UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
-------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
-------------------------- --------
Commission file number 0-18819
MONACO FINANCE, INC.
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(Exact name of small business issuer as specified in its charter)
COLORADO 84-1088131
- ---------------------------- -------------------------------
(State or other (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization)
370 SEVENTEENTH STREET, SUITE 5060
DENVER, COLORADO 80202
- ---------------------------------------------------------------------
(Address of principal executive (Zip Code)
offices)
(303) 592-9411
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(Issuer's telephone number, including area code)
Not applicable
- ---------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report)
Check whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act during
the past 12 months (or for such shorter period that the registrant
was required to file such reports, and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
Class Shares Outstanding as of August
9, 1999
- ---------------------------------------------------------------------
Class A Common Stock, $0.01 par value 2,554,558
Class B Common Stock, $0.01 par value 254,743
1
<PAGE>
CAUTIONARY NOTE ABOUT FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-QSB and the information incorporated by
reference may include "forward-looking statements" within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. In particular, your attention is directed to Part I, Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operation. We intend the disclosure in this section and throughout the Quarterly
Report on Form 10-QSB to be covered by the safe harbor provisions for
forward-looking statements. All statements regarding our expected financial
position and operating results, our business strategy, our financing plans and
the outcome of any contingencies are forward-looking statements. These
statements can sometimes be identified by our use of forward-looking words such
as "may," "believe," "plan," "will," "anticipate," "estimate," "expect,"
"intend" and other phrases of similar meaning. Known and unknown risks,
uncertainties and other factors could cause the actual results to differ
materially from those contemplated by the statements. The forward-looking
information is based on various factors and was derived using numerous
assumptions. Although we believe that the expectations expressed in these
forward-looking statements are reasonable, our expectations may not turn out to
be correct. Actual results could be materially different from our expectations
as a result of the following risks:
o We may not be able to generate or obtain sufficient capital to maintain
operations;
o We are heavily dependent upon debt financing, and interests rates and the
costs of capital are beyond our control;
o We lend to high-risk borrowers and may incur delays in repossessing
collateral;
o We may fail to compete with existing and new competitors;
o If outstanding options and warrants are exercised, you may experience
substantial dilution in the value of your stock;
o Because one stockholder owns a controlling interest, you may not realize a
premium associated with corporate control;
o Our common stock is no longer listed on NASDAQ and thus, you may experience
delays and other problems in attempting to sell your common stock;
o We may fail to identify and correct a significant year 2000 compliance
problem and experience a major system failure.
This list is intended to identify some of the principal factors that could
cause actual results to differ materially from those described in the
forward-looking statements included elsewhere in this report. These factors are
not intended to represent a complete list of all risks and uncertainties
inherent in our business that have been set forth previously in Exhibit 99 to
our Annual Report on Form 10-KSB for the year ended December 31, 1998 and that
will be provided and in future SEC filings and our press releases.
2
<PAGE>
Part 1 - Financial Information
Item 1. FINANCIAL STATEMENTS
MONACO FINANCE, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Description Page No.
Consolidated Statements of Operations for 4
the three and six month periods ended
June 30, 1999 and 1998 (unaudited)
- -------------------------------------------
Consolidated Balance Sheets as of 5
June 30, 1999 (unaudited) and
December 31, 1998
- -------------------------------------------
Consolidated Statement of Stockholders' 6
Equity for the six months ended June
30, 1999 (unaudited)
- -------------------------------------------
Consolidated Statement of Cash Flows for 7
the three and six month periods ended
June 30, 1999 and 1998 (unaudited)
- -------------------------------------------
Notes to Consolidated Financial 8
Statements (unaudited)
3
<PAGE>
MONACO FINANCE, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Three and Six Month Periods Ended June 30, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
Periods Ended June 30
--------------------------------------------------------------
Three Months Six Months
---------------------------- ----------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
(amounts in 000s except share information)
<S> <C> <C> <C> <C>
Revenues
Interest ................... $ 3,327 $ 5,178 $ 7,069 $ 11,727
Other ...................... 149 9 159 9
----------- ----------- ----------- -----------
Total Revenue ............. 3,476 5,187 7,228 11,736
----------- ----------- ----------- -----------
Costs and Expenses
Interest ................... 1,953 2,694 4,211 5,748
Operations ................. 3,342 3,780 7,308 7,296
Provision for credit losses 1,250 9 2,000 26
----------- ----------- ----------- -----------
Total Costs and Expenses .. 6,545 6,483 13,519 13,070
----------- ----------- ----------- -----------
Loss Before Income Tax Benefit (3,069) (1,296) (6,291) (1,334)
Income tax benefit ( Note 7) . -- -- -- --
----------- ----------- ----------- -----------
Net Loss ..................... (3,069) (1,296) (6,291) (1,334)
Earnings Applicable to
Preferred Shareholders....... 109 -- 221 --
----------- ----------- ----------- -----------
Net Loss Applicable to Common
Shareholders ................ $ (3,178) $ (1,296) $ (6,512) $ (1,334)
=========== =========== =========== ===========
Loss per Common Share - Basic
and Dilutive ................ $ (1.13) $ (.70) $ (2.32) $ (.73)
=========== =========== =========== ===========
Weighted Average Number of
Common Shares Outstanding ... 2,809,301 1,861,669 2,809,301 1,819,112
=========== =========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE>
Monaco Finance, Inc. and Subsidiaries
Consolidated Balance Sheets
June 30, 1999 And December 31, 1998
June 30, December 31,
1999 1998
--------- ---------
(Unaudited)
(amounts in 000s)
ASSETS
Cash and cash equivalents ....................... $ 104 $ 516
Restricted cash ................................. 5,118 5,502
Automobile receivables, net (Notes 3 and 8) ..... 78,889 107,201
Other receivables ............................... 28 67
Repossessed vehicles held for sale (Note 8) ..... 2,499 3,048
Furniture and equipment, net .................... 1,267 2,173
Other assets .................................... 852 1,372
--------- ---------
Total Assets ................................ $ 88,757 $ 119,879
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Accounts payable ................................ $ 886 $ 1,234
Accrued expenses and other liabilities .......... 1,980 1,431
Automobile receivables related debt
(Notes 5 and 8) ................................ 74,479 100,093
Other debt (Notes 5 and 8) ...................... 8,745 7,955
--------- ---------
Total Liabilities ........................... 86,090 110,713
--------- ---------
Commitments and Contingencies (Note 4)
Stockholders' Equity (Note 6)
Series 1998-1 preferred stock, liquidation
preference ..................................... 4,695 4,695
Series 1999-1 preferred stock, liquidation
preference ..................................... 837 837
Class A common stock, $.01 par value ............ 25 25
Class B common stock, $.01 par value ............ 3 3
Additional paid-in capital ...................... 31,196 31,183
Accumulated deficit ............................. (34,089) (27,577)
--------- ---------
Total Stockholders' Equity .................. 2,667 9,166
--------- ---------
Total Liabilities and Stockholders'
Equity ..................................... $ 88,757 $ 119,879
========= =========
See Notes to Consolidated Financial Statements.
5
<PAGE>
MONACO FINANCE, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
For the Six Months Ended June 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
Preferred Stock Common Stock
--------------------------------------------------- -----------------------
Series 1998-1 Series 1999-1 Class A
----------------------- ----------------------- -----------------------
Shares Amount Shares Amount Shares Amount
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998 2,347,587 $ 4,695 418,375 $ 837 2,554,558 $ 25
Imputed value on issuance
of warrants ............. 0 0 0 0 0 0
Net loss ................. 0 0 0 0 0 0
Accrual of preferred
stock dividends ......... 0 0 0 0 0 0
--------- --------- --------- --------- --------- ---------
Balance, June 30, 1999 ... 2,347,587 $ 4,695 418,375 $ 837 2,554,558 $ 25
========= ========= ========= ========= ========= =========
</TABLE>
TABLE CONTINUED BELOW
<TABLE>
<CAPTION>
Common Stock
Class B Additional
----------------------- Paid-in Retained
Shares Amount Capital Earnings Total
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1998 254,743 $ 3 $ 31,183 $ (27,577) $ 9,166
Imputed value on issuance
of warrants ............. 0 0 13 0 0
Net loss ................. 0 0 0 (6,291) (6,291)
Accrual of preferred
stock dividends ......... 0 0 0 (221) (221)
--------- --------- --------- --------- ---------
Balance, June 30, 1999 ... 254,743 $ 3 $ 31,196 $ (34,089) $ 2,667
========= ========= ========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
6
<PAGE>
MONACO FINANCE, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Six Months Periods Ended June 30, 1999 and 1998
(Unaudited)
Six Months Ended
June 30
1999 1998
(amounts in 000s)
Cash flows from operating activities:
Net loss ................................. $ (6,291) $ (1,334)
Adjustments to reconcile net to net cash
provided by operating activities:
Depreciation ........................... 670 552
Provision for credit losses ............ 2,000 26
Amortization of excess interest ........ 2,349 4,022
Amortization of other assets ........... 344 641
Amortization attributable to issuance
of warrants ........................... 13 42
Deferred tax asset ..................... -- 38
Loss on sale of fixed assets ........... 122 --
Other .................................. (42) (17)
------- -------
(835) 3,970
Changes in assets and liabilities:
Other receivables ..................... 2,265 5,763
Prepaid expenses ...................... 189 55
Accounts payable ...................... (348) 658
Accrued expenses and other liabilities 357 (49)
------- -------
Net cash provided by operating
activities ........................ 1,628 10,397
------- -------
Cash flows from investing activities:
Retail installment sales contracts ....... (1,311) (94,175)
purchased
Proceeds from principal payments on ...... 23,596 30,839
contracts
Purchases of furniture and equipment ..... -- (1,041)
Proceeds from sale of furniture and
equipment ............................... 114 --
Other .................................... 1 2
------- -------
Net cash provided by (used in)
investing activities ............. 22,400 (64,375)
------- -------
Cash flows from financing activities:
Net borrowings under lines of credit ..... (8,400) 64,170
Net decrease (increase) in restricted cash 384 613
Repayments on asset-backed notes ......... (17,214) (8,142)
Repayments on senior subordinated
debentures .............................. (270) (2,953)
Proceeds from issuance of promissory notes 1,110 2,500
Repayments on promissory notes ........... (50) (1,135)
Proceeds from exercise of stock options .. -- 21
Increase in debt issuance and conversion
costs ................................... -- (517)
------- -------
Net provided by (used) in financing
activities ....................... (24,440) 54,557
------- -------
Net increase (decrease) in cash and cash
equivalents ............................. (412) 579
Cash and cash equivalents, January 1 ..... 516 757
------- -------
Cash and cash equivalents, June 30 ....... $ 104 $ 1,336
======= ========
See Notes to Consolidated Financial Statements.
7
<PAGE>
Monaco Finance, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
Note 1 - ORGANIZATION AND Summary of Significant Accounting Policies
Business
Monaco Finance, Inc. (the "Company") is a specialty consumer finance
company which has engaged in the business of underwriting, acquiring, servicing
and securitizing automobile retail installment contracts ("Contract(s)"). The
Company has provided special finance programs to assist purchasers of vehicles
who do not qualify for traditional sources of bank financing due to their
adverse credit history, or for other reasons which may indicate credit or
economic risk (i.e., sub-prime customers). The Company has acquired Contracts in
connection with the sale of used, and to a limited extent, new vehicles, to
customers, from automobile dealers (the "Dealer(s)" )located in forty-eight
states, the majority of which are acquired from four states. The Company has
also purchased portfolios of sub-prime loans from third parties other than
dealers.
Pacific USA Holdings Corp. ("Pacific USA") and related entities hold a
controlling interest in the Company at June 30, 1999 (see Note 6).
Interim Unaudited Financial Statements
The Company's independent auditors have not audited the accompanying
financial statements related to June 30, 1999 and 1998 and the periods then
ended. However, in the opinion of management, such financial statements reflect
all adjustments (which include only normal recurring adjustments) necessary for
the fair presentation of the financial position, results of operations and cash
flows of the Company. The results of operations for the three month and six
month periods ended June 30, 1999 and 1998 are not necessarily indicative of the
results that will be or were achieved for the entirety of their respective
calendar years.
The consolidated financial statements included herein are presented in
accordance with the requirements of Form 10-QSB and consequently do not include
all of the disclosures normally made in the Registrant's annual Form 10-KSB
filing. These financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
annual report on Form 10-KSB for the year ended December 31, 1998.
Reclassifications
Certain prior year balances have been reclassified in order to conform to
the current year presentation.
8
<PAGE>
Notes to Consolidated Financial Statements (continued)
Use of Estimates
The preparation of financial statements in conformity with general accepted
accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Management believes that such estimates
have been based on reasonable assumptions and that such estimates are adequate.
However, actual results could differ from those estimates.
In connection with the purchase of Contracts, the Company has estimated the
number and dollar amount of loans expected to result in defaults and has
estimated the amount of net loss that will be incurred under each default. The
Company has provided allowances for these losses based on the historical
performance of the Contracts which are tracked by the Company on a static pool
basis. The actual losses incurred could differ materially from the amounts that
the Company has estimated in preparing the historical consolidated financial
statements. Furthermore, the recent transfer of the portfolio to another
servicer may adversely impact the performance of the portfolio.
Loan Origination and Acquisition Activities
The Company accounts for its loan origination and acquisition activities
using the static pooling method. At the time Contracts are originated or
purchased, the Company estimates future losses of related principal using the
Company's risk model which takes into account historical data from similar
contracts originated or purchased by the Company since its inception in 1988. An
amount equal to such estimated losses is added to the allowance for credit
losses by (1) capitalizing all loan discounts associated with the Contracts and
(2) adding an amount equal to the difference between the total estimated losses
and the capitalized loan discounts. The latter amount is created by establishing
a receivable for future interest, presented below as "excess interest
receivable."
The Company continually compares actual portfolio performance to the
results initially predicted by the Company's risk model. In order to maintain
the allowance for credit losses at a level, which in the opinion of management,
is adequate to absorb future losses that may occur in the present portfolio, the
Company, whenever necessary, will record a provision for credit losses. Changes
in (1) national and regional economic conditions, (2) borrower mix and (2)
various other factors could cause future actual losses to differ materially from
predicted losses.
9
<PAGE>
Notes to Consolidated Financial Statements (continued)
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 six months ended June
30, 1999 and the year ended December 31, 1998 the Company continued to suffer
recurring losses in excess of $6,500,000 and $11,000,000, respectively,
resulting in an accumulated deficit of approximately $34,100,000 at June 30,
1999. In addition, the Company lost its financing sources (see Note 5). The
Company will be seeking to obtain new financing sources. In the event the
Company obtains new financing sources it will attempt to implement a business
strategy 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 accompanying consolidated financial
statements do not include any adjustments that might be necessary if the Company
is unable to continue as a going concern.
10
Notes to Consolidated Financial Statements (continued)
Note 3 - Automobile Receivables
Automobile receivables consisted of the following as of June 30, 1999 and
December 31, 1998.
June 30 December 31,
--------- ----------
1999 1998
--------- ----------
(amounts in 000s)
Finance receivables
Retail installment sales contracts .. $ 77,476 $ 85,371
Retail installment sales contracts .. -- 19,742
- Trust
Gross finance receivables ........ 77,476 105,113
Allowance for credit losses ......... (6,065) (9,872)
Net finance receivables .......... 71,411 95,241
Other automobile related receivables
Excess interest receivable .......... 4,016 6,307
Loan loss reimbursement receivable .. 2,338 4,035
Accrued interest .................... 1,012 1,427
Other ............................... 112 191
Total other automobile related
receivables ..................... 7,478 11,960
--------- ---------
Total automobile receivables, net $ 78,889 $ 107,201
========= =========
See Note 8 for a discussion of significant subsequent events that will
eliminate from the Company's balance sheet substantially all of its finance
receivables and debt.
Activity in the allowance for credit losses during the six months ended
June 30, 1999 is summarized below.
Balance, December 31, 1998 .................. $(9,872)
Provision for credit losses ................. (2,000)
Additions for discounts on loan originations (107)
and/or purchases
Additions for unearned interest income (i.e., (59)
excess interest)
Chargeoffs of retail installment sales ...... 9,160
contracts
Recoveries, net of recovery costs ........... (3,187)
-------
Balance, June 30, 1999 ...................... $(6,065)
=======
Amortization of excess interest amounted to $2,349,000 and $4,022,000 for
the six month periods ended June 30, 1999 and 1998, respectively. Amortization
of excess interest amounted to $1,074,000 and $1,854,000 for the three month
periods ended June 30, 1999 and 1998, respectively.
Note 4 - Commitments and Contingencies
From time to time the Company and its Subsidiaries are subject to various
legal proceedings and claims that arise in the ordinary course of business. In
the opinion of management of the Company, based in part on the advice of
counsel, the amount of any ultimate liability with respect to these actions will
not materially affect the results of operations, cash flows or financial
position of the Company. It is the Company's and its Subsidiaries' policy to
vigorously defend litigation; however, the Company and its Subsidiaries have
entered into settlements of claims in the past, and may do so in the future,
whenever management deems the circumstances appropriate.
11
<PAGE>
Notes to Consolidated Financial Statements (continued)
NOTE 5 - DEBT
In February and March of 1999 the Company, MFIII and MF IV received verbal
notification from Daiwa that there existed certain violations of non-portfolio
performance related covenants in the credit agreements ("Credit Facilities" or
"Daiwa Obligations") and that, as a result, (i) no additional funds would be
advanced to MF III under the warehouse line of credit; (ii) Daiwa mandated that
the Company transfer the servicing of the related auto loans to a successor
servicer to be appointed by Daiwa, which transfer was completed on April 15,
1999 and (iii) except for servicing related fees and expenses, Daiwa is
collecting all cash flows in excess of Daiwa's regularly scheduled principal and
interest payments under the Credit Facilities.
Automobile Receivables Related Debt
Automobile receivables related debt consisted of the following as of June
30, 1999 and December 31, 1998.
June 30 December 31,
--------- ------------
1999 1998
--------- ------------
(amounts in 000s)
$75 million warehouse line of credit
payable by MF III to Daiwa Finance
Corporation; 85% of interest
payable monthly at LIBOR plus
2.5%; 15% of interest payable
monthly at 12%; secured by
Contracts of MF III and cash flow
therefrom; assets of MF III are
not available to pay general
creditors of the Company; on
July 30, 1999 MF III was merged
into MF IV (see Note 8 and Part I
Item 2 of this Form 10-QSB) $ 46,594 $ 43,581
$73.9 million portfolio purchase
credit facility payable by MF IV
to Daiwa Finance Corporation; 85%
of interest payable monthly at
LIBOR plus 3.5% (1% prior to
July 1, 1998); 15% of interest
payable monthly at 15.0% (LIBOR
plus 1% prior to July 1, 1998);
secured by Contracts of MF IV and
cash flow therefrom; assets of MF
IV are not available to pay
general creditors of the Company;
on July 30, 1999 MF III was merged
into MF IV (see Note 8 and Part I
Item 2 of this Form 10-QSB) 27,885 39,298
Automobile receivable-backed notes
payable by MF II; interest at
6.71%; secured by Contracts of MF II
and cash flow therefrom; redeemed in
January 1999 with proceeds drawn from
MF III's $75 million warehouse line of
credit - 17,214
--------- ---------
$ 74,479 $ 100,093
========= =========
12
<PAGE>
Notes to Consolidated Financial Statements (continued)
Other Debt
Other debt consisted of the following as of June 30, 1999 and December 31,
1998.
June 30 December
----------- 31
1999 1998
(amounts in 000s)
$5 million senior subordinated notes;
issued November 1994 to Rothschild
North America (the "Rothschild
Notes"); unsecured; interest
payable monthly at the lesser of
11.5% or LIBOR plus 3.5%; amended
June 1998 to provide, among other
things, for an increase in
quarterly principal payments from
$416,667 to $450,000 and a
$600,000 principal payment at
June 30, 1998; amended July 30,
1999 to provide, among other
things, that the Rothschild Notes
are no longer recourse to the
Company (see Note 8) $ 1,000 $ 1,000
$5 million senior subordinated notes;
issued January 1996 to an investor
group (the "Heller/Black Diamond
Notes"); unsecured; interest payable
at 12%; amended June 1998 to provide,
among other things, for monthly
principal payments of $135,000 and
the elimination of the holders'
options to convert the notes into
shares of the Company's Class A
common stock; amended July 30, 1999
to provide, among other things, that
the Heller/Black Diamond Notes are no
longer recourse to the Company (see
Note 8) 3,785 4,055
(The holders of the Rothschild Notes and
the Heller/Black Diamond Notes are
sometimes hereinafter referred to as
the "Sub-Debt Holders".)
Note payable to Pacific USA, a
related party; dated September 30,
1998; interest at prime plus 1%;
principal and unpaid interest due
September 30, 1999; secured by all
of the outstanding shares of MF Holding
(see Note 8) 3,010 1,900
Note payable to Pacific USA (assumed from
Pacific Southwest Bank, a subsidiary of
Pacific USA, in April 1999); dated
September 8, 1998; interest at prime
plus 1% 950 950
Other - 50
-------- -------
$ 8,745 $ 7,955
======== =======
13
<PAGE>
Notes to Consolidated Financial Statements (continued)
Other obligations outstanding during a portion of 1998 are described below.
o $15 million Revolving Warehouse Line of Credit payable to a bank; dated
January 1996; up to $6.376 million outstanding during 1998; interest
payable at the Company's option at either prime .5% or LIBOR plus 2.75%;
paid in full during March 1998
o $5 million note payable to Pacific USA; dated June 30, 1998; $4.463
million converted into 939,632 shares of the Company's Class A common
stock, effective July 1, 1998; $.537 million converted into 268,375 shares
of the Company's Series 1999-1 8% Cumulative Subordinated Preferred Stock,
effective December 31, 1998
o $1.385 million convertible subordinated notes; dated March 1993; interest
payable at 7%; paid in full during April 1998
o $1.135 million remainder of $2.525 million installment note payable by
Monaco Funding Corp. to a bank; interest payable at 16%; paid in full
during April 1998
NOTE 6 - STOCKHOLDERS' EQUITY
Preferred Stock
The authorized and outstanding shares of the Company's no par value
preferred stock were as follows as of June 30, 1999.
Authorized Outstanding
---------- -----------
8% Cumulative Convertible Preferred
Stock, Series 1998-1 10,000000 2,347,587
8% Cumulative Subordinated Preferred
Stock, Series 1999-1 585,725 418,375
Holders of the two series are generally not entitled to vote other than as
specifically provided by the articles of incorporation of the Company or
applicable law.
Both series of preferred stock have a liquidation preference of $2.00 per
share. Holders of either series are entitled to quarterly dividends, when and if
declared, at the annual rate of 8% of the stated liquidation preference ($.16
per share). Undeclared dividends are cumulative. The dividend right of holders
of Series 1999-1 Preferred Stock is subordinate to the dividend right of holders
of Series 1998-1 Preferred Stock. Dividends, other than those payable in shares
of the Company's common stock, may not be paid to holders of Series 1999-1
Preferred Stock until all accumulated, unpaid dividends have been declared and
paid to holders of Series 1998-1 Preferred Stock.
Through August 23, 1999 the Company has neither paid nor declared a
dividend with respect to either series of preferred stock. Included among
"accrued expenses and other liabilities" in the accompanying consolidated
balance sheets are accrued preferred stock dividends of $595,000 and $374,000 at
June 30, 1999 and December 31, 1998, respectively.
At the holder's option, 2.5 shares of Series 1998-1 Preferred Stock are
convertible into one share of the Company's Class A common stock (939,085 shares
in the aggregate). At such time as Series 1998-1 Preferred Stock is no longer
outstanding, or any time thereafter, the Company may redeem shares of Series
1999-1 Preferred Stock for cash in the amount of the $2.00 liquidation value
plus all accumulated, unpaid dividends.
14
<PAGE>
Notes to Consolidated Financial Statements (continued)
All of the outstanding shares of Series 1998-1 Preferred Stock were issued
in January 1998 in connection with the purchase of $81.1 million unpaid
principal balance of sub-prime automobile loans from subsidiaries of Pacific
USA, a related party ("Asset Purchase Agreement"). The Company issued 2,433,457
shares ($4,866,914 liquidation value); the balance of the $77.9 million purchase
price was financed by MF IV's portfolio purchase credit facility provided by
Daiwa Finance Corporation. During 1998, at the Company's request, Pacific USA
surrendered 85,870 shares in connection with the repurchase of automobile loans
having an original aggregate purchased principal balance of approximately $2.9
million.
All of the outstanding shares of Series 1999-1 Preferred Stock were issued
to Pacific USA on December 31, 1998 upon conversion of (1) the $536,750 balance
of the note payable dated June 30, 1998 and (2) $300,000 of the balance
outstanding under the note dated September 30, 1998.
Common Stock A 1-for-5 reverse split of all common shares outstanding
occurred November 23, 1998. All related amounts and disclosures in the
accompanying consolidated financial statements and these Notes to Consolidated
Financial Statements have been adjusted to reflect this reverse split.
The authorized and outstanding shares of the Company's $.01 par value
common stock as of June 30, 1999 are as follows. Holders of the two classes are
entitled to the same rights and privileges except that a holder of a Class B
share is entitled to three votes whereas a holder of a Class A share is entitled
to only one vote.
Authorized Outstanding
---------- -----------
Class A 30,000000 2,554,588
Class B 585,725 254,743
As required by the Asset Purchase Agreement, a subsidiary of Pacific USA
entered into a loan loss reimbursement agreement whereby it agreed to reimburse
the Company for up to 15% of any losses ("Covered Losses") incurred in
connection with the loans acquired under the Asset Purchase Agreement. In
connection therewith, this subsidiary provided for the issuance of letters of
credit ("Letters of Credit") to be drawn upon to pay for the Covered Losses. In
consideration therefore, the Company issued 162,230 shares of Class A Common
Stock. The Company allocated $1,622,304 to the cost of the purchased loans,
which represents the value assigned to the common shares.
Pacific USA was the record owner of 300,000 shares of Class A Common Stock
as of December 31, 1997. As a result of the December 1997 Option Agreement with
Consumer Finance Holdings, Inc. ("CFH"), a wholly owned subsidiary of Pacific
USA, it was granted the power to vote the 166,000 shares of Class B Common Stock
beneficially owned by the Messrs. Ginsburg and Sandler (then the President and
Executive Vice President, respectively, of the Company) ("the Shareholders") and
a limited power to direct the voting of shares subject to proxies held by the
Shareholders. Under the Conversion Rights Agreement dated July 1, 1998, Pacific
USA was issued 939,632 shares of the Company's Class A Common Stock. Pacific USA
may be deemed to be the beneficial owner of approximately 55% of the combined
outstanding shares of Class A and Class B Common Stock; it controls
approximately 65.3% of the total voting power. Pacific USA has an option
expiring in December 2000 to purchase 166,000 shares of Class B Common Stock,
owned by the Shareholders, while the Shareholders have an option, also expiring
in December 2000, to require that Pacific USA purchase all of such shares. Upon
exercise of either the put option or the call option, the Class B Common Stock
purchased by CFH will automatically convert into Class A Common Stock thereby
reducing the voting power of Pacific USA. As described herein, Pacific USA also
has the right, at any time, to convert the shares of 1998-1 Preferred Stock into
1,021,824 shares of Class A Common Stock.
15
<PAGE>
Notes to Consolidated Financial Statements (continued)
Warrants
In connection with Daiwa Finance Corporation's January 1998 financing of
the loan purchase discussed above, the Company issued Daiwa warrants for the
purchase of 50,000 shares of the Company's Class A common stock. The Company has
assigned an imputed value of $84,000 to the warrants. The warrants are
exercisable at $4.125 per share until their expiration on January 20, 2001.
Stock Option Plans
During the six months ended June 30, 1999 no new stock options were
granted. During this same period no options were exercised and 19,914 options
were cancelled.
The Company accounts for its stock option plan in accordance with SFAS No.
123, Accounting for Stock-Based Compensation which encourages entities to
recognize as expense over the vesting period the fair value of all stock-based
awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to
continue to apply the provisions of APB Opinion No. 25 and provide pro forma net
earnings and pro forma earnings per share disclosures for employee stock option
grants made in 1995 and future years as if the fair-value-based method defined
in SFAS No. 123 had been applied. The Company has elected to continue to apply
the provisions of APB Opinion No. 25 and provide the pro forma disclosure
provisions of SFAS No. 123.
The Company uses one of the most widely used options pricing models, the
Black-Scholes model (the Model), for purposes of valuing its stock options
grants. The Model was developed for use in estimating the fair value of traded
options that have no vesting restrictions and are fully transferable. In
addition, it requires the input of highly subjective assumptions including the
expected stock price volatility, expected dividend yields, the risk free
interest rate, and the expected life. In management's opinion, the value
determined by the Model is not necessarily indicative of the ultimate value of
the granted options because (1) the Company's stock options have characteristics
significantly different from those of traded options and (2) changes in
subjective input assumptions can materially affect the fair value estimate
NOTE 7 - INCOME TAXES
The Company is required to measure current and deferred tax consequences of
all events recognized in the financial statements by applying the provisions of
enacted tax laws to determine the amount of taxes payable or refundable
currently or in future years. The measurement of deferred tax assets is reduced,
if necessary, by the amount of any tax benefits that, based on available
evidence, are not expected to be realized. The major and primary source of any
differences is due to the Company accounting for income and expense items
differently for financial reporting and income tax purposes.
16
Notes to Consolidated Financial Statements (continued)
A reconciliation of the statutory federal income tax to the effective
anticipated tax is as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
---------------------- ----------------------
1999 1998 1999 1998
--------- --------- --------- ---------
(amounts in 000s)
<S> <C> <C> <C> <C>
Pretax (loss) .................. $(3,069) $(1,296) $(6,291) $(1,334)
========= ========= ========= =========
Income tax expense (benefit)
at Federal statutory rate - 34% $(1,043) $ (441) $(2,139) $ (454)
(benefit) at Federal
statutory rate - 34%
State income tax expense
(benefit) ..................... (104) (44) (214) (45)
--------- --------- --------- ---------
Income tax expense (benefit)
before valuation allowance .... (1,147) (485) (2,353) (499)
Less valuation allowance ....... 1,147 485 2,353 499
--------- --------- --------- ---------
Income tax expense (benefit) ... $ -- $ -- $ -- $ --
========= ========= ========= =========
</TABLE>
As of June 30, 1999 the Company had a net operating loss carryforward of
approximately $50.0 million for federal income tax reporting purposes which, if
unused, will expire between 2011 and 2014. During the year ended December 31,
1998 there were transactions involving changes in ownership that will
significantly restrict the utilization of net operating loss carryforwards in
the future.
The principal temporary differences that will result in deferred tax assets
and liabilities are certain expenses and losses accrued for financial reporting
purposes not deductible for tax purposes until paid, depreciation for tax
purposes in excess of depreciation for financial reporting purposes and the
utilization of net operating losses. The effect of the differences generate a
long-term deferred tax asset of approximately $13,600,000, which has been fully
allowed for as management has determined that it was more likely than not that
the Company would not realize its deferred tax asset. Accordingly, there is no
net deferred tax asset reflected in the accompanying consolidated financial
statements.
NOTE 8 - SUBSEQUENT EVENTS
On July 30, 1999 a series of agreements were executed which, among other
things, provided for the following:
o Amendment of the Daiwa Credit Facilities to specifically cause the
following to occur:
o Transfer of all the MF III-owned installment loans to MF IV
o Extinguishment of MF III's debt obligations to Daiwa and the assumption
thereof by MF IV
o MF IV's debt obligations to Daiwa to be non-recourse to the Company
o Merger of MF III into MF IV
o Creation by the Company of a wholly-owned, special purpose corporation, MF
Receivables Holding Corp. ("MF Holding") which assumed all of the Company's
subordinated debt obligations and was capitalized with all of the
outstanding shares of MF IV
o Release by the Sub-Debt Holders of the Company from all of its obligations
under the subordinated debt agreements
o Release by Daiwa of certain security interests contained in the Credit
Facilities
o Draw by MF IV of the remaining balance of $2.338 million under the Letter
of Credit
o Dividend payment of $2.338 million by MF IV to MF Holdings
17
<PAGE>
Notes to Consolidated Financial Statements (continued)
o Payment by MF Holding of $2.338 million to Sub-Debt Holders, distributed
on a pro rata basis among the individual holders and applied entirely to
principal reduction
o Dedication of future cash flows from the Daiwa-financed installment loan
portfolios first to Daiwa and then to MF IV
o Retention by MF IV of the right to receive the residual cash flows, if
any, that may be realized after satisfaction of the Daiwa Obligations
o Authorization for Daiwa to sell the related installment loans at
any time, subject to certain conditions
Parties to the various agreements included the Company, MF III, MF IV, MF
Holding, Daiwa, Pacific USA and the holders of the Rothschild and Heller/Black
Diamond Notes, among others.
The agreements limit the recourse of Daiwa to future cash flows from the
Daiwa-financed loan portfolios. Future cash flows, if any, that may occur after
full satisfaction of the amounts outstanding under the Daiwa Credit Facilities,
including interest, will be paid to MF IV. Dividends, if any, received by MF
Holding from MF IV will be used to pay the subordinated debt.
The Company will record the financial statement effect of these agreements
in July 1999 as an extinguishment of the related debt due to the transfer of the
financial assets in accordance with Financial Accounting Standards Board
Statement No. 125: Accounting for Transfers and Servicing of Financial Assets
and Extinguishment of Liabilities. The financial statement effects of the
transaction are summarized below. Amounts at June 30, 1999 are presented for
comparative purposes only.
18
Notes to Consolidated Financial Statements (continued)
1999
----------------------
June 30, July 30,
-------- --------
pro forma
(amounts in 000s)
Consideration
Unpaid principal balance of
related debt ....................... $ 79,264 $ 72,857
Accrued interest payable ............ 268 498
Servicing fees payable .............. 433 394
Residual interest in loans .......... n/a 5,820
--------
79,569
--------
Net book value of assets transferred
and other costs
Assets prorated in determination
of residual value
Outstanding principal balance
of notes receivable ................. 76,431 71,705
Allowance for credit losses before
adjustment .......................... (6,052) (4,634)
-------- --------
Net book value of notes receivable 70,379 67,071
Excess interest receivable ........... 4,016 3,698
Repossessed vehicle inventory ........ 2,330 2,330
-------- --------
Net book value of transferred
assets subject to proration ..... 76,725 73,099
Other assets transferred or
otherwise considered as a cost
of the sale
Restricted cash collected
through the transfer date .......... 5,117 4,617
Accrued interest receivable ......... 924 846
Unamortized deferred loan financing
costs .............................. 578 505
Deal costs .......................... n/a 165
--------
0 79,232
--------
Estimated gain from transfer of assets 0 $ 336
========
The residual interest in loans was determined by multiplying (1) the net
book value of transferred assets subject to proration by (2) the percentage
relationship that estimated future cash flows attributable to the Company's
interest bears to the estimated future cash flows of the transferred portfolio
as a whole. Subsequent to July 1999 an imputed interest rate of approximately
13% will be used to recognize interest income associated with the residual
interest.
The estimate of future cash flows from the loan portfolio utilizes numerous
estimates based on the Company's loss experience and the judgment of management.
Numerous factors and conditions, including the transfer of servicing
responsibilities to a third party, prepayments and other factors may cause
actual results to differ from the estimates. Accordingly, there can be no
assurance that estimated future cash flows will in fact occur in either the
anticipated amounts or anticipated time periods.
19
Notes to Consolidated Financial Statements (continued)
NOTE 9 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Supplemental information related to the accompanying consolidated statements
of cash flows is presented below.
Six Months Ended
June 30
-------------------
1999 1998
--------- ---------
Cash payments for
Interest $ 3,709 $ 5,525
Income taxes - 3
Investing and financing activities during the six month periods ended June
30, 1999 and 1998 that neither provided nor used cash are described below.
o In January 1998, in connection with the acquisition of a loan portfolio
from a subsidiary of Pacific USA, the Company issued 162,231 shares of
Class A Common Stock valued at $2.00 per share and 2,433,457 shares of 8%
Cumulative Convertible Preferred Stock - Series 1998-1 valued at $2.00 per
share. These shares were issued as purchase consideration in addition to
cash provided by debt financing (see Notes 5 and 6).
o During the six months ended June 30, 1998 the subsidiary of Pacific USA
repurchased certain of the loans referred to above for cash plus the
surrender of 77,221 shares of the Series 1998-1 Preferred Stock (85,870
shares through December 31, 1998 and June 30, 1999).
o Effective July 1, 1998, Pacific USA converted $4,463,250 of its $5.0
million Promissory Note (see Note 5) into 939,632 restricted shares of the
Company's Class A Common Stock.
o Effective December 31, 1998, Pacific USA converted the remaining $536,750
of its $5.0 million Promissory Note and $300,000 of its $1.4 million
Promissory Note (see Note 5) into 418,375 shares of 8% Cumulative
Subordinated Preferred Stock, Series 1999-1 valued
at $2.00 per share.
o Quarterly preferred stock dividends in the amount of approximately
$221,000 have been accrued during the six months ended June 30, 1999.
20
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
The following discussion is intended to assist in understanding the Company's
results of operations for the three and six month periods ended June 30, 1999
and 1998 and the Company's financial position as of June 30, 1999. The
accompanying consolidated financial statements and related notes thereto should
be read in conjunction with this discussion.
RESULTS OF OPERATIONS
The results of operations for the three and six month periods ended June 30,
1999 and 1998 are discussed together because they are similarly effected by the
same events.
For the three months ended June 30, 1999 the Company incurred a net loss of
$3,069,000 compared to a net loss of $1,296,000 for the three months ended June
30, 1998. Losses per common share, both basic and dilutive, were $1.13 and $.70
for the respective periods. Revenues were $3,476,000 for the three months ended
June 30, 1999 compared to $5,187,000 for the three months ended June 30, 1999.
Expenses for the comparable periods were $6,545,000 and $6,483,000,
respectively. There were no shares of preferred stock outstanding during the
three months ended June 30, 1998. Accordingly, the loss per common share for the
three months ended June 30, 1998 is not affected by earnings attributable to
preferred shareholders.
For the six months ended June 30, 1999 the Company incurred a net loss of
$6,291,000 compared to a net loss of $1,334,000 for the six months ended June
30, 1998. Losses per common share, both basic and dilutive, were $2.32 and $.73
for the respective periods. Revenues were $7,228,000 for the six months ended
June 30, 1999 compared to $11,736,000 for the six months ended June 30, 1998.
Expenses for the comparable periods were $13,519,000 and $13,070,000,
respectively. There were no shares of preferred stock outstanding during the six
months ended June 30, 1998. Accordingly, the loss per common share for the six
months ended June 30, 1998 is not affected by earnings attributable to preferred
shareholders.
In February and March of 1999 the Company, MF III and MF IV received verbal
notification from Daiwa that there existed certain violations of non-portfolio
performance related covenants in the Credit Facilities and that, as a result,
(i) no additional funds would be advanced to MF III under the warehouse line of
credit; (ii) Daiwa mandated that the Company transfer the servicing of the
related auto loans to a successor servicer appointed by Daiwa, which transfer
was completed on April 15, 1999; and (iii) except for servicing related fees and
expenses, Daiwa is collecting all cash flows in excess of Daiwa's regularly
scheduled principal and interest payments under the Credit Facilities. These
events negatively affected the results of operations for both the three and six
month periods ended June 30, 1999.
Interest income for the three and six month periods ended June 30, 1999
decreased $1,851,000 (35.7%) and $4,658,000 (39.7%), respectively, in relation
to the comparable periods in 1998. These decreases result principally from
changes in the outstanding principal balances of installment loans. The average
portfolio balances outstanding during the three and six month periods ended June
30, 1999 decreased $58,500,000 (40.8%) and $46,100,000 (33.5%), respectively, in
relation to the comparable periods in 1998. The decreases in average portfolio
balances are primarily attributable to (i) Company's $81 million portfolio
purchase in January 1998 not being comparably matched in 1999 and (ii) the
Company's inability to borrow additional funds under its warehouse line of
credit with Daiwa.
21
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
See Note 8 to the accompanying consolidated financial statements and the
discussion below under Liquidity and Capital Resources for information related
to significant subsequent events.
Interest expense for the three and six month periods decreased $741,000 and
$1,537,000, respectively, in relation to the comparable periods in 1998. Since
January 1, 1998 the amounts owed by the Company pursuant to its various credit
facilities has generally varied directly in relation to the aggregate,
outstanding balance of the installment loan portfolio for the reasons cited
above.
Operating expenses for the three and six month periods decreased $438,000
and increased $12,000, respectively, in relation to the comparable periods in
1998. The decrease for the three months ended June 30, 1999 reflects significant
savings in employee payroll and related benefits, temporary labor and office
supplies, among other categories. These savings are reflective of combined
workforce reductions of approximately 80% which occurred in November 1998 and
April 1999. These savings were significantly offset by the cost of utilizing a
third-party servicer effective April 15, 1999. The six month period reflects
similar savings related to the workforce reduction and the additional costs
associated with the third-party servicer; however, legal and consulting expenses
recognized in the first quarter of 1999 largely offset such net savings for the
six month period.
The provision for credit losses for the three and six month periods
increased $1,241,000 and $1,974,000, respectively, in relation to the comparable
periods in 1998. The increases reflect recent defaults that have occurred at
actual rates in excess of the estimated rates used by the Company in
establishing the initial allowances for credit losses under the static pooling
method of accounting and may, in part, result from the transfer of the servicing
of the portfolio in April 1999. A provision of $1,500,000 was recorded for
similar purposes during the three months ended December 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
Recurring net losses notwithstanding, the Company has generally achieved
positive cash flow from operating activities, including $1,628,000 and
$10,397,000 for the six month periods ended June 30, 1999 and 1998,
respectively.
The Company's liquidity has been impaired since mid-May 1999 when Daiwa
began applying all installment loan related cash receipts in excess of interest
expense and servicing costs to debt reduction (with respect to installment loan
payments received on or after April 1, 1999). As a result, the Company realizes
no cash flow from its installment loan portfolio other than from approximately
$800,000 of auto loans which are not subject to Daiwa's security interest.
Although Pacific USA has continued to provide the Company with certain debt
funding, no assurance can be nor is given that such funding will continue.
22
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
The Company's business has been, and will continue to be, cash intensive.
The Company's principal need for capital is to fund cash payments made to
Dealers in connection with purchases of installment contracts and the purchase
of existing loan portfolios. In the past, these purchases have been financed
through the Company's equity, warehouse lines of credit, securitizations and
cash flows from operations. The Company does not presently have, and may not be
able to obtain, a line of credit or other financing. Therefore, the Company may
not be able to resume its business of acquiring installment contracts from
Dealers. The failure to obtain financing will have a material adverse effect on
the Company's business, financial condition, results of operations and ability
to pay expenses. The combined effects of the foregoing have caused the Company
to be unable to pursue or otherwise react to business opportunities. The
Company's independent auditor has added an explanatory paragraph to its report
with respect to the Company's financial statements for the year ended December
31, 1998 regarding certain substantial matters which, in its opinion, raise
substantial doubt about the Company's ability to continue as a going concern.
On July 30, 1999 the Company and certain of its subsidiaries executed a
series of agreements with parties that in various combinations included Daiwa,
Pacific USA and the holders of the Heller/Black Diamond and Rothschild notes,
among others. These agreements significantly reduce the Company's debt and have
no effect on capital resources.
The following actions, among others, arise from these agreements.
o MF III was merged into MF IV, with MF IV assuming all of MF III's Daiwa
Obligations.
o The Company formed a wholly-owned, special purpose corporation, MF
Holding, which was capitalized with all of the outstanding shares of MF
IV.
o MF Holding assumed all of the outstanding subordinated debt of
the Company.
o The Sub-Debt Holders released the Company from all subordinated debt
obligations.
o MF Holding pledged 100% of the outstanding shares of MF IV to the Sub-Debt
Holders.
o In exchange for its release of its security interest in all of the shares
of MF III and MF IV, Pacific USA was granted a security interest in all of
the shares of MF Holding.
o Dividends, if any, received by MF Holding from MF IV will be used to pay
the subordinated debt.
o In the event that the installment loans financed by Daiwa are
sold prior to their maturity and
o Such sale occurs prior to December 31, 1999, Daiwa will pay to MF IV the
greater of (i) $3,500,000 or (ii) the difference between the sale
proceeds and the amount then owed by MF IV to Daiwa (subject to
proration for partial sales); or
o Such sale occurs after December 31, 1999 but before December 31, 2000,
Daiwa will pay to MF IV the greater of (i) $1,000,000 or (ii) the
difference between the sale proceeds and the amount then owed by MF IV
to Daiwa (subject to proration for partial sales); or
o Such sale occurs after January 1, 2001, MF IV will have a right of first
refusal, subject to certain conditions.
The effect of these agreements result in the transactions being recorded as
a transfer of financial assets and extinguishment of the related debt. This will
result in the Company no longer reporting in future consolidated balance sheets
(i) the outstanding obligations to Daiwa. (ii) the subordinated debt, and (iii)
the Daiwa-financed installment loan portfolio and associated assets. Instead,
the Company's consolidated financial statements will reflect an amount that
represents the Company's residual interest in the future cash flows from the
installment loan portfolio. Imputed interest at the rate of approximately 13%
will be accreted to interest income throughout the remaining life of the
residual interest. See Note 8 to the accompanying consolidated financial
statements for additional information related to the financial statement effects
of these agreements.
23
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
The estimate of future cash flows from the loan portfolio utilizes numerous
estimates based on the Company's loss experience. Numerous factors and
conditions may cause actual results to differ from the estimates which may
negatively impact the carrying value of the residual interest in loans.
Accordingly, there can be no assurance that estimated future cash flows will in
fact occur in either the anticipated amounts or anticipated time periods.
Although the Company has accomplished a significant restructuring of its
financial position, it will be necessary for the Company to obtain a line of
credit, infusion of equity and/or other financing in order to resume the
purchase of installment loans. The failure to obtain such financing will have a
material adverse effect on the Company's business, financial condition, results
of operations and ability to pay operating expenses. Although the Company is
engaged in on-going discussions related to new financing arrangements, no
assurance can be nor is given that such financing in adequate amounts will be
obtained.
Effective November 23, 1998 the Company initiated a 1-for-5 reverse stock
split of all of the outstanding shares of its Class A and Class B Common Stock.
All share and per share information presented in the accompanying consolidated
financial statements and related notes have been adjusted accordingly for all
periods presented.
The Company's Class A Common Stock is traded in the over-the-counter market
and is currently quoted on the Electronic Bulletin Board.
OTHER
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.
In 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. In June 1999 the FASB issued Statement No. 137 which deferred the
required adoption of the provisions of Statement 133. Management does not expect
the impact of this statement to have a material impact on the Company's
financial position or the results of its operations.
Management has not determined what additional disclosures, if any, may be
required by the provisions of Statements 132 and 133.
24
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Employees and Facilities
At July 31, 1999, the Company employed 28 persons on a full time basis.
The Company's office lease for its principal place of business expires
October 31, 1999. Management anticipates that the Company will relocate its
principal business address in the Denver, Colorado metropolitan area prior to
the expiration of its current lease term.
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 during 1998 and 1999.
Future Strategy
Given the recent changes in the Company's financing sources, the Company
will be seeking to obtain new financing sources. In the event the Company
obtains new financing sources it will attempt to implement a business strategy
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.
Portfolio acquisitions: In January 1998 the Company completed the acquisition of
$81 million in auto loans from affiliates of Pacific USA. In February 1998 the
Company acquired approximately $14 million of auto loans from an independent
third party. Further portfolio acquisitions are not anticipated at this time.
25
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
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 $5.3 million as well as secured loans of $1.9 million from
Pacific USA. 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. In the
first quarter of 1999 significant events have occurred which have negatively and
materially impacted the Company's financing sources (see the discussion under
"Liquidity and Capital Resources").
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 assisted the Company's
credit buyers and underwriters in pricing loans. Credit buyers negotiated
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.
Collections Management: Management believes that collections and recovery are
vital to the successful operation of the Company. Until April 15, 1999 the
Company's servicing efforts were under its direct control. At that time and at
the demand of Daiwa, the Company commenced the use of an unrelated third party
to service substantially all of the Contracts (see discussion in Liquidity and
Capital Resources). Management has not yet formed an opinion as to whether the
transfer of servicing will have any material effect on the Company's ability to
realize the carrying value of the residual interest in loans that results from
the July 30, 1999 agreements discussed above.
Controlling Interest: As a result of the Asset Purchase Agreement dated January
8, 1998, Pacific USA Holdings Corp. ("Pacific USA") increased its voting power
in the Company to 65.3%. Pacific USA is the beneficial owner of approximately
55% of the Company's outstanding voting stock. Pacific USA is a diverse U.S.
holding company whose businesses include technology, real estate, and consumer
finance.
Year 2000 Issue
The "Year 2000" issue affects the Company's installed computer systems,
network elements, software applications and other business systems that have
time-sensitive programs that may not properly reflect or recognize the Year
2000. Because many computers and computer applications define dates by the last
two digits of the year, "00" may not be properly identified as the Year 2000.
This error could result in miscalculations or system failures.
26
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
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.
27
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Although not subject to any material litigation at this time, the Company and
its Subsidiaries at times are subject to various legal proceedings and claims
that arise in the ordinary course of business. In the opinion of management of
the Company, based in part on the advice of counsel, the amount of any ultimate
liability with respect to these actions will not materially affect the results
of operations, cash flows or financial position of the Company. It is the
Company's and its Subsidiaries' policy to vigorously defend litigation, however,
the Company and its Subsidiaries have, and may in the future, enter into
settlements of claims where management deems appropriate.
ITEM 2. CHANGES IN SECURITIES
(b) Certain of the Company's loan agreements contain covenants that restrict
the Company's ability to pay cash dividends on its Class A and B Common
Stock. For a discussion of the July 30, 1999 restructuring of the Company's
debt, refer to "Note 8 - Subsequent Events" of the Notes to Consolidated
Financial Statements and "Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources."
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
On July 30, 1999, the Company executed a series of agreements which, among other
things, transferred the Company's subordinated debt to MF Holdings and allowed
the Company to remove all of its subordinated debt from its balance sheet. For a
more complete description of the transactions and the accounting treatment,
please see "Note 8 - Subsequent Events" of the Notes to Consolidated Financial
Statements and "Item 2. Management's Discussion and Analysis of Financial
Condition - Liquidity and Capital Resources." Copies of all relevant agreements
will be filed in a Current Report on Form 8-K.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit
Number Description of Document
---------- ------------------------------------------------
11.1 Statement re: Computation of Per Share Earnings
27.1 Financial Data Schedule
(b) Reports on Form 8 - K.
None.
28
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: August 23, 1999
MONACO FINANCE, INC.
A Colorado Corporation
By: /s/ Morris Ginsburg
Name: Morris Ginsburg
Title:Chief Executive Officer and Director
(Principal Executive Officer and
Principal
Financial and Accounting
Officer)
29
MONACO FINANCE, INC. AND SUBSIDIARIES
Computation of Earnings (Loss) Per Common Share
<TABLE>
<CAPTION>
Periods Ended June 30
Three Months Six Months
-------------------------- ------------------------
1999 1998 1999 1998
----------- --------- --------- ---------
(amounts in 000s except share information)
<S> <C> <C> <C> <C>
Net Loss Applicable to Common Shareholders
Net loss ................................ $ (3,069) $ (1,296) $ (6,291) $ (1,334)
Earnings applicable to preferred
shareholders ........................... 109 -- 221 --
----------- --------- --------- ---------
Net loss applicable to common
shareholders ........................... $ (3,178) $ (1,296) $ (6,512) $ (1,334)
=========== ========= ========= =========
Average Common Shares Outstanding (c)
Weighted average common shares
outstanding - basic ................... 2,809,301 1,861,669 2,809,301 1,819,112
Shares issuable from assumed
exercise of stock options (a) ......... (b) (b) (b) (b)
Shares issuable from assumed
exercise of stock warrants (a) ........ (b) (b) (b) (b)
Shares issuable from assumed
conversion of 7% subordinated debt .... (b) (b) (b) (b)
Shares issuable from assumed
conversion of senior subordinated
note .................................. (b) (b) (b) (b)
----------- ---------- ---------- ----------
Weighted average common shares
outstanding - assuming dilution ...... 2,809,301 1,861,669 2,809,301 1,819,112
=========== ========== ========== ==========
Earnings (Loss) Per Common Share -
Basic and Assuming Dilution
(Loss) per common share - basic and
assuming dilution .................... $ (1.13) $ (.70) $ (2.32) $ (.73)
=========== ========== ========== =========
</TABLE>
Notes:
(a) Dilutive potential common shares are calculated using the treasury stock
method.
(b) The computation of earnings per common share assuming dilution excludes
dilutive potential common shares that have an anti-dilutive effect on
earnings per share.
(c) All share related information has been adjusted to give effect to a 1-for-5
reverse split which was effective November 23, 1998.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 5,222,000
<SECURITIES> 0
<RECEIVABLES> 84,982,000
<ALLOWANCES> (6,065,000)
<INVENTORY> 2,499,000
<CURRENT-ASSETS> 0
<PP&E> 4,429,000
<DEPRECIATION> (3,162,000)
<TOTAL-ASSETS> 88,757,000
<CURRENT-LIABILITIES> 0
<BONDS> 83,224,000
0
5,532,000
<COMMON> 28,000
<OTHER-SE> (2,893,000)
<TOTAL-LIABILITY-AND-EQUITY> 88,757,000
<SALES> 0
<TOTAL-REVENUES> 7,228,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 7,308,000
<LOSS-PROVISION> 2,000,000
<INTEREST-EXPENSE> 4,211,000
<INCOME-PRETAX> (6,291,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,291,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,291,000)
<EPS-BASIC> (2.32)
<EPS-DILUTED> (2.32)
</TABLE>
