild
North America, Inc.(6)
10.28 Seventh Amendment to Financing Agreement with Citicorp Leasing, Inc.
dated July 26, 1994
10.29 Eighth Amendment to Financing Agreement with Citicorp Leasing, Inc.
dated September 7, 1994 (7)
10.30 Ninth Amendment to Financing Agreement with Citicorp Leasing, Inc.
dated November 2, 1994 (7)
10.31 Indenture Agreement related to private placement of $23,861,823 of
7.6% automobile receivables-backed notes (8)
10.32 Form of Term Note issued by MF Receivables Corp. I related to
private placement of $23,861,823 of 7.6% automobile
receivables-backed notes (8)
10.33 Tenth Amendment to Financing Agreement with Citicorp Leasing, Inc.
dated November 16, 1994 (10)
10.34 Amended and restated Lease re: Executive Offices at 370 17th Street,
50th floor, Denver, Colorado 80202 with Brookfield Republic,
Inc. (10)
10.35 Amended and Restated Indenture Agreement dated as of May 1, 1995
related to private placement of $40 million aggregate principal
amount of floating rate automobile receivable-backed warehouse
notes (11)
10.36 Form of Warehouse Note issued by MF Receivables Corp I related to
private placement of $40 million aggregate principal amount of
floating rate automobile receivable-backed warehouse note (11)
10.37 MBIA Forward Commitment to Issue related to private placement of $40
million aggregate principal amount of floating rate
automobile receivables-backed warehouse notes (11)
10.38 Purchase Agreement dated January 9, 1996 by and among Monaco
Finance, Inc. and Black Diamond Advisors, Inc. and other
purchasers relating to $5,000,000 in 12% Convertible Senior
Subordinated Notes due 2001 (12)
3.(a) Exhibits (continued)
10.39 Indenture dated as of January 9, 1996, between Monaco Finance, Inc.
and Norwest Bank of Minnesota, N.A., realting to 12 %
Convertable Senior Subordinated Notes due 2001 (12)
10.40 Loan and Security Agreement dated as of January 16, 1996, between
Registrant and LaSalle National Bank (12)
10.41 Revolving Credit Note in the principal amount of $15 million or so
much thereof as may be advanced, dated January 16, 1996, payable
to the order of LaSalle National Bank by Registrant (12)
10.42 Letter Agreement dated June 28, 1996, by and between the Registrant
and Black Diamond Advisors, Inc. (13)
10.43 Letter Agreement dated July 3, 1996, by and between the Registrant
and David M. Ickovic regarding director compensation (13)
10.44 Securities Purchase Agreement between the Registrant and Pacific USA
Holdings Corp. (14)
10.45 Stock Purchase Warrant in favor of Pacific USA Holdings Corp. (14)
10.46 Shareholder option Agreement among Pacific USA Holdings Corp. and
Morris Ginsburg, Irwin Sandler and Sandler Family Partners,
Ltd. (14)
10.47 Executive Employment Agreement between the Registrant and Morris
Ginsburg related to the Securities Purchase Agreement with
Pacific USA Holdings Corp. (14)
10.48 Executive Employment Agreement between the Registrant and Irwin
Sandler related to the Securities Purchase Agreement with
Pacific USA Holdings Corp. (14)
10.49 Loan Agreement between Pacific USA Holdings Corp. and the Registrant
(14)
10.50 Press Release of the Registrant related to the Securities Purchase
Agreement with Pacific USA Holdings Corp.(14)
10.51 Termination Agreement dated as of February 6, 1997, between the
Registrant and Pacific USA Holdings Corp. (15)
10.52 Press Release of the Registrant regarding the termination of the
Securities Purchase Agreement between the Registrant and Pacific
USA Holdings Corp. (15)
10.53 Trust and Security Agreement related to the placement of $42,646,534
and $2,569,068 aggregate principal amount of automobile
recievables-backed Class A Certificates and Class B
Certificates, respectively (16)
10.54 Form of Class A Certificate issued by MF Receivables Corp. II
related to the private placement of $42,646,534 of 6.71%
automobile receivables-backed notes (16)
10.55 Form of Class B Certificate issued by MF Receivables Corp. II
related to the placement of $2,569,068 of automobile receivables-
backed notes (16)
10.56 Loan Agreement dated June 26, 1997, between Monaco Funding Corp. and
Heartland Bank relating to the $2,525,000 Promissory Note (16)
10.57 Option Agreement effective as of December 4, 1997, by and between
Consumer Finance Holdings, Inc. and Morris Ginsburg, Sandler Family
Partners, Ltd., and Irwin L. Sandler (17)
10.58 Irrevocable Proxy and Power of Attorney dated December 4, 1997,
granted by Morris Ginsburg (17)
10.59 Irrevocable Proxy and Power of Attorney dated December 4, 1997,
granted by Sandler Family Partners, Ltd. (17)
10.60 Executive Employment Agreement between Registrant and Morris
Ginsburg (17)
10.61 Executive Employment Agreement between Registrant and Irwin L.
Sandler (17)
10.62 First Amendment to Buy-Sell Agreement (17)
10.63 Amended and Restated Asset Purchase Agreement dated January 8, 1998,
by and among the Company, Pacific USA Holdings Corp., and
certain of its wholly-owned or partially-owned subsidiaries (18)
10.64 Loan Purchase Agreement dated January 8, 1998 among Advantage
Funding Group, Inc., a Delaware corporation, the Company, Pacific
USA Holdings Corp., a Texas corporation, and Pacific Southwest Bank,
a federal savings bank (18)
10.65 Loan Loss Reimbursement Agreement dated January 8, 1998. between, on
the one hand, Pacific Southwest Bank, a federally chartered
savings bank, NAFCO Holding Company, LLC, a Delaware limited
liability company, and Advantage Funding Group, Inc., a Delaware
corporation, and, on the other hand, the Company (18)
10.66 Loan Purchase Agreement dated January 8, 1998 among NAFCO Holding
Company, L.L.C., a Delaware limited liability company, the
Company, Pacific USA Holdings Corp., a Texas corporation, and
Pacific Southwest Bank, a federal savings bank (18)
10.67 Interim Servicing Agreement dated as of January 8, 1998, between, on
the one hand, the Company and, on the other hand, Advantage
Funding Group, Inc., a Delaware corporation, Pacific USA Holdings
Corp., a Texas corporation, and Pacific Southwest Bank, a
federally chartered savings bank (18)
10.68 Interim Servicing Agreement dated as of January 8, 1998, between, on
the one hand, the Company and, on the other hand, NAFCO Holding
Company, LLC, a Delaware limited liability company, Pacific
USA Holdings Corp., a Texas corporation, and Pacific Southwest
Bank, a federally chartered savings bank (18)
11 Statement Re: Computation of Earnings Per Share - PAGE 63
23 Consent of Independent Certified Accountants - PAGE 64
99 Cautionary Statement Regarding Forward-looking statements- PAGES 65-75
Footnotes:
(1) Incorporated by reference to the Registrant's Registration Statement on
Form S-1 and all Amendments thereto, as filed with the Securities and Exchange
Commission, Registration No. 33-35843, and which was declared effective on
December 11, 1990.
(2) Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1990.
(3) Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1991.
(4) Incorporated by reference to the Registrant's Annual Report on Form
10-KSB for the year ended December 31, 1992.
(5) Incorporated by reference to the Registrant's Quarterly Report on Form
10-QSB for the quarter ended June 30, 1994.
(6) Incorporated by reference to the Registrant's Form 8-K dated November 3,
1994.
(7) Incorporated by reference to the Registrant's Quarterly Report on Form
10-QSB for the quarter ended September 30, 1994.
(8) Incorporated by reference to the Registrant's Form 8-K dated November 18,
1994.
(9) Incorporated by reference to the Registrant's Annual Report on Form
10-KSB for the year ended December 31, 1993.
(10) Incorporated by reference to the Registrant's Annual Report on Form
10-KSB for the year ended December 31, 1994.
(11) Incorporated by reference to the Registrant's Form 8-K dated May 18,
1995.
(12) Incorporated by reference to the Registrant's Form 8-K dated January 9,
1996.
(13) Incorporated by reference to the Registrant's Form 8-K dated June 28,
1996.
(14) Incorporated by reference to the Registrant's Form 8-K dated October 29,
1996.
(15) Incorporated by reference to the Registrant's Form 8-K dated February 7,
1997.
(16) Incorporated by reference to the Registrant's Form 10-QSB for the quarter
ended June 30, 1997.
(17) Incorporated by reference to the Registrant's Form 8-K dated December 4,
1997.
(18) Incorporated by reference to the Registrant's Form 8-K dated January 8,
1998.
(19) Incorporated by reference to the Registrant's Form 8-K dated March 4,
1998.
3.(b) Reports on Form 8-K:
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.
A Form 8-K dated December 4, 1997, was filed announcing a change in control of
the Registrant.
A Form 8-K dated January 8, 1998, was filed announcing that the
Registrant had entered into an Amended and Restated Asset Purchase Agreement
with Pacific USA Holdings Corp., and certain of its wholly-owned and
partially-owned subsidiaries, providing for, among other things, the purchase
by the Registrant of $81.1 million of sub-prime auto loans.
A Form 8-K dated March 4, 1998 was filed announcing the voting results
from the special meeting of shareholders held on March 4, 1998.
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT 11
MONACO FINANCE, INC. AND SUBSIDIARIES
-------------------------------------
COMPUTATION OF EARNINGS (LOSS) PER COMMON SHARE
-----------------------------------------------
YEAR ENDED DECEMBER 31,
<S> <C> <C>
1997 1996
------------ ------------
EARNINGS (LOSS) PER COMMON SHARE - BASIC AND ASSUMING DILUTION
NET EARNINGS (LOSS)
- --------------------------------------------------------------------
(Loss) from continuing operations. . . . . . . . . . . . . . . . . . ($9,355,000) ($2,471,424)
(Loss) on disposal of discontinued business. . . . . . . . . . . . . - (301,451)
Cumulative effect of a change in accounting principle. . . . . . . . - (4,912,790)
------------ ------------
Net (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ($9,355,000) ($7,685,665)
============ ============
AVERAGE COMMON SHARES OUTSTANDING
- --------------------------------------------------------------------
Weighted average common shares outstanding - basic . . . . . . . . . 7,912,732 6,965,485
Shares issuable from assumed exercise of stock options (a) . . . . . (b) (b)
Shares issuable from assumed exercise of stock warrants (a). . . . . (b) (b)
Shares issuable from assumed conversion of 7% subordinated debt. . . (b) (b)
Shares issuable from assumed conversion of senior subordianted note. (b) (b)
------------ ------------
Weighted average common shares outstanding - assuming dilution . . . 7,912,732 6,965,485
============ ============
EARNINGS (LOSS) PER COMMON SHARE - BASIC AND ASSUMING DILUTION
- --------------------------------------------------------------------
(Loss) from continuing operations. . . . . . . . . . . . . . . . . . ($1.18) ($0.35)
(Loss) on disposal of discontinued business. . . . . . . . . . . . . - (0.04)
Cumulative effect of a change in accounting principle. . . . . . . . - (0.71)
------------ ------------
(Loss) per common share - basic and assuming dilution. . . . . . . . ($1.18) ($1.10)
============ ============
<FN>
Notes:
------
(a) Dilutive potential common shares are calculated using the treasury stock method.
(b) The computation of earnings per common share assuming dilution excludes dilutive
potential common shares that have an anti-dilutive effect on earnings per share.
</TABLE>
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors
Monaco Finance, Inc.
370 17th, Suite 5060
Denver, Colorado 80202
We hereby consent to the incorporation by reference of our reports on Monaco
Finance, Inc. (the "Company") dated March 30, 1998, into the Company's
Registration Statement on Form S-3 (File No. 33-97976) and on Form S-8 (File
NO. 33-68530), and to all references to our firm in such Registration
Statements.
/s/ Ehrhardt Keefe Steiner & Hottman PC
-------------------------------------------
Ehrhardt Keefe Steiner & Hottman PC
March 31, 1998
Denver, Colorado
<PAGE>
EXHIBIT 99
CAUTIONARY STATEMENT REGARDING
------------------------------
FORWARD-LOOKING STATEMENTS
--------------------------
The Company wishes to take advantage of the new "safe harbor" provisions
of the Private Securities Litigation Reform Act of 1995 and is filing this
cautionary statement in connection with such safe harbor legislation. The
Company's Form 10-KSB, any Form 10-QSB, any Form 8-K, or any other written or
oral statements made by or on behalf of the Company may include
forward-looking statements which reflect the Company's current views with
respect to future events and financial performance. The words "believe,"
"expect," "anticipate," "intends," "forecast," "project," and similar
expressions identify forward-looking statements.
The Company wishes to caution investors that any forward-looking
statements made by or on behalf of the Company are subject to uncertainties
and other factors that could cause actual results to differ materially from
such statements. These uncertainties and other factors include, but are not
limited to, the Risk Factors listed below (many of which have been discussed
in prior SEC filings by the Company). Though the Company has attempted to list
comprehensively these important factors, the Company wishes to caution
investors that other factors may in the future prove to be important in
affecting the Company's results of operations. New factors emerge from time to
time and it is not possible for management to predict all of such factors, nor
can it assess the impact of each such factor on the business or the extent to
which any factor, or combination of factors, may cause actual results to
differ materially from forward-looking statements.
Investors are further cautioned not to place undue reliance on such
forward-looking statements as they speak only of the Company's views as of the
date the statement was made. The Company undertakes no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events, or otherwise.
RISK FACTORS
------------
DEPENDENCE UPON ADDITIONAL CAPITAL TO EXPAND OPERATIONS. The Company's
business has been and will continue to be cash intensive. Capital is required
primarily to purchase Contracts from the Dealer Network and to purchase
portfolios of previously originated sub-prime auto loans. Further expansion of
the Company's business and the Company's longer-term liquidity requirements
may require additional debt or equity financing. There can be no assurance
that such additional financing will be available to the Company, or if
available, on terms satisfactory to the Company. The net proceeds from any
debt or equity financing may be used for working capital and general corporate
purposes, including repayment of current debt, origination and purchase of
additional Contracts and, if required, the hiring of additional personnel to
support expanded operations.
RELIANCE ON DEBT FINANCING. Since inception, in addition to shareholders'
equity, the Company has financed its capital requirements using debt from a
variety of sources including commercial banks and other institutional
investors. One of the Company's principal sources of such capital as of
December 31, 1997, consists of a $75 million warehouse line of credit with
Daiwa Finance Corporation which expires on December 3, 1999. The Company has
an additional facility with Daiwa Finance Corporation to finance the purchase
of up to $83 million of loans purchased from Pacific USA Holdings Corp.
("Pacific USA") and certain of its wholly owned subsidiaries. This warehouse
line of credit, which expires January 4, 1999, was drawn down $73.9 million on
January 7, 1998, as a result of the acquisition of $81.1 million of loans from
Pacific USA. The warehouse lines of credit are secured by Contracts and all
proceeds received from those Contracts. A third line of credit with LaSalle
National expired on March 23, 1998. The Company's Floating Rate Auto
Receivables-Backed Note, issued in May 1995, under which the Company has the
ability to borrow up to an aggregate of $150 million will expire on May 16,
1998. The ability of the Company to receive additional advances on its
warehouse lines of credit and to secure new financing sources is dependent
upon compliance with loan covenants and other factors. Failure to meet any
loan covenant requirements may have a material adverse effect on the ability
of the Company to obtain new sources of financing and expand its operations.
SUBSTANTIAL LOSSES AND EFFECT OF DISCONTINUANCE OF CAR MART OPERATIONS.
During the fiscal years ended December 31, 1995, 1996, and 1997, the Company
sustained losses of $1,341,095, $7,685,665, and $9,355,000, respectively. Of
this amount, approximately $1,878,498 and $301,451 in 1995 and 1996,
respectively, was in connection with discontinued operations relating to the
Car Mart retail used car lots. For the same periods, income (loss) from
continuing operations was $537,403 and $(2,471,424), respectively. The Car
Mart retail used vehicle operations were closed effective May 31, 1996. In
1995, the Car Mart operations generated approximately 23% of the Contracts
financed by the Company. However, competition in the retail used car market
resulted in reduced sale prices and, accordingly, lower margins on used car
sales. In addition, the default rate with respect to certain Car Mart
Contracts was higher than the default rate with respect to Contracts purchased
from the Dealer Network.
Management determined that the Company's best interests would be served
by concentrating on its core business of acquiring and servicing sub-prime
Contracts purchased from its Dealer Network and from portfolio purchases.
Operating expenses were approximately 12% of average gross receivables for
fiscal 1995 and increased to approximately 17% of average gross receivables
for fiscal 1996. For fiscal 1997, operating expenses were approximately 16% of
average gross receivables. During 1995, the Company expanded its staff and
other services to support increased Contract acquisitions and to service its
growing Contract portfolio. However, factors, including, but not limited to,
termination of the Car Mart operations reduced the volume of Contracts
acquired by the Company in late 1996 and the entire year of 1997.
In the latter part of 1996, and for the entire year of 1997, the
Company's policy of acquiring loans through its Dealer Network, which meet its
credit criteria and provide acceptable risk adjusted yields based upon the
Company's scoring and risk models, reduced substantially the number and amount
of new loans purchased by the Company during these periods. The difficulty in
acquiring loans was further exacerbated by intense competition in the industry
that drove down yields for higher-quality Contracts to levels which were
unacceptable to the Company. At the same time the Company was developing the
infrastructure and platform to underwrite, service, and collect a
substantially greater portfolio of contracts. The interest spread from the
Company's approximately $75 million loan balance at December 31, 1997, was not
sufficient to cover costs of doing business. As a result of portfolio
purchases in late 1997 and 1998 totaling approximately $100 million, the
Company increased its loan portfolio significantly. These portfolio purchases,
together with the Company's ongoing auto loan purchases, will result in a
significant increase in interest income and have a positive impact on earnings
for 1998.
COST OF CAPITAL AND INTEREST RATE RISKS. A substantial part of the
Company's operating revenues are derived from the spread between the interest
income it collects on its contracts and the interest expense it pays on
borrowings incurred to purchase and retain such contracts. As of December 31,
1996 and 1997, the Company's interest expense as a percentage of revenues was
35.1% and 44.9%, respectively. Net interest margin percentage, representing
the difference between interest income and interest expense divided by average
finance receivables, decreased from 12.3% in 1996 to 8.7% in 1997. The
Company's capacity to generate earnings on its portfolio of contracts is
dependent upon its ability to maintain a sufficient margin between its fixed
portfolio yield and its floating or fixed cost of funds. In addition, losses
from Contract defaults reduce the Company's margins and profits. In the event
interest rates increase due to economic conditions or other reasons, resulting
in an increase in the cost of borrowed capital, it is likely that the
Company's spread will be reduced since the rates charged on the majority of
its Contracts are already at the legal limits. If defaults on outstanding
Contracts increase resulting in larger credit losses, the availability of
outside financing (i) may diminish and (ii) may become more costly due to
higher interest rates or fees. Either of these events could have an adverse
effect on the Company.
RELIANCE ON SECURITIZATIONS. The Company relies significantly on
periodically financing Contracts through asset-backed securitizations.
Proceeds from securitizations are used to repay warehouse borrowings, thereby
making such facilities available for additional warehouse financing.
The Company's ability to access such securitizations depends upon many
factors, certain of which are beyond the Company's control. These factors
among other things include delays in completing transactions, willingness of
investors to buy automobile-backed paper, rating agencies providing investment
grade ratings and the ability to obtain credit enhancement provide by monoline
assurance companies. If the Company were unable to securitize its finance
contracts, and did not have sufficient credit available under its warehouse
lines it may impact its liquidity and ability to grow.
RISK OF LENDING TO HIGHER-RISK BORROWERS. The market targeted by the
Company for financing of the purchase of vehicles consists of individuals with
low income levels and/or adverse credit histories but who fit within the
underwriting parameters established by the Company indicating a probability
that the borrower is a reasonable credit risk. The benefit to the Company is
that higher-risk borrowers are not able to obtain credit from traditional
financing sources and hence are willing to pay a relatively high annual
percentage rate of interest. The risk to the Company is that the default rate
for such borrowers is relatively high. Contracts which, according to the
Company's model pose a higher risk of default, will be acquired only if they
have a relatively high contract rate of interest and/or are purchased at a
relatively high discount from face value in order to compensate for the
increased risk.
ADVERSE ECONOMIC CHANGES MAY INCREASE DELINQUENCIES. The majority of the
individuals who purchase automobiles financed by the Company and other
sub-prime finance companies are hourly wage earners with little or no cash
reserves. In most cases, the ability of such individuals to meet their
required semi-weekly or monthly payment on their installment contract is
completely dependent upon continued employment. Job losses generally will
result in defaults on their consumer debt, including their contracts with the
Company. An economic downturn or prolonged economic recession resulting in
local, regional or national unemployment could cause a large increase in
delinquencies, defaults and charge-offs. If this would occur, the Company's
cash reserves and allowance for losses may not be sufficient to support
current levels of operations if the downturn or recession were for a sustained
period of time. Decreases in sales of vehicles as a result of a weakness in
the economy or for other reasons may have an adverse affect on the Company's
business and that of the Dealers from which it purchases Contracts.
RISK OF DELAYED REPOSSESSIONS. The relatively high default rate on
Contracts requires that the Company repossess and resell a substantial number
of vehicles. After a default occurs, the condition of the vehicle securing the
Contract in default generally deteriorates due to lack of maintenance or
otherwise. The Company carefully monitors delinquencies and moves quickly to
repossess, recondition and resell vehicles secured by Contracts in default so
as to minimize its losses. Any delays in repossessions could decrease loan
loss recoveries.
POTENTIAL INADEQUACY OF LOAN LOSS RESERVES. The Company maintains an
allowance for credit losses to absorb anticipated losses from Contract
defaults net of repossession recoveries. The allowance for credit losses 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 and the Board of Directors, provides
adequately for current and future losses that may develop in the present
portfolio. However, since the risk model uses past history to predict the
future, changes in national and regional economic conditions, borrower mix,
competition for higher quality Contracts and other factors could result in
actual losses differing from predicted losses.
CHANGE IN ACCOUNTING PRINCIPLE. 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. 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". In the fourth
quarter of 1997, the Company increased its Allowance for Credit losses $3.6
million as a result of its static pooling reserve analysis.
YEAR 2000 ISSUE. The "Year 2000" issue affects the Company's installed
computer systems, network elements, software applications and other business
systems that have time-sensitive programs that may not properly reflect or
recognize the Year 2000. Because many computers and computer applications
define dates by the last two digits of the year, "00" may not be properly
identified as the Year 2000. This error could result in miscalculations or
system failures.
The Company is conducting a review of its computer systems to identify
those areas that could be affected by the "Year 2000" issue and is developing
an implementation plan to ensure compliance. The Company is using both
internal and external sources to identify, correct and reprogram, and test its
systems for Year 2000 compliance. Because third party failures could have a
material impact on the Company's ability to conduct business, confirmations
are being requested from our processing vendors and suppliers to certify that
plans are being developed to address the Year 2000 issue. The Company
presently believes that, with modification to existing software and investment
in new software, the Year 2000 problem will not pose significant operational
concerns nor have a material impact on the financial position or results of
operation in any given year. The total cost of modifications and conversions
is not expected to be material and will be expensed as incurred.
EFFECT OF SUPERVISION AND REGULATION UPON COMPANY OPERATIONS. The
Company's present and proposed operations are subject to extensive regulation,
supervision and licensing under various federal, state and local statutes,
ordinances and regulations and, in most of the states in which the Company
conducts business, limit the interest rates the Company is allowed to charge.
While management believes that it maintains all requisite licenses and permits
and is in substantial compliance with all applicable federal, state and local
regulations, there can be no assurance that the Company will be able to
maintain all requisite licenses and permits, and the failure to satisfy those
and other regulatory requirements could have a material adverse effect on the
operations of the Company, including severe monetary and other penalties.
Further, the adoption of additional laws, rules and regulations could have a
material adverse effect on the Company's business.
POSSIBILITY OF UNINSURED LOSSES. The Company requires that all vehicles
financed by it be covered by collision insurance. To reduce the risk that such
collision insurance will lapse because of nonpayment of premiums, the Company
monitors premium payments. When notification is received that a policy has
lapsed, the Company immediately contacts the borrower by telephone and sends a
letter indicating that failure to maintain insurance constitutes default under
the borrower's Contract. If the borrower fails to secure insurance, the
Company may repossess the vehicle. In addition, the Company has the ability to
force place collision insurance should the debtor fail to pay insurance
premiums resulting in cancellation of the debtor's insurance coverage.
Collision insurance, in the event of a total vehicle loss, generally will
cover only for the fair value of the vehicle which often can be substantially
less than the outstanding contract receivable. In addition, the Company may
incur losses in situations where the borrower fails to make payments and the
Company is unable to locate the car for repossession. Although the Company's
losses to date in such cases have been minimal, there can be no assurance that
this will continue to be the case.
SUBSTANTIAL COMPETITION. In connection with its business of financing
vehicle purchases, the Company competes with many well-established financial
institutions, including banks, thrifts, independent finance companies, credit
unions, captive finance companies owned by automobile manufacturers and others
who finance used vehicle purchases (some of which are larger, have
significantly greater financial resources and have relationships with
established captive dealer networks). Any increased competition could have a
material adverse effect on the Company, including its ability to acquire loans
meeting its underwriting requirements.
DEPENDENCE ON KEY PERSONNEL. The Company's success depends largely on the
efforts and abilities of senior management. The loss of the services of any of
these individuals could have a material adverse effect on the Company's
business. The Company maintains insurance policies in the amount of $2,000,000
each on the lives of Messrs. Ginsburg and Sandler for the purpose of funding
the Company's obligation to purchase shares of its common stock beneficially
owned by either of them upon death (the "Buy-Sell Agreement"). The purchase
obligation is limited to the insurance proceeds. The purchase price is the
greater of book value or 80% of the average closing price of the Class A
Common Stock for the 30 consecutive trading days commencing 45 trading days
before the death of the insured. At December 31, 1997, the book value of the
stock was approximately $1.01 per share, while the closing price of the stock
on December 31, 1997, was $0.75 per share. As of that date, the Company's
purchase obligation would have been less than $2,000,000 with respect to each
of Messrs. Ginsburg and Sandler. Any excess insurance proceeds will be used
for general corporate purposes, including replacement of the decedent. During
the term of the Option Agreement noted in "Voting Power of Class A and Class B
Common Stock" below, the parties to the Buy-Sell Agreement have agreed that
the purchase rights and obligations under the Option Agremeent, also noted
below, shall supersede the purchase and right of first refusal provisions
contained in the Buy-Sell Agreement during the terms of the Option Agreement.
The Company also maintains a traveler's accidental death policy on the
lives of Messrs. Ginsburg and Sandler in the amount of $1,000,000 each. The
Company otherwise does not maintain key-man insurance upon the lives of its
executive officers.
INSURANCE RISKS. The Company maintains comprehensive insurance of the
type and in the amounts management believes are customarily obtained for
businesses similarly situated, including liability insurance for used
vehicles, sold, repaired or maintained by the Company. However, certain types
of losses generally of a catastrophic nature are either uninsurable or not
economically insurable. Any uninsured or partially insured loss could have an
adverse economic effect upon the Company.
EFFECT OF OUTSTANDING OPTIONS AND WARRANTS. For the respective terms of
the warrants and the options granted by the Company pursuant to the Company's
stock option plans, the holders thereof are given an opportunity to profit
from a rise in the market price of the Company's Class A Common Stock, with a
resulting dilution in the interests of the other shareholders. Further, the
terms on which the Company may obtain additional financing during those
periods may be adversely affected by the existence of such securities. The
holders of such securities may be expected to exercise them at a time when the
Company might be able to obtain additional capital through a new offering of
securities on more favorable terms.
NO CASH DIVIDENDS. The holders of Class A and Class B Common Stock are
entitled to receive dividends when, as and if declared by the Board of
Directors of the Company out of funds legally available therefor. To date, the
Company has not paid any cash dividends. The Board of Directors of the Company
does not intend to declare any cash dividends in the foreseeable future, but
instead intends to retain all earnings, if any, for use in the Company's
business operations. The Company's credit facilities restrict or prohibit the
Company from paying dividends. Accordingly, it is unlikely any dividend will
be paid on the Class A Common Stock in the foreseeable future.
NASDAQ MAINTENANCE REQUIREMENTS. Commencing February 23, 1998, the
requirements for continued trading of securities on the NASDAQ National Market
and on the NASDAQ Small Cap Market were changed to include requirements that
(i) the minimum bid price for common stock must be $1.00 or more per share,
and (ii) the market value of the public float must be $5 million or more for a
National Market security and $1 million or more for a Small Cap Market
security. If a deficiency exists for a period of 30 consecutive business days,
NASDAQ is required to promptly notify the issuer, which will have a period of
90 calendar days from such notification to achieve compliance. Compliance can
be achieved by meeting the applicable standard for a minimum of ten
consecutive business days during the 90-day compliance period.
The Company's Class A Common Stock is presently traded on the NASDAQ
National Market. The bid price of the Class A Common Stock has been less than
$1.00 per share since mid-December 1997. By letter dated Februay 27, 1998,
NASDAQ advised the Company that it was not in compliance with the new market
value of public float and bid price requirements and that the Company has
until May 28, 1998, to meet these requirements. Should the bid price of the
Class A Common Stock fail to reach $1.00 per share for ten consecutive trading
days by that date, then the Company will not meet the minimum bid price
requirements for either the National Market or the Small Cap Market and its
Class A Common Stock could be delisted from NASDAQ. In that event, the Class A
Common Stock probably would trade on the OTC Bulletin Board. Stocks which
trade on the OTC Bulletin Board generally are much less liquid than those
traded on certain other markets. In addition, stocks traded on the National
Market enjoy certain other benefits described below.
"Public float" is defined as outstanding shares other than those held by
officers, directors and beneficial owners of more than ten percent of the
total shares outstanding. From February 23, 1998 to March 30, 1998, the lowest
number of shares comprising the Company's public float has consisted of
approximately 5,677,109 shares of Class A Common Stock. To meet the National
Market requirement of $5 million in public float, the market price would have
to be approximately $.88 per share and to meet the Small Cap Market
requirement of $1 million in public float, the market price would have to be
approximately $.18 per share. Since February 22, 1998, the market value of the
public float has been less than $5 million, but greater than $1 million. If
the minimum bid price requirement is satisfied, the Company will meet the
public float requirement for the National Market. National Market securities
qualify for secondary trading exemptions in many states and states are
precluded from review of offerings of National Market securities. Small Cap
Market securities do not have these benefits.
Should the Company fail to timely meet NASDAQ's requirements, then NASDAQ
will issue a delisting letter, which will identify the review procedures
available to the Company. The Company may request review at that time, which
will generally stay delisting.
Management is considering various solutions, including a reverse stock
split and/or the sale of additional shares of Class A Common Stock to persons
other than officers, directors or more than 10% stockholders, both of which
could require shareholder approval. No assurance can be given, however, that
the Company will be able to maintain the listing of the Class A Common Stock
on either the NASDAQ National Market or the NASDAQ Small Cap Market.
VOTING POWER OF CLASS A AND CLASS B COMMON STOCK. As of December 31,
1997, 1,273,715 shares of Class B Common Stock were issued and outstanding.
These shares are held by Messrs. Ginsburg and Sandler and by another
individual. They are identical in all respects to the Class A Common Stock
except that the Class B Common Stock has three votes per share while the Class
A Common Stock has one vote per share. The Class B Common Stock automatically
converts into Class A Common Stock on a share-for-share basis upon transfer
(excluding certain transfers for estate planning purposes) or upon death of
the holder. As of December 31, 1997, holders of the Class A Common Stock owned
approximately 85% of the aggregate issued and outstanding shares of Class A
and Class B Common Stock, but had the power to cast approximately 65.3% of the
combined votes of both classes.
On or about December 4, 1997, Consumer Finance Holdings, Inc. ("CFH") and
Morris Ginsburg, the Company's President, Sandler Family Partners, Ltd., and
Irwin L. Sandler, the Company's Executive Vice President, (collectively the
"Shareholders") entered into an Option Agreement effective as of that date.
CFH is a wholly-owned subsidiary of Pacific USA Holdings Corp. ("Pacific
USA"). Pursuant to the Option Agreement, the Shareholders granted a three-year
option to CFH (the "Call Option") to purchase all, but not less than all, of
the 830,000 shares of Class B Common Stock owned by the Shareholders (the
"Option Shares") at a purchase price of $4.00 per share. Concurrently, CFH
granted to each Shareholder a three-year option (the "Put Option") to sell
that portion of the Option Shares held by each Shareholder at a price of $4.00
per share. The Put Option is exercisable with respect to 50% of the Option
Shares during the 30-day period following the second anniversary of the
effective date and 50% during the 30-day period following the third
anniversary of the effective date. The Call Option and Put Option both expire
on the third anniversary date of the effective date, or on December 4, 2000.
In the event that CFH or any of its affiliates exercises the Call Option, and
within 180 days after closing thereof, sells or agrees to sell any portion of
the Option Shares to a person who is not an affiliate of CFH for a price
greater than $4.00 per share, the seller shall be obligated to pay the
Shareholders 50% of such excess. The Shareholders agreed not to pledge, sell
or otherwise transfer the Option Shares at any time during the term of the
Call Option except to the extent of exercise of the Put Option. The obligation
of CFH under the Put Option is secured by funds in a segregated bank account.
Pursuant to the Option Agreement, each Shareholder granted CFH the right
to vote all Option Shares and to direct the exercise of all consensual or
other voting rights with respect to any additional shares of the Company's
capital stock as to which any Shareholder holds a proxy granted by a third
party, subject to any fiduciary duty owed to the grantor of any such proxy.
The Shareholders retain all other incidents of ownership with respect to the
Option Shares, including, but not limited to, the right to receive dividends.
The Option Agreement further provides that CFH shall vote or cause to be
voted shares of the Company's capital stock, including the Option Shares, to
maintain Messrs. Ginsburg and Sandler as directors of the Company. The
Shareholders agree to use their best efforts to provide CFH with the right to
designate four directors to the Company's board or such larger number as shall
then be sufficient to provide CFH with effective control of the board. As of
the date hereof, the board consists of four members.
On March 4, 1998, the Company held a special meeting of its shareholders
to consider and vote upon the proposals set forth in the Company's Proxy
Statement dated February 3, 1998. The following proposals were approved:
1. The issuance of (i) 2,433,457 shares of the Company's 8% Cumulative
Convertible Preferred Stock, Series 1998-1, (ii) 811,152 shares of the
Company's Class A Common Stock and (iii) a presently unknown number of shares
of Class A Common Stock, the issuance of which is contingent upon future
operations, to NAFCO Holding Company LLC, Advantage Funding Group, Inc.,
and/or Pacific Southwest Bank, or their respective designees, all of which are
subsidiaries of Pacific USA Holdings Corp. ("Pacific USA"), as partial
consideration for certain of the transactions under the Amended and Restated
Asset Purchase Agreement among the Company, Pacific USA and those and other of
its affiliates dated January 8, 1998.
2. An amendment to the Company's Articles of Incorporation (i)
increasing the number of authorized shares of Class A Common Stock to
30,000,000 shares, and (ii) increasing the number of authorized shares of
Preferred Stock to 10,000,000 shares having such preferences, limitations and
relative rights as may be determined by the Company's board of directors.
Pacific USA was the record owner of 1,500,000 shares of Class A Common
Stock as of December 31, 1997. As a result of the Option Agreement, it was
granted the power to vote the 830,000 shares of Class B Common Stock owned by
the Shareholders and a limited power to direct the voting of shares subject to
proxies held by the Shareholders. Also, as a result of the Asset Purchase
Agreement dated January 8, 1998, Pacific USA was issued 811,152 shares of the
Company's Class A Common Stock. As of the date of this report, 8,014,631
shares of Class A Common Stock are issued and outstanding and 1,273,715 shares
of Class B Common Stock are issued and outstanding. The Class A Common Stock
has one vote per share while the Class B Common Stock has three votes per
share. The Class A and Class B Common Stock vote together as one class.
Accordingly, Pacific USA may be deemed to be the beneficial owner of
approximately 38.6% of the Company's outstanding voting stock. Upon exercise
of either the put option or the call option, the Class B Common Stock
purchased by CFH will automatically convert into Class A Common Stock thereby
reducing the voting power of Pacific USA. Currently, Pacific USA has control
of 51.8% of the voting power.
EFFECT OF ISSUANCE OF PREFERRED STOCK. As a result of the Asset Purchase
Agreement dated January 8, 1998, the Company is authorized to issue up to
10,000,000 shares of preferred stock, no par value and did issue 2,433,457
shares of Cumulative Convertible Preferred Stock, Series 1998-1(the "Preferred
Stock") to affiliates of Pacific USA.
So long as not less than 1,500,000 shares of Preferred Stock are issued
and outstanding, the holders of the Preferred Stock, voting separately as a
class, are entitled to elect one member of the Company's board of directors.
Holders of the Preferred Stock otherwise have no voting rights except as may
be required by the laws of the State of Colorado and except with respect to
any amendment to the Company's Articles of Incorporation which would change
any of the rights or preferences enjoyed by such stock. Any corporate action
that requires a vote of the holders of the Preferred Stock of the class shall
be deemed to have been approved upon the affirmative vote by the holders of a
majority of the issued and outstanding Preferred Stock unless a higher voting
requirement is imposed by Colorado law.
The holders of the Preferred Stock are entitled to receive when, as and
if declared by the board of directors, out of any funds of the Company legally
available for that purpose, cumulative dividends from the date of issuance at
the rate of 8% ($.16) per share of Preferred Stock per year, payable quarterly
in shares of the Company's Preferred Stock valued at $2.00 per share (or in
cash if no preferred shares are available for that purpose). Dividends on the
Preferred Stock are cumulative whether or not the Company is legally able to
pay such dividends in whole or in part. No dividends (other than those payable
solely in common stock) may be paid with respect to the common stock of the
Company unless all accumulated and unpaid dividends on the Preferred Stock
shall have been declared and paid.
The Preferred Stock may be converted in whole or in part at any time and
from time to time into shares of Class A Common Stock at the rate of one share
of Class A Common Stock for each two shares of Preferred Stock so converted
(the "Conversion Ratio"). In the event the closing price of the Class A Common
Stock on the NASDAQ Stock Market shall equal or exceed $6.00 per share on each
trading day during any period of 60 consecutive calendar days, all of the
Preferred Stock shall be automatically converted into shares of Class A Common
Stock at the Conversion Ratio. The Conversion Ratio shall be proportionately
adjusted as appropriate to reflect the effect of stock splits or combinations.
Upon liquidation, dissolution or winding up of the Company, the holders
of the Preferred Stock then issued and outstanding shall be entitled to
receive an amount equal to $2.00 per share of Preferred Stock plus any
accumulated but unpaid dividends before any payment or distribution of the
assets of the Company is made to or set apart for the holders of Common Stock.
Any additional issuances of preferred stock could affect the rights of
the holders of Class A Common Stock and therefore reduce its value. The
preferred stock may be issued in one or more series, the terms of which will
be determined at the time of issuance by the Board of Directors without any
requirement for shareholder approval. Such rights may include voting rights,
preferences as to dividends and upon liquidation, conversion and redemption
rights and mandatory redemption provisions pursuant to sinking funds or
otherwise. Rights could be granted to holders of preferred stock hereafter
issued which could reduce the attractiveness of the Company as a potential
takeover target or make the removal of management of the Company more
difficult or adversely impact the rights of holders of Class A Common Stock.
The Company has no plans for the issuance of any additional preferred stock.
EFFECT OF CONVERTIBLE SECURITIES, OPTIONS, WARRANTS AND OTHER RIGHTS TO
PURCHASE. As of March 30, 1998, the Company had issued, or had agreed to
issue, options, warrants and other rights for the purchase of up to 1,809,000
shares of Class A Common Stock at exercise prices ranging from $0.53 to $6.63
per share. In addition, the Company has issued convertible securities and
options to purchase convertible securities for 4,133,394 shares of Class A
Common Stock at conversion prices ranging from $3.00 to $4.00 per share. The
shares of Class A Common Stock underlying these securities (the "Underlying
Shares") will be, when issued, "restricted securities" as that term is defined
in Rule 144 under the Securities Act of 1933, and, unless registered for
public sale, subject to a one-year holding period. However, in many cases, the
Company has either registered the Underlying Shares, as with employee stock
options, or has agreed to register the Underlying Shares upon the demand of
the holder. Additionally, the Company has agreed to give the holders "piggy
back" registration rights with respect to their Underlying Shares which, if
available, would allow registration of the Underlying Shares for public sale.
Upon effectiveness of a registration statement, the shares of stock covered
thereby can be sold immediately.
As of March 30, 1998, 8,014,631 shares of Class A common Stock and
1,273,715 shares of Class B Common Stock (convertible on a one-for-one basis
into shares of Class A Common Stock) were issued and outstanding. The options,
warrants, other rights and convertible securities described above cover an
aggregate of approximately 5,942,394 shares of Class A Common Stock. Any
significant exercise or conversion of these securities could substantially
dilute the voting power of the then outstanding Class A Common Stock, and
could result in dilution to earnings and book value per share.
In addition, the trading market for Class A Common Stock is relatively
thin. The average weekly trading volume for 1997 was approximately 134,000
shares. Thus, any significant sales of the Underlying Shares could adversely
affec the market price of the Class A Common Stock.
ABILITY OF THE COMPANY TO IMPLEMENT ITS BUSINESS STRATEGY. In order to
implement its business strategy as set for in the business section of this
Form 10-KSB, the Company must be able to accomplish the following: (1) Expand
the number of dealerships in its Dealer Network; (2) Increase its number of
sales representatives and the number of deals acquired per representative; (3)
Increase the volume of contracts acquired from its Dealer Network; (4)
Maintain and increase its warehouse facilities for financing Contracts
purchased; (5) Execute efficient and cost effective securitizations; (6) Hire,
train and retain employees skilled in areas of credit, collections, and
recoveries; and (7) Compete successfully with other companies in the sub-prime
auto finance industry. The Company's failure to accomplish some or all of
these factors may have an adverse effect on the implementation of its business
strategy, which may adversely effect its results of operations and financial
condition.
76
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
MONACO FINANCE, INC.
(Registrant)
March 31, 1998 By /s/ Morris Ginsburg
---------------------
Morris Ginsburg, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
March 31, 1998 /s/ Morris Ginsburg
---------------------
Morris Ginsburg, President,
Chief Executive Officer and
Director
March 31, 1998 /s/ Irwin L. Sandler
-----------------------
Irwin L. Sandler
Executive Vice President,
Secretary/Treasurer and
Director
March 31, 1998 /s/ Brian M. O'Meara
-----------------------
Brian M. O'Meara,
Director
March 31, 1998 /s/ David M. Ickovic
-----------------------
David M. Ickovic,
Director
March 31, 1998 /s/ Michael Feinstein
-----------------------
Michael Feinstein,
Senior Vice President,
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-31-1997 DEC-31-1997
<PERIOD-END> DEC-31-1997 DEC-31-1997
<CASH> 8,837,574 8,837,574
<SECURITIES> 0 0
<RECEIVABLES> 81,174,930 81,174,930
<ALLOWANCES> (6,850,499) (6,850,499)
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 0
<PP&E> 4,151,224 4,151,224
<DEPRECIATION> 2,095,450 2,095,450
<TOTAL-ASSETS> 90,597,721 90,597,721
<CURRENT-LIABILITIES> 0 0
<BONDS> 79,650,189 79,650,189
0 0
0 0
<COMMON> 84,772 84,772
<OTHER-SE> 8,436,660 8,436,660
<TOTAL-LIABILITY-AND-EQUITY> 90,597,721 90,597,721
<SALES> 0 0
<TOTAL-REVENUES> 3,232,488 12,638,907
<CGS> 0 0
<TOTAL-COSTS> 3,420,526 12,445,704
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 3,627,769 3,873,719
<INTEREST-EXPENSE> 1,548,062 5,674,484
<INCOME-PRETAX> (5,363,869) (9,355,000)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (5,363,869) (9,355,000)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (5,363,869) (9,355,000)
<EPS-PRIMARY> (0.63) (1.18)
<EPS-DILUTED> (0.63) (1.18)
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