<PAGE>
Filed pursuant to Rule 424(b)(2)
Registration File No. 333-28829
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED JULY 17, 1997)
$85,200,000
NATIONAL AUTO FINANCE 1998-1 TRUST
5.88% AUTOMOBILE RECEIVABLES-BACKED NOTES
NATIONAL FINANCIAL AUTO FUNDING TRUST
(Seller)
NATIONAL AUTO FINANCE COMPANY, INC.
(Servicer)
---------------------
National Auto Finance 1998-1 Trust (the 'Trust' or the 'Issuer') will be
formed pursuant to a Trust Agreement among National Financial Auto Funding Trust
(the 'Seller'), a trust the beneficial interests in which are wholly-owned by
National Auto Finance Company, Inc. ('NAFI') and affiliates of NAFI, and
Wilmington Trust Company, as Owner Trustee (the 'Owner Trustee'). The 5.88%
Automobile Receivables-Backed Notes, Series 1998-1 (the 'Notes') will be issued
pursuant to an Indenture, to be dated as of December 15, 1997 (the 'Indenture'),
among the Trust and Harris Trust and Savings Bank, as Indenture Trustee and as
Trust Collateral Agent (the 'Indenture Trustee' and 'Trust Collateral Agent,'
respectively). The Trust will also issue $8,426,373.63 aggregate principal
amount of Automobile Receivables-Backed Certificates (the 'Certificates' and,
together with the Notes, the 'Securities') that are not offered hereby but will
initially be retained by the Seller. Payments of principal of and interest on
the Certificates will be subordinated to payments of principal of and interest
on the Notes to the extent described herein.
The assets of the Trust (the 'Trust Property') will include a pool of
non-prime motor vehicle retail installment sale contracts (the 'Receivables'),
all monies paid or payable thereunder on or after the applicable Cut-off Date
(as defined herein), security interests in the new and used automobiles,
light-duty trucks, vans and minivans financed thereby, certain bank accounts
described herein, all proceeds of the foregoing, and certain other property. In
addition, the Trust Property will include funds on deposit in a pre-funding
account (the 'Pre-Funding Account') established by and maintained with the Trust
Collateral Agent. Approximately $16,490,982.64 will be deposited in the
Pre-Funding Account on the date of the issuance of the Notes. Funds on deposit
in the Pre-Funding Account will be paid to the Seller in exchange for the
transfer to the Trust of Additional Receivables (as defined herein) from time to
time during the period from and including the Closing Date (as defined herein)
until the earliest of (i) the date on which the balance of funds on deposit in
the Pre-Funding Account is reduced to an amount less than $100,000, (ii) the
date on which an Event of Default (as defined herein) occurs under the Indenture
or a Servicer Termination Event (as defined herein) occurs under the Sale and
Servicing Agreement (as defined herein) and (iii) the close of business on April
30, 1998 (the 'Pre-Funding Period').
Interest on the Notes will accrue at a rate of 5.88% per annum (the
'Interest Rate'). Interest on and principal of the Notes will be payable on the
twenty-first day of each month (or, if such day is not a Business Day, the next
succeeding Business Day), beginning on January 21, 1998 (each, a 'Distribution
Date'). To the extent not previously distributed to the holders of the Notes
(each, a 'Noteholder' or 'Holder'), the remaining outstanding principal balance
of such Notes will be distributed to such Holders on the Distribution Date
occurring in May, 2004 (the 'Final Scheduled Distribution Date'). However,
payment in full of the Notes could occur earlier than such date as described
herein.
Full and complete payment of the Scheduled Payments (as defined herein) with
respect to the Notes on each Distribution Date is unconditionally and
irrevocably guaranteed pursuant to a financial guaranty insurance policy (the
'Policy') to be issued by:
[LOGO]
There currently is no secondary market for the Notes. The Underwriter
expects, but is not obligated, to make a market in the Notes. There is no
assurance that any such market will develop or continue.
---------------------
FOR A DISCUSSION OF CERTAIN FACTORS WHICH SHOULD BE CONSIDERED BY
PROSPECTIVE PURCHASERS OF THE NOTES, SEE 'RISK FACTORS' ON PAGE S-14 HEREIN AND
ON PAGE 23 OF THE ACCOMPANYING PROSPECTUS.
---------------------
THE NOTES REPRESENT OBLIGATIONS OF THE TRUST ONLY AND DO NOT REPRESENT
OBLIGATIONS OF OR INTERESTS IN NAFI, THE SELLER OR ANY AFFILIATE OF EITHER. NONE
OF THE NOTES, THE CERTIFICATES OR THE RECEIVABLES ARE INSURED OR
GUARANTEED BY ANY GOVERNMENTAL AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO THE
PUBLIC DISCOUNT SELLER(1)(2)
<S> <C> <C> <C>
Per Note.................................... $99.97595 .300% $99.67595
Total....................................... $85,179,509.40 $255,600.00 $84,923,909.40
</TABLE>
(1) Before deducting estimated expenses of $860,000 payable by the Seller.
(2) In connection with the offering contemplated by this Prospectus Supplement,
First Union Corporation has received a fee from the Seller in respect of
certain advisory services relating to the structuring of the transaction.
See 'Underwriting' herein.
---------------------
The Notes are offered hereby by the Underwriter named below, subject to
receipt and acceptance by the Underwriter and its right to reject any order in
whole or in part. It is expected that delivery of the Notes will be made in
book-entry form only through the Same-Day Funds Settlement System of The
Depository Trust Company ('DTC'), Cedel Bank, societe anonyme and the Euroclear
System against payment therefor in immediately available funds in New York, New
York on or about January 20, 1998 (the 'Closing Date').
FIRST UNION CAPITAL MARKETS CORP.
The date of this Prospectus Supplement is January 15, 1998
<PAGE>
This Prospectus Supplement and the accompanying Prospectus may be used
by First Union Capital Markets Corp., affiliates of which have an ownership
interest in, or participate in banking transactions with, NAFI, in connection
with offers and sales related to market making transactions of the Notes. First
Union Capital Markets Corp. may act as principal or agent in such transactions.
Such sales will be made at prices related to prevailing market prices at the
time of the sale or otherwise.
THIS PROSPECTUS SUPPLEMENT DOES NOT CONTAIN COMPLETE INFORMATION ABOUT
THE OFFERING OF THE NOTES. ADDITIONAL INFORMATION IS CONTAINED IN THE PROSPECTUS
AND PROSPECTIVE INVESTORS ARE URGED TO READ BOTH THIS PROSPECTUS SUPPLEMENT AND
THE PROSPECTUS IN FULL. SALES OF THE NOTES MAY NOT BE CONSUMMATED UNLESS THE
PURCHASER HAS RECEIVED BOTH THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE
NOTES, INCLUDING PURCHASES OF NOTES TO COVER SYNDICATE SHORT POSITIONS. FOR A
DESCRIPTION OF THESE TRANSACTIONS, SEE "UNDERWRITING."
REPORTS TO NOTEHOLDERS
Unless and until Definitive Notes are issued, unaudited monthly and
annual reports, containing information concerning the Trust and prepared by the
Servicer, will be sent on behalf of the Trust to the Indenture Trustee and Cede
& Co., as registered holder of the Notes and the nominee of DTC. See "Certain
Information Regarding the Securities - Book-Entry Registration" and " - Reports
to Securityholders" in the accompanying Prospectus. Note Owners may receive such
reports, upon written request, together with a certification that they are Note
Owners and payment of any expenses associated with the distribution of such
reports, from the Indenture Trustee at its address at 311 West Monroe Street,
12th Floor, Chicago, Illinois 60606. Such reports will not constitute financial
statements prepared in accordance with generally accepted accounting principles.
Neither the Seller, NAFI nor the Insurer intends to send any of its financial
reports to Noteholders. The Servicer, on behalf of the Trust, will file with the
Commission periodic reports concerning the Trust to the extent required under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the
rules and regulations of the Commission thereunder.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents subsequently filed with the Commission by the Seller on
behalf of the Trust pursuant to Section 13(a), 13(c), 14 or 15(d) of the
Exchange Act, as amended, after the date of this Prospectus Supplement and prior
to the termination of the offering of the Notes offered hereby, shall be deemed
to be incorporated by reference in this Prospectus Supplement and to be a part
of this Prospectus Supplement from the date of the filing of such documents. Any
statement contained herein or in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus Supplement to the extent that a statement
contained herein or in any other subsequently filed document which also is or is
deemed to be incorporated by reference herein, modifies or replaces such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus
Supplement.
S-2
<PAGE>
In addition to the documents described above and in the accompanying
Prospectus under "Incorporation of Certain Documents by Reference", the
consolidated financial statements of Financial Security Assurance Inc.
("Financial Security") and Subsidiaries included in, or as exhibits to, the
following documents, which have been filed with the Commission by Financial
Security Assurance Holdings Ltd. ("Holdings"), are hereby incorporated by
reference in this Prospectus Supplement:
(a) Annual Report on Form 10-K for the year ended December 31, 1996;
(b) Quarterly Report on Form 10-Q for the three month period ended
March 31, 1997;
(c) Quarterly Report on Form 10-Q for the three month period ended June
30, 1997; and
(d) Quarterly Report on Form 10-Q for the three month period ended
September 30, 1997
All financial statements of Financial Security included in documents
filed by Holdings pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange
Act subsequent to the date of this Prospectus Supplement and prior to the
termination of the offering of the Notes shall be deemed to be incorporated by
reference into this Prospectus Supplement and to be part hereof from the
respective dates of filing of such documents.
The Seller will provide without charge to any person to whom this
Prospectus Supplement is delivered, upon the oral or written request of such
person, a copy of any or all of the reports and financial statements
incorporated herein by reference. Requests for such copies should be directed to
National Financial Auto Funding Trust, c/o National Auto Finance Company, Inc.,
One Park Place, Suite 200, 621 N.W. 53rd Street, Boca Raton, Florida 33487
(telephone (561) 997-2413), Attention: Chief Financial Officer.
S-3
<PAGE>
SUMMARY OF THE TERMS OF THE NOTES
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus Supplement and in
the accompanying Prospectus. Capitalized terms used herein and not otherwise
defined herein shall have the respective meanings ascribed to such terms
elsewhere in this Prospectus Supplement on the pages indicated in the "Index of
Defined Terms" herein or, to the extent not defined herein, in the accompanying
Prospectus on the pages indicated under the caption "Index of Defined Terms" in
the Prospectus.
<TABLE>
<S> <C>
Issuer ................................ National Auto Finance 1998-1 Trust (the "Trust" or the "Issuer"),
formed pursuant to a Trust Agreement, dated as of or prior to the
Closing Date (the "Trust Agreement"), between the Seller and the
Owner Trustee.
Seller................................. National Financial Auto Funding Trust, a trust the beneficial
interests in which are wholly-owned by NAFI and affiliates of NAFI.
See "The Seller" in the accompanying Prospectus.
Servicer............................... National Auto Finance Company, Inc. See "National Auto Finance
Company, Inc." in the accompanying Prospectus.
Indenture Trustee...................... Harris Trust and Savings Bank, an Illinois banking corporation, as
trustee under the Indenture (the "Indenture Trustee").
Owner Trustee.......................... Wilmington Trust Company, a Delaware banking corporation, as trustee
under the Trust Agreement (the "Owner Trustee").
Backup Servicer, Collateral Agent
and Trust Collateral Agent........... In addition to acting as Indenture Trustee under the Indenture,
Harris Trust and Savings Bank will agree to act as backup servicer
(in such capacity, the "Backup Servicer") under the Sale and
Servicing Agreement and to service the Receivables in the event NAFI
resigns or is removed as Servicer. Harris Trust and Savings Bank
will also agree to act as Trust Collateral Agent under the Sale and
Servicing Agreement (in such capacity, the "Trust Collateral Agent")
on behalf of the Noteholders and the Insurer with respect to the
Trust Property and to act as collateral agent (in such capacity, the
"Collateral Agent") on behalf of the Noteholders and the Insurer with
respect to the Spread Account and the amounts deposited thereto.
Insurer................................ Financial Security Assurance Inc., a financial guaranty insurance
company incorporated under the laws of the State of New York (the
"Insurer" or "Financial Security"). See "The Insurer" herein.
Terms of the Notes..................... The principal terms of the Notes will be as described below:
</TABLE>
S-4
<PAGE>
<TABLE>
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A. Distribution Dates................ The 21st day of each month (or if the 21st day is not a Business Day,
the next succeeding Business Day) commencing January 21, 1998 (each,
a "Distribution Date"). A "Business Day" is a day other than a
Saturday, Sunday or other day on which commercial banks located in
New York, Illinois or Florida are authorized or obligated to be
closed.
B. Interest Rate..................... The Notes will bear interest at the rate of 5.88% per annum (the
"Interest Rate"), calculated on the basis of a 360-day year
consisting of twelve 30-day months.
C. Interest.......................... Interest on the outstanding principal amount of the Notes will accrue
at the Interest Rate from the Closing Date (in the case of the first
Distribution Date) or from the most recent Distribution Date on which
interest has been paid to but excluding the following Distribution
Date (each an "Interest Period"). Interest on the Notes for any
Distribution Date due but not paid on such Distribution Date will be
due on the next Distribution Date together with interest on such
amount at the Interest Rate, to the extent permitted by law. The
amount of interest due and payable on the Notes on each Distribution
Date will equal 30 days' interest (or, in the case of the first
Distribution Date, interest accrued from and including the Closing
Date to but excluding such Distribution Date) and will be distributed
by the Indenture Trustee on a pro rata basis to the Noteholders of
record on the Business Day preceding such Distribution Date (the
"Record Date"). The Policy guarantees payment of Monthly Interest
payable on each Distribution Date. See "The Notes - Payments of
Interest" herein.
D. Principal......................... Principal distributions will be made to the Holders of the Notes on
each Distribution Date (other than the Final Scheduled Distribution
Date) in an amount equal to the sum of (i) 91% of the Principal
Distributable Amount for such Distribution Date and (ii) the
aggregate shortfalls in principal distributions due and payable to
the Noteholders for all prior Distribution Dates. The "Principal
Distributable Amount" for any Distribution Date generally will equal
the sum of the following, without duplication: (i) that portion of
all collections on the Receivables (other than Liquidated
Receivables, Retransferred Receivables and, to the extent included in
clause (iv) below, the outstanding principal balance of Retransfer
Default Receivables) allocable to principal, including all full and
partial principal prepayments deposited into the Collection Account
during the calendar month preceding the calendar month in which such
Distribution Date occurs (the "Due Period"), (ii) the outstanding
principal balance of all Receivables that became Liquidated
Receivables during the related Due Period (other than Liquidated
Receivables that became Retransferred Receivables during such Due
Period), (iii) the portion allocable to principal of the Purchase
Amount paid
</TABLE>
S-5
<PAGE>
<TABLE>
<S> <C>
by the Seller or NAFI, as the case may be, in respect of all Receivables
that became Retransferred Receivables on or prior to the related
Reporting Date and subsequent to the preceding Reporting Date, (iv) in
the sole discretion of the Insurer, the outstanding principal balance as
of the related Reporting Date of all Retransfer Default Receivables, and
(v) the aggregate amount of Bankruptcy Losses that occurred during the
related Due Period. To the extent not previously paid, the remaining
outstanding principal amount of the Notes will be paid in full on the
Final Scheduled Distribution Date. See "The Notes - Distributions and
Payments " herein. The Policy guarantees payment of any principal of the
Notes remaining unpaid on the Final Scheduled Distribution Date. See
"The Policy" herein. In addition to the distributions of principal
described above, Noteholders may also receive distributions of principal
in connection with an Optional Redemption or Mandatory Redemption, as
described below.
E. Optional Redemption............... The Notes will be redeemed in whole, but not in part, on any
Distribution Date on which the Seller exercises its option to
purchase the Receivables, which, subject to certain conditions, may
occur on any Distribution Date on which the aggregate of the
outstanding principal balances of the Receivables (the "Pool
Outstanding Principal Balance") is less than 10% of the Original Pool
Outstanding Principal Balance of the Receivables. The "Original Pool
Outstanding Principal Balance" will equal the aggregate outstanding
principal balance of all of the Receivables, including Additional
Receivables, as of their respective Cut-off Dates. Such right may be
exercised only with the prior written consent of the Insurer if a
claim has previously been made under the Policy and remains
unreimbursed to the Insurer or if such redemption would result in a
claim under the Policy or would result in any amount owing to the
Insurer or the Noteholders remaining unpaid. In connection with any
such redemption, the Seller will deliver to the Indenture Trustee an
amount (the "Redemption Price") equal the sum of (i) 100% of the
aggregate outstanding principal balance of the Notes on such
Distribution Date and (ii) all accrued and unpaid interest thereon at
the Interest Rate.
F. Mandatory Redemption.............. The Notes will be redeemed in part on the Distribution Date relating
to the Reporting Date next succeeding the last day of the Pre-Funding
Period in the event that any amount remains on deposit in the
Pre-Funding Account after giving effect to the purchase of all
Additional Receivables, including any such purchase on such date (a
"Mandatory Redemption"). The aggregate principal amount of the Notes
to be redeemed will be an amount equal to the amount then on deposit
in the Pre-Funding Account less any undistributed investment earnings
on deposit in the Pre-Funding Account (the "Note Redemption
</TABLE>
S-6
<PAGE>
<TABLE>
<S> <C>
Amount"). The Policy does not guaranty any such principal payment on
the Notes from funds on deposit in the Pre-Funding Account. See "The
Policy" herein.
The Notes may be accelerated and subject to immediate payment at par
upon the occurrence of an Event of Default under the Indenture. So long
as no Insurer Default shall have occurred and be continuing, an Event of
Default under the Indenture will occur only upon delivery by the Insurer
to the Indenture Trustee of notice of the occurrence of certain events
of default under the Insurance and Indemnity Agreement, dated as of the
Closing Date (the "Insurance Agreement"), among the Insurer, the Trust,
the Seller and NAFI. In the case of such an Event of Default, the Notes
will automatically be accelerated and subject to immediate payment at
par. See "The Notes - Events of Default" herein. The Policy does not
guarantee payment of any amounts that become due on an accelerated basis
unless the Insurer elects, in its sole discretion, to pay such amounts
in whole or in part. See "The Policy" herein.
The Trust Property..................... Each Note will represent an obligation of the Trust secured by the
Trust Property. The assets of the Trust (the "Trust Property") will
include (i) non-prime motor vehicle retail installment sale contracts
transferred to the Trust on the Closing Date (the "Initial
Receivables") and on subsequent transfer dates (the "Additional
Receivables" and, together with the Initial Receivables, the
"Receivables"), (ii) all monies paid or payable thereunder on or
after the applicable Cut-off Date, (iii) an assignment of the
security interests of NAFI in the new and used automobiles,
light-duty trucks, vans and minivans financed thereby (the "Financed
Vehicles"), (iv) the Receivable Files, (v) such assets as shall from
time to time be deposited in the Collection Account (the "Collection
Account"), the Distribution Account (the "Distribution Account"), the
Note Distribution Account (the "Note Distribution Account"), the
Pre-Funding Account and the Pre-Funding Period Reserve Account (as
defined herein), each established pursuant to the Sale and Servicing
Agreement or the Indenture, (vi) property that secured a Receivable
and that has been acquired by repossession or otherwise, (vii) all
rights to insurance proceeds and liquidation proceeds with respect to
the Receivables and the Financed Vehicles, (viii) certain rights of
NAFI against Dealers under the Dealer Agreements and against
Originators under the Originator Agreements, (ix) all right, title
and interest of the Seller in and to the Purchase Agreements, (x)
certain other rights under the Sale and Servicing Agreement in
respect of representations and warranties made by the Seller
regarding the Receivables in the Sale and Servicing Agreement and
(xi) the income and proceeds of the foregoing and rights to enforce
the foregoing.
</TABLE>
S-7
<PAGE>
<TABLE>
<S> <C>
The Receivables........................ The Initial Receivables had an aggregate outstanding principal
balance of $75,504,414.69 as of December 15, 1997 (the "Initial
Cut-off Date"). Pursuant to the Sale and Servicing Agreement, the
Seller may, subject to the prior written consent of the Insurer and
satisfaction of certain conditions contained in the Sale and
Servicing Agreement, transfer Additional Receivables to the Trust
from time to time during the Pre-Funding Period to the extent that
funds are then on deposit in the Pre-Funding Account. During the
Pre-Funding Period, upon the Seller's written direction to the Trust
Collateral Agent and the Servicer from time to time (but not more
than once during each calendar month or as more frequently consented
to in writing by the Insurer), the Trust will release funds in the
Pre-Funding Account on the date of any such transfer (each, a
"Subsequent Transfer Date") to the Seller in an amount equal to 91%
of the aggregate principal balance of the Additional Receivables so
transferred as of the close of business on the third Business Day (as
defined below) prior to the applicable Subsequent Transfer Date
(each, a "Subsequent Cut-off Date"; the Initial Cut-off Date and all
Subsequent Cut-off Dates are collectively referred to as the "Cut-off
Dates").
The Seller will acquire (i) the Initial Receivables from National
Financial Auto Funding Trust II ("Funding Trust II"), a Delaware
business trust wholly-owned by NAFI and affiliates of NAFI, pursuant to
the Sale Agreement, dated as of December 15, 1997 (the "Sale
Agreement"), between the Seller and Funding Trust II, and (ii) the
Additional Receivables from NAFI pursuant to a Purchase and Contribution
Agreement, dated as of the Closing Date (the "Purchase Agreement" and,
together with the Sale Agreement, the "Purchase Agreements") between the
Seller and NAFI. NAFI and Funding Trust II, in their capacities as
transferors of the Receivables to the Seller, are herein referred to
collectively as the "NAFI Transferors." The Initial Receivables
constitute, as of the Initial Cut-off Date, and the Additional
Receivables will constitute, as of the applicable Subsequent Cut-off
Date, a substantial portion of the non-prime motor vehicle retail
installment sale contracts originated by NAFI satisfying the selection
criteria described herein. The Additional Receivables to be transferred
to the Trust on each Subsequent Transfer Date will be comprised of
non-prime motor vehicle retail installment sale contracts acquired by
NAFI on or prior to the related Subsequent Cut-off Date and after the
preceding Cut-off Date. See "The Receivables Pool -General" herein.
As of the Initial Cut-off Date, the weighted average annual percentage
rate, as such term is used with respect to the Federal Truth-in-Lending
Act ("APR") of the Initial Receivables was approximately 19.19% and the
weighted average remaining scheduled maturity on the Initial Receivables
was approximately
</TABLE>
S-8
<PAGE>
<TABLE>
<S> <C>
51.82 months and the percentage of the aggregate principal balance of
the Initial Receivables as of the Initial Cut-off Date relating to the
financing of used Financed Vehicles was 77.38%. The final scheduled
payment date on the Initial Receivable with the latest maturity is
December 15, 2002. The maturity dates of the Receivables may be extended
under certain circumstances. The actual final payment date of the Notes
may be earlier than the final scheduled payment date of the Receivables
due to prepayments on the Receivables. See "Risk Factors - Yield and
Prepayment Considerations" herein and "The Receivables Pool - Average
Life of the Receivables" herein. Following the transfer of any
Additional Receivables to the Trust, the weighted average APR of the
Receivables may be as low as 18.00%, the weighted average remaining term
of the Receivables may be as high as 55 months, the percentage of the
aggregate outstanding principal balance of the Receivables represented
by Receivables relating to loans for the purchase of used Financed
Vehicles may be as high as 80% and the final scheduled payment date on
the Receivable with the latest maturity may be as late as April 21,
2003. See "The Receivables Pool" herein and "The Receivables" in the
accompanying Prospectus.
Final Scheduled
Distribution Date ..................... The Distribution Date occurring in May, 2004 (the "Final Scheduled
Distribution Date").
Subordination of the
Certificates ....................... The Certificates represent the right to receive distributions of
funds remaining in the Distribution Account on each Distribution Date
after all other payments required to be made on such Distribution
Date that are described under "The Notes - Distributions and
Payments" have been made. To the extent that the amount on deposit in
the Spread Account on any Distribution Date is less than as required
under the Spread Account Agreement, amounts remaining in the
Distribution Account after distribution of the Servicing Fee and
certain other fees payable by the Trust, principal and interest in
respect of the Notes and any amounts payable to the Insurer will be
deposited in the Spread Account in the amount of such deficiency.
Because the amount required to be on deposit in the Spread Account or
the existence thereof may be modified or terminated by the Insurer
(prior to the occurrence and continuation of an Insurer Default) with
the consent of the Seller but without the consent of the Indenture
Trustee or the Noteholders and amounts on deposit or to be deposited
in the Spread Account may be distributed to persons other than the
Insurer or the Noteholders without the consent of the Noteholders,
the Noteholders should not rely on the Spread Account for payments of
principal of or interest on the Notes. See "The Notes - Subordination
of the Certificates; Spread Account" herein.
</TABLE>
S-9
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<TABLE>
<S> <C>
Pre-Funding Account.................... The Pre-Funding Account will be established by and maintained with
the Trust Collateral Agent. The Pre-Funding Account will be funded on
the Closing Date with a portion of the proceeds of the offering of
the Notes in the amount of $16,490,982.64 (the "Pre-Funded Amount").
During the period (the "Pre-Funding Period") from and including the
Closing Date until the earlier of (i) the date on which the balance
of funds on deposit in the Pre-Funding Account is reduced to an
amount less than $100,000, (ii) the date on which an Event of Default
occurs under the Indenture or a Servicer Termination Event occurs
under the Sale and Servicing Agreement and (iii) the close of
business on April 30, 1998, the Pre-Funded Amount will be reduced by
amounts released to the Seller in connection with the transfer of
Additional Receivables to the Trust in accordance with the Sale and
Servicing Agreement. On the Distribution Date related to the
Reporting Date next succeeding termination of the Pre-Funding Period,
the Notes will be subject to Mandatory Redemption in a principal
amount equal to the amount, if any, remaining on deposit in the
Pre-Funding Account at the close of business on the last day of the
Pre-Funding Period less any undistributed investment earnings therein.
Earnings on reinvestment of amounts on deposit in the Pre-Funding
Account will be deposited monthly into the Collection Account.
Amounts on deposit in the Pre-Funding Account will be applied to the
purchase of Additional Receivables not more frequently than monthly
during the Pre-Funding Period unless the Insurer consents to more
frequent transfers. See "The Trust Agreements,Sale and Assignment of
Receivables" herein.
Pre-Funding Period
Reserve Account........................ On the Closing Date, the Indenture Trustee at the direction of the
Seller will deposit approximately $154,832.00 from the proceeds of
the sale of the Notes into the Pre-Funding Period Reserve Account.
Amounts deposited therein will be transferred to the Note
Distribution Account by the Trust Collateral Agent on each
Distribution Date occurring on or prior to the Distribution Date next
succeeding termination of the Pre-Funding Period in an amount equal
to the excess of (i) interest accrued at the Interest Rate on the
amount of funds on deposit in the Pre-Funding Account for the period
from and including the preceding Distribution Date (or, in the case
of the first Distribution Date, the Closing Date) to but not
including the current Distribution Date over (ii) the actual amount
of investment earnings on amounts on deposit in the Pre-Funding
Account from and including the preceding Distribution Date (or, in
the case of the first Distribution Date, the Closing Date) to the
current Distribution Date. If after making any required transfers to
the Note Distribution Account on any
</TABLE>
S-10
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<S> <C>
Distribution Date the amount on deposit in the Pre-Funding Period
Reserve Account exceeds the Required Reserve Amount (as defined herein),
the Trust Collateral Agent will distribute such excess to the Seller. On
the Distribution Date related to the Reporting Date immediately
following termination of the Pre-Funding Period, any amounts remaining
in the Pre-Funding Period Reserve Account (after application to interest
payable on the Notes as described above) shall be paid to the Seller
pursuant to the Sale and Servicing Agreement. Thereafter, the
Pre-Funding Period Reserve Account shall be closed.
Spread Account......................... The Spread Account will be established and maintained by Harris Trust
and Savings Bank, as collateral agent (the "Collateral Agent") under
the Spread Account Agreement, dated as of the Closing Date, among the
Seller, the Insurer and the Collateral Agent (the "Spread Account
Agreement"). The Spread Account will not be property of the Trust,
but will be held by the Collateral Agent for the benefit of the
Noteholders and the Insurer. The Spread Account will be funded on
the Closing Date with a portion of the proceeds of the sale of the
Notes in the amount of $3,745,054.95 and, on each Distribution Date,
from amounts otherwise distributable in respect of deposits to the
Pre-funding Period Reserve Account, payment of certain expenses
payable by the Trust and the Certificates. See "The Notes -
Distributions and Payments" herein. Pursuant to the Spread Account
Agreement, amounts on deposit in the Spread Account will be available
to pay the Servicing Fee and certain other fees payable by the Trust,
to make distributions of the Note Distributable Amount on any
Distribution Date to the Noteholders and to make payments due to the
Insurer pursuant to the Sale and Servicing Agreement, the Insurance
Agreement or the Indenture. Because the Spread Account may be
amended or terminated or the amount required to be on deposit therein
may be reduced by the Insurer (prior to the occurrence and
continuation of an Insurer Default) with the consent of the Seller
but without the consent of the Indenture Trustee or the Noteholders
and amounts on deposit or to be deposited in the Spread Account may
be distributed to persons other than the Insurer or the Noteholders
without the consent of the Noteholders, Noteholders should not rely
on the Spread Account for payments of principal of, or interest on,
the Notes. See "The Notes - Subordination of the Certificates; Spread
Account" herein.
The Policy............................. On the Closing Date, the Insurer will issue the Policy to the Trust
Collateral Agent for the benefit of the Noteholders pursuant to which
the Insurer will unconditionally and irrevocably guarantee to the
Noteholders the payment of interest due on the Notes on each
Distribution Date and the ultimate payment in full of the principal
amount of the Notes remaining
</TABLE>
S-11
<PAGE>
<TABLE>
<S> <C>
outstanding on the Final Scheduled Distribution Date, in each case in
accordance with the terms and conditions of the Policy. See "The
Policy." The Insurer will have the right to terminate the Servicer upon
the occurrence of a Servicer Termination Event. See "The Policy" and
"The Sale and Servicing Agreement - Servicer Termination Event" herein.
Mandatory Retransfer of Certain
Receivables........................... The Seller will make certain warranties in the Sale and Servicing
Agreement with respect to the Receivables. If (i) the Seller breaches
any such warranty with respect to a Receivable, (ii) such breach
materially and adversely affects the interests of the Noteholders,
the Certificateholders or the Insurer in such Receivable, and (iii)
the Seller does not correct or cure such breach by the Reporting Date
occurring during the second full calendar month following discovery
by the Servicer, any subservicer or the Seller or the date the Trust
Collateral Agent received notice of such breach pursuant to the Sale
and Servicing Agreement, the Seller will be required to repurchase
such Receivable pursuant to the Sale and Servicing Agreement (any
Receivable so repurchased, a "Retransferred Receivable"). NAFI will
generally be obligated to repurchase such Receivable from the Seller
pursuant to the Purchase Agreements contemporaneously with the
Seller's repurchase from the Trust. In addition, the repurchase
obligations of NAFI under the Purchase Agreements will be assigned by
the Seller to the Trust and by the Trust to the Trust Collateral
Agent for the benefit of the Noteholders and the Insurer and may be
enforced by the Trust Collateral Agent in the event the Seller
defaults in its repurchase obligation. No assurance can be given that
the Seller or NAFI will at any time have sufficient funds to satisfy
any such retransfer requirement. Mandatory retransfers to the Seller
of the Receivables will reduce the average life of the Notes and
could result in the Holders of the Notes receiving unexpected
principal payments at a time when such Holders are unable to reinvest
such payments in investments having a yield and rating comparable to
the yield and rating on the Notes. See "Risk Factors - Yield and
Prepayment Considerations."
Tax Status ............................ Subject to the discussion below (See "Certain Federal Income Tax
Consequences"), under the Internal Revenue Code of 1986 (the "Code"),
as amended, and existing regulations, administrative rules and
judicial decisions, counsel to the Seller is of the opinion that the
Notes will be characterized as indebtedness for federal income tax
purposes and the Trust will not be characterized as an association
(or a publicly traded partnership) that is taxable as a corporation.
Each Noteholder, by the acceptance of a Note, will agree to treat
the Notes as indebtedness for federal income tax purposes. See
"Certain
</TABLE>
S-12
<PAGE>
<TABLE>
<S> <C>
Federal Income Tax Consequences" herein and in the accompanying
Prospectus.
ERISA Considerations .................. Subject to the conditions and considerations discussed under "ERISA
Considerations," the Notes are eligible for purchase by pension,
profit-sharing or other employee benefit plans as well as individual
retirement accounts and certain types of Keogh Plans (each, a
"Benefit Plan"). See "ERISA Considerations" herein.
Rating ................................ As a condition of issuance, the Notes will be rated "AAA" by Standard
& Poor's Ratings Services ("S&P") and "Aaa" by Moody's Investors
Service, Inc. ("Moody's" and, together with S&P, the "Rating
Agencies") primarily on the basis of the issuance of the Policy by the
Insurer. There is no assurance that the ratings initially assigned
to the Notes will not subsequently be lowered or withdrawn by the
Rating Agencies. Such ratings will not constitute an assessment of
the likelihood that principal prepayments on the Receivables
underlying the Notes will be made by the Obligors thereon or of the
degree to which the rate of such prepayments might differ from that
originally anticipated. See "Risk Factors - Ratings on Notes" herein.
</TABLE>
S-13
<PAGE>
RISK FACTORS
Prospective Noteholders should consider, in addition to the factors
described under "Risk Factors" in the Prospectus, the following factors in
connection with the purchase of the Notes:
Geographic Concentration of Receivables
As of the Initial Cut-off Date, Obligors with respect to approximately
19.19%, 18.09% and 12.78% of the Receivables (based on Initial Cut-off Date
principal balance and mailing addresses) were located in North Carolina, Georgia
and Florida, respectively. See "The Receivables Pool." Accordingly, adverse
economic conditions or other factors particularly affecting any of these states
could adversely affect the delinquency, loan loss or repossession experience of
the Trust with respect to the Receivables.
Limited Operating History
NAFI, through two affiliated limited partnerships, commenced operations
in September 1994. Although NAFI has calculated and presented herein its net
loss experience with respect to its servicing portfolio of Receivables, there
can be no assurance that the information presented will reflect actual future
experience with respect to the Receivables. In addition, there can be no
assurance that the future delinquency, loan loss or repossession experience of
the Trust with respect to the Receivables will be better or worse than that set
forth herein with respect to NAFI's servicing portfolio. See "The Receivables
Pool - Delinquency, Repossession and Loss Information" herein.
Delinquency, Loan Loss and Repossession Experience
During 1997, NAFI experienced significant servicing and collections
problems with its servicing portfolio, which NAFI believes resulted primarily
from serious deficiencies in the servicing and collection performance of its
outside servicer.
Prior to July 1997, substantially all of the day-to-day servicing
functions with respect to NAFI's portfolio of motor vehicle retail installment
sale contracts were performed by an outside servicer subject to supervision by
NAFI. NAFI commenced operations in its internal servicing division (the
"Servicing Division") during July 1997 and had hired 74 employees as of December
31, 1997 for both collections and servicing of its receivables. The Servicing
Division began assuming collections responsibility for receivables more than 30
days past due in July 1997, and assumed responsibility for collections of the
entire servicing portfolio on October 1, 1997, although it continues to
substantially rely on and use its outside servicer for certain customer service
and management information systems ("MIS") functions (which include, but are not
limited to, payment processing, invoicing, insurance and certificate of title
tracking capabilities and certain disaster recovery capabilities). NAFI expects
to begin customer service and MIS operations in the first quarter of 1998,
although there can be no assurance that NAFI will be able to do so. During the
anticipated transition period when its outside servicer continues to provide
customer service and MIS operations for the servicing portfolio, NAFI will
experience certain duplicative costs and will not have complete self-management
of the quality and timeliness of servicing efforts.
NAFI had not serviced or collected receivables prior to July 1997 and
therefore is subject to the inherent risks associated with initiating new
operations, such as unforeseen operational, financial and management problems.
There can be no assurance that NAFI will be able to service and collect the
S-14
<PAGE>
servicing portfolio on a cost effective and timely basis or that future
delinquency and loss ratios will not increase. Industry experience indicates
that increases in delinquencies and defaults are likely to result immediately
following servicing transfers.
Reliance Upon Cash Flows from Prior Securitizations
NAFI and the Seller have agreements with the Insurer in connection with
certain prior securitizations that permit the Insurer to exercise certain
remedies in the event that delinquencies, defaults or net losses on the related
portfolio of receivables exceed established levels (such events, "portfolio
performance defaults"). Such remedies include the deposit to the related spread
account of funds otherwise distributable to the Seller, termination of the
Servicer and, in certain instances, liquidation of the receivables and
prepayment of the related securities. There have occurred certain portfolio
performance defaults with respect to two prior securitization transactions. As a
consequence, the reserve level required to be maintained in the related spread
account has increased in accordance with the terms of the related spread account
agreement. NAFI believes that such increase has not had and will not have a
material effect on its business or its expansion plans, including its
securitization program. The Insurer has waived certain other remedies available
to it in respect of such portfolio performance defaults. However, an increase in
delinquencies, defaults or net losses on the portfolios of receivables relating
to such prior securitizations may result in an Insurance Agreement Event of
Default under both the prior securitizations and the securitization described in
this Prospectus Supplement. Any increase in limitations on cash flow available
to NAFI from permanent securitization trusts, NAFI's inability to obtain any
necessary waivers from FSA or the termination of NAFI as Servicer could
materially adversely affect NAFI's financial condition, results of operations
and cash flows.
Ratings on Notes
It is a condition to the issuance of the Notes that they be rated "AAA"
by S&P and "Aaa" by Moody's primarily on the basis of the issuance of the Policy
by the Insurer. A rating is not a recommendation to purchase, hold or sell the
Notes. There is no assurance that a rating will remain in effect for any given
period of time or that a rating will not be lowered or withdrawn entirely by a
Rating Agency if in its judgment circumstances in the future so warrant. In the
event that the rating initially assigned to the Notes is subsequently lowered or
withdrawn for any reason, including by reason of a downgrading of the Insurer's
claims-paying ability, no person or entity will be obligated to provide any
additional credit enhancement with respect to the Notes. Any reduction or
withdrawal of a rating may have an adverse effect on the liquidity and market
price of the Notes.
Yield and Prepayment Considerations
The Notes will be redeemed in part on the Distribution Date following
the end of the Pre-Funding Period if and to the extent that Additional
Receivables are not transferred to the Trust in amounts sufficient to fully
utilize the Pre-Funded Amount.
On the Closing Date, $75,504,414.69 in aggregate outstanding principal
amount of Initial Receivables will be transferred and assigned to the Trust by
the Seller. In addition, on the Closing Date the Pre-Funded Amount will be
deposited by the Indenture Trustee in the Pre-Funding Account from the proceeds
of the sale of the Notes. NAFI's inability to generate Additional Receivables
during the Pre-Funding Period in an amount sufficient to permit application of
the entire Pre-Funded Amount to the purchase of Additional Receivables will
result in a Mandatory Redemption on the Distribution Date relating to the
Reporting Date next succeeding the termination of the Pre-Funding Period in an
amount
S-15
<PAGE>
equal to the amount remaining on deposit in the Pre-Funding Account less any
undistributed investment earnings on deposit therein. In addition, any transfer
and assignment of Additional Receivables to the Trust will be subject to the
satisfaction, on or before the related Subsequent Transfer Date, of the
following conditions, among others: (i) each such Additional Receivable must
satisfy the eligibility criteria with respect to the Receivables specified in
the Sale and Servicing Agreement; (ii) as of such Subsequent Transfer Date, the
Receivables in the Trust, together with the Additional Receivables to be
transferred and assigned by the Seller to the Trust on such Subsequent Transfer
Date, must meet the following criteria (computed based on the characteristics of
the Initial Receivables on the Initial Cut-off Date and any Additional
Receivable as of the related Subsequent Cut-off Date): (a) the weighted average
APR of such Receivables must not be less than 18.00%, (b) the weighted average
remaining term of such Receivables must not be greater than 55 months, (c) not
more than 80% of the aggregate outstanding principal balance of such Receivables
may relate to loans for the purchase of used Financed Vehicles, and (d) the
final scheduled payment date on the Receivable with the latest maturity will not
be later than April 21, 2003; (iii) the Seller shall have executed and delivered
to the Owner Trustee a written assignment (a "Subsequent Transfer Agreement")
conveying such Additional Receivables to the Trust (including a schedule
identifying such Additional Receivables); and (iv) the Insurer shall, in its
sole and absolute discretion, have consented in writing to the transfer and
assignment of such Additional Receivables to the Trust.
It is anticipated that the Additional Receivables Purchase Price of
Additional Receivables transferred and assigned to the Trust will not be exactly
equal to the amounts on deposit in the Pre-Funding Account and, therefore, that
there will be at least a nominal amount of principal prepaid to the Noteholders
on the Distribution Date immediately following the end of the Pre-Funding
Period.
Dependence on NAFI for the Transfer of Additional Receivables
None of the Seller, NAFI or any affiliate of either is generally
obligated to make any payments in respect of the Notes or the Receivables.
However, the ability of the Seller to transfer and assign Additional Receivables
to the Trust on Subsequent Transfer Dates is completely dependent upon the
generation or acquisition of additional motor vehicle retail installment sale
contracts by NAFI. If, during the Pre-Funding Period, NAFI is unable to generate
or acquire sufficient additional motor vehicle retail installment sale contracts
to the Seller, or if such contracts do not satisfy the eligibility criteria
described herein, the ability of the Seller to transfer and assign Additional
Receivables to the Trust will be adversely affected. There can be no assurance
that NAFI will continue to generate or acquire motor vehicle installment sale
contracts that satisfy the criteria set forth in the Sale and Servicing
Agreement at the same rate that they have generated or acquired such contracts
in recent months or that the Insurer will consent to the transfer of such
contracts to the Trust.
Events of Default Under the Indenture
So long as no Insurer Default shall have occurred and be continuing,
neither the Indenture Trustee nor the Noteholders may declare an Event of
Default under the Indenture and an Event of Default will occur only upon
delivery by the Insurer to the Indenture Trustee of notice of the occurrence of
certain events of default under the Insurance Agreement. Upon the occurrence of
an Event of Default under the Indenture (so long as an Insurer Default shall not
have occurred and be continuing), the Insurer will have the right, but not the
obligation, to cause the liquidation, in whole or in part, of the Trust
Property, which will result in redemption, in whole or in part, of the Notes.
Following the occurrence of an Event of Default, the Indenture Trustee will
continue to submit claims as necessary under the Policy to enable the Trust to
continue to make payments of the Scheduled Payments with respect to the Notes.
S-16
<PAGE>
Following the occurrence of an Event of Default, however, the Insurer may, in
its sole discretion, elect to pay all or any portion of the outstanding
principal amount of the Notes, plus accrued interest thereon.
THE TRUST
The following information supplements the information contained in the
accompanying Prospectus. Prospective Noteholders should consider, in addition to
the information below, the information under "The Trusts" in the accompanying
Prospectus.
The Issuer, National Auto Finance 1998-1 Trust, is a business trust
formed under the laws of the State of Delaware. The Seller will establish the
Trust pursuant to the Trust Agreement and will transfer and assign the
Receivables and the other Trust Property to the Trust in exchange for the
Certificates. Prior to such sale and assignment, the Trust will have no assets
or obligations. The Trust will not engage in any business activity other than
acquiring and holding the Trust Property, issuing the Certificates and the
Notes, distributing payments thereon and engaging in other activities that are
necessary, suitable or convenient to accomplish the foregoing or are incidental
thereto.
Each Note will be secured by the pledge of the Trust Property by the
Trust to the Trust Collateral Agent for the benefit of the Indenture Trustee, on
behalf of the Noteholders, and the Insurer. The Trust Property will include (i)
the Receivables, (ii) all monies paid or payable thereunder on or after the
applicable Cut-off Date, (iii) an assignment of the security interests of NAFI
in the Financed Vehicles, (iv) the Receivable Files, (v) such assets as shall
from time to time be deposited in the Collection Account (the "Collection
Account"), the Distribution Account (the "Distribution Account"), the Note
Distribution Account (the "Note Distribution Account"), the Pre-Funding Account
and the Pre-Funding Period Reserve Account (as defined herein), each established
pursuant to the Sale and Servicing Agreement or the Indenture, (vi) property
that secured a Receivable and that has been acquired by repossession or
otherwise, (vii) all rights to insurance proceeds and liquidation proceeds with
respect to the Receivables and the Financed Vehicles, (viii) certain rights of
NAFI against Dealers under the Dealer Agreements and against Originators under
the Originator Agreements, (ix) all right, title and interest of the Seller in
and to the Purchase Agreements, (x) certain other rights under the Sale and
Servicing Agreement in respect of representations and warranties made by the
Seller regarding the Receivables and (xi) the income and proceeds of the
foregoing and any and all rights to enforce the foregoing. See "The Receivables"
and "Description of the Purchase Agreements and the Trust Documents -
Collections" in the accompanying Prospectus.
Omni Financial Services of America, Inc., as custodian on behalf of the
Trust, will initially hold the original installment sale contracts as well as
copies of documents and instruments relating to the Receivables and evidencing
the security interest in the Financed Vehicle securing each Receivable (the
"Receivable Files"). It is anticipated that Omni Financial Services of America,
Inc. will transfer the Receivable Files to the Trust Collateral Agent
contemporaneously with the assumption by NAFI's Servicing Division of all
customer service and management information systems functions currently
subcontracted by NAFI, and thereafter the Trust Collateral Agent, or a custodian
on behalf of the Trust Collateral Agent, will maintain possession of the
Receivable Files. In order to protect the Trust's ownership interest in the
Receivables and the Trust Collateral Agent's security interest in the
Receivables, the NAFI Transferors and the Seller will each file UCC-1 financing
statements in Florida and Delaware to give notice of the Trust's ownership of
the Receivables and the related Trust Property and the Trust will file UCC-1
financing statements in Florida and Delaware to give notice of the Trust
S-17
<PAGE>
Collateral Agent's security interest in the Trust Property for the benefit of
the Indenture Trustee and the Insurer.
The Owner Trustee
Wilmington Trust Company, the Owner Trustee under the Trust Agreement,
is a Delaware banking corporation and its principal offices are located at 1100
North Market Street, Rodney Square North, Wilmington, DE, 19890. The Owner
Trustee will perform limited administrative functions under the Trust Agreement.
The Owner Trustee's duties in connection with the issuance and sale of the Notes
is limited solely to the express obligations of the Owner Trustee set forth in
the Trust Agreement and the Sale and Servicing Agreement.
The Indenture Trustee
Harris Trust and Savings Bank is the Indenture Trustee (the "Indenture
Trustee") under the Indenture, the Trust Collateral Agent (the "Trust Collateral
Agent") under the Sale and Servicing Agreement and the Collateral Agent (the
"Collateral Agent")) under the Spread Account Agreement. Harris Trust and
Savings Bank is an Illinois banking association the principal offices of which
are located at 311 West Monroe Street, Chicago, Illinois 60606 (telephone (312)
461-4662).
USE OF PROCEEDS
The net proceeds to be received by the Seller from the sale of the
Notes will be applied (i) to the purchase of the Receivables from Funding Trust
II, (ii) to make the initial deposit to the Spread Account, (iii) to make the
deposit of the Pre-Funded Amount to the Pre-Funding Account and (iv) to make the
initial deposit to the Pre-Funding Period Reserve Account. Substantially all of
the proceeds of the sale of the Initial Receivables by Funding Trust II to the
Seller will be distributed to First Union National Bank as holder of the most
senior class of certificates issued by a trust with respect to which Funding
Trust II acts as depositor. First Union National Bank is an affiliate of the
Underwriter.
THE RECEIVABLES POOL
General
The Seller will acquire (i) the Initial Receivables from National
Financial Auto Funding Trust II ("Funding Trust II"), a Delaware business trust
wholly-owned by NAFI and affiliates of NAFI, on the Closing Date pursuant to the
Sale Agreement and (ii) the Additional Receivables from NAFI pursuant to a
Purchase and Contribution Agreement, dated as of the Closing Date (the "Purchase
Agreement" and, together with the Sale Agreement, the "Purchase Agreements")
between the Seller and NAFI. NAFI and Funding Trust II, in their capacities as
transferors of the Receivables to the Seller, are herein referred to
collectively as the "NAFI Transferors." The Initial Receivables represent, as of
the Initial Cut-off Date, and the Subsequent Receivables will represent, as of
the related Subsequent Cut-off Date, a substantial portion of NAFI's retail
motor vehicle installment sale contracts which (a) are secured by a new or used
automobile, light-duty truck, van or minivan, (b) have a remaining maturity,
original maturity and an APR at origination within the ranges set forth in this
paragraph, (c) are dated on or after February 15, 1995, (d) were not more than
30 days delinquent as of the Initial Cut-off Date or the Subsequent Cut-off
Date, as the case may be, and (e) satisfy the representations and warranties
required to be made with
S-18
<PAGE>
respect thereto under the Sale and Servicing Agreement. Approximately 80.10% of
the Receivables (by outstanding principal balance as of the Initial Cut-off
Date) were acquired by NAFI from Dealers pursuant to Dealer Agreements and the
balance of the Receivables were acquired by NAFI from other Originators pursuant
to Originator Agreements. As of the Initial Cut-off Date, approximately 98.11%
of the Receivables (by outstanding principal balance) were fully amortizing with
level payments over their terms. As of the Initial Cut-off Date, Initial
Receivables representing approximately 77.38% of the outstanding principal
balance of the Initial Receivables were secured by Financed Vehicles that were
used vehicles at the time of origination and the remainder were secured by
Financed Vehicles that were new at such time. All Initial Receivables have an
APR of at least 14.49% and not more than 30.10% and the weighted average APR of
the Initial Receivables is approximately 19.19%. The Initial Receivables had
remaining scheduled maturities as of the Initial Cut-off Date of at least one
month but not more than 60 months and original maturities of at least 9 months
but not more than 60 months. The final scheduled payment date on the Initial
Receivable with the latest maturity is December 15, 2002. The weighted average
remaining scheduled maturity of the Initial Receivables as of the Initial
Cut-off Date was approximately 51.82 months. The average outstanding principal
balance per Initial Receivable as of the Initial Cut-off Date was approximately
$11,856.85. Initial Receivables providing for payment according to the simple
interest and the actuarial method represent approximately 87.47% and 12.53%,
respectively, of the aggregate principal balance of the Initial Receivables as
of the Initial Cut-off Date. Based upon the Servicer's billing records, the
Dealers and Originators with respect to the Initial Receivables were domiciled
in 35 states as of the Initial Cut-off Date.
Composition of Initial Receivables as of the Initial Cut-off Date
<TABLE>
<CAPTION>
Weighted Average Aggregate Principal Number of Average Principal Weighted Average Weighted Average
Annual Balance Receivables in Balance Original Term to Remaining Term to
Percentage Rate ------- Pool ------- Maturity (Range)(1) Maturity (Range)(1)
of Receivables ---- ------------------- -------------------
(Range)(1)
----------
<S> <C> <C> <C> <C> <C>
19.19% 75,504,414.69 6,368 11,856.85 55.62 51.82
(14.49 - 30.10%) (9 - 60 Mo.) (1 - 60 Mo.)
</TABLE>
- --------------------------------------------------------
(1) Based on outstanding principal balance of Initial Receivables as of the
Initial Cut-off Date.
S-19
<PAGE>
The following table sets forth information, as of the Initial Cut-off Date,
regarding the number, outstanding principal balances and percentages of the Pool
Outstanding Principal Balance of the Initial Receivables in each of the states
listed below, determined on the basis of the geographic location of the Dealer
or Originator, as applicable, as reflected in the records of the Servicer.
<TABLE>
<CAPTION>
Outstanding
Number of Principal Percentage of Pool Weighted Average Weighted Average Average Outstanding
State Loans Balance Outstanding Principal Original Term to Remaining Maturity Principal Balance
----- --------- ----------- Balance Maturity in of Receivables in of Receivables
--------------------- Months Months ------------------
---------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Alabama 3 26,965.51 0.04% 51.83 43.48 8,988.50
Arizona 35 337,806.88 0.45% 53.74 41.90 9,651.63
California 509 5,130,836.30 6.80% 52.92 45.71 10,080.23
Colorado 5 49,086.43 0.07% 55.44 51.89 9,817.29
Connecticut 46 605,736.39 0.80% 56.99 54.92 13,168.18
Florida 1074 9,661,991.60 12.80% 51.31 42.17 8,996.27
Georgia 1120 13,837,952.31 18.33% 55.83 53.09 12,355.31
Idaho 2 16,159.13 0.02% 51.66 39.48 8,079.57
Illinois 95 821,709.27 1.09% 49.91 40.52 8,649.57
Indiana 13 97,275.29 0.13% 48.34 40.54 7,482.71
Iowa 1 9,683.08 0.01% 54.00 46.00 9,683.08
Kansas 19 211,714.48 0.28% 53.90 50.11 11,142.87
Kentucky 3 23,794.24 0.03% 43.92 39.60 7,931.41
Louisiana 45 506,686.07 0.67% 52.90 47.72 11,259.69
Maryland 192 2,459,827.96 3.26% 56.75 55.18 12,811.60
Massachusetts 2 9,860.26 0.01% 36.00 25.38 4,930.13
Minnesota 3 31,461.94 0.04% 50.46 44.61 10,487.31
Mississippi 9 89,552.65 0.12% 51.88 45.95 9,950.29
Missouri 84 1,052,279.99 1.39% 56.88 53.95 12,527.14
Nevada 2 22,086.15 0.03% 52.04 44.14 11,043.08
New Jersey 187 2,562,468.74 3.39% 56.65 54.60 13,703.04
New Mexico 8 99,620.50 0.13% 57.85 55.15 12,452.56
New York 195 2,652,873.79 3.51% 57.37 54.96 13,604.48
North Carolina 1131 14,864,546.38 19.69% 57.31 55.11 13,142.83
Ohio 38 317,701.76 0.42% 47.33 41.13 8,360.57
Oklahoma 28 292,437.58 0.39% 53.56 50.76 10,444.20
Oregon 1 10,220.15 0.01% 60.00 57.00 10,220.15
Pennsylvania 169 1,669,659.32 2.21% 54.29 50.67 9,879.64
South Carolina 481 5,880,371.53 7.79% 56.62 54.06 12,225.30
Tennessee 226 3,078,283.08 4.08% 57.75 55.71 13,620.72
Texas 404 5,739,310.98 7.60% 57.63 54.99 14,206.22
Virginia 235 3,313,210.24 4.39% 57.39 55.12 14,098.77
Washington 1 8,477.67 0.01% 48.00 39.00 8,477.67
West Virginia 1 7,169.61 0.01% 36.00 27.00 7,169.61
Wisconsin 1 5,597.43 0.01% 42.00 33.00 5,597.43
Total 6368 75,504,414.69 100.00%
<CAPTION>
Final Scheduled
Weighted Payment Date of
State Average APR Receivable With
----- ----------- Latest Maturity
---------------
<S> <C> <C>
Alabama 21.00 09/14/01
Arizona 23.41 02/28/02
California 20.15 12/15/02
Colorado 21.00 08/10/02
Connecticut 16.65 12/04/02
Florida 20.71 12/14/02
Georgia 19.17 12/14/02
Idaho 22.83 06/19/01
Illinois 23.68 12/09/02
Indiana 20.66 07/11/02
Iowa 21.00 09/19/01
Kansas 17.98 12/13/02
Kentucky 21.64 06/06/01
Louisiana 19.57 11/14/02
Maryland 19.11 12/13/02
Massachusetts 19.68 07/30/00
Minnesota 20.64 01/13/02
Mississippi 19.60 11/05/02
Missouri 17.63 12/05/02
Nevada 18.21 12/23/01
New Jersey 19.23 12/13/02
New Mexico 18.75 12/06/02
New York 18.72 12/13/02
North Carolina 18.51 12/15/02
Ohio 22.93 07/12/02
Oklahoma 17.93 11/08/02
Oregon 18.49 08/21/02
Pennsylvania 18.98 12/15/02
South Carolina 19.01 12/13/02
Tennessee 18.11 12/15/02
Texas 18.42 12/15/02
Virginia 18.53 12/15/02
Washington 21.00 02/26/01
West Virginia 18.00 02/01/00
Wisconsin 21.00 08/17/00
Total
</TABLE>
S-20
<PAGE>
Distribution Of The Initial Receivables By APR As Of The Initial Cut-off Date
<TABLE>
<CAPTION>
Percentage of Weighted Average
Pool Remaining Term to Average
Outstanding Outstanding Weighted Average Maturity of Outstanding Final Scheduled Payment
Number of Principal Principal Original Term to Receivables in Principal Date of Receivable With
APR Receivables Balance Balance Maturity in Months Months Balances of Latest Maturity
--- ----------- ----------- ----------- ------------------ ----------------- ----------- Receivables
------------
<S> <C> <C> <C> <C> <C> <C> <C>
14.001 - 15.000 24 419,529.09 0.56% 59.51 57.47 17,480.38 12/12/02
15.001 - 16.000 20 349,021.21 0.46% 59.70 57.09 17,451.06 12/12/02
16.001 - 17.000 918 14,253,649.19 18.88% 59.82 57.86 15,526.85 12/15/02
17.001 - 18.000 1,452 20,297,725.75 26.88% 58.56 55.99 13,979.15 12/15/02
18.001 - 19.000 1,298 15,990,410.73 21.18% 56.51 52.74 12,319.27 12/15/02
19.001 - 20.000 537 5,691,965.18 7.54% 53.54 48.66 10,599.56 12/12/02
20.001 - 21.000 765 7,188,087.31 9.52% 50.82 44.15 9,396.19 12/13/02
21.001 - 22.000 408 4,102,218.20 5.43% 51.25 48.26 10,054.46 12/10/02
22.001 - 23.000 71 727,435.21 0.96% 53.95 48.06 10,245.57 12/05/02
23.001 - 24.000 93 834,980.24 1.11% 50.16 42.48 8,978.28 10/24/02
24.001 - 25.000 356 3,039,372.46 4.03% 46.52 41.10 8,537.56 12/08/02
25.001 - 26.000 186 1,239,686.15 1.64% 43.88 30.11 6,664.98 11/05/01
26.001 - 27.000 99 619,105.84 0.82% 39.81 30.84 6,253.59 11/09/01
27.001 - 28.000 47 295,003.51 0.39% 38.48 32.30 6,276.67 11/07/02
28.001 - 29.000 57 289,180.02 0.38% 35.82 23.68 5,073.33 10/09/00
29.001 - 30.000 36 164,760.07 0.22% 31.13 21.19 4,576.67 06/30/00
30.001 - 31.000 1 2,284.53 0.00% 18.00 8.00 2,284.53 07/08/98
Grand Total 6,368 75,504,414.69 100.00%
</TABLE>
S-21
<PAGE>
Originator Concentration
Two Originators originated approximately 6.37% and 3.75%, respectively,
of the aggregate principal balance of the Initial Receivables as of the Initial
Cut-off Date. No other Originator, Dealer or group of affiliated Dealers
originated more than 2.84% of the aggregate principal balance of the Initial
Receivables as of the Initial Cut-off Date. The failure of any one or more
Originators or Dealers to repurchase Receivables under an Originator Agreement
or Dealer Agreement with NAFI upon breaches of representations or warranties
made with respect thereto could materially and adversely impact NAFI's ability
to honor any corresponding repurchase obligation under the Trust Documents and
consequently the Seller's ability to honor any corresponding retransfer
obligation under the Trust Documents. Although NAFI historically has not had any
material problems with Originators or Dealers failing to honor their repurchase
obligations, no representations are made as to the financial condition of any
Originator or Dealer and no assurance can be given that any Originator or Dealer
from whom NAFI purchased Receivables will have the financial ability to perform
its repurchase obligations, if any, under its Originator Agreement or Dealer
Agreement, as applicable. In the event that full payment of a Receivable
required to be retransferred to the Seller is not received, the Seller defaults
in its obligation to accept a retransfer of such Receivable, the obligor under
such Receivable defaults thereon and the Insurer fails to pay any claim under
the Policy, Noteholders may sustain a loss of principal and interest on their
Notes.
Average Life of the Receivables
As of the Initial Cut-off Date, the weighted average remaining
scheduled maturity of the Initial Receivables was approximately 51.82 months,
based on the following assumptions: (i) the Initial Receivables have the
characteristics described herein, (ii) all scheduled payments on the Initial
Receivables will be made on the last day of each month, and (iii) no principal
prepayments in full (including prepayments resulting from defaults, from
repurchases of Initial Receivables by the Seller or the Servicer and from the
application of insurance proceeds) will be made on the Initial Receivables.
As described in the related Prospectus under the caption "The
Receivables - Types of Receivables - Simple Interest Receivables," additional
payments may be scheduled at the maturity dates of certain Receivables as a
result of late payments thereon, which could have the effect of extending the
weighted average remaining scheduled maturity of the Receivables at any given
time. In addition, the maturity dates of the Receivables may be extended under
the circumstances described in the accompanying Prospectus under the caption
"Description of the Purchase Agreements and the Trust Documents - Collection and
Servicing Procedures."
Prepayments on automobile receivables can be measured relative to a
prepayment standard or model. The model used in this Prospectus Supplement, the
Absolute Prepayment Model ("ABS"), represents an assumed rate of prepayment each
month relative to the original number of receivables in a pool of receivables.
ABS further assumes that all the receivables are the same size in a given
assumed pool and amortize at the same rate and that each receivable in each
month of its life will either be paid as scheduled or be prepaid in full. For
example, in a pool of receivables originally containing 10,000 receivables, a 1%
ABS rate means that 100 receivables prepay each month. ABS does not purport to
be a historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any pool of receivables, including the
Receivables.
The table captioned "Percent of Initial Note Principal Balance at
Various ABS Percentages" (the "ABS Table") has been prepared on the basis of the
following assumptions: (i) the closing date for the
S-22
<PAGE>
Notes occurs on January 20, 1998, (ii) distributions on the Notes are made on
the 21st day of each month regardless of the day on which the Distribution Date
actually occurs, commencing on January 21, 1998, (iii) no delinquencies or
defaults in the payment of principal and interest on the Receivables are
experienced, (iv) no Receivable is repurchased for breach of representation and
warranty or otherwise, (v) the Cut-off Date for the Initial Receivables is
December 15, 1997 , (vi) the Due Period related to each Distribution Date is the
calendar month preceding the month in which such Distribution Date occurs (or,
in the case of the initial Distribution Date, from and including the Initial
Cut-off Date to December 31, 1997), (vii) during the Pre-Funding Period new
Receivables are transferred to the trust with an Additional Receivables Purchase
Price equal to the Pre-Funded Amount in three equal monthly transfers, with a
term of 56 months and an APR of 19.19% per annum, (viii) prepayments on the
Receivables are received on the last day of each month at the indicated ABS
prepayment speed, (ix) the Servicing Fee is 2% per annum, (x) no Event of
Default under the Indenture occurs, (xi) the Receivables Pool had an aggregate
outstanding principal balance of $75,504,414.69 as of the Initial Cut-off Date,
a weighted average remaining term of 52 months, weighted average seasoning of 4
months and a weighted average APR of 19.19%, (xii) scheduled payments on each of
the Receivables are timely received and (xiii) no Servicer Termination Event,
Optional Redemption or Mandatory Redemption occurs (collectively, the "Modeling
Assumptions").
The ABS Table indicates, based on the assumptions set forth above, the
percentages of the initial principal amount of Note Balance of the Notes that
would be outstanding after each of the Distributions Dates shown at various
percentages of ABS and the corresponding weighted average lives of such Notes.
The actual characteristics and performance of the Receivables will differ from
the assumptions used in constructing the ABS Table. The assumptions used are
hypothetical and have been provided only to give a general sense of how the
principal cash flows might behave under varying prepayment scenarios. For
example, it is very unlikely that the Receivables will prepay at a constant
level of ABS until maturity or that all of the Receivables will prepay at the
same level of ABS. Moreover, the diverse terms of the Receivables could produce
slower or faster principal distributions than indicated in the ABS Table at the
various constant percentages of ABS specified, even if the original and
remaining terms to maturity of the Receivables are as assumed. Any difference
between such assumptions and the actual characteristics and performance of the
Receivables, or actual prepayment experience, will affect the percentages of
initial balances outstanding over time and the weighted average lives of the
Notes.
S-23
<PAGE>
PERCENT OF INITIAL NOTE BALANCE AT VARIOUS ABS PERCENTAGES
<TABLE>
<CAPTION>
ABS Prepayment Speed
Distribution Date 1.00% 1.50% 1.70% 2.00% 2.50%
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Closing 100.00% 100.00% 100.00% 100.00% 100.00%
1/21/98 98.16% 97.72% 97.54% 97.26% 96.78%
2/21/98 96.20% 95.29% 94.92% 94.35% 93.37%
3/21/98 94.10% 92.72% 92.15% 91.28% 89.78%
4/21/98 91.88% 89.99% 89.22% 88.03% 86.00%
5/21/98 89.66% 87.29% 86.31% 84.83% 82.27%
6/21/98 87.45% 84.60% 83.44% 81.66% 78.59%
7/21/98 85.24% 81.94% 80.59% 78.52% 74.97%
8/21/98 83.04% 79.31% 77.78% 75.43% 71.41%
9/21/98 80.86% 76.70% 74.99% 72.38% 67.90%
10/21/98 78.68% 74.11% 72.23% 69.37% 64.45%
11/21/98 76.51% 71.55% 69.51% 66.40% 61.07%
12/21/98 74.35% 69.01% 66.82% 63.48% 57.74%
1/21/99 72.20% 66.50% 64.17% 60.60% 54.48%
2/21/99 70.06% 64.02% 61.55% 57.77% 51.29%
3/21/99 67.93% 61.57% 58.97% 54.99% 48.16%
4/21/99 65.81% 59.15% 56.42% 52.25% 45.10%
5/21/99 63.70% 56.76% 53.92% 49.57% 42.11%
6/21/99 61.61% 54.40% 51.45% 46.94% 39.20%
7/21/99 59.52% 52.07% 49.02% 44.36% 36.36%
8/21/99 57.45% 49.78% 46.64% 41.83% 33.59%
9/21/99 55.40% 47.52% 44.29% 39.36% 30.91%
10/21/99 53.35% 45.30% 41.99% 36.95% 28.30%
11/21/99 51.32% 43.11% 39.74% 34.60% 25.78%
12/21/99 49.31% 40.96% 37.53% 32.31% 23.34%
1/21/2000 47.31% 38.84% 35.37% 30.07% 20.98%
2/21/2000 45.33% 36.77% 33.26% 27.91% 18.72%
3/21/2000 43.36% 34.74% 31.20% 25.80% 16.55%
4/21/2000 41.41% 32.74% 29.19% 23.77% 14.46%
5/21/2000 39.48% 30.80% 27.24% 21.80% 12.48%
6/21/2000 37.57% 28.89% 25.33% 19.90% 10.59%
7/21/2000 35.68% 27.03% 23.49% 18.08% 8.80%
8/21/2000 33.80% 25.22% 21.70% 16.33% 7.12%
9/21/2000 31.95% 23.45% 19.97% 14.65% 5.54%
10/21/2000 30.11% 21.73% 18.30% 13.06% 4.07%
11/21/2000 28.30% 20.06% 16.69% 11.54% 2.71%
12/21/2000 26.51% 18.44% 15.14% 10.10% 1.46%
1/21/2001 24.74% 16.88% 13.66% 8.75% 1.17%
2/21/2001 23.00% 15.37% 12.25% 7.48% 0.90%
3/21/2001 21.28% 13.91% 10.90% 6.30% 0.65%
4/21/2001 19.58% 12.52% 9.62% 5.21% 0.41%
5/21/2001 17.91% 11.18% 8.42% 4.21% 0.20%
6/21/2001 16.27% 9.90% 7.29% 3.31% 0.06%
7/21/2001 14.66% 8.68% 6.23% 2.50% 0.00%
8/21/2001 13.07% 7.52% 5.26% 1.80% 0.00%
9/21/2001 11.51% 6.43% 4.36% 1.19% 0.00%
10/21/2001 9.98% 5.41% 3.54% 0.69% 0.00%
11/21/2001 8.49% 4.45% 2.80% 0.53% 0.00%
12/21/2001 7.02% 3.56% 2.15% 0.39% 0.00%
1/21/2002 5.59% 2.75% 1.59% 0.27% 0.00%
2/21/2002 4.19% 2.01% 1.12% 0.16% 0.00%
3/21/2002 2.82% 1.34% 0.74% 0.08% 0.00%
4/21/2002 1.49% 0.75% 0.45% 0.02% 0.00%
5/21/2002 1.23% 0.59% 0.34% 0.00% 0.00%
6/21/2002 0.97% 0.45% 0.24% 0.00% 0.00%
7/21/2002 0.72% 0.32% 0.16% 0.00% 0.00%
8/21/2002 0.47% 0.20% 0.09% 0.00% 0.00%
9/21/2002 0.24% 0.10% 0.04% 0.00% 0.00%
10/21/2002 0.08% 0.03% 0.01% 0.00% 0.00%
11/21/2002 0.00% 0.00% 0.00% 0.00% 0.00%
Weighted Average Life (1) 2.01 1.76 1.65 1.49 1.26
</TABLE>
(1) The weighted average life of a Note is determined by (i) multiplying
the amount of each principal payment on a Note by the number of years
from the date of the issuance of the Note to the related Distribution
Date, (ii) adding the results and (iii) dividing the sum by the related
initial principal amount of the Note.
S-24
<PAGE>
The Seller does not believe that the timing of principal payments on
the Receivables will have a material impact on the yield to the initial
purchasers of the Notes, unless the Notes initially are purchased at a premium
or a discount. No assurance can be given, and no prediction can be made, as to
the actual prepayment experience on the Receivables.
Characteristics of Subsequent Receivables
After the transfer of Subsequent Receivables to the Trust during the
Pre-Funding Period, the weighted average APR of the Receivables may be as low as
18.00%, the weighted average remaining term of the Receivables may be as high as
55 months, the percentage of the aggregate outstanding principal balance of the
Receivables represented by Receivables relating to loans for the purchase of
used Financed Vehicles may be as high as 80% and the final scheduled payment
date on the Receivable with the latest maturity date may be as late as April 21,
2003.
S-25
<PAGE>
Delinquency, Repossession and Loss Information
The following table sets forth delinquency, repossession and loss
information since the month following NAFI's commencement of operations in
October 1994 to September 30, 1997, with respect to NAFI's serviced portfolio of
motor vehicle retail installment sale contracts (including those previously sold
by NAFI to or held by the Seller or transferred to Funding Trust II). The sum of
the individual balances and percentages set forth on the following table may not
equal the total due to rounding.
Delinquency and Loss Experience
(dollars in thousands)
<TABLE>
<CAPTION>
12/31/94 3/31/95 6/30/95 9/30/95 12/31/95 3/31/96 6/30/96 9/30/96 12/31/96
-------- ------- ------- ------- -------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Cumulative Principal Amount Outstanding $3,808 $13,112 $23,237 $35,001 $43,145 $53,534 $66,397 $82,792 $102,852
Average Principal Amount Outstanding $1,904 $8,460 $18,175 $29,119 $39,073 $48,340 $59,966 $74,595 $92,822
For the Quarter Ended
Cumulative Number of Loans Outstanding 300 1,081 1,957 2,877 3,586 4,567 5,774 7,286 9,063
Average Number of Loans Outstanding 150 691 1,519 2,417 3,232 4,077 5,171 6,530 8,175
Number of Repossessions For the 0 5 23 47 96 113 117 196 287
Quarter Ended
Principal Amount of Repossessions For
the Quarter Ended 0 $65 $279 $591 $1,097 $1,298 $1,451 $2,180 $3,066
Number of Repossessions as a Percent of
Average Number of Loans Outstanding 0.00% 0.72% 1.51% 1.94% 2.97% 2.77% 2.26% 3.00% 3.51%
Principal Amount of Repossessions as a
Percent of Average Principal Amount
Outstanding 0.00% 0.77% 1.53% 2.03% 2.81% 2.68% 2.42% 2.92% 3.30%
Net Losses For the Quarter Ended (2) $0 $2 $30 $212 $438 $665 $460 $763 $958
Net Losses as a Percent of Principal
Amount Outstanding (Annualized) (2) 0.00% 0.06% 0.51% 2.43% 4.06% 4.97% 2.77% 3.69% 3.73%
Delinquencies (1)
31 to 60 days $ 0 $ 140 $ 352 $ 785 $2,148 $ 2,057 $ 2,663 $ 4,481 $ 6,104
61 to 90 days 0 0 22 137 157 212 587 1,151 1,596
91 days or over 0 0 0 17 46 164 64 295 487
--------- -------- ------- ------- ------ -------- -------- --------- ----- ---
Total Delinquencies over 30 days $ 0 $ 140 $ 374 $ 939 $2,351 $ 2,433 $ 3,314 $ 5,927 $ 8,187
Delinquencies as a Percentage of the
Cumulative Principal Amount
Outstanding For the Quarter Ended (1)
31 to 60 days 0.00% 1.06% 1.52% 2.24% 4.98% 3.84% 4.01% 5.41% 5.93%
61 to 90 days 0.00% 0.00% 0.09% 0.39% 0.36% 0.40% 0.88% 1.39% 1.55%
91 days or over 0.00% 0.00% 0.00% 0.05% 0.11% 0.30% 0.10% 0.36% 0.47%
----- ----- ----- ----- ----- ----- ----- ----- -----
Total 0.00% 1.06% 1.61% 2.68% 5.45% 4.54% 4.99% 7.16% 7.95%
<CAPTION>
3/31/97 6/30/97 9/30/97
------- ------- -------
<S> <C> <C> <C>
Cumulative Principal Amount Outstanding $127,094 $157,111 $190,709
Average Principal Amount Outstanding $114,973 $142,103 $173,910
For the Quarter Ended
Cumulative Number of Loans Outstanding 11,321 14,392 17,593
Average Number of Loans Outstanding 10,192 12,857 15,993
Number of Repossessions For the 352 367 530
Quarter Ended
Principal Amount of Repossessions For
the Quarter Ended $3,892 $3,946 $5,390
Number of Repossessions as a Percent of
Average Number of Loans Outstanding 3.45% 2.85% 3.31%
Principal Amount of Repossessions as a
Percent of Average Principal Amount
Outstanding 3.39% 2.78% 3.10%
Net Losses For the Quarter Ended (2) $1,864 $1,971 $2,940
Net Losses as a Percent of Principal
Amount Outstanding (Annualized) (2) 5.87% 5.02% 6.13%
Delinquencies (1)
31 to 60 days $ 6,816 $10,232 $11,249
61 to 90 days 1,500 3,191 2,875
91 days or over 1,854 2,420 3,028
----- ----- -----
Total Delinquencies over 30 days $10,170 $15,843 $17,152
Delinquencies as a Percentage of the
Cumulative Principal Amount
Outstanding For the Quarter Ended (1)
31 to 60 days 5.36% 6.51% 5.90%
61 to 90 days 1.18% 2.03% 1.50%
91 days or over 1.46% 1.54% 1.59%
----- ----- -----
Total 8.00% 10.08% 8.99%
</TABLE>
- ---------------
(1) Delinquency figures reported exclude contracts as to which the cumulative
amount of payments over 30 days delinquent is less than or equal to $40.
(2) A "Net Loss" with respect to a contract charged off during a period equals
the outstanding principal balance thereof, together with earned interest thereon
to the date of default and the expenses of liquidation, less recoveries in
respect of such Receivable.
S-26
<PAGE>
NAFI commenced operations in September 1994. Accordingly, its
historical delinquency, repossession and loss experience is limited. No
assurance can be given that the delinquency, repossession and loss experience on
the Receivables will be as favorable as the experience indicated in the
foregoing tables, especially in light of such limited historical experience. In
addition, factors that may have a material impact upon loss and delinquency
experience may vary over time. For example, NAFI has over time (a) placed an
increased emphasis on credit scoring in its underwriting process, (b)
significantly expanded its geographic and Dealer origination base, (c) financed
an increasing percentage of used versus new motor vehicles and (d) increased the
ratio of Portfolio Receivables relative to Dealer Receivables.
The delinquency and loan loss experience described above should be
considered in light of the average maturity of the Receivables in each of the
respective periods, which reflect the addition of new Receivables in such
periods. NAFI's experience, and the experience of the non-prime auto finance
industry as a whole, has been that the rate of losses and delinquencies for
non-prime motor vehicle installment sale contracts generally will increase for a
period following origination before levelling and declining as such contracts
approach maturity. Accordingly, the annual loss and delinquency rates reflected
in the preceding table would be higher but for the inclusion of recently
originated contracts which exhibit relatively low loss and delinquency rates
early in their terms. Following the Pre-Funding Period, the rate of losses and
delinquencies on the Receivables pool as a whole will likely increase and exceed
the rates reflected in the preceding table for the period during which the
median age of the Receivables approximates the aging of non-prime motor vehicle
retail installment sale contracts during their period of maximum expected losses
and delinquencies.
The following tables reflect as of September 30, 1997 a "static pool"
analysis of the loss experience with respect to that portion of NAFI's serviced
portfolio of motor vehicle retail installment sale contracts (including those
previously sold by NAFI to or held by the Seller or transferred to Funding Trust
II) acquired by NAFI through June 30, 1997. The following tables set forth the
cumulative net losses and cumulative net loss rates with respect to pools of
NAFI's serviced portfolio grouped by date of acquisition by NAFI. As a result,
each such pool is fixed or "static" as of the end of the calendar quarter
indicated in the following table and, in contrast to the preceding table, the
cumulative net loss rates set forth in the following tables do not reflect the
inclusion of more recently originated contracts which generally exhibit
relatively low loss and delinquency rates early in their terms. Because the
Receivables Pool will similarly be fixed following the Pre-Funding Period, the
cumulative net loss rates set forth in the following tables are likely to be a
better indicator of expected cumulative net losses on the Receivables Pool than
the cumulative net loss rates set forth in the preceding table. However, it
should be noted that cumulative net loss rates are a function of various factors
that may vary over time and that the actual cumulative net loss rates on the
Receivables Pool may be less than or greater than the cumulative net loss rates
set forth below.
S-27
<PAGE>
SUMMARY
Static Pools Of The Company's Servicing Portfolio
For All Loans Purchased By The Company Through June 30, 1997,
as of September 30, 1997
<TABLE>
<CAPTION>
4th Qtr. 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
1994 1995 1995 1995 1995
---- ---- ---- ---- ----
Totals (dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Number of Loans
purchased during 17,382 300 795 920 1,003 868
period
Number of outstanding
Loans at end of 13,412 140 364 455 583 539
period
Principal balance of
Loans purchased $214,291 $3,820 $9,704 $11,238 $13,675 $11,378
during period
Principal balance of
loans outstanding
at end of period $140,645 $1,058 $2,554 $ 3,461 $ 5,348 $ 5,150
Principal balance of
Loans outstanding
as a percentage of
the original
principal balance 65.63% 27.70% 26.31% 30.80% 39.11% 45.26%
purchased
Cumulative Net Loss 4.80% 10.38% 10.08% 9.36% 8.63% 8.06%
<CAPTION>
1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. 1st Qtr. 2nd Qtr.
1996 1996 1996 1996 1997 1997
---- ---- ---- ---- ---- ----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Number of Loans
purchased during 1,185 1,486 1,866 2,252 2,878 3,829
period
Number of outstanding
Loans at end of 770 1,065 1,433 1,894 2,616 3,553
period
Principal balance of
Loans purchased $14,612 $18,341 $23,201 $28,805 $35,773 $43,744
during period
Principal balance of
loans outstanding
at end of period $ 7,410 $10,479 $15,072 $21,459 $29,678 $38,976
Principal balance of
Loans outstanding
as a percentage of
the original
principal balance 50.71% 57.13% 64.96% 74.50% 82.96% 89.10%
purchased
Cumulative Net Loss 7.16% 7.19% 5.38% 3.69% 1.90% 0.99%
</TABLE>
S-28
<PAGE>
PERIOD OF ORIGINATION
Cumulative Net Losses As Percentage Of Original Principal Balance
Of Loans Purchased During Period
<TABLE>
<CAPTION>
Months from
Origination 4th Qtr. 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. 1st Qtr. 2nd Qtr.
1994 1995 1995 1995 1995 1996 1996 1996 1996 1997 1997
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
2 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
3 0.00% 0.00% 0.00% 0.00% 0.05% 0.00% 0.00% 0.04% 0.00% 0.00% 0.00%
4 0.00% 0.00% 0.00% 0.03% 0.17% 0.00% 0.00% 0.04% 0.01% 0.02% 0.18%
5 0.00% 0.07% 0.10% 0.19% 0.21% 0.10% 0.10% 0.16% 0.00% 0.06% 0.46%
6 0.05% 0.14% 0.27% 0.43% 0.70% 0.39% 0.32% 0.45% 0.25% 0.23% 0.99%
7 0.05% 0.24% 0.67% 0.88% 0.96% 0.60% 0.64% 0.79% 0.61% 0.58%
8 0.31% 0.86% 1.42% 1.24% 1.05% 0.80% 1.14% 1.06% 1.21% 1.19%
9 0.47% 1.34% 1.98% 2.18% 1.57% 1.38% 1.73% 1.92% 1.89% 1.90%
10 0.51% 1.70% 2.40% 2.35% 2.28% 1.81% 2.70% 2.59% 2.55%
11 1.08% 1.73% 2.62% 2.70% 2.40% 2.00% 3.29% 3.36% 3.40%
12 1.36% 2.52% 3.14% 3.11% 3.08% 2.43% 4.34% 3.65% 3.69%
13 1.75% 3.04% 3.37% 3.60% 3.48% 3.35% 5.19% 4.47%
14 1.72% 3.39% 3.71% 3.58% 3.69% 3.60% 5.58% 5.04%
15 3.12% 3.90% 3.99% 4.13% 4.24% 4.42% 6.00% 5.38%
16 3.21% 4.20% 4.27% 4.60% 4.58% 4.71% 6.50%
17 3.80% 4.52% 4.49% 4.98% 5.36% 5.38% 6.89%
18 4.45% 4.70% 5.01% 5.14% 5.52% 5.80% 7.19%
19 4.55% 4.94% 5.35% 5.49% 6.09% 6.68%
20 4.91% 5.18% 5.75% 4.89% 6.43% 6.95%
21 4.91% 5.77% 6.13% 6.46% 6.65% 7.16%
22 5.05% 5.75% 6.84% 6.76% 7.10%
23 5.05% 6.24% 7.44% 7.02% 7.51%
24 5.79% 6.34% 7.75% 7.10% 8.06%
25 5.78% 7.01% 8.28% 7.78%
26 6.20% 7.30% 8.52% 8.37%
27 6.80% 7.65% 8.66% 8.63%
28 7.15% 8.00% 9.08%
29 7.49% 9.02% 9.31%
30 8.06% 9.15% 9.36%
31 8.23% 9.73%
32 9.07% 9.90%
33 9.07% 10.08%
34 9.61%
35 9.89%
36 10.38%
</TABLE>
S-29
<PAGE>
Prior Securitizations
NAFI and the Seller have agreements with the Insurer in connection with
certain prior securitizations that permit the Insurer to exercise certain
remedies in the event that delinquencies, defaults or net losses on the related
portfolio of receivables exceed established levels (such events, "portfolio
performance defaults"). Such remedies include the deposit to the related spread
account of funds otherwise distributable to the Seller, termination of the
Servicer and, in certain instances, liquidation of the receivables and
prepayment of the related securities. There have occurred certain portfolio
performance defaults with respect to one of the prior securitizations. As a
consequence, the reserve level required to be maintained in the related spread
account has increased in accordance with the terms of the related spread account
agreement. NAFI believes that such increase has not had and will not have a
material effect on its business or its expansion plans, including its
securitization program. The Insurer has waived certain other remedies available
to it in respect of such portfolio performance defaults. However, an increase in
delinquencies, defaults or net losses on the portfolios of receivables relating
to such prior securitizations may result in an Insurance Agreement Event of
Default under both the prior securitizations and the securitization described in
this Prospectus Supplement.
Servicing Transfer
Prior to July 1997, substantially all of the day-to-day servicing
functions with respect to NAFI's portfolio of motor vehicle retail installment
sale contracts were performed by an outside servicer subject to supervision by
NAFI. NAFI commenced operations in its internal servicing division (the
"Servicing Division") during July 1997 and had hired 74 employees as of December
31, 1997 for both collections and servicing of its receivables. The Servicing
Division began assuming collections responsibility for receivables more than 30
days past due in July 1997, and assumed responsibility for collections of the
entire servicing portfolio on October 1, 1997, although it continues to
substantially rely on and use its outside servicer for certain customer service
and management information systems ("MIS") functions (which include, but are not
limited to, payment processing, invoicing, insurance and certificate of title
tracking capabilities and certain disaster recovery capabilities). NAFI expects
to begin customer service and MIS operations in the first quarter of 1998,
although there can be no assurance that NAFI will be able to do so. During the
anticipated transition period when its outside servicer continues to provide
customer service and MIS operations for the servicing portfolio, NAFI will
experience certain duplicative costs and will not have complete self management
of the quality and timeliness of servicing efforts.
NAFI has not previously serviced or collected receivables and therefore
is subject to the inherent risks associated with initiating new operations, such
as unforeseen operational, financial and management problems. There can be no
assurance that NAFI will be able to service and collect the servicing portfolio
on a cost effective and timely basis or that future delinquency and loss ratios
will not increase. Industry experience indicates that increases in delinquencies
and defaults are likely to result immediately following servicing transfers.
S-30
<PAGE>
THE SELLER
National Financial Auto Funding Trust (the "Seller") is a Delaware
business trust 100% of the beneficial ownership of which is owned by NAFI and
affiliates of NAFI. The Seller is organized for the limited purposes of
purchasing motor vehicle retail installment sale contracts, transferring such
contracts to third parties, forming trusts and engaging in related activities.
The principal office of the Seller is located at One Park Place, Suite 200, 621
N.W. 53rd Street, Boca Raton, Florida, 33487, and its telephone number at such
office is (561) 997-2413.
NATIONAL AUTO FINANCE COMPANY, INC.
NAFI will act as servicer (in such capacity, the "Servicer") of the
Receivables pursuant to the Sale and Servicing Agreement. NAFI is a corporation
organized under the laws of the State of Delaware. Prior to January 1997 the
business of NAFI was conducted by two affiliated limited partnerships: National
Auto Finance Company L.P., organized under the laws of the State of Delaware in
September 1994, and Auto Credit Clearinghouse L.P., organized under the laws of
the State of Delaware in September 1995. NAFI was incorporated in October 1996.
The principal business of NAFI is to acquire from automobile dealers
and service motor vehicle retail installment sale and lease contracts. In
addition, NAFI has initiated a program for the strategic purchase of bulk
portfolios of non-prime motor vehicle retail installment sales contracts from
third party consumer finance companies and financial institutions. As of
September 30, 1997 NAFI had purchased approximately $37 million aggregate
principal amount of motor vehicle retail installment sales contracts pursuant to
this portfolio acquisition program. As of September 30, 1997, NAFI had gross
assets of $46,570,000 (unaudited) and total stockholders equity of $24,408,000
(unaudited). Receivables transferred by NAFI to the Seller and Funding Trust II
in connection with securitization of such Receivables are deemed to have been
sold by NAFI under generally accepted accounting principles and accordingly are
not included among NAFI's assets (other than the ratable portion of such
Receivables represented by the Seller's and Funding Trust II's respective
retained interests in such securitizations). The common stock of NAFI is quoted
on The Nasdaq Stock Market's National Market under the symbol "NAFI." NAFI is
subject to the informational requirements of the Securities Exchange Act of
1934, as amended, and in accordance therewith files reports and other
information with the Securities and Exchange Commission. NAFI's principal office
is located at One Park Place, 621 N.W. 53rd Street, Suite 200, Boca Raton,
Florida 33487, and its telephone number at such office is (561) 997-2413.
THE INSURER
General
Financial Security is a monoline insurance company incorporated in 1984
under the laws of the State of New York. Financial Security is licensed to
engage in financial guaranty insurance business in all 50 states, the District
of Columbia and Puerto Rico.
Financial Security and its subsidiaries are engaged in the business of
writing financial guaranty insurance, principally in respect of securities
offered in domestic and foreign markets. In general,
S-31
<PAGE>
financial guaranty insurance consists of the issuance of a guaranty of scheduled
payments of an issuer's securities--thereby enhancing the credit rating of those
securities--in consideration for the payment of a premium to the insurer.
Financial Security and its subsidiaries principally insure asset-backed,
collateralized and municipal securities. Asset-backed securities are generally
supported by residential mortgage loans, consumer or trade receivables,
securities or other assets having an ascertainable cash flow or market value.
Collateralized securities include public utility first mortgage bonds and
sale/leaseback obligation bonds. Municipal securities consist largely of general
obligation bonds, special revenue bonds and other special obligations of state
and local governments. Financial Security insures both newly issued securities
sold in the primary market and outstanding securities sold in the secondary
market that satisfy Financial Security's underwriting criteria.
Financial Security is a wholly owned subsidiary of Financial Security
Assurance Holdings Ltd. ("Holdings"), a New York Stock Exchange listed company.
Major shareholders of Holdings include Fund American Enterprises Holdings, Inc.,
U S WEST Capital Corporation and The Tokio Marine and Fire Insurance Co., Ltd.
No shareholder of Holdings is obligated to pay any debt of Financial Security or
any claim under any insurance policy issued by Financial Security or to make any
additional contribution to the capital of Financial Security.
The principal executive offices of Financial Security are located at
350 Park Avenue, New York, New York 10022, and its telephone number at that
location is (212) 826-0100.
Reinsurance
Pursuant to an intercompany agreement, liabilities on financial
guaranty insurance written or reinsured from third parties by Financial Security
or any of its domestic operating insurance company subsidiaries are reinsured
among such companies on an agreed-upon percentage substantially proportional to
their respective capital, surplus and reserves, subject to applicable statutory
risk limitations. In addition, Financial Security reinsures a portion of its
liabilities under certain of its financial guaranty insurance policies with
other reinsurers under various quota share treaties and on a
transaction-by-transaction basis. Such reinsurance is utilized by Financial
Security as a risk management device and to comply with certain statutory and
rating agency requirements; it does not alter or limit Financial Security's
obligations under any financial guaranty insurance policy.
Ratings of Claims-Paying Ability
Financial Security's claims-paying ability is rated "Aaa" by Moody's
and "AAA" by S&P, Fitch IBCA, Inc., Nippon Investors Service Inc. and Standard &
Poor's (Australia) Pty. Ltd. Such ratings reflect only the views of the
respective rating agencies, are not recommendations to buy, sell or hold
securities and are subject to revision or withdrawal at any time by such rating
agencies. See "Risk Factors - Ratings on Notes" herein.
S-32
<PAGE>
Capitalization
The following table sets forth the capitalization of Financial Security
and its wholly owned subsidiaries on the basis of generally accepted accounting
principles as of September 30, 1997 (in thousands):
September 30, 1997
------------------
(Unaudited)
Deferred Premium Revenue (net of
prepaid reinsurance premiums) $402,891
--------
Shareholder's Equity:
Common Stock 15,000
Additional Paid-In Capital 646,620
Unrealized Loss on Investments
(net of deferred income taxes)
Accumulated Earnings 20,808
Total Shareholder's Equity 212,033
-------
894,461
-------
Total Deferred Premium Revenue
and Shareholder's Equity $1,297,352
==========
For further information concerning Financial Security, see the
Consolidated Financial Statements of Financial Security and Subsidiaries, and
the notes thereto, incorporated by reference herein. Copies of the statutory
quarterly and annual statements filed with the State of New York Insurance
Department by Financial Security are available upon request to the State of New
York Insurance Department.
Insurance Regulation
Financial Security is licensed and subject to regulation as a financial
guaranty insurance corporation under the laws of the State of New York, its
state of domicile. In addition, Financial Security and its insurance
subsidiaries are subject to regulation by insurance laws of the various other
jurisdictions in which they are licensed to do business. As a financial guaranty
insurance corporation licensed to do business in the State of New York,
Financial Security is subject to Article 69 of the New York Insurance Law which,
among other things, limits the business of each such insurer to financial
guaranty insurance and related lines, requires that each such insurer maintain a
minimum surplus to policyholders, establishes contingency, loss and unearned
premium reserve requirements for each such insurer, and limits the size of
individual transactions ("single risks") and the volume of transactions
("aggregate risks") that may be underwritten by each such insurer. Other
provisions of the New York Insurance Law, applicable to non-life insurance
companies such as Financial Security, regulate, among other things, permitted
investments, payment of dividends, transactions with affiliates, mergers,
consolidations, acquisitions or sales of assets and incurrence of liability for
borrowings.
THE NOTES
The following information supplements the information contained in the
accompanying Prospectus. Prospective Noteholders should consider, in addition to
the information below, the information in the accompanying Prospectus under "The
Notes," "Certain Information Regarding the Securities," and "Description of the
Purchase Agreements and the Trust Documents."
S-33
<PAGE>
The Notes offered hereby will be issued pursuant to the Indenture, a
form of which has been filed as an exhibit in the Registration Statement of
which the accompanying Prospectus forms a part. The following summary of the
Notes and the Indenture does not purport to be complete and is subject to, and
is qualified in its entirety by reference to, all of the provisions of the
Notes, the Indenture and the Prospectus. Where particular provisions of or terms
used in the Indenture are referred to, the actual provisions (including
definitions of terms) are incorporated by reference as part of such summary.
General
The Notes will represent obligations solely of the Trust and will be
secured by the Trust Property pursuant to the Indenture. The assets of the Trust
(the "Trust Property") will include (i) non-prime motor vehicle retail
installment sale contracts transferred to the Trust on the Closing Date (the
"Initial Receivables") and on subsequent transfer dates (the "Additional
Receivables" and, together with the Initial Receivables, the "Receivables"),
(ii) all monies paid or payable thereunder on or after the applicable Cut-off
Date, (iii) an assignment of the security interests of NAFI in the new and used
automobiles, light-duty trucks, vans and minivans financed thereby (the
"Financed Vehicles"), (iv) the Receivable Files, (v) such assets as shall from
time to time be deposited in the Collection Account, the Distribution Account,
the Note Distribution Account, the Pre-Funding Account and the Pre-Funding
Period Reserve Account, each established pursuant to the Sale and Servicing
Agreement or the Indenture, (vi) property that secured a Receivable and that has
been acquired by repossession or otherwise, (vii) all rights to insurance
proceeds and liquidation proceeds with respect to the Receivables, (viii)
certain rights of NAFI against the Dealers under the Dealer Agreements and
against the Originators under the Originator Agreements, (ix) all right, title
and interest of the Seller in and to the Purchase Agreements, (x) certain other
rights under the Sale and Servicing Agreement in respect of representations and
warranties made by the Seller regarding the Receivables in the Sale and
Servicing Agreement and (xi) the income and proceeds of the foregoing and any
and all rights to enforce the foregoing. Holders of the Notes also will have the
benefit of the Policy subject to the terms and conditions set forth therein. See
"The Policy" herein.
The Notes will be offered for purchase in denominations of $20,000 and
integral multiples of $1,000 in excess thereof, in book-entry form only. Persons
acquiring benenficial interests in the Notes will hold their interests through
DTC in the United States or Cedel or Euroclear in Europe. See "Certain
Information Regarding the Securities--Book-Entry Registration" in the
Prospectus.
Payments of Interest
Interest on the principal balance of the Notes will accrue at the
Interest Rate and will be due and payable to the Noteholders monthly on each
Distribution Date, commencing January 21, 1998, in an amount equal to the Note
Interest Distributable Amount. The "Note Interest Distributable Amount" for a
Distribution Date will be the sum of (i) thirty (30) days of interest (or, in
the case of the initial Distribution Date, the number of days from and including
the Closing Date to but not including such initial Distribution Date) at the
Interest Rate on the aggregate outstanding principal balance of the Notes on
such Distribution Date (before reduction by any principal distributions made on
such Distribution Date) (the "Monthly Interest"), and (ii) the aggregate
shortfalls in interest distributions to the Noteholders on prior Distribution
Dates, together with interest on such shortfalls at the Interest Rate from the
applicable preceding Distribution Date through but not including the current
Distribution Date, to the extent permitted by law. Interest payments on the
Notes will be made from Available Amounts (as hereinafter defined) after payment
of accrued and unpaid trustees' fees, collateral agent fees and other
administrative fees of the Trust and payment of the Servicing Fee.
S-34
<PAGE>
Payments of Principal
Monthly Principal Distributions
Principal payments will be made to the Noteholders on each Distribution
Date in an amount equal to the Note Principal Distributable Amount. The "Note
Principal Distributable Amount" for any Distribution Date prior to the Final
Scheduled Distribution Date will be the sum of (i) 91% of the Principal
Distributable Amount for such Distribution Date and (ii) the aggregate
shortfalls in principal distributions to the Noteholders on prior Distribution
Dates. The Note Principal Distributable Amount for the Final Scheduled
Distribution Date will be the aggregate outstanding principal balance of the
Notes on such date (before giving effect to any distribution on the Notes on
such Final Scheduled Distribution Date).
The "Principal Distributable Amount" for any Distribution Date (other
than the Final Scheduled Distribution Date), will equal the sum of the
following, without duplication: (i) that portion of all collections on the
Receivables (other than Liquidated Receivables, Retransferred Receivables and,
to the extent included in clause (iv) below, the outstanding principal balance
of Retransfer Default Receivables) allocable to principal, including all full
and partial principal prepayments, deposited into the Collection Account during
the related Due Period, (ii) the outstanding principal balance of all
Receivables that became Liquidated Receivables during the related Due Period
(other than Liquidated Receivables that became Retransferred Receivables during
such Due Period), (iii) the portion of the Purchase Amount allocable to
principal of all Receivables that became Retransferred Receivables on or prior
to the related Reporting Date and subsequent to the preceding Reporting Date,
(iv) in the sole discretion of the Insurer, the outstanding principal balance as
of the related Reporting Date of all Retransfer Default Receivables, and (v) the
aggregate amount of Bankruptcy Losses that occurred during the related Due
Period. In addition to the principal distributions described above, Noteholders
may also receive distributions of principal in connection with an Optional
Redemption or Mandatory Redemption, as further described herein.
The principal balance of the Notes, to the extent not previously paid,
will be due and payable on the Final Scheduled Distribution Date. The actual
date on which the aggregate outstanding principal amount of the Notes is paid
may be earlier than the Final Scheduled Distribution Date set forth above based
on a variety of factors.
Optional Redemption
The Notes, to the extent still outstanding, may be redeemed in whole,
but not in part, on any Distribution Date on which the Seller exercises its
option to purchase the Receivables (with the prior written consent of the
Insurer, if a claim has previously been made under the Policy and has not been
reimbursed to the Insurer or if such redemption would result in a claim under
the Policy, or if such redemption would result in any amount owing to the
Insurer or the Noteholders remaining unpaid). The Sale and Servicing Agreement
will provide that either the Seller or the Servicer will have the right to
require the Trust to retransfer all of the Receivables included in the Trust,
subject to the Insurer's prior written consent if any of the circumstances
described in the preceding sentence exist or will result from such retransfer,
on or after any Distribution Date on which the aggregate of the outstanding
principal balances of the Receivables (the "Pool Outstanding Principal Balance")
is less than 10% of the Original Pool Outstanding Principal Balance (as
hereinafter defined) of such Receivables. Such redemption will effect early
retirement of the Notes. The redemption price will be equal to the unpaid
principal amount of the Notes plus accrued and unpaid interest thereon (the
"Redemption Price").
S-35
<PAGE>
Mandatory Redemption
The Notes will be redeemed in part on the Distribution Date relating to
the Reporting Date next succeeding the last day of the Pre-Funding Period in the
event that the Additional Receivables Purchase Price of Additional Receivables
transferred to the Trust during the Pre-Funding Period is less than the
Pre-Funded Amount (a "Mandatory Redemption"). The aggregate principal amount of
the Notes to be redeemed will be an amount equal to the amount then on deposit
in the Pre-Funding Account less any undistributed investment earnings then on
deposit in the Pre-Funding Account (the "Note Redemption Amount"). The Policy
does not guaranty any such principal payment on the Notes from funds on deposit
in the Pre-Funding Account. See "The Policy" herein.
Distributions and Payments
The Servicer will provide to the Trust Collateral Agent, the Owner
Trustee, the Indenture Trustee and the Insurer not later than each Reporting
Date a certificate (the "Servicer Certificate") setting forth, among other
things, the Available Amount and the Note Distributable Amount for the related
Distribution Date and, based upon such determinations and the distributions to
be made on such Distribution Date, as described below, the amount of any
withdrawal required to be made from the Spread Account and/or any Policy Claim
Amount, in each case with respect to such Distribution Date. On the twenty-first
day of each month (or, if such day is not a Business Day, the next succeeding
Business Day (each a "Distribution Date"), beginning on January 21, 1998, the
Trust Collateral Agent will, to the extent of the Available Amount together with
funds withdrawn from the Spread Account, if any, make the following payments (in
the case of withdrawals from the Spread Account, solely for payment of the
amounts described in clauses (i) through (iv) below) from the Distribution
Account in the following order of priority:
(i) first, to the Servicer, the amount of the Servicing Fee payable in
respect of the related Due Period and any Servicing Fees from prior Due Periods
to the extent not previously paid;
(ii) second, accrued and unpaid fees owing to the Indenture Trustee,
the Owner Trustee, the Trust Collateral Agent, the Collateral Agent or the
Custodian, to the extent not paid by the Servicer;
(iii) third, to the Note Distribution Account, the Note Distributable
Amount, to be distributed to the Noteholders, together with the Policy Claim
Amount, if any, first to pay the Note Interest Distributable Amount and then to
pay the Note Principal Distributable Amount;
(iv) fourth, to the Insurer (or any designee thereof), any amounts then
due to the Insurer under the Insurance Agreement, the Indenture or the Sale and
Servicing Agreement;
(v) fifth, to the Collateral Agent for deposit in the Spread Account,
the amount, if any, required to be deposited therein pursuant to the Spread
Account Agreement;
(vi) sixth, to the Pre-Funding Period Reserve Account, the amount by
which the Required Reserve Amount exceeds the amount of funds on deposit therein
after giving effect to any withdrawals from the Pre-Funding Period Reserve
Account on such Distribution Date;
(vii) seventh, to the Indenture Trustee and the Owner Trustee for any
unreimbursed expenses and to pay any indemnities owed by the Seller to the
Indenture Trustee under the Indenture or to the Owner Trustee under the Trust
Agreement;
S-36
<PAGE>
(viii) eighth, to reimburse the Servicer for any expense of an opinion
of counsel incurred in connection with an amendment to the Indenture, and any
expenses incurred by the Servicer in connection with a realization upon a
Defaulted Receivable;
(ix) ninth, to reimburse the Backup Servicer for
expenses incurred by the Backup Servicer and to reimburse the Servicer for
expenses incurred by and reimbursable, or any indemnities payable by the Seller,
to the Servicer pursuant to the Sale and Servicing Agreement;
(x) tenth, to reimburse the Seller for expenses incurred by and
reimbursable to the Seller pursuant to the Indenture and the Sale and Servicing
Agreement; and
(xi) eleventh, to the holder of the Certificates, the balance of any
funds remaining in the Distribution Account after application pursuant to the
preceding clauses (i) through (x).
The following sets forth an example of the application of the foregoing
to a hypothetical monthly distribution:
<TABLE>
<S> <C>
February 1 -
February 28................ Due Period. Scheduled payments and any prepayments and other collections on the
Receivables are received and deposited into the Collection Account.
March 15 .................. Reporting Date. On or before this date, the Servicer will notify the Indenture
Trustee, the Owner Trustee, the Trust Collateral Agent, the Insurer and the
Collateral Agent of, among other things, the amounts available in the Collection
Account and the amounts required to be distributed on the Distribution Date, and
the Seller, NAFI and the Servicer, as the case may be, will make required payments
of Purchase Amounts to the Collection Account.
March 15................... Draw Date. On this date, the Trust Collateral Agent will make any required claims
under the Policy if the Available Amount in the Collection Account (plus any
amounts deposited therein by the Collateral Agent from the Spread Account), after
giving effect to all of the other distributions having a higher priority as set
forth above, are insufficient to pay in full the Scheduled Payments for the
related Distribution Date.
March 20 .................. Record Date. Distributions on the Distribution Date will be made to Noteholders
of record at the close of business on this date.
March 21................... Distribution Date. The Trust Collateral Agent will distribute the Available
Amount together with funds withdrawn from the Spread Account, if any, and the
Policy Claim Amount, if any, in the manner and priority set forth above under the
caption " - Distributions and Payments".
</TABLE>
S-37
<PAGE>
The "Note Distributable Amount" for a Distribution Date will be the sum
of the Note Interest Distributable Amount and the Note Principal Distributable
Amount.
A "Liquidated Receivable" is any Receivable with respect to which any
of the following has occurred: (i) 90 days have elapsed since repossession of
the related Financed Vehicle, (ii) the Servicer (or a subservicer) has in good
faith determined that all amounts that it expects to recover under such
Receivable have been received, or (iii) 90% or more of any scheduled payment on
such Receivable is 120 days or more (or, if the related Obligor is a debtor
under Chapter 13 of the U.S. Bankruptcy Code, 180 days or more) delinquent as of
the end of such Due Period.
A "Retransfer Default Receivable" is any Receivable with respect to
which NAFI or the Seller, as the case may be, has failed to deposit in the
Collection Account the Retransfer Amount for such Receivable following discovery
by the Seller or receipt by the Seller of notice from the Trust Collateral
Agent, the Owner Trustee or the Indenture Trustee that such Receivable is in
breach of a representation or warranty made with respect to such Receivable in
the Sale and Servicing Agreement.
A "Bankruptcy Loss" with respect to any Receivable is an amount equal
to the excess of the principal balance of such Receivable immediately prior to
issuance of an order in a bankruptcy or insolvency proceeding reducing the
amount owed on a Receivable or otherwise modifying or restructuring the
scheduled payments to be made on a Receivable over the principal balance of such
Receivable as so reduced by such order or the net present value (using as the
discount rate the higher of the APR on such Receivable or the rate of interest,
if any, specified by the court in such order) of the scheduled payments as so
modified or restructured. A "Bankruptcy Loss" will be deemed to have occurred on
the date of issuance of such order.
Events of Default
"Events of Default" under the Indenture ("Indenture Events of Default")
will consist of: (i) a default for five days or more in the payment of any
interest on any Note when the same becomes due and payable; (ii) a default in
the payment of the outstanding principal balance of any Note on the Final
Scheduled Distribution Date; (iii) a default in the observance or performance in
any material respect of any covenant or agreement of the Trust made in the
Indenture (other than a default in the payment of interest or principal on any
Note when due) or any certificate or other writing delivered in connection
therewith, and the continuation of any such default for a period of 30 days
after notice thereof is given to the Trust by the Insurer or the Indenture
Trustee or to the Trust, the Indenture Trustee and the Insurer by the holders of
25% of the aggregate outstanding principal amount of the Notes; (iv) any
representation or warranty made by the Trust in the Indenture or in any
certificate or other writing delivered pursuant thereto or in connection
therewith having been incorrect in a material respect as of the time made if
such breach is not cured within 30 days after notice thereof is given to the
Trust by the Insurer or the Indenture Trustee or to the Trust, the Indenture
Trustee and the Insurer by the holders of 25% of the aggregate outstanding
principal amount of the Notes; or (v) certain events of bankruptcy, insolvency,
receivership or liquidation with respect to the Trust, and certain actions by
the Trust indicating its insolvency or inability to pay its obligations. Unless
an Insurer Default has occurred and is continuing, Indenture Events of Default
also will include certain Events of Default under the Insurance Agreement
designated as Cross Defaults, but only if the Insurer delivers to the Trust and
the Indenture Trustee, and does not rescind, a written notice specifying that
such Insurance Agreement Event of Default constitutes an Indenture Event of
Default. A "Cross Default" may result from: (i) a demand for payment under the
Policy, (ii) the financial insolvency, readjustment of debt, marshalling of
assets and liabilities, or similar proceedings with respect to NAFI, the Trust,
the Servicer or the Seller and certain actions by NAFI, the
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Servicer or the Seller, indicating its insolvency or inability to pay its
obligations, (iii) the Trust becoming taxable as an association (or publicly
traded partnership) or taxable as a corporation for federal or state income tax
purposes, (iv) the Notes not being treated as debt for federal or applicable
state income tax purposes and such characterization having a material adverse
effect on the Trust, the holders of the Notes or the Insurer or (v) any failure
to observe or perform in any material respect any other covenants,
representation, warranty or agreements of the Trust in the Indenture, any
certificate or other writing delivered in connection therewith proving to have
been incorrect in any material respect when made, and such failure continuing
and not being cured or the circumstance or condition in respect of which such
representation or warranty was incorrect not having been eliminated or otherwise
cured for 30 days after written notice of such failure or incorrect
representation or warranty has been given to the Trust and the Indenture Trustee
by the Insurer.
If an Indenture Event of Default occurs and is continuing, the right of
the Indenture Trustee or holders of a majority in principal amount of the Notes
to declare the Notes to be immediately due and payable will depend upon whether
or not an Insurer Default has also occurred and is continuing. If an Indenture
Event of Default occurs and an Insurer Default has not occurred, the Insurer,
and not the Indenture Trustee or the Noteholders, will have the right, but not
the obligation, to cause the Trust Collateral Agent to foreclose on the Trust
Property, in whole or in part, on any date or dates following the acceleration
of the Notes due to such Indenture Event of Default as the Insurer, in its sole
discretion, shall elect, and to deliver the proceeds of the liquidation thereof
in accordance with the terms of the Sale and Servicing Agreement. If the Insurer
does not so cause the Trust Collateral Agent to liquidate the Trust Property and
to prepay the Notes, or if the proceeds of such liquidation of the Trust
Property are not sufficient to reduce the outstanding principal amount of Notes
to zero, and the Insurer does not elect to otherwise prepay the Notes in full,
following the occurrence of an Indenture Event of Default the Indenture Trustee
will continue to submit claims under the Policy for any shortfalls in the
Noteholders' Interest Distributable Amount and, in the case of the Final
Scheduled Distribution Date, the Noteholders' Principal Distributable Amount.
The Insurer may elect, upon receipt of a claim under the Policy following an
Indenture Event of Default, to pay all or any portion of the outstanding
principal amount of the Notes plus accrued interest thereon. See "The Policy"
herein.
If both an Indenture Event of Default and an Insurer Default occur and
are continuing, then the Indenture Trustee (or the holders of not less than a
majority of the outstanding principal amount of the Notes) may declare the Notes
to be immediately due and payable. Under such circumstances, the Indenture
Trustee may cause the Trust Collateral Agent to institute proceedings to
foreclose on the Trust Property, may exercise any other remedies as a secured
party, including liquidating the Trust Property, or may elect to maintain
possession of the Trust Property and continue to apply collections on the
Receivables as if there had been no declaration of acceleration. The Trust
Collateral Agent will be prohibited from selling the Receivables following both
an Indenture Event of Default and an Insurer Default, however, unless (i) the
holders of all the outstanding Notes consent to such sale; (ii) the proceeds of
such sale are sufficient to pay in full the principal of and accrued interest on
such outstanding Notes at the date of such sale; or (iii) the Indenture Trustee
determines that the proceeds of the Receivables would not be sufficient on an
ongoing basis to make all payments on the Notes as such payments would have
become due if such obligations had not been declared due and payable and the
Indenture Trustee obtains the consent of the Holders of Notes representing a
majority of the aggregate outstanding principal amount of the Notes.
Statements to Noteholders
Concurrently with each distribution to the Holders of the Notes, the
Servicer will provide to the Trust Collateral Agent (with a copy to the Insurer)
for the Indenture Trustee to forward by mail to each
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registered Holder of a Note a statement setting forth: (i) the amount of the
distribution to the holders of the Notes (detailed with respect to each
component of the Note Distributable Amount), (ii) if the distribution is less
than the amount required to be distributed under the Indenture, the amount of
the shortfall and an allocation thereof to principal and interest on the Notes,
(iii) the Pool Outstanding Principal Balance and the amount, if any, in the
Collection Account, Distribution Account, Pre-Funding Account and Pre-Funding
Period Reserve Account at the end of the calendar month preceding such
Distribution Date, (iv) the number and aggregate outstanding principal balances
of Receivables delinquent one or more months as of the end of the preceding
calendar month, (v) the amount withdrawn from the Spread Account and included in
the amounts distributed to the Noteholders, (vi) the outstanding principal
balance of all Receivables that became Liquidated Receivables during the related
Due Period (other than Liquidated Receivables that became Retransferred
Receivables during such Due Period), (vii) the amount remaining in the Spread
Account after giving effect to any withdrawals therefrom or additions thereto on
such Distribution Date and the amount, if any, by which the amount required to
be on deposit in the Spread Account pursuant to the Spread Account Agreement
exceeds the amount in such Spread Account, (viii) the amount, if any, drawn
under the Policy included in amounts actually distributed to the Noteholders;
(ix) the amount of any Purchase Amounts paid, or required to be paid, during the
related Due Period and (x) the Pool Factor. In the case of information described
in clauses (i), (ii) and (viii) above, the amounts shall also be expressed as a
dollar amount per $1,000 denomination of Notes.
Unless and until Definitive Notes are issued, such reports will be sent
on behalf of the Trust to the Indenture Trustee and Cede & Co., as registered
holder of the Notes and the nominee of DTC. Note Owners may receive copies of
such reports upon written request, together with a certification that they are
Note Owners and payment of any expenses associated with the distribution of such
reports, from the Indenture Trustee. See "Certain Information Regarding the
Securities - Reports to Securityholders" in the accompanying Prospectus.
Within the required period of time after the end of each calendar year,
the Trust Collateral Agent will furnish to each person who at any time during
such calendar year was a Noteholder, a statement as to the aggregate amounts of
interest and principal paid to such Noteholder, information regarding the amount
of servicing compensation received by the Servicer and such other information as
the Seller deems necessary to enable such Noteholder to prepare its tax returns.
See "Certain Federal Income Tax Consequences" in the accompanying Prospectus.
Claims under Policy
If, as of the fourth Business Day prior to a Distribution Date (each, a
"Draw Date") the sum of (i) the Available Amount for the related Distribution
Date and (ii) the amount, if any, required to be withdrawn by the Collateral
Agent from the Spread Account on or prior to such Distribution Date as provided
below, is not sufficient to pay the Scheduled Payments (after giving effect to
the payments to be made pursuant to clauses (i) and (ii) under the caption " -
Distributions and Payments" above) for such Distribution Date, the Trust
Collateral Agent will deliver to the Insurer, no later than noon, New York City
time, on such Draw Date, a completed notice of claim under the Policy in the
amount of the shortfall (the amount of any such shortfall being hereinafter
referred to as the "Policy Claim Amount"). Amounts paid by the Insurer pursuant
to a claim submitted by the Trust Collateral Agent as described above will be
deposited by the Trust Collateral Agent into the Note Distribution Account for
payment to Noteholders on the related Distribution Date. Any payment made by the
Insurer under the Policy will be applied solely to the payment of the Notes, and
for no other purpose.
Insurance Agreement
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The Seller, the Trust, NAFI and the Insurer will enter into an
Insurance and Indemnity Agreement (the "Insurance Agreement") pursuant to which
the Seller will agree to reimburse, with interest, Financial Security for
amounts paid pursuant to claims under the Policy. The Seller will further agree
(i) to pay Financial Security (or its designee) all reasonable charges and
expenses which Financial Security may pay or incur relative to any amounts paid
under the Policy or otherwise in connection with the transaction, (ii) to
indemnify Financial Security against certain liabilities, and (iii) to pay
Financial Security the amount of any unpaid premium owing in respect of the
Policy.
Subordination of the Certificates; Spread Account
The rights of the holder of the Certificates to receive distributions
with respect to the Receivables will be subordinated to the rights of the
Noteholders to the extent provided in the Sale and Servicing Agreement. This
subordination is intended to enhance the likelihood of timely receipt by
Noteholders of the full amount of interest and principal required to be
distributed to them, and to afford such Noteholders limited protection against
losses in respect of the Receivables. Neither the Seller nor the Servicer will
be required to refund any amounts properly paid to them, whether or not there
are sufficient funds on any subsequent Distribution Date to make full payments
to the Noteholders.
The Collateral Agent will establish and maintain the Spread Account
pursuant to the Spread Account Agreement as an Eligible Account. The Spread
Account Agreement will authorize the Collateral Agent, pursuant to written
instructions from the Seller, to invest all funds in the Spread Account in
Eligible Investments generally maturing not later than the Business Day
preceding the Distribution Date next following the date of investment. The
Spread Account will be created with an initial deposit in the amount of
$3,745,054.95 (the "Spread Account Initial Amount"). The Spread Account will
thereafter be funded by the deposit therein of amounts remaining in the
Distribution Account after distribution of the Servicing Fee, amounts payable to
the Insurer, certain other fees and amounts payable by the Trust and principal
and interest in respect of the Notes, until the monies in the Spread Account
reach the amount required to be maintained on deposit therein accordance with
the Spread Account Agreement. Thereafter, amounts otherwise distributable in
respect of deposits to the Pre-Funding Period Reserve Account, certain expenses
payable by the Trust and the Certificates will be deposited in the Spread
Account to the extent necessary to maintain the amount in the Spread Account at
such required amount.
If the Available Amount with respect to any Distribution Date is not
sufficient to pay to the Noteholders the Note Distributable Amount, to pay to
the Servicer the Servicing Fee, to pay certain other fees payable by the Trust
or to pay the Insurer amounts owing to it under the Insurance Agreement, the
Sale and Servicing Agreement or the Indenture, the Trust Collateral Agent will
notify the Collateral Agent, the Owner Trustee, the Servicer and the Insurer of
such deficiency and will direct the Collateral Agent to withdraw from the Spread
Account (to the extent of funds on deposit therein) and transfer to the Trust
Collateral Agent for deposit in the Collection Account the amount of such
deficiency. The Trust Collateral Agent will deposit the amounts so transferred
from the Spread Account to the Collection Account for distribution to the
Noteholders, the Servicer or the Insurer, as the case may be, on the related
Distribution Date.
So long as an Insurer Default shall not have occurred and be
continuing, the Insurer will be entitled to exercise in its sole discretion all
rights under the Spread Account Agreement with respect to the Spread Account and
any amounts on deposit therein and will have no liability to the Indenture
Trustee or the Noteholders for the exercise of such rights. The Insurer may (so
long as an Insurer Default shall not have occurred and be continuing) amend or
modify any term of the Spread Account Agreement
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(including terminating such agreement and releasing all funds on deposit in the
Spread Account) with the written consent of the Seller and will not be required
to obtain the consent of the Indenture Trustee or any Noteholder to such
amendment or modification. Amounts on deposit or to be deposited in the Spread
Account may be distributed to persons other than the Insurer or the Noteholders
without the consent of the Noteholders. Accordingly, there can be no assurance
that funds deposited to the Spread Account will be available in the event
collections on the Receivables and other amounts available under the Indenture
are insufficient to make distributions of the Note Distributable Amount on any
Distribution Date.
The Accounts
The Trust Collateral Agent will establish and maintain in the name of
the Trust Collateral Agent, (i) for the benefit of the Securityholders and the
Insurer, the Collection Account and the Distribution Account and (ii) for the
benefit of the Noteholders and the Insurer, the Pre-Funding Account and the
Pre-Funding Period Reserve Account, each of which will be an Eligible Account.
The Indenture Trustee will establish and maintain in its own name, for the
benefit of the Noteholders and the Insurer, an Eligible Account designated the
Note Distribution Account. The Collateral Agent will establish and maintain, for
the benefit of the Insurer and the Indenture Trustee, on behalf of the
Noteholders, an Eligible Account designated the Spread Account.
Collection Account. On or prior to each Distribution Date, the Trust
Collateral Agent, in accordance with the instructions of the Servicer set forth
in the Servicer Certificate, will withdraw from the Collection Account and
deposit into the Distribution Account any funds on deposit therein constituting
part of the Available Amount for such Distribution Date, which funds, together
with funds deposited by the Servicer, NAFI, the Seller or the Trust Collateral
Agent directly to the Distribution Account in connection with such Distribution
Date will be available to make distributions to the Noteholders on such
Distribution Date. The "Available Amount" for any Distribution Date will equal
the sum of (i) the amount on deposit in the Distribution Account on the
preceding Distribution Date after withdrawals therefrom on such preceding
Distribution Date, (ii) the amount on deposit in the Collection Account as of
the close of business on the last day of the related Due Period (the
"Determination Date"), which generally will include collections and other
recoveries in respect of the Receivables deposited to the Collection Account
during the related Due Period, (iii) Purchase Amounts deposited to the
Collection Account on or prior to the related Reporting Date, (iv) the amounts,
if any, required to be transferred from the Pre-Funding Account and/or the
Pre-Funding Period Reserve Account, if any, to the Distribution Account on such
Distribution Date as described below, (v) any collections or recoveries in
respect of the Receivables received by the Servicer or Seller remitted to the
Trust Collateral Agent for deposit to the Distribution Account, including any
extension fees, and (vi) any amounts delivered by the Insurer, at its sole
option, to the Trust Collateral Agent for deposit into the Collection Account
and not constituting Scheduled Payments (the "Insurer Optional Deposit"), if
any, less the sum of (a) collections on Receivables previously retransferred to
the Seller that are payable to the Seller, (b) income and gain on investments of
funds in the Collection Account, and (c) certain other fees and charges on the
Receivables on deposit in the Collection Account not representing principal or
interest collections other than extension fees. The "Reporting Date" with
respect to any Distribution Date will be the earlier of (i) the 15th day of the
calendar month in which such Distribution Date occurs and (ii) the fourth
Business Day preceding such Distribution Date. Income and gain on investments of
funds in the Collection Account and late payment penalties on deposit in the
Collection Account will be paid to the Servicer on each Distribution Date as
provided in the Sale and Servicing Agreement and will not be available to make
payments to Noteholders.
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The Sale and Servicing Agreement will authorize the Trust Collateral
Agent to invest all funds in the Collection Account in Eligible Investments (as
hereinafter defined) maturing not later than the Distribution Date next
following the date of investment. "Eligible Investments" will include United
States government securities and certain other high-quality investments
acceptable to the Insurer. An "Eligible Account" is (i) a segregated trust
account maintained with the corporate trust department of a depository
institution or trust company (A) during such time as an Insurer Default has not
occurred and is not continuing, acceptable to the Insurer or (B) at any other
time, subject to regulations on fiduciary funds on deposit substantially similar
to 12 C.F.R. ss. 9.10(b); or (ii) a segregated demand deposit account maintained
with a depository institution or trust company organized under the laws of the
United States of America, or any of the states thereof, or the District of
Columbia, that has a certificate of deposit, short-term deposit or commercial
paper rating of at least A-1+ by S&P and P-1 by Moody's and (unless an Insurer
Default has occurred and is continuing) acceptable to the Insurer.
The Distribution Account. In addition to amounts withdrawn from the
Collection Account and deposited to the Distribution Account, the Trust
Collateral Agent also will deposit into the Distribution Account (i) amounts
received by it from the Seller for deposit into the Distribution Account, (ii)
amounts withdrawn from the Spread Account as described below, and (iii) all
income and gain from investments of funds in the Distribution Account. Funds on
deposit in the Distribution Account on a Distribution Date will be used to make
distributions to Noteholders and certain other payments as more fully described
under "The Notes - Distributions and Payments" herein.
The Sale and Servicing Agreement will authorize the Trust Collateral
Agent to invest all funds in the Distribution Account in Eligible Investments
maturing not later than the Distribution Date next following the date of
investment. Income earned from the investment of funds in the Distribution
Account will be paid to the Seller on each Distribution Date and will not be
available to make payments to Noteholders.
The Pre-Funding Account. On the date of the initial issuance of the
Notes, the Indenture Trustee will deposit on behalf of the Seller approximately
$16,490,982.64 in the Pre-Funding Account (the "Initial Pre-Funded Amount").
Funds on deposit in the Pre-Funding Account will be withdrawn from time to time
during the Pre-Funding Period for delivery to the Seller in exchange for the
transfer and assignment of Additional Receivables to the Trust. In addition, on
the Distribution Date related to the Reporting Date next succeeding the end of
the Pre-Funding Period, the Trust Collateral Agent will transfer the amount, if
any, on deposit in the Pre-Funding Account upon termination of the Pre-Funding
Period, less any investment earnings on deposit therein, to the Note
Distribution Account for distribution to the Noteholders pro rata in accordance
with their respective outstanding principal amounts on such Distribution Date.
Amounts on deposit in the Pre-Funding Account will be withdrawn and applied to
the purchase of Additional Receivables not more frequently than monthly during
the Pre-Funding Period unless the Insurer consents to more frequent transfers.
The Sale and Servicing Agreement will authorize the Trust Collateral
Agent to invest all funds in the Pre-Funding Account in Eligible Investments
maturing not later than the earlier of the Distribution Date next following the
date of investment and the date on which funds on deposit therein are expected
to be needed. Income earned from the investment of funds in the Pre-Funding
Account will be deposited monthly into the Collection Account.
The Pre-Funding Period Reserve Account. On the Closing Date, the
Indenture Trustee will deposit on behalf of the Seller in the Pre-Funding Period
Reserve Account from the proceeds of the sale of the Notes an amount equal to
$154,832.00. On each Distribution Date occurring on or prior to the Distribution
Date related to the Reporting Date next succeeding termination of the
Pre-Funding Period,
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the Trust Collateral Agent will transfer from the Pre-Funding Period Reserve
Account to the Note Distribution Account an amount equal to the excess of (i)
interest accrued at the Interest Rate on the amount of funds on deposit in the
Pre-Funding Account for the period from and including the preceding Distribution
Date (or, in the case of the first Distribution Date, the Closing Date) to but
not including the current Distribution Date over (ii) the actual amount of
investment earnings on amounts on deposit in the Pre-Funding Account from and
including the preceding Distribution Date (or, in the case of the first
Distribution Date, the Closing Date) to the current Distribution Date. On the
Distribution Date related to the Reporting Date immediately following the end of
the Pre-Funding Period, any amounts remaining in the Pre-Funding Period Reserve
Account (after application to interest payable on the Notes as described above)
shall be paid to the Seller pursuant to the Sale and Servicing Agreement.
Thereafter, the Pre-Funding Period Reserve Account shall be closed.
The "Required Reserve Amount" as of any Distribution Date during the
Pre-Funding Period will equal the product of (i) the Interest Rate less 2.5%,
(ii) the balance of funds on deposit in the Pre-Funding Account as of such
Distribution Date and (iii) a fraction, the numerator of which is the number of
days remaining until the Distribution Date immediately following the Pre-Funding
Period and the denominator of which is 360.
The Sale and Servicing Agreement will authorize the Trust Collateral
Agent pursuant to written instructions from the Seller to invest all funds in
the Pre-Funding Period Reserve Account in Eligible Investments maturing not
later than the earlier of the Distribution Date next following the date of
investment and the date on which funds on deposit therein are expected to be
needed. Income earned from the investment of funds in the Pre-Funding Period
Reserve Account will be deposited monthly into the Collection Account.
The Note Distribution Account. On each Distribution Date, the Trust
Collateral Agent will deposit to the Note Distribution Account and distribute to
Noteholders (i) amounts withdrawn by the Trust Collateral Agent from the
Distribution Account and distributed to the Indenture Trustee in respect of the
Note Distributable Amount, (ii) amounts withdrawn by the Collateral Agent from
the Spread Account and (iii) amounts received by it from the Insurer in payment
of claims under the Policy, as described below.
THE SALE AND SERVICING AGREEMENT
The following summary describes certain terms of the Sale and Servicing
Agreement. A form of the Sale and Servicing Agreement has been filed as an
exhibit to the Registration Statement. The summary does not purport to be
complete and is subject to, and qualified in its entirety by reference to, all
the provisions of the Sale and Servicing Agreement. The following summary
supplements the description of the general terms and provisions of the Sale and
Servicing Agreement set forth in the accompanying Prospectus, to which
description reference is hereby made.
Sale and Assignment of Receivables
The Seller will acquire (i) the Initial Receivables from Funding Trust
II, a Delaware business trust wholly-owned by NAFI and affiliates of NAFI,
pursuant to the Sale Agreement and (ii) the Additional Receivables from NAFI
pursuant to the Purchase and Contribution Agreement. NAFI and Funding Trust II,
in their capacities as transferors of the Receivables to the Seller, are herein
referred to
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collectively as the "NAFI Transferors." The Initial Receivables constitute, as
of the Initial Cut-off Date, and the Additional Receivables will constitute, as
of the applicable Subsequent Cut-off Date, a substantial portion of the
non-prime motor vehicle retail installment sale contracts originated by NAFI
satisfying the selection criteria described herein. See "The Receivables Pool -
General" herein.
Pursuant to the Sale and Servicing Agreement, the Seller may, during
the Pre-Funding Period, transfer and assign Additional Receivables to the Trust
to the extent that (i) funds are available in the Pre-Funding Account, and (ii)
Additional Receivables are available for purchase from NAFI. Transfer of
Additional Receivables will be subject to the satisfaction of certain
conditions, including the prior written consent of the Insurer to the transfer
of such Additional Receivables. Upon transfer to the Trust of such Additional
Receivables the Trust Collateral Agent will acquire pursuant to the Indenture a
first priority security interest in such Additional Receivables for the benefit
of the Noteholders and the Insurer.
During the Pre-Funding Period, upon the Seller's written direction to
the Servicer and the Trust Collateral Agent from time to time (but not more
often than once during each such period or as more frequently consented to in
writing by the Insurer), the Trust Collateral Agent will release funds in the
Pre-Funding Account to the Seller in an amount equal to 91% of the aggregate
outstanding principal balance of the Additional Receivables so transferred as of
the related Subsequent Cut-off Date (the "Additional Receivables Purchase
Price") and the Seller will transfer and assign to the Trust, without recourse,
the Seller's entire right, title and interest in and to such Additional
Receivables. Upon the transfer and assignment of Additional Receivables to the
Trust on a Subsequent Transfer Date, the Pool Outstanding Principal Balance will
increase in an amount equal to the aggregate Outstanding Principal Balance of
the Additional Receivables so transferred as of the applicable Subsequent
Cut-off Date.
Any transfer and assignment of Additional Receivables to the Trust
will be subject to the satisfaction, on or before the related Subsequent
Transfer Date, of the following conditions, among others: (i) each such
Additional Receivable must satisfy the eligibility criteria with respect to the
Receivables specified in the Sale and Servicing Agreement; (ii) as of such
Subsequent Transfer Date, the Receivables in the Trust, together with the
Additional Receivables to be transferred and assigned by the Seller to the Trust
on such Subsequent Transfer Date, must meet the following criteria (computed
based on the characteristics of the Initial Receivables on the Initial Cut-off
Date and any Additional Receivables on the related Subsequent Cut-off Date): (a)
the weighted average APR of such Receivables will not be less than 18.00%, (b)
the weighted average remaining term of such Receivables will not be greater than
55 months, (c) not more than 80% of the aggregate outstanding principal balance
of such Receivables will be attributable to loans for the purchase of used
Financed Vehicles and (d) the final scheduled payment date on the Receivable
with the latest maturity will not be later than April 21, 2003; (iii) the Seller
shall have executed and delivered to the Owner Trustee a Subsequent Transfer
Agreement conveying such Additional Receivables to the Trust; and (iv) the
Insurer shall, in its sole and absolute discretion, have consented in writing to
the transfer and assignment of such Additional Receivables to the Trust. The
representations and warranties with respect to the Initial Receivables made by
the Seller in the Sale and Servicing Agreement, and the representations and
warranties with respect to the Initial Receivables made by NAFI and assigned to
the Trust, will be deemed to have been made with respect to the Additional
Receivables as of the respective dates of their transfer to the Trust.
Retransfer of Receivables
The Sale and Servicing Agreement will provide that the Seller will
have the right to require the Trust to retransfer to the Seller all of the
Receivables included in the Trust on or after any Distribution Date on which the
Pool Outstanding Principal Balance is less than 10% of the Original Pool
Outstanding
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Principal Balance of such Receivables. The "Original Pool Outstanding Principal
Balance" will equal the aggregate outstanding principal balance of all of the
Receivables, including Additional Receivables, as of their respective Cut-off
Dates. In connection with any such retransfer, the Seller will deliver to the
Trust Collateral Agent an amount equal to the sum of (i) 100% of the aggregate
outstanding principal balance of the Notes on such Distribution Date and (ii)
accrued and unpaid interest at the Interest Rate on the aggregate outstanding
principal balance of the Notes on such Distribution Date. Such right may be
exercised only with the prior written consent of the Insurer, if a claim has
previously been made under the Policy and remains unreimbursed to the Insurer or
if such retransfer would result in a claim under the Policy or would result in
any amount owing to the Noteholders or the Insurer remaining unpaid. Upon the
exercise by the Seller to require such retransfer, the Trust shall exercise its
right under the Indenture to effect an Optional Redemption of the Notes. See
"The Notes -- Optional Redemption" herein.
Collection and Other Servicing Procedures
The Servicer will service and administer the Receivables in the Trust
on behalf of the Trust and will have full power and authority, acting alone
and/or through subservicers, to do any and all things which it may deem
necessary or desirable in connection with such servicing and administration and
which are consistent with the Sale and Servicing Agreement. In the Sale and
Servicing Agreement, the Servicer will acknowledge that it is holding any
Receivable documents in its possession and any other property constituting part
of the Trust Property held by it in trust for the benefit of the Noteholders and
the Insurer.
Servicing activities required to be performed pursuant to the Sale
and Servicing Agreement will include collecting and recording payments,
communicating with Obligors, investigating payment delinquencies, providing
billing and tax records to Obligors and maintaining internal records with
respect to each Receivable.
The Servicer will be required to take all actions that are necessary
or desirable to maintain continuous perfection and first priority of security
interests granted by the Obligors in the Financed Vehicles. These actions
include, but are not limited to, using reasonable efforts to obtain the
execution by the Obligors and the recording, registering, filing, re-recording,
re-registering and refiling of all title documents, security agreements,
financing statements, continuation statements or other instruments as are
necessary to maintain the security interests granted by the respective Obligors
under the Receivables. Neither the Servicer nor any subservicer will be
required, however, to expend its own funds to remove any security interest, lien
or other encumbrance on a Financed Vehicle.
If a Receivable becomes and continues to be a Defaulted Receivable,
the Servicer will be required to take all reasonable and lawful steps necessary
for repossession. Following repossession, Financed Vehicles are currently sold
almost entirely at regularly scheduled wholesale auctions conducted by third
parties. NAFI is considering alternatives to this method of realization on
certain Financed Vehicles and may in the future use other methods of disposition
if in its judgment such methods will increase net proceeds from the sale of the
Financed Vehicles. However, neither the Servicer nor any subservicer will be
obligated to institute any action for repossession through judicial proceedings
unless it determines in its good faith judgment that the liquidation proceeds
that would be realized in connection therewith would be sufficient for the
reimbursement in full of its out-of-pocket expenses in connection therewith. A
Receivable will become a "Defaulted Receivable" in the calendar month in which
any of the following has occurred with respect to such Receivable: (i) all or
part of any scheduled payment is 90 days or more delinquent, (ii) the Servicer
(or a subservicer) has in good faith determined that all amounts that it expects
to recover under such Receivable have been received or (iii) the Financed
Vehicle
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that secures the Receivable has been repossessed without reinstatement of the
Receivable on or before the last day of such calendar month and any applicable
redemption period has expired.
Servicer Termination Event
A "Servicer Termination Event" under the Sale and Servicing Agreement
will occur if:
(a) the Servicer shall fail, or fail to cause any subservicer, to
deliver to the Trust Collateral Agent for distribution to Noteholders any
proceeds or payments required to be so delivered by the Servicer or subservicer
under the terms of the Notes or the Sale and Servicing Agreement and such
failure shall continue unremedied for two Business Days after written notice is
received by the Servicer from the Trust Collateral Agent or (unless an Insurer
Default (as defined below) shall have occurred and be continuing) the Insurer or
after discovery of such failure by the Servicer (but in no event later than five
Business Days after the Servicer is required to make such delivery or deposit);
or
(b) the Servicer shall fail to observe or perform any other of the
covenants or agreements on the part of the Servicer in the Sale and Servicing
Agreement, which failure (i) materially and adversely affects the rights of
Noteholders (determined without regard to the availability of funds under the
Policy) or of the Insurer (unless an Insurer Default shall have occurred and be
continuing), and (ii) continues unremedied for a period of thirty days after the
date on which written notice of such failure, requiring the same to be remedied,
shall have been given to the Servicer by the Trust Collateral Agent, or to the
Servicer and the Trust Collateral Agent by the Insurer (or, if an Insurer
Default has occurred and is continuing, Holders of Notes evidencing in the
aggregate not less than 25% of the aggregate outstanding principal balance of
the Notes); or
(c) there shall have occurred certain events of bankruptcy or
insolvency with respect to the Servicer; or
(d) the Servicer shall have breached any of the representations and
warranties set forth in the Sale and Servicing Agreement which breach materially
and adversely affects the interests of the Noteholders in any Receivable
(determined without regard to the availability of funds under the Policy) or the
Insurer and the Servicer shall have failed to cure such breach in all material
respects within thirty days of its receipt of a notice of such breach; or
(e) there shall have occurred an Insurance Agreement Event of Default
(as defined below) or an event of default under any other insurance agreement to
which (x) the Insurer and (y) NAFI and/or the Seller or any other affiliate of
NAFI are party; or
(f) a claim is made under the Policy; or
(g) the Servicer fails to deliver the Servicer Certificate and such
failure remains unremedied for five days; or
(h) so long as an Insurer Default shall not have occurred and be
continuing, the Insurer shall not have delivered the notice extending the term
of the Servicer required to be delivered by the Insurer pursuant to the Sale and
Servicing Agreement in the absence of certain events.
An "Insurance Agreement Event of Default" will include (i) the
inaccuracy or incompleteness of any representation or warranty of the Trust,
NAFI, the Servicer or the Seller in the Sale and Servicing Agreement, the
Insurance Agreement or certain other documents, subject to applicable grace
periods, (ii)
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a failure by the Trust, NAFI, the Servicer or the Seller to perform or to comply
with any covenant or agreement in the Sale and Servicing Agreement, the
Insurance Agreement or certain other documents, subject to applicable grace
periods, (iii) a finding or a ruling by a governmental authority or agency that
the Insurance Agreement, the Sale and Servicing Agreement, the Indenture or
certain other documents, or any material provision of any such document, are not
binding on NAFI or the Seller or any of the other parties thereto, (iv) failure
by the Trust, NAFI, the Servicer or the Seller to pay their respective debts in
general or the occurrence of certain events of insolvency or bankruptcy with
respect to the Trust, NAFI, the Servicer or the Seller, (v) a Servicer
Termination Event, (vi) a claim for payment under the Policy, (vii) certain
events of default under any other insurance agreement or similar agreement
entered into among (A) the Insurer and (B) NAFI and/or the Seller or any other
affiliate of NAFI entered into with respect to any other series of securities
issued by NAFI or the Seller or any other affiliate of NAFI, (viii) a denial by
NAFI or the Seller of any liability or obligation under the Insurance Agreement,
the Indenture, the Sale and Servicing Agreement or certain other documents, (ix)
failure by the Trust, NAFI or the Seller to pay when due any amount owed under
the Sale and Servicing Agreement, the Insurance Agreement, the Indenture or
certain other documents, (x) failure of the Receivables to comply, in the
aggregate, with certain limitations on the levels of delinquent Receivables,
Defaulted Receivables and net losses in respect of Liquidated Receivables set
forth in the Insurance Agreement, (xi) any default in the observance or
performance of any covenant or agreement of the Trust made in the Indenture
(other than a default in the payment of the interest or principal on any Note
when due) or any representation or warranty of the Trust made in the Indenture
or certain other documents in any material respect subject to applicable grace
periods, (xii) the Trust becomes an association (or publicly traded partnership)
or taxable as a corporation for federal or state income tax purposes and (xiii)
the Notes not being treated as indebtedness for federal or applicable state
income tax purposes, and such characterization having a material adverse effect
on the Trust, the Noteholders or the Insurer.
Rights Upon a Servicer Termination Event; Appointment of Successor. If
a Servicer Termination Event occurs under the Sale and Servicing Agreement,
then, so long as such Servicer Termination Event has not been remedied, the
Insurer may (unless an Insurer Default has occurred and is continuing) and the
Indenture Trustee will, at the direction of the Insurer (or, if an Insurer
Default has occurred and is continuing, the Holders of Notes evidencing in the
aggregate not less than 51% of the aggregate outstanding principal balance of
the Notes), by notice in writing to the Servicer, the Backup Servicer and the
Seller, terminate all of the rights and obligations of the Servicer under the
Sale and Servicing Agreement and in and to the related Receivables and the
proceeds thereof and appoint the Backup Servicer or (so long as no Insurer
Default shall have occurred and be continuing) such other Person or entity as
the Insurer shall direct as the successor Servicer. Any such termination will be
subject to compensation, rights of reimbursement, indemnity and limitation on
liability to which the Servicer is then entitled. The Backup Servicer will agree
to act as successor Servicer under the Sale and Servicing Agreement in the event
that the rights and obligations of the Servicer are terminated under the Sale
and Servicing Agreement. On or after the receipt by the Servicer of written
notice of its termination and upon the effective date of the transfer specified
in such notice, all authority and power of the Servicer under the Sale and
Servicing Agreement, whether with respect to the related Notes or the related
Receivables or otherwise, will pass to and be vested in the Backup Servicer or
another successor Servicer. In the Sale and Servicing Agreement, the Servicer
will agree to cooperate with the Backup Servicer or other successor Servicer in
effecting a termination of the Servicer's responsibilities and rights
thereunder.
A "Insurer Default" shall mean the occurrence and continuance of any of
the following events: (a) the Insurer shall have failed to make a payment
required under the Policy in accordance with its terms; (b) the Insurer shall
have (i) filed a petition or commences any case or proceeding under any
provision or chapter of the United States Bankruptcy Code or any other similar
federal or state law
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relating to insolvency, bankruptcy, rehabilitation, liquidation or
reorganization, (ii) made a general assignment for the benefit of its creditors,
or (iii) had an order for relief entered against it under the United States
Bankruptcy Code or any other similar federal or state law relating to
insolvency, bankruptcy, rehabilitation, liquidation or reorganization which is
final and nonappealable; or (c) a court of competent jurisdiction, the New York
Department of Insurance or other competent regulatory authority shall have
entered a final and nonappealable order, judgment or decree (1) appointing a
custodian, trustee, agent or receiver for the Insurer or for all or any material
portion of its property or (2) authorizing the taking of possession by a
custodian, trustee, agent or receiver of the Insurer (or the taking of
possession of all or any material portion of the property of the Insurer).
On and after the time the Servicer receives a notice of termination,
the Backup Servicer or other successor Servicer designated by the Insurer (so
long as no Insurer Default shall have occurred and be continuing) will be the
successor in all respects to the Servicer in its capacity as Servicer under the
Sale and Servicing Agreement. In the event that the Insurer has not designated
as successor Servicer a person other than the Backup Servicer and the Backup
Servicer is legally unable or is unwilling to take over and assume the
responsibilities of the Servicer, the Backup Servicer may, if it is unwilling to
so act, or shall if it is unable to so act appoint, subject to the prior written
consent of the Insurer (unless an Insurer Default has occurred and is
continuing) or if an Insurer Default has occurred and is continuing, the Backup
Servicer, the Trust Collateral Agent or the Note Majority may appoint, or
petition a court of competent jurisdiction to appoint, any experienced servicer
of motor vehicle installment sale contracts and notes having a net worth of not
less than $10,000,000 as the successor to the Servicer under the Sale and
Servicing Agreement. Any successor Servicer other than the Backup Servicer must
be satisfactory to the Insurer (unless an Insurer Default has occurred and is
continuing). Pending appointment of a successor to the Servicer under the Sale
and Servicing Agreement, the Backup Servicer shall act in such capacity. In
connection with such appointment and assumption, the Trust Collateral Agent may
make such arrangements for the compensation of such successor out of payments on
related Receivables as it and such successor agree. However, no such
compensation to the successor Servicer will be in excess of that permitted the
Servicer under the Sale and Servicing Agreement unless (i) the Trust Collateral
Agent and Insurer (or, if an Insurer Default has occurred and is continuing, the
Holders of a majority in percentage interests of the Notes) agree in writing to
a larger Servicing Fee and (ii) each of S&P and Moody's delivers a letter to the
Indenture Trustee and the Insurer to the effect that such larger Servicing Fee
will not result in a reduction or withdrawal of the rating assigned by it to the
Notes. The monthly Servicing Fee for any successor Servicer, including the
Backup Servicer, may not, however, exceed one-twelfth of two percent of the Pool
Outstanding Principal Balance of the related Receivables as of the last day of
such month. The Seller, the Backup Servicer, the Trust Collateral Agent, any
subservicer and the successor Servicer will take such action, consistent with
the Sale and Servicing Agreement, as shall be necessary to effectuate any such
succession.
Servicing Fee
The Servicer will receive a monthly fee (the "Servicing Fee") as
compensation for its activities under the Sale and Servicing Agreement. As to
any calendar month, the Servicing Fee under the Sale and Servicing Agreement
will equal 1/12 of the product of (a) two percent and (b) the Pool Outstanding
Principal Balance as of the last day of such month. The Servicer will be
required to pay the fees of, and certain expenses of, the Indenture Trustee, the
Owner Trustee, the Trust Collateral Agent, the Collateral Agent, any subservicer
and the Backup Servicer.
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THE PURCHASE AGREEMENTS
The Receivables in the Trust will be acquired by the Seller from the
NAFI Transferors pursuant to the Purchase Agreements. The following summary does
not purport to be complete and is subject to, and is qualified in its entirety
by reference to, the provisions of the Purchase Agreements. Where particular
provisions or terms used in the Purchase Agreements are referenced to, the
actual provisions (including definitions of terms) are incorporated by reference
as part of such summary.
Transfer and Conveyance of Receivable Assets
Pursuant to the Purchase Agreements, the NAFI Transferors will sell,
transfer and convey to the Seller, without recourse except as specifically
provided in the Purchase Agreements, all of their respective right, title and
interest in and to the following assets: (i) the Receivables and all monies
payable thereunder on and after the applicable Cut-off Date; (ii) the related
Receivable Files; (iii) the security interests in the Financed Vehicles securing
the Receivables and the property which secured any such Receivable and which has
been acquired by repossession or otherwise; (iv) all rights to the insurance
proceeds and liquidation proceeds with respect to such Receivables; (v) certain
rights against Dealers under the related Dealer Agreements and against
Originators under the related Originator Agreements; and (vi) the proceeds of
the foregoing and the rights to enforce the foregoing. Each such sale, transfer
and conveyance of Receivables will be consummated on the Closing Date other than
Additional Receivables that may be sold, transferred and conveyed by NAFI or
Funding Trust II to the Seller on Subsequent Transfer Dates.
On or prior to the Closing Date, the NAFI Transferors will file Uniform
Commercial Code financing statements, appropriate under applicable law, to
reflect the transfer and conveyance of the Receivables to the Seller.
Representations and Warranties
In the Purchase Agreements, NAFI will make representations and
warranties with respect to each Receivable in the Trust (including Receivables
acquired by the Seller from Funding Trust II) as of the date of transfer of such
Receivable to the Trust as to, among other things, the characteristics of such
Receivable, NAFI's or Funding Trust II's interest in such Receivable and the
Financed Vehicle securing such Receivable, the nature of the interest acquired
by the Seller in such Receivable and the related Financed Vehicle, compliance of
such Receivable with consumer finance and other laws and regulations and certain
other matters.
If there has been a breach of any of the foregoing representations or
warranties with respect to a Receivable and such Receivable is retransferred or
required to be retransferred to the Seller pursuant to the Sale and Servicing
Agreement, NAFI will be required under the applicable Purchase Agreement, upon
demand, to repurchase such Receivable from the Seller at the retransfer amount
required by the Sale and Servicing Agreement.
THE POLICY
The following summary of the terms of the Policy does not purport to be
complete and is qualified in its entirety by reference to the provisions of the
Policy.
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The Policy
Simultaneously with the issuance the Notes, Financial Security will
deliver the Policy to the Trust Collateral Agent as agent for the Indenture
Trustee for the benefit of each Holder of a Note. Under the Policy, Financial
Security will unconditionally and irrevocably guarantee to the Trust Collateral
Agent for the benefit of each Holder of a Note the full and complete payment of
(i) Scheduled Payments (as defined below) on the Notes and (ii) the amount of
any Scheduled Payment which subsequently is avoided in whole or in part as a
preference payment under applicable law.
"Scheduled Payments" means payments which are scheduled to be made on
the Notes during the term of the Policy in accordance with the original terms of
the Notes when issued and without regard to any amendment or modification of the
Notes, the Indenture or the Sale and Servicing Agreement, except amendments or
modifications to which the Insurer has given its prior written consent, which
"Scheduled Payments" are (i) with respect to each Distribution Date, the Monthly
Interest payable on such Distribution Date, and (ii) with respect to the Final
Scheduled Distribution Date, any principal of the Notes remaining unpaid on such
Final Scheduled Distribution Date; Scheduled Payments do not include payments
which become due on an accelerated basis as a result of (a) a default by the
Trust, (b) an election by the Trust to pay principal on an accelerated basis,
(c) the occurrence of an Event of Default under the Indenture or (d) any other
cause, unless the Insurer elects, in its sole discretion, to pay in whole or in
part such principal due upon acceleration, together with any accrued interest to
the date of acceleration. In the event the Insurer does not so elect, the Policy
will continue to guarantee Scheduled Payments due on the Notes in accordance
with its original terms. Scheduled Payments shall not include (x) any portion of
the Note Interest Distributable Amount due to Noteholders because the
appropriate notice and certificate for payment in proper form was not timely
Received (as defined below) by the Insurer, (y) any portion of the Note Interest
Distributable Amount due to Noteholders representing interest on any overdue
interest or (z) any Note Prepayment Amounts unless, in each case, the Insurer
elects, in its sole discretion, to pay such amount in whole or in part. "Note
Prepayment Amounts" means an amount equal to each Noteholder's share of
principal payments from funds on deposit in the Pre-Funding Account on the date
of a Mandatory Redemption, as described herein. Scheduled Payments shall not
include any amounts due in respect of the Notes attributable to any increase in
interest rate, penalty or other sum payable by the Trust by reason of any
default or event of default in respect of the Notes, or by reason of any
deterioration of the creditworthiness of the Trust nor shall Scheduled Payments
include, nor shall coverage be provided under the Policy in respect of, any
taxes, withholding or other charge imposed by any governmental authority due in
connection with the payment of any Scheduled Payment to a Holder of a Note.
Payment of claims on the Policy made in respect of Scheduled Payments
will be made by Financial Security following Receipt (as defined below) by
Financial Security of the appropriate notice for payment on the later to occur
of (a) 12:00 noon, New York City time, on the third Business Day (as defined
below) following Receipt of such notice for payment, and (b) 12:00 noon, New
York City time, on the Distribution Date such payment was due on the Notes.
If payment of any amount avoided as a preference under applicable
bankruptcy, insolvency, receivership or similar law is required to be made under
the Policy, Financial Security shall cause such payment to be made on the later
of (a) the date when due to be paid pursuant to the Order (as defined below) or
(b) the first to occur of (i) the fourth Business Day following Receipt by
Financial Security from the Trust Collateral Agent of (A) a certified copy of
the order (the "Order") of the court or other governmental body which exercised
jurisdiction to the effect that the Holder is required to return the amount of
any Scheduled Payment paid on the Notes during the term of the Policy because
such distributions were avoidable as preference payments under applicable
bankruptcy law, (B) a certificate of
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the Holder that the Order has been entered and is not subject to any stay, and
(C) an assignment duly executed and delivered by the Holder, in such form as is
reasonably required by Financial Security and provided to the Holder by
Financial Security, irrevocably assigning to Financial Security all rights and
claims of the Holder relating to or arising under the Notes against the debtor
which made such preference payment or otherwise with respect to such preference
payment, or (ii) the date of Receipt by Financial Security from the Trust
Collateral Agent of the items referred to in clauses (A), (B) and (C) above if,
at least four Business Days prior to such date of Receipt, Financial Security
shall have Received (as defined below) written notice from the Trust Collateral
Agent that such items were to be delivered on such date and such date was
specified in such notice. Such payment shall be disbursed to the receiver,
conservator, debtor-in-possession or trustee in bankruptcy named in the Order
and not to the Trust Collateral Agent or any Holder directly (unless a Holder
has previously paid such amount to the receiver, conservator,
debtor-in-possession or trustee in bankruptcy named in the Order, in which case
such payment will be disbursed to the Trust Collateral Agent for distribution to
such Holder upon proof of such payment reasonably satisfactory to Financial
Security). In connection with the foregoing, the Insurer shall have the rights
provided pursuant to the Sale and Servicing Agreement.
Other Provisions of the Policy
The terms "Receipt" and "Received," with respect to the Policy, shall
mean actual delivery to Financial Security and to its fiscal agent, if any,
prior to 12:00 noon, New York City time, on a Business Day; delivery either on a
day that is not a Business Day or after 12:00 noon, New York City time, shall be
deemed to be Receipt on the next succeeding Business Day. If any notice or
certificate given under the Policy by the Trust Collateral Agent is not in
proper form or is not properly completed, executed or delivered, it shall be
deemed not to have been Received, and Financial Security or its fiscal agent, if
any, shall promptly so advise the Trust Collateral Agent and the Trust
Collateral Agent may submit an amended notice.
Under the Policy, "Business Day" means any day other than (i) a
Saturday or Sunday or (ii) a day on which banking institutions in the City of
New York, New York or Chicago, Illinois, or any other location of any successor
Servicer, successor Owner Trustee or successor Trust Collateral Agent are
authorized or obligated by law or executive order to be closed.
Financial Security's obligations under the Policy in respect of
Scheduled Payments shall be discharged to the extent funds are transferred to
the Trust Collateral Agent as provided in the Policy whether or not such funds
are properly applied by the Trust Collateral Agent.
Financial Security shall be subrogated to the rights of each Holder of
a Note to receive payments of principal and interest under the Notes to the
extent of any payment by Financial Security under the Policy.
Claims under the Policy constitute direct, unsecured and unsubordinated
obligations of Financial Security ranking not less than pari passu with other
unsecured and unsubordinated indebtedness of Financial Security for borrowed
money. Claims against Financial Security under the Policy and claims against
Financial Security under each other financial guaranty insurance policy issued
thereby constitute pari passu claims against the general assets of Financial
Security. The terms of the Policy cannot be modified or altered by any other
agreement or instrument, or by the merger, consolidation or dissolution of the
Seller or the Trust. The Policy may not be canceled or revoked prior to
distribution in full of all Scheduled Payments with respect to the Notes. The
Policy is not covered by the Property/Casualty Insurance Security Fund specified
in Article 76 of the New York Insurance Law. The Policy is governed by the laws
of the State of New York.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following general discussion, when read in conjunction with the
discussion of "Federal Income Tax Consequences" in the Prospectus, describes
certain federal income tax consequences to the original purchasers of the Notes
of the purchase, ownership and disposition of the Notes. It does not purport to
discuss all federal income tax consequences that may be applicable to investment
in the Notes or to particular categories of investors, some of which may be
subject to special rules.
The discussion that follows, and the opinions set forth below of
Morrison & Foerster LLP, special tax counsel to the Issuer ("Tax Counsel"), are
based on the provisions of the Internal Revenue Code of 1986, as amended (the
"Code") and Treasury regulations promulgated thereunder as in effect on the date
hereof and on existing judicial and administrative interpretations thereof.
These authorities are subject to change and to differing interpretations, which
could apply retroactively. The opinions of Tax Counsel are not binding on the
courts or the Internal Revenue Service (the "IRS"). Potential investors should
consult their own tax advisors in determining the federal, state, local, foreign
and any other tax consequences to them of the purchase, ownership and
disposition of the Notes.
Characterization of the Notes as Indebtedness
In the opinion of Tax Counsel, although no transaction closely
comparable to that contemplated herein has been the subject of any Treasury
regulation, revenue ruling or judicial decision, based on the application of
existing law to the facts as set forth in the applicable agreements, the proper
treatment of the Notes is as indebtedness for federal income tax purposes.
Except as described below, interest paid or accrued on a Note will be
treated as ordinary income to the Noteholders and principal payments on a Note
will be treated as a return of capital to the extent of the Noteholder's basis
in the Note allocable thereto. An accrual method taxpayer will be required to
include in income interest on the Notes when earned, even if not paid, unless it
is determined to be uncollectible. It is not anticipated that the Notes will be
issued with original issue discount. See "Federal Income Tax
Consequences--Trusts for which a Partnership Election is Made--Tax Consequences
to Holders of the Notes" in the Prospectus.
Alternative Characterizations of the Notes
Although it is the opinion of Tax Counsel that the Notes are properly
characterized as indebtedness for federal income tax purposes, no assurance can
be given that such characterization of the Notes will prevail. If the Notes were
treated as an ownership interest in the Receivables, all income on such
Receivables would be income to the holders of the Notes, and related fees and
expenses would generally be deductible (subject to certain limitations on the
deductibility of miscellaneous itemized deductions by individuals) and certain
market discount and premium provisions of the Code might apply to a purchase of
the Notes.
If, alternatively, the Notes were treated as an equity interest in the
Trust, the Trust would be treated as a partnership for federal income tax
purposes. As a partnership, the Trust will not be subject to federal income tax
unless treated as a publicly traded partnership taxable as a corporation. Any
such corporate income tax could materially reduce cash available to make
payments on the Notes. Tax Counsel is of the opinion that, although no
transaction closely comparable to that contemplated herein has been the subject
of any Treasury regulation, revenue ruling or judicial decision and, therefore,
is subject to interpretation, the Trust, if treated as a partnership, will not
be treated as a publicly traded partnership taxable as a corporation. This
opinion is based on Tax Counsel's conclusion that the nature of the income
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of the Trust exempts it from the rules that certain publicly traded partnerships
are taxable as corporations.
Trusts in which all Certificates are Retained by the Seller or an Affiliate of
the Seller
Tax Counsel will deliver its opinion that a Trust which issues one or
more classes of Notes to investors and all the Certificates of which are
retained by the Seller or an affiliate thereof will not be an association (or
publicly traded partnership) taxable as a corporation for federal income tax
purposes. This opinion will be based on the assumption that the terms of the
Trust Agreement and related documents will be complied with, and on Tax
Counsel's conclusions that the Trust will constitute a mere security arrangement
for the issuance of debt by the single Certificateholder. In the event the
Certificates were later transferred to more than one person, the discussion
under "Trusts for which a Partnership Election is Made" in the Prospectus would
apply to the Trust and the Notes.
In any event, Tax Counsel will advise the Trust that the Notes will be
classified as debt for federal income tax purposes. If, contrary to the opinion
of Tax Counsel, the IRS successfully asserted that one or more classes of Notes
did not represent debt for federal income tax purposes, such class or classes of
Notes might be treated as equity interests in the Trust. If so treated, the
Trust would most likely in the view of Tax Counsel, be treated as a partnership
for federal income tax purposes. See "Alternative Characterizations of the
Notes" above.
State Tax Considerations
Potential Noteholders should consider the state and local income tax
consequences of the purchase, ownership and disposition of the Notes. State and
local income tax laws may differ substantially from the corresponding federal
law, and this discussion does not purport to describe any aspect of the income
tax laws of any state or locality. Therefore, potential Noteholders should
consult their own tax advisors with respect to the various state and local tax
consequences of an investment in the Notes.
ERISA CONSIDERATIONS
Section 406 of ERISA, and/or Section 4975 of the Code, prohibits a
pension, profit-sharing or other employee benefit plan, as well as individual
retirement accounts and certain types of Keogh Plans (each a "Benefit Plan")
from engaging in certain transactions with persons that are "parties in
interest" under ERISA or "disqualified persons" under the Code with respect to
such Benefit Plan. A violation of these "prohibited transaction" rules may
result in an excise tax or other penalties and liabilities under ERISA and the
Code for such persons. Title I of ERISA also requires that fiduciaries of a
Benefit Plan subject to ERISA make investments that are prudent, diversified
(except if prudent not to do so) and in accordance with governing plan
documents.
Certain transactions involving the Trust might be deemed to constitute
prohibited transactions under ERISA and the Code if assets of the Trust were
deemed to be assets of a Benefit Plan. Under a regulation issued by the United
States Department of Labor (the "Plan Assets Regulation"), the assets of the
Trust would be treated as plan assets of a Benefit Plan for the purposes of
ERISA and the Code only if the Benefit Plan acquires an "Equity Interest" in the
Trust and none of the exceptions contained in the Plan Assets Regulation is
applicable. An equity interest is defined under the Plan Assets Regulation as an
interest other than an instrument which is treated as indebtedness under
applicable local law and which has no substantial equity features. Although
there is little guidance on the subject, the Seller believes that the
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Notes should be treated as indebtedness without substantial equity features for
purposes of the Plan Assets Regulation. This determination is based in part upon
the traditional debt features of the Notes, including the reasonable expectation
of purchasers of Notes that the Notes will be repaid when due, as well as the
absence of conversion rights, warrants and other typical equity features. The
debt treatment of the Notes for ERISA purposes could change if the Trust
incurred losses. However, even if the Notes are treated as debt, the acquisition
or holding of Notes by or on behalf of a Benefit Plan could be considered to
give rise to a prohibited transaction if the Trust or any of its affiliates or
the parties involved in this transaction is or becomes a party in interest or a
disqualified person with respect to such Benefit Plan. In such case, certain
exemptions from the prohibited transaction rules could be applicable depending
on the type and circumstances of the plan fiduciary making the decision to
acquire a Note. Included among these exemptions are: Prohibited Transaction
Class Exemption ("PTCE") 90-1, regarding investments by insurance company pooled
separate accounts; PTCE 95-60, regarding investments by insurance company
general accounts; PTCE 91-38, regarding investments by bank collective
investment funds; PTCE 96-23, regarding transactions affected by in-house asset
managers; and PTCE 84-14, regarding transactions effected by "qualified
professional asset managers." Each investor using the assets of a Benefit Plan
which acquires the Notes, or to whom the Notes are transferred, will be deemed
to have represented that the acquisition and continued holding of the Notes will
be covered by one of the exemptions listed above or by another Department of
Labor Class Exemption.
Employee benefit plans that are governmental plans (as defined in
Section 3(32) of ERISA) and certain church plans (as defined in Section 3(33) of
ERISA) are not subject to ERISA requirements, however, such plans may be subject
to comparable state law restrictions.
A plan fiduciary considering the purchase of Notes should consult its
tax and/or legal advisors regarding whether the assets of the Trust would be
considered plan assets, the possibility of exemptive relief from the prohibited
transaction rules and other issues and their potential consequences.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement between the Seller and First Union Capital Markets Corp. (the
"Underwriter"), the Notes will be purchased from the Seller by the Underwriter
upon issuance.
The Underwriting Agreement provides that the Underwriter is obligated
to purchase all of the Notes offered hereby, if any of such Notes are purchased.
The Seller has been advised by First Union Capital Markets Corp. that
it proposes initially to offer the Notes to the public at the public offering
price set forth on the cover page of this Prospectus Supplement and to certain
dealers at such price less a concession not in excess of 0.20% of the principal
amount of the Notes, and that the Underwriter and such dealers may re-allow a
discount of not in excess of 0.10% of the principal amount of the Notes to other
dealers. The public offering price and the concession and discount to dealers
may be changed by the Underwriter after the initial public offering of the Notes
offered hereby. In addition, certain fees and expenses of the Underwriter,
including fees and expenses of its counsel, will be paid by the Seller.
S-55
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In connection with the offering of the Notes, the Underwriter may
engage in transactions that stabilize, maintain or otherwise affect the market
price of the Notes. Such transactions may include stabilization transactions
effected in accordance with Rule 104 of Regulation M, pursuant to which such
person may bid for or purchase the Notes for the purpose of stabilizing its
market price. In addition, the Underwriter may impose "penalty bids" whereby it
may reclaim from a dealer participating in the offering the selling concession
with respect to the Notes that such dealer distributed in the offering but
subsequently purchased for the account of the Underwriter in the open market.
Any of the transactions described in this paragraph may result in the
maintenance of the price of the Notes at a level above that which might
otherwise prevail in the open market. None of the transactions described in this
paragraph is required, and, if they are taken, may be discontinued at any time
without notice.
NAFI and the Seller have agreed to indemnify the Underwriter against
certain liabilities, including certain losses, claims, damages or liabilities
arising under the Securities Act of 1933, as amended, in connection with certain
untrue statements of material fact or material omissions contained in the
Preliminary Prospectus Supplement, the Prospectus or the Registration Statement.
The Seller does not intend to apply for listing of the Notes on a
national securities exchange, but has been advised by the Underwriter that the
Underwriter currently intends to make a market in the Notes, as permitted by
applicable laws and regulations. The Underwriter is not obligated, however, to
make a market in the Notes and any such market may be discontinued at any time
at the sole discretion of the Underwriters. Accordingly, no assurance can be
given as to the liquidity of, or trading markets for, the Notes.
In the ordinary course of their respective businesses, First Union
Capital Markets Corp. and its affiliates have engaged and may engage in
investment banking and/or commercial banking transactions with NAFI and its
affiliates. See "Use of Proceeds" herein and "Plan of Distribution" in the
accompanying Prospectus. In connection with the offering contemplated by this
Prospectus Supplement, First Union Corporation, the parent company of the
Underwriter, has received a fee from the Seller in respect of certain advisory
services relating to the structuring of the transaction. In addition, on August
25, 1997, NAFI entered into a $1.5 million credit agreement with First Union
National Bank, an affiliate of the Underwriter, to fund the purchase of
furniture and equipment (the "Office Collateral") for NAFI's Jacksonville
Servicing Division and corporate headquarters secured by the Office Collateral.
This Prospectus Supplement and the accompanying Prospectus may be used
by the Underwriter, affiliates of which have an ownership interest in, or
participate in banking transactions with, NAFI, in connection with offers and
sales related to market making transactions in the Notes. The Underwriter may
act as principal or agent in such transactions. Such sales will be made at
prices related to prevailing market prices at the time of the sale or otherwise.
S-56
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LEGAL MATTERS
Certain matters with respect to the legality of the Notes and with
respect to the federal income tax matters discussed under "Certain Federal
Income Tax Consequences" will be passed upon for the Seller by Morrison &
Foerster LLP, New York, New York. Certain matters with respect to the Notes will
be passed upon for the Underwriter by Dewey Ballantine LLP, New York, New York.
RATINGS
As a condition of issuance, the Notes will be rated "AAA" by S&P and
"Aaa" by Moody's primarily on the basis of the issuance of the Policy by the
Insurer. There is no assurance that the ratings initially assigned to the Notes
will not subsequently be lowered or withdrawn by the Rating Agencies. Such
ratings will not constitute an assessment of the likelihood that principal
prepayments on the Receivables underlying the Notes will be made by the Obligors
thereon or of the degree to which the rate of such prepayments might differ from
that originally anticipated. See "Risk Factors - Ratings on Notes" herein.
EXPERTS
The consolidated balance sheets of Financial Security Assurance Inc.
and Subsidiaries as of December 31, 1996 and 1995 and the related consolidated
statements of income, changes in shareholder's equity and cash flows for each of
the three years in the period ended December 31, 1996, incorporated by reference
in this Prospectus Supplement, have been incorporated herein in reliance on the
report of Coopers & Lybrand L.L.P., independent accountants, given on the
authority of that firm as experts in accounting and auditing.
S-57
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INDEX OF DEFINED TERMS
"ABS Table"......................................23
"ABS"............................................22
"Additional Receivables Purchase Price"..........45
"Additional Receivables"......................7, 34
"aggregate risks"................................33
"Agreement".......................................4
"APR".............................................9
"Available Amount"...............................42
"Backup Servicer".................................4
"Bankruptcy Loss"................................38
"Benefit Plan"...............................13, 55
"Business Day"................................5, 53
"Certificates"....................................1
"Closing Date"....................................1
"Code".......................................13, 53
"Collateral Agent"............................4, 18
"Collection Account"..........................7, 17
"Cut-off Dates"...................................8
"Defaulted Receivable"...........................47
"Determination Date".............................42
"Distribution Account"........................7, 17
"Distribution Date"........................1, 5, 36
"Draw Date"......................................40
"DTC".............................................1
"Due Period"......................................5
"Eligible Account"...............................43
"Eligible Investments"...........................43
"Exchange Act"....................................2
"Final Scheduled Distribution Date"............1, 9
"Financed Vehicles"...........................7, 34
"Financial Security"..............................4
"Funding Trust II"............................8, 18
"Holder"..........................................1
"Holdings"....................................3, 32
"Indenture Events of Default"....................38
"Indenture Trustee"........................1, 4, 18
"Initial Cut-off Date"............................8
"Initial Pre-Funded Amount"......................43
"Initial Receivables".........................7, 34
"Insurance Agreement Event of Default"...........48
"Insurance Agreement".........................7, 41
"Insurer Default"................................49
"Insurer Optional Deposit".......................42
"Insurer".........................................4
"Interest Period".................................5
"Interest Rate"...................................5
"IRS"............................................53
"Issuer".......................................1, 4
"Mandatory Redemption"........................7, 36
"Modeling Assumptions"...........................23
"Monthly Interest"...............................34
"Moody's"........................................13
"NAFI Transferors"...............................18
"NAFI"............................................1
"Note Distribution Account"...................7, 17
"Note Prepayment Amounts"........................51
"Note Redemption Amount"......................7, 36
"Notes"...........................................1
"Order"..........................................52
"Owner Trustee"................................1, 4
"Plan Assets Regulation".........................55
"Policy Claim Amount"............................40
"Policy"..........................................1
"Pool Outstanding Principal Balance"..........6, 36
"Pre-Funded Amount"..............................10
"Pre-Funding Account".............................1
"Pre-Funding Period"..........................1, 10
"PTCE"...........................................55
"Purchase Agreement"..........................8, 18
"Purchase Agreements".........................8, 18
"Rating Agencies"................................13
"Receipt"........................................52
"Receivables"..............................1, 7, 34
"Received".......................................52
"Record Date".....................................5
"Redemption Price"............................6, 36
"Required Reserve Amount"........................44
"Retransferred Receivables".......................5
"S&P"............................................13
"Sale Agreement"..................................8
"Scheduled Payments".............................51
"Securities"......................................1
"Seller"......................................1, 31
"Servicer Certificate"...........................36
"Servicer Default"...............................47
"Servicing Fee"..................................50
"single risks"...................................33
"Spread Account Agreement".......................11
"Spread Account Initial Amount"..................41
"Subsequent Cut-off Date..........................8
"Subsequent Transfer Agreement"..................16
"Subsequent Transfer Date"........................8
"Trust Collateral Agent"..................1, 11, 18
"Trust Property"...........................1, 7, 34
"Trust"...........................................1
"Underwriter"....................................56
S-58
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No person is authorized to give any information or to make any
representation not contained in this Prospectus Supplement or the Prospectus,
and any information or representation not contained herein or therein must not
be relied upon as having been authorized by NAFI, the Seller or the Underwriter.
This Prospectus Supplement and the Prospectus do not constitute an offer of any
securities other than the registered securities to which the Prospectus
Supplement relates or an offer to any person in any jurisdiction where such an
offer would be unlawful. Neither the delivery of this Prospectus Supplement and
the Prospectus nor any sales made hereunder or thereunder shall, under any
circumstances, create any implication that information herein or therein is
correct as of any time subsequent to the date of this Prospectus Supplement or
Prospectus.
TABLE OF CONTENTS National Auto Finance 1998-1 Trust
Prospectus Supplement
Page
----
Reports To Noteholders................................S-2
Incorporation Of Certain Documents By Reference.......S-2 $85,200,000
Summary Of The Terms Of The Notes.....................S-4 5.88% Automobile Receivables-
Risk Factors.........................................S-14 Backed Notes
The Trust............................................S-17
Use Of Proceeds......................................S-18 National Financial Auto Funding Trust
The Receivables Pool.................................S-18 (Seller)
The Seller...........................................S-31
National Auto Finance Company, Inc...................S-31 National Auto Finance Company, Inc.
The Insurer..........................................S-31 (Servicer)
The Notes............................................S-33
The Sale And Servicing Agreement.....................S-44
The Purchase Agreements..............................S-50
The Policy...........................................S-50
Certain Federal Income Tax Consequences..............S-53
Erisa Considerations.................................S-54
Underwriting.........................................S-55 _______________________
Legal Matters........................................S-57
Ratings..............................................S-57 PROSPECTUS SUPPLEMENT
Experts..............................................S-57 _______________________
Prospectus
Available Information...................................3
Reports to Securityholders..............................3
Incorporation of Certain Documents by Reference.........3
Prospectus Summary......................................5
Risk Factors...........................................23
The Trusts.............................................26 January 15, 1998
The Receivables........................................28
Yield and Prepayment Considerations....................35
Pool Factor............................................36
Use of Proceeds........................................37
The Seller.............................................37
National Auto Finance Company, Inc.....................37
Omni Financial Services of America, Inc................40
The Certificates.......................................40
The Notes..............................................42
Certain Information Regarding the Securities...........48
Description of the Purchase Agreements and the Trust
Documents...........................................55
Certain Legal Aspects of the Receivables...............74
Certain Federal Income Tax Consequences................81
ERISA Considerations..................................101
Plan of Distribution..................................104
Legal Matters.........................................105
Index of Defined Terms................................106
Until 90 days after the date of this Prospectus Supplement, all dealers
effecting transactions in the Notes, whether or not participating in this
distribution, may be required to deliver a Prospectus Supplement and a
Prospectus. This is in addition to the obligation of dealers to deliver a
Prospectus Supplement and a Prospectus when acting as underwriters and with
respect to their unsold allotments or subscriptions.
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