UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-22067
NATIONAL AUTO FINANCE COMPANY, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 65-0688619
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
621 N.W. 53rd Street, Suite 200, Boca Raton, Florida 33487
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(Address of principal executive offices) (Zip Code)
(561) 997-2413
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(Registrant's telephone number, including area code)
No Change
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(Former name, former address and former fiscal year, if changed
since last report)
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 __
There were 7,026,000 shares of common stock, $.01 par value outstanding as of
August 13, 1997.
1
<PAGE>
NATIONAL AUTO FINANCE COMPANY, INC.
INDEX TO FORM 10-Q
Page
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited).............................4
Balance Sheet:
June 30, 1997 and December 31, 1996......................4
Statements of Income:
Three and Six Months Ended June 30, 1997 and 1996........5
Statement of Stockholders' Equity as of June 30, 1997........6
Statements of Cash Flows:
Six Months Ended June 30, 1997 and 1996..................7
Notes to Financial Statements................................9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................14
Part II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.........24
Item 6. Exhibits and Reports on Form 8-K............................24
SIGNATURE............................................................25
EXHIBIT INDEX........................................................26
Exhibit 11. Computation of Earnings Per Common Share.............27
Exhibit 27. Financial Data Schedule..............................28
2
<PAGE>
Forward-Looking Statements
When used in this Quarterly Report on Form 10-Q 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.
3
<PAGE>
- --------------------------------------------------------------------------------
Part I.
- --------------------------------------------------------------------------------
Item 1. Financial Statements.
NATIONAL AUTO FINANCE COMPANY, INC.
Balance Sheet
(unaudited, dollars in thousands)
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996
-------------------- -------------------
<S>
<C> <C> <C>
Assets
- ------
Cash and cash equivalents $ 2,847 $ 5,066
Investments and retained interest in
securitizations 35,922 23,404
Loans, net 4,228 -
Fixed assets, net 690 515
Deferred financing costs 1,000 1,849
Other assets 1,215 367
-------------------- -------------------
Total assets $ 45,902 $ 31,201
==================== ===================
==================== ===================
Liabilities and Stockholders' equity
- ------------------------------------
Accounts payable and accrued expenses $ 1,813 $ 1,771
Due to National Auto Finance Corporation - 178
Deferred income taxes 5,788 -
Accrued interest payable--related parties 39 144
Accrued interest payable--senior subordinated notes 200 339
Junior subordinated notes--related parties 2,012 7,218
Senior subordinated notes 12,000 12,000
-------------------- -------------------
Total liabilities 21,852 21,650
-------------------- -------------------
Stockholders' equity
Preferred stock series A - $1,000 par value;
1,000,000 shares authorized; 2,295
shares outstanding 2,295 -
Common stock - $0.01 par value; 20,000,000
shares authorized; 7,026,000 shares
outstanding 70 -
Paid in capital 20,220 -
Retained earnings 1,465 -
Partners' capital - 9,551
-------------------- -------------------
Total stockholders' equity 24,050 9,551
-------------------- -------------------
Total liabilities and stockholders' equity $ 45,902 $ 31,201
==================== ===================
</TABLE>
See accompanying notes to the financial statements.
4
<PAGE>
NATIONAL AUTO FINANCE COMPANY, INC.
Statements of Income (Loss)
(unaudited, dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue:
Gain on sales of loans $ 5,293 $ 2,531 $ 9,835 $ 4,628
Deferred gain on sales of loans 377 165 685 298
Deferred servicing income 468 187 862 328
Deferred income from securitizations 129 160 266 327
Interest income from cash investments 202 3 369 6
Other income 16 (2) 39 48
Finance charges earned 77 - 95 -
----------- ---------- ----------- -----------
Total revenue 6,562 3,044 12,151 5,635
----------- ---------- ----------- -----------
Expenses:
Interest expense 345 154 760 304
Salaries and employee benefits 1,622 841 2,921 1,502
Direct loan acquisition expenses 865 371 1,566 710
Servicing costs 763 258 1,375 480
Depreciation and amortization 214 97 393 193
Provision for credit losses 236 - 313 -
Other operating expenses 800 457 1,476 778
----------- ---------- ----------- -----------
Total expenses 4,845 2,178 8,804 3,967
----------- ---------- ----------- -----------
Income before income taxes 1,717 866 3,347 1,668
Income taxes 658 327 (1) 1,289 628 (1)
Net income before taxes from
reorganization of partnership 1,059 539 2,058 1,040
Income taxes from reorganization of
partnership - - 4,500 -
----------- ---------- ----------- -----------
Net income (loss) 1,059 539 (2,442)(2) 1,040
----------- ---------- ----------- -----------
Less preferred stock dividends 41 - 67 -
----------- ---------- ----------- -----------
Net income (loss) available for common
shareholders $ 1,018 $ 539 $ (2,509) $ 1,040
=========== ========== =========== ===========
Earnings (loss) per share $ (0.36)(2)
===========
Pro forma earnings per share $ 0.15 $ 0.08 $ 0.29 (3) $ 0.15
=========== ========== =========== ===========
Weighted average shares and share equivalents 7,026 6,976
=========== ===========
Pro forma shares outstanding 6,726 6,726
========== ===========
<FN>
(1) Pro forma income taxes for the three-month period ended June 30, 1996 and
the six month period ended June 30, 1996, respectively, calculated as if the
Company had operated as a "C" corporation.
(2) Includes the effects of a one-time, non-cash charge for deferred income
taxes arising from the reorganization of the Company from a partnership form to
a taxable corporate form in connection with the Company's initial public
offering in January 1997.
(3) Excludes the effect of the charge noted in (2) above.
</FN>
</TABLE>
See accompanying notes to the financial statements.
5
<PAGE>
NATIONAL AUTO FINANCE COMPANY, INC.
Statement of Stockholders' Equity
For the period beginning January 29 through June 30, 1997
(unaudited, dollars in thousands)
<TABLE>
<CAPTION>
Preferred Common Paid in Retained
Stock Stock Capital Earnings Total
--------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
Reorganization of NAFI Partnership
January 29, 1997 $ 2,295 $ 42 $ 7,739 $ $ 10,076
Issuance of common stock to J.P. Morgan
Investment Management in exchange for
deferred interest on senior subordinated notes 5 164 169
Income taxes from reorganization
of partnership (4,500) (4,500)
Issuance of 2,300,000 shares for the
Offering, net of costs 23 16,817 16,840
Dividends on preferred stock (67) (67)
Net income 1,532 1,532
--------- --------- --------- --------- ---------
Balance as of June 30, 1997 $ 2,295 $ 70 $ 20,220 $ 1,465 $ 24,050
========= ========= ========= ========= =========
</TABLE>
See accompanying notes to the financial statements.
6
<PAGE>
NATIONAL AUTO FINANCE COMPANY, INC.
Statements of Cash Flows
(unaudited, dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1997 1996
---------- ----------
<S>
<C> <C> <C>
Cash Flows from operating activities:
Net income (loss) $ (2,442) $ 1,668
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Gains on sales of loans (9,835) (4,628)
Depreciation expense 90 192
Provision for credit losses 313 -
Purchases of loans held for sale (77,509) (31,202)
Proceeds from sale of loans 73,045 31,202
Cash received from securitizations 5,804 2,075
Deferred gains and income recognized from securitizations (1,547) (620)
Amortization of deferred financing costs 74 75
Amortization of deferred placement costs 163 57
Amortization of deferred interest (266) (327)
Amortization of prepaid expenses 95 12
Changes in other assets and liabilities:
Other assets (1,038) (219)
Accounts payable and accrued expenses 2 217
Accrued interest payable--related parties (105) 280
Accrued interest payable--senior subordinated debt 30 -
Income taxes 5,788 -
--------- ---------
Net cash used in operating activities (7,338) (1,218)
Cash flows from investing activities:
Fixed assets purchased (265) (36)
Net invested in National Auto Receivable Master Trust (6,819) -
--------- ---------
Net cash used in investing activities (7,084) (36)
Cash flows from financing activities:
Proceeds from junior subordinated notes--related parties - 590
Payments of junior subordinated notes--related parties (5,206) (590)
Payment of preferred stock dividends (28) -
Proceeds from initial public offering 17,615 -
Preferred equity partners' contributions - 849
Due to National Auto Finance Corporation (178) -
--------- ---------
Net cash provided by financing activities 12,203 849
--------- ---------
Net decrease in cash and cash equivalents (2,219) (405)
Cash and cash equivalents at beginning of period 5,066 824
--------- ---------
Cash and cash equivalents at end of period $ 2,847 $ 419
========= =========
</TABLE>
7
<PAGE>
NATIONAL AUTO FINANCE COMPANY, INC.
Statements of Cash Flows (Continued)
(unaudited, dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended June 30,
--------------------------------
1997 1996
<S> -------- --------
<C> <C> <C>
Non-cash financing activities:
Offering costs deferred in 1996 transferred to paid-in capital $ 775 $ 0
in 1997
Accrued preferred stock dividends 40 0
Conversion of accrued interest on Senior Debt to Common Stock
and paid-in capital 169 0
Conversion of partners' capital to preferred stock 2,295 0
Conversion of partnership capital to common stock and paid-in
capital 7,256 0
Deferred income taxes from reorganization included in net loss
considered paid-in capital 4,500 0
Income earned in 1997 prior to reorganization included in paid-in
capital 525 0
</TABLE>
See accompanying notes to the financial statements.
8
<PAGE>
NATIONAL AUTO FINANCE COMPANY, INC.
Notes to Financial Statements
June 30, 1997
(Unaudited)
(1) Basis of Presentation
The accompanying unaudited interim financial statements have been prepared
pursuant to the rules and regulations for reporting on Form 10-Q.
Accordingly, certain information and footnotes required by generally
accepted accounting principles for complete financial statements are not
included herein. The interim statements should be read in conjunction with
the financial statements and notes thereto included in National Auto
Finance Company, Inc.'s (the "Company") latest Annual Report on Form 10-K
(capitalized terms used herein and not defined shall have the meanings
ascribed to them in such Form 10-K). Statements for 1996 periods reflect
the financial position and results of operations of the Company's
predecessors.
Interim statements are subject to possible adjustments in connection with
the annual audit of the Company's accounts for the full year 1997; in the
Company's opinion, all adjustments necessary for a fair presentation of
these interim statements have been included and are of a normal and
recurring nature. The results for the interim periods are not necessarily
indicative of results for a full year. Certain amounts in the 1996
financial statements have been reclassified to conform with current
financial statement presentation.
In conjunction with the reorganization from a partnership form to a taxable
corporate form, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes"
("SFAS No. 109"). Under the asset and liability method of SFAS No. 109,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax
liabilities of a change in tax rates was recognized in income in the three
month period ended March 31, 1997. The cumulative effect of this change in
accounting for income taxes was a non-cash charge of $4.5 million.
In June 1996, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities" ("SFAS No. 125"). This statement specifies when financial
assets and liabilities are to be removed from an entity's financial
statements, the accounting for servicing assets and liabilities, and the
accounting for assets that can be contractually prepaid in such a way that
the holder would not recover substantially all of its recorded investment.
Under SFAS No. 125, an entity recognizes only assets it controls and
liabilities it has incurred, discontinues recognition of assets only when
control has been surrendered, and discontinues recognition of liabilities
only when they have been extinguished. SFAS No. 125 requires that the
selling entity continue to carry retained interests relating to assets it
no longer recognizes. Such retained interests are based on the relative
fair values of the retained interests of the subject assets at the date of
transfer. The Company refers to such retained interests as the "excess
spread receivable" (the "Excess Spread Receivable" or "ESR"). Retained
interests are recorded at fair value and periodically measured in the same
manner as investments classified as available for sale or trading under
Statement of Financial Accounting Standards No. 115. Beginning January 1,
1997, the Company adopted SFAS No. 125. The ESR is treated as a trading
security and is measured quarterly for impairment for each individual
securitization by (i) calculating the actual income received, net of actual
losses, prepayments, interest carrying costs and servicing costs, and (ii)
comparing this amount to the original ESR forecast. The Company then
estimates the remaining future net cash flows anticipated, and discounts
such cash flows at a rate that the Company believes represents the rate of
return an investor would require on such cash flows. The Company then
compares this amount to the remaining ESR. Any impairment to the ESR is
recorded as a charge to operations, while benefits in excess of these
originally anticipated are deferred until actual cash flow from the
receivables is received.
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 128, "Earnings Per Share"("SFAS No. 128"). SFAS No. 128 is
effective for financial statements issued for periods ending after December
15, 1997. SFAS No. 128 establishes standards for computing and presenting
earnings per share("EPS"), simplifies the tandards previously found in
Accounting Principles Board Opinion No. 15, "Earnings
9
<PAGE>
NATIONAL AUTO FINANCE COMPANY, INC.
Notes to Financial Statements
June 30, 1997
(Unaudited)
Per Share," and makes them comparable to international EPS standards. The
Company will begin disclosing EPS in accordance with SFAS No. 128 beginning
with the year ended December 31, 1997.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No.130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997. SFAS No. 130
establishes standards for reporting and display of comprehensive income and
its components in a full set of general-purpose financial statements. SFAS
No. 130 requires that all items to be recognized under accounting standards
as components of comprehensive income be reported in a separate financial
statement. Such statement will be presented by the Company beginning with
the quarter ended March 31, 1998.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No.131, "Disclosure About Segments of an Enterprise and Related
Information" ("SFAS No. 131"). SFAS No. 131 is effective for financial
statements for periods beginning after December 15, 1997. SFAS No. 131
establishes standards for the way that public business enterprises report
information about operating segments, based upon how the enterprise defines
such segments. The Company is required to report operating segment
information, to the extent such segments are defined, beginning with the
year ended December 31, 1998.
(2) Investments and Retained Interests in Securitizations
Investments and retained interests in securitizations were as follows at
June 30, 1997 and December 31, 1996:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
-------------- ---------------
(dollars in thousands)
<S>
<C> <C> <C>
Spread Accounts $ $
14,559 8,221
Excess Spread Receivable
21,363 15,183
-------------- ---------------
$ 35,922 $ 23,404
============== ===============
</TABLE>
Spread accounts represent over-collateralization accounts of securitization
facilities designed to protect securitization investors against credit
losses ("Spread Accounts"). 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. The Company analyzes
Spread Accounts quarterly to determine if impairment exists. Impairment, if
any, is charged to operations.
The ESR is established for each securitization and represents the present
value of the gross interest income on the motor vehicle retail installment
sale contracts ("Loans") securitized less: (1) the pass-through interest
paid to the securitization investors; (2) provisions for credit losses and
prepayments over the life of the respective securitization; and (3) normal
servicing fees and recovery of the Spread Account. The ESR consists of the
gain recognized on the sale of Loans through securitization, deferred
servicing income, deferred gain attributable to the time value of money,
and deferred costs of the transactions. 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. Deferred costs of the
securitizations are amortized on a straight-line basis over the estimated
life of the securitization. The ESR is reduced by the receipt of cash from
the trusts and the amortization of the deferred gain and deferred servicing
income. 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 periodically
10
<PAGE>
NATIONAL AUTO FINANCE COMPANY, INC.
Notes to Financial Statements
June 30, 1997
(Unaudited)
reviewed by management and any impairment in the ESR is charged to
operations.Favorable experience is recognized prospectively as realized.
The ESR was as follows at June 30, 1997 and December 31, 1996:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
-------------- --------------
(dollars in thousands)
<S>
<C> <C> <C>
Gross ESR $ 29,484 $ 20,697
Deferred servicing income (5,496) (3,654)
Deferred interest and gain on securitizations (3,810) (3,208)
Deferred placement costs 1,185 1,348
-------------- --------------
ESR, Net $ 21,363 $ 15,183
============== ==============
</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 a bankruptcy-remote master trust (the
"Master Trust"). The Company retains, through Funding Trust I, certain
residual interests in future excess cash flows from the Master Trust (the
Excess Spread Receivable or ESR), in exchange for the transfer of Loans to
the Master Trust.
Periodically, the Master Trust refinances its Loans through the transfer of
the Loans (and the Company's retained interest or ESR) to separate
permanent trusts. The payment of the principal and interest on those
securities has been insured by a payment guaranty issued by Financial
Security Assurance, Inc. ("FSA"). The proceeds of the transactions are used
by the Master Trust to repay the financing of the Master Trust. The Master
Trust then commences re-borrowing to finance its purchase of additional
Loans from the Company through Funding Trust I.
During the six months ended June 30, 1997 and 1996, the following activity
took place with respect to securitization:
<TABLE>
<CAPTION>
June 30, June 30,
1997 1996
-------------- ---------------
(dollars in thousands)
<S>
<C> <C> <C>
Principal balance of Loans sold $ 75,005 $ 32,953
============== ===============
Gain on sales $ 9,835 $ 4,628
============== ===============
Weighted average coupon rate on Loans
sold during the period 19.45% 18.80%
============== ===============
</TABLE>
11
<PAGE>
NATIONAL AUTO FINANCE COMPANY, INC.
Notes to Financial Statements
June 30, 1997
(Unaudited)
(4) Junior Subordinated Notes
During 1994, 1995 and 1996, the Company received loans on a junior
subordinated basis (the "Junior Subordinated Notes") from principal equity
holders of National Auto Finance Company L.P., a Delaware limited
partnership that was organized in October 1994 (the "National Auto
Partnership") and certain affiliates. The Junior Subordinated Notes are
payable on January 31, 2002, and accrue interest at eight percent per
annum. Interest expense recognized for this debt for the periods ending
June 30, 1997 and 1996 was $123,000 and $295,000, respectively.
(5) Senior Subordinated Notes
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"), pursuant to
which $12 million principal amount of senior subordinated notes (the
"Senior Subordinated Notes"), were issued to the Morgan Group. The
principal amount of the Senior Subordinated Notes is due in August 2001 and
carries a 10% coupon payable quarterly. Prior to the consummation of the
Company's public offering (the "Offering") of 2,300,000 shares of the
Company's common stock, par value $.01 per share (the "Common Stock"),
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. Through January 29, 1997, the date of the Offering, the
Company accrued the additional 3% interest on the deferred-interest coupon,
which amount totaled approximately $169,000 at January 29, 1997. On January
29, 1997, upon the conversion of such coupon to equity, such amounts were
accounted for as paid-in-capital of the Company. The Senior Subordinated
Notes generally prohibit 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 such debt. Interest expense recognized for
this debt for the period ended June 30, 1997 was $630,000.
(6) Stock Option Plan
In 1996, the Board of Directors of the Company 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 the Company, as executive management,
employees and directors of the Company and of any parent or subsidiary of
the Company, 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 the Company's executive management, employees and
directors with those of 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).
Through the second quarter of 1997, stock options with respect to an
aggregate of 275,000 shares of Common Stock have been granted to thirteen
key employees and two directors at the fair market value at the date of
grant. At June 30, 1997, exercise of such options was considered
anti-dilutive to earnings per share, thus such options are excluded from
the calculation of earnings per share. All employee stock options vest
one-third immediately, one-third in 1998 and one-third in 1999, and
director stock options vest in 1998. All stock options expire 10 years from
the date of grant.
12
<PAGE>
NATIONAL AUTO FINANCE COMPANY, INC.
Notes to Financial Statements
June 30, 1997
(Unaudited)
(7) Subsequent Events
In July 1997, the National Auto Finance 1997-1 Trust (the "1997-1 Trust")
was formed and the Master Trust refinanced approximately $73.5 million of
its receivables in a public offering of asset-backed securities through
their transfer by the Master Trust to the 1997-1 Trust, as part of a
permanent securitization ("Permanent Securitization"). Payment of principal
of, and interest on, the $66.9 million of the securities issued in that
transaction is insured by payment guarantees issued by FSA, and such
securities are rated AAA and Aaa by Standards & Poor's Rating Service and
Moody's Investors Service, Inc., respectively. The proceeds of that
Permanent Securitization transaction were used by the Master Trust to repay
the then-outstanding balance of the variable funding (i.e., revolving)
certificates bearing interest at floating rates ("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.
13
<PAGE>
NATIONAL AUTO FINANCE COMPANY, INC.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
June 30, 1997
Item 2. 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 financial condition as of June 30, 1997 compared to
December 31, 1996, and its results of operations for the three and six month
periods ended June 30, 1997 and 1996. This management's discussion and analysis
should be read in conjunction with (i) the Company's Financial Statements and
the related notes and (ii) the Company's Annual Report on Form 10-K with respect
to the fiscal year ended December 31, 1996. The ratios and percentages provided
below are calculated using detailed financial information contained in the
Company's Financial Statements, the notes thereto and the other financial data
included elsewhere in this report.
Overview
The Company is a specialized consumer finance company engaged in the purchase,
securitization and servicing of Loans originated by automobile dealers
("Dealers") for consumers with limited financial resources or past credit
problems ("Non-Prime Consumers"). The Company acquires Loans principally from
manufacturer-franchised Dealers in connection with their sale of new and used
automobiles. The Company also acquires seasoned portfolios of such Loans from
banks and other finance companies. Until the Company's Offering of Common Stock
on January 29, 1997, 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 provision for income taxes was required.
The Company's plan of operation for the remainder of 1997 is to increase the
number of Loans that it purchases, securitizes and services by:
1. Utilizing its regional salespersons located in strategic geographic
areas to market the Company's products and services directly to
Dealers;
2. Continuing the implementation of the 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 throughout First Union's
indirect auto finance division ("FUSF"), which conducts business with
Dealers in seven southeastern states and the District of Columbia, and
five northeastern states (the "Northeastern Franchise");
3. Establishing strategic referral and marketing alliances with several
smaller financial institutions and Dealer groups; and
4. Strategically purchasing portfolios of Non-Prime Consumer Loans from
third party originators that meet the Company's strict underwriting
criteria.
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 the securitized
warehousing of all of its Loans through their daily sale (the "Revolving
Securitization") 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 in principal) 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.
Periodically, the Master Trust refinances its Loans through the transfer of the
Loans to a separate permanent trust, which then securitizes the Loans (Permanent
Securitization). The Company retains a residual interest and a cash investment
in the Master Trust, and the various Permanent Securitizations, which are
reflected as investments and retained interest in securitizations on the
Company's balance sheet. Since initiation of the Revolving Securitization, the
Company's
14
<PAGE>
NATIONAL AUTO FINANCE COMPANY, INC.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
June 30, 1997
earnings have been primarily attributable to the gains recognized on the sale of
Loans into the Master Trust. For the six month period ended June 30, 1997, such
gains accounted for approximately 81% 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 an estimated reserve for future Loan losses, prepayments, borrowing
charges and servicing costs, and discounts the remaining cash flow at a rate
which management believes an investor would expect to receive on such cash flows
to its net present value. The resulting amount is reported as gain on sale of
loans on the Company's income statement.
In addition to interest income from Loans that were not securitized and the
interest return on cash investments, other revenues are earned primarily from:
1. Amortization of the deferred servicing revenues, which offset the
direct servicing expenses incurred by the Company;
2. Amortization of the deferred gain of Loans attributable to the time
value of money; and
3. Amortization of deferred gains attributable to Permanent
Securitizations that were financed at lower rates than were used in
calculating the gains on sales when the Loans were originally sold to
the Master Trust.
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. Operating expenses consist
primarily of personnel, general and administrative and servicing expenses, in
addition to depreciation of capital expenditures for furniture and equipment
that is being recognized over five years on a straight-line basis.
Results of Operations
Where applicable, 1996 amounts used for comparison reflect pro-forma income
taxes calculated as if the predecessor of the Company had operated as a taxable
entity for the comparable 1996 period.
Three month period ended June 30, 1997, as compared to the three month period
ended June 30, 1996.
Income from Operations. The Company reported net income for the three month
period ended June 30, 1997 of $1.1 million. This is an increase of 100%, as
compared to pro forma net income of $539,000 for the three month period ended
June 30, 1996.
Gain on Sales of Loans. The Company's Loan purchasing and servicing activities
expanded significantly during the three month period ended June 30, 1997, as
compared to the three month period ended June 30, 1996. The Company purchased
2,290 or $31.3 million of principal amount of Loans from Dealers and $12.5
million or 1,541 Loans were acquired through the Company's Portfolio Acquisition
Program ("PAC") during the three month period ended June 30, 1997. Of these
amounts, $39.2 million or 90% were subsequently sold to the Master Trust. This
compares to 1,453 or $18.0 million principal amount of Loans purchased from
Dealers and $311,000 or 33 Loans were acquired through PAC during the three
month period ended June 30, 1996, all of which were sold to the Master Trust.
For the three month period ended June 30, 1997, the Company recognized a gain on
securitization of $3.9 million from Loans purchased from Dealers and $1.4
million from PAC, representing a 109% increase over the $2.5 million of gains
recognized for the three month period ended June 30, 1996. This increase was
primarily the result of a 139% increase in the dollar volume of Loans purchased
for the three month period ended June 30, 1997, as compared to the three month
period ended June 30, 1996.
15
<PAGE>
NATIONAL AUTO FINANCE COMPANY, INC.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
June 30, 1997
The table below sets forth certain information relating to the Company's Loan
purchasing activities, including the specific number and aggregate principal
amount of Loans purchased and the aggregate amount funded to Dealers:
<TABLE>
<CAPTION>
Three month period ended
June 30,
----------------------------------
1997 1996
-------------- ---------------
<S>
<C> <C> <C>
Number of Loans purchased from Dealers during period
2,290 1,453
Number of Loans purchased as portfolios (PAC)
1,541 33
-------------- ---------------
Total number of Loans purchased 3,831 1,486
============== ===============
(dollars in thousands)
Principal balance of Loans purchased from Dealers during period
$ 31,269 $ 18,031
Principal balance of Loans purchased as portfolios (PAC)
12,508 311
-------------- ---------------
Total balance of Loans purchased $ $
43,777 18,342
============== ===============
Amount funded (1) $ 42,600 17,332
============== ===============
<FN>
(1) Amount funded represents the price at which the Company purchases a
Loan from a Dealer or other seller (i.e., the amount actually paid to a
Dealer or other seller), calculated as the principal of the Loan
purchased less a negotiated discount.
</FN>
</TABLE>
Loan Loss Provision and Reserves. The Company periodically evaluates and
adjusts, if necessary, the assumptions used in its calculation of gains on sales
of Loans. The Company's gain on sale of Loans calculation assumes estimates of
potential charge-offs from the Loan portfolio securitized. For the three month
period ended June 30, 1997, the provision for Loan losses associated with sales
of loans to the Master Trust was approximately $3.3 million, or 7.8% of the
amount funded, as compared to approximately $1.1 million, or 6.3% of the amount
funded for the three month period ended June 30, 1996.
The Company's gain on sale of Loans calculation also assumes estimates of
potential prepayments from the Loan portfolio securitized. For the three month
period ended June 30, 1997, the provision for Loan prepayments associated with
sales of Loans to the Master Trust was approximately $4.8 million, or 11.3% of
the amount funded, as compared to approximately $2.4 million, or 13.6% of the
amount funded, for the three month period ended June 30, 1996.
The Company's total reserves (loss and prepayment) applied to its Excess Spread
Receivable as of June 30, 1997 were $19.6 million or 12.5% of net serviced
receivables. An increase in losses and/or prepayments or acceleration of losses
and prepayments above levels provided for would result in reduced cash flow to
the Company and a possible write-down of the ESR and the Spread Accounts.
Other Income. The Company generated approximately $1.3 million of other income
for the three month period ended June 30, 1997, as compared to $513,000 for the
three month period ended June 30, 1996. The principal sources of the Company's
other income were $377,000 of amortized deferred gain on sales of Loans,
$468,000 of servicing income, and $295,000 of interest and miscellaneous income
for the three month period ended June 30, 1997, as compared to $165,000,
$187,000, and $1,000, respectively, for the three month period ended June 30,
1996. Deferred income from securitizations of $129,000 was recognized for the
three month period ended June 30, 1997, as compared to $160,000 for the three
month period ended June 30, 1996. Deferred income results from the Permanent
Securitizations that were accomplished at lower borrowing rates than the Company
assumed in calculating its original gain on the sale of such Loans to the Master
Trust.
16
<PAGE>
NATIONAL AUTO FINANCE COMPANY, INC.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
June 30, 1997
Operating Expenses. The Company reported operating expenses of $4.8 million for
the three month period ended June 30, 1997, as compared to approximately $2.2
million for the three month period ended June 30, 1996. These expenses consisted
primarily of subordinated note interest, and personnel, loan acquisition,
portfolio servicing, and other corporate operating expenses. Operating expenses,
as a percentage of Loans purchased, decreased from 11.9% as of June 30, 1996 to
11% as of June 30, 1997. Management currently expects that operating costs will
rise throughout the remainder of fiscal year 1997 as the 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. In addition,
operating costs will also increase as the Company implements its own in-house
servicing center in Jacksonville, Florida. The Company has already hired 33
employees in its in-house collections department (14 as of June 30, 1997), and
expects to hire more employees by the end of this year for both collections and
servicing of Loans. The Company intends to assume responsibility for collecting
all of its Loans by approximately October 1, 1997, and hopes to take over all
servicing of its Loans by the end of fiscal year 1997. To that end, the Company
has leased 37,000 square feet of space in Jacksonville to house its servicing
center, and is temporarily leasing approximately 3,000 square feet of space
until the permanent space is ready for occupancy. Such increased operating
expenses may decrease the Company's operating margins and the Company's overall
profitability.
Personnel expenses for the three month period ended June 30, 1997 were
approximately $1.6 million, as compared to approximately $841,000 for the three
month period ended June 30, 1996, decreasing to 3.7% from 4.6% of Loans
purchased for the quarter. Personnel expenses consisted primarily of salaries
and wages, performance incentives, employee benefits, and payroll taxes. The
Company's number of full-time employees increased from 57 as of June 30, 1996,
to 103 as of June 30, 1997.
Corporate operating expenses for the three month period ended June 30, 1997 were
approximately $800,000, as compared to approximately $457,000 for the three
month period ended June 30, 1996, decreasing to 1.8% from 2.5% of Loans
purchased for the quarter. These expenses consisted primarily of
telecommunications, travel, professional fees, insurance expenses, and
management information systems expenses.
Servicing expenses for the three month period ended June 30, 1997 were $763,000,
as compared to $258,000 for the three month period ended June 30, 1996.
Servicing expenses consist primarily of a monthly fee paid to an outside
servicer, Omni Financial Services of America ("World Omni"), for each active
Loan. Servicing fees paid to World Omni for the three month period ended June
30, 1997 were $638,000, as compared to $212,000 for the three month period ended
June 30, 1996. The increase in expenses primarily reflected the growth in the
amount of Loans purchased and serviced by the Company. The Company's total
serviced Loan portfolio as of June 30, 1997 was approximately $157.1 million, or
14,392 outstanding Loans, as compared to approximately $66.4 million, or 5,774
outstanding Loans as of June 30, 1996.
Interest expense for the three month period ended June 30, 1997 was $345,000, as
compared to $154,000 for the three month period ended June 30, 1996. This
increase is a result of the interest expense incurred with respect to the
Company's Senior Subordinated Notes and related Deferred Additional Interest
Notes. The Senior Subordinated Notes bear interest at a rate of 10% per annum.
The Company's Junior Subordinated Notes bear interest at a rate of 8% per annum.
Six month period ended June 30, 1997, as compared to the six month period ended
June 30, 1996.
Income from Operations. The Company reported net income for the six month period
ended June 30, 1997 of $2.0 million, before a one time non-cash deferred income
tax charge to earnings of $4.5 million, arising in the first quarter of 1997,
that reflects a deferred income tax liability arising from the reorganization of
the Company's business from a partnership form to a taxable corporate form in
connection with the Company's Offering in January 1997. This is an increase of
100%, as compared to pro forma net income of $1.0 million for the six month
period ended June 30, 1996.
Gain on Sales of Loans. The Company's Loan purchasing and servicing operations
expanded significantly during the six month period ended June 30, 1997, as
compared to the six month period ended June 30, 1996. The Company purchased
4,407 or $59.2 million of principal amount of Loans from Dealers and $20.3
million or 2,302 Loans were acquired
17
<PAGE>
NATIONAL AUTO FINANCE COMPANY, INC.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
June 30, 1997
through the Company's Portfolio Acquisition Program during the six month period
ended June 30, 1997. Of these amounts, $75.0 million or 94% were subsequently
sold to the Master Trust. This compares to 2,638 or $32.6 million of principal
amount of Loans purchased from Dealers and $311,000 or 33 Loans acquired through
PAC during the six month period ended June 30, 1996, all of which were sold to
the Master Trust.
For the six month period ended June 30, 1997, the Company recognized a gain on
securitization of $7.6 million from Loans purchased from Dealers and $2.2
million from PAC, representing a combined 113% increase over the $4.6 million of
gains recognized for the six month period ended June 30, 1996. This increase was
primarily the result of a 141% increase in the dollar volume of Loans purchased
for the six month period ended June 30, 1997, as compared to the six month
period ended June 30, 1996.
The table below set forth certain information relating to the Company's Loan
purchasing activities, including the specific number and aggregate principal
amount of Loans purchased and the aggregate amount funded to Dealers:
<TABLE>
<CAPTION>
Six month period ended
June 30,
----------------------------------
1997 1996
-------------- --------------
<S>
<C> <C> <C>
Number of Loans purchased from Dealers during period
4,407 2,638
Number of Loans purchased as portfolios (PAC)
2,302 33
-------------- --------------
Total number of Loans purchased
6,709 2,671
============== ==============
(dollars in thousands)
Principal balance of Loans purchased from Dealers during period $ 59,279 $ 32,642
Principal balance of Loans purchased as portfolio (PAC) 20,270 311
-------------- --------------
Total balance of Loans purchased $ 79,549 $ 32,953
============== ==============
Amount funded (1) $ 77,509 $ 31,202
============== ==============
<FN>
(1) Amount funded represents the price at which the Company purchases a
Loan from a Dealer or other seller (i.e., the amount actually paid to
a Dealer or other seller), calculated as the principal of the Loan
purchased less a negotiated discount.
</FN>
</TABLE>
Loan Loss Provision and Reserves. For the six month period ended June 30, 1997,
the provision for Loan losses associated with sales of loans to the Master Trust
was approximately $5.7 million, or 7.3% of the amount funded, as compared to
approximately $2.0 million, or 6.3% of the amount funded, for the six month
period ended June 30, 1996.
For the six month period ended June 30, 1997, the provision for Loan prepayments
associated with sales of Loans to the Master Trust was approximately $9.4
million, or 12.1% of the amount funded, as compared to approximately $4.2
million, or 13.4% of the amount funded, for the six month period ended June 30,
1996.
18
<PAGE>
NATIONAL AUTO FINANCE COMPANY, INC.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
June 30, 1997
Other Income. The Company generated approximately $2.3 million of other income
for the six month period ended June 30, 1997, as compare to $1.0 million for the
six month ended June 30, 1996. The principal sources of the Company's other
income were $685,000 of amortized deferred gain, $862,000 of servicing income,
and $503,000 of interest and miscellaneous income for the six month period ended
June 30, 1997, as compared to $298,000, $328,000, and $54,000, respectively, for
the six month period ended June 30, 1996. Deferred income from securitizations
of $266,000 was recognized for the six month period ended June 30, 1997, as
compared to $327,000 for the six month period ended June 30, 1996.
Operating Expenses. The Company reported operating expenses of $8.8 million for
the six month period ended June 30, 1997, as compared to $4.0 million for the
six month period ended June 30, 1996. These expenses consisted primarily of
subordinated note interest, and personnel, Loan acquisition, portfolio
servicing, and other corporate operating expenses. Operating expenses, as a
percentage of Loans purchased, decreased from 12% as of June 30, 1996 to 11% as
of June 30, 1997.
Personnel expenses for the six month period ended June 30, 1997 were
approximately $2.9 million, as compared to approximately $1.5 million for the
six month period ended June 30, 1996, decreasing to 3.7% from 4.5% of Loans
purchased for the year.
Corporate operating expenses for the six month period ended June 30, 1997 were
approximately $1.5 million, as compared to approximately $778,000 for the six
month period ended June 30, 1996, decreasing to 1.8% from 2.4% of Loans
purchased for the year.
Servicing expenses for the six month period ended June 30, 1997 were $1.4
million as compared to $480,000 for the six month period ended June 30, 1996.
This represents a 0.34% increase in annualized servicing expenses as a
percentage of Loans serviced, from 1.44% as of June 30, 1996 to 1.75% as of June
30, 1997. Servicing fees paid to World Omni for the six month period ended June
30, 1997 were $1.1 million as compared to $395,000 for the six month period
ended June 30, 1996. The increase in expenses primarily reflected the growth in
the amount of Loans purchased and serviced by the Company.
Interest expense for the six month period ended June 30, 1997 was $760,000, as
compared to $304,000 for the six month period ended June 30, 1996. This increase
is a result of the interest expense incurred with respect to the Company's
Senior Subordinated Notes and related Deferred Additional Interest Notes.
Financial Condition
As of June 30, 1997, the Company had total assets of $46.0 million, as compared
to $31.2 million as of December 31, 1996. At the six months ended June 30, 1997
and December 31, 1996, these assets consisted primarily of cash, subordinated
securities, investments and retained interests in securitization trusts, and
Loans held for sale, net of allowances for credit losses.
As of June 30, 1997, the Company had cash and cash equivalents totaling
approximately $2.8 million. As of such date, the Company also had approximately
$3.0 million in cash balances held in restricted bank accounts, representing a
portion of the credit enhancement for the securitization trusts, which amount
was included in the total amount of the Company's investments and retained
interests in securitizations as of such date.
As of June 30, 1997, the Company retained approximately $21.3 million of Excess
Spread Receivables and approximately $14.6 million of Spread Accounts. These
assets represented 78% 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 June 30, 1997, the principal amount owed by the Company on Junior
Subordinated Notes was approximately $2.0 million, which bear interest at an
annual rate of 8%.
19
<PAGE>
NATIONAL AUTO FINANCE COMPANY, INC.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
June 30, 1997
Loan Loss and Delinquency Experience
The Company regularly reviews the timing of losses and prepayments and the
adequacy of loss and prepayment reserves related to securitized Loans. The
reserve assumptions used for calculations of gains on sales of loans are set at
levels considered to be sufficient to cover the cash flow impact to the Company
of expected future losses and prepayments on Loans. Changes in reserves are
based directly on the dollar value of the Loans transferred to the Master Trust,
historical loss and prepayment experience and, to a lesser extent, current
economic conditions and other factors that management deems relevant.
The Securitization Trusts' charge-off policy is based upon a Loan-by-Loan review
of delinquent accounts. A trust generally charges off a Loan at the time its
related collateral is liquidated, although certain Loans may be charged off
sooner if management determines them to be uncollectable.
The following table summarizes the Trusts' Loan losses and liquidation recovery
experience from the inception of the Company:
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996
----------------- -----------------
(dollars in thousands)
<S>
<C> <C> <C>
Aggregate number of Loans purchased 17,382 10,675
Aggregate principal balance of Loans purchased $ 214,290 $ 134,773
Principal balance of outstanding Loans $ 157,111 $ 102,852
Number of outstanding Loans 14,392 9,063
Gross charge-off principal balance $ 14,946 $ 7,760
Liquidation recoveries (7,583) (4,232)
----------------- ----------------
Net charge-offs $ 7,363 $ 3,528
================= ================
Principal balance of Loans related to vehicles held in
inventory $ 2,919 $ 2,266
</TABLE>
20
<PAGE>
NATIONAL AUTO FINANCE COMPANY, INC.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
June 30, 1997
A Loan is considered 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>
June 30, 1997 December 31, 1996
----------------- -----------------
(dollars in thousands)
<S>
<C> <C> <C>
Principal balance outstanding $ 157,111 $ 102,852
Period of delinquency
31 to 60 days $ 10,232 $ 6,104
61 to 90 days $ 3,191 $ 1,596
91 days or more $ 2,420 $ 487
================ =================
Total delinquencies $ 15,843 $ 8,187
================ =================
Total delinquencies as a percentage of the
current principal balance 10.08% 7.95%
================ =================
</TABLE>
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.
The Company monitors historical loss experience on an overall portfolio and on a
"static pool" basis. Loans 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 pool's inception and adjustments for any
additional losses will be reflected in the current period earnings. As of June
30, 1997, no such additional loss adjustments have been made.
21
<PAGE>
NATIONAL AUTO FINANCE COMPANY, INC.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
June 30, 1997
The following table summarizes the vintage static pools of the Company's
portfolio for all Loans purchased by the Company from inception through the
period ending March 31, 1997, and includes loss data through June 30, 1997:
<TABLE>
<CAPTION>
Losses Through 6/97
Loans Purchased
Through 3/97 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q
------------------- 1994 1995 1995 1995 1995 1996 1996 1996 1996 1997
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Totals
------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Original
Number
of Loans 13,553 300 795 920 1,003 868 1,185 1,486 1,866 2,252 2,878
Number of
Active
Loans 10,623 158 402 500 645 594 828 1,155 1,552 2,015 2,774
Original
Amount
Financed 170,546,706 3,819,645 9,704,263 11,237,718 13,674,781 11,378,599 14,611,677 18,341,044 23,201,321 28,804,973 35,772,705
Principal
Amount
Outstanding 114,572,706 1,266,230 3,016,157 4,046,276 6,272,519 5,978,476 8,338,435 11,968,108 16,994,942 23,847,149 32,844,413
Cumulative
Net Loss % 4.32% 9.07% 9.15% 8.66% 7.10% 6.65% 5.80% 6.00% 3.65% 1.89% 0.23%
4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q
1994 1995 1995 1995 1995 1996 1996 1996 1996 1997
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
1 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
2 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
3 0.00% 0.00% 0.00% 0.00% 0.05% 0.00% 0.00% 0.04% 0.00% 0.00%
4 0.00% 0.00% 0.00% 0.03% 0.17% 0.00% 0.00% 0.04% 0.01% 0.02%
5 0.00% 0.07% 0.10% 0.19% 0.21% 0.10% 0.10% 0.16% 0.00% 0.06%
6 0.05% 0.14% 0.27% 0.43% 0.70% 0.39% 0.32% 0.45% 0.25% 0.23%
7 0.05% 0.24% 0.67% 0.88% 0.96% 0.60% 0.64% 0.79% 0.61%
8 0.31% 0.86% 1.42% 1.24% 1.05% 0.80% 1.14% 1.06% 1.21%
9 0.47% 1.34% 1.98% 2.18% 1.57% 1.38% 1.73% 1.92% 1.89%
10 0.51% 1.70% 2.40% 2.35% 2.28% 1.81% 2.70% 2.59%
11 1.08% 1.73% 2.62% 2.70% 2.40% 2.00% 3.29% 3.36%
12 1.36% 2.52% 3.14% 3.11% 3.08% 2.43% 4.34% 3.65%
13 1.75% 3.04% 3.37% 3.60% 3.48% 3.35% 5.19%
14 1.72% 3.39% 3.71% 3.58% 3.69% 3.60% 5.58%
15 3.12% 3.90% 3.99% 4.13% 4.24% 4.42% 6.00%
16 3.21% 4.20% 4.27% 4.60% 4.58% 4.71%
17 3.80% 4.52% 4.49% 4.98% 5.36% 5.38%
18 4.45% 4.70% 5.01% 5.14% 5.52% 5.80%
19 4.55% 4.94% 5.35% 5.49% 6.09%
20 4.91% 5.18% 5.75% 4.89% 6.43%
21 4.91% 5.77% 6.13% 6.46% 6.65%
22 5.05% 5.75% 6.84% 6.76%
23 5.05% 6.24% 7.44% 7.02%
24 5.79% 6.34% 7.75% 7.10%
25 5.78% 7.01% 8.28%
26 6.20% 7.30% 8.52%
27 6.80% 7.65% 8.66%
28 7.15% 8.00%
29 7.49% 9.02%
30 8.06% 9.15%
31 8.23%
32 9.07%
</TABLE>
Liquidity and Capital Resources
General
Since inception, the Company has funded its operations and the growth of its
Loan purchasing activities primarily through six 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; (v) proceeds
from the issuance of junior subordinated debt to, and from the capital
contributions of, certain affiliates of the Company; and (vi) proceeds from the
Offering.
Net cash used in operating activities was $7.3 million during the six month
period ended June 30, 1997, compared to net cash used of $1.2 million during the
six month period ended June 30, 1996. Cash used for purchasing Loans was $77.5
million, an increase of $46.3 million, or 148%, over cash used for purchasing
Loans in the prior year's first six month period. Cash provided from the sale of
Loans to the Master Trust was $73.0 million, an increase of $41.8 million, or
134%, over cash provided from the sale of loans to the Master Trust in the prior
year's first six month period.
22
<PAGE>
NATIONAL AUTO FINANCE COMPANY, INC.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
June 30, 1997
The Company's securitization financing activities are capital-intensive and will
require significant additional capital to fund the Company's required equity
commitment to the Revolving Securitization facility and related securitization
expenses as the Company's Loan purchasing activities grow in the future. The
Company has used the proceeds of the Offering, the Senior Subordinated Notes,
and the Junior Subordinated Notes to fund, among other things, the Company's
required equity commitment to the Revolving Securitizations.
The Company has experienced an acceleration in the use of its cash during the
second quarter of 1997 and to date in excess of the cash requirements previously
projected by the Company. This acceleration is due, in large part, to six
factors: (1) a doubling of the Company's PAC volume for this fiscal year from
the originally-projected $20 million to the presently-projected $39.3 million;
(2) a greater than expected increase in the volume of Company-originated Loans;
(3) less than projected dealer discounts; (4) the implementation of the
Company's in-house servicing center and the costs associated with the
corresponding overlap of functions between that service center and World Omni's
service center; (5) an increase in the enhancement rate required as part of the
1997-1 Trust; and (6) a change in the dynamic credit support requirements of the
Company's securitization facilities has resulted in and may in the future result
in additional capital of the Company being maintained in the Spread Accounts of
two of the Permanent Securitizations. The net effect of those six factors is
that the Company will require in the fourth quarter of 1997 additional capital
to fund its operations. To that end, the Company is actively seeking to raise
additional capital in an amount sufficient to meet the Company's cash
requirements and to fund operations through the end of fiscal year 1998,
assuming the Company completes additional Permanent Securitizations.
During the six month period ended June 30, 1997, cash used for initial deposits
to Spread Accounts was $6.8 million. Cash distributed to the Company from Spread
Accounts for the six month period ended June 30, 1997 was $5.8 million, an
increase of $3.7 million, or 180%, over cash distributed from securitizations in
the prior year's period. Changes in the distributions from the various Spread
Accounts are impacted by the relative size and seasoning of the pools of sold
Loans that make up the Company's servicing portfolio.
The Company's management team possesses significant servicing, collections and
related management information systems expertise, which will assist the Company
in establishing its own internal servicing operation. As previously discussed,
the Company has begun the process of implementing an in-house servicing
operation. The Company has established a budget of $3.9 million for such
operation in 1997.
23
<PAGE>
- --------------------------------------------------------------------------------
Part II - Other Information
- --------------------------------------------------------------------------------
Item 4. Submission of Matters to a Vote of Security Holders
(a) On June 20, 1997, an annual meeting (the "Annual Meeting") of the
Company's stockholders was held.
(b) At the Annual Meeting, Keith B. Stein and Peter Offermann were
re-elected to the Company's Board of Directors. Further, Gary L.
Shapiro, Roy E. Tipton and Morgan M. Schuessler continued to serve as
members of the Company's Board of Directors. As previously reported,
on June 16, 1997, Edgar A. Otto resigned as a member of the Company's
Board of Directors, and the Board of Directors, in accordance with the
Company's by-laws, appointed Stephen Gurba to the Company's Board of
Directors to fill the vacancy left by Mr. Otto's departure.
(c) The matters voted upon at the Annual Meeting included: (1) the
election of Keith B. Stein and Peter Offermann to the Company's Board
of Directors for terms of three years; and (2) a proposal to ratify
the appointment of KPMG Peat Marwick LLP ("KPMG"), independent public
accountants, as the auditors for the Company for fiscal year 1997. A
total of 6,845,544 shares were represented by proxy at the Annual
Meeting, representing 97.4% of the 7,026,000 shares eligible to vote.
6,835,269 votes were cast in favor of electing both Keith B. Stein and
Peter Offermann as directors, 10,275 votes were withheld, and no votes
were cast against them. Additionally, 6,831,944 votes were cast in
favor of the ratification of KPMG as the Company's auditors, 9,400
votes were cast against, and 4,200 votes were abstained.
(d) Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Number Description Method of Filing
11 Computation of Earnings Filed with this document
Per Common Share
27 Financial Data Schedule Filed with this document
(b) Reports on Form 8-K
On April 29, 1997, the Company filed a Form 8-K announcing its
earnings for the first quarter of 1997.
On June 24, 1997, the Company filed a Form 8-K announcing that:
1. Morgan M. Schuessler was named a member of its Board of
Directors;
2. Jacksonville, Florida was selected as the site for the
Company's loan servicing divisional headquarters; and
3. At the Company's Annual Meeting on June 20, 1997, (a) Keith
B. Stein and Peter Offermann were re-elected to the
Company's Board of Directors, (b) the Company accepted the
resignation of Edgar Otto as a member of its Board of
Directors, and (c) Stephen Gurba was unanimously appointed
to the Company's Board of Directors to fill the vacancy left
by Mr. Otto's resignation.
No other reports on Form 8-K were filed in the second quarter of
1997.
On July 31, 1997, the Company filed a Form 8-K announcing its
earnings for the second quarter of 1997.
24
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
Date: August 14, 1997 /s/ Keith B. Stein
-----------------------------------
Keith B. Stein
Vice Chairman and Treasurer
Date: August 14, 1997 /s/ Kevin G. Adams
-----------------------------------
Kevin G. Adams
Vice President and Chief Financial Officer
25
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
11 Computation of Earnings Per Common Share
27 Financial Data Schedule
26
Exhibit 11
National Auto Finance Company, Inc.
Computation of Earnings Per Common Share
(unaudited, in thousands, except per share data)
<TABLE>
<CAPTION>
Six Months Ended June 30,
------------------------------------
1997 1996
---------------- ---------------
<S>
<C> <C> <C>
Average number of common shares outstanding
6,976
Proforma shares outstanding
6,726
Common equivalent shares outstanding:
Stock options
- -
Total common and common equivalent shares outstanding
6,976 6,726
Net income before income taxes from reorganization of
partnership $ 2,058 $ 1,040
================ ===============
================ ===============
Net income (loss) $ $
(2,442) -
================ ===============
================ ===============
Earnings per share $ 0.29 $ -
Earnings per share as adjusted $ (0.36) $ -
Proforma earnings per share $ 0.15
===============
</TABLE>
27
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE INTERIM
STATEMENT OF INCOME FOR THE SIX MONTHS ENDED JUNE 30,1997 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1997
<CASH> 2,847
<SECURITIES> 0
<RECEIVABLES> 40,463
<ALLOWANCES> (313)
<INVENTORY> 0
<CURRENT-ASSETS> 42,997
<PP&E> 960
<DEPRECIATION> (270)
<TOTAL-ASSETS> 45,902
<CURRENT-LIABILITIES> 2,052
<BONDS> 12,012
2,295
0
<COMMON> 70
<OTHER-SE> 21,685
<TOTAL-LIABILITY-AND-EQUITY> 45,902
<SALES> 0
<TOTAL-REVENUES> 12,151
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,467
<LOSS-PROVISION> 313
<INTEREST-EXPENSE> 760
<INCOME-PRETAX> 3,347
<INCOME-TAX> 5,789
<INCOME-CONTINUING> (2,442)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,442)
<EPS-PRIMARY> (0.36)
<EPS-DILUTED> (0.36)
</TABLE>
