22
FORM 10-QSB
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: JUNE 30, 1998
Commission File Number: 0-18819
MONACO FINANCE, INC.
--------------------
(Exact Name of Registrant as Specified in its Charter)
Colorado
--------
(State or Other Jurisdiction of Incorporation or Organization)
84-1088131
----------
(I.R.S. Employer Identification No.)
370 Seventeenth Street, Suite 5060, Denver, Colorado 80202
----------------------------------------------------------
(Address of Principal Executive Offices)
(303) 592-9411
--------------
(Registrant's Telephone Number, Including Area Code)
N/A
---
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the issuer was required to file such
reports),
Yes X No
-
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
-
Number of shares outstanding of the Issuer's Common Stock as of June 30, 1998:
Class A Common Stock, $.01 par value: 8,054,631 shares
Class B Common Stock, $.01 par value: 1,273,715 shares
Exhibit index is located on page 34.
Total number of pages is 37.
<PAGE>
MONACO FINANCE, INC. AND SUBSIDIARIES
FORM 10-QSB
QUARTER ENDED JUNE 30, 1998
INDEX
PAGE NO.
--------
PART I - FINANCIAL INFORMATION
Consolidated Statements of Operations for the three
months ended June 30, 1998 and 1997 (unaudited) 3
Consolidated Statements of Operations for the six
months ended June 30, 1998 and 1997 (unaudited) 4
Consolidated Balance Sheets at June 30, 1998
(unaudited) and December 31, 1997 5
Consolidated Statement of Shareholders' Equity for the
six months ended June 30, 1998 (unaudited) 6
Consolidated Statements of Cash Flows for the six
months ended June 30, 1998 and 1997 (unaudited) 7
Notes to the Consolidated Financial Statements (unaudited) 8-20
Management's Discussion and Analysis of Financial
Condition and Results of Operations 21-32
PART II - OTHER INFORMATION 33-36
EXHIBIT 11 - Computation of Earnings (Loss) per
Common Share 35
EXHIBIT 27 - Financial Data Schedule 36
SIGNATURES 37
2
<PAGE>
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MONACO FINANCE, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
THREE MONTHS ENDED JUNE 30,
<S> <C> <C>
1998 1997
------------- -------------
REVENUES:
Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,177,716 $ 3,091,430
Other income. . . . . . . . . . . . . . . . . . . . . . . . . 8,677 6
------------- -------------
Total revenues . . . . . . . . . . . . . . . . . . . . . 5,186,393 3,091,436
COSTS AND EXPENSES:
Provision for credit losses (Note 2). . . . . . . . . . . . . 8,659 77,270
Operating expenses. . . . . . . . . . . . . . . . . . . . . . 3,779,849 2,708,709
Interest expense (Note 4) . . . . . . . . . . . . . . . . . . 2,693,552 1,353,350
------------- -------------
Total costs and expenses . . . . . . . . . . . . . . . . 6,482,060 4,139,329
------------- -------------
(Loss) before income taxes. . . . . . . . . . . . . . . . . . (1,295,667) (1,047,893)
Income tax (benefit) (Note 6) . . . . . . . . . . . . . . . . - -
------------- -------------
Net (loss). . . . . . . . . . . . . . . . . . . . . . . . . . ($1,295,667) ($1,047,893)
============= =============
(LOSS) PER COMMON SHARE - BASIC AND DILUTED (NOTES 1 AND 5):
Net (loss) per common share - basic and diluted . . . . . . . ($0.14) ($0.14)
============= =============
Weighted average number of common shares outstanding. . . . . 9,308,346 7,724,594
<FN>
See notes to consolidated financial statements.
</TABLE>
3
<PAGE>
MONACO FINANCE, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
<S> <C> <C>
1998 1997
------------- -------------
REVENUES:
Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,726,954 $ 6,356,556
Other income. . . . . . . . . . . . . . . . . . . . . . . . . 8,687 122,000
------------- -------------
Total revenues . . . . . . . . . . . . . . . . . . . . . 11,735,641 6,478,556
COSTS AND EXPENSES:
Provision for credit losses (Note 2). . . . . . . . . . . . . 25,532 194,249
Operating expenses. . . . . . . . . . . . . . . . . . . . . . 7,295,863 5,887,984
Interest expense (Note 4) . . . . . . . . . . . . . . . . . . 5,748,074 2,754,510
------------- -------------
Total costs and expenses . . . . . . . . . . . . . . . . 13,069,469 8,836,743
------------- -------------
(Loss) before income taxes. . . . . . . . . . . . . . . . . . (1,333,828) (2,358,187)
Income tax (benefit) (Note 6) . . . . . . . . . . . . . . . . - -
------------- -------------
Net (loss). . . . . . . . . . . . . . . . . . . . . . . . . . ($1,333,828) ($2,358,187)
============= =============
(LOSS) PER COMMON SHARE - BASIC AND DILUTED (NOTES 1 AND 5):
Net (loss) per common share - basic and diluted . . . . . . . ($0.15) ($0.32)
============= =============
Weighted average number of common shares outstanding. . . . . 9,095,558 7,348,344
<FN>
See notes to consolidated financial statements.
</TABLE>
4
<PAGE>
MONACO FINANCE, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 AND DECEMBER 31, 1997
JUNE 30, 1998 DECEMBER 31,
(UNAUDITED) 1997
- ---------------------------------------------------------------- --------------- --------------
<S> <C> <C>
ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . $ 1,336,303 $ 757,541
Restricted cash . . . . . . . . . . . . . . . . . . . . . . 7,466,794 8,080,033
Automobile receivables - net (Notes 2 and 4). . . . . . . . 130,538,263 74,324,431
Repossessed vehicles held for sale. . . . . . . . . . . . . 5,372,291 1,738,331
Deferred income taxes (Note 6). . . . . . . . . . . . . . . 1,541,582 1,579,779
Furniture and equipment, net of accumulated
depreciation of $2,222,616 (1998) and $2,095,450 (1997) . 2,541,989 2,055,774
Other assets. . . . . . . . . . . . . . . . . . . . . . . . 1,880,599 2,061,832
Total assets . . . . . . . . . . . . . . . . . . . . . $ 150,677,821 $ 90,597,721
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable. . . . . . . . . . . . . . . . . . . . . . $ 2,195,698 $ 1,537,791
Accrued expenses and other liabilities. . . . . . . . . . . 856,626 888,309
Notes payable (Note 4). . . . . . . . . . . . . . . . . . . - 6,375,549
Warehouse note payable (Note 4) . . . . . . . . . . . . . . 100,495,842 30,000,000
Heartland promissory note payable (Note 4). . . . . . . . . - 1,135,232
Pacific USA Holdings Corp. promissory note payable (Note 4) 2,500,000 -
Convertible subordinated debt (Note 4). . . . . . . . . . . - 1,385,000
Senior subordinated debt -Rothschild (Note 4) . . . . . . . 1,899,998 3,333,332
Senior subordinated debt -Black Diamond (Note 4). . . . . . 4,865,000 5,000,000
Automobile receivables-backed notes (Note 4). . . . . . . . 24,279,037 32,421,076
--------------- --------------
Total liabilities. . . . . . . . . . . . . . . . . . . 137,092,201 82,076,289
Commitments and contingencies (Note 3)
Stockholders' equity (Note 5)
Preferred stock; no par value, 10,000,000 shares
authorized, 2,356,236 shares (1998) issued. . . . . . . 4,712,472 -
Class A common stock, $.01 par value; 30,000,000
shares authorized, 8,054,631 shares (1998) and
7,203,479 shares (1997) issued. . . . . . . . . . . . . 80,546 72,035
Class B common stock, $.01 par value; 2,250,000
shares authorized, 1,273,715 shares (1998) and
1,273,715 shares (1997) issued. . . . . . . . . . . . . 12,737 12,737
Additional paid-in capital. . . . . . . . . . . . . . . . 26,602,499 24,925,466
Accumulated (deficit) . . . . . . . . . . . . . . . . . . (17,822,634) (16,488,806)
--------------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . 13,585,620 8,521,432
---------------
Total liabilities and stockholders' equity . . . . . . . . . . . $ 150,677,821 $ 90,597,721
=============== ==============
<FN>
See notes to consolidated financial statements.
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
MONACO FINANCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
CLASS A CLASS B ADDITIONAL
PREFERRED STOCK COMMON STOCK COMMON STOCK PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
--------------- -------------- ------------ -------- ----------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance - December 31, 1997 - $ 0 7,203,479 $ 72,035 1,273,715 $12,737 $24,925,466
Shares issued related
to portfolio acquisition. . 2,356,236 4,712,472 811,152 8,111 - - 1,614,193
Exercise of stock options . - - 40,000 400 - - 20,840
Issuance of warrants. . . . - - - - - - 42,000
Net (loss) for the year . . - - - - - - -
--------------- -------------- ------------ -------- ----------- ------- -----------
Balance - June 30, 1998 . . 2,356,236 $ 4,712,472 8,054,631 $ 80,546 1,273,715 $12,737 $26,602,499
=============== ============== ============ ======== =========== ======= ===========
ACCUMULATED
DEFICIT TOTAL
------------- ------------
<S> <C> <C>
Balance - December 31, 1997 ($16,488,806) $ 8,521,432
Shares issued related
to portfolio acquisition. . - 6,334,776
Exercise of stock options . - 21,240
Issuance of warrants. . . . - 42,000
Net (loss) for the year . . (1,333,828) (1,333,828)
------------- ------------
Balance - June 30, 1998 . . ($17,822,634) $13,585,620
============= ============
<FN>
See notes to consolidated financial statements.
</TABLE>
6
<PAGE>
MONACO FINANCE, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
-----------------------------
1998 1997
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
- ---------------------------------------------------------------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . ($1,333,828) ($2,358,187)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation. . . . . . . . . . . . . . . . . . . . . 552,193 441,448
Provision for credit losses . . . . . . . . . . . . . 25,532 194,249
Amortization of excess interest . . . . . . . . . . . 4,022,051 2,384,155
Amortization of other assets. . . . . . . . . . . . . 640,528 364,360
Amortization attributable to issuance of warrants . . 42,000 -
Deferred tax asset. . . . . . . . . . . . . . . . . . 38,197 -
Other . . . . . . . . . . . . . . . . . . . . . . . . (16,828) 3,027
------------- -------------
3,969,845 1,029,052
Change in assets and liabilities:
Other receivables . . . . . . . . . . . . . . . . . . 5,762,648 (426,025)
Prepaid expenses. . . . . . . . . . . . . . . . . . . 55,427 (179,301)
Accounts payable. . . . . . . . . . . . . . . . . . . 657,907 23,466
Accrued liabilities and other . . . . . . . . . . . . (49,291) (61,259)
------------- -------------
Net cash provided by operating activities . . . . . . . . . . . 10,396,536 385,933
------------- -------------
Cash flows from investing activities:
- ---------------------------------------------------------------
Retail installment sales contracts purchased . . . . . . . (94,175,471) (16,529,660)
Proceeds from payments on contracts. . . . . . . . . . . . 30,839,224 19,694,740
Purchases of furniture and equipment . . . . . . . . . . . (1,040,599) (616,268)
Equipment deposits and other . . . . . . . . . . . . . . . 2,191 726
------------- -------------
Net cash (used in) provided by investing activities . . . . . . (64,374,655) 2,549,538
------------- -------------
Cash flows from financing activities:
- ---------------------------------------------------------------
Net borrowings under lines of credit . . . . . . . . . . . 64,170,293 (50,000)
Net decrease (increase) in restricted cash . . . . . . . . 613,239 (1,172,759)
Borrowings on asset-backed notes . . . . . . . . . . . . . - 49,917,896
Repayments on asset-backed notes . . . . . . . . . . . . . (8,142,039) (53,550,546)
Repayments on senior subordinated debentures-Rothschilds . (1,433,334) (833,334)
Repayments on senior subordinated debentures-Black Diamond (135,000) -
Proceeds from issuance of promissory note. . . . . . . . . 2,500,000 2,525,000
Repayments on promissory note. . . . . . . . . . . . . . . (1,135,232) -
Repayments on convertible subordinated debt. . . . . . . . (1,385,000) -
Proceeds from exercise of stock options. . . . . . . . . . 21,240 9,375
Increase in debt issue and conversion costs. . . . . . . . (517,286) (720,169)
------------- -------------
Net cash provided by (used in) financing activities . . . . . . 54,556,881 (3,874,537)
------------- -------------
Net increase (decrease) in cash and cash equivalents. . . . . . 578,762 (939,066)
Cash and cash equivalents, January 1. . . . . . . . . . . . . . 757,541 1,227,441
Cash and cash equivalents, June 30. . . . . . . . . . . . . . . $ 1,336,303 $ 288,375
============= =============
<FN>
See notes to consolidated financial statements.
</TABLE>
7
<PAGE>
MONACO FINANCE, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 assist
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.
The Company acquires Contracts in connection with the sale of new and used
vehicles to customers from automobile dealers (the "Dealer(s)" or the "Dealer
Network") located in twenty-four states, the majority of which are acquired
from five states.
The consolidated financial statements included herein are presented in
accordance with the requirements of Form 10-QSB and consequently do not
include all of the disclosures normally made in the registrant's annual Form
10-KSB filing. These financial statements should be read in conjunction with
the financial statements and notes thereto included in Monaco Finance, Inc.'s
latest annual report on Form 10-KSB.
PRINCIPLES OF CONSOLIDATION
- -----------------------------
The Company's consolidated financial statements include the accounts of
Monaco Finance, Inc. and its wholly owned subsidiaries, CarMart Auto
Receivables Company and MF Receivables Corp. I ("MF I"), MF Receivables Corp.
II ("MF II"), MF Receivables Corp. III ("MF III"), MF Receivables Corp. IV
("MF IV") and Monaco Funding Corp. (the "Subsidiaries"). All intercompany
accounts and transactions have been eliminated in consolidation.
INTERIM UNAUDITED FINANCIAL STATEMENTS
- -----------------------------------------
Information with respect to June 30, 1998 and 1997, and the periods then
ended, have not been audited by the Company's independent auditors, but in the
opinion of management, reflect all adjustments (which include only normal
recurring adjustments) necessary for the fair presentation of the operations
of the Company. The results of operations for the three and six months ended
June 30, 1998 and 1997 are not necessarily indicative of the results of the
entire year.
REPOSSESSED VEHICLES HELD FOR SALE
- --------------------------------------
Repossessed vehicles held for sale consist of repossessed vehicles
awaiting liquidation, sold vehicles for which payment has not been received,
vehicles in the process of being repossessed and unlocated vehicles (skips).
All vehicles are carried at estimated actual cash value. At June 30, 1998 and
December 31, 1997, approximately 1,369 and 484 vehicles, respectively, were
awaiting repossession or liquidation. This increase in vehicles was primarily
due to the charge-off of loans acquired in 1998 portfolio acquisitions of over
$100 million.
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
8
<PAGE>
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 three and six months June 30, 1997
primary and fully diluted earnings per share computations and the three and
six months June 30, 1998 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.
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 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.
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
- ------------------------------------------------------
<TABLE>
<CAPTION>
JUNE 30,
<S> <C> <C>
1998 1997
---------- ----------
Cash Payments for:
Interest . . . . . $5,525,265 $2,813,246
Income Taxes . . . $ 3,180 $ 2,704
<FN>
</TABLE>
Non-cash investing and financing activities:
- ------------------------------------------------
In April 1997, Pacific USA Holdings Corp. ("Pacific USA") converted the
entire $3.0 million outstanding principal amount of an installment note
9
<PAGE>
payable made by Pacific USA to the Company into 1.5 million shares of the
Company's Class A Common Stock. See Note 4. Included as part of the
consideration paid for the January 1998 portfolio acquisition from Pacific USA
Holdings Corp. (Notes 4 and 5), the Company issued 811,152 shares of Class A
Common Stock valued at $2.00 per share and 2,433,457 shares of 8% Cumulative
Convertible Preferred Stock, Series 1998-1 valued at $2.00 per share. As of
June 30, 1998, Pacific USA repurchased certain loans that will result in the
surrender of 77,221 shares of Preferred Stock.
RECLASSIFICATIONS
- -----------------
Certain prior year balances have been reclassified in order to conform to
the current year presentation.
NOTE 2 - AUTOMOBILE RECEIVABLES
- -----------------------------------
<TABLE>
<CAPTION>
Automobile receivables consist of the following:
JUNE 30, DECEMBER 31,
<S> <C> <C>
1998 1997
--------------------------- -----------
Retail installment sales contracts. . . . . . . . $ 102,992,647 $37,103,262
Retail installment sales contracts-Trust (Note 4) 27,607,454 37,323,549
Excess interest receivable. . . . . . . . . . . . 8,408,730 4,849,209
Other . . . . . . . . . . . . . . . . . . . . . . 938,892 777,749
Accrued interest. . . . . . . . . . . . . . . . . 1,714,423 1,121,161
---------------------------- -----------
Total finance receivables . . . . . . . . . . . . 141,662,146 81,174,930
Allowance for credit losses . . . . . . . . . . . (11,123,883) (6,850,499)
---------------------------- -----------
Automobile receivables - net. . . . . . . . . . . $ 130,538,263 $74,324,431
============================ ===========
<FN>
</TABLE>
At June 30, 1998, the accrual of interest income was suspended on $571,900 of
principal amount of retail installment sales 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. This allowance is reported as a
reduction to Automobile Receivables.
10
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
ALLOWANCE FOR
CREDIT LOSSES
---------------
Balance as of December 31, 1997. . . . . . . . $ 6,850,499
Provisions for credit losses . . . . . . . . . 25,532
Unearned interest income . . . . . . . . . . . 7,581,573
NAFCO loan loss reimbursement (see Note 5) . . 6,083,643
Unearned discounts . . . . . . . . . . . . . . 3,038,749
Retail installment sale contracts charged off. (22,098,283)
Recoveries . . . . . . . . . . . . . . . . . . 9,642,170
---------------
Balance as of June 30, 1998. . . . . . . . . . $ 11,123,883
===============
<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.
Effective January 1, 1995, upon the acquisition of certain Contracts from its
Dealer Network, a portion of future interest income, as determined by the
Company's risk analysis, was capitalized into Automobile Receivables (excess
interest receivable) and correspondingly used to increase the allowance for
credit losses (unearned interest income). Subsequent receipts of excess
interest are applied to reduce excess interest receivable. For the three and
six months ended June 30, 1998, $1,854,309 and $4,022,051, respectively, of
excess interest income were amortized against excess interest receivable.
Unearned discounts result from the purchase of Contracts from the Dealer
Network at less than 100% of the face amount of the note. All such discounts
are used to increase the allowance for credit losses.
As part of its adoption of the static pooling reserve method in October 1996,
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
11
<PAGE>
into interest income on an effective yield method over the estimated remaining
life of the related quarterly static pool.
NOTE 3 - COMMITMENTS AND CONTINGENCIES
- -------------------------------------------
CONTINGENCIES
- -------------
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.
On May 18, 1998, a class action lawsuit was filed against the Company in the
District Court of Dallas County, Texas (Dixson et al. v. Monaco Finance, Inc.,
No. DV983914). The plaintiffs alleged various violations of Texas consumer law
by the Company with respect to certain installment contracts for the credit
purchase of motor vehicles. The complaint sought recovery of unspecified
actual and statutory damages and attorney's fees.
On or about August 12, 1998, the Company and the plaintiffs verbally agreed to
settle the lawsuit for an immaterial amount.
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 $15.0 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.
On or about March 23, 1998, the Company entered into a senior debt financing
facility with LaSalle that had an outstanding balance of $50,000 at June 30,
1998.
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 $75.0 million
Warehouse Line of Credit with Daiwa Finance Corporation ("Daiwa"). All
advances received under the line of credit are secured by eligible loan
12
<PAGE>
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 June 30,
1998, the Company had borrowed $44,750,000 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.
PORTFOLIO PURCHASE CREDIT FACILITY - DAIWA FINANCE CORPORATION
- ---------------------------------------------------------------------
In January 1998, MF Receivables Corp. IV ("MF IV"), a wholly owned
special purpose subsidiary of the Company, entered into a $73,926,565
Portfolio Purchase Credit Facility (the "Credit Facility") with Daiwa. The
proceeds from the Credit Facility were used to acquire an $81.1 million
portfolio from Pacific USA Holdings Corp. and certain of its subsidiaries
(Note 5). All advances received under the Credit Facility are secured by
eligible purchased loan Contracts and all proceeds received from those
Contracts. The scheduled maturity date with respect to the advances under the
Credit Facility is the earlier of January 6, 1999 or the disposition date of
the eligible purchased loan Contract. Under the Credit Facility, prior to July
1, 1998, 85% of the amount advanced to the Company accrues interest at a rate
equal to LIBOR plus 1.0% per annum. Effective July 1, 1998, the interest rate
on this advance changes to LIBOR plus 3.5% per annum. The remaining 15% of
the amount advanced accrues interest at a rate of LIBOR plus 1.0% per annum
prior to July 1, 1998. Effective July 1, 1998, the interest rate on this
advance changes to 15% per annum. The Credit Facility Agreement requires the
Company to maintain certain standard ratios and covenants. At June 30, 1998,
the Credit Facility had an outstanding balance of $55,745,842.
The assets of MF IV 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 IV 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 USA") whereby, among other
things, Pacific USA 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 USA whereby Pacific USA loaned the Company $3.0 million ("Pacific
Loan"). On February 7, 1997, the parties terminated the Securities Purchase
Agreement; 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 USA. The Conversion Agreement converted
the entire $3.0 million outstanding principal amount of the installment note
made by Pacific USA to the Company into 1.5 million restricted shares of the
Company's Class A Common Stock. The Conversion Agreement also released the
13
<PAGE>
Company from all liability under the Loan Agreement executed on October 29,
1996 between the Company and Pacific USA pursuant to which the $3.0 million
loan was made.
PACIFIC USA HOLDINGS CORP. - PROMISSORY NOTE
- --------------------------------------------------
On June 30, 1998, the Company and Pacific USA Holdings Corp. ("Pacific
USA"), a related party, agreed to enter into a $5.0 million Loan Agreement
("Pacific USA Note"). The Pacific USA Note will be collateralized by the stock
of MF Receivables Corp. II (see Automobile Receivables-Backed Notes below).
Interest on the Pacific USA Note accrues at a fixed rate per annum of 12.0%
and is payable monthly in arrears on the fourteenth day of each month
beginning on August 14, 1998. The Pacific USA Note also calls for monthly
principal payments, commencing on August 14, 1998 and continuing through
December 14, 1998, equal to the funds to be disbursed monthly to MF
Receivables Corp. II, such amount not to exceed 17% of all amounts distributed
pursuant to the related Trust Agreement. The unpaid principal amount of the
Pacific USA Note, plus accrued and unpaid interest, is due December 31, 1998.
The Company is required to maintain certain representations, warranties and
covenants under the related Pledge and Security Agreement. As of June 30,
1998, the Company had received proceeds of $2.5 million under the Loan
Agreement. The remaining $2.5 million was received in July 1998.
CONVERTIBLE SUBORDINATED DEBENTURES
- -------------------------------------
On March 15, 1993, the Company completed a private placement of $2.0
million, 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 $1.0 million 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, at which time the Company repaid the remaining principal amount.
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.
SENIOR SUBORDINATED NOTES - ROTHSCHILD
- ------------------------------------------
On November 1, 1994 the Company sold, in a private placement, unsecured
Senior Subordinated Notes ("Senior Notes") in the gross principal amount of
$5.0 million to Rothschild North America, Inc. ("Rothschild") 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 was due and payable the first day of each quarter commencing on
January 1, 1995. Principal payments in the amount of $416,667 were due and
payable the first day of January, April, July and October of each year
commencing January 1, 1997.
On June 15, 1998, the Company and Rothschild amended the Note Purchase
Agreement to require principal payments of $450,000 on the last day of each
March, June, September and December. In lieu of the principal payment of
$416,667 due on July 1, 1998, the Company made a payment to Rothschild on June
30, 1998 of $600,000. The unpaid principal amount of the Senior Notes, plus
accrued and unpaid interest, is due October 1, 1999.
14
<PAGE>
SENIOR SUBORDINATED NOTES - BLACK DIAMOND
- ----------------------------------------------
On January 9, 1996, the Company entered into a Purchase Agreement for the
sale of an aggregate of $5.0 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
approved 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
were 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 $5.0 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.
On June 12, 1998, the Company and the related noteowners agreed to amend the
Indenture to cancel the conversion feature of the 12% Notes and to require
principal payments of $135,000 per month commencing in June 1998. The
maturity date of the 12% Notes was also amended to the earlier of the maturity
date of the Senior Notes or October 1, 1999.
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 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 Floating Rate Auto
Receivables-Backed Note as described below.
In May of 1995, MF I issued its Floating Rate Auto Receivables-Backed Note
("Revolving Note" or "Series 1995-A Note"). MF I acquired Contracts from the
Company which were pledged under the terms of the Revolving Note and Indenture
for up to $40.0 million in borrowing. Subsequently, the Revolving Note was
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 could have been used to borrow up to an aggregate of $150.0
million through May 16, 1998. In April 1998, the Company terminated the
Revolving Note. An Indenture and Servicing Agreement required that the Company
and MF I maintain certain financial ratios, as well as other representations,
15
<PAGE>
warranties and covenants. The Indenture required MF I 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 accrued 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, provided customary collection and servicing activities for the
Contracts. The maximum limit for the Series 1995-A Note was $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 ("Heartland Promissory
Note"). The Heartland Promissory Note accrued interest at a fixed rate of 16%
per annum and was collateralized by the proceeds from the Class B Notes. The
Class B Notes, and the Heartland Promissory Note, were repaid in April 1998.
Monaco Funding Corp. is required to maintain certain covenants and warranties
under the Pledge Agreement.
As of June 30, 1998, the Series 1997-1A Notes had a note balance of
$24,279,037. The underlying receivables backing the Series 1997-1A Notes had a
balance of $27,607,454 as of June 30, 1998.
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 Term Note a
nationally recognized insurance company, MBIA, has guaranteed repayment. The
MBIA insured Series 1997-1A Notes received a corresponding AAA rating by
16
<PAGE>
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 1997-1A noteholders and other general disbursements are paid to MF
II on a monthly basis.
As of June 30, 1998, the Company was in compliance will all debt covenants.
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
- --------------------
During the six months ended June 30, 1998, stock options to acquire
60,000 shares at market prices ranging from $0.63 to $0.78 were granted to
certain officers and employees of the Company under the Company's stock option
plan. During this same period, 40,000 options were exercised and 122,900
options were canceled.
Prior to January 1, 1996, the Company accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, Accounting for Stock Issued to Employees, and related interpretations.
As such, compensation expense would be recorded on the date 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 options 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.
17
<PAGE>
PREFERRED STOCK
- ----------------
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. Daiwa Finance Corporation (Note 4) provided
financing. 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. As of June 30, 1998, Pacific USA
repurchased loans with an original purchased principal balance of
approximately $2.6 million. In addition to the repurchase proceeds of $2.3
million from Pacific USA, 77,221 shares of Preferred Stock will be surrendered
by Pacific USA to the Company. Each share of Preferred Stock is convertible at
any time into one-half share of Class A Common Stock, or an aggregate of up to
1,178,118 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 therefore, 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.
Pacific USA was the record owner of 1.5 million shares of Class A Common Stock
as of December 31, 1997. As a result of the December 1997 Option Agreement
with Consumer Finance Holdings, Inc. ("CFH"), a wholly owned subsidiary of
Pacific USA, 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, 8,054,631
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 generally vote together as one
class. Accordingly, Pacific USA may be deemed to be the beneficial owner of
approximately 38.4% of the combined outstanding shares of Class A and Class B
Common Stock and controls approximately 51.6% 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 described herein, Pacific USA also has the right, exercisable at any
time, to convert the shares of Preferred Stock into 1,178,118 shares of Class
A Common Stock.
18
<PAGE>
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.
A reconciliation of the statutory federal income tax to the effective
anticipated tax is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- --------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Pretax (loss). . . . . . . . . . . $(1,295,667) $(1,047,893) $(1,333,828) $(2,358,187)
============ ============ ============ ============
Federal tax expense (benefit)
at statutory rate - 34%. . . $ (440,527) $ (356,284) $ (453,502) $ (801,784)
State income tax expense (benefit) (44,053) (35,628) (45,350) (80,178)
------------ ------------ ------------ ------------
(484,580) (391,912) (498,852) (881,962)
Less valuation allowance . . . . . (484,580) (391,912) (498,852) (881,962)
------------ ------------ ------------ ------------
Income tax expense (benefit) . . . $ 0 $ 0 $ 0 $ 0
============ ============ ============ ============
<FN>
</TABLE>
Deferred taxes are recorded based upon differences between the financial
statements and tax basis of assets and liabilities and available tax credit
carryforwards. Temporary differences and carryforwards which give rise to a
significant portion of deferred tax assets and liabilities as of June 30,
1998, were as follows:
<TABLE>
<CAPTION>
<S> <C>
Deferred tax assets:
Federal and State NOL tax carry-forward $11,456,283
Other . . . . . . . . . . . . . . . . . 40,198
------------
11,496,481
Valuation Allowance . . . . . . . . . . (5,835,005)
------------
Total deferred tax assets . . . . . . . 5,661,476
Deferred tax liabilities:
Depreciation. . . . . . . . . . . . . . (68,057)
Allowances. . . . . . . . . . . . . . . (4,051,837)
------------
Total deferred tax liability. . . . . . (4,119,894)
------------
Net deferred tax asset. . . . . . . . . $ 1,541,582
============
<FN>
</TABLE>
19
<PAGE>
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 June 30, 1998, the Company had a net operating loss carryforward of
approximately $30.2 million for federal income tax reporting purposes which,
if unused, will expire between 2011 and 2013.
The Company's ability to generate future taxable income will depend upon its
ability to implement its growth strategy. At June 30, 1998, 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 a reduction to the Company's income tax expense.
20
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- -----------------------------------------------------------------------
RESULTS OF OPERATIONS
- ---------------------
FORWARD-LOOKING STATEMENTS
- ---------------------------
This quarterly report on form 10-QSB for the period ended June 30, 1998,
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 statements. Additional
written or oral forward-looking statements may be made by the Company from
time to time in filings with the Securities and Exchange Commission or
otherwise. Such forward-looking statements are within the meaning of that term
in Section 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 quarterly
report, including the Notes to the 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 the annual report on Form 10-KSB for December 31, 1997.
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 net (loss) 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.
The average discount on all Contracts originated pursuant to discounted
Finance Programs during the six months ended June 30, 1998 and 1997 was
approximately 5.9% and 4.6%, 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 June 30, 1998 carries a contract annual percentage rate of
interest that averages approximately 22%, before discounts, and has an
original weighted average term of approximately 50 months. The average amount
financed per Contract for the six months ended June 30, 1998 and 1997 was
approximately $9,508 and $10,604, respectively.
21
<PAGE>
RESULTS OF OPERATION
- ----------------------
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Six Months
Ended June 30, Ended June 30,
(dollars in thousands, except per share amounts) 1998 1997 1998
----------------------------- --------------------------- -----------
<S> <C> <C> <C>
REVENUES:
Interest. . . . . . . . . . . . . . . . . . . . . . . $ 5,178 $ 3,091 $ 11,727
Other income. . . . . . . . . . . . . . . . . . . . . 8 - 9
----------------------------- --------------------------- -----------
Total revenues . . . . . . . . . . . . . . . . . 5,186 3,091 11,736
COSTS AND EXPENSES:
Provision for credit losses . . . . . . . . . . . . . 9 77 26
Operating expenses. . . . . . . . . . . . . . . . . . 3,780 2,709 7,296
Interest expense. . . . . . . . . . . . . . . . . . . 2,693 1,353 5,748
----------------------------- --------------------------- -----------
Total costs and expenses . . . . . . . . . . . . 6,482 4,139 13,070
----------------------------- --------------------------- -----------
(Loss) before income taxes. . . . . . . . . . . . . . (1,296) (1,048) (1,334)
Income tax (benefit). . . . . . . . . . . . . . . . . - - -
----------------------------- --------------------------- -----------
Net (loss). . . . . . . . . . . . . . . . . . . . . . ($1,296) ($1,048) ($1,334)
============================= =========================== ===========
NET (LOSS) PER COMMON SHARE-BASIC AND DILUTIVE. . . . ($0.14) ($0.14) ($0.15)
============================= =========================== ===========
Weighted average number of common shares outstanding. 9,308,346 7,724,594 9,095,558
Six Months
Ended June 30,
(dollars in thousands, except per share amounts) 1997
-----------
<S> <C>
REVENUES:
Interest. . . . . . . . . . . . . . . . . . . . . . . $ 6,357
Other income. . . . . . . . . . . . . . . . . . . . . 122
-----------
Total revenues . . . . . . . . . . . . . . . . . 6,479
COSTS AND EXPENSES:
Provision for credit losses . . . . . . . . . . . . . 194
Operating expenses. . . . . . . . . . . . . . . . . . 5,888
Interest expense. . . . . . . . . . . . . . . . . . . 2,755
-----------
Total costs and expenses . . . . . . . . . . . . 8,837
-----------
(Loss) before income taxes. . . . . . . . . . . . . . (2,358)
Income tax (benefit). . . . . . . . . . . . . . . . . -
-----------
Net (loss). . . . . . . . . . . . . . . . . . . . . . ($2,358)
===========
NET (LOSS) PER COMMON SHARE-BASIC AND DILUTIVE. . . . ($0.32)
===========
Weighted average number of common shares outstanding. 7,348,344
<FN>
</TABLE>
<TABLE>
<CAPTION>
OPERATING HIGHLIGHTS AND RATIOS
Three Months Ended June 30,
------------------------------
<S> <C>
1998
------------------------------
Avg. interest bearing portfolio balance . . . . . . . . . . . . . . . . . . . $ 144,228,403
==============================
As a % of avg. portfolio balance above (annualized)
- -----------------------------------------------------------------------------
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.4%
Interest expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.5%
------------------------------
Net interest margin. . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.9%
Operating expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.5%
Provision for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . -
Other income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -
------------------------------
Net operating expenses and other income . . . . . . . . . . . . . . . . . . . 10.5%
------------------------------
Net (loss). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -3.6%
==============================
Contract Purchase Summary
- -----------------------------------------------------------------------------
Contracts from dealer network . . . . . . . . . . . . . . . . . . . . . . . . 265
Contracts from portfolio purchases. . . . . . . . . . . . . . . . . . . . . . (273)
------------------------------
Total contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8)
Dollar Value of Contracts Acquired. . . . . . . . . . . . . . . . . . . . . . $ 2,727,075*
Average amount financed . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,291*
Three Months Ended June 30, Six Months Ended June 30,
---------------------------- --------------------------
<S> <C> <C> <C>
1997 1998 1997
---------------------------- ------------- ------------
Avg. interest bearing portfolio balance . . . . . . . $ 76,933,922 $147,999,617 $78,924,793
============================ ============= ============
As a % of avg. portfolio balance above (annualized)
- ------------------------------------------------------
Interest income . . . . . . . . . . . . . . . . . . .. 16.1% 15.9% 16.1%
Interest expense. . . . . . . . . . . . . . . . . . . 7.0% 7.8% 7.0%
---------------------------- ------------- -----------
Net interest margin. . . . . . . . . . . . . . . . . 9.1% 8.1% 9.1%
Operating expenses. . . . . . . . . . . . . . . . . . . . 14.1% 9.9% 14.9%
Provision for credit losses . . . . . . . . . . . . . . . 0.4% - 0.5%
Other income. . . . . . . . . . . . . . . . . . . . . - - -0.3%
---------------------------- ------------- -----------
Net operating expenses and other income . . . . . . .. . 14.5% 9.9% 15.1%
---------------------------- ------------- -----------
Net (loss). . . . . . . . . . . . . . . . . . . . . . -5.4% -1.8% -6.0%
============================ ============ ===========
Contract Purchase Summary
- ------------------------------------------------------
Contracts from dealer network . . . . . . . . . . . . 709 730 1,316
Contracts from portfolio purchases. . . . . . . . . . - 9,764 -
---------------------------- ------------- -----------
Total contracts. . . . . . . . . . . . . . . . . . . 709 10,494 1,316
Dollar Value of Contracts Acquired. . . . . . . . . . .$ 7,571,069 $ 99,772,744 $13,955,453
Average amount financed . . . . . . . . . . . . . . . .$ 10,679 $ 9,508 $ 10,604
<FN>
* Represents amount associated with Dealer Network Contracts for the period.
</TABLE>
22
<PAGE>
REVENUES AND NET (LOSS)
- --------------------------
The Company's revenues increased $2.1 million, or 68%, from $3.1 million
in the second quarter of 1997 to $5.2 million in the comparable 1998 period.
Net (loss) increased from ($1.0) million in the second quarter of 1997 to
($1.3) million in the comparable 1998 period. Net (loss) per common share for
both the second quarter of 1997 and 1998 was ($0.14) based on 7.7 million and
9.3 million weighted average common shares outstanding, respectively. The
increase in net (loss) was primarily due to a lower interest income rate of
14.4% compared to 16.1% which resulted from an increase in net charge-offs,
and the related interest income adjustment, associated with the conversion and
assumption of servicing of portfolios purchased since September 1997 and an
increase in operating and interest expenses associated with these
acquisitions.
For the six months ended June 30, the Company's revenues increased $5.2
million, or 81%, from $6.5 million in 1997 to $11.7 million in 1998. Net
(loss) decreased from ($2.4) million in 1997 to ($1.3) million in 1998. (Loss)
per common share was ($0.32) for 1997 and ($0.15) for 1998 based on 7.3
million and 9.1 million weighted average common shares outstanding,
respectively. The decrease in net (loss) was primarily due to an increase in
net interest margin resulting from portfolio purchases since September 1997
partially offset by an increase in operating expenses associated with these
acquisitions.
The lower reported interest income percentages - when compared to the contract
annual percentage rate of interest (21.5% at June 30, 1998 and 22.9% at June
30, 1997) - 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.
During the first six months of 1998, the Company's net Automobile Receivables
increased from $74.3 million at December 31, 1997 to $130.5 million at June
30, 1998. During the three months ended June 30, 1998, the Company originated
265 loans totaling $2.7 million. Also, during this period, 273 loans,
totaling $2.7 million, which were originally acquired through portfolio
acquisitions in 1997 and 1998, were repurchased by the seller. The average
amount financed for Contracts originated through the Dealer Network for the
second quarter of 1998 was $10,291. For the second quarter of 1997, the
Company originated 709 loans totaling $7.6 million with an average amount
financed of $10,679. During the six months ended June 30, 1998, the Company
originated 730 loans and purchased 9,764 loans through portfolio purchases
totaling $99.8 million with an average amount financed $9,508 as compared with
loan originations of 1,316 totaling $14.0 million with an average amount
financed of $10,604 for the six months ended June 30, 1997. The average
discount on all Contracts originated pursuant to discounted Finance Programs
during the six months ended June 30, 1998 and 1997 was approximately 5.9% and
4.6%, respectively.
The increase in the number and dollar value of loan originations and purchases
during the first six months of 1998, as compared to the comparable 1997 period
primarily resulted from the Company's purchase of loan portfolios previously
originated by third parties. 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.
At June 30, 1998, only $.7 million of the Company's Auto Receivable Loan
Portfolio was generated from the discontinued CarMart operations as compared
to $2.6 million of its portfolio at June 30, 1997.
COSTS AND EXPENSES
- --------------------
The provision for credit losses represents estimated current losses based
on the Company's risk analysis of historical trends and expected future
results. The decrease in the provisions for credit losses primarily was due to
the introduction of the excess interest method to record allowances effective
January 1, 1995 (see Note 2). Net charge-offs as a percentage of Average Net
Automobile Receivables increased from 7.3% in the first six months of 1997 to
8.6% in the comparable 1998 period due primarily to the charge-off of loans
acquired from Pacific USA, which are adequately covered by the related
purchase allowance for estimated losses. Excluding charge-offs of loans
acquired from Pacific USA, net charge-offs as a percentage of Average Net
Automobile Receivables (excluding the portfolio acquired from Pacific USA)
decreased to 5.8% in the first six months of 1998. 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 3.4% of its
loan portfolio over 60 days past due at June 30, 1998 compared with 1.6% at
December 31, 1997.
The Company believes that the decrease in net charge-offs as a percentage of
Average Net Automobile Receivables, excluding the portfolio acquired from
Pacific USA in January 1998, is due to the following factors:
23
<PAGE>
1. 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.
2. 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. 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. The
method previously used by the Company to analyze the Allowance for Credit
Losses was based on the total portfolio.
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 $1.1 million, or 39.5%, from $2.7 million in
second quarter of 1997 to $3.8 million in the comparable 1998 period. For the
six months ended June 30, operating expenses increased $1.4 million, or 23.9%,
from $5.9 million in 1997 to $7.3 million in 1998. The increases in operating
expenses for both the three and six months ended June 30, 1998, were due
primarily to increases in salaries and benefits, depreciation and amortization
and consulting and professional fees. These cost categories increased
primarily as a result of the Company's portfolio acquisitions, totaling over
$105 million, in late 1997 and early 1998. The major components of operating
expenses are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C>
1998 1997 INCREASE (DECR.) 1998 1997 INCREASE (DECR.)
---------------------------------- -----------------------------------
(dollars in thousands)
Salaries and benefits . . . . . . $1,520 $1,213 $ 307 $3,020 $2,750 $ 270
Depreciation and amortization . . 606 402 204 1,220 806 414
Consulting and professional fees. 855 518 337 1,647 1,114 533
Telephone . . . . . . . . . . . . 169 120 49 294 275 19
Travel and entertainment. . . . . 60 46 14 117 122 (5)
Loan origination fees . . . . . . (46) (92) 46 (124) (172) 48
Rent/Office Supplies/Postage. . . 321 259 62 613 528 85
All other . . . . . . . . . . . . 295 243 52 509 465 44
------- ------ ----------------- ----- ------ -----------------
$3,780 $2,709 $ 1,071 $7,296 $5,888 $ 1,408
======= ====== ================= ======= ====== =================
<FN>
</TABLE>
Interest expense increased $1.3 million, or 99%, from $1.4 million in the
second quarter of 1997 to $2.7 million in the comparable 1998 period. For the
six months ended June 30, interest expense increased $3.0 million, or 108.7%,
from $2.7 million in 1997 to $5.7 million in 1998. This increase primarily was
due to an increase in borrowings in 1998 used to finance the Company's
portfolio acquisitions. An increase in interest rates in 1998 as a result of
a paydown in 1997 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 and borrowings on
the Company's Portfolio Purchase Credit Facility with Daiwa at an interest
24
<PAGE>
rate of 1.0% over LIBOR also contributed to the increase. From December 31,
1997 through June 30, 1998, net increases (decreases) in the Company's debt
were as follows:
<TABLE>
<CAPTION>
(dollars in thousands)
<S> <C>
Notes payable - LaSalle . . . . . . . . . . . . . . ($6,376)
Warehouse line of credit - Daiwa. . . . . . . . . . 10,725
Portfolio purchase credit facility - Daiwa. . . . . 59,771
Heartland promissory note payable. . . . . . . . . (1,135)
Pacific USA Holdings Corp. promissory note payable 2,500
Convertible subordinated debt . . . . . . . . . . . (1,385)
Senior subordinated debt-Rothchild. . . . . . . . . (1,433)
Senior subordinated debt-Black Diamond. . . . . . . (135)
Automobile receivables-backed notes . . . . . . . . (8,142)
---------
Total. . . . . . . . . . . . . . . . . . . . . $ 54,390
=========
<FN>
</TABLE>
The average annualized interest rate on the Company's debt was 7.6% for the
second quarter of 1998 versus 7.2% for the comparable 1997 period. For the
six months ended June 30, the average annualized interest rate on the
Company's debt increased from 7.2% in 1997 to 7.9% in 1998. These increases
were due primarily to additional borrowings on the Company's warehouse line
and portfolio purchase credit facilities with Daiwa at interest rates higher
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 9.1% in the second quarter of 1997 to 6.9% in the
comparable 1998 period. For the six months ended June 30, the annualized net
interest margin percentage decreased from 9.1% in 1997 to 8.1% in 1998. These
decreases were due primarily to the reversal, in the second quarter of 1998,
of previously recognized interest income as a result of charge-offs of loans
acquired from Pacific USA in early 1998, 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.
LIQUIDITY AND CAPITAL RESOURCES
- ----------------------------------
GENERAL
- -------
The Company's cash flows for the six months ended June 30, 1998 and 1997
are summarized as follows:
<TABLE>
<CAPTION>
CASH FLOW DATA
SIX MONTHS ENDED JUNE 30,
<S> <C> <C>
(dollars in thousands). . . . . . . . . . . . . . . . 1998 1997
--------- --------
Cash flows provided by (used in):
Operating activities. . . . . . . . . . . . . . . . . $ 10,397 $ 386
Investing activities. . . . . . . . . . . . . . . . . (64,375) 2,550
Financing activities. . . . . . . . . . . . . . . . . 54,557 (3,875)
--------- --------
Net increase (decrease) in cash and cash equivalents. $ 579 ($939)
========= ========
<FN>
</TABLE>
The Company's business has been and will continue to be cash intensive. The
Company's principal need for capital is to fund cash payments made to Dealers
in connection with purchases of installment contracts 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 line 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 of the Notes to
Consolidated Financial Statements. If the Company is successful in obtaining
25
<PAGE>
such facilities, they will provide the Company with additional working capital
on more favorable terms. 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 those 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.
Based upon the Company's cash flow projections for the remainder of 1998,
Pacific USA has committed to provide necessary bridge and long term financing.
In addition, the Company has entered discussions with other financing sources
for capital either in the form of debt, equity or a combination of debt and
equity. The Company has initiated discussions with institutional financing
sources with the goal of attracting additional capital in the form of equity,
debt or some combination thereof. Pacific USA, Monaco's largest shareholder
has agreed to act as lead investor in this financing, subject to final terms
and conditions. Pacific USA has also agreed to provide additional short-term
financing to enable Monaco to meet its working capital requirements pending
completion of its longer term financing plan.
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.
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 June
30, 1998, 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.
PORTFOLIO ACQUISITION
- ----------------------
On October 9, 1996, the Company entered into a Securities Purchase
Agreement with Pacific USA Holdings Corp. ("Pacific USA") whereby, among other
things, Pacific USA 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 USA whereby Pacific USA loaned the Company $3.0 million ("Pacific
USA Loan"). On February 7, 1997, the parties terminated the Securities
Purchase Agreement; however, the Pacific USA 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 USA.
The Conversion Agreement converted the entire $3.0 million outstanding
principal amount of the installment note made by Pacific USA 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
USA pursuant to which the $3.0 million loan was made.
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. 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. As of June 30, 1998, Pacific USA repurchased loans
with an original purchased principal balance of approximately $2.6 million. In
addition to the repurchase proceeds of $2.3 million from Pacific USA, 77,221
shares of Preferred Stock will be surrendered by Pacific USA to the Company.
Each share of Preferred Stock is convertible at any time into one-half share
of Class A Common Stock, or an aggregate of up to 1,178,118 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.
26
<PAGE>
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 1.5 million shares of Class A Common Stock
as of December 31, 1997. As a result of the December 1997 Option Agreement
with Consumer Finance Holdings, Inc. ("CFH"), a wholly owned subsidiary of
Pacific USA, 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, 8,054,631
shares of Class A Common Stock were issued and outstanding and 1,273,715
shares of Class B Common Stock were 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 generally vote together as one
class. Accordingly, Pacific USA may be deemed to be the beneficial owner of
approximately 38.4% of the combined outstanding shares of Class A and Class B
Common Stock and controls approximately 51.6% 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 described herein, Pacific USA also has the right, exercisable at any
time, to convert the shares of Preferred Stock into 1,178,118 shares of Class
A Common Stock.
Daiwa Finance Corporation ("Daiwa") provided financing for this transaction.
In January 1998, MF Receivables Corp. IV ("MF IV"), a wholly owned special
purpose subsidiary of the Company, entered into a $73,926,565 Portfolio
Purchase Credit Facility (the "Credit Facility") with Daiwa. All advances
received under the Credit Facility are secured by eligible purchased loan
Contracts and all proceeds received from those Contracts. The scheduled
maturity date with respect to the advances under the Credit Facility is the
earlier of January 6, 1999 or the disposition date of the eligible purchased
loan Contract. Under the Credit Facility, prior to July 1, 1998, 85% of the
amount advanced to the Company accrues interest at a rate equal to LIBOR plus
1.0% per annum. Effective July 1, 1998, the interest rate on this advance
changes to LIBOR plus 3.5% per annum. The remaining 15% of the amount
advanced accrues interest at a rate of LIBOR plus 1.0% per annum prior to July
1, 1998. Effective July 1, 1998, the interest rate on this advance changes to
15% per annum. The Credit Facility Agreement requires the Company to maintain
certain standard ratios and covenants. At June 30, 1998, the Credit Facility
had an outstanding balance of $55,745,842.
The assets of MF IV 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 IV on a monthly basis.
In connection with this financing, the Company also agreed to issue Daiwa
warrants for the purchase of 250,000 shares of Class A Common Stock.
ASSET-BACKED SECURITIZATIONS
- -----------------------------
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 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 Floating Rate Auto
Receivables-Backed Note as described below.
In May of 1995, MF I issued its Floating Rate Auto Receivables-Backed Note
("Revolving Note" or "Series 1995-A Note"). MF I acquired Contracts from the
Company which were pledged under the terms of the Revolving Note and Indenture
for up to $40.0 million in borrowing. Subsequently, the Revolving Note was
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 could have been used to borrow up to an aggregate of $150.0
million through May 16, 1998. In April 1998, the Company terminated the
Revolving Note. An Indenture and Servicing Agreement required that the Company
27
<PAGE>
and MF I maintain certain financial ratios, as well as other representations,
warranties and covenants. The Indenture required MF I 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 accrued 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, provided customary collection and servicing activities for the
Contracts. The maximum limit for the Series 1995-A Note was $40.0 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 ("Heartland Promissory
Note"). The Heartland Promissory Note accrued interest at a fixed rate of 16%
per annum and was collateralized by the proceeds from the Class B Notes. The
Class B Notes, and the Heartland Promissory Note, were repaid in April 1998.
Monaco Funding Corp. was required to maintain certain covenants and warranties
under the Pledge Agreement.
As of June 30, 1998, the Series 1997-1A Notes had a balance of $24,279,037.
The underlying receivables backing the Series 1997-1A Notes had a balance of
$27,607,454 as of June 30, 1998.
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 Term Note, a
nationally recognized insurance company, MBIA, has guaranteed repayment. The
MBIA insured 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 1997-1A and other general disbursements are paid to MF II on a
monthly basis.
WAREHOUSE LINES OF CREDIT AND OTHER DEBT
- ----------------------------------------------
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 $15.0 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.
28
<PAGE>
On or about March 23, 1998, the Company entered into a senior debt financing
facility with LaSalle that had an outstanding balance of $50,000 at June 30,
1998.
In December 1997, MF Receivables Corp. III ("MF III"), a wholly owned special
purpose subsidiary of the Company, entered into a $75.0 million Warehouse Line
of Credit with 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 June 30, 1998, the Company had borrowed $44,750,000 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.
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 $2.0 million. The purchasers of the Notes exercised an option to
purchase an additional $1.0 million 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, at which time the Company repaid the remaining principal amount. The
Notes were 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 $5.0 million to
Rothschild North America, Inc. ("Rothschild"). Interest was due and payable
the first day of each quarter commencing on January 1, 1995. Principal
payments in the amount of $416,667 were due and payable the first day of
January, April, July and October of each year, commencing January 1, 1997. On
June 15, 1998, the Company and Rothschild amended the Note Purchase Agreement
to require principal payments of $450,000 on the last day of each March, June,
September and December. In lieu of the principal payment of $416,667 due on
July 1, 1998, the Company made a payment to Rothschild on June 30, 1998 of
$600,000. The unpaid principal amount of the Senior Notes, plus accrued and
unpaid interest, is due October 1, 1999.
On January 9, 1996, the Company entered into a Purchase Agreement for the sale
of an aggregate of $5.0 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 $5.0 million
in principal amount of the 12% Notes on or before September 10, 1998, with an
initial conversion price of $3.00 per share.
On June 12, 1998, the Company and the related noteowners agreed to amend the
Indenture to cancel the conversion feature of the 12% Notes and to require
principal payments of $135,000 per month commencing in June 1998. The
maturity date of the 12% Notes was also amended to the earlier of the maturity
date of the Senior Notes or October 1, 1999.
On June 30, 1998, the Company and Pacific USA, a related party, agreed to
enter into a $5.0 million Loan Agreement ("Pacific USA Note"). The Pacific USA
Note will be collateralized by the stock of MF Receivables Corp. II. Interest
29
<PAGE>
on the Pacific USA Note accrues at a fixed rate per annum of 12.0% and is
payable monthly in arrears on the fourteenth day of each month beginning on
August 14, 1998. The Pacific USA Note also calls for monthly principal
payments, commencing on August 14, 1998 and continuing through December 14,
1998, equal to the funds to be disbursed monthly to MF Receivables Corp. II,
such amount not to exceed 17% of all amounts distributed pursuant to the
related Trust Agreement. The unpaid principal amount of the Pacific USA Note,
plus accrued and unpaid interest, is due December 31, 1998. The Company is
required to maintain certain representations, warranties and covenants under
the related Pledge and Security Agreement. As of June 30, 1998, the Company
had received proceeds $2.5 million under the Loan Agreement. The remaining
$2.5 million was received in July 1998.
The Agreements underlying the terms of the Company's Automobile Receivable -
Backed Securitization Program ("Securitization Program") and the Warehouse
Line of Credit and Portfolio Purchase Credit Facility with Daiwa Finance
Corp., described herein, 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 credit facilities with Daiwa, 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.
NASDAQ LISTING 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 February 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 had until May 28,
1998, to meet those requirements. By letter dated May 29, 1998, Nasdaq further
advised the Company as to its continued non-compliance with the new listing
requirements and advised the Company of its options to either (a) request an
exception to the new listing requirements in writing by June 19, 1998, or (b)
appeal the delisting decision and pursue an in-person oral hearing or a
written hearing by June 5, 1998. By letter dated June 18, 1998, the Company
requested an exception to the new listing requirements. By letter dated August
11, 1998, the Nasdaq Listing Qualifications Panel (the "Panel") denied the
Company's request for continued listing. The Company has five business days
from the date of the Panel's decision letter to request a new oral or written
hearing before a new Panel. Such a request, which the Company intends to make,
will stay the Panel's delisting determination pending the final determination
of the new Panel.
"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. As of June 30, 1998, the Company's public float
consisted of approximately 5,721,109 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 $.87 per share and to meet the Small Cap
Market requirement of $1 million in public float, the market price would have
to be approximately $.17 per share. Since February 22, 1998, the market value
of the public float has been less than $5 million, but greater than $1
million.
The Company will propose to the new Panel that the Company effect a reverse
split of its Class A and Class B Common Stock and possibly its Preferred
Stock. Recently, the bid price of the Class A Common Stock has occasion-
ally been less than $0.50 per share. Accordingly, the reverse split being
considered
30
<PAGE>
will be three or more shares for each one share issued and outstanding.
While it is expected that effecting the reverse stock split will satisfy the
Nasdaq minimum bid price requirement of $1.00 per share of Class A Common
Stock, it will not satisfy the National market requirement of $5.0 million in
public float. Accordingly, the Company expects that, following the reverse
stock split, the Company's Class A Common Stock probably will trade on the
Nasdaq Small Cap Market and remain a part of the National Quotation System.
National Market securities qualify for secondary trading exemptions in many
states and states are precluded from review of certain offerings of National
Market securities. Small Cap Market securities do not enjoy all of these
benefits. In the event the shareholders do not approve the reverse stock
split or in the event the new Panel denies the Company's request for continued
Nasdaq listing, the Class A Common Stock probably would trade on the OTC
Bulletin Board. Stocks that trade on that market generally are much less
liquid than those traded on certain other markets. Correspondingly, the
Company's ability to raise capital could be adversely affected.
OTHER
- -----
INFLATION
- ---------
Inflation was not a material factor in either the sales or the operating
expenses of the Company from inception to June 30, 1998.
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. At June 30,
1998 the Company had nine marketing representatives.
31
<PAGE>
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: 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. 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.
VOTING POWER: 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 51.6%. Pacific USA is the beneficial owner of 38.4% of the
Company's outstanding voting common 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
businesses 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) the ability of the
Company to maintain and increase its capital and warehouse lines of credit;
(iv) and, the ability of the Company to successfully complete securitizations
of its portfolio.
32
<PAGE>
MONACO FINANCE, INC. AND SUBSIDIARIES
FORM 10-QSB
QUARTER ENDED JUNE 30, 1998
PART II - OTHER INFORMATION
---------------------------
ITEM 1. LEGAL PROCEEDINGS
- ----------------------------
On May 18, 1997, a class action lawsuit was filed against the Company in
the District Court of Dallas County, Texas (Dixson et al. v. Monaco Finance,
Inc., No. DV983914). The plaintiffs alleged various violations of Texas
consumer law by the Company with respect to certain installment contracts for
the credit purchase of motor vehicles. The complaint sought recovery of
unspecified actual and statutory damages and attorney's fees.
On or about August 12, 1998, the Company and the plaintiffs verbally agreed to
settle the lawsuit for an immaterial amount.
ITEM 2. CHANGES IN SECURITIES
- ---------------------------------
(b.) Certain of the Company's loan agreements, including loan agreements
entered into in the first quarter of 1996, contain covenants that restrict the
payment of cash dividends.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
- --------------------------------------------
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ---------------------------------------------------------------------
(a) The annual meeting of shareholders of Monaco Finance, Inc. was held on
June 30, 1998.
(b) Morris Ginsburg, Irwin L. Sandler, Bill C. Bradley, Bobby L. Hashaway,
Leonard M. Snyder, John R. Sloan, Robert D. Womack and William P. Clark, Jr.
were elected as Directors of the Company to serve until the next annual
meeting of the shareholders or until their successors are elected or
qualified. The aforementioned was passed with the following votes:
MORRIS GINSBURG 9,840,398 FOR; -0- WITHHELD; 267,350 AGAINST;
- -0-ABSTAIN; and -0-UNVOTED.
IRWIN L. SANDLER 9,856,498 FOR; -0- WITHHELD; 251,250 AGAINST;
- -0-ABSTAIN; and -0-UNVOTED.
BILL C. BRADLEY 9,857,508 FOR; -0- WITHHELD; 250,240 AGAINST;
- -0-ABSTAIN; and -0-UNVOTED.
BOBBY L. HASHAWAY 9,857,508 FOR; -0- WITHHELD; 250,240 AGAINST;
- -0-ABSTAIN; and -0-UNVOTED.
LEONARD M. SNYDER 9,857,508 FOR; -0- WITHHELD; 250,240 AGAINST;
- -0-ABSTAIN; and -0-UNVOTED.
JOHN R. SLOAN 9,857,508 FOR; -0- WITHHELD; 250,240 AGAINST;
- -0-ABSTAIN; and -0-UNVOTED.
ROBERT D. WOMACK 9,857,508 FOR; -0- WITHHELD; 250,240 AGAINST;
- -0-ABSTAIN; and -0-UNVOTED.
WILLIAM P. CLARK, JR. (Preferred Stock only) 2,433,457 FOR; -0-
WITHHELD; -0- AGAINST; -0-ABSTAIN; and -0-UNVOTED.
(c) Also, at the annual meeting, shareholders voted to ratify the
following:
- - The appointment of Ehrhardt, Keefe, Steiner & Hottman, P.C. as the
Company's independent certified public accountants for the current fiscal year
and until such time as its successor is approved by the Company's Board of
Directors (9,982,208 For, -0- Withheld, 73,523 Against, 52,017 Abstained, and
- -0-Unvoted).
- - The amendment to the Articles of Incorporation
Class A Common Stock - 4,136,195 For, -0- Withheld, 251,295 Against, 75,782
Abstained, and 3,323,331Unvoted.
Class B Common Stock - 3,821,145 For, -0- Withheld, -0- Against, -0-
Abstained, and -0-Unvoted.
Preferred Stock - 2,433,457 For, -0- Withheld, -0- Against, -0- Abstained, and
- -0-Unvoted.
33
<PAGE>
ITEM 5. OTHER INFORMATION
- ----------------------------
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------------
(a) Exhibits:
11 - Computation of Earnings (Loss) per Common Share. Page 35.
27 - Financial Data Schedule. Page 36.
(b) Reports on Form 8 - K:
A Form 8-K dated May 18, 1998 (subsequently amended by a Form 8-K/A), was
filed announcing that a class action lawsuit was filed against the Company in
the District Court of Dallas County, Texas.
34
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT 11
MONACO FINANCE, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS (LOSS) PER COMMON SHARE
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
EARNINGS (LOSS) PER COMMON SHARE - BASIC AND DILUTIVE:
- --------------------------------------------------------------
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
<S> <C> <C> <C> <C>
1998 1997 1998 1997
------------ ------------ ------------ ------------
NET EARNINGS (LOSS)
- ----------------------------------------------------------------
Net (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . ($1,295,667) ($1,047,893) ($1,333,828) ($2,358,187)
============ ============ ============ ============
AVERAGE COMMON SHARES OUTSTANDING
- ----------------------------------------------------------------
Weighted average common shares outstanding - basic . . . . . . . 9,308,346 7,724,594 9,095,558 7,348,344
Shares issuable from assumed exercise of stock options (a) . . . (b) (b) (b) (b)
Shares issuable from assumed exercise of stock warrants (a). . . (b) (b) (b) (b)
Shares issuable from assumed conversion of 7% subordinated debt. N/A (b) N/A (b)
Shares issuable from assumed conversion of 7% subordinated debt. N/A (b) N/A (b)
Shares issuable from assumed conversion of 7% subordinated debt. 9,308,346 7,724,594 9,095,558 7,348,344
============ ============ ============ ============
(LOSS) PER COMMON SHARE - BASIC AND DILUTIVE . . . . . . . . . . ($0.14) ($0.14) ($0.15) ($0.32)
- ---------------------------------------------------------------- ------------ ============ ============ ============
<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>
35
<PAGE>
EXHIBIT 27
<TABLE>
<CAPTION>
MONACO FINANCE, INC., AND SUBSIDIARIES
FINANCIAL DATA SCHEDULE
FOR THE THREE AND SIX MONTHS ENDING JUNE 30, 1998
ITEM 3 -MOS YEAR-TO-DATE
- ---------------------------------------------------------- --------- ---------------
<S> <C> <C>
Fiscal year end. . . . . . . . . . . . . . . . . . . . . . 31-Dec-98 31-Dec-98
Period end . . . . . . . . . . . . . . . . . . . . . . . . 30-Jun-98 30-Jun-98
Period type. . . . . . . . . . . . . . . . . . . . . . . . 3 month 6 month
Cash and cash items $ 8,803,097 $ 8,803,097
Marketable securities $ 0 $ 0
Notes and accounts receivable trade $ 141,662,146 $ 141,662,146
Allowance for doubtful accounts ($11,123,883) ($11,123,883)
Inventory $ 0 $ 0
Total current assets $ 0 $ 0
Property, plant and equipment $ 4,764,605 $ 4,764,605
Accumulated depreciation $ 2,222,616 $ 2,222,616
Total assets $ 150,677,821 $ 150,677,821
Total current liabilities $ 0 $ 0
Bonds, mortgages and similar debt $ 134,039,877 $ 134,039,877
Preferred stock-mandatory redemption $ 0 $ 0
Preferred stock no-mandatory redemption $ 4,712,472 $ 4,712,472
Common stock $ 93,283 $ 93,283
Other stockholders' equity $ 8,779,865 $ 8,779,865
Total liabilities and stockholders' equity $ 150,677,821 $ 150,677,821
Net sales of tangible products $ 0 $ 0
Total revenues $ 5,186,393 $ 11,735,641
Cost of tangible goods sold $ 0 $ 0
Total costs and expenses applicable to sales and revenues $ 3,779,849 $ 7,295,863
Other costs and expenses $ 0 $ 0
Provision for doubtful accounts and notes $ 8,659 $ 25,532
Interest and amortization of debt discount $ 2,693,552 $ 5,748,074
Income before taxes and other items ($1,295,667) ($1,333,828)
Income tax expense $ 0 $ 0
Income/(loss) continuing operations ($1,295,667) ($1,333,828)
Discontinued operations $ 0 $ 0
Extraordinary items $ 0 $ 0
Cumulative effect-changes in accounting principals $ 0 $ 0
Net income (loss) ($1,295,667) ($1,333,828)
Earnings per common share-basic ($0.14) ($0.15)
Earnings per common share-assuming dilution ($0.14) ($0.15)
<FN>
</TABLE>
36
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MONACO FINANCE, INC.
(Registrant)
Date: August 14, 1998
By: /s/ Morris Ginsburg
----------------------------
Morris Ginsburg, Chairman of the
Board of Directors
By: /s/ Joseph A. Cutrona, Jr.
-------------------------------------
Joseph A. Cutrona, Jr., Chief
Executive Officer, Principal
Financial and Accounting Officer
and Director
<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 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-END> JUN-30-1998 JUN-30-1998
<CASH> 8,803,097 8,803,097
<SECURITIES> 0 0
<RECEIVABLES> 141,662,146 141,662,146
<ALLOWANCES> (11,123,883) (11,123,883)
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 0
<PP&E> 4,764,605 4,764,605
<DEPRECIATION> 2,222,616 2,222,616
<TOTAL-ASSETS> 150,677,821 150,677,821
<CURRENT-LIABILITIES> 0 0
<BONDS> 134,039,877 134,039,877
0 0
4,712,472 4,712,472
<COMMON> 93,283 93,283
<OTHER-SE> 8,779,865 8,779,865
<TOTAL-LIABILITY-AND-EQUITY> 150,677,821 150,677,821
<SALES> 0 0
<TOTAL-REVENUES> 5,186,393 11,735,641
<CGS> 0 0
<TOTAL-COSTS> 3,779,849 7,295,863
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 8,659 25,532
<INTEREST-EXPENSE> 2,693,552 5,748,074
<INCOME-PRETAX> (1,295,667) (1,333,828)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (1,295,667) (1,333,828)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,295,667) (1,333,828)
<EPS-PRIMARY> (0.14) (0.15)
<EPS-DILUTED> (0.14) (0.15)
</TABLE>
