SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 8-K
CURRENT REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Date of Report (Date of Earliest Event Reported): May 18, 1998
National Auto Finance Company, Inc.
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(Exact Name of Registrant as Specified in its Charter)
Delaware
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(State or Other Jurisdiction of Incorporation)
0-22067 65-0688619
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(Commission File Number) (I.R.S. Employer
Identification No.)
621 N.W. 53rd Street, Suite 200
Boca Raton, Florida 33487
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(Address of Principal Executive Offices) (Zip Code)
(561) 997-2413
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(Registrant's Telephone Number, Including Area Code)
NOT APPLICABLE
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(Former Name or Former Address, if Changed Since Last Report)
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ITEM 4. CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT.
On May 18, 1998, National Auto Finance Company, Inc. (the "Company")
dismissed KPMG Peat Marwick LLP ("KPMG") as the Company's auditor of its
financial statements. On that same day, the Company announced that it was in the
process of retaining BDO Seidman, LLP ("BDO") to audit the Company's financial
statements in fiscal 1998. KPMG's opinion with respect to the Company's Annual
Report on Form 10-K for the year ended December 31, 1997 was qualified by
raising substantial doubt as to the Company's ability to continue as a going
concern. The decision to dismiss KPMG as the Company's auditor was recommended
and approved by the Audit Committee of the Board of Directors of the Company.
In connection with KPMG's review of the Company's financial statements
for the quarters ended March 31, 1997, June 30, 1997 and September 30, 1997, and
KPMG's audit of the Company's financial statements for the year ended December
31, 1997, certain disagreements arose between KPMG and the Company regarding:
(1) the periodic determination of the carrying value of the Company's retained
securitization assets, and more particularly, the assumptions and methodologies
to be employed, pursuant to Statement of Financial Accounting Standards No. 125
("SFAS No. 125"), in the computer model used to determine such carrying values,
including the determination of which components of the retained securitization
assets to be discounted to net present value and the rate at which such
components should be discounted, and the projected loan loss rate and related
collateral recovery rate to be utilized in such valuation model; and (2) the
accounting treatment of deferred income taxes recorded in connection with the
reorganization of the Company from a partnership to a corporation in connection
with the Company's initial public offering. With respect to the issues relating
to the periodic determination of the carrying value of the Company's retained
securitization assets, the Audit Committee and the Board of Directors discussed
such issues with KPMG. The Audit Committee and the Board of Directors did not
discuss the deferred income tax issue with KPMG, which was discussed between
KPMG and Company management.
While KPMG never expressed an unwillingness to be associated with any
of the financial statements prepared by management and filed with the Securities
and Exchange Commission, KPMG did indicate that it was unwilling to be
associated with the Company's initial earnings release for the quarter ended
September 30, 1997. As a result, the Company, in consultation with KPMG, revised
its earnings release for the quarter ended September 30, 1997.
With respect to the disagreements previously described, during the
course of KPMG's audit of the Company's financial statements for the year ended
December 31, 1997, KPMG indicated that its national office was developing a
"national position," for all of its clients that utilize gain-on-sale revenue
recognition accounting principles, on (1) the components of a company's retained
securitization assets that need to be discounted to net present value in
periodically determining their carrying values pursuant to SFAS No. 125, and (2)
the rate at which, and the period over which, such components are to be
discounted to net present value pursuant to SFAS No. 125. Prior to revealing to
the Company its national position on those issues, KPMG did indicate that its
initial inclination was that SFAS No. 125 required the Company to discount all
components of its retained securitization assets to net present value, including
cash spread accounts, in periodically determining their carrying values, and to
discount all such
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components at the rate of 14% without regard to any differentiation among
thosecomponents with respect to the level of risk inherent in the cash flows
projected to be derived from each of those components. The Company's view was
that each such component represents a different security, possessing different
risk characteristics with respect to the ultimate receipt of the cash flow
projected to be derived from each such component and, therefore, each such
component should be discounted to net present value using a market rate of
interest commensurate to such component's inherent risk in periodically
determining its carrying value pursuant to SFAS No. 125.
Because KPMG still had not announced its national position on those issues
by late in the audit process and the Company wanted to be prepared to discuss
with KPMG its position once announced without delaying the completion of the
audit, the Company surveyed numerous industry experts on the accounting
treatment other similarly-situated companies were utilizing with respect to the
valuation of retained securitization assets under SFAS No. 125. To that end, the
Company spoke with two accounting firms, including BDO, two investment banks
specializing in asset-backed securitizations, a commercial bank that regularly
securitizes certain of its own assets, and the leading securitization bond
insurer in the non-prime automobile finance industry, to ascertain their views
and observations on how other similarly-situated companies were interpreting
SFAS No. 125's effect on the valuation of retained securitization assets. Each
of those institutions, including BDO, observed that: (1) generally all finance
companies were discounting to net present value each component of retained
securitization assets, with the exception of cash spread accounts, in
periodically determining their respective carrying values; (2) some finance
companies were also discounting cash spread accounts to net present value; and
(3) each finance company was discounting the components being discounted at
different market rates commensurate with the level of risk inherent in the cash
flow projected to be derived from each such component. Further, the institutions
surveyed also indicated that the finance companies that were discounting cash
spread accounts to net present value generally were applying a discount rate
significantly lower than the rates they were applying to the other components of
retained securitization assets because they considered the cash flows projected
to be derived from such cash spread accounts to have a significantly lower
inherent risk than the other components. Additionally, BDO and the other
accounting firm indicated that while they had not considered or reviewed the
Company's particular circumstances and were specifically not opining on the
proper application of SFAS No. 125 to the Company's retained securitization
assets, they had interpreted SFAS No. 125 for other clients in a manner
consistent with the general industry consensus--namely, that SFAS No. 125
requires that each component of retained securitization assets be discounted
separately and at different market rates of interest to reflect that each such
component is a separate security possessing its own inherent level of risk. The
Company did share with KPMG the observations of all of the institutions surveyed
concerning the proper application of SFAS No. 125 to retained securitization
assets.
With respect to the disagreement relating to the accounting treatment
for deferred income taxes, the Company's view was that the taxes to be recorded
in connection with the reorganization of the Company from a partnership to a
corporation should have been an adjustment to paid in capital, and not an
adjustment to the Company's net income for 1997. The Company consulted with its
outside tax accountant, Coopers & Lybrand LLP ("C&L"), which orally confirmed
the Company's view. The Company did share with KPMG the views of C&L with
respect to the deferred income tax issue.
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Nevertheless, KPMG continued to maintain its position that such deferred income
taxes should be recorded as an adjustment to the Company's net income for 1997.
The Company has authorized KPMG to fully and completely respond to BDO
regarding its inquiries, if any, concerning the subject matter of each of the
disagreements previously described. Each of those disagreements was resolved by
the Company acceding to the position of KPMG prior to the filing of the
Company's quarterly reports on Form 10-Q and its Annual Report on Form 10-K for
fiscal 1997.
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SIGNATURE
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 hereto duly authorized.
Date: June 3, 1998.
NATIONAL AUTO FINANCE COMPANY, INC.
By: /s/ Keith B. Stein
Name: Keith B. Stein
Title: Vice Chairman, Chief Executive
Officer, Chief Financial Officer
and Treasurer
