FORM 10-QSB
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: MARCH 31, 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 March 31,
1998:
Class A Common Stock, $.01 par value: 8,014,631 shares
Class B Common Stock, $.01 par value: 1,273,715 shares
Exhibit index is located on page 32.
Total number of pages is 35.
MONACO FINANCE, INC. AND SUBSIDIARIES
FORM 10-QSB
QUARTER ENDED MARCH 31, 1998
INDEX
PAGE NO.
--------
PART I - FINANCIAL INFORMATION
Consolidated Statements of Operations for the three
months ended March 31, 1998 and 1997 (unaudited) 3
Consolidated Balance Sheets at March 31, 1998
(unaudited) and December 31, 1997 4
Consolidated Statement of Shareholders' Equity for the
three months ended March 31, 1998 (unaudited) 5
Consolidated Statements of Cash Flows for the three
months ended March 31, 1998 and 1997 (unaudited) 6
Notes to Consolidated Financial Statements (unaudited) 7-18
Management's Discussion and Analysis of Financial
Condition and Results of Operations 19-31
PART II - OTHER INFORMATION 32
EXHIBIT 11 - Computation of Net Earnings (Loss) per
Common Share 33
EXHIBIT 27 - Financial Data Schedule 34
SIGNATURE 35
<PAGE>
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MONACO FINANCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
<TABLE>
THREE MONTHS ENDED MARCH 31,
<CAPTION>
<S> <C> <C>
1998 1997
----------- -------------
REVENUES:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $6,549,238 $ 3,265,126
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 121,994
----------- -------------
Total revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,549,248 3,387,120
COSTS AND EXPENSES:
Provision for credit losses (Note 2) . . . . . . . . . . . . . . . . . . . . . . 16,873 116,979
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,516,014 3,179,275
Interest expense (Note 4). . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,054,522 1,401,160
----------- -------------
Total costs and expenses. . . . . . . . . . . . . . . . . . . . . . . . . . 6,587,409 4,697,414
----------- -------------
(Loss) before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . (38,161) (1,310,294)
Income tax (benefit) (Note 6). . . . . . . . . . . . . . . . . . . . . . . . . . - -
----------- -------------
Net (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ($38,161) ($1,310,294)
=========== =============
EARNINGS (LOSS) PER COMMON SHARE - BASIC AND ASSUMING DILUTION (NOTES 1 AND 5):
Net (loss) per common share - basic and assuming dilution. . . . . . . . . . . . $ 0.00 ($0.19)
=========== =============
Weighted average number of common shares outstanding . . . . . . . . . . . . . . 8,882,770 6,972,094
<FN>
See notes to consolidated financial statements.
</TABLE>
<PAGE>
MONACO FINANCE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 AND AND DECEMBER 31, 1997
<TABLE>
<CAPTION>
MARCH 31, 1998 DECEMBER 31,
(UNAUDITED) 1997
- -------------------------------------------------------------- ---------------- --------------
<S> <C> <C>
ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . $ 2,066,528 $ 757,541
Restricted cash . . . . . . . . . . . . . . . . . . . . . 8,069,313 8,080,033
Automobile receivables - net (Notes 2 and 4). . . . . . . 150,781,878 74,324,431
Repossessed vehicles held for sale. . . . . . . . . . . . 1,274,961 1,738,331
Income tax receivable (Note 6). . . . . . . . . . . . . . 38,197 -
Deferred income taxes (Note 6). . . . . . . . . . . . . . 1,541,582 1,579,779
Furniture and equipment, net of accumulated
depreciation of $1,980,964 (1998) and $2,095,450 (1997) 2,181,619 2,055,774
Other assets. . . . . . . . . . . . . . . . . . . . . . . 2,074,619 2,061,832
---------------- --------------
Total assets . . . . . . . . . . . . . . . . . . . . $ 168,028,697 $ 90,597,721
================ ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable. . . . . . . . . . . . . . . . . . . . . $ 1,097,578 $ 1,537,791
Accrued expenses and other liabilities. . . . . . . . . . 1,247,691 888,309
Notes payable (Note 4). . . . . . . . . . . . . . . . . . - 6,375,549
Warehouse note payable (Note 4) . . . . . . . . . . . . . 113,778,073 30,000,000
Promissory note payable (Note 4). . . . . . . . . . . . . 124,837 1,135,232
Convertible subordinated debt (Note 4). . . . . . . . . . 692,500 1,385,000
Senior subordinated debt (Note 4) . . . . . . . . . . . . 2,916,665 3,333,332
Convertible senior subordinated debt (Note 4) . . . . . . 5,000,000 5,000,000
Automobile receivables-backed notes (Note 4). . . . . . . 28,177,864 32,421,076
---------------- --------------
Total liabilities. . . . . . . . . . . . . . . . . . 153,035,208 82,076,289
Commitments and contingencies (Note 3)
Stockholders' equity (Note 5)
Preferred stock; no par value, 10,000,000 shares
authorized, 2,433,457 shares (1998) issued. . . . . . 4,866,914 -
Class A common stock, $.01 par value; 30,000,000
shares authorized, 8,014,631 shares (1998) and
7,203,479 shares (1997) issued. . . . . . . . . . . . 80,146 72,035
Class B common stock, $.01 par value; 2,250,000
shares authorized, 1,273,715 shares (1998) and
1,273,715 shares (1997) issued. . . . . . . . . . . . 12,737 12,737
Additional paid-in capital. . . . . . . . . . . . . . . 26,560,659 24,925,466
Retained earnings (deficit) . . . . . . . . . . . . . . (16,526,967) (16,488,806)
---------------- --------------
Total stockholders' equity . . . . . . . . . . . . . . . . . . 14,993,489 8,521,432
---------------- --------------
Total liabilities and stockholders' equity . . . . . . . . . . $ 168,028,697 $ 90,597,721
================ ==============
<FN>
See notes to consolidated financial statements.
</TABLE>
<PAGE>
MONACO FINANCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
CLASS A CLASS B ADDITIONAL
PREFERRED COMMON STOCK COMMON STOCK PAID-IN RETAINED
STOCK SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS
---------- ------------- ------------- --------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance - December 31, 1997 $ 0 7,203,479 $ 72,035 1,273,715 $ 12,737 $24,925,466 ($16,488,806)
Shares issued related
to portfolio acquisition. . 4,866,914 811,152 8,111 - - 1,614,193 -
Issuance of warrants. . . . - - - - - 21,000 21,000
Net (loss) for the year . . - - - - - - (38,161)
---------- ------------- ------------- --------- --------- ----------- -------------
Balance - March 31, 1998. . $4,866,914 8,014,631 $ 80,146 1,273,715 $ 12,737 $26,560,659 ($16,526,967)
========== ============= ============= ========= ========= =========== =============
TOTAL
------------
<S> <C>
Balance - December 31, 1997 $ 8,521,432
Shares issued related
to portfolio acquisition. . 6,489,218
Issuance of warrants
Net (loss) for the year . . (38,161)
------------
Balance - March 31, 1998. . $14,993,489
============
<FN>
See notes to consolidated financial statements.
</TABLE>
5
<PAGE>
MONACO FINANCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1998 1997
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
- --------------------------------------------------------------
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . ($38,161) ($1,310,294)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation . . . . . . . . . . . . . . . . . . . . 261,308 220,811
Provision for credit losses. . . . . . . . . . . . . 16,873 116,979
Amortization of excess interest. . . . . . . . . . . 2,167,742 1,213,605
Amortization of other assets . . . . . . . . . . . . 348,369 182,740
Amortization attributable to issuance of warrants. . 21,000 -
Deferred tax asset . . . . . . . . . . . . . . . . . 38,197 -
Other. . . . . . . . . . . . . . . . . . . . . . . . (5,819) 5,180
------------- -------------
2,809,509 429,021
Change in assets and liabilities:
Receivables. . . . . . . . . . . . . . . . . . . . . 5,461,363 (198,185)
Prepaid expenses . . . . . . . . . . . . . . . . . . (9,262) (204,334)
Accounts payable . . . . . . . . . . . . . . . . . . (440,213) (42,414)
Accrued liabilities and other. . . . . . . . . . . . 301,621 57,972
------------- -------------
Net cash provided by operating activities. . . . . . . . . . . 8,123,018 42,060
------------- -------------
Cash flows from investing activities:
- --------------------------------------------------------------
Retail installment sales contracts purchased. . . . . . . (92,621,663) (7,993,574)
Proceeds from payments on contracts . . . . . . . . . . . 15,457,826 10,013,042
Purchase of furniture and equipment . . . . . . . . . . . (388,944) (460,136)
Equipment deposits and other. . . . . . . . . . . . . . . 1,791 726
------------- -------------
Net cash (used in) provided by investing activities. . . . . . (77,550,990) 1,560,058
------------- -------------
Cash flows from financing activities:
- --------------------------------------------------------------
Net borrowings under lines of credit. . . . . . . . . . . 77,452,524 2,000,000
Net decrease (increase) in restricted cash. . . . . . . . 10,721 (212,687)
Borrowings on asset-backed notes. . . . . . . . . . . . . - 4,663,456
Repayments on asset-backed notes. . . . . . . . . . . . . (4,243,212) (7,495,439)
Repayments on senior subordinated debentures. . . . . . . (416,667) (416,667)
Repayments on promissory note . . . . . . . . . . . . . . (1,010,395) -
Repayments on convertible subordinated debt . . . . . . . (692,500) -
Increase in debt issue and conversion costs . . . . . . . (363,512) (33,373)
------------- -------------
Net cash provided by (used in) financing activities. . . . . . 70,736,959 (1,494,710)
------------- -------------
Net increase in cash and cash equivalents. . . . . . . . . . . 1,308,987 107,408
Cash and cash equivalents, January 1 . . . . . . . . . . . . . 757,541 1,227,441
------------- -------------
Cash and cash equivalents, March 31. . . . . . . . . . . . . . $ 2,066,528 $ 1,334,849
============= =============
<FN>
See notes to consolidated financial statements.
</TABLE>
6
<PAGE>
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 used and, to a
limited extent, new vehicles, to customers, from automobile dealers (the
"Dealer(s)" or the "Dealer Network") located in twenty-nine 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 March 31, 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 months ended March 31,
1998 and 1997 are not necessarily indicative of the results of the entire
year.
REPOSSESSED VEHICLES HELD FOR RESALE
- ----------------------------------------
Repossessed vehicles held for resale consist of repossessed vehicles
awaiting liquidation. Repossessed vehicles are carried at estimated actual
cash value. At March 31, 1998 and December 31, 1997, approximately 327 and
484 repossessed vehicles, respectively, were awaiting liquidation. Included
are vehicles held for resale, vehicles which have been sold for which payment
has not been received and unlocated vehicles (skips), certain of the value of
which may be recovered from insurance proceeds.
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 March 31, 1997 primary and fully
diluted earnings per share computations and the March 31, 1998 dilutive
earnings per share computations antidilutive. Accordingly, convertible
securities have already been excluded from the previously reported primary and
fully diluted earnings per share amounts and do not require restatement.
Basic and dilutive earnings per share are the same for each period presented.
USE OF ESTIMATES
- ------------------
The preparation of financial statements in conformity with general
accepted accounting principles requires management to make certain estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of financial statements and the reported amounts of revenues and
expenses during the reporting period. Management believes that such estimates
have been based on reasonable assumptions and that such estimates are
adequate, however, actual results could differ from those estimates.
In connection with the purchase of Contracts, the Company is required to
estimate the number and dollar amount of loans expected to result in defaults
and to estimate the amount of loss that will be incurred under each default.
The Company currently provides allowances for these losses based on the
historical performance of the Contracts which are tracked by the Company on a
static pool basis. The actual losses incurred could differ materially from the
amounts that the Company has estimated in preparing the historical
consolidated financial statements.
TREASURY STOCK
- ---------------
In accordance with Section 7-106-302 of the Colorado Business Corporation
Act, shares of its own capital stock acquired by a Colorado corporation are
deemed to be authorized but unissued shares. APB Opinion No. 6 requires the
accounting treatment for acquired stock to conform to applicable state law.
As such, 26,900 shares of Class A Common Stock purchased in 1996 has been
reported as a reduction to Class A Common Stock and Additional
Paid-in-Capital.
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
- ------------------------------------------------------
<TABLE>
<CAPTION>
MARCH 31,
<S> <C> <C>
1998 1997
---------- ----------
Cash Payments for:
Interest . . . . . $2,709,569 $1,419,834
Income Taxes . . . $ 3,180 $ 2,074
<FN>
</TABLE>
8
<PAGE>
Non-cash investing and financing activities:
- ------------------------------------------------
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.
RECLASSIFICATIONS
- -----------------
Certain prior year balances have been reclassified in order to conform
with the current year presentation.
NOTE 2 - AUTOMOBILE RECEIVABLES
- -----------------------------------
<TABLE>
<CAPTION>
Automobile receivables consist of the following:
MARCH 31, DECEMBER 31,
<S> <C> <C>
1998 1997
------------------ ------------
Retail installment sales contracts. . . . . . . . $ 125,519,508 $37,103,262
Retail installment sales contracts-Trust (Note 4) 32,378,104 37,323,549
Excess interest receivable. . . . . . . . . . . . 10,075,271 4,849,209
Other . . . . . . . . . . . . . . . . . . . . . . 613,262 777,749
Accrued interest. . . . . . . . . . . . . . . . . 2,218,517 1,121,161
------------------ ------------
Total finance receivables . . . . . . . . . . . . 170,804,662 81,174,930
Allowance for credit losses . . . . . . . . . . . (20,022,784) (6,850,499)
------------------ ------------
Automobile receivables - net. . . . . . . . . . . $ 150,781,878 $74,324,431
================== ============
<FN>
</TABLE>
At March 31, 1998, the accrual of interest income was suspended on
$152,098 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. A provision for credit losses is
charged to earnings in an amount sufficient to maintain the allowance. This
allowance is reported as a reduction to Automobile Receivables.
<TABLE>
<CAPTION>
<S> <C>
ALLOWANCE FOR
CREDIT LOSSES
---------------
Balance as of December 31, 1997. . . . . . . . $ 6,850,499
Provisions for credit losses . . . . . . . . . 16,873
Unearned interest income . . . . . . . . . . . 7,393,804
NAFCO loan loss reimbursement (see Note 5) . . 6,083,643
Unearned discounts . . . . . . . . . . . . . . 2,943,018
Retail installment sale contracts charged off. (5,585,235)
Recoveries . . . . . . . . . . . . . . . . . . 2,320,182
---------------
Balance as of March 31, 1998 . . . . . . . . . $ 20,022,784
===============
<FN>
</TABLE>
The provision for credit losses is based on estimated losses on all
Contracts purchased prior to January 1, 1995 with zero discounts ("100%
Contracts") and for all Contracts originated by CarMart which have been
provided for by additions to the Company's allowance for credit losses as
determined by the Company's risk analysis.
Effective January 1, 1995, upon the acquisition of certain Contracts from
its Dealer Network, a portion of future interest income, as determined by the
Company's risk analysis, was capitalized into Automobile Receivables (excess
interest receivable) and correspondingly used to increase the allowance for
credit losses (unearned interest income). Subsequent receipts of excess
interest are applied to reduce excess interest receivable. For the three
months ended March 31, 1998, $2,167,742 of excess interest income was
amortized against excess interest receivable.
Unearned discounts result from the purchase of Contracts from the Dealer
Network at less than 100% of the face amount of the note. All such discounts
are used to increase the allowance for credit losses.
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
- -------------
Although not subject to any material litigation at this time, the Company
and its Subsidiaries at times are subject to various legal proceedings and
claims that arise in the ordinary course of business. In the opinion of
management of the Company, based in part on the advice of counsel, the amount
of any ultimate liability with respect to these actions will not materially
affect the results of operations, cash flows or financial position of the
Company. It is the Company's and its Subsidiaries' policy to vigorously defend
litigation, however, the Company and its Subsidiaries have, and may in the
future, enter into settlements of claims where management deems appropriate.
NOTE 4 - DEBT
- ----------------
LASALLE NATIONAL BANK
- -----------------------
In January 1996, the Company entered into a revolving line of credit
agreement with LaSalle National Bank ("LaSalle") providing a line of credit
of up to $15 million, not to exceed a borrowing base consisting of eligible
accounts receivable to be acquired. The scheduled maturity date of the line of
credit was extended from January 1, 1998 to March 23, 1998, at which time the
outstanding balance on the line of credit was paid in full. At the option of
the Company, the interest rate charged on the loans was either .5% in excess
of the prime rate charged by lender or 2.75% over the applicable LIBOR rate.
The Company was obligated to pay the lender a fee equal to .25% per annum of
the average daily unused portion of the credit commitment. The obligation of
the lender to make advances was subject to standard conditions. The collateral
securing payment consisted of all Contracts pledged and all other assets of
the Company. The Company had agreed to maintain certain restrictive financial
covenants.
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
March 31, 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 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 March 31,
1998, the Company had borrowed $46.2 million against this line of credit.
The assets of MF III are not available to pay general creditors of the
Company. All cash collections in excess of disbursements to Daiwa and other
general disbursements are paid to MF III on a monthly basis.
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 $73,926,565.01
Portfolio Purchase Credit Facility (the "Credit Facility") with Daiwa. The
proceeds from the Credit Facility were used to acquire an $81.1 million
portfolio from Pacific USA Holdings Corp. and certain of its subsidiaries
(Note 5). All advances received under the Credit Facility are secured by
eligible purchased loan Contracts and all proceeds received from those
Contracts. The scheduled maturity date with respect to the advances under the
Credit Facility is the earlier of January 6, 1999 or the disposition date of
the eligible purchased loan Contract. Under the Credit Facility, prior to July
1, 1998, 85% of the amount advanced to the Company accrues interest at a rate
equal to LIBOR plus 1.0% per annum. Effective July 1, 1998, the interest rate
on this advance changes to LIBOR plus 3.5% per annum. The remaining 15% of
the amount advanced accrues interest at a rate of LIBOR plus 1.0% per annum
prior to July 1, 1998. Effective July 1, 1998, the interest rate on this
advance changes to 15% per annum. The Credit Facility Agreement requires the
Company to maintain certain standard ratios and covenants. At March 31, 1998,
the Credit Facility had an outstanding balance of $67,578,073.
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") whereby, among other
things, Pacific agreed to acquire certain shares of the Company's Class A
Common Stock. On November 1, 1996, the Company entered into a Loan Agreement
with Pacific whereby Pacific loaned the Company $3 million ("Pacific Loan").
On February 7, 1997, the Securities Purchase Agreement was terminated by the
parties; however, the Pacific Loan and its corresponding Installment Note
remained in effect.
On April 25, 1997, the Company executed a Conversion and Rights Agreement
(the "Conversion Agreement") with Pacific. The Conversion Agreement
converted the entire $3,000,000 outstanding principal amount of the
installment note made by Pacific to the Company into 1.5 million restricted
shares of the Company's Class A Common Stock. The Conversion Agreement also
released the Company from all liability under the Loan Agreement executed on
October 29, 1996 between the Company and Pacific pursuant to which the $3
million loan was made.
CONVERTIBLE SUBORDINATED DEBENTURES
- -------------------------------------
On March 15, 1993, the Company completed a private placement of
$2,000,000, 7% Convertible Subordinated Notes (the "Notes") with interest
payable semiannually commencing September 1, 1993. Additionally, the
purchasers of the Notes exercised an option to purchase an additional
$1,000,000 aggregate principal amount of the Notes on September 15, 1993. The
principal amount of the Notes, plus accrued and unpaid interest, was due on
March 1, 1998. On March 1, 1998, the Company repaid one-half, or $692,500, of
the then outstanding principal amount of the Notes. The maturity date of the
remaining principal amount of notes of $692,500 was extended to April 15,
1998, without penalty, 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 DEBENTURES
- --------------------------------
On November 1, 1994 the Company sold, in a private placement, unsecured
Senior Subordinated Notes ("Senior Notes") in the gross principal amount of
$5,000,000 to Rothschild North America, Inc. The Senior Notes accrue interest
at a fixed rate per annum of 9.5% through October 1, 1997, and for each month
thereafter, a fluctuating rate per annum equal to the lesser of (a) 11.5% or
(b) 3.5% above LIBOR.
Interest is due and payable the first day of each quarter commencing on
January 1, 1995. Principal payments in the amount of $416,667 are due and
payable the first day of January, April, July and October of each year
commencing January 1, 1997. The unpaid principal amount of the Senior Notes,
plus accrued and unpaid interest are due October 1, 1999.
CONVERTIBLE SENIOR SUBORDINATED NOTE OFFERING
- -------------------------------------------------
On January 9, 1996, the Company entered into a Purchase Agreement for the
sale of an aggregate of $5 million in principal amount of 12% Convertible
Senior Subordinated Notes due 2001 (the "12% Notes"). This agreement was
subsequently amended and approved by the Company's Board of Directors and
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
are convertible, subject to certain terms contained in the Indenture, into
shares of the Company's Class A Common Stock, par value $.01 per share, at a
conversion price of $4.00 per share, subject to adjustment under certain
circumstances. The 12% Notes were issued pursuant to an Indenture dated
January 9, 1996, between the Company and Norwest Bank Minnesota, N.A., as
trustee. The Company agreed to register, for public sale, the shares of
restricted Common Stock issuable upon conversion of the 12% Notes. The 12%
Notes were sold pursuant to an exemption from the registration requirements
under the Securities Act of 1933, as amended.
Provisions have been made for the issuance of up to an additional $5
million in principal amount of the 12% Notes ("Additional 12% Notes") on or
before September 10, 1998, between the Company and Black Diamond Advisors,
Inc. ("Black Diamond"), one of the initial purchasers, with an initial
conversion price of $3.00 per share.
AUTOMOBILE RECEIVABLES - BACKED NOTES
- -----------------------------------------
In November 1994, MF Receivables Corp. I. ("MF I"), the Company's wholly
owned special purpose subsidiary, sold, in a private placement, $23,861,823 of
7.6% automobile receivables-backed notes ("Series 1994-A Notes"). The Series
1994-A Notes accrued interest at a fixed rate of 7.6% per annum.
On July 24, 1997, the Company redeemed the outstanding principal balance
of its Series 1994-A Notes. The bonds were redeemed at their principal amount
of $1,220,665.33 plus accrued interest to July 24, 1997. Upon redemption of
the Series 1994-A Notes, the underlying automobile receivables of
approximately $2.5 million were pledged under the terms of the Revolving Note.
In May of 1995, MF I issued its Floating Rate Auto Receivables-Backed
Note (Revolving Note" or "Series 1995-A Note"). MF I acquired Contracts from
the Company which were pledged under the terms of the Revolving Note and
Indenture for up to $40 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 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 and March 31, 1998, the 1995-A Note did not have an outstanding principal
balance.
On September 15, 1995, MF I issued the Series 1995-B Term Notes ("Series
1995-B Notes") in the amount of $35,552,602. The Series 1995-B Notes accrued
interest at a fixed note rate of 6.45% per annum.
On December 12, 1997, the Company redeemed the outstanding principal
balance of its Series 1995-B Notes. The bonds were redeemed at their
principal amount of $5,822,934 plus accrued interest to December 12, 1997.
Upon redemption of the Series 1995-B Notes, the underlying automobile
receivables were pledged under the terms of the Warehouse Line of Credit.
In June 1997, MF Receivables Corp. II ("MF II"), a wholly owned special
purpose subsidiary of the Company, sold, in a private placement, $42,646,534
of Class A automobile receivables-backed notes ("Series 1997-1A Notes" or
"Term Note") to an outside investor and $2,569,068 of Class B automobile
receivables-backed notes ("Class B Notes") to Monaco Funding Corp., a
wholly-owned special purpose subsidiary of the Company. The Series 1997-1A
Notes accrue interest at a fixed rate of 6.71% per annum and are expected to
be fully amortized by December 2002; however, the debt maturities are based on
principal payments received on the underlying receivables, which may result in
a different final maturity. An Indenture and Servicing Agreement require that
the Company and MF II maintain certain financial ratios, as well as other
representations, warranties and covenants.
In connection with the purchase of the Class B Notes, Monaco Funding
Corp. borrowed $2,525,000 from a financial institution ("Promissory Note").
The Promissory Note accrues interest at a fixed rate of 16% per annum and is
collateralized by the proceeds from the Class B Notes. The Class B Notes,
and the Promissory Note, were repaid in April 1998. Monaco Funding Corp. is
required to maintain certain covenants and warranties under the Pledge
Agreement.
As of March 31, 1998, the Series 1997-1A Notes and the Promissory Note
had note balances of $28,177,864 and $124,837, respectively. The underlying
receivables backing the 1997-1A notes had a balance of $32,378,104 as of March
31, 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 Promissory Note noteholders and other general
disbursements are paid to MF II on a monthly basis.
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 three months ended March 31, 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, no options were exercised or 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 options
grants. The Model was developed for use in estimating the fair value of traded
options which have no vesting restrictions and are fully transferable. In
addition, it requires the input of highly subjective assumptions including
the expected stock price volatility, expected dividend yields, the risk free
interest rate, and the expected life. Because the Company's stock options have
characteristics significantly different from those of traded options, and
because changes in subjective input assumptions can materially affect the fair
value estimate, in management's opinion, the value determined by the Model is
not necessarily indicative of the ultimate value of the granted options.
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. Financing was provided by Daiwa Finance
Corporation (Note 4). The Company also agreed to issue Daiwa warrants for the
purchase of 250,000 shares of Class A Common Stock. The balance of the
purchase price of $4,866,914 was paid through the issuance of 2,433,457 shares
of the Company's 8% Cumulative Convertible Preferred Stock, Series 1998-1 (the
"Preferred Stock") valued at $2.00 per share. Each share of Preferred Stock is
convertible at any time into one-half share of Class A Common Stock, or an
aggregate of up to 1,216,728 shares of Class A Common Stock. Thus, the
effective cost to Pacific USA of the Class A Common Stock issuable upon
conversion of the Preferred Stock will be $4.00 per share.
As required by the Asset Purchase Agreement, PSB entered into a Loan Loss
Reimbursement Agreement whereby it agreed to reimburse the Company for up to
15% of any losses incurred by the Company in connection with the loans
acquired from NAFCO and Advantage. In consideration therefore, the Company
issued 811,152 shares of Class A Common Stock. The Company allocated
$1,622,304 to the cost of the purchased loans, which represents the value
assigned to the common shares.
Pacific USA was the record owner of 1,500,000 shares of Class A Common
Stock as of December 31, 1997. As a result of the Option Agreement, it was
granted the power to vote the 830,000 shares of Class B Common Stock
beneficially owned by the Messrs. Ginsburg and Sandler (President and
Executive Vice President, respectively, of the Company) ("the Shareholders")
and a limited power to direct the voting of shares subject to proxies held by
the Shareholders. Also, under the terms of the Asset Purchase Agreement dated
January 8, 1998, Pacific USA was issued 811,152 shares of the Company's Class
A Common Stock. As of the date of this report, 8,014,631 shares of Class A
Common Stock are issued and outstanding and 1,273,715 shares of Class B Common
Stock are issued and outstanding. The Class A Common Stock has one vote per
share while the Class B Common Stock has three votes per share. The Class A
and Class B Common Stock generally vote together as one class. Accordingly,
Pacific USA may be deemed to be the beneficial owner of approximately 38.6% of
the Class A and Class B Common Stock and controls approximately 51.8% of the
total voting power. Pacific USA has an option expiring in December 2000 to
purchase 830,000 shares of Class B Common Stock, owned by the Shareholders,
while the Shareholders have an option, also expiring in December 2000, to
require that Pacific USA purchase all of such shares. Upon exercise of either
the put option or the call option, the Class B Common Stock purchased by CFH
will automatically convert into Class A Common Stock thereby reducing the
voting power of Pacific USA.
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 MARCH 31,
1998 1997
--------- ------------
<S> <C> <C>
Pretax (loss). . . . . . . . . . . $(38,161) $(1,310,294)
========= ============
Federal tax expense (benefit)
at statutory rate - 34%. . . $(12,975) $ (445,500)
State income tax expense (benefit) (1,297) (44,550)
--------- ------------
(14,272) (490,050)
Less valuation allowance . . . . . (14,272) (490,050)
--------- ------------
Income tax expense (benefit) . . . $ 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 March 31,
1998, were as follows:
<TABLE>
<CAPTION>
<S> <C>
Deferred tax assets:
Federal and State NOL tax carry-forward $ 8,469,806
Other . . . . . . . . . . . . . . . . . 44,035
------------
8,513,841
Valuation Allowance . . . . . . . . . . (5,350,426)
------------
Total deferred tax assets . . . . . . . 3,163,415
Deferred tax liabilities:
Depreciation. . . . . . . . . . . . . . (68,057)
Allowances. . . . . . . . . . . . . . . (1,553,776)
------------
Total deferred tax liability. . . . . . (1,621,833)
------------
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 March 31, 1998, the Company had a net operating loss carryforward
of approximately $22.3 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 March 31, 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
---------------------
FORWARD-LOOKING STATEMENTS
- ---------------------------
This quarterly report on form 10-QSB for the period ended March 31, 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 statments. Additional
written or oral forward-looking statements may be made by the Company from
time to time in filings with the Securities and Exchange Commission or
otherwise. Such forward-looking statements are within the meaning of that term
in Section 27A of the Securities Act of 1933, as amended, and Section 21E of
the Securities Exchange Act of 1934, as amended. Such statements may include,
but are not limited to, projections of revenues, income, or loss, adequacy of
the allowance for credit losses, availability of Contracts meeting the
Company's desired risk parameters, capital expenditures, plans for future
operations, financing needs, plans or availability, objectives relating to the
Automobile Receivables and the related allowance and plans relating to
products or services of the Company, as well as assumptions relating to the
foregoing.
Forward-looking statements are inherently subject to risks and
uncertainties, some of which cannot be predicted or quantified. Future events
and actual results could differ materially from those set forth in,
contemplated by, or underlying the forward-looking statements. Statements in
this quarterly report, including the Notes to Consolidated Financial
Statements and "Management's Discussion and Analysis of Financial Condition
and Results of Operations," describe factors, among others, that could
contribute to or cause such differences. Additional factors that could cause
actual results to differ materially from those expressed in such
forward-looking statements are set forth in Exhibit 99 to the annual report on
Form 10-KSB for December 31, 1997. Such factors include, but are not limited
to, the Company's dependence upon additional capital to expand operations, its
reliance on debt financing, its recent losses and the effect of the
discontinuance of the CarMart operations, its reliance on securitizations, its
cost of capital and associated interest rate risks, the risks of lending to
higher-risk borrowers, the risk of adverse economic changes, the risk
associated with delayed repossessions, the potential inadequacy of its loan
loss reserves, the risk associated with extensive regulation, supervision and
licensing, the possibility of uninsured losses, the risk associated with
substantial competition, its dependence on key personnel, insurance risks,
"Year 2000" risks, the effect of outstanding options and warrants, the fact
that the Company has, to date, not paid cash dividends on its Common Stock,
the risk associated with not meeting the NASDAQ maintenance requirements and
the risk associated with one controlling shareholder.
SUMMARY
- -------
The Company's revenues and net (loss) primarily are derived from the
Company's loan portfolio consisting of Contracts purchased from the Dealer
Network, Contracts purchased from third-party originators, Contracts financed
from vehicle sales at the Company's Dealerships and Contracts purchased
through portfolio acquisitions.
The average discount on all Contracts originated pursuant to discounted
Finance Programs during the three months ended March 31, 1998 and 1997 was
approximately 5.9% and 4.6%, respectively. The Company services all of the
loans that it owns. However, from time to time, the Company may acquire loan
portfolios under short-term, third party interim servicing agreements. The
loan portfolio at March 31, 1998 carries a contract annual percentage rate of
interest that averages approximately 23%, before discounts, and has an
original weighted average term of approximately 52 months. The average amount
financed per Contract for the three months ended March 31, 1998 and 1997 was
approximately $9,501 and $10,518, respectively.
RESULTS OF OPERATION
- ----------------------
OVERVIEW
- --------
<TABLE>
<CAPTION>
INCOME STATEMENT DATA
Quarters ended March 31,
---------------------------
<S> <C> <C>
(dollars in thousands, except share amounts). . . . . . . 1998 1997
----------- -----------
Total revenues . . . . . . . . . . . . . . . . . . . . . . $ 6,549 $ 3,387
Total costs and expenses . . . . . . . . . . . . . . . . . $ 6,587 $ 4,697
Net (loss) . . . . . . . . . . . . . . . . . . . . . . . . ($38) ($1,310)
Net (loss) per common share - basic and assuming dilution. $ 0.00 ($0.19)
Weighted average number of common shares outstanding . . . 8,882,770 6,972,094
<FN>
</TABLE>
<TABLE>
<CAPTION>
INCOME STATEMENT DATA
AS A % OF OUTSTANDING LOAN PORTFOLIO (ANNUALIZED)
QUARTERS ENDED MARCH 31,
----------------------------
<S> <C> <C>
1998 1997
------------- ------------
Average Interest Bearing Loan Portfolio Balance $156,719,828 $81,002,911
============= ============
Interest Income . . . . . . . . . . . . . . . . 16.7% 16.1%
Interest Expense. . . . . . . . . . . . . . . . 7.8% 6.9%
------------- ------------
8.9% 9.2%
Operating Expenses. . . . . . . . . . . . . . . 9.0% 15.7%
Provision for Credit Losses . . . . . . . . . . __ 0.6%
Other Income. . . . . . . . . . . . . . . . . . - (0.6%)
------------- ------------
9.0% 15.7%
Loss before Income Taxes. . . . . . . . . . . . (0.1%) (6.5%)
Income Tax Benefit. . . . . . . . . . . . . . . - -
------------- ------------
Net Loss. . . . . . . . . . . . . . . . . . . . (0.1%) (6.5%)
============= ============
<FN>
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET DATA
<S> <C> <C>
MARCH 31, DECEMBER 31,
(dollars in thousands) . . 1998 1997
----------- --------------
Total assets. . . . . . . . $ 168,029 $ 90,598
Total liabilities . . . . . $ 153,035 $ 82,076
Retained earnings (deficit) ($16,527) ($16,489)
Stockholders' equity. . . . $ 14,994 $ 8,522
<FN>
</TABLE>
The Company's revenues increased 93% from $3.4 million in the first
quarter of 1997 to $6.5 million in the comparable 1998 period. Net (loss)
decreased from ($1.3) million in the first quarter of 1997 to ($38,000) in the
comparable 1998 period. (Loss) per common share for the first quarter of 1997
were ($0.19), based on 7.0 million weighted average common shares outstanding,
compared with $0.00 per common share, based on 8.9 million weighted average
common shares outstanding, for the comparable 1998 period. The decrease in net
loss was primarily due to increased interest income as a result of portfolio
purchases made by the Company since September 1997, partially offset by an
increase in interest expense and operating expenses associated with these
acquisitions.
OPERATIONAL ANALYSIS
- ---------------------
<TABLE>
<CAPTION>
SELECTED OPERATING DATA
Quarters ended March 31,
---------------------------
<S> <C> <C>
(dollars in thousands, except where noted). . . . . 1998 1997
-------- --------
Interest income . . . . . . . . . . . . . . . . . . $ 6,549 $ 3,265
Other income. . . . . . . . . . . . . . . . . . . . - $ 122
Provision for credit losses . . . . . . . . . . . . $ 17 $ 117
Operating expenses. . . . . . . . . . . . . . . . . $ 3,516 $ 3,179
Interest expense. . . . . . . . . . . . . . . . . . $ 3,054 $ 1,401
Operating expenses as a % of outstanding portfolio. 2.2% 4.0%
Contracts from Dealer Network . . . . . . . . . . . 465 607
Contracts from portfolio purchases. . . . . . . . . 10,037 -
-------- --------
Total contracts. . . . . . . . . . . . . . . . . . 10,502 607
Average amount financed (dollars) . . . . . . . . . $ 9,501 $10,518
<FN>
</TABLE>
REVENUES
- --------
Total revenues for the quarter ended March 31, 1998, increased $3.2
million when compared to first quarter of 1997 primarily due to an increase of
$3.3 million in interest income. The rate of interest income earned for the
quarter ended March 31, 1998 was 16.7% based on an average interest bearing
portfolio balance of $156,719,828 as compared to a rate of interest income
earned of 16.1% based on an average interest bearing portfolio balance of
$81,002,911 for the quarter ended March 31, 1997. The Company's management
believes the yields for the first quarter of 1998, should be representative of
loans purchased during the remainder of 1998 using similar programs and buying
criteria which are subject to change based on the Company's future business
plans. Other income for the quarter ended March 31, 1998 decreased $0.1
million when compared to the comparable 1997 period primarily due to a
one-time other income credit of $0.1 million from the Company's forced place
insurance provider in 1997.
The lower reported interest rate of 16.7% in the first quarter of 1998
and 16.1% in the 1997 first quarter, when compared to the contract annual
percentage rate of interest (22.8% at March 31, 1998 and 23.2% at March 31,
1997), results from the Company's use of the excess interest method of
accounting. Under this method the Company uses part of its interest income as
well as contract discounts and a provision for credit losses to establish its
allowance for credit losses on its portfolio.
During the first quarter of 1998, the Company's net Automobile
Receivables increased from $74.3 million at December 31, 1997 to $150.8
million at March 31, 1998. During the first quarter of 1998, the Company
originated 465 loans and purchased 10,037 loans through portfolio purchases
totaling $99.8 million with an average amount financed of $9,501 as compared
to loan originations of 607 totaling $6.4 million with an average amount
financed of $10,518 for the first quarter of 1997. The average discount on
all Contracts originated by the Company was 5.9% and 4.6% for the quarters
ended March 31, 1998 and 1997, respectively.
The increase in the number and dollar value of loan originations and
purchases during the first quarter of 1998, as compared to 1997, of 1,630% and
1,463%, respectively, resulted from the Company's plans to purchase loan
portfolios previously originated by third parties. In January 1998, the
Company announced that it had completed the acquisition of $81 million in auto
loans from affiliates of Pacific USA and in February 1998 the Company acquired
approximately $14 million of auto loans from another third party.
At March 31, 1998, only $1.1 million of the Company's Auto Receivable
Loan Portfolio was generated from the discontinued CarMart operations as
compared to $3.6 million of its portfolio at March 31, 1997.
COSTS AND EXPENSES
- --------------------
The provision for credit losses decreased $100,000 from $117,000 in the
quarter ended March 31, 1997 to $17,000 in the comparable 1998 period. The
provision for credit losses represents estimated current losses based on the
Company's risk analysis of historical trends and expected future results. The
decrease in the provisions for credit losses primarily was due to the
introduction of the excess interest method to record allowances effective
January 1, 1995 (see Note 2), as well as changes in certain of the Company's
programs. Net charge-offs as a percentage of Average Net Automobile
Receivables decreased from 3.0% in the first three months of 1997 to 2.9% in
the comparable 1998 period. Although the Company believes that its allowance
for credit losses is sufficient for the life of its current portfolio, a
provision for credit losses may be charged to future earnings in an amount
sufficient to maintain the allowance. The Company had 1.2% of its loan
portfolio over 60 days past due at March 31, 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 is due to the following factors:
1. Portfolio mix: Changes in the composition of the Company's portfolio,
due specifically to closing the CarMart retail stores and elimination of the
high interest rate, deep-discount programs, may reduce charge-offs as a
percentage of average automobile receivables.
2. Credit quality: All originations subsequent to August 31, 1996, were
acquired using the Company's proprietary credit scoring system including more
stringent credit criteria. These Contracts may result in lower net charge-offs
and higher risk adjusted yields in the future than for comparable periods in
1996 and 1997.
3. Collections, recovery and remarketing: In February 1997, the Company
reorganized its collections, recovery and remarketing departments. These
changes included the hiring of new managers and upgrading of the Company's
collections, recovery and remarketing systems.
Effective October 1, 1996, the Company adopted a new methodology for
reserving for and analyzing its loan losses. This accounting method is
commonly referred to as static pooling. The static pooling reserve methodology
allows the Company to stratify its Automobile Receivables portfolio, and the
related components of its Allowance for Credit Losses (i.e. discounts, excess
interest, charge offs and recoveries) into separate and identifiable quarterly
pools. These quarterly pools, along with the Company's estimate of future
principal losses and recoveries, are analyzed quarterly to determine the
adequacy of the Allowance for Credit Losses. The method previously used by the
Company to analyze the Allowance for Credit Losses was based on the total
Automobile Receivables portfolio.
As part of its adoption of the static pooling reserve method, where
necessary, the Company adjusted its quarterly pool allowances to a level
necessary to cover all anticipated future losses (i.e. life of loan) for each
related quarterly pool of loans.
Under static pooling, excess interest and discounts are used to increase
the Allowance for Credit Losses and represent the Company's primary reserve
for future losses on its portfolio. To the extent that any quarterly pool's
excess interest and discount reserves are insufficient to absorb future
estimated losses, net of recoveries, adjusted for the impact of current
delinquencies, collection efforts, and other economic indicators including
analysis of the Company's historical data, the Company will provide for such
deficiency through a charge to the Provision for Credit Losses and the
establishment of an additional Allowance for Credit Losses. To the extent that
any excess interest and discount reserves are determined to be sufficient to
absorb future estimated losses, net of recoveries, the difference will be
accreted into interest income on an effective yield method over the estimated
remaining life of the related quarterly static pool.
Operating expenses increased $0.3 million, or 10.6%, from $3.2 million in
first quarter of 1997 to $3.5 million in the comparable 1998 period. This
increase primarily was due to an increase of $212,000 in depreciation and
amortization and an increase of $196,000 related to consulting and
professional fees. The major components of operating expenses are as follows:
<TABLE>
<CAPTION>
QUARTERS ENDED MARCH 31,
<S> <C> <C> <C>
(dollars in thousands). . . . . . INCREASE
1998 1997 (DECR.)
---------- ------- --------
Salaries and benefits . . . . . . $ 1,501 $1,538 ($37)
Depreciation and amortization . . 614 404 210
Consulting and professional fees. 792 596 196
Telephone . . . . . . . . . . . . 124 155 (31)
Travel and entertainment. . . . . 58 75 (17)
Loan origination fees . . . . . . (78) (81) 3
Rent/Office Supplies/Postage. . . 291 270 21
All other . . . . . . . . . . . . 214 222 (8)
---------- ------- --------
$ 3,516 $3,179 $ 337
========== ======= ========
<FN>
</TABLE>
Interest expense increased $1.7 million, or 118%, from $1.4 million in
the first quarter of 1997 to $3.1 million in the comparable 1998 period. 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 also contributed to
the increase. From December 31, 1997 through March 31, 1998, net increases
(decreases) in the Company's debt were as follows:
<TABLE>
<CAPTION>
(dollars in thousands)
<S> <C>
Notes payable - LaSalle. . . . . . . . . . ($6,376)
Warehouse line of credit - Daiwa . . . . . 16,200
Portfolio purchase credit facility - Daiwa 67,578
Promissory note payable . . . . . . . . . (1,010)
Convertible subordinated debt. . . . . . . (692)
Convertible senior subordinated debt . . . (417)
Automobile receivables-backed notes. . . . (4,243)
---------
Total . . . . . . . . . . . . . . . . $ 71,040
=========
<FN>
</TABLE>
The average annualized interest rate on the Company's debt was 10.6% for
the first quarter of 1998 versus 7.2% for the comparable 1997 period. This
increase was primarily due to additional borrowings on the Company's warehouse
line and portfolio purchase credit facilities with Daiwa at interest rates
higher than the Company's automobile receivables-backed notes that were
redeemed or paid off in 1997.
The annualized net interest margin percentage, representing the
difference between interest income and interest expense divided by average
finance receivables, increased from 9.3% in the first quarter of 1997 to 12.4%
in the comparable 1998 period. This increase was due primarily to a larger
interest spread associated with the Company's portfolio acquisitions partially
offset by the amortization of excess interest receivable as described in Note
2 of the Notes to Consolidated Financial Statements and an increase in the
average annualized interest rate on the Company's debt.
NET (LOSS)
- -----------
Net loss decreased $1.3 million from $(1.3) million in the first quarter
of 1997 to $(38,000) in the comparable 1998 period. This decrease in loss was
primarily due to the following changes on the Consolidated Statements of
Operations:
<TABLE>
<CAPTION>
INCREASE (DECREASE)
TO NET (LOSS)
---------------
<S> <C>
(in millions of dollars)
Interest and other income . $ 3.2
Provision for credit losses. 0.1
Operating expenses . . . . . (0.3)
Interest expense . . . . . . (1.7)
Income tax expense . . . . . 0.0
------
Net decrease to net (loss). $ 1.3
======
<FN>
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
- ----------------------------------
GENERAL
- -------
The Company's cash flows for the quarters ended March 31, 1998 and 1997
are summarized as follows:
<TABLE>
<CAPTION>
CASH FLOW DATA
QUARTERS ENDED MARCH 31,
<S> <C> <C>
(dollars in thousands). . . . . . . . . . . 1998 1997
--------- --------
Cash flows provided by (used in):
Operating activities. . . . . . . . . . . . $ 8,123 $ 42
Investing activities. . . . . . . . . . . . (77,551) 1,560
Financing activities. . . . . . . . . . . . 70,737 (1,495)
--------- --------
Net increase in cash and cash equivalents. $ 1,309 $ 107
========= ========
<FN>
</TABLE>
The Company's business has been and will continue to be cash intensive.
The Company's principal need for capital is to fund cash payments made to
Dealers and to third-party originators in connection with purchases of
installment contracts and the purchase of existing loan portfolios. These
purchases have been financed through the Company's capital, warehouse lines of
credit, securitizations and cash flows from operations. It is the Company's
intent to use its warehouse line of credit, as described in detail below,
together with periodic securitizations of Contracts, to provide the liquidity
to finance the purchase of additional installment Contracts.
In order to further insure the Company's ability to finance the purchase
of installment contracts and thereby continue to grow, the Company continues
to seek to obtain additional warehouse credit facilities on terms more
favorable than those currently in place as described in Note 4 of the Notes to
Consolidated Financial Statements. If the Company is successful in obtaining
such facilties, they will provide the Company with additional working capital
to the extent that the new cash advance terms are more favorable than those
the Company currently has in place. No assurance can be given as to if, or
when, the Company would be able to consummate such transactions.
The Company also is dependent upon securitizations, the proceeds from
which are used to pay down its warehouse lines, thereby creating availability
under such warehouse lines to purchase additional Contracts. The ability to
consummate securitizations is based on many factors, including ones out of the
Company's control. In the event the Company is unable to securitize its
Contracts, its ability to acquire new contracts will be limited.
The Company's cash needs will, in part, continue to be funded through a
combination of earnings and cash flow from operations, its existing Warehouse
Line of Credit and securitizations. In addition, the Company continues to
pursue additional sources of funds including, but not limited to, various
forms of debt and/or equity. The ability of the Company to maintain past
growth levels will, in large part, be dependent upon obtaining such additional
sources of funding, of which no assurance can be given. Failure to obtain
additional funding sources will materially restrict the Company's future
business activities and could, in the future, require the Company to sell
certain of the loans in its portfolio to meet its liquidity requirements.
In March 1996, the Company announced that its Board of Directors had
authorized the purchase of up to 500,000 shares of Class A Common Stock,
representing approximately 10% of its Class A Common Stock outstanding.
Subject to applicable securities laws, repurchases may be made at such times,
and in such amounts, as the Company's management deems appropriate. As of
March 31, 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") whereby, among other
things, Pacific agreed to acquire certain shares of the Company's Class A
Common Stock. On November 1, 1996, the Company entered into a Loan Agreement
with Pacific whereby Pacific loaned the Company $3 million ("Pacific Loan").
On February 7, 1997, the Securities Purchase Agreement was terminated by the
parties, however, the Pacific Loan and its corresponding Installment Note
remained in effect. On April 25, 1997, the Company executed a Conversion and
Rights Agreement (the "Conversion Agreement") with Pacific. The Conversion
Agreement converted the entire $3,000,000 outstanding principal amount of the
installment note made by Pacific to the Company into 1.5 million restricted
shares of the Company's Class A Common Stock. The Conversion Agreement also
released the Company from all liability under the Loan Agreement executed on
October 29, 1996 between the Company and Pacific pursuant to which the $3
million loan was made.
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. Each share of Preferred Stock is convertible at any
time into one-half share of Class A Common Stock, or an aggregate of up to
1,216,728 shares of Class A Common Stock. Thus, the effective cost to Pacific
USA of the Class A Common Stock issuable upon conversion of the Preferred
Stock will be $4.00 per share.
As required by the Asset Purchase Agreement, PSB entered into a Loan Loss
Reimbursement Agreement whereby it agreed to reimburse the Company for up to
15% of any losses incurred by the Company in connection with the loans
acquired from NAFCO and Advantage. In consideration therefor, the Company
issued 811,152 shares of Class A Common Stock. The Company allocated
$1,622,304 to the cost of the purchased loans, which represents the value
assigned to the common shares.
The Company filed the required documents under the Hart-Scott-Rodino Act
("HSR Act") on January 15, 1998, and received the necessary approvals under
the HSR Act on or about February 10, 1998.
Pacific USA was the record owner of 1,500,000 shares of Class A Common
Stock as of December 31, 1997. As a result of the Option Agreement, it was
granted the power to vote the 830,000 shares of Class B Common Stock
beneficially owned by the Messrs. Ginsburg and Sandler (President and
Executive Vice President, respectively, of the Company) ("the Shareholders")
and a limited power to direct the voting of shares subject to proxies held by
the Shareholders. Also, under the terms of the Asset Purchase Agreement dated
January 8, 1998, Pacific USA was issued 811,152 shares of the Company's Class
A Common Stock. As of the date of this report, 8,014,631 shares of Class A
Common Stock are issued and outstanding and 1,273,715 shares of Class B Common
Stock are issued and outstanding. The Class A Common Stock has one vote per
share while the Class B Common Stock has three votes per share. The Class A
and Class B Common Stock generally vote together as one class. Accordingly,
Pacific USA may be deemed to be the beneficial owner of approximately 38.6% of
the Class A and Class B Common Stock and controls approximately 51.8% of the
total voting power. Pacific USA has an option expiring in December 2000 to
purchase 830,000 shares of Class B Common Stock, owned by the Shareholders,
while the Shareholders have an option, also expiring in December 2000, to
require that Pacific USA purchase all of such shares. Upon exercise of either
the put option or the call option, the Class B Common Stock purchased by CFH
will automatically convert into Class A Common Stock thereby reducing the
voting power of Pacific USA.
Financing for this transaction was provided by Daiwa Finance Corporation
("Daiwa"). In January 1998, MF Receivables Corp. IV ("MF IV"), a wholly owned
special purpose subsidiary of the Company, entered into a $73,926,565.01
Portfolio Purchase Credit Facility (the "Credit Facility") with Daiwa. All
advances received under the Credit Facility are secured by eligible purchased
loan Contracts and all proceeds received from those Contracts. The scheduled
maturity date with respect to the advances under the Credit Facility is the
earlier of January 6, 1999 or the disposition date of the eligible purchased
loan Contract. Under the Credit Facility, prior to July 1, 1998, 85% of the
amount advanced to the Company accrues interest at a rate equal to LIBOR plus
1.0% per annum. Effective July 1, 1998, the interest rate on this advance
changes to LIBOR plus 3.5% per annum. The remaining 15% of the amount
advanced accrues interest at a rate of LIBOR plus 1.0% per annum prior to July
1, 1998. Effective July 1, 1998, the interest rate on this advance changes to
15% per annum. The Credit Facility Agreement requires the Company to maintain
certain standard ratios and covenants. At March 31, 1998, the Credit Facility
had an outstanding balance of $67,578,073.
The assets of MF IV are not available to pay general creditors of the
Company. All cash collections in excess of disbursements to Daiwa and other
general disbursements are paid to MF IV on a monthly basis.
In connection with this financing, the Company also agreed to issue Daiwa
warrants for the purchase of 250,000 shares of Class A Common Stock.
ASSET-BACKED SECURITIZATIONS
- -----------------------------
In November 1994, MF Receivables Corp. I. ("MF I"), the Company's wholly
owned special purpose subsidiary, sold, in a private placement, $23,861,823 of
7.6% automobile receivables-backed notes ("Series 1994-A Notes"). The Series
1994-A Notes accrued interest at a fixed rate of 7.6% per annum.
On July 24, 1997, the Company redeemed the outstanding principal balance
of its Series 1994-A Notes. The bonds were redeemed at their principal amount
of $1,220,665.33 plus accrued interest to July 24, 1997. Upon redemption of
the Series 1994-A Notes, the underlying automobile receivables of
approximately $2.5 million were pledged under the terms of the Revolving Note.
In May of 1995, MF I issued its Floating Rate Auto Receivables-Backed
Note (Revolving Note" or "Series 1995-A Note"). MF I acquired Contracts from
the Company which were pledged under the terms of the Revolving Note and
Indenture for up to $40 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 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 and March 31, 1998, the 1995-A Note did not have an outstanding principal
balance.
On September 15, 1995, MF I issued the Series 1995-B Term Notes ("Series
1995-B Notes") in the amount of $35,552,602. The Series 1995-B Notes accrued
interest at a fixed note rate of 6.45% per annum.
On December 12, 1997, the Company redeemed the outstanding principal
balance of its Series 1995-B Notes. The bonds were redeemed at their
principal amount of $5,822,934 plus accrued interest to December 12, 1997.
Upon redemption of the Series 1995-B Notes, the underlying automobile
receivables were pledged under the terms of the Warehouse Line of Credit.
In June 1997, MF Receivables Corp. II ("MF II"), a wholly owned special
purpose subsidiary of the Company, sold, in a private placement, $42,646,534
of Class A automobile receivables-backed notes ("Series 1997-1A Notes" or
"Term Note") to an outside investor and $2,569,068 of Class B automobile
receivables-backed notes ("Class B Notes") to Monaco Funding Corp., a
wholly-owned special purpose subsidiary of the Company. The Series 1997-1A
Notes accrue interest at a fixed rate of 6.71% per annum and are expected to
be fully amortized by December 2002; however, the debt maturities are based on
principal payments received on the underlying receivables, which may result in
a different final maturity. An Indenture and Servicing Agreement require that
the Company and MF II maintain certain financial ratios, as well as other
representations, warranties and covenants.
In connection with the purchase of the Class B Notes, Monaco Funding
Corp. borrowed $2,525,000 from a financial institution ("Promissory Note").
The Promissory Note accrues interest at a fixed rate of 16% per annum and is
collateralized by the proceeds from the Class B Notes. The Class B Notes,
and the Promissory Note, were repaid in April 1998. Monaco Funding Corp. is
required to maintain certain covenants and warranties under the Pledge
Agreement.
As of March 31, 1998, the Series 1997-1A Notes and the Promissory Note
had a note balance of $28,177,864 and $124,837, respectively. The underlying
receivables backing the 1997-1A notes had a balance of $32,378,104 as of March
31, 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 Promissory Note noteholders 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 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
March 31, 1998.
In December 1997, MF Receivables Corp. III ("MF III"), a wholly owned
special purpose subsidiary of the Company, entered into a $75 million
Warehouse Line of Credit with Daiwa. 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 March 31, 1998, the Company had borrowed
$46.2 million against this line of credit.
The assets of MF III are not available to pay general creditors of the
Company. All cash collections in excess of disbursements to Daiwa and other
general disbursements are paid to MF III on a monthly basis.
During 1993, the Company completed the Note Offering described in Note 4
of the Notes to Consolidated Financial Statements. In the Note Offering, the
Company sold 7% Convertible Subordinated Notes in the aggregate principal
amount of $2,000,000. The purchasers of the Notes exercised an option to
purchase an additional $1,000,000 aggregate principal amount on September 15,
1993. The principal amount of the Notes, plus accrued interest thereon, was
due March 1, 1998. On March 1, 1998, the Company repaid $692,500 of principal
amount of the Notes. The maturity date of the remaining principal amount of
the Notes of $692,500 was extended to April 15, 1998, without penalty, 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
$5,000,000 to Rothschild North America, Inc. Interest is due and payable the
first day of each quarter commencing on January 1, 1995. Principal payments in
the amount of $416,667 are due and payable the first day of January, April,
July and October of each year, commencing January 1, 1997. The unpaid
principal amount of the Notes, plus accrued and unpaid interest, are due
October 1, 1999.
On January 9, 1996, the Company entered into a Purchase Agreement for the
sale of an aggregate of $5 million in principal amount of 12% Convertible
Senior Subordinated Notes due 2001 (the "12% Notes"). This agreement was
subsequently amended and passed by the Company's Board of Directors on
September, 10, 1996. Interest on the 12% Notes is payable monthly at the rate
of 12% per annum and the 12% Notes are convertible, subject to certain terms
contained in the Indenture, into shares of the Company's Class A Common Stock,
par value $.01 per share, at a conversion price of $4.00 per share, subject to
adjustment under certain circumstances. The 12% Notes were issued pursuant to
an Indenture dated January 9, 1996, between the Company and Norwest Bank
Minnesota, N.A., as trustee. The Company agreed to register, for public sale,
the shares of restricted Common Stock issuable upon conversion of the 12%
Notes. The 12% Notes were sold pursuant to an exemption from the registration
requirements under the Securities Act of 1933, as amended.
Provisions have been made for the issuance of up to an additional $5
million in principal amount of the 12% Notes on or before September 10, 1998,
with an initial conversion price of $3.00 per share.
The Agreements underlying the terms of the Company's Automobile
Receivable - Backed Securitization Program ("Securitization Program") and the
Warehouse Line of Credit and Portfolio Purchase Credit Facility with Daiwa
Finance Corp., described herein, contain certain covenants which, if not
complied with, could materially restrict the Company's liquidity. Furthermore,
if Net Charge-Offs increase in the future, the Company's liquidity and its
ability to increase its loan portfolio may be impacted negatively. Under the
terms of the Revolving Note and the credit facilities with Daiwa,
approximately 80% and 90%, respectively, of the face amount of Contracts, in
the aggregate, is advanced to the Company for purchasing qualifying Contracts.
The balance must be financed through capital.
NASDAQ LISTING REQUIREMENTS
- -----------------------------
Commencing February 23, 1998, the requirements for continued trading of
securities on the NASDAQ National Market and on the NASDAQ Small Cap Market
were changed to include requirements that (i) the minimum bid price for common
stock must be $1.00 or more per share, and (ii) the market value of the public
float must be $5 million or more for a National Market security and $1 million
or more for a Small Cap Market security. If a deficiency exists for a period
of 30 consecutive business days, NASDAQ is required to promptly notify the
issuer, which will have a period of 90 calendar days from such notification to
achieve compliance. Compliance can be achieved by meeting the applicable
standard for a minimum of ten consecutive business days during the 90-day
compliance period.
The Company's Class A Common Stock is presently traded on the NASDAQ
National Market. The bid price of the Class A Common Stock has been less than
$1.00 per share since mid-December 1997. By letter dated Februay 27, 1998,
NASDAQ advised the Company that it was not in compliance with the new market
value of public float and bid price requirements and that the Company has
until May 28, 1998, to meet these requirements. Should the bid price of the
Class A Common Stock fail to reach $1.00 per share for ten consecutive trading
days by that date, then the Company will not meet the minimum bid price
requirements for either the National Market or the Small Cap Market and its
Class A Common Stock could be delisted from NASDAQ. In that event, the Class A
Common Stock probably would trade on the OTC Bulletin Board. Stocks which
trade on the OTC Bulletin Board generally are much less liquid than those
traded on certain other markets. In addition, stocks traded on the National
Market enjoy certain other benefits described below.
"Public float" is defined as outstanding shares other than those held by
officers, directors and beneficial owners of more than ten percent of the
total shares outstanding. From February 23, 1998 to March 30, 1998 the lowest
number of shares comprising the Company's public float has consisted of
approximately 5,677,109 shares of Class A Common Stock. To meet the National
Market requirement of $5 million in public float, the market price would have
to be approximately $.88 per share and to meet the Small Cap Market
requirement of $1 million in public float, the market price would have to be
approximately $.18 per share. Since February 22, 1998, the market value of the
public float has been less than $5 million, but greater than $1 million. If
the minimum bid price requirement is satisfied, the Company will meet the
public float requirement for the National Market. National Market securities
qualify for secondary trading exemptions in many states and states are
precluded from review of offerings of National Market securities. Small Cap
Market securities do not have these benefits.
Should the Company fail to timely meet NASDAQ's requirements, then NASDAQ
will issue a delisting letter, which will identify the review procedures
available to the Company. The Company may request review at that time, which
will generally stay delisting.
Management is considering various solutions, including a reverse stock
split and/or the sale of additional shares of Class A Common Stock to persons
other than officers, directors or more than 10% stockholders, both of which
could require shareholder approval. No assurance can be given, however, that
the Company will be able to maintain the listing of the Class A Common Stock
on either the NASDAQ National Market or the NASDAQ Small Cap Market. The
Company's ability to raise capital, including, but not limited to, both debt
and/or equity, could be adversely affected should the Company fail to meet the
new requirements.
OTHER
- -----
INFLATION
- ---------
Inflation was not a material factor in either the sales or the operating
expenses of the Company from inception to March 31, 1998.
YEAR 2000 ISSUE
- -----------------
The "Year 2000" issue affects the Company's installed computer systems,
network elements, software applications and other business systems that have
time-sensitive programs that may not properly reflect or recognize the Year
2000. Because many computers and computer applications define dates by the
last two digits of the year, "00" may not be properly identified as the Year
2000. This error could result in miscalculations or system failures.
The Company is conducting a review of its computer systems to identify
those areas that could be affected by the "Year 2000" issue and is developing
an implementation plan to ensure compliance. The Company is using both
internal and external sources to identify, correct and reprogram, and test its
systems for Year 2000 compliance. Because third party failures could have a
material impact on the Company's ability to conduct business, confirmations
are being requested from our processing vendors and suppliers to certify that
plans are being developed to address the Year 2000 issue. The Company
presently believes that, with modification to existing software and investment
in new software, the Year 2000 problem will not pose significant operational
concerns nor have a material impact on the financial position or results of
operation in any given year. The total cost of modifications and conversions
is not expected to be material and will be expensed as incurred.
FUTURE EXPANSION AND STRATEGY
- --------------------------------
The Company's strategy is to increase the size of its loan portfolio
while maintaining the integrity of the credit quality of auto loans acquired.
The Company plans to implement its growth strategy by: (1) increasing the
number of loans acquired from the Dealer Network; (2) purchasing portfolios of
loans originated by third parties; (3) continuing its efforts to increase the
credit quality of its portfolio and reduce credit losses and charge-offs; (4)
decreasing the percentage of operating expenses to average gross receivables
by increasing the portfolio while decreasing operating expenses; and (5)
securitizing portfolios of auto loans.
To further promote its growth and profitability, the Company will
continue to pursue its growth strategy based on the following:
MARKET FOCUS: The Company targets the middle range of the Sub-prime auto
finance market. Auto loans can be classified as follows: (A) Prime loans to
borrowers with no credit blemishes; (B) Almost prime loans to borrowers with
generally good credit and a few minor blemishes; (C+) The highest category of
sub-prime borrowers who have suffered reversals in the past but are current on
all obligations and have demonstrated the ability and willingness to
reestablish their credit in the higher categories; (C) Similar to (C+) but
present a slightly greater risk due to higher debt-to-income ratios, lower
salaries, prior bankruptcy etc.; (C-) Borrowers with substantially more
adverse credit history, but appear to have the wherewithal to meet their
credit obligations; (D) First time borrowers or borrowers with little or no
past credit history, borrowers with recent bankruptcies or those lacking
stability in employment etc., Monaco Finance Inc., is focusing on all
categories of (C) credit with the emphasis on obtaining more (C+) borrowers.
The Company will purchase few, if any, (D) loans.
The Company also targets late model used vehicles, which have lower
depreciation rates than either new vehicles or used vehicles that are over
three years old and have high mileage. In addition, the Company concentrates
on acquiring loans from new car franchised dealers because, generally, such
dealers are stronger financially and can better perform on their
representations and warranties, offer higher quality vehicles, and often
provide better repair service than independent used car dealers.
During 1997, the Company acquired contracts from approximately 375
dealers in 28 states, the majority of which were purchased in five states. In
order to increase efficiency and reduce operating expenses, in the first half
of 1997, the Company temporarily reduced its marketing representatives from 16
to 6. In August 1997, the Company initiated its strategy to increase its
Dealer Network by hiring two regional marketing managers. At March 31, 1998
the Company had increased its marketing representatives to 11.
PORTFOLIO ACQUISITIONS: The Company plans to continue the purchase of
loan portfolios previously originated by third parties. In 1997, the Company
acquired, at a discount, two such portfolios with a face value of $12 million.
In January 1998, the Company announced that it had completed the acquisition
of $81 million in auto loans from affiliates of Pacific USA and in February
1998 the Company acquired approximately $14 million of auto loans from another
third party. The Company actively is seeking to acquire other portfolios of
auto loans.
FUNDING AND FINANCING STRATEGIES: In December 1997, the Company entered
into a warehouse line with Daiwa Finance Corporation, under the terms of
which, up to 90% of the face amount of loans can be financed. This facility
allows the Company to acquire loans on a leveraged basis and increase the size
of its portfolio with its current capital. Periodic rated securitizations are
also part of the Company's financing strategies. Securitizations lock in low
interest rates and free up the Company's warehouse line and capital for new
loan acquisitions. The Company makes all efforts to obtain sufficient cash
from a securitization to repay all warehouse debt collateralized by the loans.
In the event funds obtained from a securitization are not sufficient to retire
the corresponding debt, the securitization may adversely affect liquidity.
RISK EVALUATION AND UNDERWRITING: The Company has developed proprietary
credit scoring and risk evaluation systems which predicts the frequency of
default and the resultant predicted loss after repossession and sale of
financed vehicles. This system assists the Company's credit buyers and
underwriters in pricing loans to be acquired. Credit buyers can negotiate
interest rates, loan term, purchase discount and fees and terms of the deal,
including such items as down payment, in order to achieve a desired risk
adjusted rate of return for each Contract.
CENTRALIZED OPERATING STRUCTURE: Management believes the centralization
of all operations in one location results in a consistent, cost effective
means of operating a sub-prime automobile loan business. Sales
representatives, of course, are disbursed throughout the country to deal
directly with dealers.
COLLECTIONS MANAGEMENT: Management believes that collections and recovery
are vital to the successful operation of the Company. The Company has invested
substantial amounts of time, money and resources in developing an efficient
collections department. The results of the Company's efforts are evidenced by
its percentage of delinquent contracts, which at March 31, 1998, was 7.9% over
30 days past due. This percentage consisted of 6.7% 30 to 59 days past due,
1.1% 60 to 89 days past due and 0.1% over 90 days past due. Further additions
and improvements to its collections department and systems, both in personnel
and automated equipment, would enable the Company, for the first time, to seek
out servicing and collections of Sub-prime auto loans for others in similar
businesses which could result in creating a new revenue source for the
Company.
VOTING POWER: As a result of the Asset Purchase Agreement dated January
8, 1998, Pacific USA Holdings Corp. ("Pacific USA") increased its voting power
in the Company to 51.8%. Pacific USA is the beneficial owner of 38.6% of the
Company's outstanding voting stock. Pacific USA is a diverse U.S. holdings
company, 100% owned by Pacific Electric Wire & Cable, Ltd. of Hong Kong.
Pacific USA is a multi-billion dollar company which owns various 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 MARCH 31, 1998
PART II - OTHER INFORMATION
---------------------------
ITEM 1. LEGAL PROCEEDINGS
- ----------------------------
None.
ITEM 2. CHANGES IN SECURITIES
- ---------------------------------
(b.) Certain of the Company's loan agreements, including loan agreements
entered into in the first quarter of 1996, contain covenants that restrict the
payment of cash dividends.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
- --------------------------------------------
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ---------------------------------------------------------------------
On March 4, 1998, a special meeting of shareholders of the Company was
held for the following purposes:
To consider and approve the issuance of (i) 2,433,457 shares of the
Company's 8% Cumulative Convertible Preferred Stock, Series 1998-1, (ii)
811,152 shares of the Company's Class A Common Stock and (iii) a presently
unknown number of shares of Class A Common Stock, the issuance of which is
contingent upon future operations, to NAFCO Holding Company LLC, Advantage
Funding Group, Inc., and/or Pacific Southwest Bank, or their respective
designees, all of which are subsidiaries of Pacific USA Holdings Corp.
("Pacific USA"), as partial consideration for certain of the transactions
under the Amended and Restated Asset Purchase Agreement among the Company and
Pacific USA and those and other of its affiliates dated January 8, 1998.
To consider and approve an amendment to the Company's Articles of
Incorporation to (i) increase the number of authorized shares of Class A
Common Stock to 30,000,000 shares, and (ii) increase the number of authorized
shares of Preferred Stock to 10,000,000 shares having preferences, limitations
and relative rights as may be determined by the Company's board of directors.
<TABLE>
<CAPTION>
The aforementioned proposals were passed with the following votes,
respectively:
<C> <C> <C> <C> <S>
1. 7,016,151 FOR; 3,392,279 WITHHELD; 521,029 AGAINST; and 95,165 ABSTAIN.
2. 9,853,312 FOR; 466,881 WITHHELD; 612,846 AGAINST; and 91,585 ABSTAIN.
<FN>
</TABLE>
ITEM 5. OTHER INFORMATION
- ----------------------------
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------------
(a) Exhibits:
11 - Computation of Net Earnings per Common Share. Page 33.
27 - Financial Data Schedule. Page 34.
(b) Reports on Form 8 - K:
A Form 8-K dated January 8, 1998, was filed announcing that the
Registrant had entered into an Amended and Restated Asset Purchase Agreement
with Pacific USA Holdings Corp., and certain of its wholly-owned and
partially-owned subsidiaries, providing for, among other things, the purchase
by the Registrant of $81.1 million of sub-prime auto loans.
A Form 8-K dated March 4, 1998 was filed announcing the voting results
from the special meeting of shareholders held on March 4, 1998.
<TABLE>
<CAPTION>
EXHIBIT 11
MONACO FINANCE, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS (LOSS) PER COMMON SHARE
THREE MONTHS ENDED MARCH 31,
<S> <C> <C>
1998 1997
----------- ------------
EARNINGS (LOSS) PER COMMON SHARE - BASIC AND ASSUMING DILUTION
NET EARNINGS (LOSS)
- --------------------------------------------------------------------
Net (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ($38,161) ($1,310,294)
=========== ============
AVERAGE COMMON SHARES OUTSTANDING
- --------------------------------------------------------------------
Weighted average common shares outstanding - basic . . . . . . . . . 8,882,770 6,972,094
Shares issuable from assumed exercise of stock options (a) . . . . . (b) (b)
Shares issuable from assumed exercise of stock warrants (a). . . . . (b) (b)
Shares issuable from assumed conversion of 7% subordinated debt. . . (b) (b)
Shares issuable from assumed conversion of senior subordianted note. (b) (b)
----------- ------------
Weighted average common shares outstanding - assuming dilution . . . 8,882,770 6,972,094
=========== ============
EARNINGS (LOSS) PER COMMON SHARE - BASIC AND ASSUMING DILUTION
- --------------------------------------------------------------------
(Loss) per common share - basic and assuming dilution. . . . . . . . $ 0.00 ($0.19)
=========== ============
<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>
<CAPTION>
MONACO FINANCE, INC., AND SUBSIDIARIES
FINANCIAL DATA SCHEDULE
FOR THE MONTHS ENDING MARCH 31, 1998
ITEM 3 -MOS YEAR-TO-DATE
- ---- --------- --------------
<S> <C> <C>
Fiscal year end. . . . . . . . . . . . . . . . . . . . . . 31-Dec-98 31-Dec-98
Period end . . . . . . . . . . . . . . . . . . . . . . . . 31-Mar-98 31-Mar-98
Period type. . . . . . . . . . . . . . . . . . . . . . . . 3 month 3 month
Cash and cash items $ 10,135,841 $ 10,135,841
Marketable securities $ 0 $ 0
Notes and accounts receivable trade $ 170,804,662 $ 170,804,662
Allowance for doubtful accounts ($20,022,784) ($20,022,784)
Inventory $ 0 $ 0
Total current assets $ 0 $ 0
Property, plant and equipment $ 4,162,583 $ 4,162,583
Accumulated depreciation $ 1,980,964 $ 1,980,964
Total assets $ 168,028,697 $ 168,028,697
Total current liabilities $ 0 $ 0
Bonds, mortgages and similar debt $ 150,689,939 $ 150,689,939
Preferred stock-mandatory redemption $ 0 $ 0
Preferred stock no-mandatory redemption $ 4,866,914 $ 4,866,914
Common stock $ 92,883 $ 92,883
Other stockholders' equity $ 10,033,692 $ 10,033,692
Total liabilities and stockholders' equity $ 168,028,697 $ 168,028,697
Net sales of tangible products $ 0 $ 0
Total revenues $ 6,549,248 $ 6,549,248
Cost of tangible goods sold $ 0 $ 0
Total costs and expenses applicable to sales and revenues $ 3,516,014 $ 3,516,014
Other costs and expenses $ 0 $ 0
Provision for doubtful accounts and notes $ 16,873 $ 16,873
Interest and amortization of debt discount $ 3,054,522 $ 3,054,522
Income before taxes and other items ($38,161) ($38,161)
Income tax expense $ 0 $ 0
Income/(loss) continuing operations ($38,161) ($38,161)
Discontinued operations $ 0 $ 0
Extraordinary items $ 0 $ 0
Cumulative effect-changes in accounting principals $ 0 $ 0
Net income (loss) ($38,161) ($38,161)
Earnings per common share-basic $ 0.00 $ 0.00
Earnings per common share-assuming dilution $ 0.00 $ 0.00
<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: May 15, 1998
By: /s/ Morris Ginsburg
----------------------------
Morris Ginsburg, President,
Chief Executive Officer, Principal
Financial and Accounting Officer
and Director
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND THE CONSOLIDATED STATEMENTS OF OPERATIONS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-END> MAR-31-1998 MAR-31-1998
<CASH> 10,135,841 10,135,841
<SECURITIES> 0 0
<RECEIVABLES> 170,804,662 170,804,662
<ALLOWANCES> (20,022,784) (20,022,784)
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 0
<PP&E> 4,162,583 4,162,583
<DEPRECIATION> 1,980,964 1,980,964
<TOTAL-ASSETS> 168,028,697 168,028,967
<CURRENT-LIABILITIES> 0 0
<BONDS> 150,689,939 150,689,939
0 0
4,866,914 4,866,914
<COMMON> 92,883 92,883
<OTHER-SE> 10,033,692 10,033,692
<TOTAL-LIABILITY-AND-EQUITY> 168,028,697 168,028,697
<SALES> 0 0
<TOTAL-REVENUES> 6,549,248 6,549,248
<CGS> 0 0
<TOTAL-COSTS> 3,516,014 3,516,014
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 16,873 16,873
<INTEREST-EXPENSE> 3,054,522 3,054,522
<INCOME-PRETAX> (38,161) (38,161)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (38,161) (38,161)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (38,161) (38,161)
<EPS-PRIMARY> 0.00 0.00
<EPS-DILUTED> 0.00 0.00
</TABLE>
