UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission file number 0-18819
MONACO FINANCE, INC.
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(Exact name of small business issuer as specified in its charter)
COLORADO 84-1088131
- ---------------------------- --------------------------
(State or other (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization)
8400 CRESCENT PARKWAY, SUITE 190
GREENWOOD VILLAGE, COLORADO 80111
- ---------------------------------------------------------------------
(Address of principal executive (Zip Code)
offices)
(720) 528-4239
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(Issuer's telephone number, including area code)
Not applicable
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(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 during the past 12 months
(or for such shorter period that the registrant was required to file such
reports, and (2) has been subject to such filing requirements for the past 90
days. Yes X No
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
Class Shares Outstanding as of
November 15, 1999
- ---------------------------------------------------------------------
Class A Common Stock, $0.01 par 2,554,558
value
Class B Common Stock, $0.01 par 254,743
value
<PAGE>
CAUTIONARY NOTE ABOUT FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-QSB and the information incorporated by
reference may include "forward-looking statements" within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. In particular, your attention is directed to Part I, Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operation. We intend the disclosure in this section and throughout the Quarterly
Report on Form 10-QSB to be covered by the safe harbor provisions for
forward-looking statements. All statements regarding our expected financial
position and operating results, our business strategy, our financing plans and
the outcome of any contingencies are forward-looking statements. These
statements can sometimes be identified by our use of forward-looking words such
as "may," "believe," "plan," "will," "anticipate," "estimate," "expect,"
"intend" and other phrases of similar meaning. Known and unknown risks,
uncertainties and other factors could cause the actual results to differ
materially from those contemplated by the statements. The forward-looking
information is based on various factors and was derived using numerous
assumptions. Although we believe that the expectations expressed in these
forward-looking statements are reasonable, our expectations may not turn out to
be correct. Actual results could be materially different from our expectations
as a result of the following risks:
o We may not be able to generate or obtain sufficient capital to maintain
operations;
o We are heavily dependent upon debt financing, and interests rates and the
costs of capital are beyond our control;
o We lend to high-risk borrowers and may incur delays in repossessing
collateral;
o We may fail to compete with existing and new competitors;
o If outstanding options and warrants are exercised, you may experience
substantial dilution in the value of your stock;
o Because one stockholder owns a controlling interest, you may not realize
a premium associated with corporate control;
o Our common stock is no longer listed on NASDAQ and thus, you may
experience delays and other problems in attempting to sell your common
stock;
o We may fail to identify and correct a significant year 2000 compliance
problem and experience a major system failure.
This list is intended to identify some of the principal factors that could
cause actual results to differ materially from those described in the
forward-looking statements included elsewhere in this report. These factors are
not intended to represent a complete list of all risks and uncertainties
inherent in our business that have been set forth previously in Exhibit 99 to
our Annual Report on Form 10-KSB for the year ended December 31, 1998 and that
will be provided and in future SEC filings and our press releases.
<PAGE>
Part 1 - Financial Information
Item 1. FINANCIAL STATEMENTS
MONACO FINANCE, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Description Page No.
Consolidated Statements of Operations for 4
the three and nine month periods ended
September 30, 1999 and 1998 (unaudited)
Consolidated Balance Sheets as of 5
September 30, 1999 (unaudited) and
December 31, 1998
Consolidated Statement of Stockholders' 6
Equity for the nine months ended
September 30, 1999 (unaudited)
Consolidated Statement of Cash Flows for 7
the nine month ended September
30, 1999 and 1998 (unaudited)
Notes to Consolidated Financial 8
Statements (unaudited)
<PAGE>
MONACO FINANCE, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Three and Nine Month Periods Ended September 30, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
Periods Ended September 30,
------------------------------------------------------------
Three Months Nine Months
-------------------------- --------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
(amounts in 000s except share information)
<S> <C> <C> <C> <C>
Revenues
Interest ..................... $ 1,119 $ 4,558 $ 8,188 $16,285
Gain on transfer of
installment loans (Note 8) .. 316 -- 316 --
Other ........................ 1 (3) 160 6
--------- --------- --------- ---------
Total Revenue .............. 1,436 4,555 8,664 16,291
--------- --------- --------- ---------
Costs and Expenses
Interest ..................... 673 2,843 4,884 8,591
Operations ................... 2,355 4,412 9,663 11,708
Provision for credit losses .. -- 504 2,000 530
--------- --------- --------- ---------
Total Costs and Expenses .... 3,028 7,759 16,547 20,829
--------- --------- --------- ---------
Loss Before Income Tax Benefit . (1,592) (3,204) (7,883) (4,538)
Income tax benefit ( Note 7) ... -- -- -- --
--------- --------- --------- ---------
Net Loss ....................... (1,592) (3,204) (7,883) (4,538)
Earnings Applicable to Preferred
Shareholders .................. 111 94 332 280
--------- --------- --------- ---------
Net Loss Applicable to Common
Shareholders .................. $ (1,703) $(3,298) $(8,215) $(4,818)
========= ========= ========= =========
Loss per Common Share - Basic
and Dilutive .................. $ (.60) $ (1.41) $ (2.92) $ (2.42)
========= ========= ========= =========
Weighted Average Number of
Common Shares Outstanding ..... 2,809,301 2,337,482 2,809,301 1,991,903
========= ========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
- 4 -
<PAGE>
Monaco Finance, Inc. and Subsidiaries
Consolidated Balance Sheets
September 30, 1999 And December 31, 1998
September 30, December 31,
1999 1998
(amounts in 000s)
--------- ---------
(Unaudited)
ASSETS
Cash and cash equivalents ........................ $ 28 $ 516
Restricted cash .................................. 42 5,502
Automobile receivables, net(Notes 3 and 8 ........ 6,801 107,201
Other receivables ................................ 21 67
Repossessed vehicles held for sale (Note 8) .... 99 3,048
Furniture and equipment, net ..................... 1,054 2,173
Other assets ..................................... 183 1,372
--------- ---------
Total Assets ................................. $ 8,228 $ 119,879
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Accounts payable ................................. $ 378 $ 1,234
Accrued expenses and other liabilities ........... 2,480 1,431
Automobile receivables related debt - (Notes 5
and 8) .......................................... -- 100,093
Other debt (Notes 5 and 8) ....................... 4,400 7,955
--------- ---------
Total Liabilities ............................ 7,258 110,713
--------- ---------
Commitments and Contingencies (Note 4)
Stockholders' Equity (Note 6)
Series 1998-1 preferred stock, .................. 4,695 4,695
liquidation preference
Series 1999-1 preferred stock,
liquidation preference ......................... 837 837
Class A common stock, $.01 par value ............. 25 25
Class B common stock, $.01 par value ............. 3 3
Additional paid-in capital ....................... 31,202 31,183
Accumulated deficit .............................. (35,792) (27,577)
--------- ---------
Total Stockholders' Equity ................... 970 9,166
--------- ---------
Total Liabilities and Stockholders'
Equity ...................................... $ 8,228 $ 119,879
========= =========
See Notes to Consolidated Financial Statements.
- 5 -
<PAGE>
MONACO FINANCE, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
For the Nine Months Ended September 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
Preferred Stock Common Stock
--------------------------------------------------- -----------------------
Series 1998-1 Series 1999-1 Class A
----------------------- --------------------- -----------------------
Shares Amount Shares Amount Shares Amount
--------- --------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998 2,347,587 $ 4,695 418,375 $ 837 2,554,558 $ 25
Imputed value on issuance
of warrants .............. -- -- -- -- -- --
Net loss .................. -- -- -- -- -- --
Accrual of preferred
stock dividends .......... -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Balance, September 30, 1999 2,347,587 $ 4,695 418,375 $ 837 2,554,558 $ 25
========= ========= ========= ========= ========= =========
</TABLE>
TABLE CONTINUED BELOW
<TABLE>
<CAPTION>
Common Stock Additional
----------------------- Paid-in Retained
Shares Amount Capital Earnings Total
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1998 254,743 $ 3 $ 31,183 $ (27,577) $ 9,166
Imputed value on issuance
of warrants .............. -- -- 19 -- 19
Net loss .................. -- -- -- (7,883) (7,883)
Accrual of preferred
stock dividends .......... -- -- -- (332) (332)
--------- --------- --------- --------- ---------
Balance, September 30, 1999 254,743 $ 3 $ 31,202 $ (35,792) $ 970
========= ========= ========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
- 6 -
<PAGE>
MONACO FINANCE, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 1999 and 1998
(Unaudited)
Nine Months Ended
September 30,
------------------------
1999 1998
--------- ---------
(amounts in 000s)
Cash flows from operating activities:
Net loss ..................................... $ (7,883) $ (4,538)
Adjustments to reconcile net to net cash
provided by operating activities:
Depreciation ............................... 883 842
Provision for credit losses ................ 2,000 530
Amortization of excess interest ............ 2,668 5,659
Amortization of other assets ............... 899 878
Amortization attributable to issuance of
warrants .................................. 19 63
Deferred tax asset ......................... -- 38
Gain on transfer of installment loans ...... (316) --
Loss on sale of fixed assets ............... 123 76
Other ...................................... -- (21)
--------- ---------
(1,607) 3,527
Changes in assets and liabilities:
Other receivables .......................... 46 6,207
Prepaid expenses ........................... (202) 30
Accounts payable ........................... (856) (25)
Accrued expenses and other liabilities ..... 1,213 (115)
--------- ---------
Net cash provided by operating activities (1,406) 9,624
--------- ---------
Cash flows from investing activities:
Retail installment sales contracts purchased . (1,311) (100,130)
Proceeds from principal payments on contracts 32,047 47,754
Purchases of furniture and equipment ......... -- (1,337)
Proceeds from sale of furniture and equipment 113 --
--------- ---------
Net cash provided by (used in) investing
activities .............................. 30,849 (53,713)
--------- ---------
Cash flows from financing activities:
Net borrowings under lines of credit ......... (12,470) 53,555
Net decrease (increase) in restricted cash ... 861 1,444
Repayments on asset-backed notes ............. (17,214) (12,320)
Repayments on senior subordinated debentures . (2,608) (3,808)
Proceeds from issuance of promissory notes ... 1,550 6,950
Repayments on promissory notes ............... (50) (1,135)
Proceeds from exercise of stock options ...... -- 21
Increase in debt issuance and conversion costs -- (517)
--------- ---------
Net provided by (used) in financing
activities .............................. (29,931) 44,190
--------- ---------
Net increase (decrease) in cash and cash
equivalents ................................. (488) 101
Cash and cash equivalents, January 1 ......... 516 757
--------- ---------
Cash and cash equivalents, September 30 ...... $ 28 $ 858
========= =========
See Notes to Consolidated Financial Statements.
- 7 -
<PAGE>
Monaco Finance, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
Note 1 - ORGANIZATION AND Summary of Significant Accounting Policies
Business
Monaco Finance, Inc. (the "Company") is a specialty consumer finance
company which has engaged in the business of underwriting, acquiring, servicing
and securitizing automobile retail installment contracts ("Contract(s)"). The
Company has provided special finance programs 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 (i.e., sub-prime customers). The Company has acquired Contracts in
connection with the sale of used, and to a limited extent, new vehicles, to
customers, from automobile dealers (the "Dealer(s)") located in forty-eight
states, the majority of which are acquired from four states. The Company has
also purchased portfolios of sub-prime loans from third parties other than
dealers.
Pacific USA Holdings Corp. ("Pacific USA") and related entities hold a
controlling interest in the Company at September 30, 1999 (see Note 6).
Interim Unaudited Financial Statements
The Company's independent auditors have not audited the accompanying
financial statements related to September 30, 1999 and 1998 and the periods then
ended. However, in the opinion of management, such financial statements reflect
all adjustments (which include only normal recurring adjustments) necessary for
the fair presentation of the financial position, results of operations and cash
flows of the Company. The results of operations for the three month and nine
month periods ended September 30, 1999 and 1998 are not necessarily indicative
of the results that will be or were achieved for the entirety of their
respective calendar years.
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
consolidated financial statements and notes thereto included in the Company's
annual report on Form 10-KSB for the year ended December 31, 1998.
Reclassifications
Certain prior year balances have been reclassified in order to conform to
the current year presentation.
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 the 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 has estimated the
number and dollar amount of loans expected to result in defaults and has
estimated the amount of net loss that will be incurred under each default. The
Company has provided allowances for these losses based on the historical
performance of the Contracts which are tracked by the Company on a static pool
basis (see "Loan Origination and Acquisition Activities" below). The actual
losses incurred could differ materially from the amounts that the Company has
estimated in preparing the historical consolidated financial statements.
Furthermore, the recent transfer of the portfolio to another servicer may
adversely impact the performance of the portfolio.
Loan Origination and Acquisition Activities
The Company accounts for its loan origination and acquisition activities
using the static pooling method. At the time Contracts are originated or
purchased, the Company estimates future losses of related principal using 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. An
amount equal to such estimated losses is added to the allowance for credit
losses by (1) capitalizing all loan discounts associated with the Contracts and
(2) adding an amount equal to the difference between the total estimated losses
and the capitalized loan discounts. The latter amount is created by establishing
a receivable for future interest, presented below in Note 3 as "excess interest
receivable."
The Company continually compares actual portfolio performance to the
results initially predicted by the Company's risk model. In order to maintain
the allowance for credit losses at a level, which in the opinion of management,
is adequate to absorb future losses that may occur in the present portfolio, the
Company, whenever necessary, will record a provision for credit losses. Changes
in (1) national and regional economic conditions, (2) borrower mix and (2)
various other factors could cause future actual losses to differ materially from
predicted losses.
Note 2 - Continued Operations
The accompanying financial statements have been prepared on a going concern
basis which contemplates the realization of assets and liquidation of
liabilities in the ordinary course of business. During the nine months ended
September 30, 1999 and the year ended December 31, 1998 the Company continued to
suffer recurring losses in excess of $7,800,000 and $10,700,000, respectively,
resulting in an accumulated deficit of approximately $35,800,000 at September
30, 1999. In addition, the Company lost its financing sources (see Note 5). The
Company will be seeking to obtain new financing sources. In the event the
Company obtains new financing sources it will attempt to implement a business
strategy which will focus on joint ventures with third parties. This strategy
will include purchasing Contracts having (i) higher discounts to face (ii)
shorter terms and (iii) lower amounts financed. No assurance can be given that
new and adequate sources of financing will be obtained. Furthermore, no
assurance can be given that the business strategy will be implemented and, if
implemented will be successful. The accompanying consolidated financial
statements do not include any adjustments that might be necessary if the Company
is unable to continue as a going concern.
In connection with the October 31, 1999 expiration of its office lease in
Denver, Colorado, the Company relocated its principal place of business to
facilities operated by Pacific USA in Plano, Texas. A charge of $340,000 is
included among operating expenses in the accompanying Statement of Operations in
recognition of the estimated costs associated with employee termination. See
Note 10.
Note 3 - Automobile Receivables
Automobile receivables consisted of the following as of September 30, 1999
and December 31, 1998.
September December
30, 31,
---------- 1998
1999
(amounts in 000s)
Finance receivables
Retained interest in installment
sales contracts .................... $ 6,162 $ --
Retail installment sales contracts .. 626 85,371
Retail installment sales contracts
- Trust ............................ -- 19,742
--------- ---------
Gross finance receivables ......... 6,788 105,113
Allowance for credit losses ......... (143) (9,872)
--------- ---------
Net finance receivables ........... 6,645 95,241
--------- ---------
Other automobile related receivables
Excess interest receivable .......... -- 6,307
Loan loss reimbursement receivable .. -- 4,035
Accrued interest .................... 88 1,427
Other ............................... 68 191
--------- ---------
Total other automobile related
receivables ...................... 156 11,960
--------- ---------
Total automobile receivables, net $ 6,801 $ 107,201
========= =========
See Note 8 for a discussion of significant events that have resulted in the
elimination from the Company's balance sheet substantially all of its finance
receivables and debt.
Activity in the allowance for credit losses during the nine months ended
September 30, 1999 is summarized below.
(amounts in 000s)
Balance, December 31, 1998 $ (9,872)
Provision for credit losses (2,000)
Additions for discounts on loan originations
and/or purchases (107)
Additions for unearned interest income (i.e.,
excess interest) (59)
Chargeoffs, net of recoveries less recovery
costs 7,261
Transfer of installment sales contracts
(Note 8) 4,634
----------
Balance, September 30, 1999 $ (143)
==========
Amortization of excess interest amounted to $2,668,000 and $5,659,000 for
the nine month periods ended September 30, 1999 and 1998, respectively.
Amortization of excess interest amounted to $319,000 and $1,637,000 for the
three month periods ended September 30, 1999 and 1998, respectively.
Note 4 - Commitments and Contingencies
From time to time the Company and its Subsidiaries 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
entered into settlements of claims in the past, and may do so in the future,
whenever management deems the circumstances appropriate.
NOTE 5 - DEBT
In February and March of 1999 the Company, along with its subsidiaries MF
Receivables Corp. III ("MFIII") and MF Receivables Corp. IV ("MF IV"), received
verbal notification from Daiwa Finance Corporation ("Daiwa") that there existed
certain violations of non-portfolio performance related covenants in the credit
agreements ("Credit Facilities" or "Daiwa Obligations") and that, as a result,
(i) no additional funds would be advanced to MF III under the warehouse line of
credit; (ii) Daiwa mandated that the Company transfer the servicing of the
related auto loans to a successor servicer to be appointed by Daiwa, which
transfer was completed on April 15, 1999 and (iii) except for servicing related
fees and expenses, Daiwa is collecting all cash flows in excess of Daiwa's
regularly scheduled principal and interest payments under the Credit Facilities.
Automobile Receivables Related Debt
Automobile receivables related debt consisted of the following as of
September 30, 1999 and December 31, 1998.
September 30, December 31,
1999 1998
------------- ------------
(amounts in 000s)
$75 million warehouse line of credit $ - $ 43,581
payable by MF III to Daiwa Finance
Corporation; 85% of interest
payable monthly at LIBOR plus
2.5%; 15% of interest payable
monthly at 12%; secured by
Contracts of MF III and cash flow
therefrom; assets of MF III are
not available to pay general
creditors of the Company; on
July 30, 1999 MF III was merged
into MF IV (see Note 8)
$73.9 million portfolio purchase - 39,298
credit facility payable by MF IV
to Daiwa Finance Corporation; 85%
of interest payable monthly at
LIBOR plus 3.5% (1% prior to
July 1, 1998); 15% of interest
payable monthly at 15.0% (LIBOR
plus 1% prior to July 1, 1998);
secured by Contracts of MF IV and
cash flow therefrom; assets of MF
IV are not available to pay
general creditors of the Company;
on July 30, 1999 MF III was merged
into MF IV (see Note 8)
Automobile receivable-backed notes - 17,214
payable by MF II; interest at
6.71%; secured by Contracts of MF II
and cash flow therefrom; redeemed in
January 1999 with proceeds drawn from
MF III's $75 million warehouse line
of credit ------------ -----------
$ - $ 100,093
============ ===========
Other Debt
Other debt consisted of the following as of September 30, 1999 and December
31, 1998.
September 30, December 31,
1999 1998
------------- ------------
(amounts in 000s)
$5 million senior subordinated notes;
issued November 1994 to Rothschild
North America (the "Rothschild
Notes"); unsecured; interest
payable monthly at the lesser of
11.5% or LIBOR plus 3.5%; amended
June 1998 to provide, among other
things, for an increase in
quarterly principal payments from
$416,667 to $450,000 and a
$600,000 principal payment at
June 30, 1998; amended July 30,
1999 to provide, among other
things, that the Rothschild Notes
are no longer recourse to the
Company (see Note 8) $ - $ 1,000
$5 million senior subordinated notes;
issued January 1996 to an investor
group (the "Heller/Black Diamond
Notes"); unsecured; interest payable
at 12%; amended June 1998 to provide,
among other things, for monthly
principal payments of $135,000 and
elimination of the holders' options
to convert the notes into shares of
the Company's Class A common stock;
amended July 30, 1999 to provide,
among other things, that the Heller/
Black Diamond Notes are no longer
recourse to the Company (see Note 8) - 4,055
(The holders of the Rothschild Notes and
the Heller/Black Diamond Notes are
sometimes hereinafter referred to as
the "Sub-Debt Holders.")
Note payable to Pacific USA, a related
party; dated September 30, 1998;
interest at prime plus 1%; principal
and unpaid interest due September 30,
1999 (subsequently renewed to December
31, 1999); secured by all of the
outstanding shares of MF Holding (see
Note 8) 3,450 1,900
Note payable to Pacific USA (assumed from
Pacific Southwest Bank, a subsidiary of
Pacific USA, in April 1999); dated
September 8, 1998; interest at prime
plus 1% 950 950
Other - 50
---------- -----------
$ 4,400 $ 7,955
========== ===========
Other obligations outstanding during a portion of 1998 are described below.
o $15 million Revolving Warehouse Line of Credit payable to a bank; dated
January 1996; up to $6.376 million outstanding during 1998; interest
payable at the Company's option at either prime .5% or LIBOR plus 2.75%;
paid in full during March 1998
o $5 million note payable to Pacific USA; dated June 30, 1998; $4.463
million converted into 939,632 shares of the Company's Class A common
stock, effective July 1, 1998; $.537 million converted into 268,375 shares
of the Company's Series 1999-1 8% Cumulative Subordinated Preferred Stock,
effective December 31, 1998
o $1.385 million convertible subordinated notes; dated March 1993; interest
payable at 7%; paid in full during April 1998
o $1.135 million remainder of $2.525 million installment note payable by
Monaco Funding Corp. to a bank; interest payable at 16%; paid in full
during April 1998
NOTE 6 - STOCKHOLDERS' EQUITY
Preferred Stock
The authorized and outstanding shares of the Company's no par value
preferred stock were as follows as of September 30, 1999.
Authorized Outstanding
------------ -------------
8% Cumulative Convertible Preferred
Stock, Series 1998-1 10,000,000 2,347,587
------------------------------------------
8% Cumulative Subordinated Preferred
Stock, Series 1999-1 585,725 418,375
Holders of the two series are generally not entitled to vote other than as
specifically provided by the articles of incorporation of the Company or
applicable law.
Both series of preferred stock have a liquidation preference of $2.00 per
share. Holders of either series are entitled to quarterly dividends, when and if
declared, at the annual rate of 8% of the stated liquidation preference ($0.16
per share). Undeclared dividends are cumulative. The dividend right of holders
of Series 1999-1 Preferred Stock is subordinate to the dividend right of holders
of Series 1998-1 Preferred Stock. Dividends, other than those payable in shares
of the Company's common stock, may not be paid to holders of Series 1999-1
Preferred Stock until all accumulated, unpaid dividends have been declared and
paid to holders of Series 1998-1 Preferred Stock.
Through October 31, 1999 the Company has neither paid nor declared a
dividend with respect to either series of preferred stock. Included among
"accrued expenses and other liabilities" in the accompanying consolidated
balance sheets are accrued preferred stock dividends of $706,000 and $374,000 at
September 30, 1999 and December 31, 1998, respectively.
At the holder's option, 2.5 shares of Series 1998-1 Preferred Stock are
convertible into one share of the Company's Class A common stock (939,085 shares
in the aggregate). At such time as Series 1998-1 Preferred Stock is no longer
outstanding, or any time thereafter, the Company may redeem shares of Series
1999-1 Preferred Stock for cash in the amount of the $2.00 liquidation value
plus all accumulated, unpaid dividends.
All of the outstanding shares of Series 1998-1 Preferred Stock were issued
in January 1998 in connection with the purchase of $81.1 million unpaid
principal balance of sub-prime automobile loans from subsidiaries of Pacific
USA, a related party ("Asset Purchase Agreement"). The Company issued 2,433,457
shares ($4,866,914 liquidation value); the balance of the $77.9 million purchase
price was financed by MF IV's portfolio purchase credit facility provided by
Daiwa. During 1998, at the Company's request, Pacific USA surrendered 85,870
shares in connection with the repurchase of automobile loans having an original
aggregate purchased principal balance of approximately $2.9 million.
All of the outstanding shares of Series 1999-1 Preferred Stock were issued
to Pacific USA on December 31, 1998 upon conversion of (1) the $536,750 balance
of the note payable dated June 30, 1998 and (2) $300,000 of the balance
outstanding under the note dated September 30, 1998.
Common Stock
A 1-for-5 reverse split of all common shares outstanding occurred November
23, 1998. All related amounts and disclosures in the accompanying consolidated
financial statements and these Notes to Consolidated Financial Statements have
been adjusted to reflect this reverse split.
The authorized and outstanding shares of the Company's $.01 par value
common stock as of September 30, 1999 are as follows. Holders of the two
classes are entitled to the same rights and privileges except that a holder of
a Class B share is entitled to three votes whereas a holder of a Class A share
is entitled to only one vote.
Authorized Outstanding
------------ -------------
Class A 30,000,000 2,554,588
-----------------
Class B 585,725 254,743
As required by the Asset Purchase Agreement, a subsidiary of Pacific USA
entered into a loan loss reimbursement agreement whereby it agreed to reimburse
the Company for up to 15% of any losses ("Covered Losses") incurred in
connection with the loans acquired under the Asset Purchase Agreement. In
connection therewith, this subsidiary provided for the issuance of letters of
credit ("Letters of Credit") to be drawn upon to pay for the Covered Losses. In
consideration therefore, the Company issued 162,230 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 300,000 shares of Class A Common Stock
as of December 31, 1997. As a result of the December 1997 Option Agreement with
Consumer Finance Holdings, Inc. ("CFH"), a wholly owned subsidiary of Pacific
USA, it was granted the power to vote the 166,000 shares of Class B Common Stock
beneficially owned by the Messrs. Ginsburg and Sandler (then the President and
Executive Vice President, respectively, of the Company) ("the Shareholders") and
a limited power to direct the voting of shares subject to proxies held by the
Shareholders. Under the Conversion Rights Agreement dated July 1, 1998, Pacific
USA was issued 939,632 shares of the Company's Class A Common Stock. Pacific USA
may be deemed to be the beneficial owner of approximately 55% of the combined
outstanding shares of Class A and Class B Common Stock; it controls
approximately 65.3% of the total voting power. Pacific USA has an option
expiring in December 2000 to purchase 166,000 shares of Class B Common Stock,
owned by the Shareholders, while the Shareholders have an option, also expiring
in December 2000, to require that Pacific USA purchase all of such shares. Upon
exercise of either the put option or the call option, the Class B Common Stock
purchased by CFH will automatically convert into Class A Common Stock thereby
reducing the voting power of Pacific USA. As described herein, Pacific USA also
has the right, at any time, to convert the shares of 1998-1 Preferred Stock into
1,021,824 shares of Class A Common Stock.
Warrants
In connection with Daiwa Finance Corporation's January 1998 financing of
the loan purchase discussed above, the Company issued Daiwa warrants for the
purchase of 50,000 shares of the Company's Class A common stock. The Company has
assigned an imputed value of $84,000 to the warrants. The warrants are
exercisable at $4.125 per share until their expiration on January 20, 2001.
Stock Option Plans
During the nine months ended September 30, 1999 no new stock options were
granted nor were any options exercised. Options that remain outstanding carry
exercise prices that materially exceed recent market prices of the Company's
common stock.
The Company accounts for its stock option plan in accordance with SFAS No.
123, Accounting for Stock-Based Compensation which encourages entities to
recognize as expense over the vesting period the fair value of all stock-based
awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to
continue to apply the provisions of APB Opinion No. 25 and provide pro forma net
earnings and pro forma earnings per share disclosures for employee stock option
grants made in 1995 and future years as if the fair-value-based method defined
in SFAS No. 123 had been applied. The Company has elected to continue to apply
the provisions of APB Opinion No. 25 and provide the pro forma disclosure
provisions of SFAS No. 123.
The Company uses one of the most widely used options pricing models, the
Black-Scholes model (the Model), for purposes of valuing its stock options
grants. The Model was developed for use in estimating the fair value of traded
options that 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. In management's opinion, the value
determined by the Model is not necessarily indicative of the ultimate value of
the granted options because (1) the Company's stock options have characteristics
significantly different from those of traded options and (2) changes in
subjective input assumptions can materially affect the fair value estimate.
NOTE 7 - 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 Nine Months Ended
September 30, September 30,
------------------------ ----------------------
1999 1998 1999 1998
--------- --------- --------- ---------
(amounts in 000s)
<S> <C> <C> <C> <C>
Pretax (loss) $ (1,592) $ (3,204) $ (7,883) $ (4,538)
========= ========= ========= =========
Income tax expense (benefit)
at Federal statutory rate-
34% $ (541) $ (1,089) $ (2,680) $ (1,543)
State income tax expense
(benefit) (54) (109) (268) (154)
--------- --------- --------- ---------
Income tax expense (benefit)
before valuation allowance (595) (1,198) (2,948) (1,697)
Less valuation allowance 595 1,198 2,948 1,697
--------- --------- --------- ---------
Income tax expense (benefit) $ - $ - $ - $ -
========= ========= ========= =========
</TABLE>
As of September 30, 1999 the Company had a net operating loss carryforward
of approximately $51 million for federal income tax reporting purposes which, if
unused, will expire between 2011 and 2014. During the year ended December 31,
1998 there were transactions involving changes in ownership that will
significantly restrict the utilization of net operating loss carryforwards in
the future.
The principal temporary differences that will result in deferred tax assets
and liabilities are certain expenses and losses accrued for financial reporting
purposes not deductible for tax purposes until paid, depreciation for tax
purposes in excess of depreciation for financial reporting purposes and the
utilization of net operating losses. The effect of the differences generate a
long-term deferred tax asset of approximately $14,000,000, which has been fully
allowed for as management has determined that it was more likely than not that
the Company would not realize its deferred tax asset. Accordingly, there is no
net deferred tax asset reflected in the accompanying consolidated financial
statements.
NOTE 8 - EXTINGUISHMENT OF DEBT AND TRANSFER OF ASSETS
On July 30, 1999 a series of agreements were executed which, among other
things, provided for the following:
o Amendment of the Daiwa Credit Facilities to specifically cause
the following to occur:
o Transfer of all the MF III-owned installment loans to MF IV
o Extinguishment of MF III's debt obligations to Daiwa and the
assumption thereof by MF IV
o MF IV's debt obligations to Daiwa to be non-recourse to the
Company
o Merger of MF III into MF IV
o Creation by the Company of a wholly-owned, special purpose
corporation, MF Receivables Holding Corp. ("MF Holding"), which
assumed all of the Company's subordinated debt obligations and
was capitalized with all of the outstanding shares of MF IV
o Release by the Sub-Debt Holders of the Company from all of its
obligations under the subordinated debt agreements
o Release by Daiwa of certain security interests contained in the
Daiwa Credit Facilities
o Draw by MF IV of the remaining balance of $2.338 million under
the Letter of Credit
o Dividend payment of $2.338 million by MF IV to MF Holding
o Payment by MF Holding of $2.338 million to Sub-Debt Holders,
distributed on a pro rata basis among the individual holders and
applied entirely to principal reduction
o Dedication of future cash flows from the Daiwa-financed
installment loan portfolios first to Daiwa and then to MF IV
o Retention by MF IV of the right to receive the residual cash
flows, if any, that may be realized after satisfaction of the
Daiwa Obligations
o Authorization for Daiwa to sell the related installment loans at
any time, subject to certain conditions
The substantive effects of these agreements, described more fully below,
are the transfer of substantially all of the Company's installment loan
portfolio and the extinguishment of substantially all of the Company's debt.
Parties to the various agreements included the Company, MF III, MF IV, MF
Holding, Daiwa, Pacific USA and the holders of the Rothschild and Heller/Black
Diamond Notes, among others.
The agreements limit the recourse of Daiwa to future cash flows from the
Daiwa-financed loan portfolios. Future cash flows, if any, that may occur after
full satisfaction of the amounts outstanding under the Daiwa Credit Facilities,
including interest, will be paid to MF IV. Dividends, if any, received by MF
Holding from MF IV will be used to pay the Sub-Debt Holders.
The Company has recorded the financial statement effect of these agreements
in July 1999 as an extinguishment of the related debt due to the transfer of the
financial assets in accordance with Financial Accounting Standards Board
Statement No. 125: Accounting for Transfers and Servicing of Financial Assets
and Extinguishment of Liabilities. The financial statement effects of the
transaction are summarized below.
(amounts in 000s)
Consideration
Unpaid principal balance of
related debt $ 72,857
Accrued interest payable 266
Servicing fees payable 394
Residual interest in loans 6,038
----------
79,555
----------
Net book value of assets transferred
and other costs
Assets prorated in determination of
residual value
Outstanding principal balance
of notes receivable 71,705
Allowance for credit losses before
adjustment (4,634)
----------
Net book value of notes receivable 67,071
Excess interest receivable 3,698
Repossessed vehicle inventory 2,330
----------
Net book value of transferred
assets subject to proration 73,099
Other assets transferred or otherwise
considered as a cost of the sale
Restricted cash collected through the
the transfer date 4,599
Accrued interest receivable 846
Other receivables 40
Unamortized deferred loan financing
costs 490
Deal costs 165
----------
79,239
----------
Gain from transfer of assets $ 316
==========
The residual interest in loans was determined by multiplying (1) the net
book value of transferred assets subject to proration by (2) the percentage
relationship that estimated future cash flows attributable to the Company's
interest bears to the estimated future cash flows of the transferred portfolio
as a whole. Subsequent to July 1999 an imputed interest rate of approximately
12.3% will be used to recognize interest income associated with the residual
interest.
The estimate of future cash flows from the loan portfolio utilizes numerous
estimates based on the Company's loss experience and the judgment of management.
Numerous factors and conditions, including the transfer of servicing
responsibilities to a third party, prepayments and other factors may cause
actual results to differ from the estimates. Accordingly, there can be no
assurance that estimated future cash flows will in fact occur in either the
anticipated amounts or anticipated time periods.
NOTE 9 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Supplemental information related to the accompanying consolidated
statements of cash flows is presented below.
Nine Months Ended
September 30
-------------------------
1999 1998
----------- -----------
(amounts in 000s)
Cash payments for
Interest $ 4,866 $ 5,525
Income taxes - 4
Investing and financing activities during the nine month periods ended
September 30, 1999 and 1998 that neither provided nor used cash are described
below.
o See Note 8 for information related to the transfer of substantially all of
the Company's installment loan portfolio and the extinguishment of
substantially all of the Company's debt. Except for the collection of
$2.338 million from a subsidiary of Pacific USA and the forwarding of such
amount to the Sub-Debt Holders, this transaction was a non-cash
transaction.
o In January 1998, in connection with the acquisition of a loan portfolio
from a subsidiary of Pacific USA, the Company issued 162,231 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. These shares were issued as purchase consideration in addition to
cash provided by debt financing (see Notes 5 and 6).
o During the nine months ended September 30, 1998 the subsidiary of Pacific
USA repurchased certain of the loans referred to above for cash plus the
surrender of 85,870 shares of the Series 1998-1 Preferred Stock. No
additional shares have been surrendered subsequently.
o Effective July 1, 1998, Pacific USA converted $4,463,250 of its $5.0
million Promissory Note (see Note 5) into 939,632 restricted shares of the
Company's Class A Common Stock.
o Quarterly preferred stock dividends in the amount of approximately
$332,000 have been accrued during the nine months ended September 30,
1999. Cumulative preferred stock dividends attributable to all quarters of
1998 were not accrued until December 1998.
NOTE 10 - SUBSEQEUENT EVENTS
On October 25, 1999 the Company's relocated its principal place of business
to facilities owned by Pacific USA. The Company's new principal business address
is Willow Bend Center I, 2740 North Dallas Parkway, Plano, Texas 75093-4705.
At this time, the Company pays no rent for use of the Plano, Texas
facilities. The Company will continue to maintain a Denver, Colorado executive
office. As a result of the relocation, the Company employed four individuals on
a full-time basis as of October 31, 1999.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INTRODUCTION
The following discussion is intended to assist in understanding the
Company's results of operations for the three and nine month periods ended
September 30, 1999 and 1998 and the Company's financial position as of September
30, 1999. The accompanying consolidated financial statements and related notes
thereto should be read in conjunction with this discussion.
RESULTS OF OPERATIONS
The results of operations for the three and nine month periods ended
September 30, 1999 and 1998 are discussed together because they are similarly
effected by the same events.
For the three months ended September 30, 1999 the Company incurred a net
loss of $1,592,000 compared to a net loss of $3,204,000 for the three months
ended September 30, 1998. Losses per common share, both basic and dilutive, were
$.60 and $1.41 for the respective periods. Revenues were $1,119,000 for the
three months ended September 30, 1999 compared to $4,558,000 for the three
months ended September 30, 1999. Expenses for the comparable periods were
$3,028,000 and $7,759,000, respectively.
For the nine months ended September 30, 1999 the Company incurred a net
loss of $7,883,000 compared to a net loss of $4,538,000 for the nine months
ended September 30, 1998. Losses per common share, both basic and dilutive,
were $2.92 and $2.42 for the respective periods. Revenues were $8,188,000 for
the nine months ended September 30, 1999 compared to $16,285,000 for the nine
months ended September 30, 1998. Expenses for the comparable periods were
$16,547,000 and $20,829,000, respectively.
In February and March of 1999 the Company, along with its subsidiaries MF
III and MF IV, received verbal notification from Daiwa that there existed
certain violations of non-portfolio performance related covenants in the Credit
Facilities and that, as a result, (i) no additional funds would be advanced to
MF III under the warehouse line of credit; (ii) Daiwa mandated that the Company
transfer the servicing of the related auto loans to a successor servicer
appointed by Daiwa, which transfer was completed on April 15, 1999; and (iii)
except for servicing related fees and expenses, Daiwa is collecting all cash
flows in excess of Daiwa's regularly scheduled principal and interest payments
under the Daiwa Credit Facilities. These events negatively affected the results
of operations for both the three and nine month periods ended September 30,
1999.
Interest income for the three and nine month periods ended September 30,
1999 decreased $3,439,000 (75.4%) and $8,097,000 (49.7%), respectively, in
relation to the comparable periods in 1998. These decreases result principally
from decreases in the outstanding principal balances of installment loans which
are primarily attributable to (i) the transfer of installment loans discussed
below (see Notes 3 and 8), (ii) the Company's $81 million portfolio purchase in
January 1998 not being comparably matched in 1999 and (iii) the Company's
inability to borrow additional funds under its warehouse line of credit with
Daiwa.
See Note 8 to the accompanying consolidated financial statements and the
discussion below under Liquidity and Capital Resources for information related
to significant events which occurred in July 1999. In recognition of these
events, a gain of $316,000 was recorded during the three months ended September
30, 1999.
Interest expense for the three and nine month periods decreased $2,170,000
(76.4%) and $3,707,000 (43.1%), respectively, in relation to the comparable
periods in 1998. Since January 1, 1998 the amounts owed by the Company pursuant
to its various credit facilities have generally varied directly in relation to
the aggregate, outstanding balance of the installment loan portfolio for the
reasons cited above. However, a substantial portion of these decreases are
directly related to the significant events referred to above.
Operating expenses for the three and nine month periods decreased
$2,057,000 and $2,045,000, respectively, in relation to the comparable periods
in 1998. The decrease for the three months ended September 30, 1999 reflects
significant savings in employee payroll and related benefits, temporary labor
and office supplies, among other categories. These savings are reflective of
combined workforce reductions of approximately 80% which occurred in November
1998 and April 1999. These savings were partially offset by the cost of
utilizing a third-party servicer effective April 15, 1999. Following the
July 30, 1999 transfer of installment loans discussed in Note 8, such
third-party servicing costs have not been recognized. The nine month period
reflects similar savings related to the workforce reduction and the additional
costs associated with the third-party servicer; however, legal and consulting
expenses recognized in the first quarter of 1999 served to partially offset
such net savings for the nine month period. The three and nine month periods
ended September 30, 1999 include a $340,000 charge in recognition of the
estimated costs of terminating most of the Company's Denver-based employees in
connection with the relocation of the Company's headquarters to Plano, Texas.
As a result of the relocation, the Company expects to achieve material savings
in operating expenses. See Note 10.
The provision for credit losses for the three and nine month periods
decreased $504,000 and increased $1,470,000, respectively, in relation to the
comparable periods in 1998. The decrease between the comparative three months
reflects the July 30, 1999 transfer of substantially all of the Company's
installment loan portfolio as discussed in Note 8 to the accompanying
consolidated financial statements. The increase between the comparative nine
month periods reflect actual default rates in excess of the estimated rates used
by the Company in establishing the initial allowances for credit losses under
the static pooling method of accounting. Such defaults may, in part, result from
the transfer of the servicing of the portfolio in April 1999. A provision of
$1,500,000 was recorded for similar purposes during the three months ended
December 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity has been impaired since mid-May 1999 when Daiwa
began applying all installment loan related cash receipts in excess of interest
expense and servicing costs to debt reduction (with respect to installment loan
payments received on or after April 1, 1999). As a result, the Company realizes
no cash flow from its installment loan portfolio other than from approximately
$626,000 of auto loans which are not subject to Daiwa's security interest.
Although Pacific USA has continued to provide the Company with certain debt
funding, no assurance can be given that such funding will continue.
The Company's business has been, and will continue to be, cash intensive.
The Company's principal need for capital is to fund cash payments made to
Dealers in connection with purchases of installment contracts and the purchase
of existing loan portfolios. In the past, these purchases have been financed
through the Company's equity, warehouse lines of credit, securitizations and
cash flows from operations. The Company does not presently have, and may not be
able to obtain, a line of credit or other financing. Therefore, the Company may
not be able to resume its business of acquiring installment contracts from
Dealers. The failure to obtain financing will have a material adverse effect on
the Company's business, financial condition, results of operations and ability
to pay expenses. The combined effects of the foregoing have caused the Company
to be unable to pursue or otherwise react to business opportunities. The
Company's independent auditor has added an explanatory paragraph to its report
with respect to the Company's financial statements for the year ended December
31, 1998 regarding certain substantial matters which, in its opinion, raise
substantial doubt about the Company's ability to continue as a going concern.
On July 30, 1999 the Company and certain of its subsidiaries executed a
series of agreements with parties that in various combinations included Daiwa,
Pacific USA and the holders of the Heller/Black Diamond and Rothschild notes,
among others. These agreements significantly reduce the Company's debt and have
no effect on capital resources.
The following actions, among others, arise from these agreements.
o MF III was merged into MF IV, with MF IV assuming all of MF III's Daiwa
Obligations.
o The Company formed a wholly-owned, special purpose corporation, MF
Holding, which was capitalized with all of the outstanding shares of MF
IV.
o MF Holding assumed all of the outstanding subordinated debt of
the Company.
o The Sub-Debt Holders released the Company from all subordinated
debt obligations.
o MF Holding pledged 100% of the outstanding shares of MF IV to
the Sub-Debt Holders.
o In exchange for its release of its security interest in all of the shares
of MF III and MF IV, Pacific USA was granted a security interest in all
of the shares of MF Holding.
o Dividends, if any, received by MF Holding from MF IV will be used to pay
the subordinated debt.
o In the event that the installment loans financed by Daiwa are
sold prior to their maturity and
o Such sale occurs prior to December 31, 1999, Daiwa will pay to MF IV the
greater of (i) $3,500,000 or (ii) the difference between the sale
proceeds and the amount then owed by MF IV to Daiwa (subject to
proration for partial sales); or
o Such sale occurs after December 31, 1999 but before December 31, 2000,
Daiwa will pay to MF IV the greater of (i) $1,000,000 or (ii) the
difference between the sale proceeds and the amount then owed by MF IV
to Daiwa (subject to proration for partial sales); or
o Such sale occurs after January 1, 2001, MF IV will have a right of first
refusal, subject to certain conditions.
The effect of these agreements resulted in the transactions being recorded
as a transfer of financial assets and extinguishment of the related debt.
Accordingly, the Company will no longer report in its consolidated balance
sheets (i) the outstanding obligations to Daiwa, (ii) the subordinated debt, and
(iii) the Daiwa-financed installment loan portfolio and associated assets.
Instead, the Company's consolidated financial statements will reflect an amount
that represents the Company's residual interest in the future cash flows from
the installment loan portfolio. Imputed interest at the rate of approximately
12.3% will be accreted to interest income throughout the remaining life of the
residual interest. See Note 8 to the accompanying consolidated financial
statements for additional information related to the financial statement effects
of these agreements.
The estimate of future cash flows from the loan portfolio utilizes numerous
estimates based on the Company's loss experience. Numerous factors and
conditions may cause actual results to differ from the estimates which may
negatively impact the carrying value of the residual interest in loans.
Accordingly, there can be no assurance that estimated future cash flows will in
fact occur in either the anticipated amounts or anticipated time periods.
Although the Company has accomplished a significant restructuring of its
financial position, it will be necessary for the Company to obtain a line of
credit, infusion of equity and/or other financing in order to resume the
purchase of installment loans. The failure to obtain such financing will have a
material adverse effect on the Company's business, financial condition, results
of operations and ability to pay operating expenses. Although the Company is
engaged in on-going discussions related to new financing arrangements, no
assurance can be given that such financing in adequate amounts will be obtained.
Effective November 23, 1998 the Company initiated a 1-for-5 reverse stock
split of all of the outstanding shares of its Class A and Class B Common Stock.
All share and per share information presented in the accompanying consolidated
financial statements and related notes have been adjusted accordingly for all
periods presented.
The Company's Class A Common Stock is traded in the over-the-counter market
and is currently quoted on the Electronic Bulletin Board.
OTHER
Employees and Facilities
At October 31, 1999, the Company employed four persons on a full time
basis.
On October 25, 1999 the Company relocaed its principal place of business to
facilities owned by Pacific USA in Plano, Texas. As of November 15 the Company
is not obligated to pay rent to Pacific USA.
Software and Data Licensing
Effective November 30, 1998, Pacific USA paid the Company $200,000 in cash
and entered into a Software License and Development Agreement and a Data
Licensing Agreement (the "License Agreements") with the Company. Pursuant to the
License Agreements, the Company, as licensor, granted to Pacific, as licensee, a
perpetual, fully paid up, nontransferable, exclusive license covering certain
proprietary software and historical data developed by the Company with respect
to consumer automobile loans, including risk analysis (the "Monaco Software").
Pacific acquired the right to make modifications, changes or improvements to the
Monaco Software (referred to as the "Advanced Software"). Pacific has the right
to develop and market the Advanced Software as it deems fit in its sole
discretion.. Pacific granted to the Company a fully paid up, nontransferable,
nonexclusive license limited to use of the Advanced Software for the Company's
internal business purposes only. This license will terminate 90 days following
any change in control of the Company. In addition, Pacific has a right of first
refusal to purchase the Monaco Software.
Inflation
Inflation was not a material factor in either the sales or the operating
expenses of the Company during 1998 and 1999.
Future Strategy
Given the recent changes in the Company's financing sources, the Company
will be seeking to obtain new financing sources. In the event the Company
obtains new financing sources it will attempt to implement a business strategy
which will focus on joint ventures with third parties. This strategy will
include purchasing Contracts having (i) higher discounts to face, (ii) shorter
terms and (iii) lower amounts financed. No assurance can be given that new and
adequate sources of financing will be obtained. Furthermore, no assurance can be
given that the business strategy will be implemented and, if implemented, will
be successful.
Controlling Interest: As a result of the Asset Purchase Agreement dated
January 8, 1998, Pacific USA Holdings Corp. ("Pacific USA") increased its
voting power in the Company to 65.3%. Pacific USA is the beneficial owner of
approximately 59% of the Company's outstanding voting stock. Pacific USA is a
diverse U.S. holding company whose businesses include technology, real estate,
and consumer finance.
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.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Although not subject to any material litigation at this time, the Company
and its Subsidiaries at times are subject to various legal proceedings and
claims that arise in the ordinary course of business. In the opinion of
management of the Company, based in part on the advice of counsel, the amount of
any ultimate liability with respect to these actions will not materially affect
the results of operations, cash flows or financial position of the Company. It
is the Company's and its Subsidiaries' policy to vigorously defend litigation;
however, the Company and its Subsidiaries have, and may in the future, enter
into settlements of claims where management deems appropriate.
ITEM 2. CHANGES IN SECURITIES
Certain of the Company's loan agreements contain covenants that restrict
the Company's ability to pay cash dividends on its Class A and B Common Stock.
For a discussion of the July 30, 1999 restructuring of the Company's debt,
refer to "Note 8 - Extinguishment of Debt and Transfer of Assets" of the Notes
to Consolidated Financial Statements and "Item 2. Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources."
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
On July 30, 1999, the Company executed a series of agreements which, among
other things, transferred the Company's subordinated debt to MF Holding and
allowed the Company to remove all of its subordinated debt from its balance
sheet. For a more complete description of the transactions and the accounting
treatment, please see "Note 8 - Extinguishment of Debt and Transfer of Assets"
of the Notes to Consolidated Financial Statements and "Item 2. Management's
Discussion and Analysis of Financial Condition - Liquidity and Capital
Resources." Copies of all relevant agreements will be filed in a Current Report
on Form 8-K.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit
-------
Number Description of Document
11.1 Statement re: Computation of Per Share Earnings
27.1 Financial Data Schedule
(b) Reports on Form 8 - K.
None.
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: November 15, 1999
MONACO FINANCE, INC.
A Colorado Corporation
By: /s/ Morris Ginsburg
Name: Morris Ginsburg
Title: Chief Executive Officer and Director
(Principal Executive Officer and
Principal Financial and Accounting
Officer)
Exhibit 11.1
MONACO FINANCE, INC. AND SUBSIDIARIES
Computation of Earnings (Loss) Per Common Share
<TABLE>
<CAPTION>
Periods Ended September 30,
-------------------------------------------------
Three Months Nine Months
---------------------- -----------------------
1999 1998 1999 1998
--------- --------- --------- ----------
<S> <C> <C> <C> <C>
Net Loss Applicable to Common Shareholders
Net loss $(1,592) $(3,204) $(7,883) $(4,538)
Earnings applicable to preferred
shareholders 111 94 332 280
--------- --------- --------- ----------
Net loss applicable to common
shareholders $(1,703) $(3,298) $(8,215) $(4,818)
========= ========= ========= ==========
Average Common Shares Outstanding (c)
Weighted average common shares
outstanding - basic 2,809,301 2,337,485 2,809,301 1,991,903
Shares issuable from assumed
exercise of stock options (a) (b) (b) (b) (b)
Shares issuable from assumed
exercise of stock warrants (a) (b) (b) (b) (b)
Shares issuable from assumed
conversion of 7% subordinated debt n/a n/a n/a (b)
Shares issuable from assumed
conversion of senior subordinated
note n/a n/a n/a (b)
--------- --------- --------- ---------
Weighted average common shares
outstanding - assuming dilution 2,809,301 2,337,485 2,809,301 1,991,903
========= ========= ========= =========
Earnings (Loss) Per Common Share - Basic
and Assuming Dilution
(Loss) per common share - basic and
assuming dilution $ (.60) $ (1.41) $ (2.92) $ (2.43)
========= ========= ========= =========
</TABLE>
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.
(c) All share related information has been adjusted to give effect to a
1-for-5 reverse split which was effective November 23, 1998.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-1-1999
<CASH> 70,000
<SECURITIES> 0
<RECEIVABLES> 6,965,000
<ALLOWANCES> (143,000)
<INVENTORY> 99,000
<CURRENT-ASSETS> 0
<PP&E> 4,426,000
<DEPRECIATION> (3,373,000)
<TOTAL-ASSETS> 8,228,000
<CURRENT-LIABILITIES> 0
<BONDS> 4,400,000
0
5,532,000
<COMMON> 28,000
<OTHER-SE> (4,590,000)
<TOTAL-LIABILITY-AND-EQUITY> 8,228,000
<SALES> 0
<TOTAL-REVENUES> 8,664,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 9,663,000
<LOSS-PROVISION> 2,000,000
<INTEREST-EXPENSE> 4,884,000
<INCOME-PRETAX> (7,883,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,883,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,883,000)
<EPS-BASIC> (2.92)
<EPS-DILUTED> (2.92)
</TABLE>
