FORM 10-KSB
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
Commission file number 0-18819
MONACO FINANCE, INC.
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(Name of small business issuer in its charter)
Colorado 84-1088131
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(State or other (IRS Employer
jurisdiction of Identification No.)
incorporation or
organization)
370 17th Street, Suite 5060
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Denver, Colorado 80202
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (303) 592-9411
SECURITIES REGISTERED UNDER SECTION 12(B) OF THE EXCHANGE ACT:
Class A Common Stock, $.01 Par Value
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Title of Class
SECURITIES REGISTERED UNDER SECTION 12(G) OF THE EXCHANGE ACT:
Class A Common Stock, $.01 Par Value
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Title of Class
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
__X___ Yes _____ No
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendments to this Form 10-KSB. [ ]
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State issuer's revenues for its most recent fiscal year. $20,829,747.
State the aggregate market value of the voting stock held by
non-affiliates (based on the average bid and asked prices of such stock) of
the Registrant:
As of March 30, 1999: Approximately $243,000.
As of March 30, 1999, there were 2,554,558 shares of Class A Common
Stock, $.01 par value and 254,743 shares of Class B Common Stock, $.01 par
value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for the 1999 Annual Meeting to be filed within 120 days
after the fiscal year (Part III).
Transitional Small Business Disclosure Format: Yes No X
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Total number of pages:
<PAGE>
MONACO FINANCE, INC.
1998 FORM 10-KSB ANNUAL REPORT
TABLE OF CONTENTS
PAGE NUMBER
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PART I
Item 1. Description of Business, pg. 3
Item 2. Description of Property, pg. 8
Item 3. Legal Proceedings, pg. 8
Item 4. Submission of Matters to a Vote of Security
Holders, pg. 8
PART II
Item 5. Market for Common Equity and Related
Stockholder Matters, pg. 8
Item 6. Management's Discussion and Analysis of
Financial Condition and Results of Operation, pg. 10
Item 7. Financial Statements, pg. 20
Item 8. Changes In and Disagreements With Accountants
on Accounting and Financial Disclosure, pg. 55
PART III
Item 9. Directors and Executive Officers, Promoters and
Control Persons, Compliance With Section 16(a)
of the Exchange Act, pg. 55
Item 10. Executive Compensation, pg. 55
Item 11. Security Ownership of Certain Beneficial Owners
and Management, pg. 55
Item 12. Certain Relationships and Related Transactions, pg. 55
PART IV
Item 13. Exhibits and Reports on Form 8-K, pg.
Signatures, pg. 55
<PAGE>
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
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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 (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 has acquired Contracts in connection with the sale of
new and used vehicles, to customers, from automobile dealers (the "Dealer(s)"
or the "Dealer Network") located in forty-eight states, the majority of which
were acquired from four states. The Company has also purchased portfolios of
sub-prime loans from third parties other than dealers. At December 31, 1998,
the Company's loan portfolio had an outstanding balance of approximately $107
million.
See the discussion of Subsequent Events in Item 6. Management's
Discussion and Analysis of Financial Condition and Results of Operation.
AUTO FINANCE PROGRAM
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GENERAL
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The Company's automobile finance programs have been conducted under the
name Monaco Finance Auto Program ("MFAP"). At December 31, 1998, the Company
had agreements with Dealers located in forty-eight states for the purchase of
Contracts that meet the Company's financing standards, requirements and
criteria. The Contracts are purchased without recourse and are generally
purchased for a processing fee and discount ranging from $150 to $1,095 per
contract. The purchase price primarily depends upon the particular financing
option used, the length of the Contract, and the model year and mileage of the
automobile financed. To date, the obligors under the Contracts generally have
made down payments ranging between 10% and 20% of the sales price of the
vehicle financed including the value of a trade-in, if any. Generally, the
remaining balance of the purchase price plus taxes, title fees and insurance,
where applicable, is financed over a period of 24 to 60 months at annual
interest rates ranging between 17% and 25%. At December 31, 1998 the original
annual percentage rate of interest of the Company's portfolio averaged
approximately 21% and the original weighted average term of the portfolio was
approximately 51 months. From inception through December 31, 1998, the Company
originated and acquired 36,638 Contracts with an aggregate principal balance
of approximately $334 million.
PURCHASE AGREEMENTS (DEALERS)
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The Company has acquired Contracts from franchised and independent
Dealers who have entered into dealer agreements with the Company. The dealer
agreements generally are in standard form requiring that Contracts be
originated in accordance with the Company's Program guidelines and that the
Contracts be secured by a perfected first lien on the vehicle financed. The
Company underwrites each Contract prior to acceptance. The Contracts are
non-recourse to the selling Dealer except for certain representations and
warranties.
The Company has marketed its MFAP through independent contractors. The
independent contractors reside in the geographical area where the Programs
were marketed. In addition to enlisting new Dealers into the Company programs,
the independent contractors assisted Dealers by familiarizing them with
Monaco's Programs and procedures. In February 1999, the Company discontinued
these agreements with all independent contractors.
LOAN PORTFOLIO ACQUISITIONS
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In 1998, the Company acquired, at a discount, two portfolios of auto
loans with a face value of approximately $95 million from third parties. The
Company completed the first acquisition of approximately $81 million of auto
loans, at a discount, from certain affiliates of Pacific USA Holdings Corp. In
February 1998, the Company acquired approximately $14 million of auto loans,
at a discount, from an unrelated third party. At this time, the Company is
not actively seeking to acquire auto loan portfolios.
FINANCING SOURCES
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From inception through 1991, the Company financed the acquisition of
Contracts through loans from its principal stockholders and banks. In October
1991, the Company expanded its financing sources by completing its first
asset-backed automobile receivables securitization. In 1992, the Company
entered into a secured revolving line of credit with Citicorp Leasing Inc.
("Citicorp") to finance Contracts. In 1994, the Company securitized $34.1
million of its Contracts and in 1995 it obtained a $150 million revolving
secured warehouse line and securitized $43.1 million in Contracts. In 1997,
the Company securitized $51.4 million of its Contracts and entered into a $75
million Warehouse Line of Credit. In 1998 the Company entered into a $73.9
million Portfolio Purchase Credit Facility, and received capital of $5.3 mil-
lion and secured loans of $1.9 million from Pacific USA Holdings Corp. as
well as secured loans from Pacific Southwest Bank of $.95 million. Since
1993,the Company has used revolving lines of credit, private placement borrow-
ings, common stock, warrant exercises, and its Automobile Receivable-Backed
Securitization Program and the corresponding Revolving Notes and Warehouse
Notes as its primary sources of capital.
Subsequent to December 31, 1998, significant events have occurred which have
negatively and materially impacted the Company's financing sources (see the
discussion in Subsequent Events).
Reference is made to Management's Discussion and Analysis of Financial
Condition and Results of Operation and the Notes to the Consolidated Financial
Statements for details regarding the Company's financing sources.
OPERATIONS, COMPETITION AND REGULATION
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UNDERWRITING GUIDELINES
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The Company targets customers who do not qualify for traditional bank
financing primarily due to their adverse credit history or for other reasons
which may indicate credit or economic risk.
The Company has developed underwriting guidelines and standards based
upon many factors including, but not limited to the amount and terms of the
Contract, the customer's residence and employment stability, credit history,
ability to pay, discretionary income and debt ratio. In addition, the Company
uses a proprietary credit scoring system to evaluate the likeliness of default
and, in conjunction with the company's risk models, calculates the predicted
loss, if any, in the event of default. In reviewing a customer's credit, the
Company evaluates (i) the credit application; (ii) the customer's cash flow
statement of monthly cash receipts and expenses to determine debt ratios; and,
(iii) credit bureau reports as well as other information and verifies the
accuracy of all information with respect to the customer as well as the car
being financed.
RISK ADJUSTED YIELDS
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The Company reports interest income earned on its loan portfolio on the
accrual basis. Under this method, interest income represents the estimated
risk adjusted yield on the Company's Contracts. The estimated risk adjusted
yield for the Company's loan portfolio takes into account: (1) the face value
of the contracts in the portfolio; (2) the annual percentage rate of interest
on the Contracts; (3) the purchase discounts; (4) the estimated pre-payment
amount and timing; (5) the estimated frequency or occurrence of defaults; and
(6) the estimated severity of losses resulting from defaults. Since the
computation of risk adjusted yields uses estimates as well as actual data, the
risk adjusted yields as originally estimated may not equal the actual yield on
the monthly pools. Actual yield on the monthly pools can only be determined
when the Contract is repaid or defaulted. In the event the Company's estimate
of risk adjusted yield is less than actual, the difference is accreted to
income. Likewise, in the event the Company's estimate of risk adjusted yield
is greater than actual, the difference is charged to expense.
ANALYSIS OF CREDIT LOSSES
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At the time Contracts are purchased or originated, the Company estimates
future losses of principal based on the type and terms of the Contract, the
credit quality of the borrower and the underlying value of the vehicle
financed. This estimate of loss is based on the Company's risk model, which
takes into account historical data from similar contracts originated or
purchased by the Company since its inception in 1988. However, since the risk
model uses past history to predict the future, changes in national and
regional economic conditions, borrower mix and other factors could result in
actual losses differing from initially predicted losses.
The allowance for credit losses has been established utilizing data
obtained from the Company's risk models and is continually reviewed and
adjusted in order to maintain the allowance at a level which, in the opinion
of management, provides adequately for current and future losses that may
develop in the present portfolio.
The provision for credit losses represents estimated current losses based
on the Company's risk analysis and static pooling reserve analysis of
historical trends and expected future results. The provision for credit losses
also represents estimated losses on all Contracts purchased prior to January
1, 1995 with zero discounts ("100% Contracts") and on all Contracts originated
by CarMart which have been, and will continue to be, provided for by additions
to the Company's allowance for credit losses as determined by the Company's
risk analysis.
Effective January 1, 1995, upon the acquisition of certain Contracts from
its Dealer Network, a portion of future interest income, as determined by the
Company's risk analysis, is capitalized into Automobile Receivables (excess
interest receivable) and correspondingly used to increase the allowance for
credit losses (unearned interest income). Subsequent receipts of excess
interest are applied to reduce excess interest receivable.
Unearned discounts result from the purchase of Contracts from the Dealer
Network at less than 100% of the face amount of the note. All such discounts
are used to increase the allowance for credit losses.
SERVICING AND MONITORING OF CONTRACTS
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The Company has serviced all of the Contracts it purchased or originated.
From time to time, the Company has acquired loan portfolios under short-term,
third party interim servicing agreements. After December 31, 1998, the Company
intends to transfer loan servicing to an unrelated third party servicer
acceptable to Daiwa (see Subsequent Events). In the event the Company
acquires additional Contracts it intends to outsource the collection of same
through third party servicers. At December 31, 1998, the Company's
collections and asset recovery and remarketing department employed 70
individuals to perform these functions. The collection department uses
internally developed software augmented by vendor provided systems. In 1996,
the Company completed the installation of its first predictive dialer, and
installed an updated system in 1998. A predictive dialer enhances the
productivity of the Company's collection efforts by making it possible to
contact more customers in a shorter period of time.
Upon the funding of a Contract, the accounting department boards the
Contract on its servicing system, which allows the Company to track payment
history from inception to final payoff or other disposition. The servicing
system also automatically sends a payment coupon book to the customer.
Contract payments, if sent by mail, go directly to a lock box and are
forwarded daily by a third-party servicer to a bank holding the Company's
accounts. Where required, Trust receipts are subsequently forwarded to the
appropriate Trust account. As payments are processed, the customer's account
is automatically updated.
A customer service representative calls each customer, greeting them and
welcoming them to the Company. The Company begins its collection process when
a customer is five days late in making a monthly or bi-weekly payment with a
friendly reminder telephone call and a past due mailing notice. At this time,
the collector assigned to the account attempts to obtain a promise to pay. If
successful, the collector will follow up to determine if the promise is met.
If the customer reneges on his or her promise, the collector again contacts
the customer in an effort to collect and, at this time, explains to the
customer his or her obligation under the contract to repay the Company and the
consequences if timely payment is not made. These consequences include, among
other things, repossession of the vehicle financed and a further damaging
credit history for the customer. In certain cases, if the failure to pay is
the result of unforeseen emergencies such as sickness or temporary layoff, the
collector will attempt to work out a new payment schedule to bring the
customer current.
In the event the customer is not willing or able to meet his or her
obligation to the Company under the terms of the contract, and an alternative
payment schedule cannot be agreed to, the collector turns the Contract over to
a collection supervisor for further action. At this time, the supervisor can
decide to continue to work with the customer to bring the Contract current or
can remit the Contract to the manager of the collections department for
repossession. A decision to repossess generally starts when a Contract is 90
days into delinquency. All Contracts 120 days past due must be must be charged
off under Company policy as of December 31, 1998. Generally, repossession
action takes place as a last resort and when no other arrangement can be made.
MARKETING AND ADVERTISING
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The Company has utilized independent contractors and corresponding sale
and informational brochures to market its Programs to its Dealer Network. In
February 1999, the Company discontinued these agreements and is attempting
strategic marketing relationships to generate Contract purchases. There is no
assurance that these relationships will be developed or if they are that they
will be profitable to the Company. Furthermore, the development of additional
Contract purchases requires a financing source the Company does not presently
have and may not be able to obtain. See Subsequent Events.
THE USED CAR INDUSTRY AND THE SUBPRIME FINANCING MARKET
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The used car industry in the United States can be characterized as a
mature and steady market. Industry estimates place the used-vehicle market in
1996 at approximately 40 million units sold annually. Since 1994, the
compounded annual growth rate of total used car sales was approximately 9% and
Management expects that growth to continue, although no such assurances can be
given for reasons including national and regional economic conditions. The
increase in new car leasing in recent years has flooded the used car market
with late-model, low-mileage used cars: According to Andersen Consulting, 3.1
million cars came to the used car market in 1997 when their leases expired.
That trend, coupled with the rising price tags for new cars - typically twice
that of a used car - has made purchasing a quality used car more attractive to
customers.
The typical automobile finance company generally classifies borrowers
into four general and subjective credit categories labeled A, B, C, and D. The
subprime financing market is characterized by lower quality credit lenders,
typically, C and D rated paper. Generally, C and D rated paper represents
borrowers who cannot qualify for financing through traditional sources, such
as banks, credit unions or captive finance companies, due primarily to their
adverse credit and employment history. Automobile finance companies often
purchase C and D credit paper at a discount to its face value. The discount is
designed to compensate the lender for the credit risk of these contracts. In
the past several years, discount percentages have been declining due to
increased price competition. The subprime market is also characterized by
higher charge-off and delinquency ratios than the "prime" segment of the
automobile finance market.
According to the Federal Reserve Board, total outstanding automobile
credit was approximately $416 billion in 1997. Industry analysts estimate
that the subprime automobile financing market comprises approximately 26% of
the automobile finance market. Industry analysts project this market growth to
continue, with estimated annual origination's of approximately $70-$100
billion.
COMPUTERIZED INFORMATION SYSTEM
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Monaco Finance has invested significant time, money and human resources
in the enhancement of its information systems. The business requires Monaco
to timely respond to customer and dealer needs. The Company's network computer
and communication systems have undergone major changes to increase efficiency.
In early 1996, the systems were upgraded with Pentium Servers, running the
latest release of Novell Netware. All front-office and back-office desktop
computers have been modified and enhanced to provide greater accessibility to
network information via 100-Base-T intelligent switching technology.
Protection and security have been built into the infrastructure utilizing
anti-virus software and audit compliant password utilities throughout the
entire network. These enhancements and upgrades are a part of new technology
being employed at Monaco. The Company also implemented a new predictive dialer
system in 1998.
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. For recent developments regarding the
Company's business and financial position, see Subsequent Events.
FUTURE EXPANSION AND STRATEGY
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Given the recent changes in the Company's financing sources (see
Subsequent Events), 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 based upon 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 nor is given that new and adequate sources of financing will
be obtained. Furthermore, no assurance can be nor is given that the business
strategy will be implemented, and if implemented will be successful.
During 1998, the Company acquired contracts from approximately 358
dealers in 48 states, the majority of which were purchased in four states. In
order to reduce operating expenses by the end of 1998 the Company reduced its
marketing representatives from 16 to 2.
PORTFOLIO ACQUISITIONS: In January 1998, the Company 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 an independent third party.
FUNDING AND FINANCING STRATEGIES: From inception through 1991, the
Company financed the acquisition of Contracts through loans from its principal
stockholders and banks. In October 1991, the Company expanded its financing
sources by completing its first asset-backed automobile receivables
securitization. In 1992, the Company entered into a secured revolving line of
credit with Citicorp Leasing Inc. ("Citicorp") to finance Contracts. In 1994,
the Company securitized $34.1 million of its Contracts and in 1995 it obtained
a $150 million revolving secured warehouse line and securitized $43.1 million
in Contracts. In 1997, the Company securitized $51.4 million of its Contracts
and entered into a $75 million Warehouse Line of Credit. In 1998 the Company
entered into a $73.9 Portfolio Purchase Credit Facility. In addition, the
Company received capital of $5,300,000 as well as secured loans of $1,900,000
from Pacific USA Holdings Corp. The Company also received a secured loan from
Pacific Southwest Bank for $.95 million. Since 1993, the Company has used
revolving lines of credit, private placement borrowings, common stock, warrant
exercises, and its Automobile Receivable-Backed Securitization Program and the
corresponding Revolving Notes and Warehouse Notes as its primary sources of
capital. Subsequent to December 31, 1998, significant events have occurred
which have negatively and materially impacted the Company's financing sources
(see the discussion in "Subsequent Events").
RISK EVALUATION AND UNDERWRITING: As discussed in more detail elsewhere
herein, the Company has developed proprietary credit scoring and risk
evaluation systems which predicts the frequency of default and the resultant
predicted loss after repossession and sale of financed vehicles. This system
assists the Company's credit buyers and underwriters in pricing loans to be
acquired. Credit buyers can negotiate interest rates, loan term, purchase
discount and fees and terms of the deal, including such items as down payment,
in order to achieve a desired risk adjusted rate of return for each Contract.
CENTRALIZED OPERATING STRUCTURE: Management believes the centralization
of all operations in one location results in a consistent, cost effective
means of operating a sub-prime automobile loan business.
COLLECTIONS MANAGEMENT: Management believes that collections and recovery
are vital to the successful operation of the Company. The Company has invested
substantial amounts of time, money and resources in developing an efficient
collections department. The results of the Company's efforts are evidenced by
its percentage of delinquent contracts, which at February 28, 1999, was 8.81%
over 30 days past due. This percentage consisted of 6.36% 30 to 59 days past
due, 1.65% 60 to 89 days past due and 0.8% over 90 days past due. Due to
recent events, subsequent to December 31, 1998 the Company intends to utilize
a third party servicer to service the Contracts (see discussion in Subsequent
Events).
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
59.0% 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.
COMPETITION
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In connection with its business of financing vehicle purchases, the
Company competes with entities, many which may have significantly greater
financial resources and management experience than the Company. The Company's
target market consists of persons who are generally unable to obtain
traditional vehicle financing because of their prior credit history. Many
financial institutions, finance companies and lenders have entered into this
market. The Company regularly monitors their lending programs and marketing
efforts. The Company has maintained its growth by implementing and marketing
Programs and providing prompt service to the Dealer Network. Although
competition has been decreasing, if others do enter the market, competition
for the Company's target customer could increase, adversely affecting the
Company's business.
REGULATION
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The Company's operations are subject to regulation, supervision and
licensing under various federal, state and local statutes and ordinances. To
date, the Company has conducted business in the States of Arizona, California,
Colorado, Connecticut, Delaware, Florida, Georgia, Iowa, Idaho, Illinois,
Indiana, Kansas, Maryland, Michigan, Mississippi, Missouri, Nevada, New
Jersey, New Mexico, North Carolina, Nebraska, Ohio, Oklahoma, Pennsylvania,
South Carolina, South Dakota, Tennessee, Texas, Virginia and Washington and,
accordingly, the laws of those states, as well as applicable federal laws,
govern the Company's operations. Compliance with existing laws and
regulations applicable to the Company has not had a material adverse effect on
the Company's operations. Management believes that the Company maintains all
requisite licenses and permits and is in substantial compliance with all
applicable local, state and federal regulations.
EMPLOYEES AND FACILITIES
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At December 31, 1998, the Company employed 124 persons on a full time
basis. There were 3 executive officers, 15 in credit, 53 in collections, 8
in asset recovery, 9 in remarketing, 6 in Loss Control, 11 in accounting and
human resources, 2 in marketing, 7 in MIS-computer department, 4 in risk and 6
in administrative functions.
After December 31, 1998, the Company, at the mandate of Daiwa, intends
to transfer loan servicing to an unrelated third party servicer acceptable
to Daiwa (see Subsequent Events). As a result, approximately 50 employees will
be eliminated from the Company's operations.
In April 1994, the Company amended and restated its lease of office space
for its executive offices located at 370 17th Street, Suite 5060, Denver,
Colorado 80202, where it maintains approximately 24,716 square feet of space.
The Company currently pays $47,022 per month under a lease ending October 31,
1999, with adjustments for monthly payments on a periodic basis.
Effective December 1, 1996, the Company entered into a sublease agreement
for 6,571 square feet of office space located at 370 17th Street, Suite 4960,
Denver, Colorado, 80202. The Company pays $2,742 per month, plus occupancy
costs, under a sublease endingOctober 31, 1999. Currently the office space is
not being used and attempts are being made to sublease the space.
On March 31, 1994, the Company's lease at 1319 S. Havana, Aurora,
Colorado 80010 was terminated and the operations of the retail CarMart
Dealership at that location were transferred to 890 S. Havana, Aurora,
Colorado 80010. This property is owned by a corporation, certain of whose
shareholders are officers of the Company. The Company entered into a
seven-year lease commencing March 24, 1994 and ending March 23, 2001. In
September 1995, the Company amended the lease to include an additional
property at 894 S. Havana, Aurora, Colorado 80010. The Company was paying
$15,238 per month on a triple net basis. The lease called for periodic rental
adjustments over its term. It is the Company's belief that the terms of the
related party lease were generally no less favorable than could have been
obtained from unrelated third party lessors for properties of similar size,
condition and location. Effective November 1998, the Company was released from
this lease.
Through January 31, 1996, the Company operated a retail CarMart
Dealership located at 1005 Motor City Drive, Colorado Springs, Colorado 80906.
The dealership began full operation on April 30, 1991. The Company entered
into a twelve-month lease (commencing April 30, 1991 and ending May 1, 1992).
Rent was $1,200 per month. The Company extended the lease on this property
until May 31, 1998 with monthly rent of $1,800 on a triple net basis.
Effective March 15, 1996, the Company entered into a sublease agreement on the
property for the entire lease term at an amount approximately equal to the
Company's obligation. On May 31, 1998 this lease expired and was not renewed.
The Company also had a used car retail lot located at 4940 South
Broadway, Englewood, Colorado 80110 and began full operation on May 1, 1994.
The Company entered a lease, commencing March 22, 1994 and ending March 31,
1997. In January 1997, the Company extended the lease for an additional
three-year period through March 2000. The Company may, at its sole discretion,
extend the lease for an additional 3-year period through March 2003. On
January 15, 1996, the Company closed this retail lot. The Company currently
pays $10,450 per month. The lease calls for periodic adjustments over the
term. Effective March 15, 1996, the Company entered into a sublease agreement
on the property for the entire lease term at an amount approximately equal to
the Company's obligation.
ITEM 2. DESCRIPTION OF PROPERTY.
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The Company does not own any real property. The Company leases its
office facilities and its closed Company Dealerships as described in Item 1.,
"Description of Business - Employees and Facilities," above.
ITEM 3. LEGAL PROCEEDINGS.
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Although not subject to any material litigation at this time, the Company
and its Subsidiaries at times are subject to various legal proceedings and
claims that arise in the ordinary course of business. In the opinion of
management of the Company, based in part on the advice of counsel, the amount
of any ultimate liability with respect to these actions will not materially
affect the results of operations, cash flows or financial position of the
Company. It is the Company's and its Subsidiaries' policy to vigorously defend
litigation, however, the Company and its Subsidiaries have, and may in the
future, enter into settlements of claims where management deems appropriate.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
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On November 12, 1998, a special meeting of shareholders of the Company was
held for the following purposes:
1. To consider and approve a proposal to amend the Company's Articles
of Incorporation with respect to its 8% Cumulative Convertible Preferred
Stock- Series 1998-1 (the "Preferred Stock") to (i) change the Conversion
Ratio of the Preferred Stock from one share of Class A Common Stock for each
two shares of Preferred Stock that are converted to four shares of Class A
Common Stock for each two shares of Preferred Stock that are converted, and
(ii) to provide that the market price of the Class A Common Stock that causes
automatic conversion of the Preferred Stock into shares of Class A Common
Stock shall be proportionately adjusted in the event of any issuance of Class
A Common Stock as a dividend or other distribution or in the event of a
subdivision or combination of the outstanding shares of Class A Common Stock.
2. To consider and approve a proposal to authorize the Company's
Board of Directors to effect, in its discretion, a reverse split of the
outstanding shares of the Company's Class A Common Stock and Class B Common
Stock on the basis of one share for each five shares then outstanding (the
"Reverse Stock Split").
The aforementioned proposals were passed with the following votes,
respectively:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
1. 14,622,056 FOR; 3,049,576 WITHHELD; 853,158 AGAINST; and 104,164 ABSTAIN.
2. 15,438,381 FOR; 0 WITHHELD; 771,334 AGAINST; and 71,652 ABSTAIN.
<FN>
</TABLE>
The one for five reverse stock split was effected on November 19, 1998.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
- ---------------------------------------------------------------------------
The Common Stock is traded in the over-the-counter market and is
currently quoted on the Electronic Bulletin Board under the symbol "MONFA."
The Common Stock was quoted on the Nasdaq SmallCap Market under the symbol
"MONFA" until it was delisted effective November, 1998. For the past two
fiscal years, the high and low closing bid prices of the Common Stock, as
adjusted for the reverse stock split, were as follows:
<PAGE>
CLASS A COMMON STOCK
<TABLE>
<CAPTION>
<S> <C> <C>
Low Bid High Bid
Quarter Ending 03/31/97 $ 8.750 $ 12.500
Quarter Ending 06/30/97 5.625 10.315
Quarter Ending 09/30/97 3.125 6.250
Quarter Ending 12/31/97 3.440 9.69
Quarter Ending 03/31/98 $ 2.190 $ 4.375
Quarter Ending 06/30/98 2.500 4.375
Quarter Ending 09/30/98 0.780 2.815
Quarter Ending 12/31/98 0.125 2.030
<FN>
</TABLE>
The over-the-counter quotations set forth herein reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may not represent
actual transactions.
As of March 1, 1999, there were approximately 300 record holders of the
Company's Class A Common Stock and 3 record holders of Company's Class B
Common Stock.
The Board of Directors currently intends to retain earnings to finance
the Company's operations. The Company has never paid cash dividends on its
Common Stock and does not anticipate a change in this policy in the
foreseeable future. Certain of the Company's loan agreements and the 1999-1
Preferred Stock discussed below contain covenants that restrict the payment of
cash dividends.
During the fiscal year ended December 31, 1998, the Company sold equity
securities that were not registered under the Securities Act of 1933, as
amended (the "Securities Act") as follows:
In connection with an automobile loan portfolio purchase in January of
1998 the Company issued 2,433,457 shares of the Company's 8% Cumulative
Convertible Preferred Stock, Series 1998-1 (the "1998-1 Preferred Stock").
Due to a repurchase by the seller of a portion of those loans in 1998, 85,870
shares of the 1998-1 Preferred Stock were surrendered to the Company. Each
2.5 shares of the 1998-1 Preferred Stock is convertible into 1 share of the
Company's Class A Common Stock, or an aggregate of up to 1,021,824 shares of
Class A Common Stock. Each share of the 1998-1 Preferred Stock has a value of
$2.00 for a total liquidation preference of $4,695,174.
On November 30, 1998, Pacific USA converted $536,750 of unsecured debt
and $300,000 of secured debt into 418,375 shares of 8% Cumulative Subordinated
Preferred Stock, Series 1999-1 (the "1999-1 Preferred Stock") of the Company
valued at $2.00 per share. The 1999-1 Preferred Stock is subordinate to the
1998-1 Preferred Stock with respect to payment of dividends, redemption and
upon any liquidation of the Company. The 1999-1 Preferred Stock has no voting
rights other than as provided in the articles of incorporation or as required
by law. The Company has the right to redeem the 1999-1 Preferred Stock at any
time and from time to time, in whole or in part, for cash in the amount of
$2.00 per share plus accrued but unpaid dividends. However, the 1999-1
Preferred Stock cannot be redeemed as long as any 1998-1 Preferred Stock is
issued and outstanding. Dividends on the 1999-1 Preferred Stock are at the
annual rate of 8% ($.16 per share) payable quarterly in shares of 1999-1
Preferred Stock. No dividends other than those payable solely in common stock
can be paid with respect to the common stock unless all accumulated and unpaid
dividends on the 1999-1 Preferred Stock have been declared and paid in full.
The total liquidation preference for the 1999-1 Preferred Stock is $836,750.
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------------------------------------------------------------------------------
RESULTS OF OPERATION
- ----------------------
FORWARD-LOOKING STATEMENTS
- ---------------------------
This Annual Report on form 10-KSB contains forward-looking statements.
Statements that are not historical facts, including statements about
management's expectations for fiscal 1999 and beyond, are forward-looking
statements. Without limiting the foregoing, the words "believe," "expect,"
"anticipate," "intends," "forecast," "project" and similar expressions
generally identify forward-looking statements. Additional written or oral
forward-looking statements may be made by the Company from time to time in
filings with the Securities and Exchange Commission or otherwise. Such
forward-looking statements are within the meaning of that term in Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Such statements may include, but are not
limited to, projections of revenues, income, or loss, adequacy of the
allowance for credit losses, availability of Contracts meeting the Company's
desired risk parameters, capital expenditures, plans for future operations,
financing needs, plans or availability, objectives relating to the Automobile
Receivables and the related allowance and plans relating to products or
services of the Company, as well as assumptions relating to the foregoing.
Forward-looking statements are inherently subject to risks and
uncertainties, some of which cannot be predicted or quantified. Future events
and actual results could differ materially from those set forth in,
contemplated by, or underlying the forward-looking statements. Statements in
this Annual Report, including the Notes to Consolidated Financial Statements
and "Management's Discussion and Analysis of Financial Condition and Results
of Operations," describe factors, among others, that could contribute to or
cause such differences. Additional factors that could cause actual results to
differ materially from those expressed in such forward-looking statements are
set forth in Exhibit 99 to this Annual Report on Form 10-KSB. Such factors
include, but are not limited to, the Company's dependence upon additional
capital to expand operations, its reliance on debt financing, its recent
losses and the effect of the discontinuance of the CarMart operations, its
reliance on securitizations, its cost of capital and associated interest rate
risks, the risks of lending to higher-risk borrowers, the risk of adverse
economic changes, the risk associated with delayed repossessions, the
potential inadequacy of its loan loss reserves, the risk associated with
extensive regulation, supervision and licensing, the possibility of uninsured
losses, the risk associated with substantial competition, its dependence on
key personnel, insurance risks, "Year 2000" risks, the effect of outstanding
options and warrants, the fact that the Company has, to date, not paid cash
dividends on its Common Stock, the risk associated with not meeting the NASDAQ
maintenance requirements and the risk associated with one controlling
shareholder.
SUMMARY
- -------
The Company's revenues and (loss) from continuing operations primarily
are derived from the Company's loan portfolio consisting of Contracts
purchased from the Dealer Network, Contracts purchased from third-party
originators, Contracts financed from vehicle sales at the Company's
Dealerships and Contracts purchased through portfolio acquisitions.
The average discount on all Contracts purchased pursuant to discounted
Finance Programs during the fiscal years ended December 31, 1998 and 1997 was
approximately 7.3% and 5.5%, respectively. The Company has serviced 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. After
December 31, 1998, the Company, at the mandate of Daiwa, intends to transfer
loan servicing to an unrelated third party servicer acceptable to Daiwa (see
Subsequent Events).The loan portfolio at December 31, 1998 carries a contract
annual percentage rate of interest that averages approximately 21%, before
discounts, and has an original weighted average term of approximately 51
months. The average amount financed per Contract for the years ended Dec-
ember 31, 1998 and 1997 was approximately $9,652 and $10,432, respectively.
RESULTS OF OPERATION
- ----------------------
<TABLE>
<CAPTION>
OVERVIEW
- --------
INCOME STATEMENT DATA
-----------------------
Years ended December 31,
---------------------------
<S> <C> <C>
(dollars in thousands, except share amounts). . . . . . . 1998 1997
Total revenues . . . . . . . . . . . . . . . . . . . . . . $ 20,830 $ 12,639
Total costs and expenses . . . . . . . . . . . . . . . . . $ 30,003 $ 21,994
Net (loss) before income taxes . . . . . . . . . . . . . . ($9,173) ($9,355)
Income tax expense . . . . . . . . . . . . . . . . . . . . $ 1,542 -
Net (loss) . . . . . . . . . . . . . . . . . . . . . . . . ($10,715) ($9,355)
Preferred stock dividends. . . . . . . . . . . . . . . . . $ 374 -
Net (loss) . . . . . . . . . . . . . . . . . . . . . . . . ($11,089) ($9,355)
Net (loss) per common share - basic and assuming dilution. ($5.04) ($5.91)
Weighted average number of common shares outstanding . . . 2,199,035 1,582,546
<FN>
</TABLE>
<TABLE>
<CAPTION>
INCOME STATEMENT DATA
AS A % OF OUTSTANDING LOAN PORTFOLIO
YEARS ENDED DECEMBER 31,
----------------------------
<S> <C> <C>
. . . . . . . . . . . . . . . . . . . . . . . . 1998 1997
Average Interest Bearing Loan Portfolio Balance. $132,917,638 $76,924,302
Interest Income. . . . . . . . . . . . . . . . . 15.5% 16.1%
Interest Expense . . . . . . . . . . . . . . . . 8.4% 7.4%
. . . . . . . . . . . . . . . . . . . . . . . . 7.1% 8.7%
Operating Expenses . . . . . . . . . . . . . . . 12.1% 16.2%
Provision for Credit Losses. . . . . . . . . . . 2.0% 5.0%
Other Income . . . . . . . . . . . . . . . . . . (0.2%) (0.3%)
. . . . . . . . . . . . . . . . . . . . . . . . 13.9% 20.9%
Net (loss) before income taxes . . . . . . . . . (6.8%) (12.2%)
Income tax expense . . . . . . . . . . . . . . . 1.2% -
Net (loss) . . . . . . . . . . . . . . . . . . . (8.0%) (12.2%)
Preferred stock dividends. . . . . . . . . . . . .3% -
Net (loss) available to common stockholders. . . (8.3%) (12.2%)
<FN>
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET DATA
December 31,
-------------
<S> <C> <C>
(dollars in thousands) . . 1998 1997
Total assets. . . . . . . . $ 119,879 $ 90,598
Total liabilities . . . . . $ 110,713 $ 82,076
Retained earnings (deficit) ($27,577) ($16,489)
Stockholders' equity. . . . $ 9,166 $ 8,522
<FN>
</TABLE>
CONTINUING OPERATIONS
- ----------------------
<TABLE>
<CAPTION>
SELECTED OPERATING DATA
Years ended December 31,
---------------------------
<S> <C> <C>
(dollars in thousands, except where noted) . . . . . . 1998 1997
Interest income. . . . . . . . . . . . . . . . . . . . $20,617 $12,394
Other income . . . . . . . . . . . . . . . . . . . . . $ 213 $ 245
Provision for credit losses. . . . . . . . . . . . . . $ 2,682 $ 3,874
Operating expenses . . . . . . . . . . . . . . . . . . $16,096 $12,446
Interest expense . . . . . . . . . . . . . . . . . . . $11,225 $ 5,674
Operating expenses as a % of average receivables . . . 12% 16%
Contracts from Dealer Network and Portfolio Purchases. 11,189 3,189
Average amount financed (dollars). . . . . . . . . . . $ 9,652 $10,432
<FN>
</TABLE>
REVENUES
- --------
Total revenues for the year ended December 31, 1998, increased $8.2
million when compared to 1997 primarily due to an increase of $8.2 million in
interest income. The rate of interest income earned for the year ended
December 31, 1998 was 15.5% based on an average interest bearing portfolio
balance of $132,917,638 as compared to a rate of interest income earned of
16.1% based on an average interest bearing portfolio balance of $76,924,302
for the year ended December 31, 1997. The decrease in effective yield
reported by the Company for the year ended December 31, 1998, when compared to
1997, was due primarily to changes in the Company's ability to more accurately
estimate risk adjusted yields as a result of the Company's implementation of
its credit scoring system in late 1996. Acquisition of Contracts with lower
interest rates and discounts due to increased competition in the sub-prime
automobile finance industry and the Company's strategy to acquire loans with
perceived higher credit quality also adversely affected risk adjusted yields
in 1998.
The lower reported interest rate of 15.5% in 1998 and 16.1% in 1997, when
compared to the contract annual percentage rate of interest ( approximately
21% at December 31, 1998 and 23% at December 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 over their entire life.
During 1998, the Company's net Automobile Receivables increased from
$74.2 million at December 31, 1997 to $107.2 million at December 31, 1998.
During 1998, the Company originated/purchased 11,508 loans totaling $111.1
million with an average amount financed of $9,652 as compared to loan
originations of 3,189 totaling $33.3 million with an average amount financed
of $10,432 for 1997. The average discount on all Contracts purchased was 7.3%
and 5.5% for the years ended December 31, 1998 and 1997, respectively.
The increase in the number and dollar value of loan
originations/purchases during 1998, as compared to 1997, was primarily
attributable to the significant portfolio acquisitions done in 1998, as well
as a change in the Company's business philosophy in the latter part of 1997
and for 1998. This change resulted from completion of the Company's
proprietary credit scoring system, the closing of its CarMart retail sales and
financing operations and the cessation of its deep discount loan acquisition
programs. All of these measures were in accordance with the Company's loan
acquisition strategy to acquire loans that the Company believes have increased
credit quality.
At December 31, 1998, only $.3 million of the Company's Auto Receivable
Loan Portfolio was generated from the discontinued CarMart operations as
compared to $1.4 million of its portfolio at December 31, 1997.
COSTS AND EXPENSES
- --------------------
The provision for credit losses decreased $1.2 million from $3.9 million
in 1997 to $2.7 million 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 recording of a $3.6
million provision in the fourth quarter of 1997 related to the Company's
static pooling reserve analysis. Net charge-offs as a percentage of Average
Net Automobile Receivables increased from 16.8% in 1997 to 22.5% in 1998.
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 3.3% of its loan portfolio over 60 days past
due at December 31, 1998 compared with 1.6% at December 31, 1997.
The Company believes that the increase in net charge-offs as a percentage
of Average Net Automobile Receivables is due to the portfolio mix. The Company
acquired a large portfolio in January 1998 that had predicted losses of a
higher rate than the 1997 portfolio. These losses were adequately reserved
for at the time the portfolio was purchased.
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 $3.65 million, or 29.3%, from $12.4 million
in 1997 to $16.1 million in 1998. This increase primarily was due to an
increase of $1,596,233 in consulting and professional fees and an increase in
salaries and benefits of $1,047,757. The major components of the increase in
operating expenses are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
<S> <C> <C> <C>
(dollars in thousands) 1998 1997 INCREASE (DECR.)
Salaries and benefits . . . . . . $ 6,398 $ 5,350 $ 1,048
Depreciation and amortization . . 2,353 1,983 370
Consulting and professional fees. 4,187 2,591 1,596
Telephone . . . . . . . . . . . . 559 508 51
Travel and entertainment. . . . . 291 223 68
Loan origination fees . . . . . . (300) (286) (14)
Rent/Office/Postage . . . . . . . 1,148 1,114 34
All other . . . . . . . . . . . . 1,460 963 497
================================= ======== ======== =================
. . . . . . . . . . . . . . . . . $16,096 $12,446 $ 3,650
<FN>
</TABLE>
Interest expense increased $5.5 million, or 97.8%, from $5.7 million in
1997 to $11.2 million in 1998. This increase primarily was due to an increase
in borrowings in 1998 used to finance the Company's portfolio acquisitions.
An increase in interest rates in 1998 as a result of a paydown in 1997 of the
Company's automobile receivables-backed notes at interest rates between 6.45%
and 7.6% and borrowings on the warehouse line of credit with Daiwa at interest
rates of 2.5% over LIBOR on 85% of the amount advanced and 12% on the
remaining 15% of the amount advanced and borrowings on the Company's Portfolio
Purchase Credit Facility with Daiwa at an interest rate of 1.0% over LIBOR
(increasing to 3.5% over LIBOR on 85% of the amount advanced and 15% on the
remaining 15% of the amount advanced effective July 1, 1998) also contributed
to the increase. From December 31, 1997 through December 31, 1998, net
increases (decreases) in the Company's debt were as follows:
<TABLE>
<CAPTION>
(dollars in thousands)
<S> <C>
Notes payable - LaSalle . . . . . . . . ($6,326)
Warehouse note payable - Daiwa. . . . . 13,581
Portfolio purchase note payable - Daiwa 39,298
Promissory note payable. . . . . . . . 1,714
Convertible subordinated debt . . . . . (1,385)
Senior subordinated debt. . . . . . . . (2,333)
Convertible senior subordinated debt. . (945)
Automobile receivables-backed notes . . (15,207)
Total. . . . . . . . . . . . . . . $ 28,397
<FN>
</TABLE>
The average annualized interest rate on the Company's debt was 8.1% for
1998 versus 7.4% for 1997. This increase was primarily due to additional
borrowings on the Company's lines of credit at higher interest rates than the
Company's automobile receivables-backed notes that were redeemed or paid off
in 1997.
The annualized net interest margin percentage, representing the
difference between interest income and interest expense divided by average
finance receivables, decreased from 8.7% in 1997 to 7.1% in 1998. This
decrease was due primarily to the amortization of excess interest receivable
as described in Note 2 of the Notes to Consolidated Financial Statements and
an increase in the average annualized interest rate on the Company's debt.
NET INCOME (LOSS)
- -------------------
Net loss increased $1.7 million from $(9.4) million in 1997 to $(11.1)
million in 1998. This increase in loss was primarily due to the following
changes on the Consolidated Statements of Operations:
<TABLE>
<CAPTION>
(INCREASE) DECREASE TO NET (LOSS)
YEARS ENDED
DECEMBER 31
<S> <C>
(in millions of dollars)
Interest and other income. . $ 8.2
Provision for credit losses . 1.2
Operating expenses. . . . . . (3.6)
Interest expense. . . . . . . (5.6)
Income tax expense. . . . . . (1.5)
Preferred stock dividends . . (0.4)
Net (increase) to net (loss) $(1.7)
<FN>
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
- ----------------------------------
The Company's cash flows for the years ended 1998 and 1997 are summarized
as follows:
<TABLE>
<CAPTION>
CASH FLOW DATA
YEARS ENDED DECEMBER 31,
<S> <C> <C>
(dollars in thousands). . . . . . . . . . . . 1998 1997
Cash flows provided by (used in):
Operating activities. . . . . . . . . . . . . $ 10,329 $ 1,055
Investing activities. . . . . . . . . . . . . (46,338) (309)
Financing activities. . . . . . . . . . . . . 35,767 (1,216)
Net (decrease) in cash and cash equivalents. $ (242) $ (470)
<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. In the
past, these purchases have been financed through the Company's capital,
warehouse lines of credit, securitizations and cash flows from operations. In
1998 the Company did not complete any securitizations due primarily to adverse
market conditions during the fourth quarter of 1998. Furthermore, the Company
does not anticipate any securitizations in 1999.
In order for the Company to continue the purchase of installment
contracts it will be necessary to obtain a line of credit or alternative
financing. The Company does not presently have and may not be able to obtain a
line of credit or other such financing (see Subsequent Events). 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
operating expenses. Subsequent to December 31, 1998, the Company was advised
by Pacific that it can no longer be relied upon to provide capital or loans to
fund the Company's working capital needs. Although Pacific has continued to
provide certain additional secured loans to the Company, no assurance can be
given that such funding will continue. At the present time, the Company does
not generate sufficient cash flow from its operations to pay for its overhead
and other expenses.
The Company on November 1, 1996, obtained a $3 million term loan from
Pacific USA Holdings Corp., which was converted to 300,000 shares of Class A
Common Stock as of April 25, 1997, as described in Note 4 to the Company's
Consolidated Financial Statements.
The Agreements underlying the terms of the Company's Automobile
Receivable - Backed Securitization Program ("Securitization Program"), the
Portfolio Purchase Line of Credit, and the Warehouse Line of Credit with Daiwa
Finance Corp., described below, contain certain covenants which, if not
complied with, could materially restrict the Company's liquidity. Under the
terms of the Portfolio Purchase Line of Credit and the Warehouse Line of
Credit approximately 80% and 90%, respectively, of the face amount of
Contracts, in the aggregate, was originally advanced to the Company for
purchasing qualifying Contracts. The balance must be financed through capital.
Subsequent to December 31, 1998 the Company received verbal notice from Daiwa
that the Company is in violation of certain non-portfolio performance related
covenants (see Subsequent Events).
During 1993, the Company completed the Note Offering described in Note 5
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 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 94,444 shares of
Class A Common Stock.
On November 1, 1994, the Company sold in a private placement unsecured
Senior Subordinated Notes ("Rothschild 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, is due
October 1, 1999. In June of 1998 the Company and Rothschilds ammended the
Note Purchase Agreement to require principal payments of $450,000 on the last
day of each March, June, September and December. Subsequent to December 31,
1998 the Company received verbal notice from Rothschild that the Company
is in violation of certain non-portfolio performance related covenants
(see Subsequent Events).
In November 1994, MF Receivables Corp. I. ("MF I"), the Company's wholly
owned special purpose subsidiary, sold, in a private placement, $23,861,823 of
7.6% automobile receivables-backed notes ("Series 1994-A Notes"). The Series
1994-A Notes accrued interest at a fixed rate of 7.6% per annum.
On July 24, 1997, the Company redeemed the outstanding principal balance
of its Series 1994-A Notes. The bonds were redeemed at their principal amount
of $1,220,665.33 plus accrued interest to July 24, 1997. Upon redemption of
the Series 1994-A Notes, the underlying automobile receivables of
approximately $2.5 million were pledged under the terms of the Revolving Note.
In May of 1995, MF I issued its Floating Rate Auto Receivables-Backed
Note ('Revolving Note" or "Series 1995-A Note"). MF I acquires Contracts from
the Company which are pledged under the terms of the Revolving Note and
Indenture for up to $40 million in borrowing. Subsequently, the Revolving
Note is repaid by the proceeds from the issuance of secured Term Notes or
repaid from collection of principal payments and interest on the underlying
Contracts. The Revolving Note can be used to borrow up to an aggregate of
$150 million through May 16, 1998. The Term Notes have a fixed rate of
interest and likewise are repaid from collections on the underlying Contracts.
An Indenture and Servicing Agreement require that the Company and MF I
maintain certain financial ratios, as well as other representations,
warranties and covenants. The Indenture requires MF Receivables to pledge all
Contracts owned by it for repayment of the Revolving Note or Term Notes,
including all future Contracts acquired by MF I.
The Series 1995-A Note bears interest at LIBOR plus 75 basis points. The
initial funding of this Note was $26,966,489 on May 16, 1995. The Company, as
servicer, provides customary collection and servicing activities for the
Contracts. The maximum limit for the Series 1995-A Note is $40 million.
On December 4, 1997, the Company redeemed the outstanding principal
balance of its Series 1995-A Note. The bonds were redeemed at their principal
amount of $12,271,457 plus accrued interest to December 4, 1997. Upon
redemption of the Series 1995-A Note, the underlying automobile receivables
were pledged under the terms of the Warehouse Line of Credit. At December 31,
1997, the 1995-A Note did not have an outstanding principal balance.
On September 15, 1995, MF I issued the Series 1995-B Term Notes ("Series
1995-B Notes") in the amount of $35,552,602. The Series 1995-B Notes accrued
interest at a fixed note rate of 6.45% per annum.
On December 12, 1997, the Company redeemed the outstanding principal
balance of its Series 1995-B Notes. The bonds were redeemed at their
principal amount of $5,822,934 plus accrued interest to December 12, 1997.
Upon redemption of the Series 1995-B Notes, the underlying automobile
receivables were pledged under the terms of the Warehouse Line of Credit with
Daiwa Finance Corporation.
In June 1997, MF Receivables Corp. II ("MF II"), a wholly owned special
purpose subsidiary of the Company, sold, in a private placement, $42,646,534
of Class A automobile receivables-backed notes ("Series 1997-1A Notes" or
"Term Note") to an outside investor and $2,569,068 of Class B automobile
receivables-backed notes ("Class B Notes") to Monaco Funding Corp., a
wholly-owned special purpose subsidiary of the Company. The Series 1997-1A
Notes accrue interest at a fixed rate of 6.71% per annum and are expected to
be fully amortized by December 2002; however, the debt maturities are based on
principal payments received on the underlying receivables, which may result in
a different final maturity. An Indenture and Servicing Agreement require that
the Company and MF II maintain certain financial ratios, as well as other
representations, warranties and covenants.
In connection with the purchase of the Class B Notes, Monaco Funding
Corp. borrowed $2,525,000 from a financial institution ("Promissory Note").
The Promissory Note accrues interest at a fixed rate of 16% per annum and is
collateralized by the proceeds from the Class B Notes. The Class B Notes are
expected to be fully amortized by December 2002; however, the debt maturities
are based on principal payments received on the underlying receivables, which
may result in a different final maturity. Monaco Funding Corp. is required to
maintain certain covenants and warranties under the Pledge Agreement.
As of December 31, 1998, the Series 1997-1A Notes Note had a note balance
of $17,213,594. The underlying receivables backing the 1997-1A notes had a
balance of $19,728,112 as of December 31,1998 (See Subsequent Events). The
Promissory Note was repaid in April 1998.
The assets of MF I, MF II and Monaco Funding Corp. are not available to
pay general creditors of the Company. All cash collections in excess of
disbursements to the Series 1997-1A and Promissory Note noteholders and other
general disbursements are paid to MF I and MF II on a monthly basis.
On January 9, 1996, the Company entered into a Purchase Agreement for the
sale of an aggregate of $5 million in principal amount of 12% Convertible
Senior Subordinated Notes due 2001 (the "12% Notes"). This agreement was
subsequently amended and passed by the Company's Board of Directors on
September 10, 1996. Interest on the 12% Notes is payable monthly at the rate
of 12% per annum and the 12% Notes were convertible, subject to certain terms
contained in the Indenture, into shares of the Company's Class A Common Stock,
par value $.01 per share, at a conversion price of $4.00 per share, subject to
adjustment under certain circumstances. The 12% Notes were issued pursuant to
an Indenture dated January 9, 1996, between the Company and Norwest Bank
Minnesota, N.A., as trustee. The Company agreed to register, for public sale,
the shares of restricted Common Stock issuable upon conversion of the 12%
Notes. The 12% Notes were sold pursuant to an exemption from the registration
requirements under the Securities Act of 1933, as amended.
On June 12, 1998, the Company and the related noteholders agreed to amend
the Indenture to cancel the conversion feature of the 12% Notes and to require
principal payments of $135,000 per month commencing in June 1998. The
maturity date of the 12% Notes was also amended to the earlier of the maturity
date of the Rothschild Notes or October 1, 1999. Subsequent to December 31,
1998 the Company received verbal notice from the 12% Noteholders that the
Company is in violation of certain non-portfolio performance related covenants
(see Subsequent Events).
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. 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.
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
December 31, 1998.
On October 9, 1996, the Company entered into a Securities Purchase
Agreement with Pacific USA Holdings Corp. ("Pacific") whereby, amongst other
things, Pacific agreed to acquire certain shares of the Company's Class A
Common Stock. On November 1, 1996, the Company entered into a Loan Agreement
with Pacific whereby Pacific loaned the Company $3 million ("Pacific Loan").
On February 7, 1997, the Securities Purchase Agreement was terminated by the
parties, however, the Pacific Loan and its corresponding Installment Note
remained in effect.
On April 25, 1997, the Company executed a Conversion and Rights Agreement
(the "Conversion Agreement") with Pacific. The Conversion Agreement
converted the entire $3,000,000 outstanding principal amount of the
installment note made by Pacific to the Company into 300,000 restricted shares
of the Company's Class A Common Stock. The Conversion Agreement also released
the Company from all liability under the Loan Agreement executed on October
29, 1996 between the Company and Pacific pursuant to which the $3 million loan
was made.
In December 1997, MF Receivables Corp. III ("MF III"), a wholly owned
special purpose subsidiary of the Company, entered into a $75 million
Warehouse Credit Facility 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 MFIII 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 MFIII Credit
Agreement requires the Company to maintain certain standard ratios and
covenants. At December 31, 1998, the Company had borrowed $43.581 million
against this line of credit. The assets of MF III are not available to pay
general creditors of the Company. See Subsequent Events.
In January 1998, MF Receivables Corp. IV ("MF IV"), a wholly owned
special purpose subsidiary of the Company, entered into a $73,926,565
Portfolio Purchase Credit Facility (the "Credit Facility") with Daiwa. The
proceeds from the Credit Facility were used to acquire an $81.1 million
portfolio from Pacific USA Holdings Corp. and certain of its subsidiaries
(Note 5). All advances received under the Credit Facility are secured by
eligible purchased loan Contracts and all proceeds received from those
Contracts. The scheduled maturity date with respect to the advances under the
Credit Facility is the earlier of January 6, 1999 or the disposition date of
the eligible purchased loan Contract. The Company believes this maturity date
was verbally extended by Daiwa. Under the Credit Facility, prior to July 1,
1998, 85% of the amount advanced to the Company accrued interest at a rate
equal to LIBOR plus 1.0% per annum. Effective July 1, 1998, the interest rate
on this advance changed to LIBOR plus 3.5% per annum. The remaining 15% of
the amount advanced accrued interest at a rate of LIBOR plus 1.0% per annum
prior to July 1, 1998. Effective July 1, 1998, the interest rate on this
advance changed to 15% per annum. The Credit Facility Agreement requires the
Company to maintain certain standard ratios and covenants. At December 31,
1998, the Credit Facility had an outstanding balance of $39,298,048. The
assets of MF IV are not available to pay general creditors of the Company.
See Subsequent Events.
On June 30, 1998, the Company and Pacific USA, a related party, agreed to
enter into a $5.0 million Loan Agreement ("Pacific USA Note"). Effective July
1, 1998, the Company and Pacific USA entered into a Conversion and Rights
Agreement whereby $4,463,250 of the principal amount of the Pacific USA Note
was converted into 939,632 restricted shares of the Company's Class A Common
Stock. As consideration for the conversion, the Company agreed, subject to
shareholder approval, which was obtained on November 12, 1998, to change the
conversion ratio of the Company's Preferred Stock held by Pacific USA. The
remaining unconverted principal balance of the Pacific USA Note of $536,750
was converted into 268,375 shares of the Company's Series 1999-1 8% Cumulative
Subordinated Preferred Stock as of December 31, 1998.
On September 8, 1998 the Company and Pacific Southwest Bank entered into
a Promissory Note agreement whereby Pacific Southwest lent the Company
$950,000. The Promissory Note accrues interest at the prime rate plus 1% per
annum. All outstanding principal, plus accrued and unpaid interest, is due six
months from the date of the Promissory Note. Subsequent to December 31, 1998,
the Company is past due on principal payments related to the Promissory Note.
See Subsequent Events.
On September 30, 1998 the Company and Pacific USA entered in to a
Promissory Note agreement whereby Pacific USA lent the Company $1,000,000. The
Note was modified on October 31, 1998 to increase the principal balance by an
additional $400,000. Effective December 31, 1998 the Note was modified when
Pacific USA converted $300,000 of the Note balance into 150,000 shares of the
Company's Series 1999-1 8% Cumulative Subordinated Preferred Stock. A third
modification, also effective December 31, 1998, increased the principal
balance by an additional $800,000. The Promissory Note accrues interest at the
prime rate plus 1% per annum. All outstanding principal, plus accrued and
unpaid interest, is due six months from the date of the Promissory Note.
In March 1996, the Company announced that its Board of Directors had
authorized the purchase of up to 100,000 shares of Class A Common Stock,
representing approximately 10% of its Class A Common Stock outstanding.
Subject to applicable securities laws, repurchases may be made at such times,
and in such amounts, as the Company's management deems appropriate. As of
December 31, 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.
Effective November 23, 1998 the Company initiated a 1 for 5 reverse stock
split. To effect the split, the Company's authorized, issued, and outstanding
$.01 par Class A and B common stock was decreased from 12,772,790 to 2,554,558
shares and from 1,273,715 to 254,743 shares, respectively. All periods
presented and related footnote disclosures have been adjusted to reflect the
reverse split.
The Company's Class A Common Stock is traded in the over-the-counter
market and is currently quoted on the Electronic Bulletin Board.
The Company's cash needs have been funded through a combination of
earnings and cash flow from operations, its existing Warehouse Line of Credit
and securitizations, as well as capital and secured loans provided by its
major shareholder and Senior Lender, Pacific USA Holdings Corp. Subsequent to
December 31, 1998, the Company was advised by Pacific that it can no longer be
relied upon to provide capital or loans to fund the Company's working capital
needs. Although Pacific has continued to provide certain additional secured
loans to the Company, no assurance can be given that such funding will
continue. Also, subsequent to December 31, 1998, the Company received verbal
notification from Daiwa that (i) MFIII and MFIV are in violation of certain
covenants unrelated to performance of the portfolio under the Warehouse Line
of Credit and the Portfolio Purchase Credit Facility (collectively the "Credit
Facilities"); and (ii) that a servicer event of default has occurred.
In connection with the foregoing, Daiwa mandated a transfer of
servicing to a successor servicer to be appointed by Daiwa. As a result, the
Company is not receiving nor can it expect to receive monthly distributions of
excess funds from the Credit Facilities, through dividends from MFIII and
MFIV, unless and until Daiwa is paid in full. At this time the Company is
unable to determine whether or not it will receive any future cash flows or
other residual interests from the loan portfolios collateralizing the Credit
Facilities. As a result of the servicing transfer mandated by Daiwa, it is
possible there will be a degradation in the performance level of the loan
portfoilios.
SUBSEQUENT EVENTS
- ------------------
On or about January 16, 1999, in connection with the June 26, 1997 Master
Financing Securitization, the Company's wholly-owned special purpose
corporation, MFII, redeemed the outstanding Class A Certificates for a total
redemption price of approximately $16.7 million. The transaction was financed
through the existing Warehouse Credit Facility with Daiwa Finance Corporation
and MFIII. Following the redemption, the Company, MFII, and MFIII, entered
into an arrangement whereby the assets of MFII, consisting of $18.7 million
of Automobile Backed Consumer Contracts were transferred to MFIII.
In February of 1999 the Company was advised by Pacific, who is the
Company's major shareholder, Senior Lender, and major source of working
capital, that it no longer intends to continue to contribute capital or loan
funds to meet the Company's working capital requirements. Notwithstanding
the foregoing, Pacific has continued to provide certain secured loans
to the Company. However, no assurance can or is given that such financing will
continue in the future.
For the first time since the Company's inception, the Company's
independent auditors have added an explanatory paragraph to the independent
auditor's report regarding certain substantial matters which, in their
opinion, raise substantial doubt about the Company's ability to continue as a
going concern.
In February and March of 1999 the Company, MFIII, and MFIV received
verbal notification from Daiwa that there existed certain violations of
non-portfolio performance related covenants in the credit agreement and that
as a result (i) no additional funds would be advanced to MFIII under the
Warehouse Line of Credit; (ii) Daiwa has mandated that the Company cooperate
in transferring the servicing of the auto loans to a successor servicer to be
appointed by Daiwa; 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. In connection
with the foregoing (i) MFIII and MFIV are in the process of finalizing a
proposed servicing agreement with a successor servicer (an unrelated third
party) selected by Daiwa; and (iii) the Company is assisting in facilitating
the servicing transfer. As a result of the servicing transfer mandated by
Daiwa, it is possible there will be a degradation in the performance level of
the loan portfolios.
In February 1999, the Company failed to make certain payments and as a
result is in default of certain payment covenants pertaining to both the
Rothschild Notes and the 12% Notes (collectively the "Sub Debt"). The Company
believes the Sub Debt lenders have certain enforcement rights under their
respective Sub Debt agreements. These rights, in the opinion of the Company,
are subject to specific subordination and "stand-still" provisions as long as
the Company has senior debt outstanding. As of April 13, 1999, the Company
had approximately $3,860,000 of senior debt outstanding.
Subsequent to December 31, 1998, the Company was past due on principal
payments to Pacific Southwest Bank under a secured loan agreement. As of
April 13, 1999, no action has been taken by Pacific Southwest Bank to enforce
their rights or otherwise accelerate payment of the debt. No assurance is, nor
can be given that Pacific Southwest Bank will not exercise any or all of their
rights under the secured loan agreement in the future.
OTHER
- -----
ACCOUNTING PRONOUNCEMENTS
- --------------------------
In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132, "Employers' Disclosure about Pensions and Other
Postretirement Benefits" ("Statement 132"), which revises employers'
disclosures about pension and other postretirement benefit plans. Statement
132 does not change the measurement or recognition of those plans, but
requires additional information on changes in benefit obligations and fair
values of plan assets and eliminated certain disclosures previously required
by SFAS Nos. 87, 88 and 106. Statement 132 is effective for financial
statements with fiscal years beginning after December 15, 1997.
During June 1998, the FASB issued Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities." Statement 133 establishes new
standards by which derivative financial instruments must be recognized in an
entity's financial statements. Besides requiring derivatives to be included
on balance sheets at fair value, Statement 133 generally requires that gains
and losses from later changes in a derivative's fair value be recognized
currently in earnings. Statement 133 is required to be adopted by the Company
in 2000. Management, however, does not expect the impact of this statement to
have a material impact on the financial statement presentation, financial
position or results of operations.
The Company has not determined what additional disclosures, if any, may
be required by the provisions of Statements 132 and 133 but does not expect
adoption of these statements to have a material effect on its results of
operations.
SOFTWARE AND DATA LICENSING
- ------------------------------
Effective November 30, 1998, Pacific USA Holdings Corp. ("Pacific") 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 from inception to December 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
- --------------------------------
See the section of Part 1, Item I labeled "Future Expansion and
Strategy".
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
- -------------------------------
MONACO FINANCE, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
-----------------
Independent Auditors' Report F - 1
Consolidated Financial Statements
Consolidated Balance Sheet F - 2
Consolidated Statements of Operations F - 3
Consolidated Statements of Stockholders' Equity F - 4
Consolidated Statements of Cash Flows F - 5
Notes to Consolidated Financial Statements F - 6
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
Monaco Finance, Inc. and Subsidiaries
Denver, Colorado
We have audited the accompanying consolidated balance sheet of Monaco Finance,
Inc. and Subsidiaries as of December 31, 1998, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the years
ended December 31, 1998 and 1997. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Monaco Finance,
Inc. and Subsidiaries as of December 31, 1998, and the consolidated results
of their operations and their cash flows for the years ended December 31,
1998 and 1997 in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has suffered recurring losses
and has experienced difficulty in obtaining funding to continue their
operations that raise substantial doubt about its ability to continue as a
going concern. In addition, as discussed in Note 10 to the consolidated
financial statements, subsequent to year end, the servicing of a large
majority of the Company's automobile loans receivable was transferred to a an
unrelated third party servicer which will result in lower income and cash
flows to the Company. The financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts or
the amounts and classifications of liabilities that might be necessary should
the Company be unable to continue as a going concern.
/s/ Ehrhardt Keefe Steiner & Hottman PC
---------------------------------------
Ehrhardt Keefe Steiner & Hottman PC
March 21, 1999
Denver, Colorado
<PAGE>
<TABLE>
<CAPTION>
MONACO FINANCE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
--------------------------
DECEMBER 31, 1998
-----------------
<S> <C>
Assets
Cash and cash equivalents $ 515,679
Restricted cash 5,501,967
Automobile receivables - net (Notes 3 and 5) 107,201,241
Other receivables 66,527
Repossessed vehicles held for sale 3,048,171
Deferred income taxes (Note 7) -
Furniture and equipment, net of accumulated
depreciation of $2,660,985 2,173,295
Other assets 1,371,854
Total assets $119,878,734
Liabilities and Stockholders' Equity
Accounts payable $ 1,234,377
Accrued expenses and other liabilities 1,431,127
Notes payable (Note 5) 50,000
Warehouse note payable (Note 5) 43,581,000
Portfolio purchase note payable (Note 5) 39,298,048
Promissory notes payable (Note 5) 2,850,000
Convertible subordinated debt (Note 5) -
Senior subordinated debt (Note 5) 999,998
Convertible senior subordinated debt (Note 5) 4,055,000
Automobile receivables-backed notes (Note 5) 17,213,594
Total liabilities 110,713,144
Commitments and contingencies (Note 4)
Stockholders' equity (Note 6)
Series 1998-1 preferred stock; no par value; 10,000,000
shares authorized; 2,347,587 shares issued; $4,695,174
liquidation preference. 4,695,174
Series 1999-1 preferred stock; no par value; 585,725 shares
authorized; 418,375 shares issued; $836,750 liquidation
preference subordinate to 1998-1 836,750
Class A common stock, $.01 par value; 30,000,000 shares
authorized, 2,554,559 shares issued 127,728
Class B common stock, $.01 par value; 2,250,000 shares
authorized, 254,743 shares issued 12,737
Additional paid-in-capital 31,070,567
Accumulated (deficit) (27,577,366)
Total stockholders' equity 9,165,590
Total liabilities and stockholders' equity $119,878,734
<FN>
See notes to consolidated financial statements.
</TABLE>
F - 2
<PAGE>
MONACO FINANCE, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
FOR THE YEARS ENDED
DECEMBER 31,
-------------
<S> <C> <C>
1998 1997
------------ -----------
Revenues
Interest . . . . . . . . . . . . . . . . . . . . . . $ 20,617,095 $12,394,091
Other income . . . . . . . . . . . . . . . . . . . . 212,652 244,816
Total revenues. . . . . . . . . . . . . . . . . . . 20,829,747 12,638,907
Costs and expenses
Provision for credit losses (Note 3) . . . . . . . . 2,682,122 3,873,719
Operating expenses . . . . . . . . . . . . . . . . . 16,095,678 12,445,704
Interest expense (Note 5). . . . . . . . . . . . . . 11,224,798 5,674,484
Total costs and expenses. . . . . . . . . . . . . . 30,002,598 21,993,907
Net (loss) before income taxes. . . . . . . . . . . . (9,172,851) (9,355,000)
Income tax expense (Note 7) . . . . . . . . . . . . . 1,541,582 -
Net (loss). . . . . . . . . . . . . . . . . . . . . . (10,714,433) (9,355,000)
Preferred stock dividends (Note 6). . . . . . . . . . 374,127 -
Net (loss) applicable to common stockholders. . . . . $(11,088,560) $(9,355,000)
Loss per common share - basic and diluted (Note 6). . $ (5.04) $ (5.91)
Weighted average number of common shares outstanding. 2,199,035 1,582,546
<FN>
See notes to consolidated financial statements.
</TABLE>
F - 3
<PAGE>
MONACO FINANCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
-----------------------------------------------
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
----------------------------------------------
Preferred Stock Class A
1998-1 1999-1 Common Stock
Shares Amount Shares Amount Shares
--------------------------- ------------------------------------------ ---------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996 - - - - 1,129,676
Exercise of stock options - - - - 1,020
Conversion of shares - - - - 10,000
Conversion of installment note payable - - - - 300,000
Net (loss) for the year - - - - -
Balance, December 31, 1997 - - - - 1,440,696
Shares issued - portfolio acquisition 2,347,587 4,695,174 - - 162,231
Conversion of note to equity - - 418,375 836,750 939,632
Exercise of stock options - - - - 8,000
Issuance of stock - - - - 4,000
Imputed value on issuance of warrants - - - - -
Net (loss) for the year - - - - -
Balance, December 31, 1998 2,765,962 $ 5,531,924 2,765,962 $ 5,531,924 2,554,559
Class A Additional
Common Stock Class B Common Stock Paid-in Retained
Amount Shares Amount Capital Earnings Total
----------- ----------------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 $ 56,484 264,743 $13,237 $22,066,089 $ (7,133,806) $ 15,002,004
Exercise of stock options 51 - - 9,377 - 9,428
Conversion of shares 500 (10,000) (500) - - -
Conversion of installment note payable 15,000 - - 2,850,000 - 2,865,000
Net (loss) for the year - - - - (9,355,000) (9,355,000)
Balance, December 31, 1997 72,035 254,743 12,737 24,925,466 (16,488,806) 8,521,432
Shares issued - portfolio acquisition 8,111 - - 1,614,193 - 6,317,478
Conversion of note to equity 46,982 - - 4,416,268 - 5,300,000
Exercise of stock options 400 - - 20,840 - 21,240
Issuance of stock 200 - - 9,800 - 10,000
Imputed value on issuance of warrants - - - 84,000 - 84,000
Net (loss) for the year - - - - (11,088,560) (11,088,560)
Balance, December 31, 1998 $ 127,728 254,743 $12,737 $31,070,567 $(27,577,366) $ 9,165,590
<FN>
See notes to consolidated financial statements.
</TABLE>
F - 4
<PAGE>
- ------
MONACO FINANCE, INC. AND SUBSIDIARIES
-------------------------------------
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -----------------------------------------
For the Years Ended
December 31,
1998 1997
<S> <C> <C>
Cash flows from operating activities
Net loss $ (11,088,560) $ (9,355,000)
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation 1,156,182 936,055
Provision for credit losses 2,682,122 3,873,719
Amortization of excess interest 7,130,593 4,532,301
Amortization of other assets 1,216,460 1,046,924
Deferred tax asset 1,541,582 -
Loss on sale of fixed assets 196,042 -
Other (34,037) (8,611)
Change in assets and liabilities
Receivables 7,106,832 (995,897)
Prepaids and other assets 138,220 196,868
Accounts payable (303,414) 685,953
Accrued liabilities and other 586,854 142,795
21,417,436 10,410,107
Net cash provided by operating activities 10,328,876 1,055,107
Cash flows from investing activities
Retail installment sales contracts purchased (105,893,845) (37,458,258)
Proceeds from payments on contracts 61,025,599 38,064,381
Purchase of furniture and equipment (1,473,036) (926,322)
Proceeds from sale of fixed assets 3,291 10,726
Net cash (used in) investing activities (46,337,991) (309,473)
Cash flows from financing activities
Net borrowings under lines-of-credit 46,553,499 31,125,549
Net decrease (increase) in restricted cash 2,578,066 (3,616,289)
Proceeds from notes 8,150,000 65,021,526
Payments on notes (21,006,048) (92,287,986)
Proceeds from exercise of stock options 21,240 9,428
Increase in debt issue and conversion costs (529,504) (1,467,762)
Net cash provided by (used in) financing activities 35,767,253 (1,215,534)
Net decrease in cash and cash equivalents (241,862) (469,900)
Cash and cash equivalents, beginning of year 757,541 1,227,441
Cash and cash equivalents, end of year $ 515,679 $ 757,541
<FN>
See notes to consolidated financial statements.
</TABLE>
F - 5
<PAGE>
MONACO FINANCE, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ----------------------------------------------------------
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 (the "Program(s)") to purchasers
of vehicles who do not qualify for traditional sources of bank financing due
to their adverse credit history, or for other reasons which may indicate
credit or economic risk ("Sub-prime Customers). In 1997 and 1998, 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)"
or the "Dealer Network") located in forty-eight states, the majority of which
were acquired from four states. The Company has also purchased portfolios of
sub-prime loans from third parties other than dealers. At December 31, 1998,
the Company's loan portfolio had an outstanding balance of approximately $117
million.
Pacific USA Holdings Corp. and related entities ("Pacific USA") holds a
controlling interest in the Company at December 31, 1998 (Note 6)
PRINCIPLES OF CONSOLIDATION
- -----------------------------
The Company's consolidated financial statements include the accounts of Monaco
Finance, Inc. and its wholly-owned subsidiaries, MF Receivables Corp. I ("MF
I"), MF Receivables Corp. II ("MF II"), MF Receivables Corp. III ("MF III"),
MF Receivables Corp. IV ("MF IV"), MF Funding, and MF Funding Corp
(collectively the "Subsidiaries"). All intercompany accounts and transactions
have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
- ----------------------------
For purposes of cash flow reporting, cash and cash equivalents include cash,
money market funds, government securities, and certificates of deposit with
maturities of less than three months.
RESTRICTED CASH
- ----------------
Restricted cash represents cash collections related to the Automobile
Receivables-Backed Notes and the Warehouse Line of Credit (Note 5). On a
monthly basis, all cash collections in excess of disbursements to the
noteholders of the Automobile Receivables-Backed Notes, or to Daiwa Finance
Corporation, and other general disbursements, are paid to MF I, MF II, MF
III, and MF IV. At December 31, 1998 and 1997, the Company had $0 and
$1,652,596 of its restricted cash balances invested in overnight U.S.
government securities, respectively.
F - 6
<PAGE>
MONACO FINANCE, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
- -----------------------------------------------------------------------
FINANCE RECEIVABLES
- --------------------
Finance receivables primarily represent receivables generated from portfolio
purchases as well as Contracts purchased from the Dealer Network and from
Contracts from the retail sale of automobiles at the Company's CarMart stores.
In 1997 and 1998, the Company also purchased loan portfolios of previously
originated automobiles. At December 31, 1998 and 1997, approximately $0.3
million and $1.4 million, respectively, of the Automobile Receivables loan
portfolio were generated from the CarMart operations.
After December 31, 1998, the Company intends to transfer loan servicing to an
unrelated third party servicer.
STATIC POOL ACCOUNTING
- ------------------------
The Company utilizes static pooling to reserve for and analyze its loan
losses. The static pooling reserve methodology allows the Company to stratify
its Automobile Receivables portfolio, and the related components of its
Allowance for Credit Losses (i.e. discounts, excess interest, charge offs and
recoveries) into separate and identifiable quarterly pools. These quarterly
pools, along with the Company's estimate of future principal losses and
recoveries, are analyzed quarterly to determine the adequacy of the Allowance
for Credit Losses.
As part of its adoption of the static pooling reserve method, where necessary,
the Company adjusts its quarterly pool allowances to a level necessary to
cover all anticipated future losses (i.e. life of loan) for each related
quarterly pool of loans.
Under static pooling, excess interest and discounts are used to increase the
Allowance for Credit Losses and represent the Company's primary reserve for
future losses on its portfolio. To the extent that any quarterly pool's excess
interest and discount reserves are insufficient to absorb future estimated
losses, net of recoveries, adjusted for the impact of current delinquencies,
collection efforts, and other economic indicators including analysis of the
Company's historical data, the Company will provide for such deficiency
through a charge to the Provision for Credit Losses and the establishment of
an additional Allowance for Credit Losses. To the extent that any excess
interest and discount reserves are determined to be sufficient to absorb
future estimated losses, net of recoveries, the difference will be accreted
into interest income on an effective yield method over the estimated remaining
life of the related monthly static pool.
F - 7
<PAGE>
MONACO FINANCE, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
- -----------------------------------------------------------------------
REPOSSESSED VEHICLES HELD FOR RESALE
- ----------------------------------------
Repossessed vehicles held for resale consist of repossessed vehicles awaiting
liquidation. Repossessed vehicles are carried at estimated actual cash value.
At December 31, 1998 and 1997, approximately 843 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, which a portion of the value may be recovered from
insurance proceeds.
FURNITURE AND EQUIPMENT
- -------------------------
Furniture and equipment are stated at cost. Major additions are capitalized,
whereas maintenance, replacements and repairs are expensed. Depreciation is
provided for in amounts sufficient to allocate the cost of depreciable assets
to operations over their estimated service lives using the straight-line
method.
REVENUE RECOGNITION
- --------------------
Interest income from finance receivables is recognized using the interest
(actuarial) method. Accrual of interest income on finance receivables is
suspended when a loan is contractually delinquent for ninety days or more.
The accrual is resumed when the loan is less than ninety days delinquent, and
collectible past-due interest income is recognized at that time. Any
discounts recognized from the purchase of installment contracts are added to
the allowance for credit losses. Insurance income was recognized as earned.
CREDIT LOSSES
- --------------
Provisions for credit losses are continually reviewed and adjusted to maintain
the allowance at a level considered adequate to cover losses over the life of
the loans in the existing portfolio. The Company's charge-off policy is to
automatically charge-off, net of estimated recoveries, all Contracts over 100
days contractually past due.
EXCESS INTEREST
- ----------------
Upon the acquisition of certain Contracts from its Dealer Network, a portion
of future interest income, as determined by the Company's risk analysis, is
capitalized into Automobile Receivables (excess interest receivable) and
correspondingly used to increase the allowance for credit losses (unearned
interest income). Subsequent receipts of excess interest are applied to
reduce excess interest receivable.
F - 8
<PAGE>
MONACO FINANCE, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
- -----------------------------------------------------------------------
LOAN ORIGINATION FEES AND COSTS
- -----------------------------------
Fees received and direct costs incurred for the origination of Contracts are
offset and any excess fees are deferred and amortized to interest income over
the contractual lives of the Contracts using the interest method. Unamortized
amounts, if any, are recognized in income at the time Contracts are sold or
paid in full. Direct costs incurred in excess of fees received are expensed as
incurred.
CONCENTRATION OF CREDIT RISKS
- --------------------------------
The Company's customers are not concentrated in any specific geographic
region. However, their primary concentration of credit risk relates to
lending to individuals who cannot obtain traditional bank financing. The
Company places its temporary cash investments with high quality institutions,
and by policy, limits the amount of credit exposure to any one institution.
The Company does, however, on occasion exceed the FDIC federally insured
limits and at December 31, 1998 and 1997 exceeded the amount by $5,666,759 and
$9,840,730, respectively.
EARNINGS PER SHARE
- --------------------
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. The
Company has incurred losses in each of the periods covered in these financial
statements, thereby making the inclusion of convertible securities in the 1997
and 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.
<TABLE>
<CAPTION>
ANTIDILUTIVE SECURITIES EXCLUDED FROM DILUTIVE EARNINGS PER SHARE
Exercise or Conversion Potentially Dilutive
Security Price Shares Expiration Date
- --------------------------- ----------------------- -------------------- --------------------
<S> <C> <C> <C>
Stock Options $ 2.655 - $33.125 203,500 1/6/2002 - 3/26/2008
Warrants $ 4.125 - $30.00 75,300 11/7/2000 -1/20/2001
Convertible Preferred Stock $ 5.00 1,106,385 -
<FN>
</TABLE>
F - 9
<PAGE>
MONACO FINANCE, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
- -----------------------------------------------------------------------
INCOME TAXES
- -------------
The Company recognizes deferred tax liabilities and assets based on
differences between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
USE OF ESTIMATES
- ------------------
The preparation of financial statements in conformity with general accepted
accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of financial statements and the reported amounts of revenues and expenses
during the reporting period. Management believes that such estimates have been
based on reasonable assumptions and that such estimates are adequate, however,
actual results could differ from those estimates.
In connection with the purchase of Contracts, the Company is required to
estimate the number and dollar amount of loans expected to result in defaults
and to estimate the amount of loss that will be incurred under each default.
The Company currently provides allowances for these losses based on the
historical performance of the Contracts which are tracked by the Company on a
static pool basis. The actual losses incurred could differ materially from the
amounts that the Company has estimated in preparing the historical
consolidated financial statements. Furthermore, transfer of the portfolio to
another servicer may adversely impact the performance of the portfolio.
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
- ------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
---- ----
<S> <C> <C>
CASH PAYMENTS FOR:
INTEREST $ 11,065,786 $ 5,562,880
INCOME TAXES $ 4,363 $ 3,108
- --------------- ---------- -------------
<FN>
</TABLE>
Non-cash investing and financing activities:
In April 1997, Pacific USA Holdings Corp. ("Pacific") converted the entire
$3,000,000 outstanding principal amount of an installment note payable made by
Pacific to the Company into 300,000 shares of the Company's Class A Common
Stock. See Note 5.
Included as part of the consideration paid for the January 1998 portfolio
acquisition from Pacific USA Holdings Corp. (Notes 5 and 6), 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. As of September 30, 1998, Pacific USA repurchased
certain loans that have resulted in the surrender of 85,870 shares of
Preferred Stock.
F - 10
<PAGE>
MONACO FINANCE, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
- -----------------------------------------------------------------------
Supplemental Disclosures of Cash Flow Information (continued)
- -------------------------------------------------------------------
Effective July 1, 1998, Pacific USA Holdings Corp. converted $4,463,250 of its
$5.0 million Promissory Note (Note 5) into 939,632 restricted shares of the
Company's Class A Common Stock.
Effective December 31, 1998, Pacific USA Holdings Corp. converted the
remaining $536,750 of its $5.0 million Promissory Note (Note 5) and $300,000
of its $1.4 million Promissory Note (Note 5) into 418,375 shares of 8%
Cumulative Subordinated Preferred Stock, Series 1999-1 valued at $2.00 per
share.
RECENTLY ISSUED ACCOUNTING STANDARDS
- ---------------------------------------
In February 1998, the FASB issued Statement of Financial Accounting Standards
No. 132, "Employers' Disclosure about Pensions and Other Postretirement
Benefits" ("Statement 132"), which revises employers' disclosures about
pension and other postretirement benefit plans. Statement 132 does not change
the measurement or recognition of those plans, but requires additional
information on changes in benefit obligations and fair values of plan assets
and eliminated certain disclosures previously required by SFAS Nos. 87, 88 and
106. Statement 132 is effective for financial statements with fiscal years
beginning after December 15, 1997.
During June 1998, the FASB issued Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities." Statement 133 establishes new
standards by which derivative financial instruments must be recognized in an
entity's financial statements. Besides requiring derivatives to be included
on balance sheets at fair value, Statement 133 generally requires that gains
and losses from later changes in a derivative's fair value be recognized
currently in earnings. Statement 133 is required to be adopted by the Company
in 2000. Management, however, does not expect the impact of this statement to
have a material impact on the financial statement presentation, financial
position or results of operations.
The Company has not determined what additional disclosures, if any, may be
required by the provisions of Statements 132 and 133 but does not expect
adoption of these statements to have a material effect on its results of
operations.
RECLASSIFICATIONS
- -----------------
Certain 1997 balances have been reclassified in order to conform with the 1998
presentation.
F - 11
<PAGE>
MONACO FINANCE, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
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 year ended
December 31, 1998, the Company continued to suffer recurring losses in excess
of $11,000,000, resulting in an accumulated deficit of approximately
$27,600,000. In addition, subsequent to year end the Company lost its
financing sources (Note 10). 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 based upon 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 nor is given that new and adequate sources of financing
will be obtained. Furthermore, no assurance can be nor is given that the
business strategy will be implemented, and if implemented will be successful.
The consolidated financial statements do not include any adjustments that
might be necessary if the Company is unable to continue as a going concern.
NOTE 3 - AUTOMOBILE AND RELATED RECEIVABLES
- -------------------------------------------------
Net Automobile receivables consist of the following:
<TABLE>
<CAPTION>
December 31,
--------------
1998 1997
-------------- ------------
<S> <C> <C>
Retail installment sales contracts $ 85,370,939 $37,103,262
Retail installment sales contracts-Trust (Note 4) 19,742,374 37,323,549
Total finance receivables 105,113,313 74,426,811
Allowance for credit losses (9,872,318) (6,850,499)
Automobile receivables - direct 95,240,995 67,576,312
Excess interest receivable 6,307,075 4,849,209
NAFCO loan loss reimbursement receivable (Note 5) 4,034,830 -
Accrued interest 1,426,838 1,121,161
Other 191,503 647,033
Automobile related receivables 11,960,246 6,617,403
Automobile receivables - net $ 107,201,241 $74,193,715
<FN>
</TABLE>
F - 12
<PAGE>
MONACO FINANCE, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 3 - AUTOMOBILE AND RELATED RECEIVABLES (CONTINUED)
- --------------------------------------------------------------
The total finance receivables are scheduled to be collected as follows:
<TABLE>
<CAPTION>
December 31,
<S> <C>
1999 $ 6,407,564
2000 15,852,017
2001 31,988,330
2002 41,099,055
2003 9,766,347
====== =============
$ 105,113,313
<FN>
</TABLE>
Although these are the scheduled collections, they are not necessarily
indicative of actual cash flows. See Subsequent Events
At December 31, 1998, the accrual of interest income was suspended on $1.7
million of principal amount of retail installment sales contracts.
At the time installments sale contracts ("Contracts") are originated or
purchased, the Company estimates future losses of principal based on the type
and terms of the Contract, the credit quality of the borrower and the
underlying value of the vehicle financed. This estimate of loss is based on
the Company's risk model, which takes into account historical data from
similar contracts originated or purchased by the Company since its inception
in 1988. However, since the risk model uses past history to predict the
future, changes in national and regional economic conditions, borrower mix and
other factors could result in actual losses differing from initially predicted
losses.
The allowance for credit losses, as presented below, has been established
utilizing data obtained from the Company's risk models and is continually
reviewed and adjusted in order to maintain the allowance at a level which, in
the opinion of management, provides adequately for current and future losses
that may develop in the present portfolio. This allowance is reported as a
reduction to Automobile Receivables.
F - 13
<PAGE>
MONACO FINANCE, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 3 - AUTOMOBILE AND RELATED RECEIVABLES (CONTINUED)
- --------------------------------------------------------------
<TABLE>
<CAPTION>
Allowance for Credit
Losses
----------------------
<S> <C>
Balance as of December 31, 1996. . . . . . . . $ 9,518,962
Provisions for credit losses . . . . . . . . . 3,873,719
Unearned interest income . . . . . . . . . . . 2,825,819
Unearned discounts . . . . . . . . . . . . . . 2,354,792
Retail installment sale contracts charged off. (22,643,864)
Recoveries . . . . . . . . . . . . . . . . . . 10,921,071
Balance as of December 31, 1997. . . . . . . . 6,850,499
Provisions for credit losses . . . . . . . . . 2,682,122
Unearned interest income . . . . . . . . . . . 8,588,458
NAFCO loan loss reimbursement (see Note 6) . . 11,737,935
Unearned discounts . . . . . . . . . . . . . . 3,631,346
Retail installment sale contracts charged off. (39,138,587)
. . . . . . . . . . . . . . . . . . . . . . . 15,520,545
Balance as of December 31, 1998. . . . . . . . $ 9,872,318
<FN>
</TABLE>
The provision for credit losses is based on estimated losses on all Contracts
purchased prior to January 1, 1995 with zero discounts ("100% Contracts") and
for all Contracts originated by CarMart which have been provided for by
additions to the Company's allowance for credit losses as determined by the
Company's risk analysis. Also, the 1998 provision for credit losses includes a
$2.65 million charge for a change in estimate related to the Company's static
pooling reserve analysis (Note 11).
Upon the acquisition of certain Contracts from its Dealer Network, a portion
of future interest income, as determined by the Company's risk analysis, is
capitalized into Automobile Receivables (excess interest receivable) and
correspondingly used to increase the allowance for credit losses (unearned
interest income). Receipts of excess interest are applied to reduce excess
interest receivable. For the years ended December 31, 1998 and 1997,
respectively, $7,130,593 and $4,532,301 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.
F - 14
<PAGE>
MONACO FINANCE, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 3 - AUTOMOBILE AND RELATED RECEIVABLES (CONTINUED)
- --------------------------------------------------------------
The December 31, 1998, excess interest receivable balance of $6,307,075 will
be amortized as follows:
<TABLE>
<CAPTION>
Year Ended December 31, Amortization
-------------
<S> <C>
1999. . . . . . . . . . $ 3,973,058
2000. . . . . . . . . . 1,806,776
2001. . . . . . . . . . 459,491
2002. . . . . . . . . . 65,612
2003. . . . . . . . . . 2,138
$ 6,307,075
-------------
<FN>
</TABLE>
NOTE 4 - COMMITMENTS AND CONTINGENCIES
- -------------------------------------------
OPERATING LEASES
- -----------------
The Company leases office space, car lot facilities, computer and office
equipment for varying periods. Leases that expire generally are expected to
be renewed or replaced by other leases, or in the case of the former CarMart
facilities, the Company has options to extend the leases.
In April 1994, the Company amended and restated its lease of office space for
its executive offices located at 370 17th Street, Suite 5060, Denver, Colorado
80202, where it maintains approximately 24,716 square feet of space. The
Company currently pays $43,312 per month under a lease ending October 31,
1999, with adjustments for monthly payments on a periodic basis.
Effective December 1, 1996, the Company entered into a sublease agreement for
6,571 square feet of office space located at 370 17th Street, Suite 4960,
Denver, Colorado, 80202. The Company pays $1,807 per month, plus occupancy
costs, under a sublease ending October 31, 1999. This office space was vacated
subsequent to year end and the Company is attempting to find a sublessor.
On March 31, 1994, the Company's lease at 1319 S. Havana, Aurora, Colorado
80010 was terminated and the operations of the retail CarMart Dealership at
that location were transferred to 890 S. Havana, Aurora, Colorado 80010. This
property is owned by a corporation all of whose shareholders are officers of
the Company. The Company entered into a seven-year lease commencing March 24,
1994 and ending March 23, 2001. In September 1995, the Company amended its
seven-year lease to include the property at 894 S. Havana, Aurora, Colorado
80010. The Company currently pays $15,238 per month on a triple net basis.
The lease calls for periodic rental adjustments over the term. It is the
Company's belief that the terms of the related party lease are generally no
less favorable than could have been obtained from unrelated third party
lessors for properties of similar size, condition and location. Effective June
1, 1996, the Company entered into a sublease agreement on the property located
at 890 S. Havana for the entire lease term at an amount approximately equal to
the Company's obligation. Effective December 11, 1998 all lease and sublease
agreements were terminated upon sale of the property.
F - 15
<PAGE>
MONACO FINANCE, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 4 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
- --------------------------------------------------------
OPERATING LEASES (CONTINUED)
- ------------------------------
Effective January 15, 1996 and January 31, 1996, the Company closed its retail
CarMart Dealerships located at 4940 S. Broadway, Englewood, Colorado and 1005
Motor City Drive, Colorado Springs, Colorado, respectively. The Englewood,
Colorado lease was extended for a three-year period through March 2000. The
Company may, at its sole discretion, extend the Englewood, Colorado lease for
an additional three-year period through March 2003. The Company currently
pays $9,833 per month. The Colorado Springs, Colorado lease expired in May of
1998 and was not renewed by the Company. Effective March 15, 1996, the Company
entered into a sublease agreement on both properties for the entire lease
terms at an amount approximately equal to the Company's obligation.
At December 31, 1998, future minimum rental payments applicable to
noncancelable operating leases were as follows:
<TABLE>
<CAPTION>
Gross Rental Sublease Net Rental
Year Ended December 31, Payments Receipts Payments
------------- --------- -----------
<S> <C> <C> <C>
1999. . . . . . . . . . $ 645,275 $ 117,990 $ 527,285
2000. . . . . . . . . . 526,566 117,990 408,576
2001. . . . . . . . . . 22,579 - 22,579
$ 1,194,420 $ 235,980 $ 958,440
<FN>
</TABLE>
Total net lease expense for the years ended December 31, 1998 and 1997 was
$712,302 and $697,080, respectively.
CONTINGENCIES
- -------------
The Company and its Subsidiaries at times are subject to various legal
proceedings and claims that arise in the ordinary course of business. In the
opinion of management of the Company, based in part on the advice of counsel,
the amount of any ultimate liability with respect to these actions will not
materially affect the results of operations, cash flows or financial position
of the Company. It is the Company's and its Subsidiaries' policy to vigorously
defend litigation, however, the Company and its Subsidiaries have, and may in
the future, enter into settlements of claims where management deems
appropriate.
F - 16
<PAGE>
MONACO FINANCE, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 4 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
- --------------------------------------------------------
EMPLOYMENT AGREEMENTS
- ----------------------
The Company's two executive officers have entered into employment agreements
(the "Employment Agreements") with the Company.
Messrs. Ginsburg and Sandler are paid annual salaries of $310,000 and
$290,000, respectively, under their Employment Agreements and are eligible to
receive medical and hospitalization insurance and other fringe benefits as
provided to the Company's other executive-level employees, including
participating in stock option grants by the Company. The Employment
Agreements have three-year terms which began in December, 1997. Upon written
notice, the Company may terminate the Employment Agreement for cause. Each of
these individuals has agreed not to compete with the Company for a period of
two years following the termination of his relationship with the Company under
this Employment Agreement. In exchange for the non-compete agreement, each
individual is to be paid a non-competition payment of $300,000, to be paid
equally in arrears at the end of each of the two years following the
individuals' employment.
LOANS IN FUNDING (COMMITMENTS)
- ---------------------------------
As of December 31, 1998, there were no open commitments to extend credit
through the normal course of business.
401(K) EMPLOYEE SAVINGS PLAN
- -------------------------------
The Company has a voluntary 401(k) savings plan pursuant to Section 401(k) of
the Internal Revenue Code, whereby participants may contribute a percentage of
compensation, but not in excess of the maximum allowed under the code. The
plan provides for a matching contribution by the Company which amounted to
$21,923 and $24,728 in 1998 and 1997, respectively.
NOTE 5 - DEBT
- ----------------
In February and March of 1999 the Company, MFIII, and MFIV received verbal
notification from Daiwa that there existed certain violations of non-portfolio
performance related covenants in the credit agreement and that as a result (i)
no additional funds would be advanced to MFIII under the Warehouse Line of
Credit; (ii) Daiwa has mandated that the Company cooperate in transferring the
servicing of the auto loans to a successor servicer to be appointed by Daiwa;
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. In connection with the foregoing (i)
MFIII and MFIV are in the process of finalizing a proposed servicing agreement
with a successor servicer (an unrelated third party) selected by Daiwa; and
(iii) the Company is assisting in facilitating the servicing transfer.
F - 17
<PAGE>
MONACO FINANCE, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 5 - DEBT (CONTINUED)
- -----------------------------
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.
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 December
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 (Note 10). At
December 31, 1998 and 1997, the Company had borrowed $43,581,000 and
$30,000,000, respectively, against this line of credit. The assets of MF III
are not available to pay general creditors of the Company.
PORTFOLIO PURCHASE CREDIT FACILITY - DAIWA FINANCE CORPORATION
- ---------------------------------------------------------------------
In January 1998, MF Receivables Corp. IV ("MF IV"), a wholly owned special
purpose subsidiary of the Company, entered into a $73,926,565 Portfolio
Purchase Credit Facility (the "Credit Facility") with Daiwa. The proceeds
from the Credit Facility were used to acquire an $81.1 million portfolio from
Pacific USA Holdings Corp. and certain of its subsidiaries (Note 6). All
advances received under the Credit Facility are secured by eligible purchased
loan Contracts and all proceeds received from those Contracts. The scheduled
maturity date with respect to the advances under the Credit Facility is the
earlier of January 6, 1999 or the disposition date of the eligible purchased
loan Contract. Under the Credit Facility, prior to July 1, 1998, 85% of the
amount advanced to the Company accrued interest at a rate equal to LIBOR plus
1.0% per annum. Effective July 1, 1998, the interest rate on this advance
changed to LIBOR plus 3.5% per annum. The remaining 15% of the amount
advanced accrued interest at a rate of LIBOR plus 1.0% per annum prior to July
1, 1998. Effective July 1, 1998, the interest rate on this advance changed to
15% per annum. The Credit Facility Agreement requires the Company to maintain
certain standard ratios and covenants (Note 10). At December 31, 1998, the
Credit Facility had an outstanding balance of $39,298,048. The assets of MF IV
are not available to pay general creditors of the Company.
F - 18
<PAGE>
MONACO FINANCE, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 5 - DEBT (CONTINUED)
- -----------------------------
PACIFIC USA HOLDINGS CORP. - INSTALLMENT NOTES
- ----------------------------------------------------
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 300,000 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.
PACIFIC USA HOLDINGS CORP. - PROMISSORY NOTE
- --------------------------------------------------
On June 30, 1998, the Company and Pacific USA, a related party, agreed to
enter into a $5.0 million Loan Agreement ("Pacific USA Note"). Effective July
1, 1998, the Company and Pacific USA entered into a Conversion and Rights
Agreement whereby $4,463,250 of the principal amount of the Pacific USA Note
was converted into 939,632 restricted shares of the Company's Class A Common
Stock. As consideration for the conversion, the Company agreed, subject to
shareholder approval, which was obtained on November 12, 1998, to change the
conversion ratio of the Company's Preferred Stock held by Pacific USA. The
remaining unconverted principal balance of the Pacific USA Note of $536,750
was converted into 268,375 shares of the Company's Series 1999-1 8% Cumulative
Subordinated Preferred Stock as of December 31, 1998.
On September 8, 1998 the Company and Pacific Southwest Bank entered into a
Promissory Note agreement whereby Pacific Southwest lent the Company $950,000.
The Promissory Note accrues interest at the prime rate plus 1% per annum. All
outstanding principal, plus accrued and unpaid interest, is due six months
from the date of the Promissory Note. Subsequent to December 31, 1998, the
Company is past due on principal payments related to the Promissory Note (Note
10).
F - 19
<PAGE>
MONACO FINANCE, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 5 - DEBT (CONTINUED)
- -----------------------------
PACIFIC USA HOLDINGS CORP. - PROMISSORY NOTE (CONTINUED)
- ---------------------------------------------------------------
On September 30, 1998 the Company and Pacific USA entered in to a Promissory
Note agreement whereby Pacific USA lent the Company $1,000,000. The Note was
modified on October 31, 1998 to increase the principal balance by an
additional $400,000. Effective December 31, 1998 the Note was modified when
Pacific USA converted $300,000 of the Note balance into 150,000 shares of the
Company's Series 1999-1 8% Cumulative Subordinated Preferred Stock. A third
modification, also effective December 31, 1998, increased the principal
balance by an additional $800,000. The Promissory Note accrues interest at the
prime rate plus 1% per annum. All outstanding principal, plus accrued and
unpaid interest, is due six months from the date of the Promissory Note.
Convertible Subordinated Debentures
- -------------------------------------
On March 15, 1993, the Company completed a private placement of $2,000,000, 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 the notes of $692,500 was extended to April 15, 1998,
without penalty, at which time the Company repaid the remaining principal
amount. Notes with an aggregate principal amount of $1,615,500 were converted
resulting in the issuance of 94,444 shares of Class A Common Stock.
Senior Subordinated Note - Rothschild
- -----------------------------------------
On November 1, 1994 the Company sold, in a private placement, unsecured Senior
Subordinated Notes ("Rothschild Notes") in the gross principal amount of
$5,000,000 to Rothschild North America, Inc. ("Rothschild") The Rothschild
Notes accrue interest at a fixed rate per annum of 9.5% through October 1,
1997, and for each month thereafter, a fluctuating rate per annum equal to the
lesser of (a) 11.5% or (b) 3.5% above LIBOR.
Interest was due and payable the first day of each quarter commencing on
January 1, 1995. Principal payments in the amount of $416,667 were due and
payable the first day of January, April, July and October of each year
commencing January 1, 1997.
F - 20
<PAGE>
MONACO FINANCE, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 5 - DEBT (CONTINUED)
- -----------------------------
Senior Subordinated Note - Rothschild (continued)
- ------------------------------------------------------
On June 15, 1998, the Company and Rothschild amended the Note Purchase
Agreement to require principal payments of $450,000 on the last day of each
March, June, September and December. In lieu of the principal payment of
$416,667 due on July 1, 1998, the Company made a payment to Rothschild on June
30, 1998 of $600,000. The unpaid principal amount of the Senior Notes, plus
accrued and unpaid interest, is due October 1, 1999. At December 31, 1998 the
outstanding balance was $999,998. Subsequent to December 31, 1998 the Company
received verbal notice from Rothschild that the Company is in violation of
certain non-portfolio performance related covenants (Note 10).
SENIOR SUBORDINATED NOTES - BLACK DIAMOND
- ----------------------------------------------
On January 9, 1996, the Company entered into a Purchase Agreement for the sale
of an aggregate of $5.0 million in principal amount of 12% Convertible Senior
Subordinated Notes due 2001 (the "12% Notes"). This agreement was subsequently
amended and approved by the Company's Board of Directors and approved by the
Company's Shareholders on September 10, 1996. Interest on the 12% Notes is
payable monthly at the rate of 12% per annum and the 12% Notes were
convertible, subject to certain terms contained in the Indenture, into shares
of the Company's Class A Common Stock, par value $.01 per share, at a
conversion price of $4.00 per share, subject to adjustment under certain
circumstances. The 12% Notes were issued pursuant to an Indenture dated
January 9, 1996, between the Company and Norwest Bank Minnesota, N.A., as
trustee. The Company agreed to register, for public sale, the shares of
restricted Common Stock issuable upon conversion of the 12% Notes. The 12%
Notes were sold pursuant to an exemption from the registration requirements
under the Securities Act of 1933, as amended.
On June 12, 1998, the Company and the related noteowners agreed to amend the
Indenture to cancel the conversion feature of the 12% Notes and to require
principal payments of $135,000 per month commencing in June 1998. The
maturity date of the 12% Notes was also amended to the earlier of the maturity
date of the Rothschild Notes or October 1, 1999. The outstanding balance of
the 12% Notes as of December 31, 1998 was $4,055,000. Subsequent to December
31, 1998 the Company received verbal notice from the 12% Noteholders that the
Company is in violation of certain non-portfolio performance related covenants
(Note 10).
AUTOMOBILE RECEIVABLES - BACKED NOTES
- -----------------------------------------
In November 1994, MF Receivables Corp. I. ("MF I"), the Company's wholly owned
special purpose subsidiary, sold, in a private placement, $23,861,823 of 7.6%
automobile receivables-backed notes ("Series 1994-A Notes"). The Series
1994-A Notes accrued interest at a fixed rate of 7.6% per annum. On July 24,
1997, the Company redeemed the outstanding principal balance of its Series
1994-A Notes. The bonds were redeemed at their principal amount of $1,220,665
plus accrued interest to July 24, 1997. Upon redemption of the Series 1994-A
Notes, the underlying automobile receivables of approximately $2.5 million
were pledged under the terms of the Floating Rate Auto Receivables-Backed Note
as described below.
F - 21
<PAGE>
MONACO FINANCE, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 5 - DEBT (CONTINUED)
- -----------------------------
AUTOMOBILE RECEIVABLES - BACKED NOTES (CONTINUED)
- ------------------------------------------------------
In May of 1995, MF I issued its Floating Rate Auto Receivables-Backed Note
("Revolving Note" or "Series 1995-A Note"). On December 4, 1997, the Company
redeemed the outstanding principal balance of its Series 1995-A Note. The
bonds were redeemed at their principal amount of $12,271,457 plus accrued
interest to December 4, 1997. Upon redemption of the Series 1995-A Note, the
underlying automobile receivables were pledged under the terms of the
Warehouse Line of Credit. At December 31, 1997 the 1995-A Note did not have an
outstanding principal balance.
On September 15, 1995, MF I issued the Series 1995-B Term Notes ("Series
1995-B Notes") in the amount of $35,552,602. The Series 1995-B Notes accrued
interest at a fixed note rate of 6.45% per annum. On December 12, 1997, the
Company redeemed the outstanding principal balance of its Series 1995-B Notes.
The bonds were redeemed at their principal amount of $5,822,934 plus accrued
interest to December 12, 1997. Upon redemption of the Series 1995-B Notes,
the underlying automobile receivables were pledged under the terms of the
Warehouse Line of Credit.
In June 1997, MF Receivables Corp. II ("MF II"), a wholly owned special
purpose subsidiary of the Company, sold, in a private placement, $42,646,534
of Class A automobile receivables-backed notes ("Series 1997-1A Notes" or
"Term Note") to an outside investor and $2,569,068 of Class B automobile
receivables-backed notes ("Class B Notes") to Monaco Funding Corp., a
wholly-owned special purpose subsidiary of the Company. The Series 1997-1A
Notes accrue interest at a fixed rate of 6.71% per annum and are expected to
be fully amortized by December 2002; however, the debt maturities are based on
principal payments received on the underlying receivables, which may result in
a different final maturity. An Indenture and Servicing Agreement require that
the Company and MF II maintain certain financial ratios, as well as other
representations, warranties and covenants.
In connection with the purchase of the Class B Notes, Monaco Funding Corp.
borrowed $2,525,000 from a financial institution ("Heartland Promissory
Note"). The Heartland Promissory Note accrued interest at a fixed rate of 16%
per annum and was collateralized by the proceeds from the Class B Notes. The
Class B Notes, and the Heartland Promissory Note, were repaid in April 1998.
As of December 31, 1998, the Series 1997-1A Notes had a note balance of
$17,213,594. The underlying receivables backing the Series 1997-1A Notes had a
balance of $19,728,112 as of December 31, 1998.
The assets of MF I, MF II and Monaco Funding Corp. are not available to pay
general creditors of the Company.
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.
F - 22
<PAGE>
MONACO FINANCE, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 6 - STOCKHOLDERS' EQUITY
- ---------------------------------
COMMON STOCK (CONTINUED)
- --------------------------
Effective November 23, 1998 the Company initiated a 1 for 5 reverse stock
split. To effect the split, the Company's issued and outstanding $.01 par
Class A and B common stock was decreased from 12,772,790 to 2,554,558 shares
and from 1,273,715 to 254,743 shares, respectively. All periods presented and
related footnote disclosures have been adjusted to reflect the reverse split.
STOCK OPTION PLANS
- --------------------
The Company has reserved 355,000 of its authorized but unissued Class A Common
Stock for a stock option plan (the "Plan") pursuant to which officers,
directors and employees of the Company are eligible to receive incentive
and/or non-qualified stock options. The Plan, which expires on June 30, 2002,
is administered by a committee designated by the Board of Directors.
Incentive stock options granted under the Plan are exercisable for a period of
up to 10 years from the date of grant and at an exercisable price which is not
less than the fair market value of the Class A Common Stock on the date of
grant, except that the term of an incentive stock option granted under the
Plan to a stockholder owning more than 10% of the outstanding Class A Common
Stock of the Company must not exceed five years and the exercise price of an
incentive stock option granted to such a stockholder must not be less than
110% of the fair market value of the Class A Common Stock on the date of the
grant. The Plan also provides for issuance of stock appreciation rights. At
December 31, 1998 and 1997, the Company has granted options to acquire a total
of 203,500 and 280,500 shares, respectively, of the Company's Class A Common
Stock. These options are exercisable for a period of up to 10 years from the
date of grant and have exercise prices from $2.655 to $33.125 a share, which
represents bid prices of the Company's Common Stock at the date of grant.
Through December 31, 1998, 9,020 of these options have been exercised.
<TABLE>
<CAPTION>
Price
Options Warrants Per Share
-------- -------- --------------
<S> <C> <C> <C>
Outstanding December 31, 1996 168,060 - $9.38 - $33.13
Granted 138,340 25,300 $ 2.66 - $12.2
Canceled (24,880) - $9.40 - $33.15
(1,020) - $ 2.66 - $9.40
Outstanding December 31, 1997 280,500 25,300 $ 2.66 $33.13
Granted 12,000 50,000 $ 3.13 $3.90
Canceled (81,000) - $2.66 - $33.13
Exercised (8,000) - $ 2.66
Outstanding December 31, 1998 203,500 75,300 $ 2.66 $33.13
Weighted average price per share $ 7.61
Weighted average remaining contracutal life (in months) 79
<FN>
</TABLE>
F - 23
<PAGE>
MONACO FINANCE, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 6 - STOCKHOLDERS' EQUITY (CONTINUED)
- ----------------------------------------------
STOCK OPTION PLANS (CONTINUED)
- ---------------------------------
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 option pricing models, the
Black-Scholes model (the Model), for purposes of valuing its stock options
grants. The Model was developed for use in estimating the fair value of traded
options which have no vesting restrictions and are fully transferable. In
addition, it requires the input of highly subjective assumptions including
the expected stock price volatility, expected dividend yields, the risk free
interest rate, and the expected life. Because the Company's stock options have
characteristics significantly different from those of traded options, and
because changes in subjective input assumptions can materially affect the fair
value estimate, in management's opinion, the value determined by the Model is
not necessarily indicative of the ultimate value of the granted options.
Had compensation cost for the Company's stock option plan been determined
based on the fair value at the grant date for awards in 1998 and 1997
consistent with the provisions of FAS 123, the Company's 1998 and 1997 net
loss and loss per common share would have been increased to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
December 31,
--------------
1998 1997
-------------- ------------
<S> <C> <C>
Net (loss) - as reported $ (11,088,560) $(9,355,000)
Net (loss) - pro forma $ (11,088,560) $(9,604,329)
(Loss) per common share - as reported $ (5.04) $ (5.90)
(Loss) per common share - pro forma $ (5.04) $ (6.07)
<FN>
</TABLE>
Of the 12,000 options granted in 1998, 7,000 options were vested as of
December 31, 1998.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1998: dividend yield of 0.0%; expected average
annual volatility of 156.6%; average annual risk-free interest rate of 5.6%;
and expected lives of 10 years.
F - 24
<PAGE>
MONACO FINANCE, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 6 - STOCKHOLDERS' EQUITY (CONTINUED)
- ----------------------------------------------
PREFERRED STOCK
- ----------------
In connection with its portfolio acquisition strategy, the Company entered
into an Amended and Restated Asset Purchase Agreement dated as of January 8,
1998 (the "Asset Purchase Agreement"), with Pacific USA Holdings Corp.
("Pacific USA") and certain of its wholly-owned or partially-owned
subsidiaries - Pacific Southwest Bank ("PSB"), NAFCO Holding Company LLC
("NAFCO"), Advantage Funding Group, Inc. ("Advantage") and PCF Service, LLC -
providing for, among other things, the purchase by the Company of sub-prime
automobile loans from NAFCO and Advantage having an unpaid principal balance
of approximately $81,115,233 for a purchase price of $77,870,623 of which
$73,003,709 was paid in cash. Daiwa Finance Corporation (Note 5) provided
financing. The Company also agreed to issue Daiwa warrants for the purchase of
50,000 shares of Class A Common Stock for which the Company imputed a value of
$84,000. 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 19981 (the "1998-1 Preferred Stock") valued at $2.00
per share. As of December 31, 1998, Pacific USA repurchased loans with an
original purchased principal balance of approximately $2.9 million. In
addition to the repurchase proceeds of $2.6 million from Pacific USA, 85,870
shares of 1998-1 Preferred Stock were surrendered by Pacific USA to the
Company. In consideration for converting approximately $4.5 million of the
Pacific USA Note into 939,632 shares of the Company's Class A Common Stock,
the Company agreed, subject to shareholder approval, to change the conversion
ratio of the 1998-1 Preferred Stock held by Pacific USA. As originally issued,
each share of 1998-1 Preferred Stock was convertible at any time into one-half
share of Class A Common Stock. Since shareholder approval was obtained on
November 12, 1998, each two shares of 1998-1 Preferred Stock is convertible
into four shares of the Company's Class A Common Stock. As a result of the
five for one reverse split of the common shares, the conversion ratio was
amended to be each 2.5 shares of 1998-1 Preferred Stock is convertible into 1
share of the Company's Class A Common Stock, or an aggregate of up to
1,021,824 shares of Class A Common Stock.
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 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.
F - 25
<PAGE>
MONACO FINANCE, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 6 - STOCKHOLDERS' EQUITY (CONTINUED)
- ----------------------------------------------
PREFERRED STOCK (CONTINUED)
- -----------------------------
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. Also, under the terms of the Asset Purchase
Agreement dated January 8, 1998, Pacific USA was issued 162,231 shares of the
Company's Class A Common Stock and under the Conversion Rights Agreement dated
July 1, 1998, Pacific USA was issued 939,632 shares of the Company's Class A
Common Stock. As of the date of this report, 2,554,558 shares of Class A
Common Stock were issued and outstanding and 254,743 shares of Class B Common
Stock were issued and outstanding. The Class A Common Stock has one vote per
share while the Class B Common Stock has three votes per share. The Class A
and Class B Common Stock generally vote together as one class. Accordingly,
Pacific USA may be deemed to be the beneficial owner of approximately 59.0% of
the combined outstanding shares of Class A and Class B Common Stock and
controls approximately 65.3% of the total voting power. Pacific USA has an
option expiring in December 2000 to purchase 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.
At December 31, 1998, dividends on the 1998-1 Preferred Stock are accrued but
not paid.
On November 30, 1998, Pacific USA converted $536,750 of unsecured debt and
$300,000 of secured debt into 418,375 shares of 8% Cumulative Subordinated
Preferred Stock, Series 1999-1 (the "1999-1 Preferred Stock") of the Company
valued at $2.00 per share. The 1999-1 Preferred Stock is subordinate to the
1998-1 Preferred Stock with respect to payment of dividends, redemption and
upon any liquidation of the Company. The 1999-1 Preferred Stock has no voting
rights other than as provided in the articles of incorporation or as required
by law. The Company has the right to redeem the 1999-1 Preferred Stock at any
time and from time to time, in whole or in part, for cash in the amount of
$2.00 per share plus accrued but unpaid dividends. However, the 1999-1
Preferred Stock shall not be redeemed so long as any 1998-1 Preferred Stock is
issued and outstanding. Dividends on the 1999-1 Preferred Stock are at the
annual rate of 8% ($.16 per share) payable quarterly in shares of 1999-1
Preferred Stock. No dividends other than those payable solely in common stock
shall be paid with respect to the common stock unless all accumulated and
unpaid dividends on the 1999-1 Preferred Stock shall have been declared and
paid in full.
F - 26
<PAGE>
MONACO FINANCE, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 6 - STOCKHOLDERS' EQUITY (CONTINUED)
- ----------------------------------------------
OTHER
- -----
On or about December 4, 1997, Consumer Finance Holdings, Inc. ("CFH") and
Morris Ginsburg, the Company's President, Sandler Family Partners, Ltd., and
Irwin L. Sandler, the Company's Executive Vice President, (collectively the
"Shareholders") entered into an Option Agreement effective as of that date.
CFH is a wholly-owned subsidiary of Pacific USA Holdings Corp. ("Pacific
USA"). Pursuant to the Option Agreement, the Shareholders granted a three-year
option to CFH (the "Call Option") to purchase all, but not less than all, of
the 166,000 shares of Class B Common Stock owned by the Shareholders (the
"Option Shares") at a purchase price of $4.00 per share. Concurrently, CFH
granted to each Shareholder a three-year option (the "Put Option") to sell
that portion of the Option Shares held by each Shareholder at a price of $4.00
per share. The Put Option is exercisable with respect to 50% of the Option
Shares during the 30-day period following the second anniversary of the
effective date and 50% during the 30-day period following the third
anniversary of the effective date. The Call Option and Put Option both expire
on the third anniversary date of the effective date, or on December 4, 2000.
In the event that CFH or any of its affiliates exercises the Call Option, and
within 180 days after closing thereof, sells or agrees to sell any portion of
the Option Shares to a person who is not an affiliate of CFH for a price
greater than $4.00 per share, the seller shall be obligated to pay the
Shareholders 50% of such excess. The Shareholders agreed not to pledge, sell
or otherwise transfer the Option Shares at any time during the term of the
Call Option except to the extent of exercise of the Put Option. The obligation
of CFH under the Put Option is secured by funds in a segregated bank account.
Pursuant to the Option Agreement, each Shareholder granted CFH the right to
vote all Option Shares and to direct the exercise of all consensual or other
voting rights with respect to any additional shares of the Company's capital
stock as to which any Shareholder holds a proxy granted by a third party,
subject to any fiduciary duty owed to the grantor of any such proxy. The
Shareholders retain all other incidents of ownership with respect to the
Option Shares, including, but not limited to, the right to receive dividends.
The Option Agreement further provides that CFH shall vote or cause to be voted
shares of the Company's capital stock, including the Option Shares, to
maintain Messrs. Ginsburg and Sandler as directors of the Company. The
Shareholders agree to use their best efforts to provide CFH with the right to
designate four directors to the Company's board or such larger number as shall
then be sufficient to provide CFH with effective control of the board. As of
the date hereof, the board consists of four members.
F - 27
<PAGE>
MONACO FINANCE, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 6 - STOCKHOLDERS' EQUITY (CONTINUED)
- ----------------------------------------------
OTHER (CONTINUED)
- ------------------
Pacific USA is the record owner of 1,401,863 shares of Class A Common Stock.
As a result of the Option Agreement, it was granted the power to vote the
166,000 shares of Class B Common Stock owned by the Shareholders and a limited
power to direct the voting of shares subject to proxies held by the
Shareholders. As of December 31, 1998, 2,554,558 shares of Class A Common
Stock are issued and outstanding and 254,743 shares of Class B Common Stock
are issued and outstanding. The Class A Common Stock has one vote per share
while the Class B Common Stock has three votes per share. The Class A and
Class B Common Stock vote together as one class. Accordingly, Pacific USA may
be deemed to be the beneficial owner of approximately 59.0% of the Class A and
Class B Common Stock and controls approximately 65.3% of the total voting
power. Upon exercise of either the Put Option or the Call Option, the Class B
Common Stock purchased by CFH will automatically convert into Class A Common
Stock thereby reducing the voting power of Pacific USA.
The Company, Sandler Family Partners, and Messrs. Ginsburg and Sandler have
entered into a Buy-Sell Agreement giving the Company the right to buy all
shares of its capital stock owned by Mr. Ginsburg upon his death and all
shares of its capital stock beneficially owned by Mr. Sandler upon his death.
In addition, the Company had a right of first refusal to purchase any such
stock desired to be sold by Mr. Ginsburg or Sandler Family Partners. This
right of first refusal was exercisable by either the Issuer or the non-selling
Shareholder. The parties to the Buy-Sell Agreement have agreed that the
purchase rights and obligations under the Option Agreement shall supersede the
purchase and right of first refusal provisions contained in the Buy-Sell
Agreement during the term of the Option Agreement.
NOTE 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.
F - 28
<PAGE>
MONACO FINANCE, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 7 - INCOME TAXES (CONTINUED)
- --------------------------------------
The provision for income taxes is summarized as follows:
<TABLE>
<CAPTION>
For the Years Ended
December 31,
--------------------
<S> <C> <C>
1998 1997
------------- -----
Current expense (benefit)
Federal $ - $ -
State - -
$ - $ -
Deferred expense (benefit)
Federal $ - $ -
State - -
Change in valuation allowance 1,541,582 -
$ 1,541,582 $ -
<FN>
</TABLE>
The following is a reconciliation of income taxes at the Federal Statutory
rate with income taxes recorded by the Company.
<TABLE>
<CAPTION>
For the Years Ended
December 31,
<S> <C> <C>
1998 1997
------------------
Computed income taxes (benefit)
at statutory rate - 34% (34.0)% (34.0)%
State income taxes (benefit),
net of Federal income tax benefit (3.9) (3.4)
Change in valuation allowance 54.7 37.4
==================
16.8% - %
<FN>
</TABLE>
F - 29
<PAGE>
MONACO FINANCE, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 7 - INCOME TAXES (CONTINUED)
- --------------------------------------
Deferred taxes are recorded based upon differences between the financial
statements and tax basis of assets and liabilities and available tax credit
carryforwards. Temporary differences and carryforwards which give rise to a
significant portion of deferred tax assets and liabilities were as follows:
<TABLE>
<CAPTION>
For the Years Ended
December 31,
---------------------
1998 1997
--------------------- ------------
<S> <C> <C>
Deferred tax assets
Federal and state NOL tax carry-forward $ 16,484,059 $ 8,460,033
Other 151,580 45,931
16,635,639 8,505,964
Valuation allowance (11,009,306) (5,336,154)
Total deferred tax assets 5,626,333 3,169,810
Deferred tax liabilities
Depreciation - (68,057)
Allowances and loan origination fees (5,626,333) (1,521,974)
Total deferred tax liability (5,626,333) (1,590,031)
Net deferred tax asset $ - $ 1,579,779
<FN>
</TABLE>
As of December 31, 1998, the Company had a net operating loss carryforward of
approximately $43.6 million for federal income tax reporting purposes which,
if unused, will expire in 2011 through 2013. 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
outlined above generated a long-term deferred tax asset of approximately
$11,000,000. In 1998, management determined that it was more likely than not
that the Company would not realize its deferred tax asset, therefore they
fully allowed for the entire balance resulting in a charge to current year
income of $1,541,582 (Note 11). Accordingly, there is no net deferred tax
asset reflected in the accompanying consolidated financial statements.
F - 30
<PAGE>
MONACO FINANCE, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 8- DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
- --------------------------------------------------------------------
CASH AND CASH EQUIVALENTS. RESTRICTED CASH AND ACCRUED INTEREST PAYABLE
- ------------------------------------------------------------------------------
The carrying value approximates fair value due to its liquid or short-term
nature.
AUTOMOBILE RECEIVABLES - NET
- -------------------------------
The interest rates and credit ratings of the net Automobile Receivables
outstanding at December 31, 1998 are consistent with the interest rates and
credit ratings on current purchases by the Company of Contracts with the same
maturities and collateral; as such, the carrying value of the net Automobile
Receivables outstanding at December 31, 1998 approximates fair value at that
date.
PROMISSORY NOTE PAYABLE, CONVERTIBLE SUBORDINATED DEBT, SENIOR SUBORDINATED
- ------------------------------------------------------------------------------
DEBT, CONVERTIBLE SENIOR SUBORDINATED DEBT AND AUTOMOBILE RECEIVABLES-BACKED
- ------------------------------------------------------------------------------
NOTES
- -----
THE CARRYING AMOUNTS OF NOTES PAYABLE AND DEBT ISSUED APPROXIMATE FAIR VALUE
- ------------------------------------------------------------------------------
AS OF DECEMBER 31, 1998 BECAUSE INTEREST RATES ON THESE INSTRUMENTS
- -----------------------------------------------------------------------------
APPROXIMATE MARKET INTEREST RATES.
- -------------------------------------
NOTE 9 - RELATED PARTIES
- ----------------------------
Effective November 30, 1998, Pacific USA Holdings Corp. ("Pacific"), the
Company's major shareholder and Senior Lender paid the Company $200,000 in
cash to enter into a Software License and Development Agreement and a Data
Licensing Agreement (the "License Agreements"). 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.
F - 31
<PAGE>
MONACO FINANCE, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 10 - SUBSEQUENT EVENTS
- -------------------------------
Subsequent to December 31, 1998, the Company was advised by Pacific that it
can no longer be relied upon to loan funds on a secured basis to the Company
for working capital needs. Although Pacific has continued to provide secured
loans to the Company, no assurance can be given that such funding will
continue. Also, subsequent to December 31, 1998, the Company received verbal
notification from Daiwa that (i) MFIII and MFIV are in violation of certain
covenants unrelated to performance of the portfolio under the Warehouse Line
of Credit and the Portfolio Purchase Credit Facility (collectively the "Credit
Facilities"); and (ii) that accordingly a servicer event of default has
occurred. In connection with the foregoing, Daiwa requested a transfer of
servicing to a successor servicer to be appointed by Daiwa. As a result, the
Company is not receiving nor can it expect to receive monthly distributions of
excess funds from the Credit Facilities, through dividends from MFIII and
MFIV, unless and until Daiwa is paid in full. At this time the Company is
unable to determine whether or not it will receive any future cash flows or
other residual interests from the loan portfolios collateralizing the Credit
Facilities.
On or about January 16, 1999, in connection with the June 26, 1997 Master
Financing Securitization, the Company's wholly-owned special purpose
corporation, MFII, redeemed the outstanding Class A Certificates for a total
redemption price of approximately $16.7 million. The transaction was financed
through the existing Warehouse Credit Facility with Daiwa Finance Corporation
and MFIII. Following the redemption, the Company, MFII, and MFIII, entered
into an arrangement whereby the assets of MFII, consisting of $18.7 million
of Automobile Backed Consumer Contracts were transferred to MFIII.
In February 1999, the Company failed to make certain payments and as a result
is in default of certain payment covenants pertaining to both the Rothschild
Notes and the 12% Notes (collectively the "Sub Debt"). The Company believes,
the Sub Debt lenders have certain enforcement rights under their respective
Sub Debt agreements. These rights, in the opinion of the Company, are subject
to specific subordination and "stand-still" provisions as long as the Company
has senior debt outstanding. As of April 13, 1999 (unaudited), the Company
has approximately $3,860,000 of senior debt outstanding.
Subsequent to December 31, 1998, the Company was past due on principal
payments to Pacific Southwest Bank under a secured loan agreement. No action
has been taken by PSB to enforce their rights or otherwise force payment of
the debt. No assurance is, nor can be given that PSB will not exercise any or
all of their rights under the secured loan agreement in the future.
NOTE 11 - SIGNIFICANT FOURTH QUARTER ADJUSTMENTS
- ------------------------------------------------------
In December 1998, management determined that due to a lack of profitable
operating history, it was more likely than not that the Company would not
realize its deferred tax asset and therefore fully allowed for the entire
balance resulting in a charge to income of $1,541,582. Additionally, based on
the Company's static pool reserve analysis, an increase of $2,650,000 was
recorded to the allowance for credit losses.
F - 32
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------------------------------------------------------------------------------
FINANCIAL DISCLOSURE.
- ----------------------
NONE
PART III
Part III, including the following items, is incorporated by reference to
the Company's Proxy Statement which will be filed with the Securities and
Exchange on or before April 30, 1999:
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS,
- ------------------------------------------------------------------------------
COMPLIANCE WITH THE SECTION 16(A) OF THE EXCHANGE ACT.
- --------------------------------------------------------------
ITEM 10. EXECUTIVE COMPENSATION.
- -----------------------------------
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
- ------------------------------------------------------------------------------
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- --------------------------------------------------------------
PART IV
ITEM 13.EXHIBITS AND REPORTS ON FORM 8-K
- ----------------------------------------------
(a) The following documents are filed as part of this Report:
1 Financial Statements PAGE OF THIS REPORT
Independent Auditors' Report
Consolidated Balance Sheets December 31, 1998 and 1997
Consolidated Statements of Operations For the Years Ended December 31,
1998 and 1997
Consolidated Statements of Stockholders' Equity For The Years Ended
December 31, 1998 and 1997
Consolidated Statements of Cash Flows For The Years Ended December 31,
1998 and 1997
Notes to Consolidated Financial Statements -
<PAGE>
- ------
2.FINANCIAL STATEMENT SCHEDULES:
- ----------------------------------
All other statements or schedules for which provision is made in the
applicable regulation of the Securities and Exchange Commission have been
omitted because they are not required under related instructions or are
inapplicable, or the information is shown in the financial statements and
related notes.
3.(a) Exhibits
3.1 Articles of Incorporation, dated August 12, 1986, and Articles of
amendment, dated July 2, 1990 and August 31, 1990 (1)
3.2 Bylaws (1)
3.3 Articles of Amendment to the Articles of Incorporation increasing the
number of authorized shares of Class A Common Stock and Preferred
Stock (19)
3.4 Articles of Amendment to the Articles of Incorporation(20)
3.5 Amended and Restated Bylaws(20)
3.6 Articles of Amendment to Articles of Incorporation(21)
4.4 Form of Mergers and Acquisitions Agreement with the Underwriter (1)
4.5 Preferences, Limitations and Relative Rights of 8% Cumulative
Convertible Preferred Stock, Series 1998-1 (19)
4.6 Preferences, Limitations and Relative Rights of 8% Cumulative
Convertible Preferred Stock, Series 1999-1(22)
10.1 Employment Agreement between the Registrant and Morris Ginsburg dated
July 9, 1990 (1)
10.2 Employment Agreement between the Registrant and Irwin L. Sandler
dated July 9,1990 (1)
10.3 Lease with BCE Development Properties, Inc., dated December 23, 1988
(1)
10.4 Key-man Insurance Policies on the lives of Messrs.Ginsburg and
Sandler (1)
10.5 Form of Purchase Agreement (re: Dealers) (1)
10.6 Agreement - Guaranty Bank and Trust Company (1)
10.7 Agreement - Central Bank of Denver (1)
10.8 Agreement - First National Bank of Southeast Denver (1)
10.9 Agreement - Arapahoe Bank and Trust (1)
10.9 (A) First Amendment to Arapahoe Bank/Monaco Finance Agreement
dated February 22, 1991 with Assignment of Savings Account and
Security Agreement (2)
10.10 Agreement - Southwest State Bank (1)
10.11 Agreement - Lakeside National Bank (2)
10.12 Agreement - Western Funding, Inc. (2)
10.13 Form of Agreement - First Eagle (2)
10.14 Form of Financing Agreement (re: Floorplan Financing) (1)
10.15 Stock Option Plan (1)
10.16 Single Interest Blanket Insurance Policy (1)
10.17 Lease with Richard A. Boddicker dated September 4, 1990, as amended,
re: South Havana Lot (1)
10.18 Financing Agreement, Promissory Note and Security Agreement (re:
wholesale floorplan financing) (1)
10.19 Lease re: Colorado Springs Lot (3)
10.21 Lease re: West Colfax Lot (3)
10.22 Financing Agreement with Citicorp Leasing, Inc., including three
Amendments (4)
10.23 7% Subordinated Note Agreement (4)
10.24 Consent of Independent Certified Public Accountants (9)
10.25 Sixth Amendment to Financing Agreement with Citicorp Leasing, Inc.
dated June 1, 1994 (5)
10.26 Lease Agreement between the Registrant and GSC Ltd. Liability
Company, a related party owned company(5)
10.27 Note Purchase Agreement for Senior Subordinated Notes to Rothschild
North America, Inc.(6)
10.28 Seventh Amendment to Financing Agreement with Citicorp Leasing, Inc.
dated July 26, 1994
10.29 Eighth Amendment to Financing Agreement with Citicorp Leasing, Inc.
dated September 7, 1994 (7)
10.30 Ninth Amendment to Financing Agreement with Citicorp Leasing, Inc.
dated November 2, 1994 (7)
10.31 Indenture Agreement related to private placement of $23,861,823 of
7.6% automobile receivables-backed notes (8)
10.32 Form of Term Note issued by MF Receivables Corp. I related to
private placement of $23,861,823 of 7.6% automobile receivables-backed notes
(8)
10.33 Tenth Amendment to Financing Agreement with Citicorp Leasing, Inc.
dated November 16, 1994 (10)
10.34 Amended and restated Lease re: Executive Offices at 370 17th Street,
50th floor, Denver, Colorado 80202 with Brookfield Republic, Inc. (10)
10.35 Amended and Restated Indenture Agreement dated as of May 1, 1995
related to private placement of $40 million aggregate principal amount of
floating rate automobile receivable-backed warehouse notes (11)
10.36 Form of Warehouse Note issued by MF Receivables Corp I related to
private placement of $40 million aggregate principal amount of floating rate
automobile receivable-backed warehouse note (11)
10.37 MBIA Forward Commitment to Issue related to private placement of $40
million aggregate principal amount of floating rate automobile
receivables-backed warehouse notes (11)
10.38 Purchase Agreement dated January 9, 1996 by and among Monaco
Finance, Inc. and Black Diamond Advisors, Inc. and other purchasers relating
to $5,000,000 in 12% Convertible Senior Subordinated Notes due 2001 (12)
3.(a) Exhibits (continued)
10.39 Indenture dated as of January 9, 1996, between Monaco Finance, Inc.
and Norwest Bank of Minnesota, N.A., realting to 12 % Convertable Senior
Subordinated Notes due 2001 (12)
10.40 Loan and Security Agreement dated as of January 16, 1996, between
Registrant and LaSalle National Bank (12)
10.41 Revolving Credit Note in the principal amount of $15 million or so
much thereof as may be advanced, dated January 16, 1996, payable to the order
of LaSalle National Bank by Registrant (12)
10.42 Letter Agreement dated June 28, 1996, by and between the Registrant
and Black Diamond Advisors, Inc. (13)
10.43 Letter Agreement dated July 3, 1996, by and between the Registrant
and David M. Ickovic regarding director compensation (13)
10.44 Securities Purchase Agreement between the Registrant and Pacific USA
Holdings Corp. (14)
10.45 Stock Purchase Warrant in favor of Pacific USA Holdings Corp. (14)
10.46 Shareholder option Agreement among Pacific USA Holdings Corp. and
Morris Ginsburg, Irwin Sandler and Sandler Family Partners, Ltd. (14)
10.47 Executive Employment Agreement between the Registrant and Morris
Ginsburg related to the Securities Purchase Agreement with Pacific USA
Holdings Corp. (14)
10.48 Executive Employment Agreement between the Registrant and Irwin
Sandler related to the Securities Purchase Agreement with Pacific USA
Holdings Corp. (14)
10.49 Loan Agreement between Pacific USA Holdings Corp. and the Registrant
(14)
10.50 Press Release of the Registrant related to the Securities Purchase
Agreement with Pacific USA Holdings Corp.(14)
10.51 Termination Agreement dated as of February 6, 1997, between the
Registrant and Pacific USA Holdings Corp. (15)
10.52 Press Release of the Registrant regarding the termination of the
Securities Purchase Agreement between the Registrant and Pacific USA Holdings
Corp. (15)
10.53 Trust and Security Agreement related to the placement of $42,646,534
and $2,569,068 aggregate principal amount of automobile recievables-backed
Class A Certificates and Class B Certificates, respectively (16)
10.54 Form of Class A Certificate issued by MF Receivables Corp. II
related to the private placement of $42,646,534 of 6.71% automobile
receivables-backed notes (16)
10.55 Form of Class B Certificate issued by MF Receivables Corp. II
related to the placement of $2,569,068 of automobile receivables-backed notes
(16)
10.56 Loan Agreement dated June 26, 1997, between Monaco Funding Corp. and
Heartland Bank relating to the $2,525,000 Promissory Note (16)
10.57 Option Agreement effective as of December 4, 1997, by and between
Consumer Finance Holdings, Inc. and Morris Ginsburg, Sandler Family Partners,
Ltd., and Irwin L. Sandler (17)
10.58 Irrevocable Proxy and Power of Attorney dated December 4, 1997,
granted by Morris Ginsburg (17)
10.59 Irrevocable Proxy and Power of Attorney dated December 4, 1997,
granted by Sandler Family Partners, Ltd. (17)
10.60 Executive Employment Agreement between Registrant and Morris
Ginsburg (17)
10.61 Executive Employment Agreement between Registrant and Irwin L.
Sandler (17)
10.62 First Amendment to Buy-Sell Agreement (17)
10.63 Amended and Restated Asset Purchase Agreement dated January 8, 1998,
by and among the Company, Pacific USA Holdings Corp., and certain of its
wholly-owned or partially-owned subsidiaries (18)
10.64 Loan Purchase Agreement dated January 8, 1998 among Advantage
Funding Group, Inc., a Delaware corporation, the Company, Pacific USA Holdings
Corp., a Texas corporation, and Pacific Southwest Bank, a federal savings bank
(18)
10.65 Loan Loss Reimbursement Agreement dated January 8, 1998. between, on
the one hand, Pacific Southwest Bank, a federally chartered savings bank,
NAFCO Holding Company, LLC, a Delaware limited liability company, and
Advantage Funding Group, Inc., a Delaware corporation, and, on the other hand,
the Company (18)
10.66 Loan Purchase Agreement dated January 8, 1998 among NAFCO Holding
Company, L.L.C., a Delaware limited liability company, the Company, Pacific
USA Holdings Corp., a Texas corporation, and Pacific Southwest Bank, a federal
savings bank (18)
10.67 Interim Servicing Agreement dated as of January 8, 1998, between, on
the one hand, the Company and, on the other hand, Advantage Funding Group,
Inc., a Delaware corporation, Pacific USA Holdings Corp., a Texas corporation,
and Pacific Southwest Bank, a federally chartered savings bank (18)
10.68 Interim Servicing Agreement dated as of January 8, 1998, between, on
the one hand, the Company and, on the other hand, NAFCO Holding Company, LLC,
a Delaware limited liability company, Pacific USA Holdings Corp., a Texas
corporation, and Pacific Southwest Bank, a federally chartered savings bank
(18)
10.69 Conversion and Rights Agreement dated September 1, 1998, by and
between the Company and Pacific USA Holdings
Corp.(20)
10.70 Letter Agreement dated June 25, 1998, by and between the Company and
Rothschild North America, Inc., amending Note Purchase
Agreement(20)
10.71 Consent and Amendment No. 1 to Indenture and Related Documents by
and among the Company, Black Diamond Advisors, Inc., Heller
Financial, Inc.,and others dated September 9, 1998(20)
10.72 Conversion and Rights Agreement(22)
10.73 Software License and Development Agreement(22)
10.74 Data License Agreement(22)
11 Statement Re: Computation of Earnings Per Share - PAGE 59
23 Consent of Independent Certified Accountants - PAGE 60
99 Cautionary Statement Regarding Forward-looking statements- PAGES 61
Footnotes:
(1) Incorporated by reference to the Registrant's Registration Statement on
Form S-1 and all Amendments thereto, as filed with the Securities and Exchange
Commission, Registration No. 33-35843, and which was declared effective on
December 11, 1990.
(2) Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1990.
(3) Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1991.
(4) Incorporated by reference to the Registrant's Annual Report on Form
10-KSB for the year ended December 31, 1992.
(5) Incorporated by reference to the Registrant's Quarterly Report on Form
10-QSB for the quarter ended June 30, 1994.
(6) Incorporated by reference to the Registrant's Form 8-K dated November 3,
1994.
(7) Incorporated by reference to the Registrant's Quarterly Report on Form
10-QSB for the quarter ended September 30, 1994.
(8) Incorporated by reference to the Registrant's Form 8-K dated November 18,
1994.
(9) Incorporated by reference to the Registrant's Annual Report on Form
10-KSB for the year ended December 31, 1993.
(10) Incorporated by reference to the Registrant's Annual Report on Form
10-KSB for the year ended December 31, 1994.
(11) Incorporated by reference to the Registrant's Form 8-K dated May 18,
1995.
(12) Incorporated by reference to the Registrant's Form 8-K dated January 9,
1996.
(13) Incorporated by reference to the Registrant's Form 8-K dated June 28,
1996.
(14) Incorporated by reference to the Registrant's Form 8-K dated October 29,
1996.
(15) Incorporated by reference to the Registrant's Form 8-K dated February 7,
1997.
(16) Incorporated by reference to the Registrant's Form 10-QSB for the quarter
ended June 30, 1997.
(17) Incorporated by reference to the Registrant's Form 8-K dated December 4,
1997.
(18) Incorporated by reference to the Registrant's Form 8-K dated January 8,
1998.
(19) Incorporated by reference to the Registrant's Form 8-K dated March 4,
1998.
(20) Incorporated by reference to the Registrant's Form 8-K dated
September 1, 1998.
(21) Incorporated by reference to the Registrant's Form 8-K dated November
12, 1998.
(22) ncorporated by reference to the Registrant's Form 8-K dated January
16, 1999.
3.(b) Reports on Form 8-K:
A Form 8-K dated October 3, 1997, was filed announcing the execution of
an Asset Purchase Agreement to acquire certain assets from affiliates of
Dallas-based Pacific USA Holdings Corp.
A Form 8-K dated December 4, 1997, was filed announcing a change in
control of the Registrant.
A Form 8-K dated January 8, 1998, was filed announcing that the
Registrant had entered into an Amended and Restated Asset Purchase Agreement
with Pacific USA Holdings Corp., and certain of its wholly-owned and
partially-owned subsidiaries, providing for, among other things, the purchase
by the Registrant of $81.1 million of sub-prime auto loans.
A Form 8-K dated March 4, 1998 was filed announcing the voting results
from the special meeting of shareholders held on March 4, 1998.
<TABLE>
<CAPTION>
EXHIBIT 11
MONACO FINANCE, INC. AND SUBSIDIARIES
-------------------------------------
COMPUTATION OF EARNINGS (LOSS) PER COMMON SHARE
-----------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------
<S> <C> <C>
1998 1997
NET EARNINGS (LOSS)
- --------------------------------------------------------------
Net (loss) -$11,088,560 -$9,355,000
AVERAGE COMMON SHARES OUTSTANDING
- --------------------------------------------------------------
Weighted average common shares outstanding - basic 2,809,301 1,582,546
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 Preferred Stock (a) (b) (b)
Weighted average common shares outstanding - dilutive 2,809,301 1,582,546
(Loss) per common share - basic and dilutive -$3.95 -$5.91
<FN>
Notes:
------
(a) Dilutive potential common shares are calculated using the treasury stock method.
(b) The computation of earnings per common share assuming dilution excludes dilutive
potential common shares that have an anti-dilutive effect on earnings per share.
</TABLE>
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors
Monaco Finance, Inc.
370 17th, Suite 5060
Denver, Colorado 80202
We hereby consent to the incorporation by reference of our reports on Monaco
Finance, Inc. (the "Company") dated March 30, 1998, into the Company's
Registration Statement on Form S-3 (File No. 33-97976) and on Form S-8 (File
NO. 33-68530), and to all references to our firm in such Registration
Statements.
/s/ Ehrhardt Keefe Steiner & Hottman PC
----------------------------------------
Ehrhardt Keefe Steiner & Hottman PC
March 31, 1998
Denver, Colorado
<PAGE>
EXHIBIT 99
CAUTIONARY STATEMENT REGARDING
------------------------------
FORWARD-LOOKING STATEMENTS
--------------------------
The Company wishes to take advantage of the "safe harbor" provisions of
the Private Securities Litigation Reform Act of 1995 and is filing this
cautionary statement in connection with such safe harbor legislation. The
Company's Form 10-KSB, any Form 10-QSB, any Form 8-K, or any other written or
oral statements made by or on behalf of the Company may include
forward-looking statements which reflect the Company's current views with
respect to future events and financial performance. The words "believe,"
"expect," "anticipate," "intends," "forecast," "project," and similar
expressions identify forward-looking statements.
The Company wishes to caution investors that any forward-looking
statements made by or on behalf of the Company are subject to uncertainties
and other factors that could cause actual results to differ materially from
such statements. These uncertainties and other factors include, but are not
limited to, the Risk Factors listed below (many of which have been discussed
in prior SEC filings by the Company). Though the Company has attempted to list
comprehensively these important factors, the Company wishes to caution
investors that other factors may in the future prove to be important in
affecting the Company's results of operations. New factors emerge from time to
time and it is not possible for management to predict all of such factors, nor
can it assess the impact of each such factor on the business or the extent to
which any factor, or combination of factors, may cause actual results to
differ materially from forward-looking statements.
Investors are further cautioned not to place undue reliance on such
forward-looking statements as they speak only of the Company's views as of the
date the statement was made. The Company undertakes no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events, or otherwise.
RISK FACTORS
------------
ADVERSE FINANCIAL CONDITION. The Company's cash flow from operations is
not sufficient to cover its overhead and other operating expenses.
Historically, the Company's cash needs have been funded through a combination
of cash flow from operations, credit lines, securitizations and capital and
secured loans provided by various persons including the Company's major
shareholder and senior lender, Pacific USA Holdings Corp. The Company has been
advised by Pacific that it can no longer be relied upon to provide capital or
loans to fund the Company's working capital requirements. Although Pacific has
continued to provide certain additional secured loans to the Company, no
assurance can be given that such funding will continue. In addition, the
Company has been verbally notified by its principal lenders that certain loan
and/or payment covenants have been violated by the Company or by certain of
its special purpose subsidiaries. As a result, further advances under the
warehouse line of credit are unavailable, loan servicing for a substantial
portion of the Contracts has been or will be transferred from the Company to
third parties and excess funds in the special purpose subsidiaries are being
applied against the indebtedness of those subsidiaries rather than being
remitted to the Company. Thus, substantial sources of revenue are no longer
available to the Company. In addition, the Company's independent auditors have
expressed substantial doubt about the Company's ability to continue as a going
concern. Given these recent events, the Company is actively seeking to obtain
new financing sources. Also, it is attempting to implement a business strategy
based upon joint ventures with third parties. No assurance can be or is given
that new and adequate sources of financing will be obtained. In addition, no
assurance can be or is given that the business strategy will be implemented
or, if implemented, will be successful. Failure to meet loan covenant
requirements will have a material adverse effect on the ability of the Company
to obtain new sources of financing.
DEPENDANCE UPON ADDITIONAL CAPITAL TO MAINTAIN OPERATIONS. The Company's
business has been and will continue to be cash intensive. Capital is required
primarily to purchase Contracts from the Dealer Network and to fund the
Company's negative cash flow from operations. The ability of the Company to
continue operations will require additional debt or equity financing. There
can be no assurance that such additional financing will be available to the
Company, or if available, on terms satisfactory to the Company.
SUBSTANTIAL LOSSES. During the fiscal years ended December 31, 1997 and
1998 the Company sustained losses of $9,355,000 and $11,088,560, respectively.
In 1997 and 1998 the Company's policy of acquiring loans through its Dealer
Network, which meet its credit criteria and provide acceptable risk adjusted
yields based upon the Company's scoring and risk models, reduced substantially
the number and amount of new loans purchased by the Company during these
periods. The difficulty in acquiring loans was further exacerbated by intense
competition in the industry that drove down yields for higher-quality
Contracts to levels that were unacceptable to the Company. At the same time
the Company was developing the infrastructure and platform to underwrite,
service, and collect a substantially greater portfolio of contracts. The
interest spread from the Company's approximately $108 million loan balance at
December 31, 1998, was not sufficient to cover costs of doing business. As a
result of portfolio purchases in late 1997 and 1998 totaling approximately
$100 million, the Company increased its loan portfolio significantly. These
portfolio purchases, together with the Company's ongoing auto loan purchases,
did result in a significant increase in interest income, however expenses
continued to rise.
COST OF CAPITAL AND INTEREST RATE RISKS. A substantial part of the
Company's operating revenues are derived from the spread between the interest
income it collects on its contracts and the interest expense it pays on
borrowings incurred to purchase and retain such contracts. As of December 31,
1997 and 1998, the Company's interest expense as a percentage of revenues was
44.9% and 53.9%, respectively. Net interest margin percentage, representing
the difference between interest income and interest expense divided by average
finance receivables, decreased from 9.1% in 1997 to 7.2% in 1998. The
Company's capacity to generate earnings on its portfolio of contracts is
dependent upon its ability to maintain a sufficient margin between its fixed
portfolio yield and its floating or fixed cost of funds. In addition, losses
from Contract defaults reduce the Company's margins and profits. In the event
interest rates increase due to economic conditions or other reasons, resulting
in an increase in the cost of borrowed capital, it is likely that the
Company's spread will be reduced since the rates charged on the majority of
its Contracts are already at the legal limits. If defaults on outstanding
Contracts increase resulting in larger credit losses, the availability of
outside financing (i) may diminish and (ii) may become more costly due to
higher interest rates or fees. Either of these events could have an adverse
effect on the Company.
RELIANCE ON SECURITIZATIONS. The Company relies significantly on
periodically financing Contracts through asset-backed securitizations.
Proceeds from securitizations are used to repay warehouse borrowings, thereby
making such facilities available for additional warehouse financing.
The Company's ability to access such securitizations depends upon many
factors, certain of which are beyond the Company's control. These factors
among other things include delays in completing transactions, willingness of
investors to buy automobile-backed paper, rating agencies providing investment
grade ratings and the ability to obtain credit enhancement provide by monoline
assurance companies. In any event, violation by the Company of certain loan
covenants will make it difficult, if not impossible, for the Company to
securitize any finance contracts it may acquire in the future.
RISK OF LENDING TO HIGHER-RISK BORROWERS. The market targeted by the
Company for financing of the purchase of vehicles consists of individuals with
low income levels and/or adverse credit histories but who fit within the
underwriting parameters established by the Company indicating a probability
that the borrower is a reasonable credit risk. The benefit to the Company is
that higher-risk borrowers are not able to obtain credit from traditional
financing sources and hence are willing to pay a relatively high annual
percentage rate of interest. The risk to the Company is that the default rate
for such borrowers is relatively high. Contracts which, according to the
Company's model pose a higher risk of default, will be acquired only if they
have a relatively high contract rate of interest and/or are purchased at a
relatively high discount from face value in order to compensate for the
increased risk.
ADVERSE ECONOMIC CHANGES MAY INCREASE DELINQUENCIES. The majority of the
individuals who purchase automobiles financed by the Company and other
sub-prime finance companies are hourly wage earners with little or no cash
reserves. In most cases, the ability of such individuals to meet their
required semi-weekly or monthly payment on their installment contract is
completely dependent upon continued employment. Job losses generally will
result in defaults on their consumer debt, including their contracts with the
Company. An economic downturn or prolonged economic recession resulting in
local, regional or national unemployment could cause a large increase in
delinquencies, defaults and charge-offs. If this would occur, the Company's
cash reserves and allowance for losses may not be sufficient to support
current levels of operations if the downturn or recession were for a sustained
period of time. Decreases in sales of vehicles as a result of a weakness in
the economy or for other reasons may have an adverse affect on the Company's
business and that of the Dealers from which it purchases Contracts.
RISK OF DELAYED REPOSSESSIONS. The relatively high default rate on
Contracts requires that the Company repossesses and resells a substantial
number of vehicles. After a default occurs, the condition of the vehicle
securing the Contract in default generally deteriorates due to lack of
maintenance or otherwise. The Company carefully monitors delinquencies and
moves quickly to repossess, recondition and resell vehicles secured by
Contracts in default so as to minimize its losses. Any delays in repossessions
could decrease loan loss recoveries.
POTENTIAL INADEQUACY OF LOAN LOSS RESERVES. The Company maintains an
allowance for credit losses to absorb anticipated losses from Contract
defaults net of repossession recoveries. The allowance for credit losses has
been established utilizing data obtained from the Company's risk models and is
continually reviewed and adjusted in order to maintain the allowance at a
level which, in the opinion of management and the Board of Directors, provides
adequately for current and future losses that may develop in the present
portfolio. However, since the risk model uses past history to predict the
future, changes in national and regional economic conditions, borrower mix,
competition for higher quality Contracts and other factors could result in
actual losses differing from predicted losses.
CHANGE IN ACCOUNTING PRINCIPLE. Effective October 1, 1996, the Company
adopted a new methodology for reserving for and analyzing its loan losses.
This accounting method is commonly referred to as static pooling. The static
pooling reserve methodology allows the Company to stratify its Automobile
Receivables portfolio, and the related components of its Allowance for Credit
Losses (i.e. discounts, excess interest, charge offs and recoveries) into
separate and identifiable quarterly pools. These quarterly pools, along with
the Company's estimate of future principle losses and recoveries, are analyzed
quarterly to determine the adequacy of the Allowance for Credit Losses. The
method previously used by the Company to analyze the Allowance for Credit
Losses was based on the total Automobile Receivables portfolio. In
management's opinion, the static pool reserve method provides a more
sophisticated and comprehensive analysis of the adequacy of the Allowance for
Credit Losses and is preferable to the method previously used. With the
adoption of the static pooling reserve method, the Company increased its
Allowance for Credit Losses by $3.6 million in the fourth quarter of 1997 and
$2.2 million in the fourth quarter of 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.
EFFECT OF SUPERVISION AND REGULATION UPON COMPANY OPERATIONS. The
Company's present and proposed operations are subject to extensive regulation,
supervision and licensing under various federal, state and local statutes,
ordinances and regulations and, in most of the states in which the Company
conducts business, limit the interest rates the Company is allowed to charge.
While management believes that it maintains all requisite licenses and permits
and is in substantial compliance with all applicable federal, state and local
regulations, there can be no assurance that the Company will be able to
maintain all requisite licenses and permits, and the failure to satisfy those
and other regulatory requirements could have a material adverse effect on the
operations of the Company, including severe monetary and other penalties.
Further, the adoption of additional laws, rules and regulations could have a
material adverse effect on the Company's business.
POSSIBILITY OF UNINSURED LOSSES. The Company requires that all vehicles
financed by it be covered by collision insurance. To reduce the risk that such
collision insurance will lapse because of nonpayment of premiums, the Company
monitors premium payments. When notification is received that a policy has
lapsed, the Company immediately contacts the borrower by telephone and sends a
letter indicating that failure to maintain insurance constitutes default under
the borrower's Contract. If the borrower fails to secure insurance, the
Company may repossess the vehicle. In addition, the Company has the ability to
force place collision insurance should the debtor fail to pay insurance
premiums resulting in cancellation of the debtor's insurance coverage.
Collision insurance, in the event of a total vehicle loss, generally will
cover only for the fair value of the vehicle which often can be substantially
less than the outstanding contract receivable. In addition, the Company may
incur losses in situations where the borrower fails to make payments and the
Company is unable to locate the car for repossession. Although the Company's
losses to date in such cases have been minimal, there can be no assurance that
this will continue to be the case.
SUBSTANTIAL COMPETITION. In connection with its business of financing
vehicle purchases, the Company competes with many well-established financial
institutions, including banks, thrifts, independent finance companies, credit
unions, captive finance companies owned by automobile manufacturers and others
who finance used vehicle purchases (some of which are larger, have
significantly greater financial resources and have relationships with
established captive dealer networks). Any increased competition could have a
material adverse effect on the Company, including its ability to acquire loans
meeting its underwriting requirements.
DEPENDENCE ON KEY PERSONNEL. The Company's success depends largely on the
efforts and abilities of senior management. The loss of the services of any of
these individuals could have a material adverse effect on the Company's
business. The Company maintains insurance policies in the amount of $2,000,000
each on the lives of Messrs. Ginsburg and Sandler for the purpose of funding
the Company's obligation to purchase shares of its common stock beneficially
owned by either of them upon death (the "Buy-Sell Agreement"). The purchase
obligation is limited to the insurance proceeds. The purchase price is the
greater of book value or 80% of the average closing price of the Class A
Common Stock for the 30 consecutive trading days commencing 45 trading days
before the death of the insured. At December 31, 1998 the Company's purchase
obligation would have been less than $2,000,000 with respect to each of
Messrs. Ginsburg and Sandler. Any excess insurance proceeds will be used for
general corporate purposes, including replacement of the decedent. During the
term of the Option Agreement noted in "Voting Power of Class A and Class B
Common Stock" below, the parties to the Buy-Sell Agreement have agreed that
the purchase rights and obligations under the Option Agreement, also noted
below, shall supersede the purchase and right of first refusal provisions
contained in the Buy-Sell Agreement during the terms of the Option Agreement.
The Company also maintains a traveler's accidental death policy on the
lives of Messrs. Ginsburg and Sandler in the amount of $1,000,000 each. The
Company otherwise does not maintain key-man insurance upon the lives of its
executive officers.
INSURANCE RISKS. The Company maintains comprehensive insurance of the
type and in the amounts management believes are customarily obtained for
businesses similarly situated, including liability insurance for used
vehicles, sold, repaired or maintained by the Company. However, certain types
of losses generally of a catastrophic nature are either uninsurable or not
economically insurable. Any uninsured or partially insured loss could have an
adverse economic effect upon the Company.
EFFECT OF OUTSTANDING OPTIONS AND WARRANTS. For the respective terms of
the warrants and the options granted by the Company pursuant to the Company's
stock option plans, the holders thereof are given an opportunity to profit
from a rise in the market price of the Company's Class A Common Stock, with a
resulting dilution in the interests of the other shareholders. Further, the
terms on which the Company may obtain additional financing during those
periods may be adversely affected by the existence of such securities. The
holders of such securities may be expected to exercise them at a time when the
Company might be able to obtain additional capital through a new offering of
securities on more favorable terms. However, the exercise prices of all
outstanding options and warrants are substantially above the market price for
the Company's Class A Common Stock.
NO CASH DIVIDENDS. The holders of Class A and Class B Common Stock are
entitled to receive dividends when, as and if declared by the Board of
Directors of the Company out of funds legally available therefor. To date, the
Company has not paid any cash dividends. The Board of Directors of the Company
does not intend to declare any cash dividends in the foreseeable future, but
instead intends to retain all earnings, if any, for use in the Company's
business operations. The Company's credit facilities and preferences
applicable to its preferred stock restrict or prohibit the Company from paying
dividends. Accordingly, it is unlikely any dividend will be paid on the Class
A Common Stock in the foreseeable future.
MARKET FOR CLASS A COMMON STOCK. The Company's Class A Common Stock
trades on the OTC Bulletin Board under the symbol "MONFA".
VOTING POWER OF CLASS A AND CLASS B COMMON STOCK. As of December 31,
1998, 254,743 shares of Class B Common Stock were issued and outstanding.
These shares are held by Messrs. Ginsburg and Sandler and by another
individual. They are identical in all respects to the Class A Common Stock
except that the Class B Common Stock has three votes per share while the Class
A Common Stock has one vote per share. The Class B Common Stock automatically
converts into Class A Common Stock on a share-for-share basis upon transfer
(excluding certain transfers for estate planning purposes) or upon death of
the holder. As of December 31, 1998, holders of the Class A Common Stock owned
approximately 90.9% of the aggregate issued and outstanding shares of Class A
and Class B Common Stock, but had the power to cast approximately 70% of the
combined votes of both classes.
On or about December 4, 1997, Consumer Finance Holdings, Inc. ("CFH") and
Morris Ginsburg, the Company's President, Sandler Family Partners, Ltd., and
Irwin L. Sandler, the Company's Executive Vice President, (collectively the
"Shareholders") entered into an Option Agreement effective as of that date.
CFH is a wholly owned subsidiary of Pacific USA Holdings Corp. ("Pacific
USA"). Pursuant to the Option Agreement, the Shareholders granted a three-year
option to CFH (the "Call Option") to purchase all, but not less than all, of
the 166,000 shares of Class B Common Stock owned by the Shareholders (the
"Option Shares") at a purchase price of $4.00 per share. Concurrently, CFH
granted to each Shareholder a three-year option (the "Put Option") to sell
that portion of the Option Shares held by each Shareholder at a price of $4.00
per share. The Put Option is exercisable with respect to 50% of the Option
Shares during the 30-day period following the second anniversary of the
effective date and 50% during the 30-day period following the third
anniversary of the effective date. The Call Option and Put Option both expire
on the third anniversary date of the effective date, or on December 4, 2000.
In the event that CFH or any of its affiliates exercises the Call Option, and
within 180 days after closing thereof, sells or agrees to sell any portion of
the Option Shares to a person who is not an affiliate of CFH for a price
greater than $4.00 per share, the seller shall be obligated to pay the
Shareholders 50% of such excess. The Shareholders agreed not to pledge, sell
or otherwise transfer the Option Shares at any time during the term of the
Call Option except to the extent of exercise of the Put Option. The obligation
of CFH under the Put Option is secured by funds in a segregated bank account.
Pursuant to the Option Agreement, each Shareholder granted CFH the right
to vote all Option Shares and to direct the exercise of all consensual or
other voting rights with respect to any additional shares of the Company's
capital stock as to which any Shareholder holds a proxy granted by a third
party, subject to any fiduciary duty owed to the grantor of any such proxy.
The Shareholders retain all other incidents of ownership with respect to the
Option Shares, including, but not limited to, the right to receive dividends.
The Option Agreement further provides that CFH shall vote or cause to be
voted shares of the Company's capital stock, including the Option Shares, to
maintain Messrs. Ginsburg and Sandler as directors of the Company. The
Shareholders agree to use their best efforts to provide CFH with the right to
designate four directors to the Company's board or such larger number as shall
then be sufficient to provide CFH with effective control of the board. As of
the date hereof, the board consists of four members.
CONTROL BY PACIFIC USA. On November 12, 1998, the shareholders of the
Company approved a proposal to amend the Company's Articles of Incorporation
with respect to its 8% Cumulative Convertible Preferred Stock- Series 1998-1
(the "Preferred Stock"), all of which is held by Pacific USA or its
affiliates, to, among other things, change the Conversion Ratio of the
Preferred Stock from one share of Class A Common Stock for each two shares of
Preferred Stock that are converted to four shares of Class A Common Stock for
each two shares of Preferred Stock that are converted. As a result, the
conversion price of the Preferred Stock into Class A Common Stock was reduced
by a factor of four. At the date of the special meeting, Pacific USA
controlled a majority of the voting power of all classes of the Company's
capital stock and, accordingly, was able to unilaterally effect the amendment
to the Articles.
Pacific USA was the record owner of 1,401,863 shares of Class A Common
Stock as of December 31, 1998. As a result of the Option Agreement, it was
granted the power to vote the 166,000 shares of Class B Common Stock owned by
the Shareholders and a limited power to direct the voting of shares subject to
proxies held by the Shareholders. Also, as a result of the Asset Purchase
Agreement dated January 8, 1998, Pacific USA was issued 162,231 shares of the
Company's Class A Common Stock. As of December 31, 1998, 2,554,558 shares of
Class A Common Stock were issued and outstanding and 254,743 shares of Class B
Common Stock were issued and outstanding. The Class A Common Stock has one
vote per share while the Class B Common Stock has three votes per share. The
Class A and Class B Common Stock vote together as one class on most matters.
Accordingly, Pacific USA may be deemed to be the beneficial owner of
approximately 59.0% of the Company's outstanding voting stock. Upon exercise
of either the put option or the call option, the Class B Common Stock
purchased by CFH will automatically convert into Class A Common Stock thereby
reducing the voting power of Pacific USA. Currently, Pacific USA has control
of 65.3% of the voting power.
EFFECT OF ISSUANCE OF PREFERRED STOCK. As of December 31, 1998,
affiliates of Pacific USA are the record owners of 2,347,587 shares of
Cumulative Convertible Preferred Stock, Series 1998-1(the "1998-1 Preferred
Stock"). So long as not less than 300,000 shares of 1998-1 Preferred Stock are
issued and outstanding, the holders of the 1998-1 Preferred Stock, voting
separately as a class, are entitled to elect one member of the Company's board
of directors. Holders of the 1998-1 Preferred Stock otherwise have no voting
rights except as may be required by the laws of the State of Colorado and
except with respect to any amendment to the Company's Articles of
Incorporation which would change any of the rights or preferences enjoyed by
such stock. Any corporate action that requires a vote of the holders of the
1998-1 Preferred Stock of the class shall be deemed to have been approved upon
the affirmative vote by the holders of a majority of the issued and
outstanding 1998-1 Preferred Stock unless a higher voting requirement is
imposed by Colorado law.
The holders of the 1998-1 Preferred Stock are entitled to receive when,
as and if declared by the board of directors, out of any funds of the Company
legally available for that purpose, cumulative dividends from the date of
issuance at the rate of 8% ($.16) per share of 1998-1 Preferred Stock per
year, payable quarterly in shares of the Company's 1998-1 Preferred Stock
valued at $2.00 per share (or in cash if no preferred shares are available for
that purpose). Dividends on the 1998-1 Preferred Stock are cumulative whether
or not the Company is legally able to pay such dividends in whole or in part.
No dividends (other than those payable solely in common stock) may be paid
with respect to the common stock of the Company unless all accumulated and
unpaid dividends on the 1998-1 Preferred Stock shall have been declared and
paid.
The 1998-1 Preferred Stock may be converted in whole or in part at any
time and from time to time into shares of Class A Common Stock at the rate of
one share of Class A Common Stock for each 2.5 shares of 1998-1 Preferred
Stock so converted (the "Conversion Ratio"). In the event the closing price
of the Class A Common Stock on the NASDAQ Stock Market shall equal or exceed
$6.00 per share on each trading day during any period of 60 consecutive
calendar days, all of the 1998-1 Preferred Stock shall be automatically
converted into shares of Class A Common Stock at the Conversion Ratio. The
Conversion Ratio shall be proportionately adjusted as appropriate to reflect
the effect of stock splits or combinations.
Upon liquidation, dissolution or winding up of the Company, the holders
of the 1998-1 Preferred Stock then issued and outstanding shall be entitled to
receive an amount equal to $2.00 per share of 1998-1 Preferred Stock plus any
accumulated but unpaid dividends before any payment or distribution of the
assets of the Company is made to or set apart for the holders of Common Stock.
Effective as of November 30, 1998, Pacific USA converted $536,750 of
unsecured debt and $300,000 of secured debt into 418,375 shares of the
Company's 8% Cumulative Subordinated Preferred Stock, Series 1999-1 (the
"1999-1 Preferred Stock") valued at $2.00 per share. The 1999-1 Preferred
Stock is subordinate to the 1998-1 Preferred Stock with respect to payment of
dividends, redemption and upon any liquidation of the Company. The 1999-1
Preferred Stock has no voting rights other than as provided in the articles of
incorporation or as required by law. The Company has the right to redeem the
1999-1 Preferred Stock at any time and from time to time, in whole or in part,
for cash in the amount of $2.00 per share plus accrued but unpaid dividends.
However, the 1999-1 Preferred Stock shall not be redeemed so long as any
1998-1 Preferred Stock is issued and outstanding. Dividends on the 1999-1
Preferred Stock are at the annual rate of 8% ($.16 per share) payable
quarterly in shares of 1999-1 Preferred Stock. No dividends other than those
payable solely in common stock shall be paid with respect to the common stock
unless all accumulated and unpaid dividends on the 1999-1 Preferred Stock
shall have been declared and paid in full.
Any additional issuance's of preferred stock could affect the rights of
the holders of Class A Common Stock and therefore reduce its value. The
preferred stock may be issued in one or more series, the terms of which will
be determined at the time of issuance by the Board of Directors without any
requirement for shareholder approval. Such rights may include voting rights,
preferences as to dividends and upon liquidation, conversion and redemption
rights and mandatory redemption provisions pursuant to sinking funds or
otherwise. Rights could be granted to holders of preferred stock hereafter
issued which could reduce the attractiveness of the Company as a potential
takeover target or make the removal of management of the Company more
difficult or adversely impact the rights of holders of Class A Common Stock.
The Company has no plans for the issuance of any additional preferred stock.
EFFECT OF CONVERTIBLE SECURITIES, OPTIONS, WARRANTS AND OTHER RIGHTS TO
PURCHASE. As of December 31, 1998, the Company had issued, or had agreed to
issue, options, warrants and other rights for the purchase of up to 278,800
shares of Class A Common Stock at exercise prices ranging from $0.53 to $6.63
per share. In addition, the Company has issued convertible securities and
options to purchase convertible securities for 4,695,174 shares of Class A
Common Stock at conversion prices ranging from $3.00 to $4.00 per share. The
shares of Class A Common Stock underlying these securities (the "Underlying
Shares") will be, when issued, "restricted securities" as that term is defined
in Rule 144 under the Securities Act of 1933, and, unless registered for
public sale, subject to a one-year holding period. However, in many cases, the
Company has either registered the Underlying Shares, as with employee stock
options, or has agreed to register the Underlying Shares upon the demand of
the holder. Additionally, the Company has agreed to give the holders "piggy
back" registration rights with respect to their Underlying Shares which, if
available, would allow registration of the Underlying Shares for public sale.
Upon effectiveness of a registration statement, the shares of stock covered
thereby can be sold immediately.
As of December 31, 1998, 2,554,558 shares of Class A common Stock and
254,743 shares of Class B Common Stock (convertible on a one-for-one basis
into shares of Class A Common Stock) were issued and outstanding. The options,
warrants, other rights and convertible securities described above cover an
aggregate of approximately 4,973,974 shares of Class A Common Stock. Any
significant exercise or conversion of these securities could substantially
dilute the voting power of the then outstanding Class A Common Stock, and
could result in dilution to earnings and book value per share.
In addition, the trading market for Class A Common Stock is very thin.
Thus, any significant sales of the Underlying Shares could adversely affect
the market price of the Class A Common Stock.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
MONACO FINANCE, INC.
(Registrant)
April 15, 1999 By /s/ Morris Ginsburg
---------------------
Morris Ginsburg, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
April 15, 1999 /s/ Morris Ginsburg
---------------------
Morris Ginsburg, President,
Chairman of the Board and
Director
April 15, 1999 /s/ Irwin L. Sandler
-----------------------
Irwin L. Sandler
Executive Vice President,
Secretary/Treasurer and
Director
April 15, 1999 /s/ Bill Bradley
------------------
Bill Bradley
Director
April 15, 1999 /s/ Bill Clark
----------------
Bill Clark
Director
April 15, 1999 /s/ Bobby Hashaway
--------------------
Bobby Hashaway
Director
April 15, 1999 /s/ Leonard M. Snyder
------------------------
Leonard M. Snyder
Director
April 15, 1999 /s/ Joe Cutrona
-----------------
Joe Cutrona
Director
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0
5,531,924
<COMMON> 140,465
<OTHER-SE> 3,493,201
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<SALES> 0
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<CGS> 0
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<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,682,122
<INTEREST-EXPENSE> 11,224,798
<INCOME-PRETAX> (9,172,851)
<INCOME-TAX> 1,541,582
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,088,560)
<EPS-PRIMARY> (5.04)
<EPS-DILUTED> (5.04)
</TABLE>
