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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (Fee Required)
For the fiscal year ended December 31, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No Fee Required)
For the transition period from ___________ to ___________
Commission file number 0-22067
NATIONAL AUTO FINANCE COMPANY, INC.
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(Exact name of registrant as specified in its charter)
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<S> <C>
DELAWARE 65-0688619
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(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
621 N.W. 53RD STREET, SUITE 200, BOCA RATON, FLORIDA 33487
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (561) 997-2413
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Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
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NONE NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
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(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [x].
Aggregate market value of the voting stock of the registrant held by
non-affiliates of the registrant at March 27, 1997 (computed by reference to the
last reported closing sale price of the Common Stock on the National Association
of Securities Dealers Automated Quotation System-National Market System on such
date): $21,669,000.
On March 27, 1997, the registrant had outstanding 7,026,000 shares of Common
Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required to be furnished pursuant to Part III of this Form
10-K will be set forth in, and incorporated by reference from, the registrant's
definitive proxy statement for the annual meeting of stockholders to be held in
June 1997, which definitive proxy statement the registrant presently intends
will be filed with the Securities and Exchange Commission not later than 120
days after the end of the Registrant's fiscal year ended December 31, 1996.
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FORWARD-LOOKING STATEMENTS
When used in this Annual Report on Form 10-K or future filings by the
Company (as defined below) with the Securities and Exchange Commission (the
"Commission"), in the Company's press releases or other public or stockholder
communications, or in oral statements made with the approval of an authorized
executive officer, the words or phrases "will likely result," "are expected to,"
"will continue," "is anticipated," "estimate," "project" or similar expressions
are intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. The Company wishes to caution
readers not to place undue reliance on any such forward-looking statements,
which speak only as of the date made, and to advise readers that various
factors, including regional and national economic conditions, substantial
changes in levels of market interest rates, credit and other risks of lending
and investment activities and competitive and regulatory factors could affect
the Company's financial performance and could cause the Company's actual results
for future periods to differ materially from those anticipated or projected.
The Company does not undertake and specifically disclaims any obligation
to update any forward-looking statements to reflect the occurrence of
anticipated or unanticipated events or circumstances after the date of such
statements.
PART I
ITEM 1. BUSINESS.
GENERAL
National Auto Finance Company, Inc. (the "Company") is a specialized
consumer finance company engaged in the purchase, securitization and servicing
of motor vehicle retail installment sale contracts ("Loans") originated by
automobile dealers ("Dealers") for consumers with limited financial resources or
past credit problems ("Non-Prime Consumers"). The Company purchases Loans
principally from manufacturer-franchised Dealers in connection with their sale
of new and used automobiles. The Company's strategy is to develop a network of
Dealers throughout the United States that will refer Non-Prime Consumer Loan
applications to the Company. To implement this strategy, the Company offers to
Dealers products and services designed to enhance their ability to sell vehicles
to Non-Prime Consumers. The Company markets these products and services to
Dealers through the efforts of its direct sales force and through strategic
referral and marketing alliances with financial and other institutions that have
established relationships with Dealers.
The Company was organized as a Delaware corporation on October 4, 1996. Prior to
the date of its organization and until the consummation by the Company of the
Offering (as defined below), the business of the Company was operated by
National Auto Finance Company L.P., a Delaware limited partnership that was
organized in October 1994 (the "National Auto Partnership"), and Auto Credit
Clearinghouse L.P., a Delaware limited partnership that was organized in
September 1995 and dissolved on February 4, 1997 (the "ACCH Partnership" and,
together with the National Auto Partnership, the "Partnerships"). In connection
with a public offering (the "Offering") of 2,000,000 shares of the Company's
common stock, par value $.01 per share (the "Common Stock"), the Company became
the successor (by transfer of assets) to the businesses of the Partnerships on
February 4, 1997. Immediately prior to the settlement date with respect to the
Offering, the assets and liabilities of the Partnerships were transferred to the
Company in exchange for all of the Common Stock and all of the preferred stock
of the Company then outstanding (such transactions referred to herein as the
"Reorganization"). As of the date of the Offering, the National Auto Partnership
beneficially owned 4,230,000 shares of the Common Stock, representing
approximately 63% of the outstanding Common Stock on that date (calculated
without the inclusion of an additional 300,000 shares of Common Stock issued
pursuant to the subsequent exercise of the underwriters' over-allotment option).
(References hereinafter to the Company shall mean the Company and the
predecessor Partnerships, as the context shall require.)
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As of December 31, 1996, the Company had established contractual
relationships with over 1,550 Dealers. The Company attributes its success in
rapidly establishing its Dealer base to (i) the introduction, development and
improvement of products and services designed to enhance the ability of Dealers
to sell vehicles to Non-Prime Consumers, (ii) the employment of regional
salespersons located in strategic geographic areas ("Dealer Relations Managers")
who spend time on-site with Dealers in order to augment Dealers' understanding
of the Non-Prime Consumer market and the Company's products and services, (iii)
the expertise of its four senior operating executives, each of whom has over 14
years of direct experience in automobile finance, (iv) its rapid response to
Dealers' requests for financing, (v) the maintenance of centralized control over
the underwriting and Loan approval functions with a view to consistent and
efficient processing, (vi) the employment of a proprietary credit scoring system
and well-defined underwriting criteria to ensure consistency in evaluating the
underlying credit risks associated with the Loans it purchases and (vii) the
funding of the Company's purchases of Loans primarily through an asset
securitization strategy (see "Securitization Program" below).
The Company's plan of operation for 1997 is to increase the number of
Loans that it purchases, securitizes and services by (i) utilizing its Dealer
Relations Managers to market the Company's products and services directly to
Dealers (including Dealers with which the Company currently does not have a
contractual relationship), (ii) further implementing a strategic referral and
marketing alliance with First Union National Bank of North Carolina ("First
Union") and certain of its national bank affiliates (the "First Union Strategic
Alliance"), including the expansion of the scope thereof throughout First
Union's indirect sales finance division ("FUSF"), which conducts business with
Dealers throughout seven southeastern states and the District of Columbia (the
"Southeastern Franchise") and five northeastern states (the "Northeastern
Franchise"), (iii) implementing strategic referral and marketing alliances with
several smaller financial institutions and Dealer groups with whom the Company
has recently entered into contractual relationships for the purchase of
Non-Prime Consumer Loans and (iv) strategically purchasing bulk portfolios of
Non-Prime Consumer Loans meeting the Company's strict underwriting criteria from
third-party originators of such Loans.
THE NON-PRIME CONSUMER AUTOMOTIVE FINANCE INDUSTRY
Automobile financing is the second largest sector, by dollar amount, of
consumer installment debt in the United States. According to the United States
Federal Reserve Board, approximately $350 billion of automobile installment
credit was outstanding at the end of 1995. The Company estimates that the
outstanding automobile installment credit attributable to Non-Prime and
Sub-Prime Consumers is in excess of $60 billion. The Company believes that the
portion of the automobile finance market attributable to Non-Prime Consumers has
grown significantly in recent years and is poised for further growth. The
factors contributing to such growth include: (i) the doubling in the past ten
years of the number of personal bankruptcy filings, (ii) the continual increase
of total consumer debt service payments as a percentage of disposable income,
(iii) the increase in credit card delinquencies, as reported by the American
Bankers Association and (iv) during the period from 1991 through 1996, the
comparatively rapid growth in the sale of used cars as compared to new cars.
Historically, the market for Non-Prime and Sub-Prime Consumer credit has
been highly fragmented, with no one company controlling more than 3% of the
market. The Company believes that it is well-positioned to gain an increasing
share of this growth market through its emphasis on strategic referral and
marketing alliances and Dealer support and service.
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DEALER RELATIONSHIPS
As of December 31, 1996, the Company had contractual relationships with
over 1,550 Dealers located in 26 states, including over 750 contractual
relationships established through the First Union Strategic Alliance (see
"Strategic Alliances" below). The Company focuses on developing relationships
with well-established Dealers. Over 98% of the Company's contractual
relationships are with manufacturer-franchised Dealers, rather than with
independent Dealers. The Company will not enroll a Dealer unless (i) it is duly
licensed by the state in which it does business, (ii) in the case of a used car
Dealer, it has been in business for a minimum of five years, (iii) the Dealer's
net worth and financial stability are acceptable to the Company and (iv) the
Dealer's reputation in the industry is satisfactory to the Company.
Each Dealer doing business with the Company enters into a non-exclusive
written agreement with the Company that governs the Company's purchases of Loans
from such Dealer. Although these agreements do not obligate a Dealer to sell, or
the Company to purchase, any particular Loan, the agreements set forth the terms
upon which Loans will be purchased by the Company. Additionally, these
agreements contain representations and warranties to be made with respect to
each Loan purchased by the Company, each automobile that serves as collateral
for the Loan (e.g., that it is properly registered and that the Company is the
first lienholder), and compliance with certain laws and regulations. Dealer
agreements generally provide that the Loans are sold to the Company "without
recourse" (i.e., the Dealer does not assume or retain the credit risk with
respect to any Loan purchased by the Company), unless the Dealer has breached
certain representations and warranties in the agreement.
PRODUCTS AND SERVICES
In its efforts to build a strong Dealer network, the Company provides a
broad array of products and services to Dealers. The most commonly used sales
technique of automobile finance companies is delivery of brochures and rate
cards to Dealers by sales representatives. The Company's Dealer Relations
Managers not only use such material, but also provide services that include (i)
reviewing Dealer inventories to determine adequate inventory models and levels
to promote Non-Prime Consumer vehicle purchasing, (ii) training Dealer sales
people to identify Non-Prime Consumers who meet the Company's underwriting
criteria and (iii) working with Dealers to establish separate finance desks that
specifically service Non-Prime Consumers.
The Company has also developed specific products and services for Dealers
that are designed to attract customers and offer flexible financing. For
example, the Company conducts Credit Clinics(TM), which is a service pursuant to
which the Company assists the Dealer in running a weekend sale event during
which the Dealer advertises a sale for the "credit challenged" using advertising
material designed by the Company, and the Company provides an on-site credit
counselor who advises the Non-Prime Consumer on choosing a vehicle with a
monthly payment he or she can manage. The Company believes that this service
enhances a Dealer's sales of automobiles because such targeted advertising and
credit counseling encourages Non-Prime Consumers who might otherwise be
apprehensive about their personal credit histories to finance their acquisition
of vehicles.
PCOP (Preferred Customer Option Plan) is a product developed by the
Company for customers who demonstrate a greater ability to meet payment
requirements, but have difficulty meeting the payment requirements of the
vehicle they would like to purchase. PCOP enables such a customer to buy the
vehicle by reducing the monthly principal repayment amount until the maturity
date of the Loan by up to 20% and creating a balloon payment for that unpaid
amount that is payable at the end of the loan term. When the balloon payment is
due, the customer has the option to pay the remaining principal balance in cash,
refinance the vehicle for up to one year or relinquish the vehicle to the
Dealer. The Dealer then has the option of either acquiring the vehicle by paying
off the balloon payment or relinquishing the vehicle to the Company.
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In addition to the specific products and services described above, the
Company has other products and services designed to enhance Dealers' sales of
automobiles to Non-Prime Consumers. The Company is regularly seeking to modify
existing products and services and to implement new ones in order to respond to
changing market conditions and serve specific niches in the Non-Prime Consumer
automobile financing market.
MARKETING STRATEGY
The Company's plan of operation for 1997 is to increase the number of
Loans that it purchases, securitizes and services by (i) utilizing its Dealer
Relations Managers to market the Company's products and services directly to
Dealers (including Dealers with which the Company currently does not have a
contractual relationship), (ii) further implementing the First Union Strategic
Alliance, including the expansion of the scope thereof throughout FUSF's
Southeastern and Northeastern Franchises, (iii) implementing strategic referral
and marketing alliances with several smaller financial institutions and Dealer
groups with whom the Company has recently entered into contractual relationships
for the purchase of Non-Prime Consumer Loans and (iv) strategically purchasing
bulk portfolios of Non-Prime Consumer Loans meeting the Company's strict
underwriting criteria from third-party originators of such Loans. Although the
Company is currently doing business with Dealers in 26 states, as of December
31, 1996, approximately 72% of the principal balance of the Company's Loan
portfolio was purchased through Dealers located in Georgia, North Carolina,
South Carolina and Virginia. The Company intends to increase its volume of
business in the states in which it currently operates and to expand into
additional states.
The Company's direct marketing strategy is centered around experienced
management and field sales personnel who are located in key geographic regions.
Direct marketing to Dealers is conducted by Dealer Relations Managers who seek
to train and educate Dealers about the credit profile of the Non-Prime Consumer
who meets the Company's underwriting criteria, familiarize Dealers with the
Company's existing products and services, solicit feedback from Dealers
regarding new products and services that would enhance a Dealer's ability to
sell vehicles to Non-Prime Consumers, and generally provide Dealers with ongoing
service and support. The Company believes that the intensive face-to-face Dealer
service provided by Dealer Relations Managers enhances the effectiveness of the
products and services offered by the Company, strengthens existing Dealer
relationships and fosters new business.
Through strategic referral and marketing alliances with financial and
other institutions, the Company expects to increase the number of Loans it
purchases by (i) leveraging such institutions' existing Dealer relationships and
finance sales forces to market the Company's Non-Prime Consumer products and
services and (ii) obtaining the right to review and purchase Non-Prime Consumer
Loans that do not necessarily meet such institutions' underwriting criteria.
Through such strategic referral and marketing alliances, the Company offers such
institutions the opportunity to provide a broader product offering to Dealers
and to earn additional income based on the number of Loans that are purchased by
the Company as a result of such alliance.
Marketing to financial and other institutions is conducted by senior
management staff of the Company and a field service staff of institutional
relations managers ("Institutional Relations Managers") who are experienced with
Dealer financing policies and the sales and marketing techniques of such
institutions. Generally, senior management seeks to identify prospective
institutions suitable for strategic alliances and negotiate the terms of such
alliances. The Institutional Relations Managers provide such institutions with
operating services and support, including training and education with respect to
both the Non-Prime Consumer market and the Company's products and services. Upon
consummation of strategic alliances, the Company expects that such institutions'
sales personnel will also support the Company's direct marketing efforts with
Dealers.
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STRATEGIC ALLIANCES
In April 1996, the Company entered into the First Union Strategic
Alliance. The First Union Strategic Alliance initially provided for (i) the
joint marketing of the Company's products and services by both the Company's
sales force and the sales personnel in First Union's indirect sales finance
division ("FUSF") to the approximately 1,800 Dealers throughout seven
southeastern states and the District of Columbia (the "Southeastern Franchise")
with which FUSF has an existing relationship, and (ii) the exclusive referral by
FUSF to the Company of all applications for Non-Prime Consumer Loans received
from Dealers located in the Southeastern Franchise that fall below certain
established credit guidelines of FUSF (collectively the "Referral Services").
The First Union Strategic Alliance significantly enhanced the Company's ability
to further its market penetration and increase the size of its Dealer base
through the marketing assistance, support and exclusive referrals provided by
FUSF. Through December 31, 1996, the Company had established relationships with
over 750 additional Dealers through the First Union Strategic Alliance and
funded approximately 2,400 Loans having an aggregate principal balance of
approximately $29,300,000.
The First Union Strategic Alliance is evidenced by a referral agreement
dated as of April 15, 1996 (the "Referral Agreement") between the Company and
First Union. Pursuant to the Referral Agreement, First Union committed to
perform the Referral Services. In consideration for such services, First Union
receives a fee on each Loan purchased by the Company as a result of the First
Union Strategic Alliance. Pursuant to the Referral Agreement, funded Loan
referrals are without recourse to First Union. The parties are, however, liable
to each other for any breach of their respective representations, warranties,
covenants and indemnities. The term of the Referral Agreement is for an initial
period of three years from the date of its execution and is renewable by the
Company on each anniversary of such date for an additional year, provided that
First Union consents to such renewal. On March 14, 1997, the Referral Agreement
was renewed. The agreement contains provisions that preclude the Company from
purchasing Loans from FUSF Dealers through alliances with other financial
institutions and that permit First Union to terminate the agreement upon, among
other things, a "change of control" of the Company.
The introduction of the First Union Strategic Alliance to FUSF sales
personnel in the Southeastern Franchise was completed in October 1996. Such
introduction involved the Company's intensive training of FUSF sales personnel
with respect to both the Non-Prime Consumer market and the Company's products
and services, followed by the development of a joint marketing plan for Dealers
in each region served by FUSF. On December 13, 1996, First Union exercised its
option under the Referral Agreement to expand the scope of the First Union
Strategic Alliance to include approximately 1,500 additional Dealers in FUSF's
Northeastern Franchise. The Company and First Union began the roll-out of the
program throughout the five states of the Northeastern Franchise in March 1997.
The Company is dependent upon the First Union Strategic Alliance to
penetrate certain markets and significantly increase the number of Loans the
Company purchases. The Company has entered into, and intends to continue to
enter into, similar strategic referral and marketing alliances with other
institutions. There can be no assurance that the Company can continue to
profitably purchase a significant number of Loans through the First Union
Strategic Alliance. In addition, the Company's current focus on implementation
of the First Union Strategic Alliance (including the expansion of the scope of
such alliance to FUSF's Northeastern Franchise) and the significant involvement
of First Union in the Company's business may delay or impair the Company's
ability to consummate additional strategic referral and marketing alliances. If
the First Union Strategic Alliance is ultimately unsuccessful or if the Company
is unable to form additional strategic marketing and referral alliances, other
than those which are described elsewhere herein (including, without limitation,
upon the expiration, without renewal, on April 15, 2000 of the First Union
Referral
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Agreement), the Company's financial condition and results of operations may be
materially and adversely affected.
PORTFOLIO ACQUISITION PROGRAM
The Company has initiated a program for the strategic purchase of bulk
portfolios of Non-Prime Consumer Loans meeting the Company's strict underwriting
criteria from third-party originators of such Loans. The Company has established
relationships with several origination institutions to purchase their Loans on a
quarterly basis. As of December 31, 1996, the Company purchased approximately
$4.8 million aggregate principal amount of Loans pursuant to this portfolio
acquisition program. The Company intends to continue to expand its portfolio
acquisition activities in 1997 as part of its core operating strategy.
CREDIT UNDERWRITING AND ADMINISTRATION
Target Market and Customer Profile
The Company seeks to identify customers with stable and predictable
incomes, whose payments will be made in a timely and consistent manner and who
fall into the "B-," "C+" and "C" credit borrower categories. A description of
the credit rating categories used by the Company is set forth below:
Category Description
"A" A consumer who has a long credit history with no defaults, has
been in the same job for at least 18 months and can easily
finance a new car purchase through a bank or captive finance
subsidiary of an automobile manufacturer.
"B" A Non-Prime Consumer who may have had some minor credit
problems in his or her past, or may not have been employed at
his or her current job for 18 months. To finance a new or
late-model used car, the "B" credit borrower may not qualify
for a loan from a bank, but may have success borrowing from a
captive finance subsidiary and can access credit through an
independent finance company.
"C" A Non-Prime Consumer who may have an inconsistent employment
record or more significant or unresolved problems with credit
in the past. To finance a late-model or older used car
purchase, this borrower will generally not be able to obtain a
loan from a captive finance subsidiary or a bank and will have
to access an independent finance company that lends into this
market category.
"D" A Sub-Prime consumer who has unfavorable employment history
and serious credit problems, such as multiple personal
bankruptcies. This borrower's only choice is to finance his or
her used car purchase, which is often from an independent as
opposed to a franchise dealer, through an independent finance
company that is active in this market segment.
The Company targets Non-Prime Consumers who previously established good credit
records but who have subsequently experienced non-repetitive credit problems
such as a personal bankruptcy, illness, loss of employment or poor cash
management. The Company's target customer is generally anxious to re-establish
his or her credit and obtain transportation for employment. The Company's
average customer has a gross monthly
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income of approximately $2,765, has an average length of employment at their
current job of approximately 5.75 years and has resided in the same area for
approximately 5.8 years.
Credit Evaluation Procedures
The Company applies uniform underwriting standards in purchasing Loans.
These standards have been developed and refined over the course of management's
years of experience in the automobile finance industry. The two most important
criteria the Company uses in evaluating a Loan are the applicant's
creditworthiness and the collateral value of the vehicle relative to the amount
financed. The Dealer submits the customer's credit application by fax to the
Company's headquarters in Boca Raton, Florida, where the customer's
creditworthiness is reviewed. The Company utilizes a proprietary credit scoring
system initially developed by Fair, Issac and Company, Inc. to assist it in
determining a customer's creditworthiness. Among other requirements, the Company
requires that each Non-Prime Consumer make a minimum 10% downpayment on the
purchase price of the vehicle. The Company's senior management regularly reviews
credit decisions made by the Company's employees to assure uniformity in
underwriting standards. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Loan Loss and Delinquency Experience" for
a numerical analysis of the Company's Loan loss and delinquency experience.
Approval and Funding Statistics
The table below indicates, since the Company's inception, the number of
applications reviewed by the Company and the percentage of applications
approved, conditionally approved and funded. Conditionally approved applications
are applications by Non-Prime Consumers whose underlying credit is generally
acceptable to the Company but with respect to which the Company requires a
modification of terms (typically monthly payment levels or downpayment amount)
prior to final credit approval.
(As of December 31, 1996)
Percentage of
Applications Approved
Number of and Conditionally Percentage of
Applications Received Approved Applications Funded
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103,182 31.24% 10.06%
Contract Servicing and Administration
All of the Loans purchased by the Company since it commenced business have
been serviced by Omni Financial Services of America ("World Omni"). The
servicing procedures have been specifically tailored to Non-Prime Consumers and
include (i) monitoring Loans and related collateral, (ii) accounting for and
posting all payments received, (iii) responding to borrowers' inquiries, (iv)
taking all necessary action to maintain the security interest granted in the
financed automobile, (v) investigating delinquencies and communicating with
borrowers to obtain timely payments, (vi) pursuing deficiencies on Loans and
(vii) when necessary, contracting licensed third-party agents to repossess and
dispose of the financed automobile. The current servicing agreement between the
Company and World Omni contemplates that new Loans will be accepted for
servicing by World Omni until December 31, 1997, after which date, unless the
agreement is extended, World Omni would be obligated to continue to service only
the Loans then under contract for the life of such Loans. Although the Company
currently is developing plans to establish its own servicing operation, as
described below, the Company currently does not have the internal capacity to
service all of its Loans. Accordingly, the failure of World Omni
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to adequately service the Company's Loans or the termination of the servicing
agreement with World Omni could adversely affect the Company until arrangements
with another third-party servicer can be implemented or until the Company
establishes its own servicing operation. While there are other independent
consumer loan servicing organizations that provide servicing on a contract
basis, there can be no assurance that another servicer could be substituted at a
comparable cost and quality of service, or on a timely basis.
The Company believes that its management team possesses significant
servicing, collections and related management information systems expertise,
which will enable the Company to establish its own internal servicing operation.
Several of the Company's senior management personnel each held management
positions at World Omni for in excess of five years and have in-depth knowledge
relating to the servicing of automobile finance receivables. The Company
currently is developing plans to establish its own servicing operation and has
taken certain steps in that regard, including a detailed review of possible
geographic locations for such an operation, the acquisition of a software
platform for the servicing and collection of automobile finance receivables, the
identification of senior management and the creation of a capital expenditure
and general expense budget for such an operation. Although the Company
anticipates that its servicing operation will be fully operational by the end of
1997, there can be no assurance that such objective can be achieved within this
time frame or that the Company will be able to successfully establish such an
operation.
Collection Policy
The Company employs a stringent collection policy, which is implemented by
World Omni on a case-by-case basis. Rather than mailing past-due notices, the
Company's policy is to immediately begin a proactive collection effort when the
account becomes five days past due. The extent of the Company's actions with
respect to delinquent Loans is measured against the extent of the delinquency.
Generally, the Company's policy is to work with the customer to permit the
customer to keep the automobile and continue making payments. However, the
Company takes more aggressive action if the customer fails to continue making
payments. Generally, the Company reviews whether to begin the process of
repossession when payments are 45 days past due. Repossessions are handled by
independent licensed repossession firms engaged by the Company. Generally, the
Company's collection policy permits Loan extensions twice during the term of
financing, assuming the borrower meets the following criteria: (i) no extensions
are permitted until the borrower has made the first six full payments on the
contract in a timely manner and (ii) a second extension is permitted if a
borrower has made an additional six payments since the first extension in a
timely manner.
Management Information Systems
The Company uses advanced computer systems and software specifically
tailored for use by the Company to automate Loan purchasing and servicing. The
Company enters an applicant's data into the system for review by credit
investigators at the Company's office. Once investigators confirm the
applicant's information and complete the credit file, the application is
forwarded to a Company credit analyst for on-line review. After the analyst
makes a decision about the application, the result is telephoned and faxed to
the submitting Dealer. The Company believes that the capabilities and
flexibility of its application processing and its computer system provide the
Company with a competitive advantage.
The Company maintains a local-area network of workstations that has a
dedicated connection to World Omni's computer systems. This integrated system
allows the Company and World Omni to share information about a customer from the
time of Loan origination through any collection and repossession procedures, if
necessary. Such integration allows the Company to monitor its delinquencies on a
"real time" basis. Since World Omni handles collections and repossessions for
the Company, all information about each Loan is already in World Omni's database
if such actions become necessary. The Company's computer systems provide the
ability to track all Loan details, assess losses and identify trends among
customers. This information is valuable
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in determining which consumers are more likely to default on Loans and lessening
the chance of extending Loans to higher-risk customers.
LOAN PORTFOLIO
General
The Company's ability to continue to increase the number of Loans it
purchases depends, in part, upon its ability to continue to effect
securitization transactions or to establish alternative long-term financing
arrangements and to obtain sufficient financing upon acceptable terms under
interim credit facilities. These transactions and facilities will, in turn,
require the Company to obtain additional subordinated debt and/or equity
financing over time. If the Company is unable to obtain such financing, its
ability to purchase Loans will be inhibited. The Company believes that it
presently has sufficient capital to meet its cash requirements and to fund
operations for approximately 12 to 15 months, assuming the Company completes
regular securitizations during such 12- to 15-month period. Thereafter, the
Company could be required to issue additional subordinated debt or equity. No
assurance can be given, however, that the Company will have access to the
capital markets in the future for debt or equity issuances or for
securitizations, or that financing through borrowings or other means will be
available on terms acceptable to the Company to satisfy the Company's cash
requirements needed to implement its business strategy. The Company's inability
to access the capital markets or obtain financing on acceptable terms could have
a material adverse effect on the Company's financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources."
Loan Statistical Profile
The tables below set forth an analysis of Loans purchased by the Company
from inception through the dates specified. The Company has been able to
increase significantly the number of Loans in its servicing portfolio since its
inception while maintaining a consistent profile of key Loan parameters.
<TABLE>
<CAPTION>
As of
------------------------------------------------------------------------------------
Dec. 31, March 31, June 30, Sept. 30, Dec. 31, March 31, June 30, Sept. 30, Dec. 31,
Total Portfolio 1994 1995 1995 1995 1995 1996 1996 1996 1996
----- ---- ---- ---- ---- ---- ---- ---- ----
($ in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Aggregate number
of Loans
purchased..... 300 1,095 2,015 3,018 3,886 5,071 6,557 8,423 10,675
Average amount
funded........ $11,986 $11,626 $11,578 $12,025 $12,121 $12,023 $11,942 $11,913 $11,999
Weighted average
initial annual
percentage rate 17.83% 18.38% 18.43% 18.35% 18.31% 18.41% 18.50% 18.63% 18.67%
Weighted average
initial term
(months)...... 54.6 52.1 51.9 52.3 52.5 52.0 53.6 53.7 51.7
Weighted average
initial yield 21.17% 21.73% 21.78% 21.56% 21.45% 21.50% 21.68% 21.75% 21.80%
</TABLE>
New vs. Used Automobile Loans
The Company's portfolio of outstanding Loans as of December 31, 1996
consisted of 32% new automobile Loans and 68% used automobile Loans. The Company
prefers to finance used automobiles because of the significant depreciation on
new automobiles (in case of repossession) relative to used automobiles and the
higher interest rates the Company is permitted to charge under certain state
laws on used automobile Loans.
9
<PAGE>
<TABLE>
<CAPTION>
(As of December 31, 1996)
-------------------------
Percentage of
Current Total Current Percentage of
Principal Principal Number of Total Numbers
Balance Balance Loans of Loans
------- ------- ----- --------
<S> <C> <C> <C> <C>
New.......................................... $ 33,171,612 32.25% 2,346 25.89%
Used......................................... $ 69,680,492 67.75% 6,717 74.11%
------------ ----- ------ ------
Total.................................... $102,852,104 100.00% 9,063 100.00%
============ ========= ====== =======
</TABLE>
Geographic Distribution of Loans
The Company has purchased Loans from Dealers in 26 states. The largest
concentration of business of the Company, based on Loan principal balance, is in
the States of Georgia (approximately 39%), North Carolina (approximately 16%),
South Carolina (approximately 9%) and Virginia (approximately 7%). Given this
concentration, an economic slowdown, recession or a change in the regulatory or
legal environment in one or more of these states could have a material adverse
effect on the Company's financial condition and results of operations.
Accordingly, the Company's growth strategy includes expanding its network of
Dealers to other states.
The list below indicates the geographic distribution of Loans
outstanding as of December 31, 1996.
<TABLE>
<CAPTION>
Principal Percentage of Number of
State Balance Principal Balance Active Loans
- ----- ------- ----------------- ------------
<S> <C> <C> <C>
Georgia..................................................... $40,377,782 39.26% 3,481
North Carolina.............................................. 16,418,179 15.96% 1,397
South Carolina.............................................. 9,730,613 9.46% 908
Virginia.................................................... 7,405,837 7.20% 631
Florida..................................................... 6,140,641 5.97% 538
Texas....................................................... 5,873,747 5.71% 428
California.................................................. 3,083,930 3.00% 302
Tennessee................................................... 2,569,255 2.50% 205
Maryland.................................................... 1,710,208 1.66% 146
Maine....................................................... 1,653,707 1.61% 220
Massachusetts............................................... 1,481,061 1.44% 181
Ohio........................................................ 1,288,936 1.25% 124
Pennsylvania................................................ 1,167,268 1.13% 133
All other states(1)......................................... 3,950,940 3.85% 369
------------ ------- -----
Total..................................................... $102,852,104 100.00% 9,063
============ ====== =====
<FN>
- ------------------
(1) No state other than those listed represents more than 1% of the principal balance of Loans
outstanding.
</FN>
</TABLE>
SECURITIZATION PROGRAM
The Company currently funds its purchases of Loans primarily through an
asset securitization program that involves (i) the securitized warehousing of
all of its Loans through their daily sale (the "Revolving Securitization") to a
bankruptcy-remote master trust (the "Master Trust") pursuant to the Revolving
Securitization, followed by (ii) the refinancing of such warehoused Loans from
time to time through their transfer by the Master Trust to a discrete trust
("Permanent Securitizations"), thereby creating additional availability of
capital from the Master Trust.
10
<PAGE>
Specifically, pursuant to the Revolving Securitization, the Company
sells Loans that it has purchased from Dealers on a daily basis to a
special-purpose subsidiary, which then sells the Loans to the Master Trust in
exchange for certain cash and residual interests in future excess cash flows
from the Master Trust. The Master Trust, to date, has issued two classes of
investor certificates: "Class B Certificates," which are variable funding (i.e.,
revolving) certificates bearing interest at floating rates, and "Class C
Certificates," representing a portion of the residual interest of the Company's
special-purpose subsidiary in future excess cash flows from the Master Trust
after required payments to the holders of the Class B Certificates, deposit of
funds to a restricted cash account as a reserve for future Loan losses (which
provides additional credit enhancement for the holders of the Class B
Certificates) and payment of certain other expenses and obligations of the
Master Trust. First Union currently owns 100% of the outstanding Class B
Certificates.
In November 1995, the Master Trust refinanced $42 million of its
receivables in a private placement of asset-backed securities through a
Permanent Securitization. In such transaction, the National Auto Finance 1995-1
Trust (the "1995-1 Trust") was formed and issued $42 million of asset-backed
securities to various private investors. In November 1996, the National Auto
Finance 1996-1 Trust (the "1996-1 Trust") was formed and the Master Trust
refinanced $68 million of its receivables in a public offering by the 1996-1
Trust of asset-backed securities through a Permanent Securitization. Payment of
principal of, and interest on, $38 million and $62 million, respectively, of the
securities issued in such transactions is insured by payment guarantees issued
by Financial Security Assurance Inc. ("FSA"), and such securities are rated AAA
by Standard & Poor's Rating Services ("S&P") and Aaa by Moody's Investors
Service, Inc. ("Moody's"). The proceeds of each such Permanent Securitization
transaction were used by the Master Trust to repay the then-outstanding balance
of the Class B Certificates. Since such time, the Master Trust has issued
additional beneficial interests in Loans purchased by the Master Trust, as
evidenced by the Class B Certificates, to finance its purchase of Loans from the
Company. The Company expects additional Permanent Securitizations to be
consummated in the future in order to refinance periodically amounts outstanding
under such Class B Certificates.
Collection of the indebtedness evidenced by the Loans in each of the
Master Trust, the 1995-1 Trust and the 1996-1 Trust and related administration
is handled by World Omni. The Company acts as master servicer for the Loans sold
to each of the trusts and receives monthly fees from the trusts at base rates of
2% per annum for the 1995-1 Trust and the 1996-1 Trust and 4% per annum for the
Master Trust, plus certain late fees and prepayment charges received on the
securitized Loans.
The Company relies in part on cash flow from the Master Trust to
support its operations. Since the Master Trust's interest rates under the
Revolving Securitization are floating and the interest rates charged on the
Loans (which are generally at or near the maximum rates permitted by applicable
state laws) are fixed, increases in the interest rates incurred with respect to
the Class B Certificates could have a material adverse effect both on cash flows
from the Master Trust and on the Company's net income, thereby adversely
affecting the Company's financial condition and results of operations. In order
to mitigate the negative impact of rising interest rates, the Master Trust has
entered into interest rate swap agreements, which have the effect of fixing the
rates charged on a portion of the Master Trust's indebtedness. Although these
agreements provide the Master Trust (and therefore the Company) some protection
against rising interest rates, these agreements also reduce the benefits to the
Master Trust (and therefore to the Company) when interest rates decline below
the rates set forth in such agreements. In addition, upon refinancing of Loans
through Permanent Securitizations, the interest spread with respect to such
refinanced Loans may be fixed.
11
<PAGE>
Flow Chart of a Securitization Transaction by the Company
---------------------------------------------------------
The diagram below (which omits certain intermediate steps) generally
illustrates the Company's securitization of a Loan:
----------
| NAFCO | <------------
---------- |
| /|\ |
| | |
-------------------------- | | |
| lender (First Union) with| sale | | payment | servicing
| respect to revolving | of | | for | fees
| securitization facility | loans | | loans |
-------------------------- | | |
| /|\ | | |
| | Class B \|/ | |
| | Certificates ------------ |
| ------------------------- | master | |
---------------------------> | trust | -----------
funding of ------------
payment for loans | /|\
| |
| |
transfer | | payment
of | | for
loans | | loans
| |
| |
\|/ |
--------------------------
| permanent securitization |
| trust |
--------------------------
| /|\
| |
payment issuance of | | payment
guarantor (FSA) ---> asset-backed | | for
securities | | securities
| |
\|/ |
--------------
| investors |
--------------
12
<PAGE>
COMPETITION
The non-prime credit market is highly fragmented, consisting of a few
national and many regional and local competitors. Existing and potential
competitors include well-established financial institutions, such as commercial
banks, credit unions, savings and loan associations, small loan companies,
leasing companies and captive finance companies owned by automobile
manufacturers and others. Many of these financial institutions do not
consistently solicit business in the Non-Prime Consumer credit market. The
Company believes that captive finance companies generally focus on new car
financing and direct their marketing efforts to the Non-Prime Consumer market
only when inventory control and/or production scheduling requirements of their
parent organization dictate a need to enhance sales volumes, and then exit the
market once such sales volumes are satisfied. The Company also believes that
regulatory oversight and capital requirements imposed by market conditions and
governmental agencies have limited the activities of many banks and savings and
loan associations in the Non-Prime Consumer credit market. As a result, the
Non-Prime Consumer credit market is primarily serviced by smaller finance
companies that solicit business when and as their capital resources permit. Due
to the lack of major, consistent financing sources and the absence of
significant barriers to entry, many companies have entered this market in recent
years, including well-capitalized public companies. Recent entrants include
General Electric Capital Corporation, whose indirect finance program consists of
relationships with several small, regional independent non-prime automobile
finance companies. In addition, Ford Motor Credit Company, Mellon Bank
Corporation, KeyCorp and Southern National Corp. have all recently devoted
resources to the Non-Prime Consumer market. In addition, there are several other
moderately-sized independent non-prime auto finance companies doing business in
numerous states throughout the United States, and there have been several
independent finance companies that have also recently entered the market.
The Company believes that no one competitor or group of competitors has
a dominant presence in the Non-Prime Consumer market segment of "B-," "C+" and
"C" credit consumers. The Company's strategy is designed to capitalize on the
lack of a major national financing source in this market niche. The Company
believes that competitors in its principal geographic markets include the Money
Store, AutoFinance Group, Inc. (recently merged into Key Auto Inc.), Auto One
Acceptance Corp. and First Merchants Acceptance Corp.
REGULATION
The Company's business is subject to regulation and licensing under
various federal, state and local statutes and regulations. The Company's
business operations are conducted with Dealers located in 26 states and,
accordingly, the laws and regulations of such states govern the Company's
operations. Most states in which the Company purchases Loans (i) limit the
interest rate, fees and other charges that may be imposed by, or prescribe
certain other terms of, the Loans that the Company purchases and (ii) define the
Company's rights to repossess and sell collateral. In addition, the Company is
required to be licensed or registered to conduct its finance operations in 11 of
the 26 states in which the Company currently purchases Loans. As the Company
expands its operations into other states, it will be required to comply with the
laws of such states.
Numerous federal and state consumer protection laws and related
regulations impose substantive disclosure requirements upon lenders and
servicers involved in automotive financing. Some of the federal laws and
regulations include the Truth-in-Lending Act, the Equal Credit Opportunity Act,
the Federal Trade Commission Act, the Fair Debt Collection Practices Act, the
Magnuson-Moss Warranty Act, the Federal Reserve Board's Regulations B and Z and
the Soldiers' and Sailors' Civil Relief Act.
In addition, the Federal Trade Commission ("FTC") has adopted a
limitation on the holder-in-due-course rule which has the effect of subjecting
persons who finance consumer credit transactions (and certain related lenders
and their assignees) to all claims and defenses that the purchaser could assert
against
13
<PAGE>
the seller of the goods and services. With respect to used automobiles
specifically, the FTC's Rule on Sale of Used Vehicles requires that all sellers
of used automobiles prepare, complete and display a Buyer's Guide which explains
the warranty coverage for such automobiles. The Credit Practices Rules of the
FTC impose additional restrictions on sales contract provisions and credit
practices.
Certain states in which the Company operates have adopted motor vehicle
retail installment sales acts or variations thereof. Certain states have adopted
the Uniform Consumer Credit Code, subject to certain variations. This law and
similar laws in the other states in which the Company purchases Loans regulate,
among other things, the interest rate, fees and other charges and terms and
conditions of motor vehicle retail installment loans. These laws also impose
restrictions on consumer transactions and require disclosures in addition to
those required under federal law. These requirements impose specific statutory
liabilities upon creditors who fail to comply. In addition, certain states
impose plain-language restrictions on the textual provisions of motor vehicle
retail installment sales contracts in the context of consumer credit
transactions. Furthermore, certain states or municipalities require that a
creditor provide a purchaser of a motor vehicle with a foreign-language
translation of the entire motor vehicle retail installment sale contract if the
contract was negotiated in a language other than English. The plain-language and
foreign-language laws impose specific liabilities on creditors who fail to so
comply.
The laws of certain states grant to the purchasers of vehicles certain
rights of rescission under so-called "lemon laws." Under such statutes,
purchasers of motor vehicles may be able to seek recoveries from, or assert
defenses against, the Company.
In the event of default by an obligor, the Company has all the remedies
of a secured party under the Uniform Commercial Code ("UCC"), except where
specifically limited by other state laws. The remedies of a secured party under
the UCC include the right to repossession by self-help means, unless such means
would constitute a breach of the peace. In the event of default by the obligor,
some jurisdictions require that the obligor be notified and be given time in
which to cure the default prior to repossession. In addition, courts have
applied general equitable principles to secured parties pursuing repossession or
litigation involving deficiency balances.
The UCC and other state laws require a secured party who has
repossessed collateral to provide an obligor with reasonable notice of the date,
time and place of any public sale and/or the date after which any private sale
of the collateral may be held. The obligor has the right to redeem the
collateral prior to actual sale.
The proceeds from resale of financed vehicles generally will be applied
first to the expenses of repossession and resale and then to the satisfaction of
the Loan. A deficiency judgment can be sought in most states subject to
satisfaction of statutory procedural requirements by the secured party and
certain limitations as to the initial sale price of the motor vehicle. Certain
state laws require the secured party to remit the surplus to any holder of a
lien with respect to the vehicle or, if no such lienholder exists, the UCC
requires the secured party to remit the surplus to the former owner of the
financed vehicle.
In addition to laws limiting or prohibiting deficiency judgments,
numerous other statutory provisions, including federal bankruptcy laws and
related state laws, may interfere with or affect the ability of the Company to
realize upon collateral or enforce a deficiency judgment.
The Company believes that it is in substantial compliance with all
applicable material laws and regulations. Adverse changes in the laws or
regulations to which the Company's business is subject, or in the interpretation
thereof, could have a material adverse effect on the Company's business. Because
the Company
14
<PAGE>
generally charges the highest finance charges permitted by law, reductions in
statutory maximum rates could directly impair the Company's profitability.
BANKING REGULATION
IronBrand Capital LLC, a North Carolina limited liability company and
an indirect wholly owned subsidiary of First Union ("IronBrand"), is a limited
partner of the National Auto Partnership and is subject to certain banking laws,
regulations and orders (collectively, the "Banking Laws"). IronBrand currently
has an economic interest with respect to approximately 15% of the Common Stock
held by the National Auto Partnership (or 9.03% of the outstanding shares of
Common Stock as of March 27, 1997). Based upon several factors, including the
overall performance of the First Union Strategic Alliance and the total market
value of the Company over a specified time period, IronBrand may obtain an
economic interest with respect to an approximate additional 34% of the Common
Stock held by the National Auto Partnership. Any such increase would be
non-dilutive to the public stockholders of the Company. As a result of
IronBrand's indirect beneficial ownership interest in the Company through the
National Auto Partnership, the Company has agreed, in order to facilitate
IronBrand's compliance with applicable Banking Laws, to engage solely in
activities that are permissible for national banks as determined by Banking Laws
in effect from time to time. Accordingly, the Company has agreed to be subject
to the supervision and examination of the Office of the Comptroller of the
Currency (the "OCC"), one of the principal regulatory bodies having jurisdiction
over First Union and the First Union Partner. The OCC has reviewed the First
Union Strategic Alliance and the terms thereof, and the OCC's written approval
was required in order for the First Union Strategic Alliance to be consummated.
If IronBrand determines that any proposed activities of the Company are
impermissible for national banks, it has the right to prevent the Company from
engaging in such activities. Management does not believe, however, that the
Banking Laws will impact significantly the manner in which the Company intends
to conduct or expand its business or product and service offerings, although
there can be no assurance that the Banking Laws will not have such an effect.
EMPLOYEES
At December 31, 1996, the Company had 67 employees, of whom 15 held
marketing positions, 46 held administrative positions and 6 held senior
management positions.
EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY OFFICE HELD SINCE
- ---- --- ------------------------- -----------------
<S> <C> <C> <C>
Gary L. Shapiro..................... 47 Chairman of the Board, Chief Executive Officer October 4, 1996
Keith B. Stein...................... 39 Vice Chairman, Treasurer, Secretary October 4, 1996
Roy E. Tipton....................... 42 President October 4, 1996
William G. Magro.................... 47 Executive Vice President October 4, 1996
Blane H. McDonald................... 40 Vice President and Chief Operating Officer October 4, 1996
Kevin G. Adams...................... 40 Vice President and Chief Financial Officer October 4, 1996
Stephen R. Stack.................... 38 Senior Vice President-Sales and Marketing October 4, 1996
Tim W. Carter....................... 46 Vice President-Planning and Development October 4, 1996
</TABLE>
Gary L. Shapiro is the Chairman of the Board of Directors and the Chief
Executive Officer of the Company, and has been the Chairman and Chief Executive
Officer of National Auto Finance Corporation (the "National Auto General
Partner"), the general partner of the National Auto Partnership, since October
1994. Mr. Shapiro has been the Chairman and Chief Executive Officer of National
Financial Companies LLC (the successor to National Financial Corporation) for
more than the past five years. Mr. Shapiro served as a partner in the firm of
Mailman, Ross, Toyes and Shapiro, Certified Public Accountants, from November
1973 to March 1982. In 1981, Mr. Shapiro
15
<PAGE>
founded National Machine Tool Finance Corporation ("National Tool"), a machine
tool finance company. He served as President of National Tool until 1990.
Keith B. Stein is the Vice Chairman, Secretary, Treasurer and a
Director of the Company, and has been the Executive Vice President and Assistant
Secretary of the National Auto General Partner since January 1995, and a
Managing Director of National Financial Companies LLC since January 1995. Mr.
Stein served from March 1993 to September 1994 as Senior Vice President,
Secretary and General Counsel of WestPoint Stevens Inc. after having served the
same company from October 1992 to February 1993 in the capacity of Acting
General Counsel and Secretary. From May 1989 to February 1993, Mr. Stein was
associated with the law firm of Weil, Gotshal & Manges LLP. Mr. Stein has been a
director of DVL, Inc., a public company engaged in the real estate finance
business, since September 1996.
Roy E. Tipton is the President and a Director of the Company, and has
been the President of the National Auto Partnership since May 1994. Mr. Tipton
served from April 1992 to May 1994 as the President of Stanford Automotive
Financial Company, an automobile finance company. He served from April 1991 to
April 1992 as a Regional Manager of Primus Auto Company, an automobile finance
company ("Primus"). Mr. Tipton served in several capacities at each of Ford
Motor Credit Company from June 1975 to September 1985 and at World Omni from
September 1985 to February 1990.
William G. Magro is the Executive Vice President of the Company, and
has been the Executive Vice President of the National Auto Partnership since
September 1994. Mr. Magro served from January 1985 to August 1994 as a Director
of Collection and Client Services for World Omni. He served from January 1972 to
December 1984 as a Collection Supervisor and a Dealer Relations Supervisor at
General Motors Acceptance Corp.
Blane H. McDonald is the Vice President and Chief Operating Officer of
the Company, and has been the Vice President and Chief Operating Officer of the
National Auto Partnership since July 1994. He served from February 1994 to July
1994 as a Vice President of Operations of AutoLend Corporation, an automobile
finance concern. Mr. McDonald served from February 1992 to February 1994 as a
Vice President of Operations of Stanford Automotive Financial, an automobile
finance company. Mr. McDonald served from October 1990 to January 1992 as Sales
Representative for the State of Florida at Primus. Mr. McDonald served in
various positions from August 1984 to September 1990 at World Omni and from
February 1982 to July 1984 at General Motors Acceptance Corporation.
Kevin G. Adams is the Vice President and Chief Financial Officer of the
Company, and has been a Vice President and Chief Financial Officer of the
National Auto Partnership since July 1994. He served from December 1992 to
October 1994 as Vice President-Finance of National Financial Companies LLC. Mr.
Adams served from September 1983 to June 1992 as a Vice President and Chief
Financial Officer of National Tool.
Stephen R. Stack is the Senior Vice President - Sales and Marketing of
the Company and has been Vice President of the National Auto Partnership since
December 1995. Mr. Stack served from March 1990 through September 1995 in
various executive positions (including as executive director) with Alamo
Rent-A-Car, Inc., an automobile rental concern. From 1976 through 1989, Mr.
Stack held various positions with General Motors Acceptance Corporation.
Tim W. Carter is the Vice President - Planning and Development of the
Company and has been the Vice President of the National Auto Partnership since
February 1996. Mr. Carter served from July 1991 to February 1996 as the Director
of
16
<PAGE>
Development of World Omni. Mr. Carter held various positions with World Omni
from March 1988 to July 1991.
ITEM 2. PROPERTIES.
The Company's headquarters are located at 621 N.W. 53rd Street, Suite
200, Boca Raton, Florida 33487. The Company currently has leases on
approximately 17,000 square feet of office space on favorable terms.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not involved in, and none of the Company's property is
subject to, any material pending litigation. Nevertheless, the Company may be
involved from time to time in routine litigation incidental to its business,
none of which is likely to have a significant negative impact on the business,
income, assets or operation of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
17
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(a) Market Information.
In connection with the Offering, the Common Stock was accepted for
quotation in the National Association of Securities Dealers Automated Quotation
System - National Market System ("NASDAQ-NMS") on January 29, 1997. The Common
Stock is quoted in NASDAQ-NMS under the symbol "NAFI." The shares issued and
sold pursuant to the Offering were registered on a Registration Statement on
Form S-1 (File No. 333-13667) filed with the Commission on October 8, 1996, as
amended on November 25, 1996, January 9, 1997 and January 28, 1997, and declared
effective by the Commission on January 29, 1997.
Set forth below is the range of high and low bid quotations reported in
NASDAQ-NMS for the period from January 29, 1997 through and including March 27,
1997:
<TABLE>
<CAPTION>
Period High Bid Low Bid
------ -------- -------
<S> <C> <C>
January 29, 1997 through and including March 27, 1997 9-7/8 7-3/4
</TABLE>
On March 27, 1997, the average of the high and low bid and asked prices
for the Common Stock quoted in NASDAQ-NMS was 8-1/4 and 7-3/4, respectively.
(b) Holders.
As of March 27, 1997, there were approximately 23 record holders of the
Common Stock.
(c) Dividends.
The Company has never paid cash dividends and has no present intention
of paying cash dividends on the Common Stock. The Company is a party to certain
Note Purchase Agreements (collectively, the "Note Purchase Agreements") relating
to the issuance of certain subordinated notes that remain outstanding (the
"Senior Subordinated Notes"), each of which Note Purchase Agreement is dated as
of August 7, 1996, with Morgan Guaranty Trust Company of New York, as trustee of
the Commingled Pension Trust Fund (Multi-Market Special Investment Fund II) of
Morgan Guaranty Trust Company of New York; Morgan Guaranty Trust Company of New
York, as trustee of the Multi-Market Special Investment Trust Fund of Morgan
Guaranty Trust Company of New York; and Morgan Guaranty Trust Company, as
investment manager and agent for an institutional investor (collectively, the
"Morgan Group"). The Note Purchase Agreements generally prohibit the Company's
payment of dividends on its Common Stock, subject to certain qualifications and
exceptions. Subject to such qualifications and exceptions, any future
determination by the Company to pay cash dividends on its Common Stock will be
at the discretion of the Board of Directors and will be dependent upon the
Company's financial condition, results of operations, capital requirements and
such other factors, as the Board of Directors may deem relevant.
18
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data
for the Company for the fiscal years ended December 31, 1996 and 1995 and the
period from October 1, 1994 (date of inception) to December 31, 1994,
respectively. The selected consolidated financial data presented herein are
derived from, and are qualified by reference to, the financial statements of the
Company audited by KPMG Peat Marwick LLP, independent auditors, which are
included under Item 8 of this Annual Report on Form 10-K, and should be read in
conjunction with those financial statements and the notes thereto.
The Company commenced operations in October 1994. Consequently,
financial information with respect to the Company is available only since
October 1994. This information is not necessarily indicative of the Company's
future performance. The data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and the related notes
thereto included elsewhere herein.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1996 1995 1994
---- ---- ----
(In thousands)
<S> <C> <C> <C>
INCOME STATEMENT DATA:
Gain on sales of Loans................................. $12,178 $ 6,487 $ 0
Gain on securitization of Loans purchased prior to
January 6, 1995(1).................................. 0 639 0
Deferred gain on sales of Loans........................ 762 241 0
Deferred servicing income.............................. 866 219 0
Deferred income from securitizations................... 624 0 0
Interest income from cash investments.................. 258 11 32
Other income........................................... 103 32 0
Finance charges earned................................. 0 0 95
Provision for credit losses(2)......................... 0 182 (182)
------- --------- -----------
Total revenue.......................................... 14,791 7,811 (55)
Operating expenses..................................... (10,301) (4,530) (420)
-------- --------- -----------
Net income (loss) before pro forma
income tax expense.................................. 4,490 3,281 (475)
Pro forma income taxes(3).............................. (1,688) (1,066) 0
-------- ---------- -----------
Pro forma net income (loss)............................ $ 2,802 $ 2,215 $(475)
======== ========== ===========
Pro forma earnings (loss) per share.................... $ .42 $ .33(4) $(.07)
Pro forma weighted average shares outstanding(5)....... 6,726,000 6,726,000 6,726,000
<FN>
___________________
(1) Represents $639,000 gain on sale for Loans purchased between October
12, 1994 and January 16, 1995 and sold to the Master Trust on January
16, 1995 in connection with the Company's initiation of its Revolving
Securitization program.
(2) Approximately 5%, or $182,000, of the $3.6 million of Loans purchased
during the three months ended December 31, 1994 was set aside as a
provision for possible Loan losses. This reserve was reversed when
these Loans were sold to the Master Trust on January 16, 1995 in
connection with the Revolving Securitization. Subsequently, all
reserves for Loan losses have been accounted for by the Master Trust.
19
<PAGE>
(3) The pro forma income taxes reflect the application of a combined
federal and state income tax rate of approximately 38% as if the
Company had been taxed as a "C" corporation for all periods presented.
For the period ended December 31, 1995, taxes have been calculated at
38% after netting prior year's net operating loss from pro forma net
income.
(4) Includes approximately $0.07 per share attributable to gains on Loans
purchased between the Company's commencement of operations on October
12, 1994 and January 16, 1995, when the Company initiated its Revolving
Securitization program.
(5) Adjusted to give effect to the sale by the Company of 2,000,000 shares
of Common Stock in the Offering. Based on 7,026,000 shares of Common
Stock outstanding as a result of the exercise of the underwriters'
over-allotment option, pro forma net income (loss) per share would have
been $.40, $.32, and ($.07) for 1996, 1995 and 1994, respectively.
</FN>
</TABLE>
<TABLE>
<CAPTION>
December 31,
------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
BALANCE SHEET DATA:
Total assets......................................... $31,201 $12,003 $5,800
Senior Subordinated Notes payable.................... 12,000 0 0
Junior Subordinated Notes payable.................... 7,218 7,556 5,324
Total liabilities.................................... 21,650 8,556 5,775
Partners' preferred equity........................... 2,296 482 48
Partners' equity..................................... 7,255 2,965 (23)
<CAPTION>
Year Ended December 31,
-----------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
LOAN PORTFOLIO INFORMATION:
Number of Loans purchased during
period (not in thousands).......................... 6,789 3,586 300
Principal balance of Loans purchased
during period...................................... $84,958 $45,972 $3,820
<CAPTION>
December 31,
------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Aggregate number of Loans purchased.................. 10,675 3,886 300
Aggregate principal balance of Loans purchased....... $134,773 $49,792 $3,820
Number of outstanding Loans.......................... 9,063 3,586 300
Principal balance of outstanding Loans............... $102,852 $43,145 $3,800
Net charge-offs as a percentage of aggregate
principal balance of Loans purchased............... 2.62% 1.31% 0.00%
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following management's discussion and analysis provides information
regarding the Company's consolidated financial condition as of December 31, 1995
and 1996, and its results of operations for the years ended December 31, 1995
and 1996. A discussion of other periods is not included below because the
Company only commenced its operations in October 1994, and any comparison with
the results of the full 1995 or 1996 fiscal years would not be analytically
useful. This management's discussion and analysis should be read in conjunction
with the preceding "Selected Consolidated Financial Data" and the Company's
Consolidated Financial Statements and the notes thereto and the other financial
data included under Item 8 of this Annual Report on Form 10-K. The ratios and
percentages provided below are calculated using detailed financial
20
<PAGE>
information contained in the Company's Consolidated Financial Statements, the
notes thereto and the other consolidated financial data included under Item 8 of
this Annual Report on Form 10-K.
OVERVIEW
For all periods presented, the Company operated as two limited
partnerships. As such, the income tax effects of all earnings or losses of the
Company were passed directly to the partners and no provisions for income taxes
were required.
The Company's plan of operation for 1997 is to increase the number of
Loans that it purchases, securitizes and services by (i) utilizing its Dealer
Relations Managers to market the Company's products and services directly to
Dealers (including Dealers with which the Company currently does not have a
contractual relationship), (ii) further implementing the First Union Strategic
Alliance, including the expansion of the scope thereof throughout FUSF's
Southeastern and the Northeastern Franchises, (iii) implementing strategic
referral and marketing alliances with several smaller financial institutions and
Dealer groups with whom the Company has recently entered into contractual
relationships for the purchase of Non-Prime Consumer Loans and (iv)
strategically purchasing bulk portfolios of Non-Prime Consumer Loans meeting the
Company's strict underwriting criteria from third-party originators of such
Loans. The Company believes that it presently has sufficient capital to meet its
cash requirements and to fund operations for approximately 12 to 15 months,
assuming the Company completes regular securitizations during such 12- to
15-month period. Thereafter, the Company could be required to issue additional
subordinated debt or equity.
HISTORICAL DEVELOPMENT AND GROWTH
From the inception of the Company in October 1994 through January 16,
1995, the primary source of revenue for the Company was net interest income on
Loans purchased by the Company. In January 1995, the Company began using a
Revolving Securitization pursuant to which the Company sells its Loans on a
daily basis to the Master Trust. The Revolving Securitization was implemented
effective January 16, 1995. On that date, the Company sold to the Master Trust
407 Loans (approximately $5 million principal amount) that were purchased by the
Company from October 12, 1994 through January 16, 1995. Thereafter, the Company
commenced selling Loans purchased by it to the Master Trust on a daily basis.
The Company's first Permanent Securitization, completed November 22, 1995,
involved the transfer by the Master Trust to the 1995-1 Trust of Loans with an
aggregate principal amount totaling $42 million. The Company's next Permanent
Securitization, completed November 13, 1996, involved the sale by the Master
Trust to the 1996-1 Trust of Loans with an aggregate principal amount totaling
$68 million. The Company retains a residual interest and a cash investment with
respect to each of the Master Trust, the 1995-1 Trust and the 1996-1 Trust,
which are reflected as the "excess spread receivable" ("ESR") and the "spread
accounts" on the Company's balance sheet. Since initiation of the Revolving
Securitization, the Company's earnings have been primarily attributable to the
gains recognized on the sale of Loans into the Master Trust. For the year ended
December 31, 1996, such gains accounted for approximately 82% of the Company's
revenues.
COMPONENTS OF REVENUE AND EXPENSES
Revenues. The Company derives revenues principally from the purchase
and daily sale of Loans to the Master Trust pursuant to the Revolving
Securitization. In determining its reported gain from these securitization
activities, the Company adds the total interest payments due from borrowers and
the dollar amount of the discount at which the Loans were purchased from
Dealers. The Company then deducts estimated reserves for future Loan losses,
prepayments, borrowing charges and deferred servicing costs and discounts the
remaining
21
<PAGE>
cash flow to its net present value. The resulting amount is reported as gain on
securitization of finance receivables on the Company's income statement.
In addition to interest income from cash investments, other revenues
are earned primarily from amortization of the deferred servicing costs which are
recognized to offset the direct servicing expenses incurred by the Company.
Additional income is recognized from the monthly amortization of the deferred
gain on sales of Loans attributable to the time value of money.
Expenses. The Company's expenses consist of interest and operating
expenses. Interest expense is the interest incurred on notes to certain
affiliates of the Company and notes to certain institutional investors. See
"Liquidity and Capital Resources" below.
Operating expenses consist primarily of personnel, general,
administrative and servicing expenses. Depreciation of the Company's capital
expenditures for furniture and equipment that is being recognized over five
years on a straight-line basis is also included in this category.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996, AS COMPARED TO THE YEAR ENDED DECEMBER 31, 1995.
Income from Operations. The Company reported income from operations of
$4.5 million for the year ended December 31, 1996, an increase of 70%, as
compared to income from operations of $2.6 million for the year ended December
31, 1995, after excluding $639,000 that represented income from Loans purchased
from October 12, 1994 to January 16, 1995 and sold to the Master Trust in
January 1995. The Company would have reported $2.8 million of pro forma net
income after a provision for income taxes for the year ended December 31, 1996,
an increase of 58%, as compared to pro forma net income of $1.8 million for the
year ended December 31, 1995, after excluding approximately $439,000 of pro
forma net income from Loans purchased from October 12, 1994 to January 16, 1995
and sold to the Master Trust in January 1995.
Gain on Sales of Loans. The Company's Loan purchasing and servicing
operations expanded significantly during the year ended December 31, 1996, as
compared to the year ended December 31, 1995. The Company purchased from Dealers
and subsequently sold to the Master Trust $84.9 million principal amount of
Loans, or 6,789 Loans, during the year ended December 31, 1996, as compared to
$46.0 million principal amount of Loans, or 3,586 Loans, purchased from Dealers
and subsequently sold to the Master Trust during the year ended December 31,
1995. For the year ended December 31, 1996, the Company recognized a gain on
sales of Loans of $12.2 million, representing an 87.7% increase over the $6.5
million of gains recognized for the year ended December 31, 1995, excluding
$639,000 from the sale of Loans purchased in 1994. This increase was primarily
the result of an 84.6% increase in the dollar volume of Loans purchased and
subsequently sold to the Master Trust for the year ended December 31, 1996, as
compared to the year ended December 31, 1995.
22
<PAGE>
The table below sets forth certain information relating to the
Company's Loan purchasing activities, including, specifically, the number and
aggregate principal amount of Loans purchased, the aggregate amount funded to
Dealers and the related amount of deferred gain and deferred servicing revenue
from the securitization of such Loans:
<TABLE>
<CAPTION>
Year Ended
December 31,
------------------------------------------------
1996 1995 1994
(dollars in thousands)
<S> <C> <C> <C>
Number of Loans purchased during period................... 6,789 3,586 300
Principal balance of Loans purchased during period........ $84,958 $45,972 $3,820
Amount funded(1).......................................... 80,956 43,505 3,596
Percent sold to trusts.................................... 100.00% 100.00% 0.00%
Gain on sales of Loans.................................... 12,178 7,126(2) 0
Amortization of deferred gain and servicing............... 1,628 460 0
Gain on sale revenue as a percent of total revenue........ 82.33 91.22 0
<FN>
- ------------------
(1) Amount funded represents the price at which the Company purchases a
Loan from a Dealer (i.e., the amount actually paid to a Dealer),
calculated as the principal of the Loan purchased less a negotiated
discount.
(2) Includes $639,000 of gain on sale for Loans purchased between October
12, 1994 and January 16, 1995 and sold to the Master Trust in
connection with the Revolving Securitization on January 16, 1995.
</FN>
</TABLE>
23
<PAGE>
Loan Loss Provision
The Company's gain on sale of Loans calculation assumes potential
charge-offs from the Loan portfolio securitized. For the year ended December 31,
1996, the provision for Loan losses (recorded at the Trust level) was
approximately $5.7 million, or 7.0% of the amount funded, as compared to
approximately $2.2 million, or 5% of the amount funded for the year ended
December 31, 1995. An increase in losses above levels provided for could result
in reduced cash flow to the Company and a possible write-down of the ESR and
spread account.
Loan Prepayment Provision
The Company's gain on sale of loans calculation assumes estimates of
potential prepayments from the Loan portfolio securitized. For the year ended
December 31, 1996, the provision for Loan prepayments (recorded at the Trust
Level) was approximately $11.1 million, or 13.71% of the amount funded, as
compared to approximately $4.9 million, or 11.32% of the amount funded, for the
year ended December 31, 1995.
Other Income
The Company generated approximately $2.6 million of other income for
the year ended December 31, 1996, as compared to $685,000 for the year ended
December 31, 1995. The principal sources of the Company's other income were
$762,000 of amortized deferred gain, $866,000 of servicing income and $361,000
of interest and miscellaneous income for the year ended December 31, 1996, as
compared to $241,000, $219,000 and $225,000, respectively, for the year ended
December 31, 1995. An additional $624,000 was recognized for the year ended
December 31, 1996 from the amortization of additional deferred gain that
resulted from the transfer of receivables from the Master Trust to the 1995-1
Trust. This deferred gain resulted from the fact that the Permanent
Securitization was accomplished at a lower borrowing rate than the Company
assumed in calculating its gain on the sale of such Loans to the Master Trust.
Operating Expenses
The Company reported operating expenses of $9.8 million (net of
depreciation and amortization expense of approximately $492,000) for the year
ended December 31, 1996, as compared to approximately $4.3 million (net of
depreciation and amortization expense of approximately $183,000) for the year
ended December 31, 1995. These expenses consisted primarily of interest on
subordinated notes and personnel, general, administrative (including origination
and other operating expenses) and servicing expenses. The increase in expenses,
from 55.65% of revenues as of December 31, 1995 to 66.31% as of December 31,
1996, reflected the growth in the number of Loans purchased and serviced by the
Company, the hiring of additional senior management and the other start-up costs
associated with implementation of the First Union Strategic Alliance. Management
currently expects that operating costs will continue to rise throughout fiscal
year 1997 as a result of anticipated growth in the number of Loans purchased and
serviced by the Company and the hiring of additional personnel in connection
with the expansion of the First Union Strategic Alliance to FUSF's Northeastern
Franchise, and the establishment of the Company's own in-house servicing
operation. Increased operating expenses will decrease the Company's operating
margins and the Company's overall profitability.
Personnel expenses for the year ended December 31, 1996 were
approximately $3.6 million, as compared to approximately $1.7 million for the
year ended December 31, 1995. Personnel expenses consisted primarily of salaries
and wages, performance incentives, employee benefits and payroll taxes. The
increase in personnel expenses primarily reflected the growth in the amount of
Loans purchased and serviced by the Company, the hiring of additional senior
management and the other start-up costs associated with implementation of the
First Union Strategic Alliance. The Company's number of full-time employees
increased
24
<PAGE>
from 38 as of December 31, 1995 to 67 as of December 31, 1996. The Company
expects that its number of full-time employees will continue to increase
commensurate with the growth of the Company's Loan purchasing and intended
future in-house servicing activities.
General and administrative expenses for the year ended December 31,
1996 were approximately $3.7 million, as compared to approximately $1.8 million
for the year ended December 31, 1995. These expenses consisted primarily of
telecommunications, travel, professional fees, insurance expenses and management
information systems expenses. The increase in expenses primarily reflected the
hiring of additional senior management and the other start-up costs associated
with the implementation of the First Union Strategic Alliance.
Interest expense for the year ended December 31, 1996 was $1.2 million,
as compared to $498,000 for the year ended December 31, 1995. This increase is a
result of the interest expense incurred on $12,000,000 aggregate principal
amount of Senior Subordinated Notes and related Deferred Additional Interest
Notes (as defined in Item 8 below). The Junior Subordinated Notes (as defined in
Item 8 below) bear interest at a rate of 8% per annum, payable quarterly in
arrears, commencing September 30, 1996. The Senior Subordinated Notes bear
interest at a rate of 10% per annum payable quarterly in arrears, commencing
October 31, 1996.
Servicing expenses for the year ended December 31, 1996 were $1.3
million as compared to $371,000 for the year ended December 31, 1995. Servicing
expenses consist primarily of a monthly fee to an outside servicer for each
active Loan. Servicing fees paid to World Omni for the year ended December 31,
1996 were $1,100,000, as compared to $326,000 for the year ended December 31,
1995. The increase in servicing expenses primarily reflected the growth in the
amount of Loans purchased and serviced by the Company. The Company's total
serviced Loan portfolio was approximately $102.9 million, or 9,063 outstanding
Loans, as compared to approximately $43.1 million, or 3,586 outstanding Loans,
as of December 31, 1995.
FINANCIAL CONDITION
As of December 31, 1996, the Company had total assets of $31.2 million,
as compared to $12.0 million as of December 31, 1995. For the years ended
December 31, 1996 and December 31, 1995, these assets consisted primarily of
cash, subordinated securities and ESRs from the securitization trusts.
As of December 31, 1996, the Company had cash and cash equivalents
totaling approximately $5.0 million. As of such date, the Company also had
approximately $2.1 million in cash balances held in restricted bank accounts
representing credit enhancement in the form of Loan loss reserves for the
securitization trusts, which amount was included in the total amount of the
Company's ESRs as of such date.
As of December 31, 1996, the Company retained approximately $15.2
million of ESRs and approximately $8.2 million of subordinated securities. These
assets represented 75% of the total assets of the Company as of such date. The
value of these assets would be reduced in the event of a material increase in
the Loan loss and prepayment experience relative to the amounts estimated by the
Company for such items at the time of the sale of the related Loans to the
Master Trust.
As of December 31, 1996, the principal amount owed by the Company on
Junior Subordinated Notes was approximately $7.4 million (including $144,000 of
accrued interest), which bear interest at an annual rate of 8%. Interest in the
amount of $968,000 accrued on such notes through September 30, 1996 was paid in
1996. Principal in the amounts of $4.5 million and $666,000 were paid to holders
of the Junior Subordinated Notes on February 3, 1997 and March 7, 1997,
respectively.
25
<PAGE>
In August 1996, the Company sold $12,000,000 aggregate principal amount
of Senior Subordinated Notes and related Deferred Additional Interest Notes. In
connection with the reorganization of the Company the Deferred Additional
Interest Notes were exchanged for 470,000 shares of Common Stock, representing
10% of the outstanding Common Stock immediately following the reorganization of
the Company, and the Senior Subordinated Notes became the obligation of the
Company.
LOAN LOSS AND DELINQUENCY EXPERIENCE
The Company regularly reviews the performance of Loans that it has
originated and sold. The Company also reviews the impact of Loan performance on
the collectibility of the ESR and the timing thereof. Loan loss assumptions used
in calculating the gain on sale of Loans and evaluating the ESR are set at
levels considered to be sufficient to cover the expected future losses on
existing Loans. Changes in reserves are based directly on the dollar value of
the Loans transferred to the Master Trust, historical loss experience and, to a
lesser extent, current economic conditions and other factors that management
deems relevant. Losses are continuously monitored on an overall portfolio and
individual month-of-purchase static pool basis.
The Trust's charge-off policy is based upon a Loan-by-Loan review of
delinquent accounts. The Company generally charges off a Loan at the time
management determines it to be uncollectible.
As of December 31, 1996, the Loans acquired and sold by the Company had
net charge-offs of $3.5 million, or 2.62% of the aggregate principal balance of
Loans purchased since October 1994, as compared to $650,000, or 1.31%, as of
December 31, 1995.
The Company monitors historical loss experience on a static pool basis.
Loans acquired and sold to the Master Trust in each calendar month are
segregated into individual static pools. The Company considers a pool of Loans
to be "seasoned" when it has been aged for an average of 18 to 24 months. Actual
pool losses are then compared to the estimates for the net loss reserve for each
pool that were established at the pools' inception and adjustments for any
additional losses will be reflected in the current period earnings. As of
December 31, 1996, no such additional loss adjustments have been made.
26
<PAGE>
The following table summarizes the Trusts' Loan loss and repossession
loss experience:
<TABLE>
<CAPTION>
As of December 31,
----------------------------------------------
1996 1995 1994
---- ---- ----
(dollars in thousands)
<S> <C> <C> <C>
Aggregate number of Loans purchased....................... 10,675 3,886 300
Aggregate principal balance of Loans purchased............ $134,773 $49,792 $3,820
Principal balance of outstanding Loans.................... $102,852 $43,145 $3,800
Number of outstanding Loans............................... 9,063 3,586 300
Gross charge-off principal balance(1)..................... 7,760 1,447 0
Liquidation recoveries.................................... (4,232) (797) 0
--------- ------- -------
Net charge-offs........................................... 3,528 650 0
Net charge-offs as a percentage
of aggregate principal balance
of Loans purchased...................................... 2.62% 1.31% 0.00%
Principal balance of Loans related
to vehicles held in inventory........................... 2,266 553 $0
<FN>
- ------------------
(1) Does not include vehicles repossessed and held in inventory.
</FN>
</TABLE>
The Company considers a Loan to be delinquent if the borrower fails to
make any payment substantially in full on or before the due date as specified by
the terms of the Loan. The Company typically initiates contact with borrowers
whose payments are not received by the due date on the fifth day following the
due date. The following table summarizes the delinquency experience with respect
to outstanding Loans sold to the Master Trust:
<TABLE>
<CAPTION>
As of December 31,
---------------------------------------------
1996 1995 1994
---- ---- ----
(Three Months) (Dollars in thousands)
<S> <C> <C> <C>
Number of Loans........................................... 9,063 3,586 300
Principal balance outstanding............................. $ 102,852 $ 43,145 $ 3,800
Period of delinquency
31 to 60 days........................................... 6,104 2,148 0
61 to 90 days........................................... 1,596 157 0
91 days or more, average................................ 487 46 0
Total delinquencies....................................... $ 8,187 $ 2,351 $ 0
Total delinquencies as a percentage of the current
principal balance of outstanding Loans.................. 7.95% 5.45% 0%
</TABLE>
Management of the Company believes that the payment practices of
Non-Prime Consumers are partially a function of seasonality. Since Non-Prime
Consumers typically have low disposable incomes, they frequently tend to fall
behind in payments on their Loans during the early winter months, when the
holiday season generates demands for their limited disposable income and when
these borrowers encounter weather-related work slow-downs and other seasonal
demands on their disposable income. As a result, absent unforeseen
circumstances, management expects delinquencies to be highest in the first
calendar quarter and the fourth calendar quarter of each year. Generally, there
is a 60- to 120-day lag between initial delinquency and charge-off.
27
<PAGE>
Since October 1994, the Company has maintained, at its own expense,
supplemental vendor's single interest insurance that protects the Company's
interest in Loan collateral against uninsured physical damage (including total
loss) and instances where neither the vehicle nor the borrower can be found.
LIQUIDITY AND CAPITAL RESOURCES
General
Since inception, the Company has funded its operations and the growth
of its Loan purchasing activities primarily through five principal sources of
capital: (i) cash flows from operating activities, (ii) proceeds from
securitization transactions, (iii) cash flows from servicing fees, (iv) proceeds
from the issuance of senior subordinated debt to institutional investors, and
(v) proceeds from the issuance of junior subordinated debt to, and from the
capital contributions of, certain affiliates of the Company. In the future, the
Company expects that a portion of the proceeds of the Offering will also be used
to fund operations.
Securitization Program
The Company currently funds its purchases of Loans primarily through an
asset securitization program that involves (i) the securitized warehousing of
all of its Loans through their daily sale to the Master Trust pursuant to the
Revolving Securitization, followed by (ii) the refinancing of such warehoused
Loans, from time to time, through Permanent Securitizations.
Specifically, pursuant to the Revolving Securitization the Company
sells Loans that it has purchased from Dealers on a daily basis to a
special-purpose subsidiary, which then sells the Loans to the Master Trust in
exchange for cash and certain residual interests in future excess cash flows
from the Master Trust. The Master Trust, to date, has issued Class B
Certificates, which are variable funding (i.e., revolving) certificates bearing
interest at floating rates, and Class C Certificates, representing a portion of
the residual interest of the Company's special-purpose subsidiary in future
excess cash flows from the Master Trust after required payments to the holders
of the Class B Certificates, deposit of funds to a restricted cash account as a
reserve for future Loan losses (which provides additional credit enhancement for
the holders of the Class B Certificates) and payment of certain other expenses
and obligations of the Master Trust. First Union currently owns 100% of the
outstanding Class B Certificates.
The Company is required to maintain a minimum equity position in the
Revolving Securitization of 10% of the net serviced receivables. This equity
currently consists of cash invested by the Company and the unamortized dealer
discount. As of December 31, 1996, the Company had a 12.32% equity investment in
the Revolving Securitization.
In November 1995, the Master Trust refinanced $42.0 million of its
receivables in a private placement of asset-backed securities through a
Permanent Securitization. In such transaction, the 1995-1 Trust was formed and
issued $42.0 million of asset-backed securities to various private investors. In
November 1996, the 1996-1 Trust was formed and the Master Trust refinanced $68.0
million of its receivables in a public offering by the 1996-1 Trust of
asset-backed securities through a Permanent Securitization. Payment of principal
of, and interest on, $38.0 million and $62.0 million, respectively, of the
securities issued in such transactions is insured by payment guarantees issued
by FSA, and such securities are rated AAA by S&P and Aaa by Moody's. The
proceeds of each of such Permanent Securitization transaction were used by the
Master Trust to repay the then-outstanding balance of the Class B Certificates.
Since such time, the Master Trust has issued additional beneficial interests in
Loans purchased by the Master Trust, as evidenced by the Class B Certificates,
to finance its purchase of Loans from the Company. The Company expects
additional Permanent Securitizations to be
28
<PAGE>
consummated in the future in order to refinance periodically amounts outstanding
under such Class B Certificates.
Collection of the indebtedness evidenced by the Loans in each of the
Master Trust, the 1995-1 Trust and the 1996-1 Trust and related administration
is handled by World Omni. World Omni is primarily responsible for invoicing
customers, and collecting and processing payments. The Company acts as master
servicer for the Loans sold to each of the trusts and receives monthly fees from
the trusts at base rates of 2% per annum for each of the 1995-1 Trust and the
1996-1 Trust and 4% per annum for the Master Trust, plus certain late fees and
prepayment charges received on the securitized Loans.
The Company relies in part on cash flow from the Master Trust to
support its operations. Since the Master Trust's interest rates under the
Revolving Securitization are floating and the interest rates charged on the
Loans (which are generally at or near the maximum rates permitted by applicable
state laws) are fixed, increases in the interest rates incurred with respect to
the Class B Certificates could have a material adverse effect both on cash flows
from the Master Trust and on the Company's net income, thereby adversely
affecting the Company's financial condition and results of operations. In order
to mitigate the negative impact of rising interest rates, the Master Trust has
entered into interest rate swap agreements, which have the effect of fixing the
rates charged on a portion of the Master Trust's indebtedness. Although these
agreements provide the Master Trust (and therefore the Company) some protection
against rising interest rates, they also reduce the benefits to the Master Trust
(and therefore to the Company) when interest rates decline below the rates set
forth in such agreements. In addition, upon refinancing of Loans through
Permanent Securitizations, the interest spread with respect to such refinanced
Loans may be fixed.
Under the financial structures the Company has used to date in its
securitizations, certain excess cash flows generated by the Loans are retained
in a spread account within the securitization trusts to provide liquidity and
credit enhancement. While the specific terms and mechanics of the spread account
can vary slightly depending on each transaction, the Company's agreements with
FSA generally provide that the Company is not entitled to receive any excess
cash flows unless certain spread account balances have been attained and/or the
delinquency or losses related to the Loans in the pool are below certain
predetermined levels. In the event delinquencies and losses on the Loans exceed
such levels, the terms of the securitization may (i) require increased spread
account balances to be accumulated for the particular pool, (ii) restrict the
distribution to the Company of excess cash flows associated with the pool in
which asset-backed securities are insured by FSA, and (iii) in certain
circumstances, require the transfer of servicing on some or all of the Loans in
FSA-insured pools to another servicer. The imposition by FSA of any of these
conditions could materially adversely affect the Company's liquidity and
financial condition. As of December 31, 1996, all FSA-insured pools were
performing within the guidelines required by their related insurance policies.
Inflation
Increases in the rate of inflation of prices in the U.S. economy
generally result in higher interest rates. Typically, higher interest rates
result in a decrease in the Company's net interest margins and a corresponding
decrease in the Company's gain on sale revenue for a given Loan amount; to the
extent not offset by increases in the volume of Loans purchased, inflation can
therefore lead to decreases in the Company's profitability.
29
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
<TABLE>
<S> <C>
Page
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
Unaudited Pro Forma Balance Sheet as of December 31, 1996....................................................32
Unaudited Pro Forma Statement of Income for
the year ended December 31, 1996....................................................................33
Notes to Unaudited Pro Forma Consolidated Financial Statements...............................................34
HISTORICAL FINANCIAL STATEMENTS
Independent Auditors' Report.................................................................................36
Consolidated Balance Sheets as of December 31, 1996 and 1995.................................................37
Consolidated Statements of Income (Loss) for the years ended December 31, 1996 and 1995,
and for the period from October 1, 1994 (date of inception) to December 31, 1994....................38
Consolidated Statements of Partners' Capital for the years ended December 31, 1996 and 1995,
and for the period from October 1, 1994 (date of inception) to December 31, 1994....................39
Consolidated Statements of Cash Flows for the years ended December 31, 1996 and 1995,
and for the period from October 1, 1994 (date of inception) to December 31, 1994....................40
Notes to Consolidated Financial Statements as of December 31, 1996 and 1995..................................41
</TABLE>
30
<PAGE>
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The following pro forma financial information sets forth historical
information which has been adjusted to reflect the Reorganization, which
includes, among other things, (i) certain transactions associated with the
reorganization of the business of the Partnerships into corporate form, (ii) the
income tax effects of the Reorganization, assuming the Reorganization, (iii) the
issuance by the Company of 2,300,000 shares of Common Stock (including the
issuance of 300,000 shares of Common Stock pursuant to the exercise of the
underwriter's over-allotment option) at an assumed offering price of $8.50 per
share in an initial public offering, net of related fees and expenses and (iv)
repayment of the $5.181 million of subordinated debt. The effects of the
Reorganization are reflected in the first pro forma column in the Unaudited Pro
Forma Financial Statements titled "National Auto Finance Company, Inc. Pro
Forma." The effects of the issuance of Common Stock by the Company, as well as
the effects of the Reorganization, will be reflected in the last column of the
Unaudited Pro Forma Financial Statements titled "National Auto Finance Company,
Inc. Pro Forma (As Adjusted)."
The Unaudited Pro Forma Statement of Income assumes the Reorganization
took place at January 1, 1996. The Unaudited Pro Forma Balance Sheet assumes the
Reorganization took place on the date presented. See "Notes to Unaudited Pro
Forma Financial Statements." The pro forma information is based on certain
assumptions and estimates that management believes are reasonable in the
circumstances and does not purport to be indicative of the results which
actually would have been attained had the above transactions occurred at the
dates indicated or the results which may be attained in the future. This
information should be read in conjunction with the Company's financial
statements and related notes.
31
<PAGE>
<TABLE>
<CAPTION>
NATIONAL AUTO FINANCE COMPANY, INC.
Unaudited Pro Forma Balance Sheet
December 31, 1996
National National
Auto Auto
National Finance Finance
Auto Reorganization Company, Offering Company, Inc.
Limited Pro forma Inc. Pro forma Pro forma
Partnership Adjustments Pro forma Adjustments (As Adjusted)
----------- ----------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Assets
Cash & cash equivalents $5,066,467 $(546)(3) $5,065,921 $18,166,500 (4) $18,050,971
(5,181,450)(5)
Excess spread receivable 15,183,107 15,183,107 15,183,107
Spread accounts 8,220,813 8,220,813 8,220,813
Fixed assets, net 513,775 513,775 513,775
Deferred financing and
stock issuance costs 1,849,245 1,849,245 (760,000)(4) 1,089,245
Other assets 367,226 367,226 367,226
------- ------- -------
Total Assets $31,200,633 $31,200,087 $43,425,137
----------- ----------- -----------
Liabilities and Ownership Equity
Liabilities
Senior subordinated notes $12,000,000 $12,000,000 $12,000,000
Junior subordinated notes 7,217,590 7,217,590 (5,181,450)(5) 2,036,140
Subordinated Note Interest 482,966 482,966 482,966
Due to National Auto Finance
Corporation 177,909 177,909 177,909
Pro forma Deferred Taxes 2,755,099(1) 2,755,099 2,755,099
Accounts payable and accrued
expenses 1,771,216 (140,000)(8) 1,631,216 1,631,216
--------- --------- ---------
Total Liabilities 21,649,681 24,264,780 19,083,330
Ownership Equity
Preferred Capital 2,295,546 (2,295,546)(3) - -
Partners' Capital 7,255,406 (7,255,406)(2) - -
---------
Total Partners Capital 9,550,952 - -
Stockholders Equity
Common Stock 47,000(2)(8) 47,000 23,260(4) $70,260
Preferred Stock 2,295,000(3) 2,295,000 2,295,000
Paid in Capital 53,000(2) 4,593,307 17,383,240(4) 21,976,547
4,540,307(1)(2)(3)
(9)
--------- ----------
Retained Earnings
Total Stockholders Equity 6,935,307 24,341,807
--------- --------- ----------
Total Ownership Equity 9,550,952 6,935,307 24,341,807
--------- --------- ----------
Total Liabilities
and Ownership Equity $31,200,633 $31,200,087 $43,425,137
----------- ----------- -----------
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
NATIONAL AUTO FINANCE COMPANY, INC.
Unaudited Pro Forma Statement of Income
Year Ended December 31, 1996
National National
Auto Auto
National Finance Finance
Auto Reorganization Company, Offering Company, Inc.
Limited Pro forma Inc. Pro forma Pro forma
Partnership Adjustments Pro forma Adjustments (As Adjusted)
----------- ----------- --------- ----------- -------------
<S> <C> <C> <C>
REVENUE
Gain on sale of Loans $12,177,932 $12,177,932 $12,177,932
Interest income from cash investments 258,521 258,521 258,521
Deferred gain on sales of Loans 761,529 761,529 761,529
Deferred servicing income 866,809 866,809 866,809
Deferred income from
securitizations 624,013 624,013 624,013
Other income 102,787 102,787 102,787
------- ------- -------
Total Revenues 14,791,591 14,791,591 14,791,591
Operating Expenses 10,300,448 10,300,448 (415,000)(6) 9,885,448
---------- ---------- -------- ---------
Net income before taxes 4,491,143 4,491,143 415,000 4,906,143
Pro forma income taxes 1,688,670(1) 1,688,670 155,000(6) 1,843,670
---------- --------- ---------
Net Income $4,491,143 $2,802,473 260,000 $3,062,473
---------- ---------- ----------
Dividend on preferred
stock 157,500(7) 157,500 157,500
------- -------
Net income available to
Common Stock holders 2,644,973 2,904,973
========= =========
Pro forma net income per
common share $ .41(10)(11)
========
Pro forma weighthed average
shares outstanding $7,026,000(10)(11)
==========
</TABLE>
33
<PAGE>
NATIONAL AUTO FINANCE COMPANY, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(1) Adjustment to reflect a deferred income tax liability (assuming an
approximate rate of 38%) as if the Company had operated as a taxable
"C" corporation from inception.
Year ended December 31, 1994 $ 0
Year ended December 31, 1995 1,066,429
Year ended December 31, 1996 1,688,670
---------
2,755,099
=========
(2) Adjustment to reflect the exchange of certain general and limited
partnership interests for 4,700,000 shares of the Common Stock with a
par value of $.01, as part of the Reorganization.
(3) Adjustment to reflect (i) the exchange of certain preferred equity
partnership interests for 2,250 shares of Series "A" 7% Cumulative
Preferred Stock, par value $1,000 per share, and the payment of $668 in
lieu of the issuance of a fractional share of Preferred Stock, as of
September 30, 1996 and (ii) the exchange of Preferred Equity dividends
accrued in the fourth quarter of 1996 for 45 additional shares of
Series "A" 7% Cumulative Preferred Stock, par value $1,000 per share,
and the payment of $546 in lieu of the issuance of a fractional share
of Preferred Stock.
(4) Adjustment to reflect the $17,406,500 of net proceeds obtained through
the sale of 2,300,000 shares of Common Stock with a par value of $.01.
(5) Adjustment to give effect to the use of proceeds from the issuance of
the Common Stock offered by the Company for the payment of $5,181,450
in junior subordinated debt (relating to the Junior Subordinated Notes,
as such term is defined in note 1 of this Item 8 under the caption
"Notes to Consolidated Financial Statements").
(6) Adjustment to reflect to reduction in interest expense and related
increase in current income taxes that would result from payment of the
junior subordinated debt described above.
(7) Reflects annual dividend rate of $70 per share for 2,295 shares of
Series A Preferred Stock issued to the preferred equity partner (the
National Auto Partnership) in conjunction with the Reorganization.
(8) Reflects the exchange of accrued Deferred Additional Interest on Senior
Subordinated Debt (relating to the Senior Subordinated Notes and the
Deferred Additional Interest Notes, as such latter term is defined in
note 5 of this Item 8 under the caption "Notes to Consolidated
Financial Statements") of $140,000 for 470,000 shares of Common Stock
in conjunction with the Reorganization.
(9) In connection with the Reorganization completed on February 4, 1997,
and based upon the audited financial results as of September 30, 1996,
$3,620,000 of retained earnings were transferred to additional paid in
capital to reflect a constructive distribution to the partners of the
National Auto Partnership followed by a contribution to the capital of
the Company. Subsequent to this transfer, and based upon the audited
financial results as of December 31, 1996, an additional $920,000 of
retained earnings were transferred to additional paid in capital to
reflect a constructive distribution of 1996's fourth quarter earnings
to the partners of the National Auto Partnership followed by a
contribution to the capital of the Company.
(10) Pro forma income per common share assumes dividends were accrued on
preferred stock commencing January 1, 1996. Pro forma income per
common share also assumes 7,026,000 shares of Common Stock outstanding,
which number represents the total number of shares of Common Stock
outstanding after the Offering, including the 300,000 shares of Common
Stock issued and sold pursuant of the exercise of the underwriters'
over-allotment option.
34
<PAGE>
(11) Pro forma net income per share for the year ended December 31, 1996
(excluding any pro forma preferred stock dividends) was $.42 based on a
computation that reflects 6,726,000 shares of Common Stock outstanding,
and $.40 based on a computation that reflects 7,026,000 shares of
Common Stock outstanding, including the 300,000 shares of Common Stock
issued and sold in connection with the exercise of the underwriters'
over-allotment option and excluding the effects of the reduction in
interest expense and related increase in current income taxes described
in Note 6 above.
35
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
National Auto Finance Corporation, General Partner
National Auto Finance Company L.P.:
We have audited the accompanying consolidated balance sheets of National Auto
Finance Company L.P. and subsidiary as of December 31, 1996 and 1995, and the
related consolidated statements of income (loss), partners' capital and cash
flows for the years ended December 31, 1996 and 1995, and for the period from
October 1, 1994 (date of inception) to December 31, 1994. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
National Auto Finance Company L.P. and subsidiary as of December 31, 1996 and
1995, and the consolidated results of their operations and their cash flows for
the years ended December 31, 1996 and 1995, and for the period from October 1,
1994 (date of inception) to December 31, 1994 in conformity with generally
accepted accounting principles.
KPMG PEAT MARWICK LLP
February 28, 1997
Fort Lauderdale, Florida
36
<PAGE>
<TABLE>
<CAPTION>
NATIONAL AUTO FINANCE COMPANY L.P.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
Assets 1996 1995
- ------ ---- ----
<S> <C> <C>
Cash and cash equivalents $ 5,066,467 824,388
Excess spread receivable 15,183,107 5,140,006
Spread accounts 8,220,813 5,173,764
Fixed assets, net 513,775 273,330
Deferred financing and stock
issuance costs 1,849,245 434,135
Other assets 367,226 157,207
-------------- --------------
Total assets $ 31,200,633 12,002,830
============= ==============
Liabilities and Partners' Capital
Accounts payable and accrued expenses $ 1,771,216 421,434
Due to National Auto Finance Corporation 177,909 46,744
Accrued interest payable-related parties 143,611 531,850
Accrued interest payable-senior subordinated notes 339,355 -
Junior subordinated notes-related parties 7,217,590 7,555,991
Senior subordinated notes 12,000,000 -
-------------- -------------
Total liabilities 21,649,681 8,556,019
-------------- --------------
Total partners' capital 9,550,952 3,446,811
-------------- --------------
Total liabilities and partners' capital $31,200,633 12,002,830
============== ==============
</TABLE>
See accompanying notes to the consolidated financial statements.
37
<PAGE>
<TABLE>
<CAPTION>
NATIONAL AUTO FINANCE COMPANY L.P.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
For the years ended December 31, 1996 and 1995 and for the period
from October 1, 1994 (date of inception) to December 31, 1994
Year ended Year ended October 1 to
December 31, December 31, December 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenue:
Gain on sales of Loans $ 12,177,932 7,125,849 -
Deferred gain on sales of Loans 761,529 240,869 -
Deferred servicing income 866,809 218,665 -
Deferred income from securitizations 624,013 - -
Interest income from cash
investments 258,521 10,828 32,097
Other income 102,787 32,768 -
Finance charges earned - - 94,729
Provision for credit losses - 182,000 (182,000)
-------------- -------------- --------------
Total revenue 14,791,591 7,810,979 (55,174)
-------------- -------------- --------------
Expenses:
Interest expense 1,204,042 498,460 77,950
Salaries and employee benefits 3,633,865 1,665,968 222,874
Direct loan acquisition expenses 1,032,596 502,064 22,172
Servicing costs 1,291,118 370,506 6,104
Depreciation and amortization 492,032 182,999 6,841
Other operating expenses 2,646,795 1,310,156 83,601
-------------- -------------- --------------
Total expenses 10,300,448 4,530,153 419,542
-------------- -------------- --------------
Net income (loss) $ 4,491,143 3,280,826 (474,716)
============= ============== ==============
Pro forma data (unaudited) (note 10):
Pro forma income (loss) before income taxes 4,491,143 3,280,826 (474,716)
Pro forma income taxes 1,688,670 1,066,429 -
------------- -------------- --------------
Pro forma net income (loss) $2,802,473 2,214,397 (474,716)
============= ============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
38
<PAGE>
<TABLE>
<CAPTION>
NATIONAL AUTO FINANCE COMPANY L.P.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
For the years ended December 31, 1996 and 1995 and for the period
from October 1, 1994 (date of inception) to December 31, 1994
Preferred
General Limited equity
partner partners partners Total
------- -------- -------- -----
<S> <C> <C> <C> <C>
Balance as of October 1, 1994
(date of inception) $ - - - -
Contributions 1,000 99,000 400,000 500,000
Net loss (38,717) (83,836) (352,163) (474,716)
---------- --------- ---------- --------
Balance as of December 31, 1994 (37,717) 15,164 47,837 25,284
Contributions - - 140,701 140,701
Net loss 67,375 2,955,308 258,143 3,280,826
Preferred equity earnings - (35,000) 35,000 -
--------- ----------- ---------- ---------
Balance as of December 31, 1995 29,658 2,935,472 481,681 3,446,811
Contributions - - 1,612,998 1,612,998
Net income 42,897 4,247,379 200,867 4,491,143
-------- ----------- ----------- -----------
Balance as of December 31, 1996 $ 72,555 7,182,851 2,295,546 9,550,952
========= =========== =========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
39
<PAGE>
<TABLE>
<CAPTION>
NATIONAL AUTO FINANCE COMPANY L.P.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1996 and 1995 and for the period
from October 1, 1994 (date of inception) to December 31, 1994
Three months
Year ended Year ended ended
December 31, December 31, December 31,
1996 1995 1994
------------ -------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 4,491,143 3,280,826 (474,716)
Adjustments to reconcile net income
(loss) to net cash used in operating activities:
Gain on sales of Loans (12,177,932) (7,125,849) -
Depreciation expense 136,835 38,508 6,841
Provision for credit losses - (182,000) 182,000
Loss from the sale of fixed assets - 1,415 -
Purchases of loans held for sale (77,864,548) (43,146,025) (3,690,004)
Proceeds from sale of Loans 77,864,548 41,773,945 29,940
Cash received from spread account 4,112,143 2,511,938 -
Deferred gains and income recognized (2,252,351) (459,534) -
Amortization of deferred financing costs 355,197 144,491 -
Changes in other assets and liabilities:
Due from related parties - - -
Other assets (210,019) (144,431) (12,776)
Accounts payable and accrued expenses 1,349,782 97,225 324,209
Accrued interest payable-related parties (388,239) 453,901 77,949
Accrued interest payable-senior
subordinated debt 339,355 - -
-------------- ------------ -------------
Net cash used in operating activities (4,244,086) (2,755,590) (3,556,557)
-------------- ------------ -------------
Cash flows from investing activities:
Start-up costs and deferred structuring fees (828,196) (45,086) (533,543)
IPO costs incurred (774,665) - -
Fixed assets purchased (377,280) (265,285) (68,415)
Fixed assets sold - 13,328 -
Net received from (invested in) National
Financial Auto Receivable Master Trust 710,875 3,186,395 (25,000)
Investment in National Auto Finance 1995-1 UIC trust 979,494 (3,369,295) -
Investment in National Auto Finance 1996-1 UIC trust (4,629,825) - -
Due from National Auto Finance Corporation - 99,500 (99,500)
-------------- ------------ -------------
Net cash used in investing activities (4,919,597) (380,443) (726,458)
-------------- ------------ -------------
Cash flows from financing activities:
Proceeds from senior subordinated debt 12,000,000 - -
Proceeds from junior subordinated notes-related parties 700,000 2,336,745 5,323,733
Payments of junior subordinated notes-related parties (1,038,401) (104,487) -
Preferred equity partners' contributions 1,612,998 140,701 400,000
General and limited partners' contributions - - 100,000
Due to National Auto Finance Corporation 131,165 (2,559) 49,303
-------------- ------------ -------------
Net cash provided by financing activities 13,405,762 2,370,400 5,873,036
-------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents 4,242,079 (765,633) 1,590,021
Cash and cash equivalents at beginning of period 824,388 1,590,021 -
-------------- ------------ -------------
Cash and cash equivalents at end of period $5,066,467 824,388 1,590,021
============== ============ =============
Noncash investing and financing activities:
On January 16, 1995, the Company transferred
receivables of $4,875,979 to the spread account.
Cash paid for interest $ 1,252,926 - -
============== ============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
40
<PAGE>
NATIONAL AUTO FINANCE COMPANY L.P.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Organization and Business
National Auto Finance Company L.P. (the "National Auto
Partnership") was established in October 1994 with
approximately $5,800,000 of partners' equity and junior
subordinated debt from certain partners and affiliates (the
"Junior Subordinated Notes"). The general partner, National
Auto Finance Corporation, a Delaware corporation (the "General
Partner"), was appointed to manage the businesses. During the
periods reported on herein, the National Auto Partnership
owned 97% of the limited partnership interest and 100% of the
preferred equity partnership interest in Auto Credit
Clearinghouse L.P. (the "ACCH Partnership"). The General
Partner of the National Auto Partnership was also the general
partner of the ACCH Partnership. The ACCH Partnership was
established in September 1995 with approximately $140,000 of
partners' equity. (The National Auto Partnership and the ACCH
Partnership are collectively referred to in these Notes to the
Consolidated Financial Statements as the "Company.")
The Company purchases Non-Prime retail installment contracts
("Loans") from manufacturer-franchised automobile dealers on a
nonrecourse basis. As of December 31, 1996, approximately 39%
of the outstanding principal balance of Loans relates to Loans
originated in Georgia, 16% in North Carolina, and 9% in South
Carolina. No single Dealer originates more than 5% of Loans
purchased.
Through strategic referral and marketing alliances with
financial and other institutions, the Company seeks to
increase the number of Loans it purchases by (i) leveraging a
financial institution's existing Dealer relationships and
finance sales force to market the Company's Non-Prime Consumer
products and services and (ii) obtaining the right to review
and purchase Non-Prime Consumer Loans which do not meet a
financial institution's underwriting criteria. Through such
strategic referral and marketing alliances, the Company offers
the financial institution the opportunity to provide a broader
product offering to Dealers and to earn additional income
based on the number of Loans which are purchased by the
Company.
In April 1996, the Company entered into the First Union
Strategic Alliance with First Union National Bank of North
Carolina and certain of its affiliates ("First Union"). The
First Union Strategic Alliance provides for (i) joint
marketing of the Company's products and services by both the
Company's sales force and the marketing and sales personnel
from First Union to Dealers in various states and (ii)
exclusive referral by FUSF to the Company of all applications
for Non-Prime Consumer Loans falling below certain established
credit guidelines. Through December 31, 1996, the Company had
funded approximately $29,300,000 of Loans under the First
Union Strategic Alliance.
As a result of an affiliate of First Union's having a
beneficial interest in the Company, the Company has agreed to
engage solely in activities that are permissible for national
banks. Management does not believe that the banking laws,
orders and regulations significantly impact the manner in
which the Company intends to conduct or
41
<PAGE>
NATIONAL AUTO FINANCE COMPANY L.P.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
expand its business or product or service offerings, although
there can be no assurance that such laws, orders and
regulations will not have such an effect. An affiliate of
First Union, has also served as a placement agent and
underwriter for the Company's securitization and financing
transactions. The affiliate of First Union may, under certain
circumstances, cause the National Auto Partnership to redeem
the First Union Partner's interest.
Profits and losses of the ACCH Partnership and the National
Auto Partnership are allocated to the partners as follows: If
a net loss has been previously incurred, the income in future
periods goes first to the preferred equity partners and then
to the general partner up to the amount of their initial
contribution, provided, however, that losses related to the
Junior Subordinated Notes shall be allocated to the partners
bearing the risk of loss with respect to such notes. Next, a
seven percent return on the preferred equity partners' initial
investment is allocated to them. Any remainder is allocated
based on the partnership agreement.
(b) Summary of Significant Accounting Policies
A description of the significant accounting policies that are
followed by the Company is presented below:
(i) Principles of Consolidation
The consolidated financial statements include the
accounts of the National Auto Partnership and the
ACCH Partnership. All significant intercompany
accounts and transactions have been eliminated in
consolidation.
(ii) Cash and Cash Equivalents
The Company considers money market funds and all
other highly liquid debt instruments purchased with
an original maturity of less than three months to be
cash equivalents.
(iii) Loans
Loans are held for sale until packaged and sold
through asset-backed securitization. The Loans are
carried at the lower of their principal amount
outstanding (amortized cost), or market value. The
Loans, which mature at various dates through 2001,
are carried as either precomputed-interest or
simple-interest Loans. On precomputed (or discount)
Loans, the amount of cash loaned to the borrower is
less than the face amount of the Loan; the difference
represents unearned interest earned by the Company
over the life of the Loan. The face amount of a
simple-interest Loan equals the amount of cash
advanced to the borrower. Interest income on
simple-interest Loans is calculated based on the
principal outstanding. Precomputed-interest Loans are
carried at the aggregate of receivable payments less
unearned finance charges and the deferred Dealer
discount. Simple-interest Loans are reported at the
net amount
42
<PAGE>
NATIONAL AUTO FINANCE COMPANY L.P.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
advanced plus the accrued unpaid finance charges. All
Loans are at a fixed rate of interest and are secured
by automotive vehicles. The Company provides an
allowance for credit losses from the date of purchase
to the date of securitization.
Revenue from Loans is recognized based upon the
method of interest calculation of each Loan type.
Unearned finance income from precomputed-interest
Loans is accreted as interest income using a
level-yield interest method. Interest income from
simple-interest Loans is recognized as earned. The
related deferred Dealer discount income, for both
classifications, is recognized on the actuarial
method.
(iv) Securitization of Loans
The Company sells its Loans to the Master Trust
through Revolving Securitizations and recognizes a
gain at the time of sale of the Loans, based upon the
net present value of the Excess Spread Receivable
from the cash flow stream over the life of the Loans.
The "net present value" calculation is based upon a
discount rate which the Company believes is
consistent with industry practice and would be
applied by an unrelated purchaser of similar cash
flows. The Company retains a residual ownership
interest in the Loans sold through securitizations.
This residual interest represents the cash flows from
the securitized Loans, including principal and
interest, expected to remain after (i) all amounts
passed through to the securitization bond investors,
(ii) credit losses, (iii) lost interest attributable
to prepayments of Loans over the life of the
securitization, (iv) servicing fees, and (v) recovery
of the Spread Account. The residual interest is
discounted and carried on the balance sheet as Excess
Spread Receivable.
Periodically, the Master Trust may sell Loans to
another trust in a permanent securitization. At the
time of a Permanent Securitization, the Company
calculates an additional gain in the same manner
described above, based upon the terms of the
Permanent Securitization. Such gain (deferred income
from securitizations) is deferred and amortized over
the life of the Permanent Securitization using the
interest method.
The Company is the master servicer and servicer of
record for the securitized Loans and utilizes an
unrelated entity to provide the actual servicing. A
normal servicing fee of 2% is assumed in the gain
calculation; this amount is passed through to the
servicer of record by the Master Trust (see note 3).
Under the financial structures the Company has used
to date in its securitizations, certain excess cash
flows generated by the Loans are retained in a Spread
Account within the securitization trusts to provide
liquidity and credit enhancement. While the specific
terms and mechanics of the Spread Account can vary
slightly depending on each transaction, the Company's
agreements with FSA, the financial guaranty insurer
that has provided credit enhancements in connection
with the Company's
43
<PAGE>
NATIONAL AUTO FINANCE COMPANY L.P.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
securitizations generally provide that the Company is
not entitled to receive any excess cash flows unless
certain Spread Account balances have been attained
and/or the delinquency or losses related to the Loans
in the pool are below certain predetermined levels.
In the event delinquencies and losses on the Loans
exceed such levels, the terms of the securitization
may (i) require increased Spread Account balances to
be accumulated for the particular pool; (ii) restrict
the distribution to the Company of excess cash flows
associated with the pool in which asset-backed
securities are insured by FSA; and (iii) in certain
circumstances, require the transfer of servicing on
some or all of the Loans in FSA-insured pools to
another servicer. The imposition by FSA of any of
these conditions could materially adversely affect
the Company's liquidity and financial condition. As
of December 31, 1996, all FSA-insured pools were
performing within the guidelines required by their
related insurance policies.
(v) Excess Spread Receivable
The Excess Spread Receivable is established for each
securitization and represents the present value of
the gross interest income on the Loans securitized
less the pass-through interest paid to the
securitization bond investors, less provisions for
credit losses and prepayments over the life of the
respective securitization, less normal servicing fees
and recovery of the Spread Account. The Excess Spread
Receivable consists of the gain recognized on the
sale of Loans through securitization, deferred
servicing income and a deferred gain attributable to
the time value of money. Deferred servicing income is
recognized as earned over the life of the related
Loans in proportion to the principal paydown of the
Loans outstanding. The deferred gain (attributable to
the time value of money) is recognized as earned in
relation to the balance of securitized Loans
outstanding. The Excess Spread Receivable is reduced
by the receipt of cash from the trusts and the
amortization of the deferred gain and deferred
servicing costs. Deferred servicing costs are
amortized over the life of the related Loans as a
percentage of Loans outstanding. Prepayment and loss
experience rates are based upon the nature of the
receivables and historical information available to
the Company. Prepayment assumptions and credit loss
provisions are regularly reviewed. Deficiencies, if
any, in excess of estimated reserves are charged to
operations.
(vi) Spread Account
The Spread Account represents an
overcollateralization pool of the securitization
facility to protect securitization bond investors
against credit losses. Funds in excess of specified
percentages are available to be remitted to the
Company over the life of the securitization. For each
securitization, there is no recourse to the Company
beyond the amounts maintained in this account.
However, the Excess Spread Receivable noted above is
only available to the Company to the extent that
there is no impairment of the Spread Account that
relates to the securitization. The Company
44
<PAGE>
NATIONAL AUTO FINANCE COMPANY L.P.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
analyzes the Spread Account regularly to determine if
impairment exists. Impairment, if any, is charged to
operations.
(vii) Fixed Assets, Net
Purchases of capital equipment in excess of $500 are
capitalized and depreciated on a straight-line basis
over the estimated life of the equipment, which is
generally five years.
(viii) Deferred Financing and Stock Issuance Costs
In accordance with Financial Accounting Standards
Board ("FASB") Statement No. 7, "Development Stage
Enterprises," various organizational expenses of the
Company have been capitalized for these financial
statements and will be amortized over five years on a
straight-line basis.
A structuring fee incurred in connection with the
placement of a securitized credit facility was
capitalized and will be amortized on a straight-line
basis over the initial term of the facility, which is
three years.
A structuring fee incurred in connection with the
financing of the senior subordinated debt was
capitalized and will be amortized on a straight-line
basis over the initial term of the debt, which is
five years.
Costs associated with the issuance of Common Stock
were capitalized and charged against paid-in capital
upon completion of the Offering (see note 11).
(ix) Income Taxes
No provision or benefit for income taxes has been
included in these financial statements since taxable
income or loss passes through to, and is reportable
by, the partners individually. The Company's tax
returns are subject to examination by federal and
state taxing authorities.
(x) Use of Estimates
In preparing the financial statements, management is
required to make estimates and assumptions that
affect the reported amounts of assets, liabilities,
revenue and expense. The most significant of the
estimates relate to the components of the Excess
Spread Receivable and the related gain on sales of
Loans. Actual results could differ from these
estimates.
45
<PAGE>
NATIONAL AUTO FINANCE COMPANY L.P.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
(c) New Accounting Pronouncements
(i) Accounting for Stock-Based Compensation
On October 23, 1995, the FASB issued Statement of
Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" ("FAS 123"). This
Statement applies to all transactions in which an
entity acquires goods or services by issuing equity
instruments or by incurring liabilities where the
payment amounts are based on the entity's Common
Stock price. FAS 123 covers transactions with
employees and nonemployees and is applicable to both
public and nonpublic entities. Entities are allowed
for stock-based compensation to employees (1) to
continue to use the Accounting Principles Board
Opinion No. 25 method ("APB 25"), or (2) to adopt the
FAS 123 fair-value-based method. Once the method is
adopted, the method selected cannot be changed and
will be applicable to all of an entity's compensation
plans and transactions. At December 31, 1996, no
employee options or other stock-based instruments
were outstanding. In the first quarter of 1997,
management will determine whether to apply the
provisions of APB 25 or FAS 123 for stock-based
employee compensation issued (see note 11).
(ii) Accounting for Transfers of Servicing of Financial
Assets and Extinguishments of Liabilities
In June 1996, the FASB issued Statement of Financial
Accounting Standards No. 125, "Accounting for
Transfers of Servicing of Financial Assets and
Extinguishments of Liabilities" ("FAS 125"). FAS 125
provides accounting and reporting standards for
transfers and servicing of financial assets and
extinguishments of liabilities based on a
financial-components approach that focuses on
control. FAS 125 is effective for transfers and
servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996 and is
to be prospectively applied.
The Company's assessment of the adoption of FAS 125
indicates that the accounting for the revolving
securitizations will not change materially from the
present accounting. The Company believes that its
securitization process meets the requirements for
surrender of control over the securitized assets. In
addition, the Company believes that the gain
presently deferred at the time of permanent
securitization can be recognized under FAS 125.
FAS 125 requires that Excess Spread Receivables be
broken into their component parts and subsequently
measured for impairment based upon their fair value
at the measurement date. As such, adverse changes in
market conditions or assumptions will impact the
value of the Spread Account and the Excess Spread
Receivable in the future.
46
<PAGE>
NATIONAL AUTO FINANCE COMPANY L.P.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
(2) EXCESS SPREAD RECEIVABLE
The Excess Spread Receivable was as follows at December 31, 1996 and
1995:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Present value of expected future cash flows $ 19,463,126 7,038,961
Allowance for credit losses (4,280,019) (1,898,955)
---------- ----------
15,183,107 5,140,006
========== =========
Allowance for credit losses as a percentage of
Loans serviced 4.16% 5.3%
==== ===
Activity in the Excess Spread Receivable is as follows:
<CAPTION>
Year ended Year ended
December 31, December 31,
1996 1995
---- ----
<S> <C> <C>
Balance at beginning of period $ 5,140,006 -
Gain on sales of Loans 12,177,932 7,125,849
Cash received and other reductions during the
period net of amortization (2,134,831) (1,985,843)
----------- -----------
Balance at end of period $15,183,107 5,140,006
========== =========
</TABLE>
(3) SECURITIZATION OF LOANS
In January 1995, the Company began using a revolving securitization
facility pursuant to which the Company sells its Loans on a daily basis
to a bankruptcy-remote special purpose subsidiary trust ("Funding Trust
I"), which in turn transfers such Loans to the Master Trust. The
Company retains, through Funding Trust I, certain residual interests in
future excess cash flows from the Master Trust, in exchange for the
transfer of Loans to the Master Trust.
To date, the Master Trust has issued Class B Certificates, which are
variable funding (that is, revolving) certificates, and Class C
Certificates, representing a portion of such residual interest retained
by the Company. First Union owns 100% of the outstanding Class B
Certificates. The Company is required to maintain a minimum equity
position in the Master Trust of 10% of the net serviced receivables.
The Company has pledged a portion of the Class C Certificates, and a
cash reserve account to protect against future credit losses.
Interest on the Class B Certificates is charged (i) during the month in
which the Loan is sold to the Master Trust, at First Union's prime rate
of interest, and (ii) thereafter, based upon a formula of the London
Interbank Offered Rate ("LIBOR") plus between 75 and 300 basis points.
The amount of funds available under the Class B Certificates is
governed by a borrowing-base formula that provides availability as a
multiple of the overcollateralization capital pledged and is restricted
by a number of financial covenants. Since the Master Trust's borrowing
rates under the securitization are floating and the interest rates
charged on the Loans are fixed, increases in the interest rates charged
on the Master
47
<PAGE>
NATIONAL AUTO FINANCE COMPANY L.P.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
Trust's borrowings could have an effect both on cash flows from the
Master Trust to the Company and on the Company's reported net income.
In order to mitigate the negative impact of rising interest rates, the
Master Trust has entered into interest rate swap agreements which have
the effect of fixing the rates charged on a portion of the Master
Trust's indebtedness.
In November 1996 and 1995, the Master Trust refinanced its receivables
through the transfer of the related Loans to separate trusts, the
1996-1 Trust and the 1995-1 Trust, respectively (collectively, the
"Permanent Trusts"), which issued to various third-party investors
$62,000,000 and $38,000,000, respectively, of fixed-rate asset-backed
securities. The payment of the principal and interest on those
securities is insured by a payment guaranty issued by FSA. The proceeds
of the transactions were used by the Master Trust to repay the
then-outstanding balance of the Class B Certificates. The Master Trust
then commenced re-borrowing against the Class B Certificates to finance
its purchase of additional Loans from the Company through Funding Trust
I.
The Permanent Trust securitizations were accomplished by Funding Trust
I reacquiring the Loans and transferring them to the Permanent Trusts.
In addition to offering fixed-rate financing, the Permanent Trusts
securitizations as insured by FSA offered lower overcollateralization
levels than those required by the Master Trust facility. The Company
retains, through a second bankruptcy-remote special purpose subsidiary
trust ("Funding Trust II"), certain residual interests in future excess
cash flows from the Permanent Trusts.
The Master Trust organizational documents required the consent of all
certificate holders to transfer (sell) the Loans. In 1995 and 1996,
substantially all eligible Loans in the Master Trust were transferred
to the Permanent Trusts. The Permanent Trusts acquired the Loans from
the Master Trust at par with the net proceeds of the offering of
certificates by the Permanent Trusts, which are guaranteed by FSA.
The terms of the transactions between the Company and the Master Trust
which resulted in the issuance of the Class B and Class C Certificates
were negotiated by the Company with First Union. The terms of the
reacquisition of the Loans from the Master Trust were negotiated with
FSA, the certificate holders, and First Union at the time of
acquisition.
The Permanent Trusts' transactions did not affect the accounting sale
treatment previously applied to the transfers of the Loans to the
Master Trust, inasmuch as the transactions required the consent of all
certificate holders as provided in the Master Trust documents, and
therefore were consistent with the sale treatment.
48
<PAGE>
NATIONAL AUTO FINANCE COMPANY L.P.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
During the years ended December 31, 1996 and 1995, the following
activity took place with respect to securitization:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Original customer principal balance
of Loans sold, during the year $ 84,957,692 49,814,996
============= ==========
Gain on sales, during the year $ 12,177,932 7,125,849
============= ==========
Remaining principal balance of Loans
sold since inception, at period end $ 102,852,104 43,144,670
============= ==========
Weighted average coupon rate on Loans sold
during the year 18.9% 18.3%
==== ====
Weighted average original term (months) on Loans sold
during the year 51 53
== ==
Weighted average discount rate of excess spread 11% 11%
=== ===
</TABLE>
Both of the consolidated Partnerships utilize the securitization
facilities.
(4) JUNIOR SUBORDINATED NOTES
The debt is payable on January 31, 2002 to principal equity holders of
the Company and certain affiliates and carries interest at eight
percent. Interest expense recognized for this debt for the periods
ending December 31, 1996 and 1995 and for the period from October 1,
1994 (inception) to December 31, 1994 was $579,809, $497,260, and
$77,950, respectively.
(5) SENIOR SUBORDINATED DEBT
In August 1996, the Company completed a $12 million senior subordinated
debt financing with J.P. Morgan Investment Management, Inc., acting on
behalf of certain institutional investors (the "Morgan Group"). The
principal amount of the senior subordinated debt is due in August 2001
and carries a 10% coupon payable quarterly. Prior to the consummation
of the Offering, there was also an additional 3% deferred-interest
coupon that accrued interest on a compounded basis and was payable in
August 2006, but was converted into 470,000 shares of the Common Stock
upon the consummation of the Offering. During 1996, the Company accrued
the additional 3% interest on the deferred-interest coupon, which
amount totaled approximately $140,000 at December 31, 1996. On January
29, 1997, upon the conversion of such coupon to equity, such amounts
were accounted for as paid-in capital of NAFI (see note 11). The senior
subordinated debt generally prohibits the payment of dividends on
Common Stock following consummation of an initial public offering of
Common Stock so long as any amount remains outstanding on this debt.
49
<PAGE>
NATIONAL AUTO FINANCE COMPANY L.P.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
(6) OTHER OPERATING EXPENSES
Other operating expenses consisted of the following:
<TABLE>
<CAPTION>
Year ended Year ended October 1 to
December 31, December 31, December 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Dealer incentives $ 333,460 169,782 -
Legal expenses 164,316 102,706 5,815
Rent expenses 213,649 93,673 5,404
Travel and entertainment 455,705 233,061 25,657
Management fees 480,000 342,428 11,900
Other 999,665 368,506 34,825
---------- ------- ------
$ 2,646,795 1,310,156 83,601
=========== ========= ======
</TABLE>
Management fees represent fees paid to the General Partner of the
Partnerships for operational, legal, administrative and other services
provided to the Partnerships under a management agreement that expires
on December 21, 2015.
(7) COMMITMENTS AND CONTINGENCIES
The Company entered into various office and equipment leases for the
National Auto and the ACCH Partnerships. Future minimum rental payments
as of December 31, 1996, are as follows:
<TABLE>
<CAPTION>
Year ending Operating Capital
December 31, leases leases Total
------------ ------ ------ -----
<S> <C> <C> <C>
1997 $ 164,690 25,531 190,221
1998 172,922 25,531 198,453
1999 109,377 25,531 134,908
2000 99,836 17,020 116,856
2001 42,440 - 42,440
Thereafter - - -
----------- --------- ---------
Total lease commitment $ 589,265 93,613 682,878
=========== ========= =========
</TABLE>
Capital leases are included as a component of accounts payable and
accrued expenses.
(8) EMPLOYEE BENEFIT PLANS
The Company adopted a 401(k) profit sharing plan (the "Plan") in August
1996 that is intended to be a tax-qualified defined-contribution plan.
All employees of the Company, other than employees who work less than
1,000 hours per year, are eligible to participate in the Plan once they
have completed six months of continuous service.
A participating employee may contribute up to 15 percent of his/her
compensation, with a maximum contribution of $9,500 to the Plan on a
pretax basis. The Company may make a matching contribution to each
employee's account based on the amount of pretax contributions made by
the employee.
50
<PAGE>
NATIONAL AUTO FINANCE COMPANY L.P.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
Currently, the Company is allocating a 50% match of the first 6%
contributed by the employee, subject to certain legal limitations
imposed on tax-qualified plans. Matching contributions by the Company
are made regardless of profits and are allocated only to qualified
participants on a monthly basis.
Contributions to the Plan are invested in a variety of funds as
directed by the Plan participants. All pretax employee contributions to
the Plan are 100% vested and matching contributions by the Company are
vested at 20% per annum over a five-year period from the date the
employee joined the Plan. All active employees that had completed 1,000
hours of service as of August 30, 1996 were invited to join the Plan
and have matching-contribution vested rights predated to their date of
employment.
Generally, employees may not receive distributions from the Plan until
their retirement, death, certain disability or termination of
employment. Loans are prohibited by the Plan, although distributions
for certain hardship purposes are allowed in accordance with tax
regulations promulgated under the Code. All distributions for the Plan
are made in the form of a single lump-sum distribution.
(9) FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 107, "Disclosures about Fair Value of Financial
Instruments" ("FAS 107") as of January 1, 1995. FAS 107 defines the
fair value of a financial instrument as the amount at which the
instrument could be exchanged in a current transaction between willing
parties.
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments:
o Cash and cash equivalents have carrying amounts which
approximate fair value because of the short maturity of these
instruments.
o The fair value of notes payable is determined as the present
value of expected future cash flows discounted at the interest
rate currently offered to the Company, which approximates
rates currently offered for Loans of similar terms to
companies with comparable credit risk.
The carrying amount approximates fair value.
o The fair value of the Excess Spread Receivable: the fair value
is determined by taking the net present value of the expected
future cash flows discounted at a rate which approximates the
rate a willing investor would pay for a comparable
interest-only strip. The carrying amount approximates fair
value.
o Included in accrued interest payable at December 31, 1996 is
$140,000 of accrued interest related to a 3% deferred interest
coupon on Senior Subordinated Debt (see note 5). On January
29, 1997, such coupon was converted to 470,000 shares of
Common Stock valued at $8.50 per share (see note 11).
51
<PAGE>
NATIONAL AUTO FINANCE COMPANY L.P.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
(10) UNAUDITED PRO FORMA INFORMATION
Pro forma adjustments for income taxes represent the difference between
historical income taxes and income taxes that would have been reported
had the Partnerships filed income tax returns as taxable "C"
corporations for each of the years presented.
52
<PAGE>
NATIONAL AUTO FINANCE COMPANY L.P.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
The following summarizes historical and pro forma income taxes:
<TABLE>
<CAPTION>
Year ended Year ended Year ended
December 31, December 31, December 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Historical income taxes:
Federal $ - - -
State and local - - -
---------------- -------------- --------------
- - -
---------------- -------------- --------------
Pro forma income tax adjustments (unaudited):
Federal 1,526,988 963,555 -
State and local 161,682 102,874 -
---------------- -------------- --------------
1,688,670 1,066,429 -
---------------- -------------- --------------
$ 1,688,670 1,066,429 -
=============== ============== ==============
</TABLE>
If the Company terminated its partnership status (see note 11), as of
December 31, 1996 the Company would be required to record a deferred
tax liability for the tax effect of temporary differences between
financial reporting and tax reporting. The tax effect of such temporary
differences existing on December 31, 1996 consist of a deferred tax
liability of:
Securitized assets sold for financial
statement purposes, financed for
income tax purposes $4,866,569
Fixed assets 8,567
Other 14,769
----------
$4,889,905
==========
53
<PAGE>
NATIONAL AUTO FINANCE COMPANY L.P.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
Pro forma income taxes differ from the amounts computed by applying
federal statutory rates due to:
<TABLE>
<CAPTION>
Year Year Year
ended ended ended
December 31, December 31, December 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Pro forma provision computed at
federal statutory rate of 34% $1,526,988 1,115,481 (161,404)
State income taxes, net of federal
tax benefit 161,682 119,094 (17,232)
Valuation allowance - (178,045) 178,045
Other - 9,899 591
------------- -------------- -------------
1,688,670 1,066,429 -
============= ============== =============
</TABLE>
(11) SUBSEQUENT EVENTS
On January 29, 1997, National Auto Finance Company, Inc. ("NAFI")
effected an initial public offering of 2,000,000 shares of Common Stock
through a transaction registered with the Securities and Exchange
Commission, i.e., the "Offering."
Immediately prior to the settlement with respect to the sale of the
shares of Common Stock pursuant to the Offering, the respective assets
and liabilities of the National Auto and ACCH Partnerships were
transferred to NAFI in exchange for all the Common Stock then
outstanding and all of the preferred stock of NAFI then outstanding
(such transaction being referred to herein as the "Reorganization").
Specifically, the Reorganization entailed the following transfers:
(a) The partners of the ACCH Partnership (other than the National
Auto Partnership) transferred all of their partner interests in
the ACCH Partnership to the National Auto Partnership in
exchange for limited partner interests in the National Auto
Partnership.
(b) The National Auto Partnership transferred all of its assets,
subject to all of its liabilities, to NAFI in exchange for
4,229,000 shares of Common Stock (which, together with the 1,000
shares of Common Stock acquired by the National Auto Partnership
in connection with the initial organization of NAFI in October
1996, increased the National Auto Partnership's holdings to a
total of 4,230,000 shares of Common Stock) and all of the
outstanding preferred stock of NAFI.
(c) Upon the transfer of the assets of the National Auto Partnership
to NAFI, NAFI issued to the Morgan Group 470,000 shares of
Common Stock (representing 10% of the outstanding Common Stock
immediately following the Reorganization) in exchange for the
Deferred Additional Interest Notes.
The National Auto Partnership became the owner of preferred stock of
NAFI. The terms of the Preferred Stock are as follows: 7% cumulative
dividend, payable quarterly; callable at par plus accrued dividends at
the option of NAFI; nonvoting, except under certain circumstances; and
mandatory redemption eight years from the issue date.
54
<PAGE>
NATIONAL AUTO FINANCE COMPANY L.P.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
On February 24, 1997, the underwriters of the initial public offering
of NAFI exercised their over-allotment option and NAFI sold an
additional 300,000 shares of Common Stock to the public.
The Board of Directors of NAFI adopted a share incentive plan (the
"1996 Share Incentive Plan"). The 1996 Share Incentive Plan is intended
to provide incentives which will attract, retain and motivate highly
competent persons, each of whom will contribute to the success and
future growth and profitability of NAFI, as executive management,
employees and directors of NAFI and of any parent or subsidiary of
NAFI, by providing them the opportunity to acquire shares of Common
Stock or to receive monetary payments based on the value of such shares
pursuant to certain benefits contemplated by the 1996 Share Incentive
Plan. Furthermore, the 1996 Share Incentive Plan is intended to assist
in aligning the interests of NAFI's executive management, employees and
directors with those if its stockholders.
The 1996 Share Incentive Plan provides for the granting of certain
benefits in any one or a combination of (i) stock options, (ii) stock
appreciation rights, (iii) stock awards, (iv) performance awards and
(v) stock units. The aggregate number of shares of Common Stock that
may be subject to such benefits, including stock options, is 500,000
shares of Common Stock (subject to adjustment in the event of a merger,
consolidation, reorganization, recapitalization, stock dividend, stock
split, reverse stock split, split up, spinoff, combination of shares,
exchange of shares, dividend in kind or other like change in capital
structure or distribution).
55
<PAGE>
NATIONAL AUTO FINANCE COMPANY L.P.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
(12) SELECTED QUARTERLY RESULTS (UNAUDITED)
The following tables summarize the quarterly results of operations for
the periods indicated.
<TABLE>
<CAPTION>
1996 Year ended
Three months ended December 31,
-------------------------------------------------------------------- ---------------
March 31 June 30 September 30 December 31 1996
-------- ------- ------------ ----------- ----
<S> <C> <C> <C> <C> <C>
Gain on sale of Loans $2,097,247 2,530,932 3,560,294 3,989,459 12,177,932
Other revenue 494,100 513,533 659,851 946,175 2,613,659
---------------- -------------- -------------- -------------- --------------
Total revenue 2,591,347 3,044,465 4,220,145 4,935,634 14,791,591
Total expenses 1,789,284 2,178,331 2,786,528 3,546,305 10,300,448
---------------- -------------- -------------- -------------- --------------
Net income $802,063 866,134 1,433,617 1,389,329 4,491,143
================ ============== ============== ============== ==============
Pro forma income
before income taxes $802,063 866,134 1,433,617 1,389,329 4,491,143
Pro forma income taxes
301,816 325,927 539,470 521,457 1,688,670
---------------- -------------- -------------- -------------- --------------
Pro forma net income $500,247 540,207 894,147 867,872 2,802,473
================ ============== ============== ============== ==============
<CAPTION>
1995 Year ended
Three months ended December 31,
---------------------------------------------------------------------- ---------------
March 31 June 30 September 30 December 31 1995
-------- ------- ------------ ----------- ----
<S> <C> <C> <C> <C> <C>
Gain on sale of Loans $1,763,672 1,732,447 2,063,115 1,566,615 7,125,849
Other revenue 17,634 92,249 178,261 396,986 685,130
---------------- -------------- -------------- -------------- --------------
Total revenue 1,781,306 1,824,696 2,241,376 1,963,601 7,810,979
Total expenses 856,168 1,058,182 1,183,623 1,432,180 4,530,153
---------------- -------------- -------------- -------------- --------------
Net income $925,138 766,514 1,057,753 531,421 3,280,826
================ ============== ============== ============== ==============
Pro forma income
before income taxes $925,138 766,514 1,057,753 531,421 3,280,826
Pro forma income taxes 173,273 293,547 398,032 201,577 1,066,429
---------------- -------------- -------------- -------------- --------------
Pro forma net income $751,865 472,967 659,721 329,844 2,214,397
================ ============== ============== ============== ==============
</TABLE>
56
<PAGE>
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
57
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required to be furnished pursuant to this item with
respect to Directors of the Company will be set forth under the caption
"Election of Directors" in the registrant's proxy statement (the "Proxy
Statement"), which Proxy Statement the Company presently intends will be filed
with the Commission not later than 120 days after the end of the Company's
fiscal year ended December 31, 1996, and which will be furnished to stockholders
in connection with the solicitation of proxies by the Company's Board of
Directors for use at the 1997 Annual Meeting of Stockholders to be held in June
1997, and is incorporated herein by reference, and the information with respect
to Executive Officers of the Registrant is set forth, pursuant to General
Instruction G(3) of Form 10-K and Instruction 3 to Item 401(b) of Regulation S-K
of the Exchange Act, under Part I of this Report under a like caption.
ITEM 11. EXECUTIVE COMPENSATION.
The information required to be furnished pursuant to this item will be
set forth under the caption "Executive Compensation" in the Company's Proxy
Statement, and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required to be furnished pursuant to this item will be
set forth under the captions "Voting Securities" and "Security Ownership of
Management" in the Proxy Statement, and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required to be furnished pursuant to this caption will
be set forth under the caption "Certain Transactions" of the Proxy Statement,
and is incorporated herein by reference.
58
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
(1) Financial Statements
Audited financial statements required by this item
are presented and listed in Part II, Item 8.
(2) Financial Statement Schedules
Financial Statement Schedules ordinarily required to
be filed by Item 8 of Form 10-K are omitted because
the information is inapplicable.
(3) Executive Compensatory Plans or Arrangements
-- 1996 Share Incentive Plan.
-- Form of 401(k) Plan.
-- Employment Agreement, dated as of July 1,
1996, between National Auto Finance Company,
Inc. and William G. Magro.
-- Employment Agreement, dated as of September
16, 1995, between National Auto Finance
Company, Inc. and Roy E. Tipton.
-- Employment Agreement, dated as of October
19, 1995, between National Auto Finance
Company, Inc. and Blane H. McDonald.
-- Employment Agreement, dated as of December
31, 1996, between National Auto Finance
Company, Inc. and Stephen R. Stack.
(b) Reports on Form 8-K
No Current Reports on Form 8-K were filed during the last
quarter of the period covered by this Annual Report on Form
10-K. On March 7, 1997, a Current Report on Form 8-K with
respect to the Company's year-end results for the year ended
December 31, 1996 was filed with the Commission.
59
<PAGE>
(c) Exhibits.
With the exception of Exhibits 23.1 and 27.1, each of which is
filed herewith, all of the below-listed Exhibits were filed by
the Company with the Commission as Exhibits to its
Registration Statement on Form S-1, dated October 8, 1996, as
amended on November 25, 1996, January 9, 1997 and January 28,
1997, and declared effective by the Commission on January 29,
1997, and are incorporated by reference from such Registration
Statement.
3.1 Certificate of Incorporation of the Company.
3.1-1 Certificate of the Designations, Preferences and
Rights of the Series A Preferred Stock of the
Company.
3.2 Form of By-laws of the Company.
4.1 Specimen Certificate of Common Stock.
10.1 Second Amended and Restated Agreement of Limited
Partnership of National Auto Finance Company L.P.,
dated as of September 1, 1995, by and among National
Auto Finance Corporation, The S Associates Limited
Partnership, The O Associates Limited Partnership,
Stephen L. Gurba, Craig Schnee, Roy E. Tipton, Blane
H. McDonald, Michael B. Colley, Irwin I. Kent,
William G. Magro, Kevin G. Adams, Kamala R. Chapman,
Keith B. Stein, Colleen S. McMillen, Richard H.
Steffer, Tim Rooney, Lynn Dunham-Sirota and IronBrand
Capital, LLC.
10.2 1996 Share Incentive Plan.
10.3 Form of 401(k) Plan.
10.4 Employment Agreement, dated as of July 1, 1996,
between National Auto Finance Company, Inc. and
William G. Magro.
10.5 Employment Agreement, dated as of September 16, 1995,
between National Auto Finance Company, Inc. and Roy
E. Tipton.
10.6 Employment Agreement, dated as of October 19, 1995,
between National Auto Finance Company, Inc. and Blane
H. McDonald.
10.7 Promissory Note, dated October 31, 1994, payable by
National Auto Finance Company L.P. to the order of
Gary L. Shapiro.
10.8 Promissory Note, dated October 6, 1994, payable by
National Auto Finance Company L.P. to the order of
Edgar A. Otto.
10.9 Promissory Note, dated November 8, 1994, payable by
National Auto Finance Company L.P. to the order of
Stephen L. Gurba.
60
<PAGE>
10.10 Promissory Note, dated March 27, 1995, payable by
National Auto Finance Company L.P. to the order of
Nova Financial Corporation.
10.11 Promissory Note, dated May 1, 1995, payable by
National Auto Finance Company L.P. to the order of
Nova Corporation.
10.12 Note Purchase Agreement, dated as of August 9, 1996,
between National Auto Finance Company L.P. and Morgan
Guaranty Trust Company of New York, as Trustee of the
Commingled Pension Trust Fund (Multi-Market Special
Investment Fund II) of Morgan Guaranty Trust Company
of New York, Morgan Guaranty Trust Company of New
York, as Trustee of the Multi-Market Special
Investment Trust Fund of Morgan Guaranty Trust
Company of New York and Morgan Guaranty Trust
Company, as investment manager and agent for the
Alfred P. Sloan Foundation (Multi-Market Account).
10.13 Promissory Note (No. 101), dated August 9, 1996,
payable by National Auto Finance Company L.P. to the
order of Kelly & Co., as nominee for Morgan Guaranty
Trust Company of New York.
10.14 Promissory Note (No. 201), dated August 9. 1996,
payable by National Auto Finance Company L.P. to the
order of Kelly & Co., as nominee for Morgan Guaranty
Trust Company of New York.
10.15 Promissory Note (No. 102), dated August 9, 1996,
payable by National Auto Finance Company L.P. to the
order of Kelly & Co., as nominee for Morgan Guaranty
Trust Company of New York.
10.16 Registration Rights Agreement, dated as of August 9,
1996, among National Auto Finance Company Inc. and
Morgan Guaranty Trust Company of New York, as Trustee
of the Commingled Pension Trust Fund (Multi-Market
Special Investment Fund II) of Morgan Guaranty Trust
Company of New York, Morgan Guaranty Trust Company of
New York, as Trustee of the Multi-Market Special
Investment Trust Fund of Morgan Guaranty Trust
Company of New York and Morgan Guaranty Trust
Company, as investment manager and agent for the
Alfred P. Sloan Foundation (Multi-Market Account).
10.17 Receivables Purchase Agreement, dated as of December
8. 1994, by and between National Auto Finance Company
L.P., as Seller, and NAFCO Funding Trust, as
Purchaser.
10.18 Promissory Note, dated December 8, 1994, payable by
NAFCO Funding Trust to the order of National Auto
Finance Company L.P.
10.19 NAFCO Auto Receivables Master Trust Pooling and
Administration Agreement, dated as of December 8,
1994, among NAFCO Funding Trust, as Transferor,
National Auto Finance Company L.P., as the
Administrator, and Bankers Trust Company, as Trustee.
61
<PAGE>
10.20 Series 1994 R, Class B Supplement, dated as of
December 8, 1994, to the Pooling and Administration
Agreement, dated as of December 8, 1994, among NAFCO
Funding Trust, as Transferor, National Auto Finance
Company L.P., as the Administrator, and Bankers Trust
Company, as Trustee.
10.21 Trust Agreement, dated as of October 5, 1994, between
National Auto Finance Corporation and Bankers Trust.
10.22 First Amended and Restated Trust Agreement of NAFCO
Funding Trust, dated as of December 8, 1994, between
National Auto Finance Company L.P., as Depositor, The
Chase Manhattan Bank (USA), as Owner Trustee and Gary
L. Shapiro and Edgar A. Otto, as Co-Trustees.
10.23 Servicing Agreement, dated July 25, 1994, by and
between World Omni Financial Corp. and National Auto
Finance Corporation.
10.24 Certificate Purchase Agreement, dated as of December
8, 1994, among NAFCO Funding Trust, National Auto
Finance Company L.P., as Initial Administrator and
First Union National Bank of North Carolina.
10.25 Management Agreement, dated as of December 29, 1994,
by and between National Auto Finance Company L.P. and
National Auto Finance Corporation.
10.25-1 First Amendment of Management Agreement, dated as of
January 1, 1996, by and between National Auto Finance
Company L.P., Auto Credit Clearinghouse L.P. and
National Auto Finance Corporation.
10.26 Services Agreement, dated as of December 29, 1994, by
and between National Auto Finance Corporation and
National Financial Corporation.
10.26-1 First Amendment to Services Agreement, dated as of
January 1, 1996, by and between National Auto Finance
Corporation and National Financial Corporation.
10.27 Pooling and Servicing Agreement, dated as of October
1, 1995, by and among National Financial Auto Funding
Trust, as Transferor, National Auto Finance Company
L.P., as Master Servicer, and Harris Trust and
Savings Bank, as Trustee.
10.28 Assignment Agreement, dated as of October 1, 1995,
between Bankers Trust Company, as Trustee, and
National Financial Auto Funding Trust.
10.29 Transfer Agreement No. 1, dated as of October 1,1995,
between National Financial Auto Funding Trust and
Harris Trust and Savings Bank.
62
<PAGE>
10.30 Insurance and Indemnity Agreement, dated as of
November 21, 1995, among Financial Security Assurance
Inc., National Financial Auto Funding Trust and
National Auto Finance Company L.P.
10.31 Indemnification Agreement, dated as of November 21,
1995, among Financial Security Assurance Inc.,
National Financial Auto Funding Trust and First Union
Capital Markets Corp.
10.32 Master Spread Account Agreement, dated as of November
21, 1995, among National Financial Auto Funding
Trust, Financial Security Assurance Inc. and Harris
Trust and Savings Bank, as Trustee and as Collateral
Agent.
10.33 Financial Guaranty Insurance Policy (Policy No.:
50522-N), together with Endorsement No. 1 thereto,
dated November 13, 1996, issued by Financial Security
Assurance Inc. in favor of Harris Trust and Savings
Bank, as trustee for the benefit of the Certificate
Holders.
10.34 Amended and Restated Servicing Agreement, dated as of
December 5, 1994, by and between World Omni Financial
Corp. and National Auto Finance Company L.P.
10.35 Assignment and Assumption Agreement, dated as of
October 23, 1995, among World Omni Financial Corp.
and Omni Financial Services of America, Inc.
10.36 Supplement to the Amended and Restated Servicing
Agreement, dated as of December 5, 1994, as amended
as of October 1, 1995, between World Omni Financial
Corp. ("WOFC"), as Servicer, and National Auto
Finance Company L.P. ("NAFCO" ) is made as of
November 21, 1995 by and between Omni Financial
Services of America, Inc., as assignee of WOFC
("Servicer") and NAFCO.
10.37 Custodial Agreement, dated as of November 21, 1995,
by and between Omni Financial Services of America,
Inc., as custodian, and National Auto Finance Company
L.P. as Master Servicer.
10.38 Placement Agent Agreement, dated as of November 20,
1995, between First Union Capital Markets Corp. and
National Financial Auto Funding Trust.
10.39 Amendment, dated as of November 21, 1995, to the
First Amended and Restated Trust Agreement of NAFCO
Funding Trust, dated as of December 8, 1994, among
National Auto Finance Company L.P., as Depositor, The
Chase Manhattan Bank (USA), as Owner Trustee, and
Gary L. Shapiro, Edgar Otto A. and Andrew Stidd, as
Co-Trustees.
10.40 Form of Indemnification Agreement, dated as of
February 4, 1997, among National Auto Finance
Company, Inc. and each of the Officers and Directors
thereof.
63
<PAGE>
10.41 Assignment and Assumption Agreement, dated as of
October 7, 1996, between National Auto Finance
Company, Inc. and National Auto Finance Company L.P.
10.42 Pooling and Servicing Agreement, dated as of October
21, 1996, by and among National Financial Auto
Funding Trust, as Transferor, National Auto Finance
Company L.P., as Servicer, and Harris Trust and
Savings Bank, as Trustee.
10.43 Purchase and Contribution Agreement, dated as of
October 21, 1996, by and between National Auto
Finance Company L.P. and National Financial Auto
Funding Trust.
10.44 Assignment Agreement, dated as of October 21, 1996,
between Bankers Trust Company and National Financial
Auto Funding Trust 11.
10.45 Master Spread Account Agreement, dated as of November
13, 1996, among National Financial Auto Funding
Trust, Financial Security Assurance Inc. and Harris
Trust and Savings Bank, as Trustee and Collateral
Agent.
10.46 Insurance and Indemnity Agreement, dated as of
November 13, 1996, among Financial Security Assurance
Inc., National Financial Auto Funding Trust and
National Auto Finance Company L.P.
10.47 Sale Agreement, dated as of October 21, 1996, by and
between National Financial Auto Funding Trust and
National Financial Auto Funding Trust II.
10.48 Purchase Agreement, dated as of October 21. 1996, by
and between Auto Credit Clearinghouse L.P. and
National Auto Finance Company L.P.
10.49 Supplement to the Amended and Restated Servicing
Agreement, dated as of December 5, 1994, as amended
as of October 1, 1995 (the "Servicing Agreement"),
between World Omni Financial Corp (WOFC) and National
Auto Finance Company L.P. (NAFCO) is made as of
November 13, 1996 by and between Omni Financial
Services of America, Inc. as assignee of WOFC, and
NAFCO.
10.50 Transfer Agreement No. 1, dated as of November 13,
1996, by National Financial Auto Funding Trust as
Transferor to Harris Trust and Savings Bank, as
Trustee, pursuant to a Pooling and Servicing
Agreement, dated as of October 21, 1996.
10.51 Form of Financial Guaranty Insurance Policy issued by
Financial Security Assurance Inc.
10.52 Employment Agreement, dated as of December 31, 1996,
between National Auto Finance Company, Inc. and
Stephen R. Stack.
64
<PAGE>
10.53 Amended and Restated Promissory Note, dated as of
January 3, 1997, payable by National Auto Finance
Company L.P. to the order of Gary L. Shapiro.
10.54 Amended and Restated Promissory Note, dated as of
January 3, 1997, payable by National Auto Finance
Company L.P. to the order of Edgar A. Otto.
10.55 Amended and Restated Promissory Note, dated as of
January 3, 1997, payable by National Auto Finance
Company L.P. to the order of Stephen L. Gurba.
10.56 Amended and Restated Promissory Note, dated as of
January 3, 1997, payable by National Auto Finance
Company L.P. to the order of Nova Financial
Corporation.
10.57 Amended and Restated Promissory Note, dated as of
January 3, 1997, payable by National Auto Finance
Company L.P. to the order of Nova Corporation.
10.58 Form of First Amendment, dated as of December 1,
1996, to Second Amended and Restated Limited
Partnership of National Auto Finance Company L.P.
10.59 Form of Amendment to Assignment and Assumption
Agreement, dated as of January 27, 1997.
10.60 Referral Agreement, dated as of April 15, 1996, by
and between First Union National Bank of North
Carolina and Auto Credit Clearinghouse L.P.
10.61 Referral Contract, dated as of November 14, 1996, by
and between Community Bank and Auto Credit
Clearinghouse L.P.
23.1 Consent of KPMG Peat Marwick LLP (referencing KPMG
Peat Marwick LLP's reports incorporated by reference
in the Company's Registration Statement on Form S-8
(File No. 333-23649)(the "S-8"), which reports were
incorporated by reference in the S-8 from the
Company's Registration Statement on Form S-1 (File
No.333-13367) and Current Report on Form 8-K (File
No. 0-22067)).
27.1 Financial Data Schedule for the year ended December
31, 1996.
(d) Financial Statement Schedules:
All Schedules have been omitted because the information is not
applicable or is presented in the financial statements or the
notes thereto.
65
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NATIONAL AUTO FINANCE COMPANY, INC.
March 28, 1997 By:/s/ Keith B. Stein
-----------------------
Name: Keith B. Stein
Title: Vice Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Gary L. Shapiro Chief Executive Officer March 28, 1997
- ----------------------------------------- and Chairman of the Board
Gary L. Shapiro (principal executive officer)
/s/ Kevin G. Adams Vice President and Chief Financial March 28, 1997
- ----------------------------------------- Officer (principal financial
Kevin G. Adams and accounting officer)
/s/ Keith B. Stein Vice Chairman and Director March 28, 1997
- -----------------------------------------
Keith B. Stein
/s/ Edgar A. Otto Director March 28, 1997
- -----------------------------------------
Edgar A. Otto
/s/ Roy E. Tipton Director March 28, 1997
- -----------------------------------------
Roy E. Tipton
/s/ Peter Offermann Director March 28, 1997
- -----------------------------------------
Peter Offermann
</TABLE>
66
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION*
- ------ ------------
3.1 Certificate of Incorporation of the Company.
3.1-1 Certificate of the Designations, Preferences and Rights
of the Series A Preferred Stock of the Company.
3.2 Form of By-laws of the Company.
4.1 Specimen Certificate of Common Stock.
10.1 Second Amended and Restated Agreement of Limited
Partnership of National Auto Finance Company L.P.,
dated as of September 1, 1995, by and among National
Auto Finance Corporation, The S Associates Limited
Partnership, The O Associates Limited Partnership,
Stephen L. Gurba, Craig Schnee, Roy E. Tipton, Blane
H. McDonald, Michael B. Colley, Irwin I. Kent,
William G. Magro, Kevin G. Adams, Kamala R.
Chapman, Keith B. Stein, Colleen S. McMillen, Richard
H. Steffer, Tim Rooney, Lynn Dunham-Sirota and
IronBrand Capital, LLC.
10.2 1996 Share Incentive Plan.
10.3 Form of 401(k) Plan.
10.4 Employment Agreement, dated as of July 1, 1996,
between National Auto Finance Company, Inc. and
William G. Magro.
10.5 Employment Agreement, dated as of September 16,
1995, between National Auto Finance Company, Inc.
and Roy E. Tipton.
10.6 Employment Agreement, dated as of October 19, 1995,
between National Auto Finance Company, Inc. and
Blane H. McDonald.
- --------
* With the exception of Exhibits 23.1 and 27.1, each of which is
filed herewith, all of the below-listed Exhibits were filed by
the Company with the Commission as Exhibits to its
Registration Statement on Form S-1, dated October 8, 1996, as
amended on November 25, 1996, January 9, 1997 and January 28,
1997, and declared effective by the Commission on January 29,
1997, and are incorporated by reference from such Registration
Statement.
67
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
10.7 Promissory Note, dated October 31, 1994, payable by
National Auto Finance Company L.P. to the order of
Gary L. Shapiro.
10.8 Promissory Note, dated October 6, 1994, payable by
National Auto Finance Company L.P. to the order of
Edgar A. Otto.
10.9 Promissory Note, dated November 8, 1994, payable by
National Auto Finance Company L.P. to the order of
Stephen L. Gurba.
10.10 Promissory Note, dated March 27, 1995, payable by
National Auto Finance Company L.P. to the order of
Nova Financial Corporation.
10.11 Promissory Note, dated May 1, 1995, payable by
National Auto Finance Company L.P. to the order of
Nova Corporation.
10.12 Note Purchase Agreement, dated as of August 9, 1996,
between National Auto Finance Company L.P. and
Morgan Guaranty Trust Company of New York, as
Trustee of the Commingled Pension Trust Fund (Multi-
Market Special Investment Fund II) of Morgan Guaranty
Trust Company of New York, Morgan Guaranty Trust
Company of New York, as Trustee of the Multi-Market
Special Investment Trust Fund of Morgan Guaranty
Trust Company of New York and Morgan Guaranty
Trust Company, as investment manager and agent for
the Alfred P. Sloan Foundation (Multi-Market Account).
10.13 Promissory Note (No. 101), dated August 9, 1996,
payable by National Auto Finance Company L.P. to the
order of Kelly & Co., as nominee for Morgan Guaranty
Trust Company of New York.
10.14 Promissory Note (No. 201), dated August 9. 1996,
payable by National Auto Finance Company L.P. to the
order of Kelly & Co., as nominee for Morgan Guaranty
Trust Company of New York.
10.15 Promissory Note (No. 102), dated August 9, 1996,
payable by National Auto Finance Company L.P. to the
order of Kelly & Co., as nominee for Morgan Guaranty
Trust Company of New York.
10.16 Registration Rights Agreement, dated as of August 9,
1996, among National Auto Finance Company Inc. and
Morgan Guaranty Trust Company of New York, as
68
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
Trustee of the Commingled Pension Trust Fund
(Multi-Market Special Investment Fund II) of Morgan
Guaranty Trust Company of New York, Morgan Guaranty
Trust Company of New York, as Trustee of the
Multi-Market Special Investment Trust Fund of
Morgan Guaranty Trust Company of New York and
Morgan Guaranty Trust Company, as investment
manager and agent for the Alfred P. Sloan
Foundation (Multi-Market Account).
10.17 Receivables Purchase Agreement, dated as of December
8. 1994, by and between National Auto Finance
Company L.P., as Seller, and NAFCO Funding Trust,
as Purchaser.
10.18 Promissory Note, dated December 8, 1994, payable by
NAFCO Funding Trust to the order of National Auto
Finance Company L.P.
10.19 NAFCO Auto Receivables Master Trust Pooling and
Administration Agreement, dated as of December 8,
1994, among NAFCO Funding Trust, as Transferor,
National Auto Finance Company L.P., as the
Administrator, and Bankers Trust Company, as Trustee.
10.20 Series 1994-R, Class B Supplement dated as of
December 8, 1994, to the Pooling and Administration
Agreement, dated as of December 8, 1994, among
NAFCO Funding Trust, as Transferor, National Auto
Finance Company L.P., as the Administrator, and
Bankers Trust Company, as Trustee.
10.21 Trust Agreement, dated as of October 5, 1994, between
National Auto Finance Corporation and Bankers Trust.
10.22 First Amended and Restated Trust Agreement of
NAFCO Funding Trust, dated as of December 8, 1994,
between National Auto Finance Company L.P., as
Depositor, The Chase Manhattan Bank (USA), as Owner
Trustee and Gary L. Shapiro and Edgar A. Otto, as Co-
Trustees.
10.23 Servicing Agreement, dated July 25, 1994, by and
between World Omni Financial Corp. and National Auto
Finance Corporation.
10.24 Certificate Purchase Agreement, dated as of December
8, 1994, among NAFCO Funding Trust, National Auto
Finance Company L.P., as Initial Administrator and
First Union National Bank of North Carolina.
69
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
10.25 Management Agreement, dated as of December 29,
1994, by and between National Auto Finance Company
L.P. and National Auto Finance Corporation.
10.25-1 First Amendment of Management Agreement, dated as
of January 1, 1996, by and between National Auto
Finance Company L.P., Auto Credit Clearinghouse L.P.
and National Auto Finance Corporation.
10.26 Services Agreement, dated as of December 29, 1994, by
and between National Auto Finance Corporation and
National Financial Corporation.
10.26-1 First Amendment to Services Agreement, dated as of
January 1, 1996, by and between National Auto Finance
Corporation and National Financial Corporation.
10.27 Pooling and Servicing Agreement, dated as of October
1, 1995, by and among National Financial Auto Funding
Trust, as Transferor, National Auto Finance Company
L.P, as Master Servicer, and Harris Trust and Savings
Bank, as Trustee.
10.28 Assignment Agreement, dated as of October 1, 1995,
between Bankers Trust Company, as Trustee, and
National Financial Auto Funding Trust.
10.29 Transfer Agreement No. 1, dated as of October 1,1995,
between National Financial Auto Funding Trust and
Harris Trust and Savings Bank.
10.30 Insurance and Indemnity Agreement, dated as of
November 21, 1995, among Financial Security
Assurance Inc., National Financial Auto Funding Trust
and National Auto Finance Company L.P.
10.31 Indemnification Agreement, dated as of November 21,
1995, among Financial Security Assurance Inc., National
Financial Auto Funding Trust and First Union Capital
Markets Corp.
10.32 Master Spread Account Agreement, dated as of
November 21, 1995, among National Financial Auto
Funding Trust, Financial Security Assurance Inc. and
Harris Trust and Savings Bank, as Trustee and as
Collateral Agent.
10.33 Financial Guaranty Insurance Policy (Policy No.: 50522-
N), together with Endorsement No. 1 thereto, dated
November 13, 1996, issued by Financial Security
70
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
Assurance Inc. in favor of Harris Trust and Savings
Bank, as trustee for the benefit of the Certificate
Holders.
10.34 Amended and Restated Servicing Agreement, dated as of
December 5, 1994, by and between World Omni
Financial Corp. and National Auto Finance Company
L.P.
10.35 Assignment and Assumption Agreement, dated as of
October 23, 1995, among World Omni Financial Corp.
and Omni Financial Services of America, Inc.
10.36 Supplement to the Amended and Restated Servicing
Agreement, dated as of December 5, 1994, as amended
as of October 1, 1995, between World Omni Financial
Corp. ("WOFC"), as Servicer, and National Auto
Finance Company L.P. ("NAFCO") is made as of
November 21, 1995 by and between Omni Financial
Services of America, Inc., as assignee of WOFC
("Servicer") and NAFCO.
10.37 Custodial Agreement, dated as of November 21, 1995,
by and between Omni Financial Services of America,
Inc., as custodian, and National Auto Finance Company
L.P. as Master Servicer.
10.38 Placement Agent Agreement, dated as of November 20,
1995, between First Union Capital Markets Corp. and
National Financial Auto Funding Trust.
10.39 Amendment, dated as of November 21, 1995, to the
First Amended and Restated Trust Agreement of
NAFCO Funding Trust, dated as of December 8, 1994,
among National Auto Finance Company L.P., as
Depositor, The Chase Manhattan Bank (USA), as Owner
Trustee, and Gary L. Shapiro, Edgar A. Otto and
Andrew Stidd, as Co-Trustees.
10.40 Form of Indemnification Agreement, dated as of
February 4, 1997, by and among National Auto Finance
Company, Inc. and each of the Officers and Directors
thereof.
10.41 Assignment and Assumption Agreement, dated as of
October 7, 1996, between National Auto Finance
Company, Inc. and National Auto Finance Company
L.P.
71
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
10.42 Pooling and Servicing Agreement, dated as of October
21, 1996, by and among National Financial Auto
Funding Trust, as Transferor, National Auto Finance
Company L.P., as Servicer, and Harris Trust and
Savings Bank, as Trustee.
10.43 Purchase and Contribution Agreement, dated as of
October 21, 1996, by and between National Auto
Finance Company L.P. and National Financial Auto
Funding Trust.
10.44 Assignment Agreement, dated as of October 21, 1996,
between Bankers Trust Company and National Financial
Auto Funding Trust II.
10.45 Master Spread Account Agreement, dated as of
November 13, 1996, among National Financial Auto
Funding Trust, Financial Security Assurance Inc. and
Harris Trust and Savings Bank, as Trustee and Collateral
Agent.
10.46 Insurance and Indemnity Agreement, dated as of
November 13, 1996, among Financial Security
Assurance Inc., National Financial Auto Funding Trust
and National Auto Finance Company L.P.
10.47 Sale Agreement, dated as of October 21, 1996, by and
between National Financial Auto Funding Trust and
National Financial Auto Funding Trust II.
10.48 Purchase Agreement, dated as of October 21. 1996, by
and between Auto Credit Clearinghouse L.P. and
National Auto Finance Company L.P.
10.49 Supplement to the Amended and Restated Servicing
Agreement, dated as of December 5, 1994, as amended
as of October 1, 1995 (the "Servicing Agreement"),
between World Omni Financial Corp (WOFC) and
National Auto Finance Company L.P. (NAFCO) is made
as of November 13, 1996 by and between Omni
Financial Services of America, Inc. as assignee of
WOFC, and NAFCO.
10.50 Transfer Agreement No. 1, dated as of November 13,
1996, by National Financial Auto Funding Trust as
Transferor to Harris Trust and Savings Bank, as
Trustee, pursuant to a Pooling and Servicing Agreement,
dated as of October 21, 1996.
72
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
10.51 Form of Financial Guaranty Insurance Policy issued by
Financial Security Assurance Inc.
10.52 Employment Agreement, dated as of December 31,
1996, between National Auto Finance Company, Inc.
and Stephen R. Stack.
10.53 Amended and Restated Promissory Note, dated as of
January 3, 1997, payable by National Auto Finance
Company L.P. to the order of Gary L. Shapiro.
10.54 Amended and Restated Promissory Note, dated as of
January 3, 1997, payable by National Auto Finance
Company L.P. to the order of Edgar A. Otto.
10.55 Amended and Restated Promissory Note, dated as of
January 3, 1997, payable by National Auto Finance
Company L.P. to the order of Stephen L. Gurba.
10.56 Amended and Restated Promissory Note, dated as of
January 3, 1997, payable by National Auto Finance
Company L.P. to the order of Nova Financial
Corporation.
10.57 Amended and Restated Promissory Note, dated as of
January 3, 1997, payable by National Auto Finance
Company L.P. to the order of Nova Corporation.
10.58 Form of First Amendment, dated as of December 1,
1996, to Second Amended and Restated Limited
Partnership of National Auto Finance Company L.P.
10.59 Form of Amendment to Assignment and Assumption
Agreement, dated as of January 27, 1997.
10.60 Referral Agreement, dated as of April 15, 1996, by and
between First Union National Bank of North Carolina
and Auto Credit Clearinghouse L.P.
10.61 Referral Contract, dated as of November 14, 1996, by
and between Community Bank and Auto Credit
Clearinghouse L.P.
23.1 Consent of KPMG Peat Marwick LLP (referencing KPMG Peat Marwick
LLP's reports incorporated by reference in the Company's
Registration Statement on Form S-8 (File No. 333-23649)(the
"S-8"), which reports were incorporated by reference in the S-8
from the Company's Registration Statement on Form S-1 (File
No.333-13367) and Current Report on Form 8-K (File No. 0-22067)).
27.1 Financial Data Schedule for the year ended December
31, 1996.
73
ACCOUNTANTS' CONSENT
The Board of Directors
National Auto Finance Company, Inc.:
We consent to incorporation by reference in the Registration Statement on Form
S-8 of National Auto Finance Company, Inc. of our report dated February 28, 1997
relating to the consolidated balance sheets of National Auto Finance Company,
L.P. as of December 31, 1996 and 1995 and the related consolidated statements of
income (loss), statements of partners' capital and cash flows for each of the
years in the two year period ended December 31, 1996 and the period October 1,
1994 (inception) to December 31, 1994, which report appears in the December 31,
1996 annual report on Form 10-K of National Auto Finance Company, Inc.
KPMG PEAT MARWICK LLP
Fort Lauderdale, Florida
March 25, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS CONTAINED IN THE BODY OF THE ACCOMPANYING ANNUAL REPORT ON
FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 5,066,467
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 23,403,920
<INVESTMENTS-MARKET> 23,403,920
<LOANS> 0
<ALLOWANCE> 0
<TOTAL-ASSETS> 31,200,633
<DEPOSITS> 0
<SHORT-TERM> 0
<LIABILITIES-OTHER> 21,649,681
<LONG-TERM> 0
0
0
<COMMON> 0
<OTHER-SE> 9,550,952
<TOTAL-LIABILITIES-AND-EQUITY> 31,200,633
<INTEREST-LOAN> 0
<INTEREST-INVEST> 0
<INTEREST-OTHER> 258,521
<INTEREST-TOTAL> 258,521
<INTEREST-DEPOSIT> 0
<INTEREST-EXPENSE> 1,204,042
<INTEREST-INCOME-NET> (945,521)
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 12,939,461
<EXPENSE-OTHER> 9,096,406
<INCOME-PRETAX> 4,491,143
<INCOME-PRE-EXTRAORDINARY> 4,491,143
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,491,143
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 0
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 0
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 0
<ALLOWANCE-DOMESTIC> 0
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</TABLE>
