<PAGE>
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 September 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 _____________
Commission file number 0-22067
NATIONAL AUTO FINANCE COMPANY, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 65-0688619
---------------------------------------- -------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
621 N.W. 53rd Street, Suite 200, Boca Raton, Florida 33487
----------------------------------------------------- --------------
(Address of principal executive offices) (Zip Code)
(800) 999-7535
------------------------------------------
(Registrant's telephone number, including area code)
No Change
-----------------------------------------------------------------
(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 7,126,000 shares of common stock, $.01 par value outstanding as of
November 25, 1997.
<PAGE>
NATIONAL AUTO FINANCE COMPANY, INC.
INDEX TO FORM 10-Q
Page
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)..................................4
Balance Sheet:
September 30, 1997 and December 31, 1996......................4
Statements of Income:
Three and Nine Months Ended September 30, 1997 and 1996.......5
Statement of Stockholders' Equity as of September 30, 1997........6
Statements of Cash Flows:
Nine Months Ended September 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 6. Exhibits and Reports on Form 8-K.................................26
SIGNATURE..................................................................27
EXHIBIT INDEX..............................................................28
Exhibit 11. Computation of Earnings Per Common Share.....................29
Exhibit 27. Financial Data Schedule......................................30
2
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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
September 30, 1997 (unaudited), December 31, 1996
(dollars in thousands)
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996
------------------ -----------------
<S> <C> <C>
Assets
------
Cash and cash equivalents $ 326 $ 5,066
Investments and retained interest in
securitizations 42,516 23,404
Fixed assets, net 1,393 515
Deferred financing costs 925 1,849
Other assets 1,410 367
------------------ -----------------
Total assets $ 46,570 $ 31,201
================== =================
Liabilities and Stockholders' equity
------------------------------------
Accounts payable and accrued expenses $ 1,636 $ 1,771
Due to National Auto Finance Corporation - 178
Deferred income taxes 6,057 -
Accrued interest payable--related parties 40 144
Accrued interest payable--senior subordinated notes 200 339
Notes payable 222 -
Junior subordinated notes--related parties 2,007 7,218
Senior subordinated notes 12,000 12,000
------------------ -----------------
Total liabilities 22,162 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 20,190 -
Retained earnings 1,853 -
Partners' capital - 9,551
------------------ -----------------
Total stockholders' equity 24,408 9,551
------------------ -----------------
Total liabilities and stockholders' equity $ 46,570 $ 31,201
================== =================
</TABLE>
See accompanying notes to the financial statements.
4
<PAGE>
NATIONAL AUTO FINANCE COMPANY, INC.
Statements of Income (Loss)
For the three months ended September 30, 1997 and 1996 (unaudited),
For the nine months ended September 30, 1997 (unaudited) and 1996
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
-------- -------- ----------- --------
<S> <C> <C> <C> <C>
Revenue:
Gain on sales of Loans $ 3,596 $ 3,560 $ 13,431 $ 8,188
Amortization of excess spread receivable 583 345 1,534 970
Servicing income 1,305 259 2,167 587
Interest income from cash investments 168 51 536 57
Other income 42 6 81 54
Finance charges earned -- -- 95 --
-------- -------- -------- --------
Total revenue 5,694 4,221 17,844 9,856
-------- -------- -------- --------
Expenses:
Interest expense 343 372 1,103 676
Salaries and employee benefits 1,670 1,008 4,591 2,510
Direct loan acquisition expenses 936 528 2,502 1,238
Servicing Division expenses 903 298 2,278 778
Service center expenses 699 -- 699 --
Depreciation and amortization 148 150 541 343
Provision for credit losses (313) -- -- --
Other operating expenses 610 431 2,086 1,209
-------- -------- -------- --------
Total expenses 4,996 2,787 13,800 6,754
-------- -------- -------- --------
Income before income taxes 698 1,434 4,044 3,102
Income taxes before reorganizaiton of partnership 269 -- 1,557 --
Income before taxes from
reorganization of partnership 429 1,434 2,487 3,102
Income taxes from reorganization of
partnership -- -- 4,500(2) --
-------- -------- -------- --------
Net income (loss) 429 1,434 (2,013) 3,102
-------- -------- -------- --------
Less preferred stock dividends 40 -- 107 --
-------- -------- -------- --------
Net income (loss) available for common
shareholders $ 389 $ 1,434 $ (2,120) $ 3,102
======== ======== =========== ========
Earnings (loss) per share $ 0.06 $ (0.30)
Proforma: (1)
Income before income taxes 698 1,434 4,044 3,102
Income taxes 269 539 1,557 1,167
Proforma net income $ 429 $ 895 $ (2,013) $ 1,935
Pro forma earnings per share $ 0.06 $ 0.13 $ 0.34(3) $ 0.29
======== ======== =========== ========
Weighted average shares and share equivalents 7,026 6,995
======== ===========
Pro forma shares outstanding 6,726 6,726
======== ========
</TABLE>
(1) Prior to January 29, 1997, the Company's operations were conducted
through two related partnerships. The pro forma data reflects the
Company's after-tax earnings as though it had been taxed as a
C-corporation for these periods. Income taxes for the three-month period
ended September 30, 1996 and the nine month period ended September 30,
1996, reflect the proforma 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.
(2) Amount represents a one-time, non-cash deferred income tax charge to
earnings 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 initial public offering in January 1997.
(3) Excludes the effect of the charge noted in (2) above.
See accompanying notes to the financial statements.
5
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NATIONAL AUTO FINANCE COMPANY, INC.
Statement of Stockholders' Equity
For the period beginning January 29 through September 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 $ 7,709 $ $ 10,046
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 cost 23 16,817 16,840
Dividends on preferred stock (107) (107)
Net income 1,960 1,960
------- ----- -------- -------- --------
Balance as of September 30, 1997 $ 2,295 $ 70 $ 20,190 $1,853 $24,408
======= ===== ======== ======== ========
</TABLE>
See accompanying notes to the financial statements.
6
<PAGE>
NATIONAL AUTO FINANCE COMPANY, INC.
Statements of Cash Flows
For the nine months ended September 30, 1997 (unaudited) and 1996
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1997 1996
---- ----
<S> <C> <C>
Cash Flow from operating activities:
Net income (loss) $ (2,013) $ 3,102
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Gains on sales of loans (13,431) (8,188)
Depreciation expense 80 217
Purchases of loans held for sale (127,583) (51,077)
Proceeds from sale of loans 127,583 51,540
Cash received from securitization 8,501 3,451
Amortization of ESR and income recognized from securitizations (3,701) (1,557)
Amortization of deferred financing cost 214 121
Amortization of deferred placement costs 254 42
Amortization of prepaid expenses 150 22
Changes in other assets and liabilities:
Other assets (1,382) (353)
Accounts payable and accrued expenses (354) 322
Accrued interest payable - related parties (104) (460)
Accrued interest payable - senior subordinated debts 30 212
Income taxes 6,057 --
--------- ---------
Net cash used in operating activities (5,699) (2,606)
Cash flow from investing activities:
Fixed assets purchased (959) (283)
Net invested in National Financial Auto Receivables Master Trust (10,640) (1,650)
--------- ---------
Net Cash used in investing activities (11,599) (1,933)
Cash flows from financing activities:
Proceeds from junior subordinated notes - related parties -- 700
Proceeds from First Union National Bank notes 222 --
Proceeds from senior subordinated debt -- 11,303
Payment of junior subordinated notes - related parties (5,211) (1,038)
Payment of preferred stock dividends (67) --
Proceeds from initial public offering 17,614 --
Preferred equity partners' contributions -- 1,606
--------- ---------
Net cash provided by financing activities 12,558 12,571
--------- ---------
Net increase/(decrease) in cash and cash equivalents (4,740) 8,032
Cash and cash equivalents at beginning of period 5,066 824
--------- ---------
Cash and cash equivalents at end of period $ 326 $ 8,856
========= =========
Cash paid for interest $ 1,346 $ 898
========= =========
</TABLE>
7
<PAGE>
NATIONAL AUTO FINANCE COMPANY, INC.
Statements of Cash Flows (Continued)
For the nine months ended September 30, 1997 (unaudited) and 1996
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1997 1996
---- ----
<S> <C> <C>
Non-cash financing activities:
Offering costs deferred in 1996 transferred to paid-in
capital in 1997 775 0
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 526 0
See accompanying notes to the financial statements.
</TABLE>
8
<PAGE>
NATIONAL AUTO FINANCE COMPANY, INC.
Notes to Financial Statements
September 30, 1997
(Unaudited)
(1) Basis of Presentation
The accompanying unaudited interim financial statements for the nine
month periods ended September 30, 1997 (unaudited) and 1996 have been
prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. 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" or "NAFI") 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 recorded in the first
quarter.
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"
("Excess Spread Receivable" or the "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 periodically for changes in value in the
aggregate 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.
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 standards
previously found in Accounting Principles Board Opinion No. 15,
"Earnings
9
<PAGE>
NATIONAL AUTO FINANCE COMPANY, INC.
Notes to Financial Statements
September 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 Interest in Securitizations
Investments and retained interest in securitizations were as follows at
September 30, 1997 and December 31, 1996:
September 30, December 31,
1997 1996
--------------- --------------
(dollars in thousands)
Spread Accounts $ 18,170 $ 8,221
Excess Spread Receivable 24,346 15,183
--------------- -------------
$ 42,516 $ 23,404
=============== =============
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 sales 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, servicing income, and the
amortization of ESR attributable to the time value of money. Servicing
income and the amortization of ESR attributable to the time value of
money is recognized over the expected life of the securitized Loans.
The ESR is reduced by the receipt of cash from the trusts, the
amortization of
the ESR and 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
10
<PAGE>
NATIONAL AUTO FINANCE COMPANY, INC.
Notes to Financial Statements
September 30, 1997
(Unaudited)
loss provisions are periodically reviewed by management and
any impairment in the ESR is charged to operations.
The ESR was as follows at September 30, 1997 and December 31, 1996:
September 30, December 31,
1997 1996
--------------- ---------------
(dollars in thousands)
Gross ESR $ 34,477 $ 20,697
Deferred servicing income (6,425) (3,654)
Deferred interest and gain on
securitizations (3,706) (3,208)
Deferred placement costs -- 1,348
--------------- ---------------
ESR, Net $ 24,346 $ 15,183
=============== ===============
(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 payment guaranty policies 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.
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.
11
<PAGE>
NATIONAL AUTO FINANCE COMPANY, INC.
Notes to Financial Statements
September 30, 1997
(Unaudited)
During the nine months ended September 30, 1997 and 1996, the following
activity took place with respect to securitization:
September 30, September 30,
1997 1996
--------------- ---------------
(dollars in thousands)
Principal balance of Loans sold $ 130,757 $ 56,152
=============== ===============
Gain on sales $ 13,431 $ 8,188
=============== ===============
Weighted average coupon rate on Loans
sold during the period 19.40% 19.70%
=============== ===============
(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 September 30, 1997 and 1996 was $163,000 and $436,000,
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 496,000 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
September 30, 1997 was $930,000.
(6) Notes Payable
The Company has entered into a $1.5 million revolving credit agreement
("FUNB Note") dated as of August 25, 1997 with First Union National
Bank to fund the purchase of furniture and equipment ("collateral") for
the Company's Jacksonville Servicing Division and corporate
headquarters. FUNB retains a security interest in the collateral. The
FUNB Note accrues interest at the 1 month London Interbank Offered
Rate plus 2.5% (8.15% at September 30, 1997), payable monthly. As of
September 30, 1997, the principal amount owed by the Company was
approximately $222,000.
12
<PAGE>
NATIONAL AUTO FINANCE COMPANY, INC.
Notes to Financial Statements
September 30, 1997
(Unaudited)
As of September 29, 1997, the Company has entered into a three-year,
$10 million revolving credit facility with BankBoston, N.A., secured by
motor vehicle installment contracts, with a short-term $8.0 million
working capital subfacility secured by the Company's investments and
retained interest in its securitizations, which matures on January 19,
1998.
(7) 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 third quarter of 1997, stock options with respect to an
aggregate of 371,000 shares of Common Stock have been granted to
sixteen key employees and three directors at the fair market value at
the date of grant. At September 30, 1997, exercise of 341,000 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.
(8) Subsequent Events
Upon the occurrence of a Permanent Securitization failing to meet
certain portfolio performance tests requiring that the Loan portfolio
of each Permanent Securitization trust have (i) an average delinquency
rate less than a specified percentage; (ii) a cumulative default rate
less than specified percentages that vary based on the aging of the
relevant trust's Loan pool; and (iii) a cumulative net loss rate less
than specified percentages that vary based on the aging of the
relevant trust's Loan pool (an "Insurance Agreement Event of
Default"), the Company will be in default under its insurance
agreements with FSA. Upon an Insurance Agreement Event of Default, FSA
may (i) permanently suspend distributions of cash flow to the Company
from the related securitization trust and all other FSA-insured trusts
until the asset-backed securities have been paid in full; (ii) capture
all excess cash flows from performing FSA-insured trusts; (iii)
increase its premiums; and (iv) replace the Company as servicer with
respect to all FSA-insured trusts. In April 1997, the Permanent
Securitization trust formed in November 1995 experienced an Insurance
Agreement Event of Default. In October 1997, the Company entered into
an agreement with FSA that (i) permanently waived the Insurance
Agreement Event of Default, thereby permitting distributions of excess
cash flows to the Company; (ii) modified the portfolio performance
tests described above to increase the thresholds through June 1998;
(iii) required the Company to cause the spread account for each
FSA-insured securitization trust to be cross-collateralized to the
spread accounts established in connection with each of its other
FSA-insured securitization trusts; (iv) permitted the Company to enter
into a $10.0 million revolving credit agreement with BankBoston, N.A.
(the "Revolving Credit Agreement"); (v) provided that FSA would
consider providing credit enhancement for the Company's next Permanent
Securitization; and (vi) provided for the issuance of 100,000 shares
of Common Stock to FSA.
13
<PAGE>
NATIONAL AUTO FINANCE COMPANY, INC.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
September 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 September 30, 1997 compared to
December 31, 1996, and its results of operations for the three and nine month
periods ended September 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 included elsewhere herein 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.
Securitization Activities
NAFI is a consumer finance company specializing in the business of
purchasing, financing, securitizing and servicing Loans to borrowers with
limited credit histories, low incomes or past credit problems ("Non-Prime
Consumers"). The Company currently finances its purchases of Loans primarily
through an asset securitization program that involves (i) the securitized
warehousing of substantially 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. The following discussion summarizes the effect of the Company's
securitization activities on its revenues, expenses and cash flows.
Revenues. The Company derives revenues primarily from the gains it
recognizes in connection with the purchase and daily sales of its Loans to the
Master Trust. In determining its reported gain on sales of Loans, the Company
adds the total interest payments due from borrowers to the Dealer Discount and
then deducts from this sum amounts equal to estimates of future borrowing costs,
servicing costs, Loan losses, Loan prepayments and fees and costs associated
with securitization. The Company then discounts the remaining cash flow to its
net present value. The resulting amount is reported as gain on sales of Loans in
the Company's income statement.
In addition, upon the sales of its Loans, the Company records an asset on
its balance sheet, the excess spread receivable or ESR, which represents the
non-cash portion of the gain on sales of Loans and is reflected on the balance
sheet as a component of "investments and retained interest in securitizations."
As cash is received from the securitization trusts, the Company records as
income the amortization of that portion of the ESR representing the deferred
gain on sales. In the event that the actual loss or prepayment experience of
the Company's Loans differs materially from the estimates established in
connection with the gain on sales calculation, the Company may be required to
revalue, and possibly reduce, the ESR, which would result in reduced income in
future periods and reduced total assets.
As the result of the Company's continued detailed review and analysis,
including extensive computer modeling, of factors effecting the performance of
the Company's Loan portfolio and the related carrying value of the ESR, the
Company adjusted the gain on sales of Loans and servicing income and
the value of the ESR in the third quarter of 1997 by a total of
$2,000,000 pre-tax, consisting of (i) the expensing of certain previously
capitalized fees and costs incurred in connection with prior securitization
transactions (net of certain previously amortizing deferred interest income) in
the pre-tax amount of $1,389,000, and (ii) an increase of the Company's net loss
estimate for the Company's Loan portfolio, in the pre-tax amount of $611,000
(net of $660,000 of related servicing income).
The Company also receives monthly income from the securitization trusts in
cash as a fee paid for the Company's servicing of the Loans. Servicing income is
amortized over the expected life of the related Loans, and typically offsets the
direct expenses the Company incurs in connection with the servicing of the
Servicing Portfolio (the aggregate outstanding principal amount of Loans for
which the Company performs servicing and collections). Finally, the Company also
earns interest income on its cash investments and from Loans it temporarily
holds for sale pending their securitization. Unlike many of its competitors, the
Company earns only a nominal amount of interest on Loans held for sale because
the Company securitizes substantially all of its Loans on a daily basis and,
therefore, derives gains from such sales.
Distributions of Cash from Securitizations. When the Company securitizes
Loans, it is required to establish and maintain credit enhancements on a
trust-specific basis for the benefit of investors in the asset-backed
securities. The Company uses initial cash deposits, plus a portion of the excess
cash flows from the Loans (that is, the difference between cash received by the
relevant trust and its payments on the asset-backed securities and trust
expenses), to fund the spread accounts. Once the funds in the spread accounts
meet specified levels (which may be increased if the performance of the relevant
Loan pool deteriorates), any excess cash flows thereafter will be released to
the Company on a monthly basis. Any remaining cash in the spread accounts after
the asset-backed securities have been paid in full also will be released to the
Company. The amount of excess cash available for distribution to the Company
will be affected by the Servicing Portfolio's actual loss and prepayment
experience.
14
<PAGE>
NATIONAL AUTO FINANCE COMPANY, INC.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
September 30, 1997
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 September 30, 1997 compared to the three month period
ended September 30, 1996.
Income from Operations. The Company reported net income after preferred stock
dividends for the three month period ended September 30, 1997 of $389,000. This
is a decrease of 57%, compared to pro forma net income after a provision for
income taxes ("pro forma income taxes") of $895,000 for the three month period
ended September 30, 1996.
Gain on Sales of Loans. The Company's Loan purchasing and servicing activities
expanded significantly during the three month period ended September 30, 1997
compared to the three months ended September 30, 1996. The Company purchased
4,205 Loans, having a principal balance of $51.2 million, during the three month
period ended September 30, 1997 compared to 1,866 Loans, having a principal
balance of $23.2 million, during the three month period ended September 30,
1996. These loan purchases consisted of 2,864 Loans purchased from Dealers
($39.3 million principal balance) and 1,341 Loans purchased from Third Party
Originators ($11.9 million principal balance) during the three month period
ended September 30, 1997, all of which were sold to the Master Trust. This
compares to 1,701 Loans purchased from Dealers ($21.4 million principal
balance) and 165 Loans purchased from Third Party Originators ($1.8 million
principal amount) during the three month period ended September 30, 1996, all of
which were sold to the Master Trust. For the three month period ended September
30, 1997, the Company recognized a gain on sales of Loans of $3.6 million,
compared to $3.6 million of gain on sales of Loans recognized for the three
month period ended September 30, 1996. Notwithstanding a 121% increase in the
dollar volume of Loans purchased during the three month period ended
September 30, 1997 compared to the three month period ended September 30, 1996,
gain on sales of Loans remained constant due to the $2,000,000 pre-tax
adjustment to the ESR (net of $660,000 of related servicing income) in the three
month period ended September 30, 1997.
15
<PAGE>
NATIONAL AUTO FINANCE COMPANY, INC.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
September 30, 1997
The table below sets forth certain information relating to the Company's Loan
purchasing activities:
<TABLE>
<CAPTION>
Three month period ended
September 30,
----------------------------------
1997 1996
-------------- ---------------
<S> <C> <C>
Number of Loans purchased from Dealers during period 2,864 1,701
Number of Loans purchased as portfolios 1,341 165
-------------- ---------------
Total number of Loans purchased 4,205 1,866
============== ===============
<CAPTION>
(dollars in thousands)
<S> <C> <C>
Principal balance of Loans from Dealers purchased during period $ 39,287 $ 21,427
Principal balance of Loans in portfolio 11,921 1,772
-------------- ---------------
Total balance of Loans purchased $ 51,208 $ 23,199
============== ===============
Amount funded (1) $ 50,075 $ 22,014
============== ===============
</TABLE>
(1) Amount funded represents the price at which the Company purchases a
Loan from a Dealer or Third-Party Originator (i.e., the amount
actually paid to a Dealer or Third-Party Originator), calculated as
the principal of the Loan purchased less a negotiated discount.
Loan Loss Provision. The Company's gain on sales of Loans calculation includes
an amount equal to an estimate of cumulative net losses to be experienced with
respect to the Loans securitized. For the three month period ended September 30,
1997, the gain on sales of Loans calculations made throughout such period
included a total Loan loss estimate of approximately $5.8 million, or 11.0% of
the total amount funded, compared to approximately $1.4 million, or 6.2% of the
total amount funded, for the three month period ended September 30, 1996. At
September 30, 1997, the securities issued by Permanent Securitization trusts to
investors to that date had a weighted average yield of 6.34% per annum, while
the Loans purchased and securitized by the Company since inception to that date
had a weighted average yield to the Company of 21.0% per annum.
The Company recently has experienced significant servicing and collection
problems with the Servicing Portfolio, which the Company believes result
primarily from serious deficiencies in the servicing and collection performance
of its outside servicer. The Company believes that these performance
deficiencies are largely responsible for the increase in delinquency and net
loss experience of the Servicing Portfolio throughout the nine months ended
September 30, 1997. In response thereto, the Company's estimates for Loan losses
were increased to 11.0% for the third quarter of 1997, compared to 9.0% for the
second quarter and 7.0% for the first quarter. The Company also added, in the
third quarter of 1997, a total of $1.3 million to its loss reserves, as a result
of the adjustment to the value of the ESR previously described. The Company's
Servicing Division began assuming collections responsibility for Loans more than
30 days past due in July 1997, and assumed responsibility for collections of the
entire Servicing Portfolio on October 1, 1997. Since initiating self-management
of collections in July 1997, the outstanding principal balance of Loans that
were more than 30 days past due has decreased to 9.0% of the Company's Servicing
Portfolio as of September 30, 1997, from 10.1% as of June 30, 1997. Although
there can be no assurances, management believes that this improvement will
continue as the Company completes its transition to in-house servicing and
collections.
Loan Prepayment Provision. The Company's gain on sales of Loans calculation also
assumes estimates of potential prepayments with respect to the Loans
securitized. For the three months ended September 30, 1997, the gain on sales of
Loan calculations made throughout such period included a total Loan prepayment
estimate of approximately $4.9 million, or 9.7% of the amount funded, compared
to approximately $3.0 million, or 13.6% of the amount funded, for the three
months ended September 30, 1996.
Total reserves (Loan loss and prepayments) calculated at the securitization
trust level as of September 30, 1997 were $25.0 million, or 13.1% of the
Servicing Portfolio, compared to $13.8 million, or 13.4% of the Servicing
Portfolio, as of December 31, 1996. An increase in losses or prepayments or
an acceleration of prepayments above the amounts provided for could result in
reduced cash flow to the Company and a possible reduction of the value of its
investments and retained interest in securitizations.
Amortization of Excess Spread Receivable. The amortization of excess spread
receivable for the three months ended September 30, 1997 was $583,000 compared
to $345,000 for the three months ended September 30, 1996. The growth was
attributable to the growth of the securitized Servicing Portfolio and the
resulting growth of the ESR.
Servicing Income. The Company receives a servicing fee of approximately 4% of
the principal amount of the Loans sold to the Master Trust and 2% of the
principal amount of the Loans subsequently sold to the Permanent
Securitizations, which typically offsets actual servicing expenses incurred by
the Company. This income is calculated as part of the gain on sales of Loans
calculation and is amortized over the expected life of the Loans. The
amortization of such servicing income was $1.3 million for the three months
ended September 30, 1997 compared to $259,000 for the three months ended
September 30, 1996. The growth was attributable to the increase in the size of
the Servicing Portfolio.
16
<PAGE>
NATIONAL AUTO FINANCE COMPANY, INC.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
September 30, 1997
Other Income. Other income consists of interest income on cash investments,
other income and finance charges earned. The Company generated approximately
$210,000 of other income for the three months ended September 30, 1997 compared
to $57,000 for the three months ended September 30, 1996. The increase in other
income was primarily attributable to interest earned on the net proceeds of the
Company's initial public offering, pending utilization thereof.
Total Expenses. The Company reported total operating expenses of $5.0 million
for the three months ended September 30, 1997, compared to approximately $2.8
million for the three months ended September 30, 1996. These expenses consisted
primarily of interest on subordinated notes, salaries and employee benefits,
direct Loan acquisition expenses and servicing expenses. Total expenses, as a
percentage of the average Servicing Portfolio, decreased from 15.7% as of
September 30, 1996 to 13.6% as of September 30, 1997.
Interest expense for the three months ended September 30, 1997 was $343,000,
compared to $372,000 for the three months ended September 30, 1996. This
decrease was the result of the reduction of interest expense on the Company's
Junior Subordinated Notes due to a partial principal pay-down with the proceeds
of the Company's initial public offering. The Senior Subordinated Notes bear
interest at a rate of 10% per annum payable quarterly in arrears, commencing
October 1, 1996. The Company's Junior Subordinated Notes bear interest at a rate
of 8% per annum, payable quarterly in arrears, commencing September 30, 1996.
Salaries and employee benefits for the three months ended September 30, 1997
were approximately $1.7 million compared to approximately $1.0 million for the
three months ended September 30, 1996. These expenses consisted primarily of
salaries and wages, performance incentives, employee benefits, and payroll
taxes. The increase in expenses primarily reflects the hiring of additional
personnel and other costs associated with the growth of the Company. The
Company's number of full-time employees excluding employees of the Servicing
Division whose salaries and employee benefits expenses are included in the
Servicing Division expenses increased from 67 as of September 30, 1996 to 98 as
of September 30, 1997. The Company expects that its number of full time
employees will continue to increase commensurate with the growth of the Company.
Direct Loan acquisition expenses for the three months ended September 30, 1997
were $936,000 compared to $528,000 for the three months ended September 30,
1996. These expenses consisted primarily of Dealer incentives, fees paid to
Strategic Alliance partners, broker fees, credit information fees and telephone
expenses. Direct Loan acquisition expenses declined as a percentage of Loans
funded to 1.9% for the three months ended September 30, 1997 from 2.4% for the
three months ended September 30, 1996.
Servicing costs for the three months ended September 30, 1997 were $903,000,
compared to $298,000 for the three months ended September 30, 1996. Servicing
costs consisted primarily of a monthly fee paid to an outside servicer for each
active Loan and the cost of vendor's single interest insurance maintained by the
Company. Servicing fees paid to the Company's outside servicer for the three
months ended September 30, 1997 were $779,000, compared to $300,000 for the
three months ended September 30, 1996. The increase in servicing costs
primarily reflected the growth in the Servicing Portfolio. The Company's
Servicing Portfolio was approximately $190.7 million, representing 17,593
outstanding Loans, as of September 30, 1997 compared to an approximately $82.8
million Servicing Portfolio, representing 7,286 outstanding Loans, as of
September 30, 1996. The Company will continue to pay its outsider servicer fees
during the period of transition to the full servicing and collecting operations
of the Servicing Division.
17
<PAGE>
NATIONAL AUTO FINANCE COMPANY, INC.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
September 30, 1997
The Company has assumed responsibility for collecting all of its Loans, and
anticipates assuming responsibility for the other servicing of its Loans and MIS
operations in the first quarter of 1988. Servicing Division expenses consisted
primarily of salaries and other operating expenses relating to the Servicing
Division and totaled $699,000 for the nine months ended September 30, 1997. In
addition, the Company capitalized $574,000 of expenses during the three months
ended September 30, 1997. The Company commenced operations in its Servicing
Division during July 1997 and had hired 76 employees as of September 30, 1997
and expects to hire more employees by the end of this year for both collections
and servicing of its Loans.
Other operating expenses for the three months ended September 30, 1997 were
$610,000 compared to $431,000 for the three months ended September 30, 1996.
These expenses consisted primarily of telecommunications, travel, professional
fees, insurance expenses, and MIS expenses. The increase in other operating
expenses primarily reflected the growth in the amount of Loans purchased and
serviced by the Company, the hiring of additional personnel and the other costs
associated with the growth of the Company.
Nine month period ended September 30, 1997 compared to the nine month period
ended September 30, 1996.
Income from Operations. The Company reported net income after preferred stock
dividends for the nine months ended September 30, 1997 of $2.4 million, before a
one time, non-cash, deferred income tax charge to earnings of $4.5 million,
arising in the first quarter of 1997, which reflected a deferred income tax
liability that arose from the reorganization of the Company's business from a
partnership form to a taxable corporate form in connection with the initial
public offering in January 1997. This is an increase of 23% compared to pro
forma net income after a provision for income taxes of $1.9 million for the nine
month period ended September 30, 1996.
Gain on Sales of Loans. The Company's Loan purchasing and servicing operations
expanded significantly during the nine months ended September 30, 1997 compared
to the nine months ended September 30, 1996. The Company purchased 10,914 Loans,
having a principal balance of $130.8 million, during the nine month period ended
September 30, 1997 compared to 4,537 Loans, having a principal balance of $56.2
million, for the nine month period ended September 30, 1996. These Loan
purchases consisted of 7,271 Loans purchased from Dealers ($98.6 million
principal balance) and 3,643 Loans purchased from Third-Party Originators ($32.2
million principal balance) during the nine month period ended September 30,
1997, all of which were sold to the Master Trust. This compares to 4,339 Loans
purchased from Dealers ($54.1 million principal balance) and 198 Loans purchased
from Third-Party Originators ($2.1 million principal balance) during the nine
month period ended September 30, 1996, all of which were sold to the Master
Trust. For the nine months ended September 30, 1997, the Company recognized a
gain on sales of Loans of $13.4 million, representing a 64.0% increase over the
$8.2 million of gain on sales of Loans recognized for the nine months ended
September 30, 1996. This increase was primarily the result of a 133.0% increase
in the dollar volume of Loans purchased during the nine months ended September
30, 1997 compared to the nine months ended September 30, 1996.
18
<PAGE>
NATIONAL AUTO FINANCE COMPANY, INC.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
September 30, 1997
The table below set forth certain information relating to the Company's Loan
purchasing activities:
<TABLE>
<CAPTION>
Nine month period ended
September 30,
----------------------------------
1997 1996
-------------- ---------------
<S> <C>
Number of Loans purchased from Dealers during period 7,271 4,339
Number of Loans purchased as portfolios 3,643 198
-------------- ---------------
Total number of Loans purchased 10,914 4,537
============== ===============
(dollars in thousands)
Principal balance of Loans from Dealers purchased during period $ 98,566 $ 54,069
Principal balance of Loans in portfolio 32,191 2,083
-------------- ---------------
Total balance of Loans purchased $ 130,757 $ 56,152
============== ===============
Amount funded (1) $ 127,584 $ 53,216
============== ===============
</TABLE>
(1) Amount funded represents the price at which the Company purchases a
Loan from a Dealer or Third-Party Originator (i.e., the amount
actually paid to a Dealer or Third-Party Originator), calculated as
the principal of the Loan purchased less a negotiated discount.
Loan Loss Provision. For the nine months ended September 30, 1997, the gain on
sales of Loans calculations made throughout such period included a total Loan
loss estimate of approximately $11.5 million, or 9.0% of the total amount
funded, compared to approximately $3.3 million, or 6.3% of the total amount
funded, for the nine months ended September 30, 1996.
Loan Prepayment Provision. For the nine months ended September 30, 1997, the
gain on sales of Loans calculations made throughout such period included a total
Loan prepayment estimate of approximately $14.7 million, or 11.5% of the amount
funded, compared to approximately $7.2 million, or 13.5% of the amount funded,
for the nine months ended September 30, 1996. During the nine months ended
September 30, 1997, the Company decreased its prepayment estimate to reflect a
decrease in the Servicing Portfolio's actual prepayment experience.
Total reserves (Loan losses and prepayments) calculated at the
securitization trust level as of September 30, 1997 were $25.0 million, or 13.1%
of the Servicing Portfolio, compared to $9.8 million, or 11.9% of the Servicing
Portfolio, as of September 30, 1996.
Amortization of Excess Spread Receivable. The amortization of excess spread
receivable for the nine months ended September 30, 1997 was $1.5 million
compared to $970,000 for the nine months ended September 30, 1996. The
growth was attributable to the growth of the securitized Servicing Portfolio
and the resulting growth of the ESR.
Servicing Income. The amortization of such servicing income was $2.2 million for
the nine months ended September 30, 1997 compared to $587,000 for the nine
months ended September 30, 1996. The growth was attributable to the increase in
the size of the Servicing Portfolio.
Other Income. Other income consists of interest income on cash investments,
other income and finance charges earned. The Company generated approximately
$712,000 of other income for the nine months ended September 30, 1997
compared to $111,000 for the nine months ended September 30, 1996. The
increase in other income was primarily attributable to interest earned on the
net proceeds of the Company's initial public offering, pending utilization
thereof.
Total Expenses. The Company reported total expenses of $13.8 million for the
nine months ended September 30, 1997 compared to approximately $6.7 million for
the nine months ended September 30, 1996. These expenses consisted primarily of
interest expense on subordinated notes, salaries and employee benefits, direct
Loan acquisition expenses and servicing expenses. Total annualized expenses, as
a percentage of the average principal balance of the Servicing Portfolio
decreased from 10.75% as of September 30, 1996 to 9.4% as of September 30,
1997.
Interest expense for the nine months ended September 30, 1997 was $1.1
million compared to $676,000 for the nine months ended September 30, 1996. The
increase was the result of the interest expense incurred on the Company's sale
in August 1996 of $12.0 million aggregate principal amount of Senior
Subordinated notes.
Salaries and employee benefits for the nine months ended September 30, 1997
were approximately $4.6 million compared to approximately $2.5 million for the
nine months ended September 30, 1996. These expenses consisted primarily of
salaries and wages, performance incentives, employee benefits and payroll taxes.
The increase in expenses reflects the hiring of additional personnel and costs
associated with the growth of the Company.
Direct Loan acquisition expenses for the nine months ended September 30,
1997 were $2.5 million compared to $1.2 million for the nine months ended
September 30, 1996. These expenses consisted primarily of Dealer incentives,
fees paid to Strategic Alliance partners, broker fees, credit information fees
and telephone expenses. Direct Loan acquisition expenses declined as a
percentage of Loans funded to 2.0% for the nine months ended September 30, 1997
from 2.3% for the nine months ended September 30, 1996.
Servicing costs for the nine months ended September 30, 1997 were $2.3
million compared to $778,000 for the nine months ended September 30, 1996.
Servicing costs consisted primarily of a monthly fee to an outside servicer for
each active Loan and the cost of vendor's single interest insurance maintained
by the Company. Servicing fees paid to the Company's outside servicer for the
nine months ended September 30, 1997 were $1.9 million compared to $718,000 for
the nine months ended September 30, 1996. The increase in servicing costs
primarily reflected the growth in the Servicing Portfolio.
Other operating expenses for the nine months ended September 30, 1997 were
$2.1 million compared to $1.2 million for the nine months ended September 30,
1996. These expenses consisted primarily of telecommunications, travel,
professional fees, insurance expenses and MIS expenses. The increase in other
operating expenses primarily reflected the growth in the amount of Loans
purchased and serviced by the Company, the hiring of additional personnel and
the other costs associated with the growth of the Company.
Loan Loss and Delinquency Experience
Loan losses and prepayments are continuously monitored on an overall portfolio
and individual month-of-purchase pool basis. Pursuant to the requirements of
SFAS No. 125, the Company reviews its actual Loan loss experience in conjunction
with its periodic valuation of the ESR. Charge-off policies are based upon an
account-by-account review of delinquent Loans by the Company. The Company
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 uncollectible.
19
<PAGE>
NATIONAL AUTO FINANCE COMPANY, INC.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
September 30, 1997
The Company recently has experienced significant servicing and collections,
problems with the Servicing Portfolio, which the Company believes results
primarily from serious deficiencies in the servicing and collection performance
of its outside servicer. The Company believes that these performance
deficiencies are largely responsible for the Servicing Portfolio's delinquency
and loss ratio increasing from 7.95% at December 30, 1996 to 10.08% at June 30,
1997, which, in turn, caused an Insurance Agreement Event of Default in April
1997 with respect to the 1995 Permanent Securitization and other FSA
performance tests to be violated with respect to the 1995 and 1996 Permanent
Securitizations. The Company's Servicing Division began assuming collections
responsibility for Loans more than 30 days past due in July 1997, and assumed
responsibility for collections of the entire Servicing Portfolio on October 1,
1997, although it continues to use its outside servicer's customer service and
MIS operations. The Company expects to begin customer service and MIS operations
in the first quarter of 1998. During the transition period when its outside
servicer continues to provide customer service and MIS service for the Servicing
Portfolio, the Company will experience increased costs and will not have
complete self management of the quality and timeliness of servicing efforts.
The Company has not previously serviced or collected Loans and therefore is
subject to the inherent risks associated with initiating new operations, such as
unforeseen operational, financial and management problems. There can be no
assurance that the Company will be able to service and collect the Servicing
Portfolio on a cost effective and timely basis or that future delinquency and
loss ratios will not increase.
The gain on sales of Loans the Company recognizes from the sale of Loans to the
Master Trust, and the cash flow from its securitizations are substantially
dependent on the Servicing Portfolio's delinquency and loss performance.
Increases in delinquencies and losses may result in (i) increased capital and/or
collateral credit enhancement requirements for securitizations; (ii) reductions
in cash flow to the Company; and (iii) additional violations of Permanent
Securitization portfolio performance tests. Consequently, the Company's failure
to effectively service and collect the Servicing Portfolio could have a material
adverse effect on the Company's financial condition, results of operations and
cash flows.
Since October 1994, the Company has maintained, at its own expense, supplemental
vendor single interest insurance that protects the Company's interest in Loan
collateral against uninsured physical damage (including total loss) in
instances where neither the vehicle nor the borrower can be found.
The following table summarizes the Trusts' Loan losses and liquidation recovery
experience from the inception of the Company:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
----------------- ----------------
(dollars in thousands)
<S> <C> <C>
Aggregate number of Loans purchased 21,589 10,675
Aggregate principal balance of Loans purchased $ 265,530 $ 134,773
Principal balance of the Servicing Portfolio $ 190,709 $ 102,852
Number of Loans in the Servicing Portfolio 17,593 9,063
Aggregate gross charge-off principal balance $ 20,084 $ 7,760
Aggregate liquidation recoveries (9,781) (4,232)
--------------- --------------
Aggregate net charge-offs $ 10,303 $ 3,528
================ ==============
Average principal balance of the Servicing Portfolio $ 147,394 $ 71,181
Net charge-offs as a percent of the average
principal balance of the Servicing Portfolio
(annualized) 6.13% 4.04%
Principal balance of Loans related to vehicles held in
Inventory $ 3,171 $ 2,266
Inventory as a percentage of the Servicing Portfolio 1.66% 2.20%
</TABLE>
20
<PAGE>
NATIONAL AUTO FINANCE COMPANY, INC.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
September 30, 1997
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 and repossession with
respect to the Servicing Portfolio.
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
--------------- ----------------
(dollars in thousands)
<S> <C> <C>
Number of Loans in the Servicing Portfolio 17,593 9,063
Principal balance of the Servicing Portfolio $ 190,709 $ 102,852
Principal balance delinquent (period of delinquency)
31 to 60 days $ 11,249 $ 6,104
61 to 90 days 2,875 1,596
91 days or more 3,028 487
--------------- ----------------
Total delinquencies $ 17,152 $ 8,187
=============== ================
Total delinquencies as a percentage of the
principal balance of the Servicing Portfolio 8.99% 7.95%
=============== ================
</TABLE>
(insert RIDER 22 here)
21
<PAGE>
NATIONAL AUTO FINANCE COMPANY, INC.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
September 30, 1997
Management believes that the payment practices of Non-Prime Consumers are
partially a function of seasonality. Because 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. 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.
The Company monitors historical loss experience on an overall portfolio and 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 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 September 30, 1997, no such adjustments have been made due to
actual losses; however, the Company has added, in the third quarter of 1997, a
total of $1.3 million to its loss reserves, as a result of the adjustment to the
value of the ESR previously described.
The following tables summarize the vintage static pools of the Company's
Servicing Portfolio for all Loans purchased by the Company from inception
through the period ending June 30, 1997, and include loss data through September
30, 1997:
<TABLE>
<CAPTION>
4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q
1994 1995 1995 1995 1995 1996 1996 1996 1996 1997 1997
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Totals (dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Number of Loans pur-
chased during period 17,382 300 795 920 1,003 868 1,185 1,486 1,866 2,252 2,878 3,829
Number of outstanding
Loans at end of
period 13,412 140 364 455 583 539 770 1,065 1,433 1,894 2,616 3,553
Principal balance of
Loans purchased
during period $214,291 $3,820 $9,704 $11,238 $13,675 $11,378 $14,612 $18,341 $23,201 $28,805 $35,773 $43,744
Principal balance of
Loans outstanding
at end of period $140,645 $1,058 $2,554 $ 3,461 $ 5,348 $ 5,150 $ 7,410 $10,479 $15,072 $21,459 $29,678 $38,976
Principal balance of
Loans outstanding as
a percentage of the
original principal
balance purchased 65.63% 27.70% 26.31% 30.80% 39.11% 45.26% 50.71% 57.13% 64.96 74.50% 82.96% 89.10%
Cumulative Net Loss 4.80% 10.38% 10.08% 9.36% 8.63% 8.06% 7.16% 7.19% 5.38% 3.69% 1.90% 0.99%
</TABLE>
PERIOD OF ORIGINATION
Cumulative Net Losses as Percentage of Original Principal Balance
of Loans Sold During Period
<TABLE>
<CAPTION>
4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q
1994 1995 1995 1995 1995 1996 1996 1996 1996 1997 1997
Months From Origination ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
2 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
3 0.00% 0.00% 0.00% 0.00% 0.05% 0.00% 0.00% 0.04% 0.00% 0.00% 0.00%
4 0.00% 0.00% 0.00% 0.03% 0.17% 0.00% 0.00% 0.04% 0.01% 0.02% 0.18%
5 0.00% 0.07% 0.10% 0.19% 0.21% 0.10% 0.10% 0.16% 0.00% 0.06% 0.46%
6 0.05% 0.14% 0.27% 0.43% 0.70% 0.39% 0.32% 0.45% 0.25% 0.23% 0.99%
7 0.05% 0.24% 0.67% 0.88% 0.96% 0.60% 0.64% 0.79% 0.61% 0.58%
8 0.31% 0.86% 1.42% 1.24% 1.05% 0.80% 1.14% 1.06% 1.21% 1.19%
9 0.47% 1.34% 1.98% 2.18% 1.57% 1.38% 1.73% 1.92% 1.89% 1.90%
10 0.51% 1.70% 2.40% 2.35% 2.28% 1.81% 2.70% 2.59% 2.55%
11 1.08% 1.73% 2.62% 2.70% 2.40% 2.00% 3.29% 3.36% 3.40%
12 1.36% 2.52% 3.14% 3.11% 3.08% 2.43% 4.34% 3.65% 3.69%
13 1.75% 3.04% 3.37% 3.60% 3.48% 3.35% 5.19% 4.47%
14 1.72% 3.39% 3.71% 3.58% 3.69% 3.60% 5.58% 5.04%
15 3.12% 3.90% 3.99% 4.13% 4.24% 4.42% 6.00% 5.38%
16 3.21% 4.20% 4.27% 4.60% 4.58% 4.71% 6.50%
17 3.80% 4.52% 4.49% 4.98% 5.36% 5.38% 6.89%
18 4.45% 4.70% 5.01% 5.14% 5.52% 5.80% 7.19%
19 4.55% 4.94% 5.35% 5.49% 6.09% 6.68%
20 4.91% 5.18% 5.75% 4.89% 6.43% 6.95%
21 4.91% 5.77% 6.13% 6.46% 6.65% 7.16%
22 5.05% 5.75% 6.84% 6.76% 7.10%
23 5.05% 6.24% 7.44% 7.02% 7.51%
24 5.79% 6.34% 7.75% 7.10% 8.06%
25 5.78% 7.01% 8.28% 7.78%
26 6.20% 7.30% 8.52% 8.37%
27 6.80% 7.65% 8.66% 8.63%
28 7.15% 8.00% 9.08%
29 7.49% 9.02% 9.31%
30 8.06% 9.15% 9.36%
31 8.23% 9.73%
32 9.07% 9.90%
33 9.07% 10.08%
34 9.61%
35 9.89%
36 10.38%
</TABLE>
22
<PAGE>
NATIONAL AUTO FINANCE COMPANY, INC.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
September 30, 1997
Liquidity and Capital Resources
General
Since inception, the Company has funded its operations and the growth of
its Loan purchasing activities primarily through six 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 indebtedness; (v) capital contributions of certain affiliates of the
Company; and (vi) proceeds from the Company's initial public offering of Common
Stock.
The Company has experienced an acceleration in the use of cash during 1997
compared to 1996, due, in large part, to six factors: (i)an increase in the
volume of Loans purchased from Dealers; (ii)a higher volume of Loans
purchased from Third-Party Originators; (iii) a decrease in the average
Dealer Discount; (iv) costs associated with the implementation of the
Company's Servicing Division and the corresponding overlap of costs between the
Servicing Division and its outside servicer; (v) an increase in the initial
cash deposit to the spread account required as a credit enhancement for the
Permanent Securitization completed in July 1997 and (vi) a change in the
credit support requirements of the Company's other securitization facilities,
which has resulted in, and may continue in the future to result in, additional
capital of the Company being maintained in the spread accounts of its Permanent
Securitizations.
The Company's business requires substantial cash to support the funding of
accounts for its securitizations, issuance costs of its asset securitizations,
operating expenses, tax payments, debt service and other cash requirements.
These cash requirements increase as the number of Loans purchased and serviced
by the Company increase. Historically, the Company has operated on a negative
operating cash flow basis and its negative operating cash flow is expected to
continue for the foreseeable future. The Company has funded its negative
operating cash flows principally through borrowings under its secured financing
facilities, issuances of subordinated debt and sales of equity securities. The
Company will in the future be required to issue additional debt or equity, which
could dilute the interests of stockholders of the Company, in order to fund, in
part, its negative operating cash flow, and is currently pursuing several such
debt and equity raising transactions. The availability under the Company's
existing Master Trust warehousing facility has been increased by up to $25
million, to a total of up to $100 million, which is sufficient to fund the
Company's anticipated Loan purchases through the end of 1997. The Company
anticipates completing its next Permanent Securitization transaction, in the
amount of approximately $70 million, in mid-December 1997, the proceeds of which
will pay down amounts outstanding under the Master Trust facility, thereby
creating additional availability. There can be no assurance, however, that such
transaction will be completed before year-end or at all. In addition, there
can be no assurance 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. 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, results of operations and cash flows.
Net cash used in operating activities was $5.7 million during the nine
month period ended September 30, 1997 compared to net cash used of $2.6 million
during the nine month period ended September 30, 1996. Cash used for purchasing
Loans was $127.6 million, an increase of $76.5 million, or 150.0%, over cash
used for purchasing Loans in the prior year's first nine month period. Cash
provided from the sales of Loans to the Master Trust was $127.6 million, an
increase of $76.0 million, or 148.0%, over cash provided from the sales of Loans
to the Master Trust in the prior year's first nine month period.
The Company is required to maintain a minimum equity position in the
Revolving Securitization of 10.0% of the net serviced receivables. This equity
currently consists of cash invested by the Company and the unamortized Dealer
Discount. As of September 30, 1997, the Company had a 10.0% equity investment in
the Revolving Securitization.
During the nine month period ended September 30, 1997, cash used for
initial deposits to spread accounts was $10.6 million. Cash distributed to the
Company from securitizations, representing cash flows related to the ESR
for the nine month period ended September 30, 1997 was $8.5 million, an increase
of $5.0 million, or 146.0%, 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 Loans
that make up the Company's Servicing Portfolio and the pools' performance
experience.
As of September 30, 1997, the Company had total assets of $46.6 million
compared to approximately $31.2 million as of December 31, 1996, and
approximately $12.0 million as of December 31, 1995. These assets consisted
primarily of cash, and investments and retained interest in securitizations.
As of September 30, 1997, the Company retained approximately $24.3 million
of ESRs and approximately $18.2 million of spread accounts, which combined
represented $42.5 million shown on the balance sheets as investments and
retained interest in securitizations, representing 91.0% of the total assets of
the Company. 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 September 30, 1997, the principal amount owed by the Company on the
Junior Subordinated Notes was approximately $2.0 million (including $40,000 of
accrued interest), which bear interest at an annual rate of 8.0%, and the
principal amount owed by the Company on the Senior Subordinated Notes was
approximately $12.2 million (including $200,000 of accrued interest), which bear
interest at an annual rate of 10.0%.
Each Permanent Securitization trust has certain portfolio performance tests
relating to levels of delinquency, defaults and net losses on the Loans in such
trust. Portfolio performance tests require that the Loan portfolio of each
Permanent Securitization trust have (i) an average delinquency rate less than a
specified percentage; (ii) a cumulative default rate less than specified
percentages that vary based on the aging of the relevant trust's Loan pool; and
(iii) a cumulative net loss rate less than specified percentages that vary based
on the aging of the relevant trust's Loan pool. If any Permanent Securitization
Loan portfolio fails to satisfy any of these tests, the amount required to be
retained in the spread account related to such securitization trust will be
increased to an amount generally equal to 7.0% of the then outstanding balance
held by the securitization trust. Certain portfolio performance tests were not
met at various times in the first nine months of 1997 with respect to the
Permanent Securitization trusts formed in November 1995 and November 1996,
resulting in an additional $2.8 million of total cash required to be retained
in the spread
23
<PAGE>
NATIONAL AUTO FINANCE COMPANY, INC.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
September 30, 1997
accounts related to such Securitization trusts until the violation of such
performance tests are cured. As of September 30, 1997, a total of $2.8
million of such additional $1.3 million had been accumulated in the spread
accounts of such trusts, in lieu of being distributed to the Company. All of
the additional amount required to be retained in the 1995 securitization trust
spread account has been accumulated therein, and since September 30, 1997, the
Company has once again been receiving distributions of excess cash flows from
such trust. The Company anticipates that the approximately $1.5 million of the
additional cash required to be retained in the 1996 securitization trust spread
account will have been accumulated therein by March 31, 1998, after which time
the Company will again receive distributions of excess cash flows from such
trust. FSA has modified its portfolio performance tests for such trusts for the
period through June 1998, which has resulted in higher thresholds to trigger
further violations of such tests.
Any increase in limitations on cash flow available to the Company from
Permanent Securitization trusts, the Company's inability to obtain any necessary
waivers from FSA or the termination of servicing arrangements could materially
adversely affect the Company's financial condition, results of operations and
cash flows.
As of September 29, 1997, the Company entered into a three-year, $10.0
million revolving credit the Revolving Credit Agreement, secured by Loans,
including a short-term $8.0 million working capital sub-facility secured
primarily by the Company's ESRs and spread accounts, which sub-facility matures
on January 19, 1998. The Company's cash requirements (principally to fund
required credit enhancements for the Master Trust, initial deposits to spread
accounts for Permanent Securitizations, and for working capital) have been, and
will continue to be, significant. As of November 25, 1997, the Company had
approximately $850,000 of cash and cash equivalents on hand, and approximately
$2.6 million was available under the short-term working
capital sub-facility.
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.
24
<PAGE>
- --------------------------------------------------------------------------------
Part II - Other Information
- --------------------------------------------------------------------------------
Item 6. Exhibits and Reports on Form 8-K.
a) Exhibits
<TABLE>
<CAPTION>
Number Description Method of Filing
------ ----------- ----------------
<S> <C> <C> <C>
11 Computation of Earnings Filed with this document
Per Common Share
27 Financial Data Schedule Filed with this document
</TABLE>
b) Reports on Form 8-K
On July 31, 1997, the Company filed a Form 8-K announcing its
earnings for the second quarter of 1997.
On November 26, 1997, the Company filed a Form 8-K announcing its
restated third quarter and nine month results for the periods
ended September 30, 1997.
No other reports on Form 8-K were filed in the third quarter of
1997.
25
<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: November 26, 1997 /s/ Keith B. Stein
------------------------------------
Keith B. Stein
Vice Chairman and Treasurer
Date: November 26, 1997 /s/ Kevin G. Adams
-------------------------------------
Kevin G. Adams
Vice President and Chief Financial
Officer
26
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
------ -----------
11 Computation of Earnings Per Common Share
27 Financial Data Schedule
27
<PAGE>
Exhibit 11
National Auto Finance Company, Inc.
Computation of Earnings Per Common Share
(unaudited, in thousands, except per share data)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
------------------------------------
1997 1996
---------------- ---------------
<S> <C> <C>
Average number of common shares outstanding 6,995
Proforma shares outstanding - 6,726
Common equivalent shares outstanding:
Stock options - -
Total common and common equivalent shares outstanding 6,995 6,726
Net income before income taxes from reorganization of
partnership $ 2,487 $ 1,935
================ ===============
Net income (loss) $ (2,120) $ -
================ ===============
Earnings per share $ 0.34 $ -
================ ===============
Earnings per share as adjusted $ (0.30) $ -
================ ===============
Proforma earnings per share $ 0.29
===============
</TABLE>
28
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE INTERIM
STATEMENT OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 362
<SECURITIES> 0
<RECEIVABLES> 42,516
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 42,842
<PP&E> 1,563
<DEPRECIATION> (270)
<TOTAL-ASSETS> 46,570
<CURRENT-LIABILITIES> 1,876
<BONDS> 14,229
2,295
0
<COMMON> 70
<OTHER-SE> 23,273
<TOTAL-LIABILITY-AND-EQUITY> 46,570
<SALES> 0
<TOTAL-REVENUES> 17,844
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 12,697
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,103
<INCOME-PRETAX> 4,044
<INCOME-TAX> 6,057
<INCOME-CONTINUING> (2,120)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,120)
<EPS-PRIMARY> (0.30)
<EPS-DILUTED> (0.30)
</TABLE>
