<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 March 31, 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)
<TABLE>
<S> <C>
DELAWARE 65-0688619
-------------------------------------------------------------- --------------------------------
(State or other jurisdiction of incorporation or organization) (IRS Employer Identification No.)
621 N.W. 53rd Street, Suite 200, Boca Raton, Florida 33487
------------------------------------------------------------- ---------------------------
(Address of principal executive offices) (Zip Code)
</TABLE>
(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 9,030,762 shares of common stock, $.01 par value outstanding as of
May 15, 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:
March 31, 1998 and December 31, 1997 . . . . . . . . . . . . . . . . . . . . 4
Statements of Income:
Three Months Ended March 31, 1998 and 1997 . . . . . . . . . . . . . . . . . 5
Statements of Stockholders' Equity as of March 31, 1998 and 1997 . . . . . . . . 6
Statements of Cash Flows:
Three Months Ended March 31, 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 . . . . . . . . . . . . . . . . . . . . . . . . . 26
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
EXHIBIT INDEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Exhibit 11. Computation of Earnings Per Common Share . . . . . . . . . . . . . . . . . . 29
Exhibit 27. Financial Data Schedule . . . . . . . . . . . . . . . . . . . . . . . . . . 30
</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," "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 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.
Consolidated Balance Sheets (unaudited)
March 31, 1998 and December 31, 1997
(dollars in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 26,724 $ 26,467
Retained interest in securitizations, at fair value 45,100 31,569
Furniture, fixtures and equipment 2,430 2,262
Deferred financing costs 3,168 2,539
Related party receivables - 155
Other assets 2,791 1,883
---------- ----------
Total assets $ 80,213 $ 64,875
========== ==========
LIABILITIES:
Accounts payable and accrued expenses $ 2,534 $ 3,260
Accrued interest payable-related parties 39 39
Accrued interest payable-senior subordinated notes 1,187 132
Accrued interest payable-notes 15 50
Junior subordinated notes-related parties 1,940 1,940
Senior subordinated notes 52,774 34,546
Notes payable 1,598 1,614
---------- ----------
Total liabilities 60,087 41,581
---------- ----------
Mandatorily 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 2,336 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 36,381 34,417
Accumulated deficit (18,681) (13,549)
---------- ----------
Total stockholders' equity 17,790 20,958
---------- ----------
Total liabilities, mandatorily redeemable preferred stock and
stockholders' equity $ 80,213 $ 64,875
========== ==========
</TABLE>
See accompanying notes to the consolidated financial statements.
4
<PAGE> 5
NATIONAL AUTO FINANCE COMPANY, INC.
Consolidated Statements of Operations (unaudited)
For the Three Months Ended March 31, 1998 and 1997
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------------
1998 1997
------------ ------------
(Restated)
<S> <C> <C>
REVENUE:
Securitization related income $ 74 $ 2,052
Servicing income 1,272 537
Interest income 696 167
Other income 78 41
---------- -----------
Total revenue 2,120 2,797
========== ==========
EXPENSES:
External servicing expenses 840 612
Internal servicing expenses 1,464 -
Interest expense 1,530 415
Salaries and employee benefits 1,643 1,324
Direct loan acquisition expenses 651 701
Depreciation and amortization 187 179
Other operating expenses 937 753
---------- ----------
Total expenses 7,252 3,984
---------- ----------
Loss before income taxes (5,132) (1,187)
Income taxes (benefit) - (457)
---------- ----------
Net loss before taxes from reorganization of partnership (5,132) (730)
---------- ----------
Income taxes from reorganization of partnership - 5,416
---------- ----------
Net loss (5,132) (6,146)
Preferred stock dividends 40 27
---------- ----------
Loss attributed to common shareholders $ (5,172) $ (6,173)
========= ==========
PER SHARE DATA:
Loss per common share - basic $ (0.57) $ (0.89)
Loss per common share - diluted $ (0.57) $ (0.89)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 9,031 6,898
Diluted 9,031 6,898
</TABLE>
See accompanying notes to the consolidated financial statements.
5
<PAGE> 6
NATIONAL AUTO FINANCE COMPANY, INC.
Consolidated Statements of Stockholders' Equity (unaudited)
For the Three Months Ended March 31, 1998 and 1997
(dollars in thousands)
<TABLE>
<CAPTION>
Common Paid in Retained
Stock Capital Earnings Total
-------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Balance as of December 31, 1997 $ 90 $ 34,417 $ (13,549) $ 20,958
Issuance of 593,671 Warrants to purchase Common Stock
in connection with the issuance of Senior
Subordinated Notes 2,004 2,004
Dividends on mandatorily redeemable preferred stock (40) (40)
Net loss (5,132) (5,132)
------ -------- --------- --------
Balance as of March 31, 1998 $ 90 $ 36,381 $ (18,681) $ 17,790
====== ======== ========= ========
Equity of
Common Paid-in Retained Predecessor
Stock Capital Earnings Entity Total
----- ------- -------- ------- ------
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)
Deferred income taxes recorded in connection
with reorganization (5,416) (5,416)
Issuance of 496,000 shares of Common Stock in
exchange for deferred interest on Senior
Subordinated Notes 5 164 169
Issuance of 2,300,000 shares of common stock
in initial public offering, net of costs 23 16,961 16,984
Dividends on mandatorily redeemable preferred stock (27) (27)
Net loss subsequent to reorganization (1,256) (1,256)
------ -------- ------- ------- -------
Balance as of March 31, 1997 $ 70 $ 19,391 $ (1,256) $ 0 $ 18,205
- ---------------- ====== ======== ======= ======= =======
(1) $2,295 of such amount was attributed to mandatorily redeemable preferred stock.
</TABLE>
See accompanying notes to the consolidated financial statements.
6
<PAGE> 7
NATIONAL AUTO FINANCE COMPANY, INC.
Consolidated Statements of Cash Flows (unaudited)
For the Three Months Ended March 31, 1998 and 1997
(dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------
1998 1997
----------- -----------
(Restated)
<S> <C> <C>
CASH FLOW OPERATING ACTIVITIES:
Net loss $ (5,132) $ (6,146)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Securitization related income (74) (2,052)
Depreciation expense 143 37
Provision for credit losses - 77
Purchases of loans held for sale (47,422) (34,909)
Proceeds from transfer of loans to Master Trust 47,422 33,813
Cash flows from Retained Interest released to Company 1,768 3,331
Cash deposits to Spread Accounts (15,227) (3,835)
Amortization and write-off of deferred financing costs 122 68
Amortization of deferred placement costs - 74
Amortization of warrants 233 -
Changes in other assets and liabilities:
Other assets (753) (1,429)
Accounts payable and accrued expenses (726) (67)
Accrued interest payable-related parties - (59)
Accrued interest payable-senior subordinated notes
and other notes 1,020 (139)
Deferred income taxes - 4,959
--------- --------
Net cash used in operating activities (18,626) (6,277)
CASH FLOW FROM INVESTING ACTIVITIES:
Fixed assets purchased (309) (287)
--------- --------
Net cash used in investing activities (309) (287)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from senior subordinated notes 19,248 -
Principal payments on junior subordinated notes-related parties - (5,186)
Principal payments on notes (16) -
Proceeds from initial public offering - 17,759
Due to National Auto Finance Corporation - (178)
Payment of preferred stock dividends (40)
-------- ---------
Net cash provided by financing activities 19,192 12,395
--------- --------
Net increase in cash and cash equivalents 257 5,831
Cash and cash equivalents in beginning of period 26,467 5,066
--------- --------
Cash and cash equivalents at end of period $ 26,724 $ 10,897
========= ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for income taxes $ - $ -
========= ========
Cash paid for interest $ 280 $ 445
========= ========
</TABLE>
7
<PAGE> 8
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------
1998 1997
----------- ----------
(Restated)
<S> <C> <C>
NON-CASH FINANCING ACTIVITIES:
Offering costs deferred in 1996 transferred to paid-in capital in 1997 $ 0 $ 775
Accrued mandatorily redeemable preferred stock dividends 0 40
Conversion of deferred interest on senior subordinated debt to common
stock and paid-in capital 0 169
Conversion of predecessor entity capital to mandatorily redeemable
preferred stock 0 2,295
Conversion of predecessor entity capital to common stock and
paid-in capital 0 7,225
Deferred taxes from reorganization considered reduction in paid-in capital 0 5,416
Income earned in 1997 prior to reorganization included in
paid-in capital 0 526
Issuance of 593,671 warrants in conjuction with senior subordinated
notes considered paid-in-capital 2,004 0
</TABLE>
See accompanying notes to the consolidated financial statements.
8
<PAGE> 9
NATIONAL AUTO FINANCE COMPANY, INC.
Notes to Consolidated Financial Statements
March 31, 1998
(unaudited)
(1) BASIS OF PRESENTATION
In April 1998, National Auto Finance Company, Inc. ("the Company")
announced that it would likely be restating its financial statements for
each of the first, second and third quarters of 1997. The comparative
amounts included herein reflect the restated amounts for the first quarter
of 1997. Further information regarding the restatement is provided in
Note 2 below.
The accompanying unaudited interim consolidated financial statements at
March 31, 1998 and December 31, 1997 and for the three month periods
ended March 31, 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
In April 1998, the Company announced that it would likely be restating its
financial statements for each of the first, second and third quarters of
1997.
The Company has restated its consolidated financial statements for the
first quarter of 1997. The restatement resulted from applying the
Company's December 31, 1997 model pursuant to SFAS No. 125 relating to the
calculation of securitization income and the related valuation of 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 March 31, 1997
included:
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) Accrual of certain anticipated costs associated with future
securitizations.
9
<PAGE> 10
NATIONAL AUTO FINANCE COMPANY, INC.
Notes to Consolidated Financial Statements
March 31, 1998
(unaudited)
Consolidated Balance Sheet (Unaudited)
As of March 31, 1997
(dollars in thousands)
<TABLE>
<CAPTION>
Reported As Adjusted
------------ ------------
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 10,897 $ 10,897
Retained interest in securitizations, at fair value 29,988 26,361
Finance receivables, net 1,038 1,038
Furniture, fixtures and equipment 679 732
Deferred financing costs 1,117 1,039
Other assets 585 1,725
---------- ----------
Total assets $ 44,304 $ 41,792
========== ==========
LIABILITIES:
Accounts payable and accrued expenses $ 1,683 $ 1,990
Accrued interest payable-related parties 84 84
Accrued interest payable-senior subordinated notes 200 200
Junior subordinated notes-related parties 2,032 2,032
Senior subordinated notes 12,000 12,000
Deferred income taxes 5,130 4,959
---------- ----------
Total liabilities 21,129 21,265
---------- ----------
Mandatorily 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 2,322
STOCKHOLDERS' EQUITY:
Common stock -$0.01 par value; 20,000,000 shares authorized;
7,026,000 shares outstanding 70 70
Paid-in-capital 20,364 19,391
Retained earnings 446 (1,256)
---------- ----------
Total stockholders' equity 20,880 18,205
---------- ----------
Total liabilities, mandatorily redeemable preferred stock and
stockholders' equity $ 44,304 $ 41,792
========== ==========
</TABLE>
10
<PAGE> 11
NATIONAL AUTO FINANCE COMPANY, INC.
Notes to Consolidated Financial Statements
March 31, 1998
(unaudited)
Consolidated Statements of Operations
For the Three Months Ended March 31, 1997
(in thousands, except per share data)
<TABLE>
<CAPTION>
Reported As Adjusted
------------ ------------
<S> <C> <C>
REVENUE:
Securitization related income $ 4,987 $ 2,052
Servicing income 394 537
Interest income 167 167
Other income 41 41
---------- ----------
Total revenue 5,589 2,797
========== ==========
EXPENSES:
External servicing expenses 612 612
Interest expense 415 415
Salaries and employee benefits 1,299 1,324
Direct loan acquisitions expenses 701 701
Depreciation and amortization 179 179
Other operating expenses 753 753
---------- ----------
Total expenses 3,959 3,984
---------- ----------
Income (loss) before income taxes 1,630 (1,187)
Income taxes (benefit) 630 (457)
---------- ----------
Net income (loss) before taxes from reorganization of partnership 1,000 (730)
Income taxes from reorganization of partnership 4,500 5,416
---------- ----------
Net income (loss) (3,500) (6,146)
Preferred stock dividends 27 27
---------- ----------
Loss attributed to common shareholders $ (3,527) $ (6,173)
========= ==========
PER SHARE DATA:
Loss per common share - basic $ (0.51) $ (0.89)
Loss per common share - diluted $ (0.51) $ (0.89)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 6,898 6,898
Diluted 6,898 6,898
</TABLE>
11
<PAGE> 12
NATIONAL AUTO FINANCE COMPANY, INC.
Notes to Consolidated Financial Statements
March 31, 1998
(unaudited)
(3) RETAINED INTEREST IN SECURITIZATIONS
Retained Interest in Securitizations were as follows at March 31, 1998 and
December 31, 1997:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
----------- -------------
(dollars in thousands)
<S> <C> <C>
Spread Accounts $ 24,290 $ 14,846
Excess Spread Receivable (ESR) 20,810 16,723
--------- ---------
$ 45,100 $ 31,569
========= =========
</TABLE>
Assumptions used to value the Retained Interests in Securitizations at
March 31, 1998 and December 31, 1997 were as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
--------- -----------
<S> <C> <C>
Weighted average cumulative net loss rate 12.88% 12.88%
Weighted average cumulative prepayment rate 21.40% 20.89%
Discount rate 14.00% 14.00%
Level of required Cash Spread Account 5% to 11% 5% to 11%
Rate of interest on Cash Spread Account 5.50% 5.50%
Weighted average interest rate on Loans 19.05% 19.01%
Weighted average yield on bonds and notes
held by securitization investors 6.14% 6.15%
</TABLE>
The Company has historically funded its purchases of 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 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) 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.
In January 1998, the National Auto Finance 1998-1 Trust (the "1998-1
Trust") was formed and the Master Trust refinanced approximately $93.6
million of its receivables in a public offering of asset-back securities
through their transfer by the Master Trust to the 1998-1 Trust, as part of
a Permanent Securitization. Payment of principal of, and interest on, the
$85.2 million of the securities issued in that transaction is insured by
payment guarantees by FSA, and
12
<PAGE> 13
NATIONAL AUTO FINANCE COMPANY, INC.
Notes to Consolidated Financial Statements
March 31, 1998
(unaudited)
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 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 Securitization to be consummated in the future in
order to refinance periodically amounts outstanding under such Class B
Certificates.
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 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 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 Dealer Discount related to the
principal balance of Loans. As of March 31, 1998, the Company had a 20.50%
equity investment in the Revolving Securitization.
In the event delinquencies or losses on the Loans exceed such levels
("Trigger Events"), the terms of the 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. Certain portfolio performance tests
were not met at various times in the first quarter of 1998 with respect to
the Permanent Securitization trusts formed in November 1995, November 1996,
and July 1997 resulting in additional cash being required to be retained in
the Spread Accounts related to such Permanent Securitization trusts until
the violation of such performance tests are cured.
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 its insurance agreements with FSA. Upon an Insurance
Agreement Event of Default, FSA may: (i) permanently suspend distributions
of cash flow to the Company from the related securitization trust and all
other FSA-insured trusts until the asset-backed securities have been paid
in full; (ii) capture all excess cash flows from performing FSA-insured
trusts; (iii) increase its premiums; and (iv) replace the Company as
servicer with respect to all FSA-insured trusts. In April 1997, the
Permanent Securitization trust formed in November 1995 experienced an
Insurance Agreement Event of Default. In October 1997, the Company entered
into an agreement with FSA that: (i) permanently waived the April 1997
Insurance Agreement Event of Default; (ii) modified the portfolio
performance tests described above to increase the thresholds through June
1998 for the Permanent Securitization trusts formed in November 1995 and
1996 (temporary revisions); (iii) increased the amount required to be
retained in the Spread Account related to the November 1995 and 1996 trust
to an amount generally equal to 11% of the then outstanding balance held by
the securitization trust if the modified portfolio performance tests are
not met; (iv) required the Company to cause the Spread Account for each
FSA-insured securitization trust to be cross-collateralized to the Spread
Accounts established in connection with each of its other FSA-insured
securitization trusts; (v) permitted the Company to enter into the $10.0
million BankBoston Agreement; (vi) provided that FSA would consider
providing credit enhancement for the Company's next Permanent
Securitization; and (vii) provided for the issuance of 100,000 shares of
Common Stock to FSA. In consideration for such agreement, the Company
issued 100,000 shares of Common Stock to FSA and reduced securitization
related income by $700,000 in 1997. As a result of the aforementioned
cross-collateralization, the excess cash flow from a performing FSA-insured
trust may be required to be used to support negative cash flow from, or to
replenish a deficient Spread Account in connection with, a non-performing
FSA-insured securitization trust, thereby further restricting excess cash
flow available to the Company. If excess cash flow from all FSA-insured
securitization trusts is not sufficient to replenish all these Spread
Accounts, no cash flow would be available to the Company for that month.
The Company's right to service the Loans sold in FSA-insured
13
<PAGE> 14
NATIONAL AUTO FINANCE COMPANY, INC.
Notes to Consolidated Financial Statements
March 31, 1998
(unaudited)
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 does not meet such requirements in 1998,
the carrying value of the Company's Retained Interest in Securitizations
would be materially impacted in a negative manner. As of March 31, 1998,
the Company was not in violation of the insurance agreement Event of
Default.
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. The Company is in the process of seeking
a waiver of such covenant breaches and modification of certain terms of the
Master Trust to permit availability under the Master Trust.
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.
During the three months ended March 31, 1998 and 1997, the following
activity took place with respect to securitizations:
<TABLE>
<CAPTION>
March 31, March 31,
1998 1997
-------- --------
(dollars in thousands)
<S> <C> <C>
Principal balance of Loans sold . . . . . . $ 48,991 $ 35,712
======= =======
Weighted average coupon rate on Loans
sold during the period . . . . . . . . . 19.32% 18.88%
====== ======
</TABLE>
(4) SENIOR SUBORDINATED DEBT
In December 1997, the Company completed a private placement (the "December
Private Placement") of $10 million in Common Stock and $40 million
principal amount of Senior Subordinated Notes with detachable 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 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%.
In conjunction with the March Private Placement, placement fees of
$400,000 and $200,000 were paid to First Union Capital Markets Corp. and
National Financial Companies, L.L.C., respectively. Additionally, a fee
of $200,000 was paid to the Lender.
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 $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 March 31, 1998, 50% of net
income (if positive) for each fiscal quarter plus (c) 100% of
14
<PAGE> 15
NATIONAL AUTO FINANCE COMPANY, INC.
Notes to Consolidated Financial Statements
March 31, 1998
(unaudited)
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 is in discussions with the lenders under such debt agreements
to obtain waivers of the breach of such covenant violations. If such
waivers are not obtained, the holders of the indebtedness represented
thereby may declare a default and accelerate the payment of the principal
amount of such indebtedness.
(5) JUNIOR SUBORDINATED NOTES
The Junior Subordinated Notes are payable to certain affiliates on January
31, 2002, and accrue interest at 8% per annum. Such debt is subordinated
to all other debt of the Company. Interest expense recognized for this
debt for the three months ended March 31, 1998 and 1997 was $39,000 and
$84,000, respectively.
(6) NOTES PAYABLE
The Company has entered into a $1.5 million revolving credit agreement
("FUNB Note") dated as of August 25, 1997 with First Union National Bank
to fund the purchase of furniture and equipment ("collateral") for the
Company's 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% (8.19% at March 31,
1998), payable monthly. The principal amount of the FUNB Note is payable
monthly beginning March 1998 and matures March 2001. As of March 31,
1998, the principal amount owed by the Company was $1.0 million. Interest
expense recognized for this debt for the three month period ended March
31, 1998 was $21,000.
As of September 29, 1997, the Company entered into the BankBoston
Agreement, a three year, $10.0 million revolving credit facility secured
by Loans. This debt accrues interest at the greater of the prime rate of
the federal funds rate plus 0.50% (8.5% at March 31, 1998), payable
monthly. As of March 31, 1998, the principal amount owed by the Company
was $254,000. At March 31, 1998, the Company was in violation of the
BankBoston Agreement's Minimum Quarterly Net Income and Minimum Debt
Service Coverage Covenants. The Company repaid the remaining balance in
April 1998 and does not intend to borrow under the BankBoston Agreement in
the foreseeable future. Interest expense recognized for this debt for the
three month period ended March 31, 1998 was $15,000.
The Company has entered into a four year capital lease for furniture for
the Company's service center. The lease accrues interest at 7.05%.
Principal and interest are payable monthly. As of March 31, 1998, the
principal amount owed by the Company was $268,000. Interest expense
recognized for this debt for the period ended March 31, 1998 was $5,400.
(7) STOCK OPTION PLAN
In 1998, stock options with respect to an aggregate of 232,500 shares of
Common Stock have been granted to key employees, affiliates of the Company
and directors at the fair market value at the date of grant. The amount
of shares granted in excess of the available shares and the granting of
options to independent contractors and employees of affiliates of the
Company are subject to shareholder approval at the Annual Meeting. All
employee and affiliate stock options vest one-third immediately, one-third
in 1998 and one-third in 1999, and director stock options vest in 1998.
All stock options expire 10 years from the date of grant.
(8) SUBSEQUENT EVENTS
As discussed in Note 4, the Company is in violation of certain financial
covenants in agreements with certain of its lenders. As of May 15, 1998,
the lenders have not declared a default or accelerated the payment of the
principal amount of the debt owed to them by the Company. The Company is
in discussions with its lenders to obtain waivers of those covenant
violations.
The Company has agreed to engage a back-up servicer to further ensure the
continuity of servicing for its Servicing Portfolio. The Company is in
discussions with a financial services company to be the Company's back-up
servicer.
15
<PAGE> 16
NATIONAL AUTO FINANCE COMPANY, INC.
Notes to Consolidated Financial Statements
March 31, 1998
(unaudited)
The Company also is in discussions with First Union to continue Loan
financing availability under its Master Trust facility warehouse line. As
of May 15, 1998, the Company has continued to fund Loans under the Master
Trust facility warehouse line. The amount available under the Master
Trust for purchase of Loans was $7.7 million as of May 15, 1998.
Additionally, the Company and the automobile finance division of First
Union ("First Union Auto Finance") have agreed to allow First Union Auto
Finance up to and including May 15, 1998 to notify the Company of First
Union Auto Finance's renewal or non-renewal of its referral agreement with
the Company for an additional year.
The Company is undergoing a restructuring of its operations, including,
without limitation, the reduction of personnel, and expects to focus its
originations in the areas of the highest geographic volume and continue
originating loans pursuant to certain of its strategic alliances. The
Company also anticipates tightening its underwriting criteria, becoming
more selective in the types of vehicles and customers that it will
finance, and increasing its loan yields. The Company is continuing to
develop a revised business model reflective of these strategies and
expects to announce in the near future additional steps to reposition its
business. The Company is currently reviewing several strategic options to
expand the business of its service center.
16
<PAGE> 17
NATIONAL AUTO FINANCE COMPANY, INC.
Managements's Discussion and Analysis of Financial Condition
and Results of Operations
March 31, 1998
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
In April 1998, the Company announced that it would likely be restating its
financial statements for each of the first, second and third quarters of 1997.
The discussion below reflects the restated amounts for the first quarter of
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 March 31, 1998 compared to
December 31, 1997 and its results of operations for the three month period
ended March 31, 1998 and the restated three month period ended March 31, 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.
Revenues
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"). Since then, the
Company has undertaken a continuing process of refining the assumptions and
methodologies used to measure the fair value of its Retained Interest in
Securitizations based upon the historical performance of its Loan portfolio.
Specifically, the Company has increased the cumulative net loss estimate from
7% as of March 31, 1997 to 12.88% as of March 31, 1998 increased the discount
rate applied to estimated cash flows from the securitizations from 11% at March
31, 1997 to 14% at March 31, 1998 and increased assumptions related to levels
of cash required to be maintained in spead 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 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. 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
gain on sales of Loans than such competitors.
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, which 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
17
<PAGE> 18
NATIONAL AUTO FINANCE COMPANY, INC.
Managements's Discussion and Analysis of Financial Condition
and Results of Operations
March 31, 1998
relevant trust and its interest and principal payments on the asset-backed
securities and trust expenses). Once the funds in 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 months ended March 31, 1998 and 1997, the following
activity took place with respect to securitizations:
<TABLE>
<CAPTION>
March 31,
--------------------------------
1998 1997
------------- --------------
(restated)
(dollars in thousands)
<S> <C> <C>
Number of Loans purchased . . . . . . . . . . . . 4,087 2,878
Principal balance of Loans purchased . . . . . . $ 48,991 $ 35,772
Principal amount of Loans funded (1) . . . . . . $ 47,422 $ 34,909
Securitization related income (loss) . . . . . . $ 74 $ 2,052
Servicing income . . . . . . . . . . . . . . . . $ 1,272 $ 537
</TABLE>
- ------------------------
(1) Amount funded represents the price at which the Company purchases a Loan
from a Dealer or Third-Party Originator (i.e., the amount actually paid
to a Dealer or Third-Party Originator), calculated as the principal of
the Loan purchased less the Dealer Discount.
RESULTS OF OPERATIONS
THREE MONTH PERIOD ENDED MARCH 31, 1998, COMPARED TO THE THREE MONTH PERIOD
ENDED MARCH 31, 1997.
Income from Operations
The Company reported net loss of $5.2 million attributed to common
shareholders for the three month period ended March 31, 1998, compared to a net
loss of $6.2 million attributed to common shareholders for the three month
period ended March 31, 1997.
Securitization Related Income (Loss)
The Company's Loan purchasing and servicing operations expanded
significantly during the three month period ended March 31, 1998 compared to
the three month period ended March 31, 1997. The Company purchased 4,087
Loans, having a principal balance of $49.0 million, during the three month
period ended March 31, 1998, compared to 2,878 Loans, having a principal
balance of $35.8 million, for the three months ended March 31, 1997. These
Loan purchases consisted of 2,823 Loans purchased from Dealers ($37.7 million
principal balance) and 1,264 Loans purchased from Third-Party Originators
($11.3 million principal balance) during the three month period ended March 31,
1998. This compares to 2,117 Loans purchased from Dealers ($28.0 million
principal balance) and 761 Loans purchased from Third-Party Originators ($7.8
million principal balance) during the three month period ended March 31, 1997.
For the three month periods ended March 31, 1998 and 1997, the Company
recognized securitization related income of $74,000 and $2.0 million,
respectively. Notwithstanding a 37% increase in the dollar volume of Loans
purchased during the three month period ended March 31, 1998 compared to the
three month period ended March 31, 1997, securitization income decreased due to
the increase in the cumulative net loss estimate from 7% as of March 31, 1997
to 12.88% as of March 31, 1998. In addition, in the first quarter of 1998, the
Company was required to provide additional credit enhancements to the Master
Trust in the amount of $15.3 million and as part of the evaluation of the
Retained Interest in Securitizations, the cash deposits were discounted using a
rate of 14%, which reduced the securitization income reported for the first
quarter.
18
<PAGE> 19
NATIONAL AUTO FINANCE COMPANY, INC.
Managements's Discussion and Analysis of Financial Condition
and Results of Operations
March 31, 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
three month periods ended March 31, 1998 and 1997 was $1.3 million and
$537,000, respectively. The growth in servicing income was attributable to the
increase in the size of the Servicing Portfolio.
Other Income
Other income consists of interest income on cash investments and late
charges earned. The other income for the three month periods ended March 31,
1998 and 1997 was $774,000 and $208,000, respectively.
Total Expenses
The Company reported total expenses for the three month periods ended
March 31, 1998 and 1997 of $7.3 million and $4.0 million, respectively. These
expenses consisted primarily of interest expense on long-term indebtedness
including the Company's senior subordinated notes, salaries and employee
benefits, direct Loan acquisition expenses and servicing expenses. The
increase in expenses was due to the start-up and duplicative expenses
associated with the Company's transition from an outside servicer to in-house
servicing and the additional interest expense associated with the increased
debt of the Company.
External servicing expenses for the three month periods ended March 31,
1998 and 1997 were $840,000 and $612,000, respectively. Servicing costs
consisted primarily of a monthly fee to an outside servicer for each active
Loan and 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 March 31, 1998 and 1997 were $731,000 and $491,000,
respectively. The increase in servicing expenses primarily reflected the
growth in the Servicing Portfolio. The Company's Servicing Portfolio grew from
a $127.1 million Servicing Portfolio, representing 11,321 outstanding Loans as
of March 31, 1997, to a $251.1 million Servicing Portfolio, representing 23,597
outstanding Loans, as of March 31, 1998. The Company will continue to pay its
outside servicer fees during the period of transition to the complete internal
servicing and MIS operations, which is expected to be completed later in the
second quarter of 1998. Thereafter, servicing expenses will decline but will
be partially replaced by internal servicing expenses.
The Company has assumed responsibility for collecting all of its Loans,
and anticipates assuming responsibility for all other servicing of its Loans
and MIS operations late in the second quarter of 1998. Internal servicing
expenses consisted primarily of salaries and other operating expenses totaling
$1.5 million for the three month period ended March 31, 1998. In addition, the
Company capitalized $41,000 of start-up costs during the three month period
ended March 31, 1998. The Company commenced operations in its own internal
servicing center during July 1997 and had hired 102 employees through March 31,
1998. The internal servicing expenses will continue to grow as the transition to
in-house servicing continues.
Interest expense for the three month periods ended March 31, 1998 and
1997 was $1.5 million and $415,000, respectively. The increase in interest
expense resulted from the increases in the long-term debt balances of the
Company.
Salaries and employee benefits for the three month periods ended March
31, 1998 and 1997 were approximately $1.6 million and $1.3 million,
respectively. The increase resulted from the hiring of additional senior
management. These expenses consisted primarily of salaries and wages,
performance incentives, employee benefits and payroll taxes.
Direct Loan acquisition expenses for the three month periods ended March
31, 1998 and 1997 were $651,000 and $701,000, respectively. These expenses
consisted primarily of Dealer incentives, fees paid to Strategic Alliance
partners, broker fees, credit information fees and telephone expenses. The
expenses were relatively consistent for the three month periods ended March 31,
1998 and 1997 despite volume increases in 1998 due to decreased rates obtained
on credit reports and telephone charges.
19
<PAGE> 20
NATIONAL AUTO FINANCE COMPANY, INC.
Managements's Discussion and Analysis of Financial Condition
and Results of Operations
March 31, 1998
Other operating expenses for the three month periods ended March 31, 1998
and 1997 were $937,000 and $753,000, respectively. These expenses consisted
primarily of telecommunications, travel, professional fees, insurance expenses
and MIS expenses. The increase in other operating expenses primarily reflects
the growth in the number of Loans purchased and serviced by the Company, the
hiring of additional personnel and other costs associated with the growth of
the Company.
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 revaluation of the carrying value
of Retained Interest in Securitizations. Charge-off of Loans are based upon an
account-by-account review of delinquent Loans by the Company. The Trusts
generally charge 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
uncollectable. The following table summarizes the Company's loan loss
experience:
<TABLE>
<CAPTION>
As of March 31,
------------------------------
1998 1997
------------- ---------------
(dollars in thousands)
<S> <C> <C>
Average Servicing Portfolio during period . . . . $ 237,864 $ 114,247
Gross charge-offs . . . . . . . . . . . . . . . . 5,411 3,575
Liquidation proceeds from repossessed assets . . 2,357 1,711
----------- -----------
Net charge-offs . . . . . . . . . . . . . . . . . $ 3,054 $ 1,864
=========== ===========
Net charge-offs as a percentage of average Servicing
Portfolio . . . . . . . . . . . . . . . . . 1.28% 1.63%
=========== ===========
</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 and
management problems. There can be no assurance that the Company will be able
to service and collect the Servicing Portfolio on a cost effective and timely
basis or that future delinquency and loss ratios will not increase.
The 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.
Since October 1994, the Company has maintained, 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.
20
<PAGE> 21
NATIONAL AUTO FINANCE COMPANY, INC.
Managements's Discussion and Analysis of Financial Condition
and Results of Operations
March 31, 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 fifth day following the due
date. The following table summarizes the delinquency and repossession
experience with respect to the Servicing Portfolio:
<TABLE>
<CAPTION>
As of March 31,
--------------------------
1998 1997
----------- -----------
(dollars in thousands)
<S> <C> <C>
Period of delinquency:
31 to 60 days . . . . . . . . . . . . . . . . $ 12,481 $ 6,816
61 to 90 days . . . . . . . . . . . . . . . . 2,624 1,500
91 days or more . . . . . . . . . . . . . . . 3,488 1,854
--------- ---------
Total delinquencies . . . . . . . . . . . . . . . $ 18,593 $ 10,170
========= =========
Total delinquencies as a percentage of the
Servicing Portfolio . . . . . . . . . . . . . 7.40% 8.00%
Principal balance of Loans related to repossession
inventory . . . . . . . . . . . . . . . . . . $ 5,839 $ 2,579
Repossession inventory as a percentage of the
Servicing Portfolio . . . . . . . . . . . . . 2.33% 2.03%
</TABLE>
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.
21
<PAGE> 22
NATIONAL AUTO FINANCE COMPANY, INC.
Managements's Discussion and Analysis of Financial Condition
and Results of Operations
March 31, 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 December 31, 1997, and includes loss data through
March 31, 1998:
<TABLE>
<CAPTION>
4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
1994 1995 1995 1995 1995 1996 1996 1996 1996 1997 1997 1997 1997
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <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%
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%
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%
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%
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%
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%
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%
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%
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%
10 0.51% 1.70% 2.40% 2.35% 2.28% 1.81% 2.70% 2.59% 2.55% 2.34% 3.26%
11 1.08% 1.73% 2.62% 2.71% 2.40% 2.00% 3.29% 3.36% 3.40% 2.84% 3.51%
12 1.36% 2.52% 3.14% 3.11% 3.08% 2.43% 4.34% 3.65% 3.69% 3.45% 4.31%
13 1.75% 3.04% 3.37% 3.60% 3.48% 3.35% 5.19% 4.47% 4.02% 3.95%
14 1.72% 3.39% 3.71% 3.58% 3.69% 3.60% 5.58% 5.04% 4.53% 4.21%
15 3.12% 3.90% 3.99% 4.13% 4.24% 4.42% 6.00% 5.38% 5.12% 4.86%
16 3.21% 4.20% 4.27% 4.60% 4.58% 4.71% 6.50% 5.95% 5.49%
17 3.80% 4.52% 4.49% 4.98% 5.36% 5.38% 6.89% 6.37% 5.89%
18 4.45% 4.70% 5.01% 5.14% 5.52% 5.80% 7.19% 6.84% 6.48%
19 4.55% 4.94% 5.35% 5.49% 6.09% 6.68% 7.52% 7.32%
20 4.91% 5.18% 5.75% 5.96% 6.43% 6.95% 7.85% 8.13%
21 4.91% 5.77% 6.13% 6.46% 6.65% 7.16% 8.25% 8.58%
22 5.05% 5.75% 6.84% 6.76% 7.10% 7.60% 8.47%
23 5.05% 6.24% 7.44% 7.02% 7.51% 8.09% 9.35%
24 5.79% 6.34% 7.75% 7.10% 8.06% 8.24% 9.81%
25 5.78% 7.01% 8.28% 7.78% 8.34% 8.32%
26 6.20% 7.30% 8.52% 8.37% 8.62% 8.71%
27 6.80% 7.65% 8.66% 8.63% 8.82% 9.12%
28 7.15% 8.00% 9.08% 8.71% 8.97%
29 7.49% 9.02% 9.31% 8.86% 9.30%
30 8.06% 9.15% 9.36% 8.92% 9.98%
31 8.23% 9.73% 9.57% 9.06%
32 9.07% 9.90% 9.60% 9.81%
33 9.07% 10.08% 9.89% 10.14%
34 9.61% 10.07% 9.96%
35 9.89% 10.28% 10.33%
36 10.38% 10.59% 10.58%
37 11.44% 10.81%
38 11.48% 11.15%
39 11.81% 11.52%
40 11.84%
41 11.87%
42 12.22%
</TABLE>
22
<PAGE> 23
NATIONAL AUTO FINANCE COMPANY, INC.
Managements's Discussion and Analysis of Financial Condition
and Results of Operations
March 31, 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 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 $12.3 million from
$6.3 million for the three month period ended March 31, 1997 to $18.6 million
for the three month period ended March 31, 1998, principally due to increased
operating expenses resulting from the growth of the Company, the change in the
credit enhancement requirements of the Company's securitization facilities and
the increase in the volume of Loans purchased.
Net cash used in investing activities were relatively consistent for the
three month periods ended March 31, 1998 and 1997.
Net cash provided by financing activities increased by $6.8 million from
$12.4 million for the three month period ended March 31, 1997 to $19.2 million
for the three month period ended March 31, 1998. Such increase was the result
of the proceeds received from the Company's sale of the Senior Subordinated
Notes.
The Company is 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 March 31, 1998, the
Company had a 20.5% equity investment in the Revolving Securitization.
As of March 31, 1998, the Company retained approximately $20.8 million of
ESRs, approximately $13.2 million of Cash Spread Accounts and approximately
$11.1 million of Over-Collateralization Accounts, which combined represent the
$45.1 million shown on the balance sheet as Retained Interest in
Securitizations, representing 56% 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 March 31, 1998, the principal amount owed by the Company on the
Junior Subordinated Notes was approximately $2 million (including $39,000 of
accrued interest), which bear interest at an annual rate of 8.0%, and the
principal amount owed by the Company on the Senior Subordinated Notes was $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 for further discussions of the notes.
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. There can be no assurance that in the future the
Company will not experience an interruption in its receipt of excess cash
flows, which could adversely affect the Company's financial condition, results
of operations and cash flows.
23
<PAGE> 24
NATIONAL AUTO FINANCE COMPANY, INC.
Managements's Discussion and Analysis of Financial Condition
and Results of Operations
March 31, 1998
Each Permanent Securitization trust has certain portfolio performance
tests relating to levels of delinquency, defaults and net losses on the Loans
in such trust ("Maintenance Tests"). Portfolio performance tests require that
the Loan portfolio of each Permanent Securitization trust have: (i) an average
delinquency rate less than a specified percentage; (ii) a cumulative default
rate less than specified percentages that vary based on the aging of the
relevant trust's Loan pool; and (iii) a cumulative net loss 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 7.0% of the then outstanding balance held by the securitization trust.
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 its insurance agreements with FSA. Upon an insurance Agreement
Event of Default, FSA may: (i) permanently suspend distributions of cash flow
to the Company from the related securitization trust and all other FSA-insured
trusts until the asset-backed securities have been paid in full; (ii) capture
all excess cash flows from performing FSA-insured trusts; (iii) increase its
premiums; and (iv) replace the Company as servicer with respect to all
FSA-insured trusts. In April 1997, the Permanent Securitization trust formed
in November 1995 experienced an Insurance Agreement Event of Default. In
October 1997, the Company entered into an agreement with FSA that: (i)
permanently waived the April 1997 Insurance Agreement Event of Default; (ii)
modified the portfolio performance tests described above to increase the
thresholds through June 1998 for the Permanent Securitization trusts formed in
November 1995 and 1996 (temporary revisions); (iii) increased the amount
required to be retained in the Spread Account related to the November 1995 and
1996 trust to an amount generally equal to 11% of the then outstanding balance
held by the securitization trust if the modified portfolio performance tests
are not met; (iv) required the Company to cause the Spread Account for each
FSA-insured securitization trust to be cross-collateralized to the Spread
Accounts established in connection with each of its other FSA-insured
securitization trusts; (v) permitted the Company to enter into the $10.0
million BankBoston Agreement; (vi) provided that FSA would consider providing
credit enhancement for the Company's next Permanent Securitization; and (vii)
provided for the issuance of 100,000 shares of Common Stock to FSA. In
consideration for such agreement, the Company issued 100,000 shares of Common
Stock to FSA and reduced securitization related income by $700,000 in 1997. As
a result of the aforementioned cross-collateralization, the excess cash flow
from a performing FSA-insured trust may be required to be used to support
negative cash flow from, or to replenish a deficient Spread Account in
connection with, a non-performing FSA-insured securitization trust, thereby
further restricting excess cash flow available to the Company. If excess cash
flow from all FSA-insured securitization trusts is not sufficient to replenish
all these Spread Accounts, no cash flow would be available to the Company for
that month. 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 does not meet such requirements in 1998, the carrying
value of the Company's Retained Interest in Securitizations would be materially
impacted in a negative manner.
In 1998, certain modified portfolio performance tests were not met with
respect to the Permanent Securitization trusts formed in November 1995,
November 1996 and July 1997, resulting in the Company being required to retain
an additional amount of $3.1 million over the $2.1 million previously required
to be retained in the Cash Spread Accounts as of December 31, 1997 related to
such Permanent Securitization trusts until the violation of such modified
performance tests are cured. As of April 30, 1998, a total of $3.8 million of
the total $5.2 million in increased spread account funding requirements had
been accumulated in the Cash Spread Accounts of such trusts, in lieu of being
distributed to the Company.
The following is a table showing the portfolio performance tests by Trust
as of March 31, 1998:
<TABLE>
<CAPTION>
Delinquency Test Default Test Loss Test
----------------------------- ---------------------------- -------------------------------
Actual Maintenance Insurance Actual Maintenance Insurance Actual Maintenance Insurance
------ ----------- --------- ------ ----------- --------- ------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
95-1 9.49% 9.50% 12.00% 16.57% 20.00% 25.00% 9.08% 10.50% 12.00%
96-1 10.74 9.75 12.00 21.53 20.00 25.00 8.71 10.00 12.00
97-1 8.51 8.25 11.00 21.37 18.00 25.00 9.61 8.00 11.00
98-1 5.09 8.25 11.00 7.77 18.00 25.00 0.22 8.00 11.00
</TABLE>
24
<PAGE> 25
NATIONAL AUTO FINANCE COMPANY, INC.
Managements's Discussion and Analysis of Financial Condition
and Results of Operations
March 31, 1998
The modified performance test levels for the 95-1 Trust will decrease in
June 1998 to: (i) 8.25% for the delinquency maintenance test and to 11% for
the delinquency insurance test; (ii) 14% for the default maintenance test and
to 17% for the default insurance test; and (iii) 8% for the loss maintenance
test and to 10% for the loss insurance test. The modified performance test
levels for the 96-1 Trust will decrease in June 1998 to: (i) 8.25% for the
delinquency maintenance test and to 11% for the delinquency insurance test;
(ii) to 14% in July 1998 for the default maintenance test and to 17% for the
default insurance test; and (iii) 6% in July 1998 for the loss maintenance test
and to 8% for the loss insurance test.
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.
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 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. The Company is in
discussions with the lenders under such debt agreements to obtain waivers of
the breach of such covenant violations. If such waivers are not obtained, the
holders of the indebtedness represented thereby may declare a default and
accelerate the payment of the principal amount of such indebtedness.
At March 31, 1998, the Company was in violation of the BankBoston
Agreement's Minimum Quarterly Net Income and Minimum Debt Service Coverage
Covenants. The Company has repaid the remaining balance in April 1998 and does
not intend to borrow in the future.
The Company experienced an increase in the use of cash during the three
month period ended March 31, 1998 compared to the three month period ended March
31, 1997, due, in large part, to four factors: (i) an increase in the volume of
Loans purchased from Dealers; (ii) a higher volume of Loans purchased from
Third-Party Originators; (iii); the corresponding overlap of costs between the
Company's internal servicing and its outside servicer; and (iv) a change in the
credit support requirements of the Company's other securitization facilities,
which has resulted in, and may continue in the future to result in, additional
capital of the Company being maintained in the spread accounts of its Permanent
Securitizations.
The Company's business requires substantial cash to support the funding
of 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. The Company believes cash currently on hand should be
sufficient to meet the Company's cash requirements and to fund its operations
through the third quarter of 1998, assuming the Company completes regular
securitizations during that period. Thereafter, the Company will be required
to issue additional debt or equity, which could dilute the interests of
stockholders of the Company. There can be no assurance that the Company will
have access to the capital markets in the future for debt or equity issuances
or for securitizations, or that financing through borrowings or other means
will be available on terms acceptable to the Company. The Company's inability
to access the capital markets or obtain financing on acceptable terms could
have a material adverse effect on the Company's financial condition, results of
operations and cash flows.
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.
25
<PAGE> 26
PART II Other Information
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
<TABLE>
<CAPTION>
a) Exhibits
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 January 26, 1998, the Company filed a Form 8-K announcing that it
completed a $93.6 million securitization of its motor vehicle retail
installment Loans on January 20, 1998.
On February 4, 1998, the Company filed a Form 8-K announcing the
appointment of Joseph P. Donlan and David W. Young to the Company's Board
of Directors.
On March 5, 1998, the Company filed a Form 8-K announcing several changes
in the Company's Senior Management.
On March 19, 1998, the Company filed a Form 8-K announcing that: (i) the
Company has signed a referral agreement with U.S. Bank, N.A.; and (2) the
Company's independent auditor is continuing to review emerging issues
under Statement of Financial Accounting Standards No. 125 that may affect
the Company's accounting policies and the related valuation of certain of
the Company's securitized assets.
26
<PAGE> 27
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: May 15, 1998 /s/ Keith B. Stein
-----------------------------------------
Keith B. Stein
Vice Chairman, Chief Financial Officer
and Treasurer
27
<PAGE> 28
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- -----------
<S> <C> <C>
11 -- Computation of Earnings Per Common Share
27 -- Financial Data Schedule
</TABLE>
28
<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
March 31,
----------------------
1998 1997
--------- ---------
<S> <C> <C>
Average number of common shares outstanding . . . . . . . . . . . 9,031 6,898
Common equivalent shares outstanding:
Stock options (1) . . . . . . . . . . . . . . . . . . . . . . . . -- --
------- ------
Total common and common equivalent shares outstanding . . . . . . 9,031 6,898
======= ======
Net loss attributed to common shareholders . . . . . . . . . . . $ (5,172) $ (6,173)
======= ======
Loss per common share (basic and diluted) . . . . . . . . . . . . $ (0.57) $ (0.89)
- ------------------------ ======= ======
</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.
29
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE INTERIM
STATEMENT OF INCOME FOR THE THREE MONTHS ENDED MARCH 31, 1998, AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 26,724
<SECURITIES> 0
<RECEIVABLES> 45,100
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 71,824
<PP&E> 2,975
<DEPRECIATION> (545)
<TOTAL-ASSETS> 80,213
<CURRENT-LIABILITIES> 3,775
<BONDS> 56,312
2,336
0
<COMMON> 90
<OTHER-SE> 17,700
<TOTAL-LIABILITY-AND-EQUITY> 80,213
<SALES> 0
<TOTAL-REVENUES> 2,120
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 5,722
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,530
<INCOME-PRETAX> (5,132)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,132)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,172)
<EPS-PRIMARY> (0.57)
<EPS-DILUTED> (0.57)
</TABLE>
