<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ____________
Commission file number 0-22067
NATIONAL AUTO FINANCE COMPANY, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 65-0688619
- ----------------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
621 N.W. 53rd Street, Suite 200,
Boca Raton, Florida 33487
- ----------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
(561) 997-2413
----------------------------------------------------
(Registrant's telephone number, including area code)
No Change
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
There were 7,026,000 shares of common stock, $.01 par value outstanding as of
August 13, 1997.
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NATIONAL AUTO FINANCE COMPANY, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements (unaudited)............................................... 4
Consolidated Balance Sheets:
June 30, 1997 and December 31, 1996........................................ 4
Consolidated Statements of Operations:
Three and Six Months Ended June 30, 1997 and 1996.......................... 5
Consolidated Statement of Stockholders' Equity as of June 30, 1997............. 6
Consolidated Statements of Cash Flows:
Six Months Ended June 30, 1997 and 1996.................................... 7
Notes to Consolidated Financial Statements..................................... 9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................... 14
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders............................ 23
Item 6. Exhibits and Reports on Form 8-K............................................... 23
SIGNATURE ........................................................................... 24
EXHIBIT INDEX........................................................................... 25
Exhibit 11. Computation of Earnings Per Common Share.......................... 26
Exhibit 27. Financial Data Schedule........................................... 27
</TABLE>
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FORWARD-LOOKING STATEMENTS
When used in this Quarterly Report on Form 10-Q or future filings by the Company
(as defined below) with the Securities and Exchange Commission (the
"Commission"), in the Company's press releases or other public or stockholder
communications, or in oral statements made with the approval of an authorized
executive officer, the words or phrases "will likely result," "are expected to,"
"will continue," "is anticipated," "estimate," "project" or similar expressions
are intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. The Company wishes to caution
readers not to place undue reliance on any such forward-looking statements,
which speak only as of the date made, and to advise readers that various
factors, including regional and national economic conditions, substantial
changes in levels of market interest rates, credit and other risks of lending
and investment activities and competitive and regulatory factors could affect
the Company's financial performance and could cause the Company's actual results
for future periods to differ materially from those anticipated or projected.
The Company does not undertake and specifically disclaims any obligation to
update any forward-looking statements to reflect the occurrence of anticipated
or unanticipated events or circumstances after the date of such statements.
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Part I.
Item 1. Financial Statements.
NATIONAL AUTO FINANCE COMPANY, INC.
Consolidated Balance Sheets (unaudited)
June 30, 1997 and December 31, 1996
(dollars in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
-------- ------------
1997 1996
-------- ------------
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 2,847 $ 5,066
Retained interest in securitizations 31,353 23,404
Loans, net 4,228 --
Fixed assets, net 1,016 515
Deferred financing costs 1,000 1,849
Other assets 1,992 367
-------- --------
Total assets $ 42,436 $ 31,201
======== ========
LIABILITIES:
Accounts payable and accrued expenses $ 2,545 $ 1,771
Due to National Auto Finance Corporation -- 178
Deferred income taxes 5,084 --
Accrued interest payable--related parties 39 144
Accrued interest payable--senior subordinated notes 200 339
Junior subordinated notes--related parties 2,012 7,218
Senior subordinated notes 12,000 12,000
-------- --------
Total liabilities 21,880 21,650
-------- --------
Mandatorily redeemable preferred stock series A - $.01 par value, $1,000 stated
value; 1,000,000 shares authorized; 2,295 shares outstanding; redeemable in
January 2005, stated at redemption value 2,335 --
STOCKHOLDERS' EQUITY:
Common stock - $0.01 par value; 20,000,000
shares authorized; 7,026,000 shares outstanding 70 --
Paid in capital 19,207 --
Accumulated deficit (1,056) --
Equity of predecessor entity 9,551
-------- --------
Total stockholders' equity 18,221 9,551
-------- --------
Total liabilities, mandatorily redeemable preferred
stock and stockholders' equity $ 42,436 $ 31,201
======== ========
</TABLE>
See accompanying notes to the consolidated financial statements.
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NATIONAL AUTO FINANCE COMPANY, INC.
Consolidated Statements of Operations (unaudited)
For the Three and Six Months Ended June 30, 1997 and 1996
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ----------------------
1997 1996 1997 1996
-------- ------- ------- -------
<S> <C> <C> <C> <C>
REVENUE:
Securitization related income $ 4,119 $ 2,856 $ 6,171 $ 5,253
Servicing income 838 187 1,375 328
Interest income 202 3 369 6
Other income 93 (2) 134 48
------- ------- ------- -------
Total revenue 5,252 3,044 8,049 5,635
------- ------- ------- -------
EXPENSES:
Interest expense 345 154 760 304
Salaries and employee benefits 1,671 841 2,995 1,502
Direct loan acquisition expenses 865 371 1,566 710
Servicing expenses 763 258 1,375 480
Depreciation and amortization 214 97 393 193
Other operating expenses 1,069 457 1,822 778
------- ------- ------- -------
Total expenses 4,927 2,178 8,911 3,967
------- ------- ------- -------
Income (loss) before income taxes 325 866 (862) 1,668
Income taxes (benefit) 125 327(1) (332) 628(1)
------- ------- ------- -------
Net income (loss) before taxes from
reorganization of partnership 200 539 (530) 1,040
Income taxes from reorganization of
Partnership -- -- 5,416 --
------- ------- ------- -------
Net income (loss) 200 539 (5,946)(2) 1,040
------- ------- ------- -------
Less preferred stock dividends 41 -- 67 --
------- ------- ------- -------
Net income (loss) available for common
shareholders $ 159 $ 539 $(6,013) $ 1,040
======= ======= ======= =======
Loss per share as adjusted $ (0.86)(2)
=======
Loss per share $ 0.02 $ (0.09)(3)
======= =======
Pro forma earnings per share $ 0.13 $ 0.25
======= =======
Weighted average shares and share equivalents 7,026 6,976
======= =======
Pro forma shares outstanding 4,230 4,230
======= =======
</TABLE>
(1) Pro forma income taxes for the three-month period ended June 30, 1996 and
the six month period ended June 30, 1996, respectively, calculated as if
the Company had operated as a "C" corporation.
(2) Includes the effects of a one-time, non-cash charge for deferred income
taxes arising from the reorganization of the Company from a partnership
form to a taxable corporate form in connection with the Company's initial
public offering in January 1997.
(3) Excludes the effect of the charge noted in (2) above.
See accompanying notes to the consolidated financial statements.
5
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NATIONAL AUTO FINANCE COMPANY, INC.
Consolidated Statement of Stockholders' Equity (unaudited)
For the Six Months Ended June 30, 1997
(dollars in thousands)
<TABLE>
<CAPTION>
Retained Equity of
Common Paid in Earnings Predecessor
Stock Capital (Deficit) Entity Total
----- ------- --------- ------ -----
<S> <C> <C> <C> <C> <C>
Balance as of December 31, 1996 9,551 9,551
Net income from January 1, 1997 through
Reorganization on January 29, 1997 526 526
Assets retained by partnership (31) (31)
--------- ---------
Balance as of January 29, 1997 10,046 10,046
Exchange of predecessor equity for stock
in connection with Reorganization on
January 29, 1997 42 7,709 (10,046)(1) (2,295)
Issuance of 496,000 shares of common stock
in exchange for deferred interest on Senior
Subordinated Notes 5 164 169
Deferred income taxes recorded in connection
with Reorganization (5,416) (5,416)
Issuance of 2,300,000 shares of common stock in
initial public offering, net of costs 23 16,817 16,840
Dividends on mandatorily redeemable
preferred stock (67) (67)
Net loss subsequent to Reorganization (1,056) (1,056)
--------- --------- -------- -------- --------
Balance as of June 30, 1997 70 19,207 (1,056) 0 18,221
========= ========= ======== ======== ========
</TABLE>
- --------------------------
(1) $2,295 of such amount was attributed to mandatorily redeemable preferred
stock.
See accompanying notes to the consolidated financial statements.
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NATIONAL AUTO FINANCE COMPANY, INC.
Consolidated Statements of Cash Flows (unaudited)
For the Six Months Ended June 30, 1997 and 1996
(dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------
1997 1996
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (5,946) $ 1,040
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH USED IN OPERATING
ACTIVITIES:
Securitization related income (6,171) (5,253)
Depreciation 90 192
Provision for credit losses 313 --
Purchases of loans held for sale (77,509) (31,202)
Proceeds from transfer of loans to master trust 73,045 31,202
Cash flows from retained interest released to Company 4,941 1,753
Cash deposits to spread accounts (6,819) --
Amortization of deferred financing costs 74 75
Amortization of deferred placement costs 163 57
CHANGES IN OTHER ASSETS AND LIABILITIES:
Other assets (1,625) (207)
Accounts payable and accrued expenses 774 217
Accrued interest payable--related parties (105) 280
Accrued interest payable--senior subordinated debt (139) --
Income taxes 5,084 628
-------- --------
Net cash used in operating activities (13,830) (1,218)
CASH FLOWS FROM INVESTING ACTIVITIES:
Fixed assets purchased (593) (36)
-------- --------
Net cash used in investing activities (593) (36)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from junior subordinated notes-related parties -- 590
Principal payments on junior subordinated
notes-related parties (5,206) (590)
Payment of preferred stock dividends (27) --
Proceeds from initial public offering 17,615 --
Preferred equity partners' contribution -- 849
Due to National Auto Finance Corporation (178) --
-------- --------
Net cash provided by financing activities 12,204 849
-------- --------
Net decrease in cash and cash equivalents (2,219) (405)
Cash and cash equivalents at beginning of period 5,066 824
-------- --------
Cash and cash equivalents at end of period $ 2,847 $ 419
======== ========
</TABLE>
7
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NATIONAL AUTO FINANCE COMPANY, INC.
Consolidated Statements of Cash Flows (unaudited)
For the Six Months Ended June 30, 1997 and 1996
(dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------------
1997 1996
-------- -------
<S> <C> <C>
NON-CASH FINANCING ACTIVITIES:
Offering costs deferred in 1996 transferred to paid-in-capital $ 775 $ 0
in 1997
Accrued preferred stock dividends 41 0
Conversion of accrued interest on senior subordinated debt to
Common Stock and paid-in-capital 169 0
Conversion of partners' capital to preferred stock 2,295 0
Conversion of partnership capital to common stock
and paid-in-capital 7,225 0
Deferred income taxes from Reorganization included in net loss
considered paid-in-capital 5,416 0
Income earned in 1997 prior to Reorganization included in
paid-in-capital 526 0
</TABLE>
See accompanying notes to the consolidated financial statements.
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NATIONAL AUTO FINANCE COMPANY, INC.
Notes to the Consolidated Financial Statements
June 30, 1997
(unaudited)
(1) BASIS OF PRESENTATION
The financial statements presented herein, to the extent that they relate
to periods (i) prior to January 29, 1997, are the consolidated financial
statements of the National Auto Partnership and the ACCH Partnership, and
(ii) after January 29, 1997 are the financial statements of National Auto
Finance Company, Inc., and subsidiaries (the "Company").
The accompanying unaudited interim financial statements have been prepared
pursuant to the rules and regulations for reporting on Form 10-Q.
Accordingly, certain information and footnotes required by generally
accepted accounting principles for complete financial statements are not
included herein. The interim statements should be read in conjunction with
the financial statements and notes thereto included in 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 1997; in the
Company's opinion, all adjustments necessary for a fair presentation of
these interim statements have been included and are of a normal and
recurring nature. The results for the interim periods are not necessarily
indicative of results for a full year. Certain amounts in the 1996
financial statements have been reclassified to conform with current
financial statement presentation.
In conjunction with the reorganization from a partnership form to a taxable
corporate form, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes"
("SFAS No. 109"). Under the asset and liability method of SFAS No. 109,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax
liabilities of a change in tax rates was recognized in income in the three
month period ended March 31, 1997. The cumulative effect of this change in
accounting for income taxes was a non-cash charge of $5.4 million recorded
in the first quarter.
In June 1996, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities" ("SFAS No. 125"). This statement specifies when financial
assets and liabilities are to be removed from an entity's financial
statements, the accounting for servicing assets and liabilities, and the
accounting for assets that can be contractually prepaid in such a way that
the holder would not recover substantially all of its recorded investment.
Under SFAS No. 125, an entity recognizes only assets it controls and
liabilities it has incurred, discontinues recognition of assets only when
control has been surrendered and discontinues recognition of liabilities
only when they have been extinguished. SFAS No. 125 requires that the
selling entity continue to carry retained interests relating to assets it
no longer recognizes. Such retained interests are based on the relative
fair values of the retained interests of the subject assets at the date of
transfer. The Company refers to such retained interests as "Retained
Interest in Securitizations", consisting of several components including
the "excess spread receivable" ("Excess Spread Receivable" or the "ESR").
Retained interests are recorded at fair value and periodically measured in
the same manner as investments classified as available for sale or trading
under Statement of Financial Accounting Standards No. 115. Effective
January 1, 1997, the Company adopted SFAS No. 125.
Loans that are purchased by the Company are sold on a daily basis in a
two-step securitization program described below. Securitization related
income or loss is recognized (1) upon transfer of Loans to the Master Trust
based upon the amount of cash received upon transfer of such Loans
generally equal to the Company's purchase price of the Loan and (2) an
estimate of the Company's residual interest in the Master Trust (which
constitute a portion of Retained Interest in Securitizations). The value of
the Company's residual interest in the Master Trust is determined by
estimating the fair value of amounts to be received from the Master Trust
and the
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subsequent "Permanent Securitizations"
The Retained Interest in Securitizations is classified as a trading
security for financial reporting purposes with changes in fair value either
credited or charged to the statement of operations.
The Company is aware of a limited market for the purchase or sale of its
Over-Collateralization Accounts (a portion of its Retained Interest in
Securitizations), but is not aware of an active market for the purchase or
sale of the other components of its Retained Interest in Securitizations
(ESR's and Cash Spread Accounts) and accordingly, the Company has
determined the estimated fair value of the Retained Interest in
Securitizations at June 30, 1997 by the following process:
1. The Company has estimated the timing and amount of cash flows to be
received from Loans transferred to each securitization trust based upon
assumptions relating to estimate of defaults, loss severity,
prepayments and normal principal and interest amortization "cash-in";
2. The Company has calculated the timing and amount of the total remaining
principal and interest to be paid to the securitization investors given
the assumptions noted above and the contractual requirements of each
securitization;
3. The Company has estimated the total amount to be paid by each
securitization trust for servicing, insurance and other costs and the
timing of such payments;
4. The estimated cash payments described in (2) and (3) above have been
subtracted from the estimated cash-in to determine the estimated Excess
Spread Receivable (ESR) for each month.
5. The Company has estimated the required Cash Spread Account balance for
each securitization trust for each period given the requirements of
each trust and the impact of the assumptions noted above. The Company
has then calculated the amount of Excess Spread Receivable to be added
to the Cash Spread Account or the amount of Cash Spread Account to be
released to the Company each month.
6. The estimated amount of cash available to the Company as described in
(5), represents the Company's estimate of the "cash-out" of the
securitization.
7. The fair value of cash-out over the remaining life of the
securitization has been determined by discounting the estimated
cash-out at a rate management believes an investor would require for a
stream of cash flows with similar cash risk characteristics.
8. The Company has compared the fair value of the cash-out for each
securitization trust to the Retained Interest in Securitizations for
each securitization trust. Adjustments to fair value or impairments are
charged to securitization related income (loss).
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 128, "Earnings Per Share"("SFAS No. 128"). SFAS No. 128
is effective for financial statements issued for periods ending after
December 15, 1997. SFAS No. 128 establishes standards for computing and
presenting earnings per share ("EPS"), simplifies the standards previously
found in Accounting Principles Board Opinion No. 15, "Earnings Per Share,"
and makes them comparable to international EPS standards. The Company will
begin disclosing EPS in accordance with SFAS No. 128 beginning with the
year ended December 31, 1997.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130
is effective for fiscal years beginning after December 15, 1997. SFAS
No. 130 establishes standards for reporting and display of comprehensive
income and its components in a full set of general-purpose financial
statements. SFAS No. 130 requires that all items to be recognized under
accounting standards as components of comprehensive income be reported in
a separate
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financial statement. Such statement will be presented by the Company
beginning with the quarter ended March 31, 1998.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosure About Segments of an Enterprise and Related
Information" ("SFAS No. 131"). SFAS No. 131 is effective for financial
statements for periods beginning after December 15, 1997. SFAS No. 131
establishes standards for the way that public business enterprises report
information about operating segments, based upon how the enterprise defines
such segments. The Company is required to report operating segment
information, to the extent such segments are defined, beginning with the
year ended December 31, 1998.
(2) RETAINED INTEREST IN SECURITIZATIONS
Retained Interest in Securitizations were as follows at June 30, 1997 and
December 31, 1996:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
----------- ----------
(dollars in thousands)
<S> <C> <C>
Spread Accounts $ 11,333 $ 8,221
Excess Spread Receivable 20,020 15,183
----------- ----------
$ 31,353 $ 23,404
=========== ==========
</TABLE>
Assumptions used to value the Retained Interests in Securitizations at June
30, 1997 were as follows:
<TABLE>
<CAPTION>
<S> <C>
Weighted average cumulative net loss rate 9.00%
Weighted average cumulative prepayment rate 20.64%
Discount rate 11.00%
Level of required Cash Spread Account 3.4% to 7.00%
Rate of interest on Cash spread Account 5.50%
Weighted average yield on Loans 19.54%
</TABLE>
In January 1995, the Company began using a revolving securitization
facility pursuant to which the Company sells its Loans on a daily basis to
a bankruptcy-remote special purpose subsidiary trust ("Funding Trust"),
which in turn transfers such Loans to a bankruptcy-remote master trust (the
"Master Trust"). The Company retains, through Funding Trust, certain
residual interests in future excess cash flows from the Master Trust (the
Excess Spread Receivable or ESR), in exchange for the transfer of Loans to
the Master Trust.
Periodically, the Master Trust refinances its Loans through the transfer of
the Loans (and Company's retained interest or ESR) to separate permanent
trusts. The payment of the principal and interest on those securities has
been insured by a payment guaranty issued by Financial Security Assurance,
Inc. ("FSA"). The proceeds of the transactions are used by the Master Trust
to repay the financing of the Master Trust. The Master Trust then commences
re-borrowing to finance its purchase of additional Loans from the Company
through Funding Trust.
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During the six months ended June 30, 1997 and 1996, the following activity
took place with respect to securitization:
<TABLE>
<CAPTION>
June 30,
-------------------------
1997 1996
----------- ----------
(dollars in thousands)
<S> <C> <C>
Original customer principal balance of Loans sold,
as of period end $ 75,005 $ 32,953
=========== ==========
Securitization related income $ 6,171 $ 5,253
=========== ==========
Remaining principal balance of Loans sold since
inception, as of period end $ 127,094 $ 53,534
=========== ==========
Weighted average coupon rate on Loans sold
as of period end 19.54% 18.80%
=========== ==========
</TABLE>
(3) JUNIOR SUBORDINATED NOTES
During 1994, 1995, and 1996, the Company received loans on a junior
subordinated basis (the "Junior Subordinated Notes") from principal equity
holders of National Auto Finance Company L.P., a Delaware limited
partnership that was organized in October 1994 (the "National Auto
Partnership") and certain affiliates. The Junior Subordinated Notes are
payable on January 31, 2002, and accrue interest at 8% per annum. Interest
expense recognized for this debt for the periods ending June 30, 1997 and
1996 was $123,000 and $295,000, respectively.
(4) SENIOR SUBORDINATED NOTES
In August 1996, the Company completed a $12 million senior subordinated
debt financing with J.P. Morgan Investment Management, Inc., acting on
behalf of certain institutional investors (the "Morgan Group"), pursuant to
which $12 million principal amount of senior subordinated notes (the
"Senior Subordinated Notes"), were issued to the Morgan Group. The
principal amount of the Senior Subordinated Notes is due in August 2001 and
carries a 10% coupon payable quarterly. Prior to the consummation of the
Company's public offering (the "Offering") of 2,300,000 shares of the
Company's common stock, par value $.01 per share (the "Common Stock"),
there was also an additional 3% deferred-interest coupon that accrued
interest on a compounded basis and was payable in August 2006, but was
converted into 470,000 shares of the Common Stock upon the consummation of
the Offering. Through January 29, 1997, the date of the Offering, the
Company accrued the additional 3% interest on the deferred-interest coupon,
which amount totaled approximately $169,000 at January 29, 1997. On January
29, 1997, upon the conversion of such coupon to equity, such amounts were
accounted for as paid-in-capital of the Company. The Senior Subordinated
Notes generally prohibit the payment of dividends on Common Stock following
consummation of an initial public offering of Common Stock so long as any
amount remains outstanding on such debt. Interest expense recognized for
this debt for the period ended June 30, 1997 was $630,000.
(5) STOCK OPTION PLAN
In 1996, the Board of Directors of the Company adopted a share incentive
plan (the "1996 Share Incentive Plan"). The 1996 Share Incentive Plan is
intended to provide incentives which will attract, retain and motivate
highly competent persons, each of whom will contribute to the success and
future growth and profitability of the Company, as executive management,
employees and directors of the Company and of any parent or subsidiary of
the Company, by providing them the opportunity to acquire shares of Common
Stock or to receive monetary payments based on the value of such shares
pursuant to certain benefits contemplated by the 1996 Share
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Incentive Plan. Furthermore, the 1996 Share Incentive plan is intended to
assist in aligning the interests of the Company's executive management,
employees and directors with those of its stockholders.
The 1996 Share Incentive Plan provides for the granting of certain benefits
in any one or a combination of (i) stock options, (ii) stock appreciation
rights, (iii) stock awards, (iv) performance awards, and (v) stock units.
The aggregate number of shares of Common Stock that may be subject to such
benefits, including stock options, is 500,000 shares of Common Stock
(subject to adjustment in the event of a merger, consolidation,
reorganization, recapitalization, stock dividend, stock split, reverse
stock split, split up, spin-off, combination of shares, exchange of shares,
dividend in-kind or other like change in capital structure or
distribution).
Through the second quarter of 1997, stock options with respect to an
aggregate of 275,000 shares of Common Stock have been granted to thirteen
key employees and two directors at the fair market value at the date of
grant. At June 30, 1997, exercise of such options was considered
anti-dilutive to earnings per share, thus such options are excluded from
the calculation of earnings per share. All employee stock options vest
one-third immediately, one-third in 1998 and one-third in 1999, and
director stock options vest in 1998. All stock options expire 10 years from
the date of grant.
(6) SUBSEQUENT EVENTS
In July 1997, the National Auto Finance 1997-1 Trust (the "1997-1 Trust")
was formed and the Master Trust refinanced approximately $73.5 million of
its receivables in a public offering of asset-backed securities through
their transfer by the Master Trust to the 1997-1 Trust, as part of a
permanent securitization ("Permanent Securitization"). Payment of principal
of, and interest on, the $66.9 million of the securities issued in that
transaction is insured by payment guarantees issued by FSA, and such
securities are rated AAA and Aaa by Standards & Poor's Rating Service and
Moody's Investors Service, Inc., respectively. The proceeds of that
Permanent Securitization transaction were used by the Master Trust to repay
the then-outstanding balance of the variable funding (i.e., revolving)
certificates bearing interest at floating rates ("Class B Certificates").
Since such time, the Master Trust has issued additional Beneficial
interests in Loans purchased by the Master Trust, as evidenced by the Class
B Certificates, to finance its purchase of Loans from the Company. The
Company expects additional Permanent Securitizations to be periodically
consummated in the future in order to refinance amounts outstanding under
such Class B Certificates.
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NATIONAL AUTO FINANCE COMPANY, INC.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
June 30, 1997
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following management's discussion and analysis provides information
regarding the Company's financial condition as of June 30, 1997 compared to
December 31, 1996, and its results of operations for the three and six month
periods ended June 30, 1997 and 1996. This management's discussion and analysis
should be read in conjunction with (i) the Company's Financial Statements and
the related notes and (ii) the Company's Annual Report on Form 10-K with respect
to the fiscal year ended December 31, 1996. The ratios and percentages provided
below are calculated using detailed financial information contained in the
Company's Financial Statements, the notes thereto and the other financial data
included elsewhere in this report.
OVERVIEW
The Company is a specialized consumer finance company engaged in the purchase,
securitization and servicing of Loans originated by automobile dealers
("Dealers") for consumers with limited financial resources or past credit
problems ("Non-Prime Consumers"). The Company acquires Loans principally from
manufacturer-franchised Dealers in connection with their sale of new and used
automobiles. The Company also acquires seasoned portfolios of such Loans from
banks and other finance companies. Until the Company's Offering of Common Stock
on January 29, 1997, the Company operated as two limited partnerships. As such,
the income tax effects of all earnings or losses of the Company were passed
directly to the partners and no provision for income taxes was required.
The Company's plan of operation for the remainder of 1997 is to increase the
number of Loans that it purchases, securitizes and services by:
1. Utilizing its regional salespersons located in strategic
geographic areas to market the Company's products and services
directly to Dealers;
2. Continuing the implementation of the strategic referral and
marketing alliance with First Union National Bank of North
Carolina ("First Union") and certain of its national bank
affiliates (the "First Union Strategic Alliance"), including the
expansion throughout First Union's indirect auto finance division,
which conducts business with Dealers in seven southeastern states
and the District of Columbia, and five northeastern states (the
"Northeastern Franchise");
3. Establishing strategic referral and marketing alliances with
several smaller financial institutions and Dealer groups; and
4. Strategically purchasing portfolios of Non-Prime Consumer Loans
from third party originators that meet the Company's strict
underwriting criteria.
HISTORICAL DEVELOPMENT AND GROWTH
From the inception of the Company in October 1994 through January 16, 1995, the
primary source of revenue for the Company was net interest income on Loans
purchased by the Company. In January 1995, the Company began the securitized
warehousing of all of its Loans through daily sale (the "Revolving
Securitization") to the Master Trust. The Revolving Securitization was
implemented effective January 16, 1995. On that date, the Company sold to the
Master Trust 407 Loans (approximately $5 million in principal) that were
purchased by the Company from October 12, 1994 through January 16, 1995.
Thereafter, the Company commenced selling Loans purchased by it to the Master
Trust on a daily basis.
Periodically, the Master Trust refinances its Loans through the transfer of the
Loans to a separate permanent trust, which then securitizes the Loans (Permanent
Securitization). The Company retains a residual interest and a cash investment
in the Master Trust, and the various Permanent Securitizations, which are
reflected as retained interest in securitizations on the Company's balance
sheet. Since initiation of the Revolving Securitization, the Company's earnings
have been primarily attributable to the securitization income recognized on the
sale of Loans into the
14
<PAGE> 15
NATIONAL AUTO FINANCE COMPANY, INC.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
June 30, 1997
Master Trust. For the six month period ended June 30, 1997, such securitization
related income accounted for approximately 77% of the Company's revenues.
COMPONENTS OF REVENUE AND EXPENSES
Revenues
In January, 1997, the Company adopted Statement of Financial Accounting
Standards (SFAS) NO. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishing of Liabilities' (SFAS No. 125) which the Company uses
to measure the fair value of its Retained Interest in Securitizations. The
Company derives revenues principally from the securitization related income it
records as a result of the SFAS No. 125 calculation.
The Company also receives monthly payments from the securitization trusts in
cash as a fee paid for the Company's servicing of Loans. Servicing income is
recognized as earned and typically offsets the direct expenses the Company
incurs in connection with 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. Unlike many of its competitors, the
Company earns only a nominal amount of interest on Loans held for sale because
the Company securitizes substantially all of its Loans on a daily basis and,
therefore, generally recognizes a higher level of securitization related income
than such competitors.
Expenses
The Company's expenses consist of interest and operating expenses. Interest
expense is the interest incurred on notes to certain affiliates of the Company
and notes to certain institutional investors. Operating expenses consist
primarily of personnel, general and administrative and servicing expenses, in
addition to depreciation of capital expenditures for furniture and equipment
that is being recognized over five years on a straight-line basis.
RESULTS OF OPERATIONS
WHERE APPLICABLE, 1996 AMOUNTS USED FOR COMPARISON REFLECT PRO-FORMA INCOME
TAXES CALCULATED AS IF THE PREDECESSOR OF THE COMPANY HAD OPERATED AS A TAXABLE
ENTITY FOR THE COMPARABLE 1996 PERIOD.
THREE MONTH PERIOD ENDED JUNE 30, 1997, AS COMPARED TO THE THREE MONTH PERIOD
ENDED JUNE 30, 1996.
Income from Operations
The Company reported net income for the three month period ended June 30, 1997
of $159,000 compared to pro forma net income of $539,000 for the three month
period ended June 30, 1996.
Securitization Related Income
The Company's Loan purchasing and servicing activities expanded significantly
during the three month period ended June 30, 1997, as compared to the three
month period ended June 30, 1996. The Company purchased $31.2 million of
principal amount of Loans or 2,290 Loans from Dealers and $12.6 million of
principal amount of Loans from Dealers or 1,541 Loans were acquired through the
Company's Portfolio Acquisition Program ("PAC") during the three month period
ended June 30, 1997. Of these amounts, $39.2 million or 90% were subsequently
sold to the Master Trust. This compares to $18.0 million principal amount of
Loans purchased from Dealers or 1,453 Loans and $311,000 principal amount of
Loans or 33 Loans were acquired through PAC during the three month period ended
June 30, 1996, all of which were sold to the Master Trust.
For the three month periods ended June 30, 1997 and 1996 the Company recognized
securitization related income of $4.1 million and $2.9 million, respectively.
This increase was primarily the result of a 139% increase in the dollar volume
of Loans purchased for the three month period ended June 30, 1997, as compared
to the three month period ended June 30, 1996.
15
<PAGE> 16
NATIONAL AUTO FINANCE COMPANY, INC.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
June 30, 1997
The table below sets forth certain information relating to the Company's Loan
purchasing activities, including the specific number and aggregate principal
amount of Loans purchased and the aggregate amount funded to Dealers:
<TABLE>
<CAPTION>
Three Month Period Ended
June 30,
--------------------------
1997 1996
----------- -----------
(dollars in thousands)
<S> <C> <C>
Number of Loans purchased from Dealers during period 2,290 1,453
Number of Loans purchased as portfolios (PAC) 1,541 33
----------- -----------
Total number of Loans purchased 3,831 1,486
=========== ===========
Principal balance of Loans from Dealers purchased during period $ 31,208 $ 18,031
Principal balance of Loans in portfolios (PAC) 12,569 311
----------- -----------
Total balance of Loans purchased $ 43,777 $ 18,342
=========== ===========
Amount funded(1) $ 42,600 $ 17,332
=========== ===========
</TABLE>
- ----------------------------
(1) Amount funded represents the price at which the Company purchases a Loan
from a Dealer or other seller (i.e., the amount actually paid to a Dealer
or other seller), calculated as the principal of the Loan purchased less a
negotiated discount.
Other Income
The Company generated approximately $1.1 million of other income for the three
month period ended June 30, 1997, as compared to $188,000 for the three month
period ended June 30, 1996. The principal sources of the Company's other income
were $838,000 of servicing income and $295,000 of interest and miscellaneous
income for the three month period ended June 30, 1997, as compared to $187,000
and $1,000, respectively, for the three month period ended June 30, 1996.
Total Expenses
The Company reported operating expenses of $4.9 million for the three month
period ended June 30, 1997, as compared to approximately $2.2 million for the
three month period ended June 30, 1996. These expenses consisted primarily of
subordinated note interest, personnel, loan acquisition, portfolio servicing and
other corporate operating expenses. Operating expenses, as a percentage of Loans
purchased, decreased from 11.9% as of June 30, 1996 to 11.3% as of June 30,
1997. Management currently expects that operating costs will rise throughout the
remainder of fiscal year 1997 as the result of anticipated growth in the number
of Loans purchased and serviced by the Company, and the hiring of additional
personnel in connection with the expansion of the First Union Strategic Alliance
to FUSF's Northeastern Franchise. In addition, operating costs will also
increase as the Company implements its own in-house servicing center in
Jacksonville, Florida. The Company has already hired 33 employees in its
in-house collections department (14 as of June 30, 1997), and expects to hire
more employees by the end of this year for both collections and servicing of
Loans. The Company intends to assume responsibility for collecting all of its
Loans by approximately October 1, 1997, and hopes to take over all servicing of
its Loans by the end of fiscal year 1997. To that end, the Company has leased
37,000 square feet of space in Jacksonville to house its servicing center, and
is temporarily leasing approximately 3,000 square feet of space until the
permanent space is ready for occupancy. Such increased operating expenses may
decrease the Company's operating margins and the Company's overall
profitability.
Salary and employee benefits for the three month period ended June 30, 1997 were
approximately $1.7 million, as compared to approximately $841,000 for the three
month period ended June 30, 1996. Personnel expenses consisted
16
<PAGE> 17
NATIONAL AUTO FINANCE COMPANY, INC.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
June 30, 1997
primarily of salaries and wages, performance incentives, employee benefits, and
payroll taxes. The Company's number of full-time employees increased from 57 as
of June 30, 1996, to 103 as of June 30, 1997.
Other operating expenses for the three month period ended June 30, 1997 were
approximately $1.1 million, as compared to approximately $457,000 for the three
month period ended June 30, 1996. These expenses consisted primarily of
telecommunications, travel, professional fees, insurance expenses, and
management information systems expenses.
Servicing expenses for the three month period ended June 30, 1997 were $763,000,
as compared to $258,000 for the three month period ended June 30, 1996.
Servicing expenses consist primarily of a monthly fee paid to an outside
servicer, Omni Financial Services of America ("World Omni"), for each active
Loan. Servicing fees paid to World Omni for the three month period ended June
30, 1997 were $638,000, as compared to $212,000 for the three month period ended
June 30, 1996. The increase in expenses primarily reflected the growth in the
amount of Loans purchased and serviced by the Company. The Company's total
serviced Loan portfolio as of June 30, 1997 was approximately $157.1 million, or
14,392 outstanding Loans, as compared to approximately $66.4 million, or 5,774
outstanding Loans as of June 30, 1996.
Interest expense for the three month period ended June 30, 1997 was $345,000, as
compared to $154,000 for the three month period ended June 30, 1996. This
increase is a result of the interest expense incurred with respect to the
Company's Senior Subordinated Notes and related Deferred Additional Interest
Notes. The Senior Subordinated Notes bear interest at a rate of 10% per annum.
The Company's Junior Subordinated Notes bear interest at a rate of 8% per annum.
SIX MONTH PERIOD ENDED JUNE 30, 1997, AS COMPARED TO THE SIX MONTH PERIOD ENDED
JUNE 30, 1996.
Income from Operations
The Company reported a net loss for the six month period ended June 30, 1997 of
$597,000, before a one-time non-cash deferred income tax charge to earnings of
$5.4 million, arising in the first quarter of 1997, which reflects a deferred
income tax liability arising from the reorganization of the Company's business
from a partnership form to a taxable corporate form in connection with the
Company's Offering in January 1997 compared to pro forma net income of $1.0
million for the six month period ended June 30, 1996.
Securitization Related Income
The Company's Loan purchasing and servicing operations expanded significantly
during the six month period ended June 30, 1997, as compared to the six month
period ended June 30, 1996. The Company purchased $59.2 million of principal
amount of Loans or 4,407 Loans from Dealers and $20.3 million principal amount
of Loans or 2,302 Loans were acquired through the Company's Portfolio
Acquisition Program during the six month period ended June 30, 1997. Of these
amounts, $75.0 million or 94% were subsequently sold to the Master Trust. This
compares to $32.6 million of principal amount of Loans or 2,638 Loans purchased
from Dealers and $311,000 principal amount of Loans or 33 Loans acquired through
PAC during the six month period ended June 30, 1996, all of which were sold to
the Master Trust.
For the six month periods ended June 30, 1997 and 1996 the Company recognized
securitization related income of $6.2 million and $5.3 million, respectively.
This increase was primarily the result of a 141% increase in the dollar volume
of Loans purchased for the six month period ended June 30, 1997, as compared to
the six month period ended June 30, 1996.
17
<PAGE> 18
NATIONAL AUTO FINANCE COMPANY, INC.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
June 30, 1997
The table below set forth certain information relating to the Company's Loan
purchasing activities, including the specific number and aggregate principal
amount of Loans purchased and the aggregate amount funded to Dealers:
<TABLE>
<CAPTION>
Six Month Period Ended
June 30,
--------------------------
1997 1996
----------- -----------
(dollars in thousands)
<S> <C> <C>
Number of Loans purchased from Dealers during period 4,407 2,638
Number of Loans purchased as portfolios (PAC) 2,302 33
----------- -----------
Total number of Loans purchased 6,709 2,671
=========== ===========
Principal balance of Loans from Dealers purchased during period $ 59,217 $ 32,642
Principal balance of Loans in portfolios (PAC) 20,332 311
----------- -----------
Total balance of Loans purchased $ 79,549 $ 32,953
=========== ===========
Amount funded(1) $ 77,509 $ 31,202
=========== ===========
</TABLE>
- -------------------
(1) Amount funded represents the price at which the Company purchases a Loan
from a Dealer or other seller (i.e., the amount actually paid to a Dealer
or other seller), calculated as the principal of the Loan purchased less a
negotiated discount.
Other Income
The Company generated approximately $1.9 million of other income for the six
month period ended June 30, 1997, as compare to $382,000 for the six month ended
June 30, 1996. The principal sources of the Company's other income were $1.4
million of servicing income and $503,000 of interest and miscellaneous income
for the six month period ended June 30, 1997, as compared to $328,000 and
$54,000, respectively, for the six month period ended June 30, 1996.
Total Expenses
The Company reported operating expenses of $8.9 million for the six month period
ended June 30, 1997, as compared to $4.0 million for the six month period ended
June 30, 1996. These expenses consisted primarily of subordinated note interest,
personnel, Loan acquisition, portfolio servicing, and other corporate operating
expenses.
Salaries and benefits for the six month period ended June 30, 1997 were
approximately $3.0 million, as compared to approximately $1.5 million for the
six month period ended June 30, 1996.
Other operating expenses for the six month period ended June 30, 1997 were
approximately $1.8 million, as compared to approximately $778,000 for the six
month period ended June 30, 1996.
Servicing expenses for the six month period ended June 30, 1997 were $1.4
million as compared to $480,000 for the six month period ended June 30, 1996.
This represents a 0.34% increase in annualized servicing expenses as a
percentage of Loans serviced, from 1.44% as of June 30, 1996 to 1.75% as of June
30, 1997. Servicing fees paid to World Omni for the six month period ended June
30, 1997 were $1.1 million as compared to $395,000 for the six month period
ended June 30, 1996. The increase in expenses primarily reflected the growth in
the amount of Loans purchased and serviced by the Company.
18
<PAGE> 19
NATIONAL AUTO FINANCE COMPANY, INC.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
June 30, 1997
Interest expense for the six month period ended June 30, 1997 was $760,000, as
compared to $304,000 for the six month period ended June 30, 1996. This increase
is a result of the interest expense incurred with respect to the Company's
Senior Subordinated Notes and related Deferred Additional Interest Notes.
FINANCIAL CONDITION
As of June 30, 1997, the Company had total assets of $42.4 million, as compared
to $31.2 million as of December 31, 1996. These assets consisted primarily of
cash, subordinated securities, investments and retained interests in
securitization trusts, and Loans held for sale, net of allowances for credit
losses.
As of June 30, 1997, the Company had cash and cash equivalents totaling
approximately $2.8 million. As of such date, the Company also had approximately
$3.0 million in cash balances held in restricted bank accounts, representing a
portion of the credit enhancement for the securitization trusts, which amount
was included in the total amount of the Company's investments and retained
interests in securitizations as of such date.
As of June 30, 1997, the Company retained approximately $20.0 million of Excess
Spread Receivables and approximately $11.3 million of Spread Accounts. These
assets represented 74% of the total assets of the Company as of such date. The
value of these assets would be reduced in the event of a material increase in
the Loan loss and prepayment experience relative to the amounts estimated by the
Company for such items at the time of the sale of the related Loans to the
Master Trust.
As of June 30, 1997, the principal amount owed by the Company on Junior
Subordinated Notes was approximately $2.0 million, which bear interest at an
annual rate of 8%.
LOAN LOSS AND DELINQUENCY EXPERIENCE
The Company regularly reviews the timing of losses and prepayments and the
adequacy of loss and prepayment reserves related to securitized Loans. The
reserve assumptions used for calculation of securitization related income are
set at levels considered to be sufficient to cover the cash flow impact to the
Company of expected future losses and prepayments on Loans. Changes in reserves
are based directly on the dollar value of the Loans transferred to the Master
Trust, historical loss and prepayment experience and, to a lesser extent,
current economic conditions and other factors that management deems relevant.
The Securitization Trusts' charge-off policy is based upon a Loan-by-Loan review
of delinquent accounts. A trust generally charges off a Loan at the time its
related collateral is liquidated, although certain Loans may be charged off
sooner if management determines them to be uncollectable.
The following table summarizes the Trusts' Loan losses and liquidation recovery
experience from the inception of the Company:
<TABLE>
<CAPTION>
As of June 30,
--------------------------
1997 1996
----------- -----------
(dollars in thousands)
<S> <C> <C>
Aggregate number of Loans purchased 17,382 10,675
Aggregate principal balance of Loans purchased $ 214,290 $ 134,773
Principal balance of outstanding Loans $ 157,111 $ 102,852
Number of outstanding Loans 14,392 9,063
Gross charge-off principal balance (1) $ 14,946 $ 7,760
Liquidation recoveries (7,583) (4,232)
------------ ------------
Net charge-offs $ 7,363 $ 3,528
=========== ===========
Principal balance of Loans related to vehicles held in
Inventory $ 2,919 $ 2,266
</TABLE>
19
<PAGE> 20
NATIONAL AUTO FINANCE COMPANY, INC.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
June 30, 1997
A Loan is considered to be delinquent if the borrower fails to make any payment
substantially in full by the due date as specified by the terms of the Loan. The
Company typically initiates contact with borrowers whose payments are not
received by the due date on the fifth day following the due date. The following
table summarizes the delinquency experience with respect to outstanding Loans
sold to the Master Trust:
<TABLE>
<CAPTION>
As of June 30,
--------------------------
1997 1996
----------- -----------
(dollars in thousands)
<S> <C> <C>
Principal balance outstanding $ 157,111 $ 102,852
Period of delinquency
31 to 60 days $ 10,232 $ 6,104
61 to 90 days 3,191 1,596
91 days or more, average 2,420 487
----------- -----------
Total delinquencies $ 15,843 $ 8,187
=========== ===========
Total delinquencies as a percentage of the current
principal balance of outstanding Loans 10.08% 7.95%
=========== ===========
</TABLE>
Since October 1994, the Company has maintained, at its own expense, supplemental
vendor's single interest insurance that protects the Company's interest in Loan
collateral against uninsured physical damage (including total loss) and
instances where neither the vehicle nor the borrower can be found.
The Company monitors historical loss experience on an overall portfolio and on a
"static pool" basis. Loans sold to the Master Trust in each calendar month are
segregated into individual static pools. The Company considers a pool of Loans
to be "seasoned" when it has been aged for an average of 18 to 24 months. Actual
pool losses are then compared to the estimates for the net loss reserve for each
pool that were established at the pool's inception and adjustments for any
additional losses will be reflected in the current period earnings.
20
<PAGE> 21
NATIONAL AUTO FINANCE COMPANY, INC.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
June 30, 1997
The following tables summarize the vintage static pools of the Company's
Servicing Portfolio for all Loans purchased by the Company from inception
through the period ending March 31, 1997, and includes loss data through June
30, 1997:
<TABLE>
<CAPTION>
4Q 1Q 2Q 3Q 4Q
1994 1995 1995 1995 1995
---- ---- ---- ---- ----
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Number of Loans pur-
chased during period 13,553 300 795 920 1,003 868
Number of outstanding
Loans at end of
period 10,623 158 402 500 645 594
Principal balance of
Loans purchased
during period 170,546,706 3,819,645 9,704,263 11,237,718 13,674,781 11,378,599
Principal balance of
Loans outstanding at
end of period 114,572,705 1,266,230 3,016,157 4,046,276 6,272,519 5,978,476
</TABLE>
<TABLE>
<CAPTION>
1Q 2Q 3Q 4Q 1Q
1996 1996 1996 1996 1997
---- ---- ---- ---- ----
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Number of Loans pur-
chased during period 1,185 1,486 1,866 2,252 2,878
Number of outstanding
Loans at end of
period 828 1,155 1,552 2,015 2,774
Principal balance of
Loans purchased
during period 14,611,677 18,341,044 23,201,321 28,804,973 35,772,705
Principal balance of
Loans outstanding at
end of period 8,338,435 11,968,108 16,994,942 23,847,149 32,844,413
</TABLE>
<TABLE>
<CAPTION>
Cumulative
Net Loss % 4.32% 9.07% 9.15% 8.66% 7.10% 6.65% 5.80% 6.00% 3.65% 1.89% 0.23%
4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q
1994 1995 1995 1995 1995 1996 1996 1996 1996 1997
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <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%
2 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
3 0.00% 0.00% 0.00% 0.00% 0.05% 0.00% 0.00% 0.04% 0.00% 0.00%
4 0.00% 0.00% 0.00% 0.03% 0.17% 0.00% 0.00% 0.04% 0.01% 0.02%
5 0.00% 0.07% 0.10% 0.19% 0.21% 0.10% 0.10% 0.16% 0.00% 0.06%
6 0.05% 0.14% 0.27% 0.43% 0.70% 0.39% 0.32% 0.45% 0.25% 0.23%
7 0.05% 0.24% 0.67% 0.88% 0.96% 0.60% 0.64% 0.79% 0.61%
8 0.31% 0.86% 1.42% 1.24% 1.05% 0.80% 1.14% 1.06% 1.21%
9 0.47% 1.34% 1.98% 2.18% 1.57% 1.38% 1.73% 1.92% 1.89%
10 0.51% 1.70% 2.40% 2.35% 2.28% 1.81% 2.70% 2.59%
11 1.08% 1.73% 2.62% 2.70% 2.40% 2.00% 3.29% 3.36%
12 1.36% 2.52% 3.14% 3.11% 3.08% 2.43% 4.34% 3.65%
13 1.75% 3.04% 3.37% 3.60% 3.48% 3.35% 5.19%
14 1.72% 3.39% 3.71% 3.58% 3.69% 3.60% 5.58%
15 3.12% 3.90% 3.99% 4.13% 4.24% 4.42% 6.00%
16 3.21% 4.20% 4.27% 4.60% 4.58% 4.71%
17 3.80% 4.52% 4.49% 4.98% 5.36% 5.38%
18 4.45% 4.70% 5.01% 5.14% 5.52% 5.80%
19 4.55% 4.94% 5.35% 5.49% 6.09%
20 4.91% 5.18% 5.75% 4.89% 6.43%
21 4.91% 5.77% 6.13% 6.46% 6.65%
22 5.05% 5.75% 6.84% 6.76%
23 5.05% 6.24% 7.44% 7.02%
24 5.79% 6.34% 7.75% 7.10%
25 5.78% 7.01% 8.28%
26 6.20% 7.30% 8.52%
27 6.80% 7.65% 8.66%
28 7.15% 8.00%
29 7.49% 9.02%
30 8.06% 9.15%
31 8.23%
32 9.07%
</TABLE>
21
<PAGE> 22
NATIONAL AUTO FINANCE COMPANY, INC.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
June 30, 1997
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
Since inception, the Company has funded its operations and the growth of its
Loan purchasing activities primarily through six principal sources of capital:
(i) cash flows from operating activities; (ii) proceeds from securitization
transactions; (iii) cash flows from servicing fees; (iv) proceeds from the
issuance of senior subordinated debt to institutional investors; (v) proceeds
from the issuance of junior subordinated debt to, and from the capital
contributions of, certain affiliates of the Company; and (vi) proceeds from the
Offering.
Net cash used in operating activities was $13.8 million during the six month
period ended June 30, 1997, compared to net cash used of $1.2 million during the
six month period ended June 30, 1996. Cash used for purchasing Loans was $77.5
million, an increase of $46.3 million, or 148%, over cash used for purchasing
Loans in the prior year's first six month period. Cash provided from the sale of
Loans to the Master Trust was $73.0 million, an increase of $41.8 million, or
134%, over cash provided from the sale of loans to the Master Trust in the prior
year's first six month period.
The Company's securitization financing activities are capital-intensive and will
require significant additional capital to fund the Company's required equity
commitment to the Revolving Securitization facility and related securitization
expenses as the Company's Loan purchasing activities grow in the future. The
Company has used the proceeds of the Offering, the Senior Subordinated Notes,
and the Junior Subordinated Notes to fund, among other things, the Company's
required equity commitment to the Revolving Securitizations.
The Company has experienced an acceleration in the use of its cash during the
second quarter of 1997 in excess of the cash requirements previously projected
by the Company. This acceleration is due, in large part, to six factors: (1) a
doubling of the Company's PAC volume for this fiscal year from the
originally-projected $20 million to the presently-projected $39.3 million; (2) a
greater than expected increase in the volume of Company-originated Loans; (3)
less than projected dealer discounts; (4) the implementation of the Company's
in-house servicing center and the costs associated with the corresponding
overlap of functions between that service center and World Omni's service
center; (5) an increase in the enhancement rate required as part of the 1997-1
Trust; and (6) a change in the dynamic credit support requirements of the
Company's securitization facilities has resulted in and may in the future result
in capital of the Company being maintained in the Spread Accounts of two of the
Permanent Securitizations. The net effect of these six factors is that the
Company will require in the fourth quarter of 1997 additional capital to fund
its operations. To that end, the Company is actively seeking to raise additional
capital in an amount sufficient to meet the Company's cash requirements and to
fund operations through the end of fiscal year 1998.
During the six month period ended June 30, 1997, cash used for initial deposits
to Spread Accounts was $6.8 million. Cash flows from retained interest released
to the Company for the six month period ended June 30, 1997 was $4.9 million, an
increase of $3.2 million, or 182%, over cash distributed from securitizations in
the prior year's period. Changes in the distributions from the various Spread
Accounts are impacted by the relative size and seasoning of the pools of sold
Loans that make up the Company's servicing portfolio.
The Company's management team possesses significant servicing, collections and
related management information systems expertise, which will assist the Company
in establishing its own internal servicing operation. As previously discussed,
the Company has begun the process of implementing an in-house servicing
operation. The Company has established a budget of $3.9 million for such
operation in 1997.
22
<PAGE> 23
Part II - Other Information
Item 4. Submission of Matters to a Vote of Security Holders
(a) On June 20, 1997, an annual meeting (the "Annual Meeting") of the
Company's stockholders was held.
(b) At the Annual Meeting, Keith B. Stein and Peter Offermann were
re-elected to the Company's Board of Directors. Further, Gary L.
Shapiro, Roy E. Tipton and Morgan M. Schuessler continued to serve
as members of the Company's Board of Directors. As previously
reported on June 16, 1997, Edgar A. Otto resigned as a member of
the Company's Board of Directors, and the Board of Directors, in
accordance with the Company's by-laws, appointed Stephen Gurba to
the Company's Board of Directors to fill the vacancy left by Mr.
Otto's departure.
(c) The matters voted upon at the Annual Meeting included (1) the
election of Keith B. Stein and Peter Offermann to the Company's
Board of Directors for terms of three years; and (2) a proposal to
ratify the appointment of KPMG Peat Marwick LLP ("KPMG"),
independent public accountants, as the auditors for the Company
for fiscal year 1997. A total of 6,845,544 shares were represented
by proxy at the Annual Meeting, representing 97.4% of the
7,026,000 shares eligible to vote. 6,835,269 votes were cast in
favor of electing both Keith B. Stein and Peter Offermann as
directors, 10,275 votes were withheld, and no votes were cast
against them. Additionally, 6,831,944 votes were cast in favor of
the ratification of KPMG as the Company's auditors, 9,400 votes
were cast against, and 4,200 votes were abstained.
(d ) Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
<TABLE>
<CAPTION>
<S> <C> <C>
Number Description Method of Filing
------ ----------- ----------------
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 April 29, 1997, the Company filed a Form 8-K announcing its
earnings for the first quarter of 1997.
On June 24, 1997, the Company filed a Form 8-K announcing that:
1. Morgan M. Schuessler was named a member of its Board of
Directors;
2. Jacksonville, Florida was selected as the site for the
Company's loan servicing divisional headquarters; and
3. At the Company's Annual Meeting on June 20, 1997, (a)
Keith B. Stein and Peter Offermann were re-elected to the
Company's Board of Directors, (b) the Company accepted the
resignation of Edgar Otto as a member of its Board of
Directors, and (c) Stephen Gurba was unanimously appointed
to the Company's Board of Directors to fill the vacancy
left by Mr. Otto's resignation.
No other reports on Form 8-K were filed in the second quarter of
1997.
On July 31, 1997, the Company filed a Form 8-K announcing its
earnings for the second quarter of 1997.
23
<PAGE> 24
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: July 7, 1998 /s/ KEITH B. STEIN
-----------------------------------
Keith B. Stein
Chief Executive Officer
24
<PAGE> 25
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
11 Computation of Earnings Per Common Share
27 Financial Data Schedule
</TABLE>
25
<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 June 30,
---------------------------
1997 1996
--------- ------------
<S> <C> <C>
Average number of common shares outstanding 6,976
Pro forma shares outstanding -- 4,230
Common equivalent shares outstanding: -- --
--------- -----------
Stock options
Total common and common equivalent shares outstanding 6,976 4,230
========= ===========
Net income (loss) before income taxes from Reorganization
of partnership $ (530) $ 1,040
========= ===========
Net income (loss) as adjusted $ (6,013)
========
Loss per share $ (0.09)
=========
Loss per share as adjusted $ (0.86)
=========
Pro forma earnings per share $ 0.25
===========
</TABLE>
26
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE INTERIM
STATEMENT OF INCOME FOR SIX MONTHS ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 2,847
<SECURITIES> 0
<RECEIVABLES> 35,894
<ALLOWANCES> (313)
<INVENTORY> 0
<CURRENT-ASSETS> 38,428
<PP&E> 1,286
<DEPRECIATION> (270)
<TOTAL-ASSETS> 42,436
<CURRENT-LIABILITIES> 2,784
<BONDS> 14,012
2,335
0
<COMMON> 70
<OTHER-SE> 18,151
<TOTAL-LIABILITY-AND-EQUITY> 42,436
<SALES> 0
<TOTAL-REVENUES> 8,049
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 7,838
<LOSS-PROVISION> 313
<INTEREST-EXPENSE> 760
<INCOME-PRETAX> (862)
<INCOME-TAX> 5,084
<INCOME-CONTINUING> (5,946)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,013)
<EPS-PRIMARY> (.86)
<EPS-DILUTED> (.86)
</TABLE>
