<PAGE> 1
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, 1998
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 incorporation (IRS Employer
or organization) Identification No.)
10302 Deerwood Park Blvd., Suite 100,
Jacksonville, Florida 32256
---------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
(904) 996-2500
----------------------------------------------------
(Registrant's telephone number, including area code)
621 N.W. 53rd Street, Suite 200, Boca Raton, Florida, 33487
-----------------------------------------------------------------
(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 9,030,762 shares of common stock, $.01 par value, outstanding as of
November 13, 1998.
<PAGE> 2
NATIONAL AUTO FINANCE COMPANY, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)........................................................ 4
Balance Sheets:
September 30, 1998 and December 31, 1997............................................ 4
Statements of Operations:
Three and Nine Months Ended September 30, 1998 and 1997............................. 5
Statements of Stockholders' Equity as of September 30, 1998 and 1997.................. 6
Statements of Cash Flows:
Nine months Ended September 30, 1998 and 1997....................................... 7
Notes to Financial Statements......................................................... 9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................... 17
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K........................................................ 28
SIGNATURES......................................................................................... 29
EXHIBIT INDEX...................................................................................... 30
Exhibit 11. Computation of Earnings Per Common Share.......................................... 31
Exhibit 27. Financial Data Schedule........................................................... 32
</TABLE>
2
<PAGE> 3
FORWARD-LOOKING STATEMENTS
When used in this Quarterly Report on Form 10-Q or future filings by the Company
(as hereinafter defined) 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," "instead," "foresee,"
"exepected,""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,
competitive and regulatory factors, and changes in generally accepted accounting
principles could affect the Company's actual and/or reported financial
performance and could cause the Company's actual and/or reported results for
future periods to differ materially from those anticipated by any forward
looking statement.
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> 4
- - --------------------------------------------------------------------------------
Part I
- - --------------------------------------------------------------------------------
Item I. Financial Statements
NATIONAL AUTO FINANCE COMPANY, INC.
Balance Sheets
September 30, 1998 and December 31, 1997
(dollars in thousands)
<TABLE>
<CAPTION>
September 30,
1998 December 31,
(unaudited) 1997
---------- ----------
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 15,613 $ 26,467
Retained interest in securitizations, at fair value 46,579 31,569
Furniture, fixtures and equipment, net 3,717 2,262
Deferred financing costs 2,898 2,539
Related party receivables -- 155
Other assets 999 1,883
---------- ----------
Total assets $ 69,806 $ 64,875
========== ==========
LIABILITIES:
Accounts payable and accrued expenses $ 1,964 $ 3,260
Accrued interest payable-related parties 78 39
Accrued interest payable-senior subordinated notes 1,187 132
Accrued interest payable-notes -- 50
Junior subordinated notes-related parties 1,940 1,940
Senior subordinated notes 53,310 34,546
Notes payable 1,141 1,614
---------- ----------
Total liabilities 59,620 41,581
---------- ----------
Mandatory redeemable preferred stock series A-$0.01 par value; $1,000 stated
value; 1,000,000 shares authorized; 2,295 shares
outstanding; redeemable in January 2005, stated at redemption value 2,375 2,336
STOCKHOLDERS' EQUITY:
Common stock -$0.01 par value; 20,000,000 shares authorized;
9,030,762 shares outstanding 90 90
Paid-in-capital 36,301 34,417
Accumulated deficit (28,580) (13,549)
---------- ----------
Total stockholders' equity 7,811 20,958
---------- ----------
Total liabilities, mandatory redeemable preferred stock and
stockholders' equity $ 69,806 $ 64,875
========== ==========
</TABLE>
See accompanying notes to the financial statements.
4
<PAGE> 5
NATIONAL AUTO FINANCE COMPANY, INC.
Statements of Operations (unaudited)
For the Three and Nine Months Ended September 30, 1998 and 1997
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
(Restated) (Restated)
<S> <C> <C> <C> <C>
REVENUE:
Securitization related income $ (1,439) $ (9,694) $ 15 $ (3,521)
Servicing income 1,972 863 4,887 2,238
Interest income 555 168 1,850 536
Other income 45 43 201 176
---------- ---------- ---------- ----------
Total revenue 1,133 (8,620) 6,953 (571)
---------- ---------- ---------- ----------
EXPENSES:
External servicing expenses 213 903 2,899 2,278
Internal servicing expenses 681 998 2,625 998
Interest expense 2,107 342 5,750 1,103
Salaries and employee benefits 2,301 1,597 5,603 4,591
Direct loan acquisition expenses 188 936 1,411 2,502
Depreciation and amortization 245 148 664 541
Other operating expenses 1,008 265 3,033 2,086
---------- ---------- ---------- ----------
Total expenses 6,743 5,189 21,985 14,099
---------- ---------- ---------- ----------
Loss before income taxes (5,610) (13,809) (15,032) (14,670)
Income taxes -- 332 -- --
---------- ---------- ---------- ----------
Net loss before taxes from reorganization
of partnership (5,610) (14,141) (15,032) (14,670)
---------- ---------- ---------- ----------
Income taxes from reorganization of partnership -- (5,416) -- --
---------- ---------- ---------- ----------
Net loss (5,610) (8,725) (15,032) (14,670)
Preferred stock dividends 40 40 120 108
---------- ---------- ---------- ----------
Loss attributed to common shareholders $ (5,650) $ (8,765) (15,152) (14,778)
========== ========== ========== ==========
PER SHARE DATA:
Loss per common share - basic $ (0.63) $ (1.25) (1.68) (2.11)
Loss per common share - diluted $ (0.63) $ (1.25) (1.68) (2.11)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 9,031 7,026 9,031 6,994
Diluted 9,031 7,026 9,031 6,994
</TABLE>
See accompanying notes to the financial statements.
5
<PAGE> 6
NATIONAL AUTO FINANCE COMPANY, INC.
Statements of Stockholders' Equity (unaudited)
For the Nine Months Ended September 30, 1998
(dollars in thousands)
<TABLE>
<CAPTION>
Common Paid-in Accumulated
Stock Capital Deficit Total
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Balance as of December 31, 1997 $ 90 $ 34,417 $(13,549) $ 20,959
Issuance of 593,671 Warrants to purchase Common Stock
in connection with the issuance of Senior
Subordinated Notes -- 2,004 -- 2,004
Dividends on mandatory redeemable preferred stock -- (120) -- (120)
Net loss (15,032) (15,032)
-------- -------- -------- --------
Balance as of September 30, 1998 $ 90 $ 36,301 $(28,581) $ 7,811
======== ======== ======== ========
</TABLE>
See accompanying notes to the financial statements.
6
<PAGE> 7
NATIONAL AUTO FINANCE COMPANY, INC.
Consolidated Statements of Cash Flows (unaudited)
For the Nine Months Ended September 30, 1998 and 1997
(dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------------
1998 1997
---------- ----------
(Restated)
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss $ (15,032) $ (14,671)
Adjustments to reconcile net loss to net cash used in operating activities:
Securitization related income (59) 3,521
Depreciation expense 483 80
Provision for credit losses --
Purchases of loans held for sale (85,468) (12,758)
Proceeds from transfer of loans to Master Trust 85,468 12,758
Cash flows from Retained Interest released to Company 8,748 6,618
Cash deposits to Spread Accounts (23,700) (9,830)
Amortization and write-off of deferred financing costs 422 277
Amortization of deferred placement costs -- 75
Amortization of warrants 768 --
Changes in other assets and liabilities:
Other assets 1,038 (1,974)
Accounts payable and accrued expenses (1,296) 211
Accrued interest payable-related parties 39 (104)
Accrued interest payable-senior subordinated notes
and other notes 1,006 (140)
---------- ----------
Net cash used in operating activities (27,583 (15,937)
---------- ----------
CASH FLOW FROM INVESTING ACTIVITIES:
Fixed assets purchased (1,937) (1,360)
---------- ----------
Net cash used in investing activities (1,937) (1,360)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from senior subordinated notes 19,220 --
Principal payments on junior subordinated notes-related parties -- (5,182)
Principal payments on notes (474) --
Payments on capitalized leases -- (29)
Proceeds from First Union Bank notes -- 222
Proceeds from initial public offering -- 17,614
Preferred equity partners distribution -- (1)
Payment of preferred stock dividends (80) (67)
---------- ----------
Net cash provided by financing activities 18,666 12,557
Net decrease in cash and cash equivalents (10,854) (4,740)
Cash and cash equivalents at beginning of period 26,467 5,066
---------- ----------
Cash and cash equivalents at end of period $ 15,613 $ 326
========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 3,929 $ 1,346
========== ==========
</TABLE>
7
<PAGE> 8
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------------
1998 1997
---------- ----------
(Restated)
<S> <C> <C>
NON-CASH FINANCING ACTIVITIES:
Offering costs deferred in 1996 transferred to paid-in capital in 1997 $ -- $ 775
Accrued mandatory redeemable preferred stock dividends 120 40
Conversion of deferred interest on senior subordinated debt to common
stock and paid-in capital -- 169
Conversion of predecessor entity capital to mandatory redeemable preferred stock -- 2,295
Conversion of predecessor entity capital to common stock and
paid-in capital -- 7,225
Deferred taxes from reorganization considered reduction in paid-in capital -- 5,416
Income earned in 1997 prior to reorganization included in
paid-in capital -- 526
Issuance of 593,671 warrants in conjunction with senior subordinated
notes considered paid-in-capital 2,004 --
</TABLE>
See accompanying notes to the financial statements.
8
<PAGE> 9
NATIONAL AUTO FINANCE COMPANY, INC.
Notes to Financial Statements
September 30, 1998
(unaudited)
(1) BASIS OF PRESENTATION
During July 1998, National Auto Finance Company, Inc. (the "Company")
restated its financial statements for each of the first, second and third
quarters of 1997. The comparative amounts included herein reflect the
restated amounts for 1997. Further information regarding the restatement
is provided in Note 2 below.
The accompanying unaudited interim financial statements at September 30,
1998 and December 31, 1997 and for the three and nine months ended
September 30, 1998 and 1997 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 the Company's 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).
Interim statements are subject to possible adjustments in connection with
the annual audit of the Company's accounts for the full year 1998; 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 1997
financial statements have been reclassified to conform with current
financial statement presentation.
(2) RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS
As discussed above, the Company has restated its quarterly consolidated
financial statements for 1997. The restatement resulted from applying the
Company's December 31, 1997 model pursuant to Statement of Financial
Standards No. 125 ("SFAS No. 125") relating to the calculation of
securitization income and the related valuation of the Company's "Retained
Interest in Securitizations" based upon facts and assumptions as of March
31, June 30 and September 30, 1997.
The significant changes in methodologies and assumptions at September
30, 1997 include:
1) Present valuing in conjunction with the implementation of SFAS
No. 125 on January 1, 1997 of the Company's Spread Accounts
that includes "Cash Spread Accounts" and
"Over-Collateralization Accounts" and is a component of the
Company's Retained Interest in Securitizations;
2) Expensing of certain previously capitalized fees and costs
incurred in connection with prior securitization transactions;
3) Accruing of certain anticipated costs associated with future
securitizations; and
4) Increasing the cumulative net loss rate from 7% to 9%.
9
<PAGE> 10
NATIONAL AUTO FINANCE COMPANY, INC.
Notes to Financial Statements
September 30, 1998
(unaudited)
Balance Sheet (Unaudited)
As of September 30, 1997
(dollars in thousands)
<TABLE>
<CAPTION>
Reported As Adjusted
---------- ----------
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 326 $ 326
Retained interest in securitizations, at fair value 42,516 23,077
Furniture, fixtures and equipment, net of depreciation 1,393 1,667
Deferred financing costs 925 925
Other assets 1,410 2,246
---------- ----------
Total assets $ 46,570 $ 28,241
========== ==========
LIABILITIES:
Accounts payable and accrued expenses $ 1,636 $ 1,982
Notes payable 222 222
Accrued interest payable-related parties 40 40
Accrued interest payable-senior subordinated notes 200 200
Junior subordinated notes-related parties 2,007 2,007
Senior subordinated notes 12,000 12,000
Deferred income taxes 6,057 --
---------- ----------
Total liabilities 22,162 16,451
---------- ----------
Mandatory redeemable preferred stock series A-$0.01 par value; $1,000 stated
value; 1,000,000 shares authorized; 2,295 shares
outstanding; redeemable in January 2005, stated at redemption value 2,295 2,335
STOCKHOLDERS' EQUITY:
Common stock -$0.01 par value; 20,000,000 shares authorized;
7,026,000 shares outstanding 70 70
Paid-in-capital 20,190 19,166
Retained earnings (accumulated deficit) 1,853 (9,781)
---------- ----------
Total stockholders' equity 22,113 9,455
---------- ----------
Total liabilities, mandatory redeemable preferred stock and
stockholders' equity $ 46,570 $ 28,241
========== ==========
</TABLE>
10
<PAGE> 11
NATIONAL AUTO FINANCE COMPANY, INC.
Notes to Financial Statements
September 30, 1998
(unaudited)
Statements of Operations
For the Three and Nine Months Ended September 30, 1997
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1997 September 30, 1997
---------------------------- -----------------------------
Reported As Adjusted Reported As Adjusted
---------- ---------- ---------- -----------
REVENUE:
<S> <C> <C> <C> <C>
Securitization related income $ 4,179 $ (9,693) $ 14,965 $ (3,521)
Servicing income 1,305 863 2,167 2,238
Interest income 168 168 536 536
Other income 42 42 176 176
---------- ---------- ---------- ----------
Total revenue 5,694 (8,620) 17,844 (571)
========== ========== ========== ==========
EXPENSES:
Servicing expenses 1,602 1,901 2,977 3,276
Interest expense 343 342 1,103 1,103
Salaries and employee benefits 1,670 1,597 4,591 4,591
Direct loan acquisitions expenses 936 936 2,502 2,502
Depreciation and amortization 148 148 541 541
Other operating expenses 297 265 2,086 2,086
---------- ---------- ---------- ----------
Total expenses 4,996 5,189 13,800 14,099
---------- ---------- ---------- ----------
Income (loss) before income taxes 698 (13,809) 4,044 (14,670)
Income taxes 269 332 1,557
---------- ---------- ----------
Net income (loss) before taxes from reorganization 429 (14,141) 2,487 (14,670)
of partnership
Income taxes from reorganization of partnership -- (5,416) 4,500 --
---------- ---------- ---------- ----------
Net income (loss) 429 (8,725) (2,013) (14,670)
Preferred stock dividends 40 40 107 108
---------- ---------- ---------- ----------
Loss attributed to common shareholders $ 389 $ (8,765) (2,120) (14,778)
========== ========== ========== ==========
PER SHARE DATA:
Loss per common share - basic $ .06 $ (1.25) (.30) (2.11)
Loss per common share - diluted $ .06 $ (1.25) (.30) (2.11)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 7,026 7,026 6,994 6,994
Diluted 7,026 7,026 6,994 6,994
</TABLE>
11
<PAGE> 12
NATIONAL AUTO FINANCE COMPANY, INC.
Notes to Financial Statements
September 30, 1998
(unaudited)
(3) RETAINED INTEREST IN SECURITIZATIONS
Retained Interest in Securitizations were as follows at September 30, 1998
and December 31, 1997:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---------- ----------
(dollars in thousands)
<S> <C> <C>
Spread Accounts $ 30,477 $ 14,846
Excess Spread Receivable ("ESR") 16,102 16,723
---------- ----------
$ 46,579 $ 31,569
========== ==========
</TABLE>
Assumptions used to value the Retained Interests in Securitizations at
September 30, 1998 and December 31, 1997 were as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Weighted average cumulative net loss rate 12.88 % 12.88 %
Weighted average cumulative prepayment rate 23.87 % 20.89 %
Discount rate 14.00 % 14.00 %
Level of required Cash Spread Account 9% to 11 % 5% to 11 %
Rate of interest on Cash Spread Account 5.50 % 5.50 %
Weighted average interest rate on Loans 19.35 % 19.01 %
Weighted average yield on bonds and notes
held by securitization investors 6.13 % 6.15 %
</TABLE>
The Company has historically funded its purchases of motor vehicle retail
installment sale contracts ("Loans") primarily through an asset
securitization program consisting of (i) the securitized warehousing of
all of its Loans through their daily sale ("Revolving Securitization") to
a bankruptcy-remote master trust ("Master Trust") pursuant to the
Revolving Securitization, followed by (ii) the transfer of such warehoused
Loans from time to time by the Master Trust to a discrete trust
("Permanent Securitizations"), thereby creating additional availability of
capital from the Master Trust.
Specifically, pursuant to the Revolving Securitization, the Company sells
Loans that it has purchased from automobile dealers ("Dealers") on a
daily basis to a special-purpose subsidiary, which then sells the Loans to
the Master Trust in exchange for cash and certain residual interests in
future excess cash flows from the Master Trust. The Master Trust, to date,
has issued two classes of investor certificates: "Class B Certificates,"
which are variable funding (i.e., revolving) certificates bearing interest
at floating rates, and "Class C Certificates," representing a portion of
the residual interest of the Company's special-purpose subsidiary in
future excess cash flows from the Master Trust after required payments to
the holders of the Class B certificates, deposits of funds to a restricted
cash account as a reserve for future Loan losses which provides additional
credit enhancement for the holders of the Class B Certificates and payment
of certain other expenses and obligations of the Master Trust. First Union
National Bank of North Carolina ("First Union") currently owns 100% of the
outstanding Class B Certificates. Collectively, the restricted cash
account and the Class C Certificate portion of Loan principal
(Over-Collateralization Accounts, which are held by the Company) that
collateralize the Master Trust are the components of the Spread Accounts.
The Spread Accounts and ESRs are reflected collectively on the balance
sheet as "Retained Interest in Securitizations."
Periodically the Master Trust transfers Loans and Spread Account balances
to Permanent Securitizations in exchange for cash, which is used to repay
the Class B Certificates. Debt securities representing interests in the
Permanent Securitizations are sold to third-party investors, who are
repaid from cash flows from the Loan receivables in the applicable
Permanent Securitization. Excess Spread Receivables and return of Spread
Accounts attributable to such Loans flow from the Permanent Securitization
to the Company to the extent such funds are available.
12
<PAGE> 13
NATIONAL AUTO FINANCE COMPANY, INC.
Notes to Financial Statements
September 30, 1998
(unaudited)
Under the financial structures the Company has used to date in its
securitizations, certain excess cash flows generated by the Loans are
retained in the Spread Accounts within the securitization trusts to
provide liquidity and credit enhancement. While the specific terms and
mechanics of the Spread Accounts can vary depending on each transaction,
the Company's agreements with Financial Security Assurance Inc., ("FSA")
the financial guaranty insurer that has provided credit enhancements in
connection with the Company's securitizations, generally provide that the
Company is not entitled to receive any excess cash flows unless the level
of certain Spread Account balances, comprised of cash and generally a 9%
interest in the principal balance of the Loans in the trust (the
"Over-Collateralization Accounts"), have been attained and/or the
delinquency or losses related to the Loans in the pool are below certain
predetermined levels. Additionally, the Company is currently required to
maintain a minimum equity position in the Revolving Securitization of
14.0% of the net serviced receivables in the Master Trust, or 2.5 times
net losses, whichever is greater. This equity currently consists of cash
invested by the Company and over-collateralization in the form of the
discount from the face amount of a Loan at which the Company is willing to
purchase the Loan from an automobile dealer ("Dealer Discount") related to
the principal balance of Loans. As of September 30, 1998, the Company had
a 14.00% equity investment in the Revolving Securitization.
In the event delinquencies or losses on the Loans exceed certain levels in
the Permanent Securitizations ("Trigger Events"), the terms of the
Permanent Securitization may: (i) require increased Cash Spread Account
balances to be accumulated for the particular pool; (ii) restrict the
distribution to the Company of excess cash flows associated with the pool
in which asset-backed securities are insured by FSA; and (iii) in certain
circumstances, require the transfer of servicing on some or all of the
Loans in FSA-insured pools to another servicer. The imposition by FSA of
any of these conditions could materially adversely affect the Company's
liquidity and financial condition by delaying the timing of cash flows to
the Company, thus reducing the value of the Retained Interest in
Securitizations. In fact, certain portfolio performance tests were not met
at various times during the third quarter of 1998 with respect to the
Permanent Securitization trusts formed in November 1995, November 1996,
July 1997, and January 1998 resulting in additional cash being required to
be retained in the Spread Accounts related to such Permanent
Securitization trusts.
Moreover, under the terms of the Company's insurance agreements with FSA,
upon the occurrence of a Permanent Securitization failing to meet
portfolio performance tests of the nature described above but at
significantly higher levels (an "Insurance Agreement Event of Default"),
the Company will be in default under those insurance agreements. 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 July,
August and September 1998, the Permanent Securitization trusts formed in
November 1995, November 1996 and July 1997 experienced Insurance Agreement
Events of Default. Since the occurrence of those Insurance Agreement
Events of Default, FSA has captured all excess cash flows from the four
FSA-insured trusts. The Company is currently in discussions with FSA
regarding the waiver of such Insurance Agreement Events of Default to
allow the Company to resume receiving those excess cash flows and the form
and amount of the consideration to be paid by the Company for such
waivers. There can be no assurance, however, that the Company will be
successful in such discussions. If the Company does not receive cash flows
from those trusts in the near future, the Company's liquidity and
financial condition could be materially adversely affected.
The Company's right to service the Loans sold in FSA-insured
securitizations is generally subject to the discretion of FSA.
Accordingly, there can be no assurance that the Company will continue as
servicer for such Loans and receive related servicing fees. Additionally,
there can be no assurance that there will not be additional Insurance
Agreement Events of Default in the future, or that, if such events of
default occur, waivers will be available. If the Company's Servicing
Portfolio does not meet such performance requirements in the future, the
future carrying value of the Company's Retained Interest in
Securitizations would be materially impacted in a negative manner. In
addition, 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.
13
<PAGE> 14
NATIONAL AUTO FINANCE COMPANY, INC.
Notes to Financial Statements
September 30, 1998
(unaudited)
During the nine months ended September 30, 1998 and 1997, the following
activity took place with respect to securitizations:
<TABLE>
<CAPTION>
September 30,
1998 1997
------------ ------------
(dollars in thousands)
<S> <C> <C>
Principal balance of Loans sold $ 87,118 $ 130,757
============ ============
Weighted average coupon rate on Loans
sold during the period 19.35 % 19.40 %
============ ============
</TABLE>
(4) SENIOR SUBORDINATED DEBT AND WAREHOUSE FACILITY
In December 1997, the Company completed a private placement (the "December
Private Placement") of $10 million of the Company's Common Stock, $.01 par
value ("Common Stock") and $40 million principal amount of Senior
Subordinated Notes with detachable warrants to purchase Common Stock
("Warrants"). The December Private Placement of the $10 million in Common
Stock resulted in the issuance of 1,904,762 shares in the aggregate of the
Company's Common Stock at $5.25 per share. Additionally, a representative
of each of two of the senior subordinated debt lenders who were also stock
purchasers was elected to the Company's Board of Directors. In March 1998,
the Company completed a private placement (the "March Private Placement")
of $20 million principal amount of Senior Subordinated Notes with
detachable Warrants under terms similar to that of the December Private
Placement. The principal amount of the aggregate $60 million of Senior
Subordinated Notes is due in December 2004 and the Senior Subordinated
Notes bear interest at 11.875% per annum for the first three years,
12.875% per annum for year four, 13.875% per annum for year five, and
14.875% per annum thereafter, with interest payable quarterly. In
connection with the December Private Placement and the March Private
Placement, the Company issued an aggregate of 1,632,685 detachable
Warrants with a ten-year life, exercisable into Common Stock of the
Company at $0.01 per share. The fair value of such Warrants was estimated
to be based upon a share value of $5.25 for the December Private Placement
and $3.37 for the March Private Placement, for a total of $7.5 million.
Such amount is recorded as a discount to the related debt and additional
paid-in capital, and is being amortized over the life of the debt using
the interest method. The effective interest rate, including the value of
the Warrants, is approximately 15%.
The Company is in violation of the Minimum Consolidated Net Worth and
Adjusted Interest Expense covenants contained in the Securities Purchase
Agreements pursuant to which it issued the $60,000,000 aggregate principal
amount of Senior Subordinated Notes. The Minimum Consolidated Net Worth
covenant requires that the Company maintain Consolidated Net Worth (as
defined) of not less than (a) $25,890,000 plus (b) on a cumulative basis
commencing with the fiscal quarter ending March 31, 1998, 50% of net
income (if positive) for each fiscal quarter plus (c) 100% of the net
proceeds from any public offering or private placement of Common Stock.
The Adjusted Interest Expense covenant requires generally that the sum of
the Company's Net Income (as defined), Consolidated Total Interest Expense
(as defined) and income and franchise taxes divided by its Consolidated
Total Interest Expense (as defined) for each period of four fiscal
quarters ending December 31, 1997 and thereafter be at least 1:4:1.
Refer to Note 8 for additional disclosure.
The Company is in violation of certain covenants with respect to the
Master Trust, including specifically, the covenant that the Master Trust
maintain certain interest rate hedging agreements and covenants related to
allowable repossession and recovery limits. As more fully described in
Note 8, the Company is in the process of seeking a waiver of such covenant
breaches and modification of certain terms of the Master Trust to continue
availability under the Master Trust. If such a waiver is not granted, the
Company may cease receiving the cash flows the Company would otherwise
ordinarily receive from the Master Trust and the Company may be terminated
as a servicer of the Loans held in the Master Trust. Notwithstanding such
covenant violations, the Company has been allowed to continue borrowing
under the Master Trust.
14
<PAGE> 15
NATIONAL AUTO FINANCE COMPANY, INC.
Notes to Financial Statements
September 30, 1998
(unaudited)
(5) JUNIOR SUBORDINATED NOTES
The Junior Subordinated Notes are payable to certain affiliates on January
31, 2002, and accrue interest at 8% per annum. Interest expense recognized
for this debt for the nine months ended September 30, 1998 and 1997 was
$77,000 and $123,000, respectively. Pending the resolution of the
restructuring of the Company's debt as more fully described in Note 8, the
Company has ceased paying interest on the Junior Subordinated Notes since
the second quarter of 1998.
(6) NOTES PAYABLE
The Company entered into a credit agreement ("FUNB Note") dated as of
August 25, 1997 with First Union National Bank of Florida ("FUNB") to fund
the purchase of furniture and equipment ("collateral") for the Company's
service center and corporate headquarters. FUNB retains a security
interest in the collateral. The FUNB Note accrues interest at the one
month London Interbank offered rate plus 2.5% (8.09% at September 30,
1998), payable monthly. The principal amount of the FUNB Note is payable
monthly beginning March 1998 and matures March 2001. As of September 30,
1998, the principal amount owed by the Company was $820,000. Interest
expense recognized for this debt for the three and nine months ended
September 30, 1998 was $17,000 and $58,000, respectively.
The Company has entered into a four-year capital lease for furniture. The
lease accrues interest at 7.05%. Principal and interest are payable
monthly. As of September 30, 1998, the principal amount owed by the
Company was $304,000. Interest expense recognized for this debt for the
three and nine months ended September 30, 1998 was $5,595 and 16,900,
respectively.
(7) RECENT EVENTS
On June 19, 1998, the Company converted its Servicing Portfolio computer
data from its outside servicer's computer systems to its new Consumer Loan
Asset Servicing System ("CLASS") developed by BNI, Inc. ("BNI"). The CLASS
system is composed of separate modules integrating loan origination, loan
servicing, operational accounting, portfolio performance analysis and loan
securitization functions. The CLASS system modules are generally operating
effectively, though there are still a number of problems with certain
aspects of these modules. BNI has developed modified modules and a new
operating environment to run in parallel with the current CLASS system
environment. BNI has stated that the new environment, coupled with certain
program modifications, will correct all significant problems with the
CLASS system. Nevertheless, the continuing delays in completing this
installation has had and may continue to have a negative impact on the
performance of the Loans for which the Company performs servicing and
collections (the "Servicing Portfolio").
As part of the Company's June 30, 1998 Form 10-Q filing, the Company
disclosed that a company controlled by Gary L. Shapiro, the Company's
former Chairman and Chief Executive Officer and a continuing director of
the Company, has acquired an option to purchase a controlling stock
ownership interest in BNI and a related company, also controlled by Mr.
Shapiro, has made a loan to BNI. According to a representative of Mr.
Shapiro, the status of the option to acquire BNI and the loan remains
unchanged.
On August 12, 1998, The NASDAQ Stock Market, Inc. ("NASDAQ") advised the
Company that unless the closing bid price of the Company's Common Stock
allows for the maintenance of a greater than $5 million public float, for
at least 10 consecutive trading days during the period ending on November
13, 1998, the Company's Common Stock will be delisted on November 17,
1998. Further, on September 2, 1998, NASDAQ advised the Company that if
the Company's Common Stock does not trade at a minimum bid price of $1.00
for a minimum of ten consecutive trading days by December 1, 1998, the
Company's Common Stock will be delisted on December 3, 1998. The Company
has requested a hearing before NASDAQ to permit the Company the
opportunity to provide details of its business plan and restructuring in
furtherance of a request for additional time to enable the Company to
reestablish compliance with the NASDAQ listing requirements. NASDAQ has
stated that no delisting will occur prior to the hearing. There can be no
assurance, however, that the Company will not be delisted.
15
<PAGE> 16
NATIONAL AUTO FINANCE COMPANY, INC.
Notes to Financial Statements
September 30, 1998
(unaudited)
(8) SUBSEQUENT EVENTS
On October 29, 1998, a class action lawsuit was filed in the United States
District Court for the Southern District of Florida on behalf of the named
plaintiff and others who purchased the Common Stock of the Company during
the period of January 29, 1997 through April 15, 1998. The complaint
charges the Company and certain of its officers and directors with
violating federal securities laws. The Company was only recently served
with the complaint and its response is not yet due.
As discussed in Note 4, the Company is in violation of various financial
covenants in agreements with its senior subordinated noteholders
("Noteholders") and is in violation of certain non-financial covenants
with its warehouse lender, First Union. The Company has recently executed
a term sheet (the "Term Sheet") with its Noteholders and certain of its
equityholders that sets forth the framework for a financial restructuring
of the Company and the resolution of certain issues among the parties. The
Term Sheet provides for, among other things: (1) the waiver of the past
financial covenant violations; (2) the amendment of such financial
covenants for the two-year period following the consummation of the
restructuring; (3) granting the Company the option to pay during that
two-year period fifty percent (50%) of the interest owed on the Senior
Subordinated Notes through the issuance of additional debt securities that
are convertible into Common Stock; (4) the issuance of Common Stock to the
Noteholders as consideration for the waivers and amendments granted to the
Company; (5) the granting of three additional seats on the Company's Board
of Directors to the Noteholders; and (6) the execution of full and
complete releases by and among the Company and the Noteholders. Moreover,
the Term Sheet provides for the issuance of additional Common Stock to the
Noteholders that also purchased Common Stock of the Company at the time of
their investment in exchange for the execution of full and complete
releases of any claims arising by virtue of those Noteholders' equity
investment. The Term Sheet, however, is an expression of intent only among
the parties, and none of the parties to that Term Sheet are required to
consummate the transactions contemplated therein until an agreement
satisfactory to all parties is negotiated and executed by the parties and
all conditions precedent to closing have been satisfied or waived.
One of the most significant conditions precedent to closing the
transactions set forth in the Term Sheet is that the Company reach
agreement with First Union, in form and substance satisfactory in all
respects to each of the Noteholders and the Company in their sole
discretion, to provide capital resources and financial liquidity
sufficient to meet the Company's financial needs for a period of at least
two years following the date of the restructuring. To that end, the
Company has received term sheets from First Union that provide for, among
other things, the extension of the Company's warehouse line for an
additional two years (through December 21, 2000) and the purchase by First
Union of up to $15 million of subordinated asset-backed debt securities in
connection with the Company's securitizations over the next two years. The
Company is also engaged in discussions with First Union regarding the
extension of the Company's Loan origination referral agreement with First
Union for an additional year (through April 15, 2001). There is, however,
no guarantee that the Company will be able to reach agreement with First
Union on the specific terms of these proposed facilities and arrangements
to the extent necessary to satisfy the Noteholders' conditions precedent,
in which event the restructuring of the Senior Subordinated Notes
described above may not be consummated and the Company may not be able to
fund the purchase of additional loans on an ongoing basis through the
First Union facility.
By the end of October 1998, the Company completed the transition of all of
its operations to its Jacksonville, Florida facility. In connection with
that transition, the Company closed its Boca Raton, Florida offices.
On November 5, 1998, the referral agreement between U.S. Bank N.A. and the
Company was terminated effective February 3, 1999. Prior to the notice of
termination, the agreement had not resulted in material loan volume for
the Company.
16
<PAGE> 17
NATIONAL AUTO FINANCE COMPANY, INC.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
September 30, 1998
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
During July 1998, the Company restated its financial statements for each of
the first, second and third quarters of 1997. The discussion below reflects the
restated amounts for 1997. Further information regarding the restatement is
provided in Note 2 of the Notes to the unaudited interim Consolidated Financial
Statements contained elsewhere herein.
The following management's discussion and analysis provides information
regarding the Company's financial condition as of September 30, 1998 compared to
December 31, 1997 and its results of operations for the three and nine months
ended September 30, 1998 and the restated three and nine months ended September
30, 1997. This management's discussion and analysis should be read in
conjunction with (i) the Company's Consolidated 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, 1997. 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
The Company currently finances its purchases of Loans primarily through a
two-step 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 a Revolving Securitization followed by (ii) the
transfer of such warehoused Loans from time to time through Permanent
Securitizations. In connection with the securitization of the Loans sold by the
Company, the Company is required to establish and maintain certain credit
enhancements to support the timely payment of interest and principal on the
bonds and notes issued to investors by the securitization trusts, which credit
enhancements include, among other things, funding and maintaining spread
accounts, which are monies held on deposit (Cash Spread Accounts), and
maintaining a residual interest in the pools of receivables held by such
securitization trusts (Over-Collateralization Accounts). The following
discussion summarizes the effect of the Company's securitization activities on
its revenues, expenses and cash flows.
Revenue
In January 1997, the Company adopted Statement of Financial Accounting
Standards SFAS No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishment of Liabilities" (SFAS No. 125). Pursuant to SFAS No.
125, the Company periodically evaluates the assumptions applied and modifies
them as necessary based upon the performance of the loan portfolio during the
most recent fiscal quarter. The assumptions impact the measurement of the fair
value of its Retained Interest in Securitizations. Specifically, the Company
increased the cumulative net loss estimate from 11.00% as of September 30, 1997
to 12.88% as of December 31, 1997, increased the discount rate applied to
estimated cash flows from the securitizations from 11.00% at September 30, 1997
to 14.00% at December 31, 1997, and increased assumptions related to levels of
cash required to be maintained in spread accounts to reflect anticipated changes
in such required amounts over time. The increase in the cumulative net loss
estimate results primarily from an increase in default rates expected to be
experienced over the life of the Loans, lower expected recovery rates on the
underlying collateral and changes in prepayment speeds, compared to the rates of
such items estimated in earlier periods. The Company has maintained consistent
net loss and discount rate assumptions for the reporting periods subsequent to
December 31, 1997 through September 30, 1998.
The Company also receives monthly payments from the securitization trusts
in cash as a fee paid for the Company's servicing of the Loans. Servicing income
is recognized as earned and typically offsets the direct expenses the Company
incurs in connection with the servicing of the Servicing Portfolio. Finally, the
Company also earns interest income on its cash investments and from Loans it
temporarily holds for sale pending their securitization.
Distributions of Cash from Securitization
When the Company securitizes Loans, it is required to establish and
maintain credit enhancements on a trust-specific basis to support the timely
payment of interest and principal on the notes issued to investors by such
securitization trusts. These credit enhancements include, among other things,
funding and maintaining the Cash Spread Accounts and maintaining the
Over-Collateralization Accounts. The Cash Spread Accounts are funded through
initial cash deposits by the Company, plus a portion of the excess cash flows
from the Loans (that is, the difference between cash received by the relevant
trust and its interest and principal payments on the asset-backed securities and
trust expenses). Once the funds in
17
<PAGE> 18
NATIONAL AUTO FINANCE COMPANY, INC.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
September 30, 1998
the Cash Spread Accounts meet specified levels (which may be increased if the
performance of the relevant Loan pool deteriorates), any subsequent excess cash
flows thereafter will be released to the Company on a monthly basis. Any
remaining cash in the Cash 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. See Note 3 to the
Financial Statements Retained Interest in Securitizations.
During the three and nine months ended September 30, 1998 and 1997, the
following activity took place with respect to securitizations:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
1998 1997 1998 1997
-------- -------- -------- --------
(restated) (restated)
(dollars in thousands - except numbers of loans)
<S> <C> <C> <C> <C>
Number of Loans purchased 308 4,205 6,972 10,914
Principal balance of Loans purchased $ 3,404 $ 51,208 $ 87,118 $130,757
Principal amount of Loans funded (1) $ 3,072 $ 50,075 $ 84,176 $127,584
</TABLE>
- - ----------
(1) Amount funded represents the price at which the Company purchases a Loan
from a Dealer or third party originator ("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 the Dealer
Discount.
RESULTS OF OPERATIONS
THREE MONTH PERIOD ENDED SEPTEMBER 30, 1998, COMPARED TO THE THREE MONTH
PERIOD ENDED SEPTEMBER 30, 1997.
Income from Operations
The Company reported a net loss of $5.7 million for the three month period
ended September 30, 1998, compared to a net loss of $8.8 million for the three
month period ended September 30, 1997.
Securitization Related Income
For the three month periods ended September 30, 1998 and 1997, the
Company recognized securitization related revenue of ($1.4) million (net of an
adjustment of $(1.9) million related to the valuation of the Retained Interest
in Securitizations) and ($9.7) million (net of an adjustment of $(16.0) million
related to the valuation of the Retained Interest in Securitizations),
respectively. Reported revenue was impacted by a 93.3% decrease in the dollar
volume of Loans purchased during the three month period ended September 30, 1998
compared to the three month period ended September 30, 1997. Additionally,
securitization income was negatively impacted due to the increase in the
cumulative net loss estimate from 12.00% as of September 30, 1997 to 12.88% as
of September 30, 1998. As part of the valuation of the Retained Interest in
Securitizations, the cash deposits were discounted using a rate of 14.00%, which
reduced the securitization income reported for the third quarter. The Company's
Loan purchasing volume declined significantly during the three month period
ended September 30, 1998 compared to the three month period ended September 30,
1997. This decline in volume was primarily due to the Company's decision to,
beginning in the second quarter of 1998, temporarily curtail Loan originations
to allow the Company to preserve its cash while undertaking a debt and
operational restructuring, in light of the losses recently incurred by the
Company and limited warehouse line availability. The Company purchased 308
Loans, having a principal balance of $3.4 million, during the three month period
ended September 30, 1998, compared to 4,205 Loans, having a principal balance of
$51.2 million, for the three months ended September 30, 1997. All Loans were
purchased from Dealers during the three month period ended September 30, 1998.
This compares to 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.
18
<PAGE> 19
NATIONAL AUTO FINANCE COMPANY, INC.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
September 30, 1998
Servicing Income
The Company receives a servicing fee in cash of approximately 4.0% of the
principal amount of the Loans sold to the Master Trust and 2.0% for 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 recognized as received. Servicing income for the
three month periods ended September 30, 1998 and 1997 was $2.0 million and
$863,000, respectively. The growth in servicing income was attributable to the
increase in the size of the Servicing Portfolio.
Total Expenses
The Company reported total expenses for the three month periods ended
September 30, 1998 and 1997 of $6.7 million and $5.2 million, respectively.
These expenses consisted primarily of servicing expense, interest expense on
long-term indebtedness including the Company's Senior Subordinated Notes,
salaries and employee benefits and direct Loan acquisition expenses. The
increase in expenses was impacted by the payment of one-time retention bonuses
to Company employees who remained with the Company through the time of the
transition of their departments to the Company's Jacksonville, Florida facility,
and certain attorney and advisory fees associated with the corporate debt
restructuring.
Servicing expenses for the three month periods ended September 30, 1998
and 1997 were $894,000 and $1.9 million, respectively. Servicing costs consisted
primarily of a combination of internal servicing expenses and fees to an outside
servicer for each active Loan not serviced in-house. Additionally, the Company
incurred the cost of vendor's single interest ("VSI") insurance maintained by
the Company. Servicing fees paid to the Company's outside servicer for the three
month period ended September 30, 1998 and 1997 were $213,000 and $903,000,
respectively. The decrease in servicing expenses primarily reflected the
conversion from external to internal servicing of the Portfolio. The Company's
Servicing Portfolio grew from $190.7 million, representing 17,593 outstanding
Loans as of September 30, 1997, to $235.3 million, representing 23,189
outstanding Loans, as of September 30, 1998.
Interest expense for the three-month periods ended September 30, 1998 and
1997 was $2.1 million and $342,000, respectively. The increase in interest
expense resulted from the increases in the long-term debt balances of the
Company, including interest paid on the Senior Subordinated Notes.
Direct Loan acquisition expenses for the three-month periods ended
September 30, 1998 and 1997 were $188,000 and $936,000, respectively. These
expenses consisted primarily of Dealer incentives, fees paid to strategic
alliance partners, broker fees, credit information fees and telephone expenses.
The expenses declined primarily due to the reduction in Loan originations
during the three months ended September 30, 1998.
19
<PAGE> 20
NATIONAL AUTO FINANCE COMPANY, INC.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
September 30, 1998
NINE MONTH PERIOD ENDED SEPTEMBER 30, 1998, AS COMPARED TO THE NINE MONTH PERIOD
ENDED SEPTEMBER 30, 1997.
Income from Operation
The Company reported a net loss for the nine month period ended September
30, 1998 of $15.2 million as compared to a net loss of $14.8 million for the
nine month period ended September 30, 1997.
Securitization Related Income
For the nine month periods ended September 30, 1998 and 1997, the Company
recognized securitization related revenue of $15,000 (net of an adjustment of
$(9.0) million related to the valuation of the Retained Interest in
securitizations) and $(3.5) million (net of an adjustment of $(19.3) million
related to the valuation of the Retained Interest in Securitizations),
respectively. Reported revenue was impacted by a 33.4% decrease in the dollar
volume of Loans purchased during the nine month period ended September 30, 1998
compared to the nine month period ended September 30, 1997. Additionally,
securitization income was negatively impacted due to the increase in the
cumulative net loss estimate from 12.00% as of September 30, 1997 to 12.88% as
of September 30, 1998. As part of the valuation of the Retained Interest in
Securitizations, the cash deposits were discounted using a rate of 14.00%, which
reduced the securitization income reported for the third quarter.
The Company's Loan purchasing activity declined significantly during the
nine month period ended September 30, 1998 compared to the nine month period
ended September 30, 1997. This decline in volume was primarily due to the
Company's decision to, beginning in the second quarter of 1998, temporarily
curtail Loan originations to allow the Company to preserve its cash while
undertaking a debt and operational restructuring, in light of the losses
recently incurred by the Company and limited warehouse line availability. The
Company purchased 4,941 or $65.6 million of principal amount of Loans from
Dealers and $21.5 million or 2,031 Loans were acquired through the Company's
Portfolio Acquisition Program during the nine month period ended September 30,
1998, 100% of which were sold to the Master Trust. This compares to 7,271 Loans
or $98.6 million of principal amount of Loans purchased from Dealers and $32.2
million or 3,643 Loans acquired through the Company's Portfolio Acquisition
Program during the nine month period ended September 30, 1997. This decline in
volume was primarily due to the Company's decision to, beginning in the second
quarter of 1998, temporarily curtail Loan originations to allow the Company to
preserve its cash while undertaking a debt and operational restructuring
process, in light of losses recently incurred by the Company and warehouse line
availability.
During the nine month period ended September 30, 1998, the Company was
required to provide additional credit enhancements to the Master Trust in the
amount of $23.7 million due to the origination of new Loans and the increase in
the required level of collateralization. As part of the evaluation of the
Retained Interest in Securitizations, the cash deposits were discounted using a
rate of 14.00%, which reduced the securitization income reported for the nine
month period ended September 30, 1998.
The Company's model used to calculate the fair value of Retained Interest
in Securitizations includes an amount equal to an estimate of cumulative net
losses to be experienced with respect to the Loans securitized. Significant
changes in such cumulative net loss estimate will result in adjustments to the
carrying value of Retained Interest in Securitizations.
Servicing Income
The Company receives a servicing fee in cash of approximately 4.0% of the
principal amount of the Loans sold to the Master Trust and 2.0% for 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 recognized as earned. Servicing income for the nine
month periods ended September 30, 1998 and 1997 was $4.9 million and $2.2
million, respectively. The growth in servicing income was attributable to the
increase in the size of the Servicing Portfolio.
Total Expenses
The Company reported operating expenses of $21.9 million for the nine
month period ended September 30, 1998, as compared to $14.1 million for the nine
month period ended September 30, 1997. These expenses consisted primarily of
servicing costs, subordinated note interest and personnel expenses. Operating
expenses, as a percentage of Loans purchased, increased from 10.7% as of
September 30, 1997 to 25.1% as of September 30, 1998.
Servicing expenses for the nine month period ended September 30, 1998 were
$5.5 million as compared to $3.3 million for the nine month period ended
September 30, 1997. This represents an increase in annualized servicing expenses
as a percentage of average Loans serviced, from 2.2% as of September 30, 1997 to
2.3% as of September 30, 1998. Servicing fees paid to the Company's external
servicer for the nine month period ended September 30, 1998 were $2.9 million as
compared to $2.3 million for the nine month period ended September 30, 1997. The
increase in expenses primarily reflects the growth in the portfolio serviced by
the Company.
Interest expense for the nine month period ended September 30, 1998 was
$5.8 million, as compared to $1.1 million for the nine month period ended
September 30, 1997. This increase is a result of the incremental interest
expense incurred relative to the Company's Senior Subordinated Notes beginning
in December 1997.
20
<PAGE> 21
NATIONAL AUTO FINANCE COMPANY, INC.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
September 30, 1998
LOAN LOSS AND DELINQUENCY EXPERIENCE
Loan losses and Loan prepayments are continuously monitored on an overall
portfolio and month-of-purchase static pool basis. Pursuant to the requirements
of SFAS No. 125, the Company reviews its actual Loan loss experience in
conjunction with its quarterly valuation of its Retained Interest in
Securitizations. Charge-off of Loans 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 deems them to be uncollectible. The following
table summarizes the Company's Loan loss experience for the nine month periods:
<TABLE>
<CAPTION>
As of September 30,
------------------------
1998 1997
-------- --------
(dollars in thousands)
<S> <C> <C>
Average Servicing Portfolio during period................... $242,811 $147,394
Gross charge-offs........................................... 21,115 20,084
Liquidation proceeds from repossessed assets................ 8,215 9,781
-------- --------
Net charge-offs............................................. $ 12,900 $ 10,303
======== ========
Net charge-offs as a percentage of average Servicing
Portfolio (annualized).................................. 7.0 % 9.3 %
======== ========
</TABLE>
Prior to July 1997, the Company had not serviced or collected Loans and
therefore continues to be subject to the inherent risks associated with
initiating new operations, such as unforeseen operational, financial, management
and technology issues. 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.
On June 19, 1998, the Company converted its Servicing Portfolio computer
data from its outside servicer's computer systems to its new Consumer Loan Asset
Backed Security System (CLASS) developed by BNI. The CLASS system is composed
of separate modules integrating loan origination, loan servicing, operational
accounting, portfolio performance analysis and loan securitization functions.
The installation of certain modules of the CLASS system is still ongoing, and a
number of the modules are still not completed or fully functioning. The
continuing delays in completing this installation has had and may continue to
have a negative impact on the performance of the Servicing Portfolio.
The securitization income 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.
Increase in delinquencies and losses may result in: (i) increased capital and/or
credit enhancement requirements for securitizations; (ii) reductions in cash
flow to the Company; and (iii) additional violations of Permanent Securitization
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. See Note 3
to the Financial Statements - Retained Interest in Securitizations.
The Company maintains, at its own expense, supplemental VSI insurance that
protects the Company's interest in Loan collateral against uninsured physical
damage (including total loss) in instances where neither the automobile nor the
borrower can be found.
21
<PAGE> 22
NATIONAL AUTO FINANCE COMPANY, INC.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
September 30, 1998
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 eleventh day following the due date. The
following table summarizes the delinquency and repossession experience with
respect to the Servicing Portfolio:
<TABLE>
<CAPTION>
As of September 30,
------------------------
1998 1997
-------- --------
(dollars in thousands)
<S> <C> <C>
Period of delinquency:
31 to 60 days.............................................. $ 15,143 $ 11,249
61 to 90 days.............................................. 4,908 2,875
91 days or more............................................ 3,577 3,028
-------- --------
Total delinquencies........................................... $ 23,628 $ 17,152
======== ========
Total delinquencies as a percentage of the
Servicing Portfolio........................................ 10.11 % 8.99 %
Principal balance of Loans related to repossession
inventory.................................................. $ 5,482 $ 3,171
Repossession inventory as a percentage of the ending
Servicing Portfolio........................................ 2.30 % 1.66 %
</TABLE>
Total delinquencies as a percentage of the Servicing Portfolio increased
as of September 30, 1998 relative to the same period during 1997 primarily due
to the decline in loan originations and the disruption in collection activities
due to the Company's servicing system conversion. Refer to Note 7 of the Notes
to Financial Statements for more discussion of the servicing system conversion.
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
basis 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 net
losses, and adjustments to the carrying value of Retained Interest in
Securitizations for the effect of any anticipated additional losses will be
reflected in the current period earnings.
22
<PAGE> 23
NATIONAL AUTO FINANCE COMPANY, INC.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
September 30, 1998
The following table summarizes 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, 1998, and includes loss data through
September 30, 1998:
<TABLE>
<CAPTION>
4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q
1994 1995 1995 1995 1995 1996 1996 1996 1996 1997 1997 1997 1997 1998 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <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% 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% 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% 0.02% 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% 0.17% 0.02% 0.00% 0.02% 0.10%
5 0.00% 0.07% 0.00% 0.19% 0.21% 0.10% 0.10% 0.16% 0.00% 0.06% 0.43% 0.07% 0.06% 0.02% 0.35%
6 0.05% 0.14% 0.27% 0.43% 0.70% 0.39% 0.31% 0.45% 0.25% 0.23% 0.93% 0.22% 0.23% 0.11%
7 0.05% 0.24% 0.67% 0.88% 0.96% 0.60% 0.63% 0.79% 0.61% 0.58% 1.40% 0.41% 0.44% 0.48%
8 0.31% 0.86% 1.42% 1.24% 1.05% 0.80% 1.14% 1.06% 1.21% 1.19% 1.89% 0.79% 0.78% 0.67%
9 0.47% 1.34% 1.98% 2.18% 1.57% 1.38% 1.73% 1.92% 1.89% 1.90% 2.58% 1.25% 1.16% 0.99%
10 0.51% 1.70% 2.40% 2.35% 2.28% 1.81% 2.70% 2.59% 2.55% 2.34% 3.26% 1.69% 1.78%
11 1.08% 1.73% 2.62% 2.71% 2.40% 2.00% 3.29% 3.36% 3.40% 2.84% 3.51% 2.16% 2.04%
12 1.36% 2.52% 3.14% 3.11% 3.08% 2.43% 4.34% 3.65% 3.69% 3.45% 4.31% 2.84% 2.40%
13 1.75% 3.04% 3.37% 3.60% 3.48% 3.35% 5.19% 4.47% 4.02% 3.95% 5.10% 3.46%
14 1.72% 3.39% 3.71% 3.58% 3.69% 3.60% 5.58% 5.04% 4.53% 4.21% 5.76% 3.80%
15 3.12% 3.90% 3.99% 4.13% 4.24% 4.42% 6.00% 5.38% 5.12% 4.86% 6.55% 4.15%
16 3.21% 4.20% 4.27% 4.60% 4.58% 4.71% 6.50% 5.95% 5.49% 5.46% 7.18%
17 3.80% 4.52% 4.49% 4.98% 5.36% 5.38% 6.89% 6.37% 5.89% 6.27% 7.37%
18 4.45% 4.70% 5.01% 5.14% 5.52% 5.80% 7.19% 6.84% 6.48% 6.92% 7.67%
19 4.55% 4.94% 5.35% 5.49% 6.09% 6.68% 7.52% 7.32% 7.06% 7.42%
20 4.91% 5.18% 5.75% 5.96% 6.43% 6.95% 7.85% 8.13% 7.87% 7.70%
21 4.91% 5.77% 6.13% 6.46% 6.65% 7.16% 8.25% 8.58% 8.22% 8.06%
22 5.05% 5.75% 6.84% 6.76% 7.10% 7.60% 8.47% 8.97% 8.73%
23 5.05% 6.24% 7.44% 7.02% 7.51% 8.09% 9.35% 9.52% 9.06%
24 5.79% 6.34% 7.75% 7.10% 8.06% 8.24% 9.81% 10.12% 9.26%
25 5.78% 7.01% 8.28% 7.78% 8.34% 8.32% 10.35% 10.58%
26 6.20% 7.30% 8.52% 8.37% 8.62% 8.71% 10.61% 10.79%
27 6.80% 7.65% 8.66% 8.63% 8.82% 9.12% 11.04% 11.07%
28 7.15% 8.00% 9.08% 8.71% 8.97% 9.36% 11.50%
29 7.49% 9.02% 9.31% 8.86% 9.30% 9.57% 11.47%
30 8.06% 9.15% 9.36% 8.92% 9.98% 9.77% 11.64%
31 8.23% 9.73% 9.57% 9.06% 10.28% 10.09%
32 9.07% 9.90% 9.60% 9.81% 10.55% 10.37%
33 9.07% 10.08% 9.89% 10.14% 10.86% 10.42%
34 9.61% 10.07% 9.96% 10.40% 11.11%
35 9.89% 10.28% 10.33% 10.54% 11.24%
36 10.38% 10.59% 10.58% 10.81% 11.36%
37 11.44% 10.81% 10.82% 11.02%
38 11.48% 11.15% 10.97% 11.08%
39 11.81% 11.52% 11.10% 11.23%
40 11.84% 11.52% 11.21%
41 11.87% 11.52% 11.21%
42 12.22% 11.52% 11.24%
43 12.22% 11.52%
44 12.31% 11.81%
45 12.31% 11.84%
</TABLE>
23
<PAGE> 24
NATIONAL AUTO FINANCE COMPANY, INC.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
September 30, 1998
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 and
subsequent private issuances of Common Stock.
The Company's primary uses of cash are to fund: (i) Spread Accounts; (ii)
securitizations; (iii) Loan purchases; (iv) debt service; (v) issuance costs of
asset securitizations; and (vi) operating expenses.
Net cash used in operating activities increased by $11.6 million from
$15.9 million for the nine month period ended September 30, 1997 to $27.5
million for the nine month period ended September 30, 1998, principally due to
increased operating expenses associated with a larger Servicing Portfolio and
the change in the credit enhancement requirements of the Company's
securitization facilities. Operating expenses were also impacted by the start-up
costs and overlap of costs associated with the conversion from external to
internal servicing.
Net cash used in investing activities increased from $1.4 million for the
nine month period ended September 30, 1997, to $1.9 million for the nine month
period ended September 30, 1998. This increase is due to the purchase of
computers, data systems and furniture for the Jacksonville facility.
Net cash provided by financing activities increased by $6.1 million from
$12.5 million for the nine month period ended September 30, 1997 to $18.6
million for the nine month period ended September 30, 1998. Such increase was
primarily the result of the proceeds received from the March Private Placement
of Senior Subordinated Notes. In addition to net operating losses of $13.1
million, the Company funded deposits to Spread Accounts totaling $23.7 million.
The Company is currently required to maintain a minimum equity position in
the Revolving Securitization of 14.0% of the net serviced receivables or 2.5
times net losses, whichever is greater. This equity currently consists of cash
invested by the Company and over-collateralization in the form of Dealer
Discounts related to the principal balance of Loans. As of September 30, 1998,
the Company had a 14.00% equity investment in the Revolving Securitization.
As of September 30, 1998, the Company retained approximately $16.1 million
of ESRs, approximately $15.6 million of Cash Spread Accounts and approximately
$14.9 million of Over-Collateralization Accounts, which combined represent the
$46.6 million shown on the balance sheet as Retained Interest in
Securitizations, representing 66% of the total assets of the Company. The value
of these assets would be reduced in the event of a future material increase in
the Loan loss or prepayment experience relative to the amounts previously
estimated by the Company.
As of September 30, 1998, the principal amount owed by the Company on the
Junior Subordinated Notes was approximately $2.0 million (including $38,703 of
accrued interest), principal bearing interest at an annual rate of 8%, and the
principal amount owed by the Company on the Senior Subordinated Notes was $60.0
million. The Senior Subordinated Notes, which mature on December 2004, bear
interest at an annual rate of 11.875% for the first three years, and increase
thereafter. See Notes 4 and 5 of the Notes to financial Statements for further
discussions of the Senior Subordinated and Junior Subordinated Notes.
As discussed in Notes 4 and 8 of the Notes to Financial Statements, the Company
is in violation of the Minimum Consolidated Net Worth and Adjusted Interest
Expense covenants contained in the December 1997 and March 1998 Securities
Purchase Agreement pursuant to which it issued $60,000,000 aggregate principal
amount of Senior Subordinated Notes. The Minimum Consolidated Net Worth
covenant requires that the Company maintain Consolidated Net Worth (as defined)
of not less than (a) $25,890,000 plus (b) on a cumulative basis commencing with
the first fiscal quarter ending September 30, 1998, 50% of net income (if
positive) for each fiscal quarter plus (c) 100% of the net proceeds from any
public offering or private placement of Common Stock. The Adjusted Interest
Expense covenant requires generally that the sum of the Company's Net Income
(as defined), Consolidated Total Interest Expense (as defined) and income and
franchise taxes divided by its Consolidated Total Interest Expense (as defined)
for each period of four fiscal quarters ending December 31, 1997 and thereafter
be at least 1.4:1.
The Company has recently executed a Term Sheet with its Noteholders and
certain of its equityholders that sets forth the framework for a financial
restructuring of the Company and the resolution of certain issues among the
parties. The Term Sheet provides for, among other things: (1) the waiver of the
past financial covenant violations; (2) the amendment of such financial
covenants for the two-year period following the consummation of the
restructuring; (3) granting the Company the option to pay during that two-year
period fifty percent (50%) of the interest owed on the Senior Subordinated Notes
through the issuance of additional debt securities that are convertible into
Common Stock; (4) the issuance of Common Stock to the Noteholders as
consideration for the waivers and amendments granted to the Company; (5) the
granting of three additional seats on the Company's Board of Directors to the
Noteholders; and (6) the execution of full and complete releases by and among
the Company and the Noteholders. Moreover, the Term Sheet provides for the
issuance of additional Common Stock to the Noteholders that also purchased
Common Stock of the Company at the time of their investment in exchange for the
execution of full and complete releases of any claims arising by virtue of those
Noteholders' equity investment. The Term Sheet, however, is an expression of
intent only among the parties, and none of the parties to that Term Sheet are
required to consummate the transactions contemplated therein until an agreement
satisfactory to all parties is negotiated and executed by the parties and all
conditions precedent to closing have been satisfied or waived.
24
<PAGE> 25
NATIONAL AUTO FINANCE COMPANY, INC.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
September 30, 1998
One of the most significant conditions precedent to closing the
transactions set forth in the Term Sheet is that the Company reach agreement
with First Union, in form and substance satisfactory in all respects to each of
the Noteholders and the Company in their sole discretion, to provide capital
resources and financial liquidity sufficient to meet the Company's financial
needs for a period of at least two years following the date of the
restructuring. To that end, the Company has received term sheets from First
Union that provide for, among other things, the extension of the Company's
warehouse line for an additional two years (through December 21, 2000) and First
Union's commitment to purchase up to $15 million of subordinated asset-backed
debt securities in connection with the Company's securitizations over the next
two years. The Company is also engaged in discussions with First Union regarding
the extension of the Company's loan origination referral agreement with First
Union for an additional year (through April 15, 2001). There is, however, no
guarantee that the Company will be able to reach agreement with First Union on
the specific terms of these proposed facilities and arrangements to the extent
necessary to satisfy the Noteholders' conditions precedent, in which event the
restructuring of the Senior Subordinated Notes described above may not be
consummated and the Company may not be able to fund the purchase of additional
loans on an ongoing basis through the First Union facility.
Further, the Company's future liquidity and financial condition, and its
ability to finance the growth of its business and to repay or refinance its
indebtedness, will depend substantially on distributions of excess cash flow
from the Master Trust and Permanent Securitization trusts. The Company's
agreements with FSA provide that each Permanent Securitization trust must
maintain specified levels of cash in its Cash Spread Account during the life of
the trust. These spread accounts are funded initially out of beginning deposits
and are funded thereafter with excess cash flow from the Loan pool. During each
month, excess cash flow distributable to the Company from all Permanent
Securitization trusts is first used to replenish any Cash Spread Account
deficiencies and then is distributed to the Company. The timing and amount of
distributions of excess cash from securitization trusts varies based on a number
of factors, including loan delinquencies, defaults and net losses, the rate of
disposition of repossession inventory and recovery rates, the age of Loans in
the portfolio, prepayment experience and required Spread Account levels. A
deterioration of the Company's Loan delinquencies, defaults or net losses, or a
build-up in repossession inventory could reduce excess cash available to the
Company.
Certain portfolio performance tests ("Maintenance Tests") in each of the
Permanent Securitization trusts require that the Loan portfolio of each such
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
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 of cash required to be retained in the
Cash Spread Account related to such securitization trust will be increased to an
amount generally equal to 9.0% to 11.0% of the then outstanding balance held by
the securitization trust. In fact, certain Maintenance Tests were not met during
the third quarter of 1998 with respect to the Permanent Securitization trusts
formed in November 1995, November 1996, July 1997, and January 1998, resulting
in additional cash being required to be retained in the Spread Accounts related
to such Permanent Securitization trusts. Because those Maintenance Tests were
not met, the Company was required to retain an additional amount of $5.1 million
related to such Permanent Securitization trusts. During the nine month period
ending September 30, 1998, $4.6 million in additional Spread Account funding had
been accumulated in the Cash Spread Accounts of such trusts, in lieu of being
distributed to the Company.
Moreover, under the terms of the Company's insurance agreements with FSA,
upon the occurrence of a Permanent Securitization failing to meet portfolio
performance tests of the nature described above but at significantly higher
levels (an Insurance Agreement Event of Default), the Company will be in default
under those insurance agreements. 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 July,
August and September 1998, the Permanent Securitization trusts formed in
November 1995, November 1996, and July 1997 experienced Insurance Agreement
Events of Default. Since the occurrence of those Insurance Agreement Events of
Default, FSA has captured excess cash flows totaling $1.1 from the four
FSA-insured trusts. The Company is currently in discussions with FSA regarding
the waiver of such Insurance Agreement Events of Default to allow the Company to
resume receiving those excess cash flows and the form and amount of the
consideration to be paid by the Company for such waivers. There can be no
assurance, however, that the Company will be successful in such discussions. If
the Company does not receive cash flows from those trusts in the near future,
the Company's liquidity and financial condition could be materially adversely
affected.
25
<PAGE> 26
NATIONAL AUTO FINANCE COMPANY, INC.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
September 30, 1998
The Company's right to service the Loans sold in FSA-insured
securitizations is generally subject to the discretion of FSA. Accordingly,
there can be no assurance that the Company will continue as servicer for such
Loans and receive related servicing fees. Additionally, there can be no
assurance that there will not be additional Insurance Agreement Events of
Default in the future, or that, if such events of default occur, waivers will be
available. If the Company's Servicing Portfolio does not meet such requirements
in the future, the Company's liquidity would be materially impacted in a
negative manner.
The following is a table showing the portfolio performance tests by Trust
as of September 30, 1998:
<TABLE>
<CAPTION>
Delinquency Test Default Test Loss Test
------------------------------------ ----------------------------------- ------------------------------------
Actual Maintenance Insurance Actual Maintenance Insurance Actual Maintenance Insurance
------ ----------- --------- ------ ----------- --------- ------ ----------- ---------
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
95-1 12.83% 8.25% 11.00% 17.09% 14.00% 17.00% 12.72% 6.00% 8.00%
96-1 12.05 8.25 11.00 23.02 14.00 17.00 11.06 6.00 8.00
97-1 11.76 8.25 11.00 20.27 18.00 25.00 9.75 8.00 11.00
98-1 9.83 8.25 11.00 16.47 18.00 25.00 6.36 8.00 11.00
</TABLE>
The modified Maintenance Test levels for the 95-1 Trust decreased in July
1998 to: (i) 6.00% for the loss Maintenance Test and to 8.00% for the Insurance
Agreement Event of Default test. The modified Maintenance Test levels for the
96-1 Trust decreased in July 1998 to: (i) 14.00% for the default Maintenance
Test and to 17.00% for the Insurance Agreement Event of Default test; (ii) to
6.00% for the maintenance loss Maintenance Test and to 8.00% for the loss
Insurance Agreement Event of Default test.
26
<PAGE> 27
NATIONAL AUTO FINANCE COMPANY, INC.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
September 30, 1998
The Company's business requires substantial cash to support the funding of
Cash Spread 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.
Assuming the restructuring of the Senior Subordinated Notes, the First
Union financings and the agreement with FSA as previously described above are
consummated, the Company believes that it will have cash liquidity sufficient
to meet the Company's cash requirements and to fund its operations through the
third quarter of 1999 and beyond. There can be no assurance, however, that such
restructuring, financings and agreements described above will be consummated.
In the event that they are not consummated, there can be no assurance the
Company's cash liquidity will be sufficient through the third quarter of 1999.
In that event, the Company may be required to issue additional debt or equity,
which could dilute the interests of stockholders of the Company. There can be
no assurance, however, that the Company will have access to the capital markets
in the future for debt or equity issuances or for securitizations or that
financing through borrowings or other means will be available on terms
acceptable to the Company. 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.
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.
YEAR 2000
The Company has installed in its Jacksonville, Florida facility the CLASS
system for the underwriting, collecting and servicing of its Loan portfolio.
CLASS is a finance company software platform composed of separate modules
integrating loan origination, loan servicing, operational accounting, portfolio
performance analysis and loan securitization functions. The Company believes,
and the developer of CLASS has represented to the Company, that the CLASS
software platform is Year 2000 compliant. The Company is also in the process of
installing a financial accounting software package, which the Company believes
to be Year 2000 compliant. Once the CLASS system and the financial accounting
software package are fully installed, the Company believes that all of its
computer systems will be Year 2000 compliant. There can be no assurance,
however, that software incompatibility with the Year 2000 on the part of the
Company or any of its significant suppliers will not have a material adverse
effect on the Company and a plan for dealing with such incompatibility has not
yet been fully developed by the Company. The Company continues to develop such a
contingency plan.
27
<PAGE> 28
- - --------------------------------------------------------------------------------
PART II - Other Information
- - --------------------------------------------------------------------------------
ITEM 1. LEGAL PROCEEDINGS
On October 29, 1998, a class action lawsuit was filed in the United
States District Court for the Southern District of Florida on behalf of the
named plaintiff and others who purchased the Common Stock of the Company during
the period of January 29, 1997 through April 15, 1998. The complaint charges the
Company and certain of its officers and directors with violating federal
securities laws. The Company was only recently served with the complaint and its
response is not yet due.
The Company is involved in various pending or threatened legal
proceedings arising from the ordinary conduct of its business. These
proceedings, in some instances, include claims for punitive damages and similar
types of relief in unspecified or substantial amounts, in addition to amounts
for alleged contractual liability or claims for equitable relief. In
management's opinion, after consultation with counsel and review of available
facts, these proceedings likely will ultimately be resolved without materially
affecting the Company's financial condition or results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits
<TABLE>
<CAPTION>
Number Description Method of Filing
- - --------- ----------- ----------------
<S> <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 1, 1998, the Company filed Amendment No. 2 to its Form 8-K,
in which it responds to KPMG Peat Marwick LLP's ("KPMG") response to the
Company's disclosure on Form 8-K regarding certain disagreements between KPMG
and the Company. On July 23, 1998, the Company filed Amendment No. 3 to its Form
8-K, in which it attached a copy of KPMG's response to the Company's disclosure
in its Amendment No. 2 to its Form 8-K. On August 17, 1998, the Company filed a
Form 8-K announcing: (a) the Company's second quarter 1998 results; (b) the
naming of Keith B. Stein as the permanent Chief Executive Officer of the Company
and Thomas Costanza as the Chief Financial Officer of the Company; and (c) that
The Nasdaq Stock Market, Inc. has advised the Company of the possibility that
the Company's Common Stock will be delisted on November 17, 1998.
Press Release, dated August 14, 1998, announcing: (a) the Company's
second quarter 1998 results; (b) the naming of Keith B. Stein as the permanent
Chief Executive Officer of the Company and Thomas Costanza as the Chief
Financial Officer of the Company; and (c) that The Nasdaq Stock Market, Inc.
has advised the Company of the possibility that the Company's common stock will
be delisted on November 17, 1998.
28
<PAGE> 29
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 13, 1998 /s/ Thomas Costanza
-----------------------------------
Thomas Costanza
Vice President and Chief Financial Officer
29
<PAGE> 30
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- - ------ -----------
<S> <C>
11 Computation of Earnings per Common Share
27 Financial Data Schedule
</TABLE>
30
<PAGE> 1
EXHIBIT 11
NATIONAL AUTO FINANCE COMPANY, INC.
Computation of Earnings per Common Share
(Unaudited, in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
---------------------------
1998 1997
-------- --------
<S> <C> <C>
Average number of common shares outstanding ................ 9,031 7,026
Common equivalent shares outstanding:
Stock options (1) ..........................................
-------- --------
Total common and common equivalent shares outstanding ...... 9,031 7,026
======== ========
Loss attributed to common shareholders ..................... $ (5,650) $ (8,765)
======== ========
Loss per common share (basic and diluted) .................. $ (.63) $ (1.25)
======== ========
</TABLE>
- - ----------
(1) Stock options are excluded from the computation of diluted loss per
common share as the effect of such options would be anti-dilutive.
31
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE INTERIM
STATEMENT OF INCOME FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 15,613
<SECURITIES> 0
<RECEIVABLES> 46,579
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 64,105
<PP&E> 4,603
<DEPRECIATION> (886)
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2,375
0
<COMMON> 90
<OTHER-SE> 7,721
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<CGS> 0
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<INCOME-PRETAX> (5,610)
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<CHANGES> 0
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<EPS-PRIMARY> (.63)
<EPS-DILUTED> (.63)
</TABLE>
