MONACO FINANCE INC, 10QSB, 1998-11-16

MONACO FINANCE INC
10QSB, 1998-11-16
AUTO DEALERS & GASOLINE STATIONS

Previous: EAGLE BANCORP INC /GA/, 10QSB, 1998-11-16

Next: PAINEWEBBER R&D PARTNERS III L P, 10-Q, 1998-11-16

FORM 10-QSB

U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: SEPTEMBER 30, 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 September 30,
1998:

Class A Common Stock, $.01 par value: 12,772,788 shares
Class B Common Stock, $.01 par value: 1,273,715 shares

Exhibit index is located on page 36.
Total number of pages is 39.

<PAGE>
MONACO FINANCE, INC. AND SUBSIDIARIES

FORM 10-QSB

QUARTER ENDED SEPTEMBER 30, 1998

INDEX

PAGE NO.
--------
PART I - FINANCIAL INFORMATION
Consolidated Statements of Operations for the three
months ended September 30, 1998 and 1997 (unaudited) 3
Consolidated Statements of Operations for the nine
months ended September 30, 1998 and 1997 (unaudited) 4
Consolidated Balance Sheets at September 30, 1998
(unaudited) and December 31, 1997 5
Consolidated Statement of Shareholders' Equity for the
nine months ended September 30, 1998 (unaudited) 6
Consolidated Statements of Cash Flows for the nine
months ended September 30, 1998 and 1997 (unaudited) 7
Notes to the Consolidated Financial Statements (unaudited) 8-21
Management's Discussion and Analysis of Financial
Condition and Results of Operations 22-34
PART II - OTHER INFORMATION 35-38
EXHIBIT 11 - Computation of Earnings (Loss) per
Common Share 37
EXHIBIT 27 - Financial Data Schedule 38

SIGNATURES 39

<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 SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)

THREE MONTHS ENDED SEPTEMBER 30,
<S> <C> <C>
1998 1997
------------- -------------

REVENUES:
Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,557,792 $ 2,923,353
Other income. . . . . . . . . . . . . . . . . . . . . . . . . (2,649) 4,510
------------- -------------
Total revenues . . . . . . . . . . . . . . . . . . . . . 4,555,143 2,927,863

COSTS AND EXPENSES:
Provision for credit losses (Note 2). . . . . . . . . . . . . 504,345 51,701
Operating expenses. . . . . . . . . . . . . . . . . . . . . . 4,412,104 3,137,194
Interest expense (Note 4) . . . . . . . . . . . . . . . . . . 2,842,918 1,371,912
------------- -------------
Total costs and expenses . . . . . . . . . . . . . . . . 7,759,367 4,560,807
------------- -------------

(Loss) before income taxes. . . . . . . . . . . . . . . . . . (3,204,224) (1,632,944)
Income tax (benefit) (Note 6) . . . . . . . . . . . . . . . . - -
------------- -------------

Net (loss). . . . . . . . . . . . . . . . . . . . . . . . . . ($3,204,224) ($1,632,944)
============= =============

(LOSS) PER COMMON SHARE - BASIC AND DILUTED (NOTES 1 AND 5):

Net (loss) per common share - basic and diluted . . . . . . . ($0.27) ($0.19)
============= =============

Weighted average number of common shares outstanding. . . . . 11,687,425 8,477,094

<FN>

See notes to consolidated financial statements.
</TABLE>

<PAGE>

MONACO FINANCE, INC. AND SUBSIDIARIES
<TABLE>

CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)

NINE MONTHS ENDED SEPTEMBER 30,
<S> <C> <C>
1998 1997
------------- -------------

REVENUES:
Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 16,284,746 $ 9,279,909
Other income. . . . . . . . . . . . . . . . . . . . . . . . . 6,038 126,510
------------- -------------
Total revenues . . . . . . . . . . . . . . . . . . . . . 16,290,784 9,406,419

COSTS AND EXPENSES:
Provision for credit losses (Note 2). . . . . . . . . . . . . 529,877 245,950
Operating expenses. . . . . . . . . . . . . . . . . . . . . . 11,707,967 9,025,178
Interest expense (Note 4) . . . . . . . . . . . . . . . . . . 8,590,992 4,126,422
------------- -------------
Total costs and expenses . . . . . . . . . . . . . . . . 20,828,836 13,397,550
------------- -------------

(Loss) before income taxes. . . . . . . . . . . . . . . . . . (4,538,052) (3,991,131)
Income tax (benefit) (Note 6) . . . . . . . . . . . . . . . . - -
------------- -------------

Net (loss). . . . . . . . . . . . . . . . . . . . . . . . . . ($4,538,052) ($3,991,131)
============= =============

(LOSS) PER COMMON SHARE - BASIC AND DILUTED (NOTES 1 AND 5):

Net (loss) per common share - basic and diluted . . . . . . . ($0.46) ($0.52)
============= =============

Weighted average number of common shares outstanding. . . . . 9,959,514 7,724,594
<FN>

See notes to consolidated financial statements.
</TABLE>

<PAGE>
MONACO FINANCE, INC. AND SUBSIDIARIES
<TABLE>

CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997

SEPTEMBER 30, 1998 DECEMBER 31,
(unaudited) 1997
- - ----------------------------------------------------------------- -------------------- ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents. . . . . . . . . . . . . . . . . . $ 858,978 $ 757,541
Restricted cash. . . . . . . . . . . . . . . . . . . . . . . 6,635,211 8,080,033
Automobile receivables - net (Notes 2 and 4) . . . . . . . . 103,678,418 67,576,312
Other receivables (Note 2) . . . . . . . . . . . . . . . . . 14,646,206 6,748,119
Repossessed vehicles held for sale . . . . . . . . . . . . . 4,023,172 1,738,331
Deferred income taxes (Note 6) . . . . . . . . . . . . . . . 1,541,582 1,579,779
Furniture and equipment, net of accumulated
depreciation of $2,492,453 (1998) and $2,095,450 (1997). . 2,472,405 2,055,774
Other assets . . . . . . . . . . . . . . . . . . . . . . . . 1,667,554 2,061,832
Total assets. . . . . . . . . . . . . . . . . . . . . . $ 135,523,526 $ 90,597,721
==================== ==============

LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable . . . . . . . . . . . . . . . . . . . . . . $ 1,513,103 $ 1,537,791
Accrued expenses and other liabilities . . . . . . . . . . . 773,815 888,309
Notes payable (Note 4) . . . . . . . . . . . . . . . . . . . - 6,375,549
Warehouse note payable (Note 4). . . . . . . . . . . . . . . 89,880,842 30,000,000
Heartland promissory note payable (Note 4) . . . . . . . . . - 1,135,232
Pacific USA Holdings Corp. promissory notes payable (Note 4) 2,486,750 -
Convertible subordinated debt (Note 4) . . . . . . . . . . . - 1,385,000
Senior subordinated debt -Rothschild (Note 4). . . . . . . . 1,449,998 3,333,332
Senior subordinated debt -Black Diamond (Note 4) . . . . . . 4,460,000 5,000,000
Automobile receivables-backed notes (Note 4) . . . . . . . . 20,100,670 32,421,076
-------------------- --------------
Total liabilities . . . . . . . . . . . . . . . . . . . 120,665,178 82,076,289
Commitments and contingencies (Note 3)
Stockholders' equity (Note 5)
Preferred stock; no par value, 10,000,000 shares
authorized, 2,347,587 shares (1998) issued . . . . . . . 4,695,174 -
Class A common stock, $.01 par value; 30,000,000
shares authorized, 12,772,788 shares (1998) and
7,203,479 shares (1997) issued . . . . . . . . . . . . . 127,728 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 . . . . . . . . . . . . . . . . 31,049,567 24,925,466
Accumulated (deficit). . . . . . . . . . . . . . . . . . . (21,026,858) (16,488,806)
Total stockholders' equity. . . . . . . . . . . . . . . . . . . . 14,858,348 8,521,432
-------------------- --------------
Total liabilities and stockholders' equity. . . . . . . . . . . . $ 135,523,526 $ 90,597,721
==================== ==============

<FN>

See notes to consolidated financial statements.
</TABLE>

<PAGE>

MONACO FINANCE, INC. AND SUBSIDIARIES
<TABLE>

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 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 - Dec. 31, 1997. . . - $ 0 7,203,479 $ 72,035 1,273,715 $12,737 $24,925,466
Shares issued related
to portfolio acquisition . . 2,347,587 4,695,174 811,152 8,111 - - 1,614,193
Conversion of note to equity - - 4,698,157 46,982 - - 4,416,268
Exercise of stock options. . - - 40,000 400 - - 20,840
Issuance of stock. . . . . . - - 20,000 200 - - 9,800
Issuance of warrants . . . . - - - - - - 63,000
Net (loss) for the year. . . - - - - - - -
--------------- ------------- ------------ -------- ----------- ------- -----------
Balance - Sept. 30, 1998 . . 2,347,587 $ 4,695,174 12,772,788 $127,728 1,273,715 $12,737 $31,049,567
=============== ============= ============ ======== =========== ======= ===========

ACCUMULATED
DEFICIT TOTAL
------------- ------------
<S> <C> <C>
Balance - Dec. 31, 1997. . . ($16,488,806) $ 8,521,432
Shares issued related
to portfolio acquisition . . - 6,317,478
Conversion of note to equity - 4,463,250
Exercise of stock options. . - 21,240
Issuance of stock. . . . . . - 10,000
Issuance of warrants . . . . - 63,000
Net (loss) for the year. . . (4,538,052) (4,538,052)
------------- ------------
Balance - Sept. 30, 1998 . . ($21,026,858) $14,858,348
============= ============
<FN>

See notes to consolidated financial statements.
</TABLE>

<PAGE>

MONACO FINANCE, INC. AND SUBSIDIARIES
<TABLE>

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)

NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------
1998 1997
-------------- -------------
<S> <C> <C>
Cash flows from operating activities:
- - -----------------------------------------------------------------
Net (loss) . . . . . . . . . . . . . . . . . . . . . . . . . ($4,538,052) ($3,991,131)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation. . . . . . . . . . . . . . . . . . . . . . 842,030 690,976
Provision for credit losses . . . . . . . . . . . . . . 529,877 245,950
Amortization of excess interest . . . . . . . . . . . . 5,658,628 3,510,372
Amortization of other assets. . . . . . . . . . . . . . 878,456 711,986
Amortization attributable to issuance of warrants . . . 63,000 -
Loss on sale of property and equipment. . . . . . . . . 75,699 -
Deferred tax asset. . . . . . . . . . . . . . . . . . . 38,197 1,872
Other . . . . . . . . . . . . . . . . . . . . . . . . . (20,433) (2,792)
-------------- -------------
3,527,402 1,167,233
Change in assets and liabilities:
Other receivables . . . . . . . . . . . . . . . . . . . 6,207,112 (658,685)
Prepaid expenses. . . . . . . . . . . . . . . . . . . . 29,534 (164,277)
Accounts payable. . . . . . . . . . . . . . . . . . . . (24,687) (230,745)
Accrued liabilities and other . . . . . . . . . . . . . (114,888) 386,408
Net cash provided by operating activities . . . . . . . . . . . . 9,624,473 499,934
-------------- -------------
Cash flows from investing activities:
- - -----------------------------------------------------------------
Retail installment sales contracts purchased . . . . . . . . (100,130,153) (26,423,798)
Proceeds from payments on contracts. . . . . . . . . . . . . 47,753,980 29,222,786
Purchases of furniture and equipment . . . . . . . . . . . . (1,337,251) (706,402)
Equipment deposits and other . . . . . . . . . . . . . . . . 291 726
Net cash provided by (used in) provided by investing activities . (53,713,133) 2,093,312
-------------- -------------
Cash flows from financing activities:
- - -----------------------------------------------------------------
Net borrowings under lines of credit . . . . . . . . . . . . 53,555,293 2,700,000
Net decrease in restricted cash. . . . . . . . . . . . . . . 1,444,822 827,227
Borrowings on asset-backed notes . . . . . . . . . . . . . . - 58,079,887
Repayments on asset-backed notes . . . . . . . . . . . . . . (12,320,406) (64,822,533)
Repayments on senior subordinated debentures-Rothschilds . . (1,883,334) (1,250,001)
Repayments on senior subordinated debentures-Black Diamond . (540,000) -
Proceeds from issuance of notes- Pacific USA Holdings, Inc.. 6,950,000 2,525,000
Repayments on promissory note - Heartland Bank . . . . . . . (1,135,232) (528,916)
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) (728,614)
Net cash provided by (used in) financing activities . . . . . . . 44,190,097 (3,188,575)
-------------- -------------
Net increase (decrease) in cash and cash equivalents. . . . . . . 101,437 (595,329)
Cash and cash equivalents, January 1. . . . . . . . . . . . . . . 757,541 1,227,441
-------------- -------------
Cash and cash equivalents, September 30 . . . . . . . . . . . . . $ 858,978 $ 632,112
============== =============

<FN>

See notes to consolidated financial statements.
</TABLE>

<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 thirty-three 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 September 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 nine
months ended September 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 September 30,
1998 and December 31, 1997, approximately 1,093 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
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 nine months September 30,
1997 primary and fully diluted earnings per share computations and the three
and nine months September 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 generally
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
- - ------------------------------------------------------

SEPTEMBER 30,
<S> <C> <C>
1998 1997
---------- ----------
Cash Payments for:
Interest . . . . . $8,308,911 $4,207,666
Income Taxes . . . $ 4,363 $ 3,108

<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
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
September 30, 1998, Pacific USA repurchased certain loans that have resulted
in, or will result in, the surrender of 85,870 shares of Preferred Stock.

Effective July 1, 1998, Pacific USA Holdings Corp. converted $4,463,250 of its
$5.0 million Promissory Note (Note 4) into 4,698,157 restricted shares of the
Company's Class A Common Stock.

RECLASSIFICATIONS
- - -----------------
Certain prior year balances have been reclassified in order to conform to
the current year presentation.

NOTE 2 - NET AUTOMOBILE RECEIVABLES AND OTHER RECEIVABLES
- - -----------------------------------------------------------------
<TABLE>
<CAPTION>

Net Automobile receivables consist of the following:

SEPTEMBER 30, DECEMBER 31,
<S> <C> <C>
1998 1997
--------------- --------------
Retail installment sales contracts. . . . . . . . $ 92,269,288 $ 37,103,262
Retail installment sales contracts-Trust (Note 4) 23,165,832 37,323,549
--------------- --------------
Total finance receivables . . . . . . . . . . . . 115,435,120 74,426,811
Allowance for credit losses . . . . . . . . . . . (11,756,702) (6,850,499)
--------------- --------------
Automobile receivables - net. . . . . . . . . . . $ 103,678,418 $ 67,576,312
=============== ==============
<FN>

</TABLE>

<TABLE>

Other receivables consist of the following:

SEPTEMBER 30, DECEMBER 31,
<S> <C> <C>
1998 1997
-------------- -------------
Excess interest receivable. . . . . . . . . . . . $ 7,284,672 $ 4,849,209
NAFCO loan loss reimbursement receivable (Note 5) 5,436,866
Accrued interest. . . . . . . . . . . . . . . . . 1,433,148 1,121,161
Other . . . . . . . . . . . . . . . . . . . . . . 491,520 777,749
-------------- -------------
Other receivables . . . . . . . . . . . . . . . . $ 14,646,206 $ 6,748,119
============== =============
<FN>

</TABLE>

At September 30, 1998, the accrual of interest income was suspended on $1.1
million 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.

<TABLE>

<S> <C>
ALLOWANCE FOR
CREDIT LOSSES
---------------
Balance as of December 31, 1997. . . . . . . . $ 6,850,499
Provisions for credit losses . . . . . . . . . 529,877
Unearned interest income . . . . . . . . . . . 8,094,091
NAFCO loan loss reimbursement (see Note 5) . . 11,737,935
Unearned discounts . . . . . . . . . . . . . . 3,312,247
Retail installment sale contracts charged off. (31,950,708)
Recoveries . . . . . . . . . . . . . . . . . . 13,182,761
---------------
Balance as of September 30, 1998 . . . . . . . $ 11,756,702
===============

<FN>

</TABLE>

The provision for credit losses is based on estimated losses on all Contracts
purchased prior to January 1, 1995 with zero discounts ("100% Contracts") and
for all Contracts originated by CarMart which have been provided for by
additions to the Company's allowance for credit losses as determined by the
Company's risk analysis. Also, the third quarter 1998 provision for credit
losses includes a $.5 million charge for a change in estimate related to the
Company's static pooling reserve analysis.

Effective January 1, 1995, upon the acquisition of certain Contracts from its
Dealer Network, a portion of future interest income, as determined by the
Company's risk analysis, was capitalized into Automobile Receivables (excess
interest receivable) and correspondingly used to increase the allowance for
credit losses (unearned interest income). Subsequent receipts of excess
interest are applied to reduce excess interest receivable. For the three and
nine months ended September 30, 1998, $1,636,577 and $5,658,628, 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
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.

In August 1998, the Company and the plaintiffs settled the lawsuit for an
immaterial amount.

On August 24, 1998, a lawsuit, seeking class action status, was filed against
the Company in the Superior Court of California, County of San Francisco
(Gilyard and Doyle et al. v. Monaco Finance, Inc.). The plaintiffs allege
certain violations of the Rees-Levering Automobile Sales Finance Act with
respect to the statutory notice given to customers following repossession. The
complaint seeks the recovery of unspecified actual and statutory damages and
attorney's fees.

At this early stage in the proceedings, legal counsel has not been able to
express any view of the probable outcome of this lawsuit. In any event, at
this time Management believes the Company's liability, if any, with respect to
the claims made are most likely immaterial and the Company intends to
vigorously defend the allegations.

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 September
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
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 September
30, 1998, the Company had borrowed $43,475,000 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 accrued interest at a rate
equal to LIBOR plus 1.0% per annum. Effective July 1, 1998, the interest rate
on this advance changed to LIBOR plus 3.5% per annum. The remaining 15% of
the amount advanced accrued 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 changed to 15% per annum. The Credit Facility Agreement requires the
Company to maintain certain standard ratios and covenants. At September 30,
1998, the Credit Facility had an outstanding balance of $46,405,842.

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
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"). Effective July 1, 1998, the Company and Pacific USA
entered into a Conversion and Rights Agreement whereby $4,463,250 of the
principal amount of the Pacific USA Note was converted into 4,698,157
restricted shares of the Company's Class A Common Stock. As consideration for
the conversion, the Company agreed, subject to shareholder approval, which was
obtained on November 12, 1998, to change the conversion ratio of the Company's
Preferred Stock held by Pacific USA. The remaining unconverted principal
balance of the Pacific USA Note of $536,750 is collateralized by the stock of
MF Receivables Corp. II (see Automobile Receivables-Backed Notes below).
Interest on the outstanding Pacific USA Note balance accrues at a fixed rate
per annum of 12.0%. All outstanding principal and interest is due and payable
on or before December 31, 1998. On September 8, 1998 and September 30, 1998,
the Company and Pacific USA entered into Promissory Note agreements whereby
Pacific USA lent the Company $950,000 and $1,000,000, respectively. Both
Promissory Notes accrue interest at the prime rate plus 1% per annum. All
outstanding principal, plus accrued and unpaid interest, is due six months
from the date of the Promissory Note.

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.

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.

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,
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 September 30, 1998, the Series 1997-1A Notes had a note balance of
$20,100,670. The underlying receivables backing the Series 1997-1A Notes had a
balance of $23,165,832 as of September 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 noteholders and other general disbursements are paid to MF
II on a monthly basis.

As of September 30, 1998, the Company was in compliance with SMTScott Taylor
Is this supposed to be "with", not "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 nine months ended September 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 391,000
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 option pricing models, the
Black-Scholes model (the Model), for purposes of valuing its stock option
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.

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 September 30, 1998, Pacific USA
repurchased loans with an original purchased principal balance of
approximately $2.9 million. In addition to the repurchase proceeds of $2.6
million from Pacific USA, 85,870 shares of Preferred Stock were or will be
surrendered by Pacific USA to the Company. In consideration for converting
approximately $4.5 million of the Pacific USA Note into 4.7 million shares of
the Company's Class A Common Stock, the Company agreed, subject to shareholder
approval, to change the conversion ratio of the Preferred Stock held by
Pacific USA. As originally issued, each share of Preferred Stock was
convertible at any time into one-half share of Class A Common Stock. Since
shareholder approval was obtained on November 12, 1998, each share of
Preferred Stock is convertible into two shares of the Company's Class A Common
Stock, or an aggregate of up to 4,695,174 shares of Class A Common Stock.
Under FAS 123, the Company will value the potential additional issuable Class
A Common Stock using the Black-Scholes pricing model and will record a fourth
quarter charge, and a corresponding addition to shareholders' equity.

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.

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 SEPT. 30, NINE MONTHS ENDED SEPT. 30,
------------------------------- ---------------------------
1998 1997 1998 1997
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
Pretax (loss). . . . . . . . . . . $(3,204,224) $(1,632,944) $(4,538,052) $(3,991,131)
============ ============ ============ ============
Federal tax expense (benefit)
at statutory rate - 34%. . . $(1,089,436) $ (555,201) $(1,542,938) $(1,356,985)
State income tax expense (benefit) (108,944) (55,520) (154,293) (135,698)
------------ ----------- ------------ ------------
(1,198,380) (610,721) (1,697,231) (1,492,683)
Less valuation allowance . . . . . (1,198,380) (610,721) (1,697,231) (1,492,683)
------------ ----------- ------------ ------------
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 September 30,
1998, were as follows:

<TABLE>

<S> <C>
Deferred tax assets:
Federal and State NOL tax carry-forward $13,984,733
Other . . . . . . . . . . . . . . . . . 35,390
------------
14,020,123
Valuation Allowance . . . . . . . . . . (7,033,385)
------------
Total deferred tax assets . . . . . . . 6,986,738
Deferred tax liabilities:
Depreciation. . . . . . . . . . . . . . (45,624)
Allowances. . . . . . . . . . . . . . . (5,399,532)
------------
Total deferred tax liability. . . . . . (5,445,156)
------------
Net deferred tax asset. . . . . . . . . $ 1,541,582
============
<FN>

</TABLE>

The net deferred asset disclosed above equals the deferred income taxes on the
balance sheet. The valuation allowance relates to those deferred tax assets
that may not be fully utilized.

As of September 30, 1998, the Company had a net operating loss carryforward of
approximately $37.0 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 September 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.

<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
-----------------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------

FORWARD-LOOKING STATEMENTS
- - ---------------------------
This quarterly report on form 10-QSB for the period ended September 30,
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
Small Cap maintenance requirements and the risk associated with the
significant dependence on one controlling shareholder.

SUMMARY
- - -------
The Company's revenues 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 nine months ended September 30, 1998 and 1997 was
approximately 5.5% and 7.1%, 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 September 30, 1998 carries a contract annual percentage rate
of interest that averages approximately 21.5%, before discounts, and has an
original weighted average term of approximately 50 months. The average amount
financed per Contract for the nine months ended September 30, 1998 and 1997
was approximately $9,582 and $9,852, respectively.

RESULTS OF OPERATION
- - ----------------------
<TABLE>

CONSOLIDATED STATEMENTS OF OPERATIONS

Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
(dollars in thousands,
except per share amounts) 1998 1997 1998 1997
------------------------- ----------------------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Interest . . . . . . . . . . . $ 4,557,792 2,923,353 16,284,746 9,279,909
Other income . . . . . . . . . (2,649) 4,510 6,038 126,510
------------------------- ----------------------- ----------- -----------
Total revenues. . . . . . 4,555,143 2,927,863 16,290,784 9,406,419

COSTS AND EXPENSES:
Provision for credit losses. . 504,345 51,701 529,877 245,950
Operating expenses . . . . . . 4,412,104 3,137,194 11,707,967 9,025,178
Interest expense . . . . . . . 2,842,918 1,371,912 8,590,992 4,126,422
------------------------- ----------------------- ----------- -----------
Total costs and expenses. 7,759,367 4,560,807 20,828,836 13,397,550
------------------------- ----------------------- ----------- -----------

(Loss) before income taxes . . (3,204,224) (1,632,944) (4,538,052) (3,991,131)
Income tax (benefit) . . . . . - - - -
------------------------- ----------------------- ----------- -----------

Net (loss) . . . . . . . . . . (3,204,224) (1,632,944) (4,538,052) (3,991,131)
========================= ======================= =========== ===========

NET (LOSS) PER COMMON SHARE
- - -BASIC AND DILUTIVE. . . . . . ($0.27) ($0.19) ($0.46) ($0.52)
========================= ======================= =========== ===========

Weighted average number of
common shares outstanding. . . 11,687,425 8,477,094 9,959,514 7,724,594
<FN>

</TABLE>

<TABLE>

OPERATING HIGHLIGHTS AND RATIOS

Three Months Ended Sept. 30, Nine Months Ended Sept.30,
<S> <C> <C> <C> <C>
1998 1997 1998 1997
------------------------- ------------------------ ------------- ------------
Avg. interest bearing
portfolio balance . . . . . . . . $ 123,017,611 $ 74,094,439 $139,868,719 $77,548,675
========================= ======================== ============= ============
As a % of avg. portfolio
balance above (annualized)
- - -----------------------------------
Interest income . . . . . . . . . 14.8% 15.8% 15.5% 16.0%
Interest expense. . . . . . . . . 9.2% 7.4% 8.2% 7.1%
------------------------- ------------------------ ------------- ------------
Net interest margin. . . . . . 5.6% 8.4% 7.3% 8.9%

Operating expenses. . . . . . . . 14.4% 16.9% 11.1% 15.6%
Provision for credit losses. . . 1.6% 0.3% 0.5% 0.4%
Other income . . . . . . . . . . - - - 0.2%
--------------------------------------------------------------------------------
Net operating expenses
and other income. . . . . . . . . 16.0% 17.2% 11.6% 15.8%
------------------------- ------------------------ ------------- ------------

Net (loss). . . . . . . . . . . . . (10.4%) (8.8%) (4.3%) (6.9%)
========================= ======================== ============= ============

Contract Purchase Summary
- - -----------------------------------
Contracts from dealer network . . . 509 384 1,239 1,700
Contracts from portfolio purchases. (26) 649 9,738 649
------------------------- ------------------------ ------------- ------------
Total contracts. . . . . . . . . 483 1,033 10,977 2,349

Dollar Value of Contracts Acquired. $ 5,407,674 $ 9,186,231 $105,180,418 $23,141,684

Average amount financed . . . . . . $ 11,196 $ 8,893 $ 9,582 $ 9,852

<FN>

</TABLE>

REVENUES AND NET (LOSS)
- - --------------------------
The Company's revenues increased $1.6 million, or 56%, from $2.9 million
in the third quarter of 1997 to $4.5 million in the comparable 1998 period.
Net (loss) increased from ($1.6) million in the third quarter of 1997 to
($3.2) million in the comparable 1998 period. Net (loss) per common share was
($0.19) for the third quarter of 1997 and ($0.27) for the comparable 1998
period based on 8.5 million and 11.7 million weighted average common shares
outstanding, respectively. The increase in net (loss) was primarily due to a
lower interest income effective yield of 14.8% compared to 15.8% which
resulted from a decrease in the Company's weighted average contract annual
percentage rate of interest, the reversal of interest income and an increase
in the provision for credit losses associated with an increase in charge-offs,
the costs 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 nine months ended September 30, the Company's revenues increased $7.0
million, or 75%, from $9.3 million in 1997 to $16.3 million in 1998. Net
(loss) increased from ($4.0) million in 1997 to ($4.5) million in 1998. (Loss)
per common share was ($0.52) for 1997 and ($0.46) for 1998 based on 7.7
million and 10.0 million weighted average common shares outstanding,
respectively. The increase in net (loss) was primarily due to a lower interest
income effective yield of 15.5% compared to 16.0% which resulted from a
decrease in the Company's weighted average contract annual percentage rate of
interest, the reversal of interest income and an increase in the provision for
credit losses associated with an increase in charge-offs, the costs 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.

The lower reported interest income percentages - when compared to the contract
annual percentage rate of interest (21.5% at September 30, 1998 and 22.7% at
September 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 nine months of 1998, the Company's net Automobile Receivables
increased from $67.6 million at December 31, 1997 to $103.7 million at
September 30, 1998. During the three months ended September 30, 1998, the
Company originated 509 loans totaling $5.7 million. The average amount
financed for Contracts originated through the Dealer Network for the third
quarter of 1998 was $11,191. For the third quarter of 1997, the Company
originated 384 loans totaling $4.0 million with an average amount financed of
$10,516 and purchased a loan portfolio of 649 loans totaling $5.1 million.
During the nine months ended September 30, 1998, the Company originated 1,239
loans and purchased 9,738 loans through portfolio purchases totaling $105.2
million with an average amount financed $9,582 as compared with loan
originations of 1,700 and a portfolio purchase of 649 loans totaling $23.1
million with an average amount financed of $9,852 for the nine months ended
September 30, 1997. The average discount on all Contracts originated pursuant
to discounted Finance Programs during the nine months ended September 30, 1998
and 1997 was approximately 5.5% and 7.1%, respectively.

The increase in the total number and total dollar value of loan originations
and purchases during the first nine 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. In September
1997, the Company completed the acquisition of $5 million in auto loans.

At September 30, 1998, only $.5 million of the Company's Auto Receivable Loan
Portfolio was generated from the discontinued CarMart operations as compared
to $1.9 million of its portfolio at September 30, 1997.

COSTS AND EXPENSES
- - --------------------
The increase in the provisions for credit losses for the quarter and nine
months ended September 30, 1998, as compared to the comparable 1997 periods,
primarily was due to the 1998 third quarter provision for credit losses of $.5
million for a change in estimate related to the Company's static pooling
reserve analysis. This increase was partially offset by a decrease in the
provision associated with 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 12.7% in the
first nine months of 1997 to 14.7% in the comparable 1998 period due primarily
to the charge-off of loans acquired from affiliates of Pacific USA, which the
Company currently believes are adequately covered by the related purchase
allowance for estimated losses. Excluding the loans and related charge-offs
associated with the portfolio acquired from affiliates of Pacific USA, net
charge-offs as a percentage of Average Net Automobile Receivables decreased to
10.8% in the first nine months of 1998. Again, it should be noted that the
Company currently believes that anticipated losses associated with the loans
acquired from affiliates of Pacific USA are adequately covered by the related
allowance for credit losses. 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 3.0% of its loan portfolio over 60
days past due at September 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
affiliates of Pacific USA in January 1998, is due to the following factors:
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.

Operating expenses increased $1.3 million, or 40.6%, from $3.1 million in
third quarter of 1997 to $4.4 million in the comparable 1998 period. For the
nine months ended September 30, operating expenses increased $2.7 million, or
29.7%, from $9.0 million in 1997 to $11.7 million in 1998. The increase in
operating expenses for both the three and nine months ended September 30,
1998, were due primarily to increases in salaries and benefits 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>

THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------- ------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1998 1997 INCREASE (DECR.) 1998 1997 INCREASE (DECR.)
(dollars in thousands) ------- ------ ---------------- -------- ------ -----------------
Salaries and benefits . . . . . . $1,731 $1,233 $ 498 $ 4,751 $3,961 $ 790
Depreciation and amortization . . 549 597 (48) 1,769 1,403 366
Consulting and professional fees. 1,282 706 576 2,929 1,820 1,109
Telephone . . . . . . . . . . . . 144 115 29 437 390 47
Travel and entertainment. . . . . 102 42 60 220 163 57
Loan origination fees . . . . . . (88) (57) (31) (212) (229) 17
Rent/Office Supplies/Postage. . . 283 275 8 896 803 93
All other . . . . . . . . . . . . 409 226 183 918 714 204
------- ------ ---------------- -------- ------ -----------------
$4,412 $3,137 $ 1,275 $11,708 $9,025 $ 2,683
======= ====== ================ ======== ====== =================
<FN>

</TABLE>

Interest expense increased $1.5 million, or 107.2%, from $1.4 million in the
third quarter of 1997 to $2.9 million in the comparable 1998 period. For the
nine months ended September 30, interest expense increased $4.5 million, or
108.2%, from $4.1 million in 1997 to $8.6 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 rate of 1.0% over LIBOR (increasing to 3.5% over LIBOR on 85% of
the amount advanced and 15% on the remaining 15% of the amount advanced
effective July 1, 1998) also contributed to the increase. From December 31,
1997 through September 30, 1998, net increases (decreases) in the Company's
debt were as follows:

<TABLE>

(dollars in thousands)

<S> <C>
Notes payable - LaSalle . . . . . . . . . . . . . . ($6,376)
Warehouse line of credit - Daiwa. . . . . . . . . . 13,475
Portfolio purchase credit facility - Daiwa. . . . . 46,406
Heartland promissory note payable. . . . . . . . . (1,135)
Pacific USA Holdings Corp. promissory note payable 2,487
Convertible subordinated debt . . . . . . . . . . . (1,385)
Senior subordinated debt-Rothchild. . . . . . . . . (1,883)
Senior subordinated debt-Black Diamond. . . . . . . (540)
Automobile receivables-backed notes . . . . . . . . (12,321)
---------
Total. . . . . . . . . . . . . . . . . . . . . $ 38,728
=========
<FN>

</TABLE>

The average annualized interest rate on the Company's debt was 9.0% for the
third quarter of 1998 versus 7.5% for the comparable 1997 period. For the
nine months ended September 30, the average annualized interest rate on the
Company's debt increased from 7.3% in 1997 to 8.2% 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 gross
Automobile Receivables, decreased from 8.4% in the third quarter of 1997 to
5.6% in the comparable 1998 period. For the nine months ended September 30,
the annualized net interest margin percentage decreased from 8.9% in 1997 to
7.3% in 1998. These decreases were primarily due to a decrease in the
Company's weighted average contract annual percentage rate of interest, the
reversal of previously recognized interest income as a result of charge-offs
of loans, 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 nine months ended September 30, 1998 and
1997 are summarized as follows:
<TABLE>

CASH FLOW DATA
NINE MONTHS ENDED SEPTEMBER 30,

<S> <C> <C>
(dollars in thousands). . . . . . . . . . . . . . . . 1998 1997
--------- --------
Cash flows provided by (used in):
Operating activities. . . . . . . . . . . . . . . . . $ 9,624 $ 500
Investing activities. . . . . . . . . . . . . . . . . (53,713) 2,093
Financing activities. . . . . . . . . . . . . . . . . 44,190 (3,188)
--------- --------
Net increase (decrease) in cash and cash equivalents. $ 101 ($595)
========= ========
<FN>

</TABLE>

The Company's business has been and will continue to be cash intensive. The
Company's current principal needs for cash include cash required for payments
to Dealers in connection with purchases of installment contracts, cash
required for the purchase of existing loan portfolios and cash required for
working capital. This utilization of cash is currently financed through the
Company's capital, warehouse lines of credit, securitizations and other
short-term loans. 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. However, it should be noted that during the third
quarter of 1998, certain asset-backed securitizors experienced significant
reduction in liquidity. It was reported through several market sources that
during the third quarter of 1998, hedge funds, some of which are significant
buyers of asset-backed investments, were required by their lenders to
liquidate substantial portions of their portfolio, thereby creating an over
abundance of supply and, simultaneously, a reduced demand for asset-backed
investments. These conditions as well as the current overall unsettled nature
of the capital markets could negatively impact the Company's ability to
provide liquidity through securitizations and additional warehouse credit
facilities.

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
such facilities, they will provide the Company with additional financing on
more favorable terms. Due primarily to the current unsettled nature of the
capital markets, no assurance can be given as to if, or when, the Company
could be able to consummate such transactions.

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. The Company is also in discussion with
Pacific USA, it's largest shareholder, regarding Pacific USA's interest in
participating in additional financing facilities. Given the current
uncertainty of the capital markets, there are no assurances as to if or when
Pacific USA will participate in additional financing facilities. Pacific USA
has not committed any additional funds, equity, loan or otherwise, beyond the
equity contribution and loans described in Note 4 of the Notes to Consolidated
Financial Statements.

The ability of the Company to maintain current growth levels will, in
large part, be dependent upon obtaining additional sources of financing, of
which no assurance can be given. Failure to obtain additional financing
sources will materially restrict the Company's future business activities and
current operations and could, in the future, require the Company to pursue
selling certain of the loans in its portfolio to address its liquidity
requirements.

Because the Company has not been operating at full operating capacity and as a
means of addressing liquidity needs and reducing operating costs, the Company
announced on November 6, 1998, a restructuring effort which included the
elimination of approximately 40 positions. Management believes this
restructuring will streamline the Company's operations and will allow it to
more fully utilize the automation benefits of its advanced technology. The
Company's service and collection departments will be unaffected, reflecting
the Company's commitment to maintaining its high standards of service and
asset management control.

In March 1996, the Company announced that its Board of Directors had
authorized the purchase of up to 500,000 shares of Class A Common Stock,
representing approximately 10% of its Class A Common Stock outstanding.
Subject to applicable securities laws, repurchases may be made at such times,
and in such amounts, as the Company's management deems appropriate. As of
September 30, 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 September 30, 1998, Pacific USA repurchased
loans with an original purchased principal balance of approximately $2.9
million. In addition to the repurchase proceeds of $2.6 million from Pacific
USA, 85,870 shares of Preferred Stock were or will be surrendered by Pacific
USA to the Company. In consideration for converting approximately $4.5 million
of the Pacific USA Note into 4.7 million shares of the Company's Class A
Common Stock (Note 4), the Company agreed, subject to shareholder approval,
which was obtained on November 12, 1998, to change the conversion ratio of
the Preferred Stock held by Pacific USA. As originally issued, each share of
Preferred Stock was convertible at any time into one-half share of Class A
Common Stock. Since shareholder approval was obtained on November 12, 1998,
each share of Preferred Stock is convertible into two shares of the Company's
Class A Common Stock, or an aggregate of up to 4,695,174 shares of Class A
Common Stock. Under FAS 123, the Company will value the potential additional
issuable Class A Common Stock using the Black-Scholes pricing model and will
record a fourth quarter charge, and a corresponding addition to shareholders'
equity.

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.

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 (then the
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 and under the Conversion Rights Agreement dated
July 1, 1998, Pacific USA was issued 4,698,157 shares of the Company's Class A
Common Stock. As of the date of this report, 12,772,788 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 49.9% of the combined outstanding shares of Class A and Class B
Common Stock and controls approximately 65.3% 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 4,695,174 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 accrued interest at a rate equal to LIBOR plus
1.0% per annum. Effective July 1, 1998, the interest rate on this advance
changed to LIBOR plus 3.5% per annum. The remaining 15% of the amount
advanced accrued 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 changed to
15% per annum. The Credit Facility Agreement requires the Company to maintain
certain standard ratios and covenants. At September 30, 1998, the Credit
Facility had an outstanding balance of $46,405,842.

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 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.

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 September 30, 1998, the Series 1997-1A Notes had a balance of
$20,100,670. The underlying receivables backing the Series 1997-1A Notes had a
balance of $23,165,832 as of September 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.

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 September
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 September 30, 1998, the Company had borrowed $43,475,000
against this line of credit.

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.

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"). Effective July 1, 1998, the Company and Pacific USA entered into a
Conversion and Rights Agreement whereby $4,463,250 of the principal amount of
the Pacific USA Note was converted into 4,698,157 restricted shares of the
Company's Class A Common Stock. As consideration for the conversion, the
Company agreed, subject to shareholder approval, which was obtained on
November 12, 1998, to change the conversion ratio of the Company's Preferred
Stock held by Pacific USA. The remaining unconverted principal balance of the
Pacific USA Note of $536,750 is collateralized by the stock of MF Receivables
Corp. II. Interest on the outstanding Pacific USA Note balance accrues at a
fixed rate per annum of 12.0%. All outstanding principal and interest is due
and payable on or before December 31, 1998. On September 8, 1998 and September
30, 1998, the Company and Pacific USA entered into Promissory Note agreements
whereby Pacific USA lent the Company $950,000 and $1,000,000, respectively.
Both Promissory Notes accrue interest at the prime rate plus 1% per annum. All
outstanding principal, plus accrued and unpaid interest, is due six months
from the date of the note.

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. From February 23, 1998, to the date of this report, the bid
price of the Company's Class A Common Stock has been less than $1.00 per share
and the market value of the public float has been less than $5 million.

"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 September 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 $.88 per share and to meet the Small Cap
Market requirement of $1 million in public float, the market price would have
to be approximately $.18 per share. As of the date of this report, the market
value of the public float was less than $5 million, but greater than $1
million.

In February 1998, Nasdaq notified the Company that it was not in compliance
with the National Market requirements and that the Class A Common Stock would
be delisted unless compliance was achieved. The Company appealed and requested
an exception to the listing requirements. On November 4, 1998, Nasdaq advised
the Company that an exception would not be granted. However, it also noted
that, upon consummation of the reverse stock split, the Company will likely
satisfy the $1.00 bid price and the $1,000,000 market value of public float
requirements necessary for continued listing on the Nasdaq Small Cap Market.
Accordingly, the Panel decided to move the Company's listing to the Nasdaq
Small Cap Market effective November 6, 1998, provided that on or before
November 23, 1998, the Company must effectuate a reverse stock split
sufficient to bring it into compliance with the $1.00 per share minimum bid
price requirement; thereafter, the closing bid price must meet or exceed $1.00
per share for a minimum of ten consecutive trading days. The Company must also
demonstrate compliance with all requirements for continued listing on the
Nasdaq Small Cap Market. In the event the Company fails to meet any of these
requirements, the Company's securities will be delisted from the Nasdaq Stock
Market.

Upon approval of the Company's Board of Directors, the Company will effect a
five for one reverse split of its Class A and Class B Common Stock. Recently,
the bid price of the Class A Common Stock has occasionally been less than
$0.20 per share. The reverse split being considered will be five 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, no assurances can be given that such
minimum bid price will be met or can be maintained.

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 split does not result in a minimum bid price
requirement of $1.00 per share of Class A Common Stock, 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 September 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.

During 1997, the Company acquired contracts from approximately 375 dealers in
28 states, the majority of which were purchased in five states.

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,
approximately 90% of the face amount of Contracts, in the aggregate, is
advanced to the Company for purchasing qualifying Contracts. 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.

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, and the Conversion Rights Agreement dated July 1, 1998, Pacific USA
Holdings Corp. ("Pacific USA") increased its voting power in the Company to
65.3%. Pacific USA is the beneficial owner of 49.9% 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.

<PAGE>
- - ------

MONACO FINANCE, INC. AND SUBSIDIARIES

FORM 10-QSB

QUARTER ENDED SEPTEMBER 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.

In August 1998, the Company and the plaintiffs settled the lawsuit for an
immaterial amount.

At this early stage in the proceedings, legal counsel has not been able to
express any view of the probable outcome of this lawsuit. In any event, at
this time, Management believes the Company's liability, if any, with respect
to the claims made, are most likely immaterial and the Company intends to
vigorously defend the allegations.

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
- - ---------------------------------------------------------------------
(c.) On November 12, 1998, a special meeting of shareholders of the
Company was held for the following purposes:

To consider and approve a proposal to amend the Company's Articles of
Incorporation with respect to its 8% Cumulative Convertible Preferred Stock -
Series 1998-1 (the "Preferred Stock") to (i) change the Conversion Ratio of
the Preferred Stock from one share of Class A Common Stock for each two shares
of Preferred Stock that are converted to four shares of Class A Common Stock
for each two shares of Preferred Stock that are converted, and (ii) to provide
that the market price of the Class A Common Stock that causes automatic
conversion of the Preferred Stock into shares of Class A Common Stock shall be
proportionately adjusted in the event of any issuance of Class A Common Stock
as a dividend or other distribution or in the event of a subdivision or
combination of the outstanding shares of Class A Common Stock.

To consider and approve a proposal to authorize the Company's Board of
Directors to effect, in its discretion, a reverse split of the outstanding
shares of the Company's Class A Common Stock and Class B Common Stock on the
basis of one share for each five shares then outstanding (the "Reverse Stock
Split").

The aforementioned proposals were passed with the following votes,
respectively:

- - - The amendment to the Articles of Incorporation
Class A Common Stock - 8,452,724 For, 853,158 Against, 104,164 Abstained, and
3,049,576 Unvoted.
Class B Common Stock - 1,273,715 For, -0- Against, -0- Abstained, and -0-
Unvoted.
Preferred Stock - 2,347,587 For, -0- Against, -0- Abstained, and -0- Unvoted.

- - - The reverse stock split
Class A Common Stock - 11,616,636 For, 771,334 Against, 71,652 Abstained, and
- - -0-Unvoted.
Class B Common Stock - 1,273,715 For, -0- Against, -0- Abstained, and -0-
Unvoted.

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 37.
27 - Financial Data Schedule. Page 38.

(b) Reports on Form 8 - K:
A Form 8-K dated September 1, 1998 was filed announcing the conversion of
$4.5 million of debt to equity by Pacific USA Holdings Corp., the appointment
of Joseph A. Cutrona as Chief Executive Officer of the Company and the
amendment of the Note Purchase Agreement with Rothschild North America, Inc.
and the Indenture to the Company's 12% Convertible Senior Subordinated Notes.

<PAGE>

<TABLE>

EXHIBIT 11
MONACO FINANCE, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS (LOSS) PER COMMON SHARE
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997

EARNINGS (LOSS) PER COMMON SHARE - BASIC AND DILUTIVE:
--------------------------------------------------------------

THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
<S> <C> <C> <C> <C>
1998 1997 1998 1997
------------ ------------ ------------ ------------
NET EARNINGS (LOSS)
- - ---------------------------------------------

Net (loss). . . . . . . . . . . . . . . . . . ($3,204,224) ($1,632,944) ($4,538,052) ($3,991,131)
============ ============ ============ ============

AVERAGE COMMON SHARES OUTSTANDING
- - ---------------------------------------------
Weighted average common shares
outstanding - basic. . . . . . . . . . . . . 11,687,425 8,477,094 9,959,514 7,724,594
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
Pacific USA Holdings Corp. Note Payable . . . (b) (b) (b) (b)
Shares issuable from assumed
conversion of Preferred Stock . . . . . . . . (b) (b) (b) (b)
Shares issuable from assumed
conversion of 7% subordinated debt . . . . . N/A (b) N/A (b)
Weighted average common shares
outstanding - dilutive . . . . . . . . . . . 11,687,425 8,477,094 9,959,514 7,724,594
============ ============ ============ ============

(Loss) per common share - basic and dilutive. ($0.27) ($0.19) ($0.46) ($0.52)
============ ============ ============ ============

<FN>

NOTES
(a) Dilutive potential common shares are calculated using the treasury stock method.
(b) The computation of earnings per common share assuming dilution excludes dilutive potential common
shares that have an anti-dilutive effect on earnings per share.
</TABLE>

<PAGE>
EXHIBIT 27
<TABLE>

MONACO FINANCE, INC., AND SUBSIDIARIES
FINANCIAL DATA SCHEDULE

FOR THE THREE AND NINE MONTHS ENDING SEPTEMBER 30, 1998

ITEM 3 -MOS YEAR-TO-DATE
- - ---------------------------------------------------------- ------------ ------------
<S> <C> <C>
Fiscal year end. . . . . . . . . . . . . . . . . . . . . . 31-Dec-98 31-Dec-98
Period end . . . . . . . . . . . . . . . . . . . . . . . . 30-Sep-98 30-Sep-98
Period type. . . . . . . . . . . . . . . . . . . . . . . . 3 month 9 month
Cash and cash items $ 7,494,189 $ 7,494,189
Marketable securities $ 0 $ 0
Notes and accounts receivable trade $ 115,435,120 $ 115,435,120
Allowance for doubtful accounts ($11,756,702) ($11,756,702)
Inventory $ 0 $ 0
Total current assets $ 0 $ 0
Property, plant and equipment $ 4,964,858 $ 4,964,858
Accumulated depreciation $ 2,492,453 $ 2,492,453
Total assets $ 135,523,526 $ 135,523,526
Total current liabilities $ 0 $ 0
Bonds, mortgages and similar debt $ 118,378,260 $ 118,378,260
Preferred stock-mandatory redemption $ 0 $ 0
Preferred stock no-mandatory redemption $ 4,695,174 $ 4,695,174
Common stock $ 140,465 $ 140,465
Other stockholders' equity $ 10,022,709 $ 10,022,709
Total liabilities and stockholders' equity $ 135,523,526 $ 135,523,526
Net sales of tangible products $ 0 $ 0
Total revenues $ 4,555,143 $ 16,290,784
Cost of tangible goods sold $ 0 $ 0
Total costs and expenses applicable to sales and revenues $ 4,412,104 $ 11,707,967
Other costs and expenses $ 0 $ 0
Provision for doubtful accounts and notes $ 504,345 $ 529,877
Interest and amortization of debt discount $ 2,842,918 $ 8,590,992
Income before taxes and other items ($3,204,224) ($4,538,052)
Income tax expense $ 0 $ 0
Income/(loss) continuing operations ($3,204,224) ($4,538,052)
Discontinued operations $ 0 $ 0
Extraordinary items $ 0 $ 0
Cumulative effect-changes in accounting principals $ 0 $ 0
Net income (loss) ($3,204,224) ($4,538,052)
Earnings per common share-basic ($0.27) ($0.46)
Earnings per common share-assuming dilution ($0.27) ($0.46)

<FN>

</TABLE>

<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: November 16, 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

<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 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-END> SEP-30-1998 SEP-30-1998
<CASH> 7,494,189 7,494,189
<SECURITIES> 0 0
<RECEIVABLES> 115,435,120 115,435,120
<ALLOWANCES> (11,756,702) (11,756,702)
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 0
<PP&E> 4,964,858 4,964,858
<DEPRECIATION> 2,492,453 2,492,453
<TOTAL-ASSETS> 135,523,526 135,523,526
<CURRENT-LIABILITIES> 0 0
<BONDS> 118,378,260 118,378,260
0 0
4,695,174 4,695,174
<COMMON> 140,465 140,465
<OTHER-SE> 10,022,709 10,022,709
<TOTAL-LIABILITY-AND-EQUITY> 135,523,526 135,523,526
<SALES> 0 0
<TOTAL-REVENUES> 4,555,143 16,290,784
<CGS> 0 0
<TOTAL-COSTS> 4,412,104 11,707,967
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 504,345 529,877
<INTEREST-EXPENSE> 2,842,918 8,590,992
<INCOME-PRETAX> (3,204,224) (4,538,052)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (3,204,224) (4,538,052)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (3,024,224) (4,538,052)
<EPS-PRIMARY> (0.27) (0.46)
<EPS-DILUTED> (0.27) (.46)

</TABLE>