<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 June 30, 1999
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.
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(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 65-0688619
- ---------------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
10302 Deerwood Park Blvd.,
Suite 100, Jacksonville, Florida 32256
- ---------------------------------------- ---------------------------------
(Address of principal executive offices) (Zip Code)
</TABLE>
(904) 996-2500
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(Registrant's telephone number, including area code)
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(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 17,280,762 shares of Common Stock, $.01 par value, outstanding as of
August 16, 1999.
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NATIONAL AUTO FINANCE COMPANY, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Balance Sheets as of June 30, 1999 and December 31, 1998: 4
Statements of Operations For the Three and Six Months
ended June 30, 1999 and 1998: 5
Statements of Cash Flows For the Six Months Ended June 30, 1999 and 1998: 6
Notes to Financial Statements: 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations: 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 2. Changes in Securities 26
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
Exhibit 99. Press Release: 31
</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 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," "intend," "foresee," "expected",
project" or similar expressions are intended to identify "forward-looking
statements". The Company wishes to caution readers not to place undue reliance
on any such forward-looking statements, which speak only as of the date made,
and to advise readers that various factors, including regional and national
economic conditions, substantial changes in levels of market interest rates,
credit and other risks of lending and investment activities, competitive and
regulatory factors, and changes in generally accepted accounting principles
could affect the Company's actual and/or reported financial performance and
could cause the Company's actual and/or reported results for future periods to
differ materially from those anticipated by any forward looking statement. The
Company does not undertake and specifically disclaims any obligation to update
any forward-looking statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
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PART I
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ITEM I. FINANCIAL STATEMENTS
NATIONAL AUTO FINANCE COMPANY, INC.
BALANCE SHEETS
JUNE 30, 1999 AND DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
June 30,
1999 December 31,
(unaudited) 1998
------------ ------------
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 6,989 $ 9,540
Retained interest in securitizations, at estimated fair value (Note 2) 34,053 34,117
Furniture, fixtures and equipment, net 3,483 3,277
Deferred financing costs (Note 4) 4,603 2,759
Other assets 1,294 1,039
------------ ------------
TOTAL ASSETS $ 50,422 $ 50,732
============ ============
LIABILITIES:
Accounts payable and accrued expenses $ 2,083 $ 2,444
Accrued interest payable-related parties 873 117
Junior Subordinated Notes-related parties (Notes 3 and 4) 2,096 1,940
Senior Subordinated Notes (Notes 3 and 4) 54,113 53,578
Notes payable 777 1,017
------------ ------------
TOTAL LIABILITIES 59,942 59,096
------------ ------------
COMMITMENTS AND CONTINGENCIES
MANDATORY REDEEMABLE PREFERRED STOCK series A-$0.01 par value;
$1,000 stated value; 1,000,000 shares authorized; 2,295 shares
outstanding; redeemable in January 2005, stated at redemption value 2,496 2,415
CAPITAL DEFICIT:
Common Stock -$0.01 par value; 20,000,000 shares authorized;
17,280,762 and 9,030,762 shares outstanding (Note 4) 173 90
Paid-in-capital (Note 4) 38,325 36,261
Accumulated deficit (50,514) (47,130)
------------ ------------
Total capital deficit (12,016) (10,779)
------------ ------------
Total liabilities, mandatory redeemable preferred stock and
capital deficit $ 50,422 $ 50,732
============ ============
</TABLE>
See accompanying notes to the financial statements.
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NATIONAL AUTO FINANCE COMPANY, INC.
Statements of Operations (unaudited)
For the Three and Six Months Ended June 30, 1999 and 1998
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------------------------------ ------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUE:
Securitization related income (Note 2) $ 3,039 $ 1,380 $ 4,508 $ 1,454
Servicing income 1,411 1,643 2,859 2,915
Interest income 372 599 814 1,295
Other income 80 78 443 156
------------ ------------ ------------ ------------
Total revenue 4,902 3,700 8,624 5,820
------------ ------------ ------------ ------------
EXPENSES:
Servicing expenses 736 2,326 1,593 4,630
Interest expense 2,105 2,112 4,210 3,643
Salaries and employee benefits 1,158 1,659 2,232 3,302
Direct loan acquisition expenses 239 573 493 1,223
Depreciation expense 356 232 704 419
Other operating expenses 1,943 1,088 2,855 2,025
------------ ------------ ------------ ------------
Total expenses 6,537 7,990 12,087 15,242
------------ ------------ ------------ ------------
Net Loss (1,635) (4,290) (3,463) (9,422)
Preferred stock dividends 40 40 80 80
------------ ------------ ------------ ------------
Loss attributed to common shareholders $ (1,675) $ (4,330) $ (3,543) $ (9,502)
============ ============ ============ ============
PER SHARE DATA:
Loss per common share - basic and diluted $ (0.10) $ (0.48) $ (0.28) $ (1.05)
============ ============ ============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic and diluted 16,731 9,031 12,881 9,031
============ ============ ============ ============
</TABLE>
See accompanying notes to the financial statements.
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NATIONAL AUTO FINANCE COMPANY, INC.
Statements of Cash Flows (unaudited)
For the Six months ended June 30, 1999 and 1998
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------------
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,463) $ (9,422)
Adjustments to reconcile net loss to net cash used in
operating activities:
Securitization related income (4,508) (1,454)
Depreciation expense 321 318
Purchases of loans held for sale (27,752) (81,104)
Proceeds from transfer of loans to Master Trust 27,752 81,104
Cash flows from Retained Interest released to Company 9,909 3,679
Cash deposits to Spread Accounts (5,338) (22,082)
Amortization and write-off of deferred financing costs 383 276
Amortization of warrants 535 500
Changes in other assets and liabilities:
Other assets (255) 1,091
Accounts payable and accrued expenses (360) (1,103)
Accrued interest payable-Senior Subordinated notes
and other notes 757 (181)
------------ ------------
Net cash used in operating activities (2,019) (28,378)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Fixed assets purchased (447) (1,722)
------------ ------------
Net cash used in investing activities (447) (1,722)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Senior Subordinated notes -- 19,243
Proceeds from Junior Subordinated notes 156 --
Principal payments on notes (241) (363)
Payment of Mandatory Redeemable Preferred Stock dividends -- (80)
------------ ------------
Net cash provided by (used) financing activities (85) 18,800
------------ ------------
Net decrease in cash and cash equivalents (2,551) (11,300)
Cash and cash equivalents at beginning of period 9,540 26,467
------------ ------------
Cash and cash equivalents at end of period $ 6,989 $ 15,167
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 2,763 $ 3,323
============ ============
NON-CASH FINANCING ACTIVITIES:
Accrued mandatory redeemable preferred stock dividends 80 80
Issuance of 593,671 warrants in conjunction with Senior Subordinated
notes considered paid-in-capital -- 2,004
Issuance of 8,250,000 shares of Common Stock to Senior Subordinated
noteholders (See Note 4) 2,228 --
</TABLE>
See accompanying notes to the financial statements.
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NATIONAL AUTO FINANCE COMPANY, INC.
Notes to Financial Statements
June 30, 1999
(unaudited)
(1) BASIS OF PRESENTATION
The accompanying unaudited interim financial statements at June 30, 1999
and 1998 and for the three and six months ended June 30, 1999 and 1998
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 1999; 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 1998
financial statements have been reclassified to conform with current
financial statement presentation.
(2) RETAINED INTEREST IN SECURITIZATIONS
Retained Interest in Securitizations were $34.1 and $34.1 million at June
30, 1999 and December 31, 1998.
Assumptions used to value the Retained Interests in Securitizations at
June 30, 1999 and December 31, 1998 were as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
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<S> <C> <C>
Weighted average cumulative net loss rate 14.00% 14.00%
Weighted average cumulative prepayment rate 21.77% 21.40%
Discount rate 14.00% 14.00%
Level of required Cash Spread Account 11.00% 11.00%
Rate of interest on Cash Spread Account 4.85% 4.85%
Weighted average interest rate on Loans 18.87% 18.67%
Weighted average yield on bonds and notes
held by securitization investors 6.11% 6.12%
</TABLE>
The Company has historically funded 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.
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<PAGE> 8
NATIONAL AUTO FINANCE COMPANY, INC.
Notes to Financial Statements
June 30, 1999
(unaudited)
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
currently owns 100% of the outstanding Class B Certificates. Collectively,
the Cash Spread Accounts and the Class C Certificate portion of Loan
principal (Over-Collateralization Accounts), are held by the Company to
collateralize the Master Trust. The Spread Accounts and Excess Spread
Receivables 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 Loans 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.
Under the financing structures the Company has used to date for its
securitizations, certain excess cash flows generated by the Loans are
retained in the Cash Spread Accounts within the securitization trusts to
provide liquidity and credit enhancement. While the specific terms and
mechanics of the Cash Spread Accounts can vary depending on each
transaction, the Company's agreements with Financial Security Assurance
Inc. ("FSA"), the financial guaranty insurer that has provided credit
enhancements in connection with the Company's securitizations, generally
provide that the Company is not entitled to receive any excess cash flows
unless the level of certain Spread Account balances, comprised of cash and
the Overcollateralization Accounts, have been attained and/or the
delinquency or losses related to the Loans in the pool are below certain
predetermined levels. Additionally, effective as of the Restructuring date
(See Note 4 - Recent Events), the Company is required to maintain a
minimum equity position in the Revolving Securitization of 19.0% of the
net serviced receivables in the Master Trust, or 3.0 times net losses,
whichever is greater. This minimum equity position currently consists of
cash invested by the Company and overcollateralization in the form of the
discount from the face amount of a Loan at which the Company is willing to
purchase the Loan from an automobile dealer ("Dealer Discount") related to
the principal balance of Loans. As of June 30, 1999 and 1998, the Company
had a 19.00% and 14.18% minimum equity position investment in the
Revolving Securitization. See Note 4 - Recent Events.
Since the completion of the Restructuring, under the terms of the
Company's insurance agreements with FSA, upon the occurrence of a
Permanent Securitization failing to meet portfolio performance tests (an
"Insurance Agreement Event of Default"), the Company would be in default
under those insurance agreements. Upon an Insurance Agreement Event of
Default, FSA may: (i) permanently suspend distributions of cash flow to
the Company from the related securitization trust and all other
FSA-insured trusts until the asset-backed securities have been paid in
full; (ii) capture all excess cash flows from performing FSA-insured
trusts; (iii) increase its premiums; and (iv) replace the Company as
servicer with respect to all FSA-insured trusts. See Note 4 - Recent
Events.
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<PAGE> 9
NATIONAL AUTO FINANCE COMPANY, INC.
Notes to Financial Statements
(unaudited)
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 if such events of default
occur, waivers will be available. If the Company's Servicing Portfolio
does not meet such performance requirements, the future carrying value of
the Company's Retained Interest in Securitizations would be materially
impacted in a negative manner. In addition, any increase in limitations on
cash flow available to the Company from Permanent Securitization trusts,
the Company's inability to obtain any necessary waivers from FSA or the
termination of servicing arrangements could materially adversely affect
the Company's financial condition, results of operations and cash flows.
See Note 4 - Recent Events.
During the six months ended June 30, 1999 and 1998, the following activity
took place with respect to securitizations:
<TABLE>
<CAPTION>
June 30,
1999 1998
------------ ------------
(dollars in thousands)
<S> <C> <C>
Principal balance of Loans purchased $ 29,215 $ 83,620
============ ============
Weighted average coupon rate on Loans sold during the
period 18.80% 19.35%
============ ============
</TABLE>
(3) DEBT
The balance of the Senior Subordinated Notes payable was $54.1 and $53.6
million as of June 30, 1999 and December 31, 1998. Such amounts are shown
net of discounts of $5.9 million and $6.4 million. The principal amount of
the aggregate $60 million of Senior Subordinated Notes is due in December
2004 and bears interest at 11.875% per annum until December 21, 2000,
12.875% per annum for the period from December 22, 2000 until December 21,
2001, 13.875% per annum for the period from December 22, 2001 until
December 21, 2002, and 14.875% per annum thereafter, with interest payable
quarterly.
The Senior Subordinated Notes were issued in two separate private
placements, the first of which occurred in December 1997 in the principal
amount of $40 million (the "December Private Placement") and the second of
which occurred in March 1998 in the principal amount of $20 million (the
"March Private Placement"). See Note 4 Recent Events for a discussion of
the impact of the comprehensive financial restructuring on the Senior
Subordinated Debt.
On June 16, 1999, the Company borrowed $1.5 million on its Revolving
Credit Facility with First Union. The $1.5 million advance was repaid on
June 21, 1999. (See Note 4).
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<PAGE> 10
NATIONAL AUTO FINANCE COMPANY, INC.
Notes to Financial Statements
June 30, 1999
(unaudited)
(4) RECENT EVENTS
COMPREHENSIVE FINANCIAL RESTRUCTURING
On April 7, 1999, the Company completed a comprehensive financial
restructuring (the "Restructuring") of its Senior Subordinated and Junior
Subordinated Notes, resolved certain other issues with its Senior
Subordinated Noteholders and Junior Subordinated Noteholders, entered into
several loan facilities and arrangements with First Union, and modified
certain of the terms of the insurance guarantee arrangements with FSA,
related to the Company's securitized asset-backed bonds.
The agreements and transactions with the Senior Subordinated Noteholders
provide for and include, among other things: (1) the waiver of the past
defaults and breaches of covenants, representations and warranties, if
any, made in connection with the Senior Subordinated Notes; (2) the
waiving of the previously existing Net Worth Covenant; (3) the
establishment of a new covenant requiring that, on a quarterly basis, the
Company's net return on assets invested in loan receivables, expressed as
a percentage, exceed pre-established quarterly goals (the "Return on
Assets Covenant"); the first quarterly measurement period for this
covenant begins as of the quarter ending September 30, 1999; (4) the
granting to the Company of the option to pay during the two-year period
ending March 31, 2001 fifty percent (50%) of the interest owed on the
Senior Subordinated Notes (and the interest on such interest) through the
issuance of additional Senior Subordinated Notes, convertible into Common
Stock at the conversion price of $.75 per share; (5) the issuance to the
Senior Subordinated Noteholders of 7,071,429 shares of Common Stock as
consideration for the waivers and amendments granted to the Company; (6)
the issuance to those Noteholders that also purchased Common Stock of the
Company at the time of their debt investment 1,178,571 additional shares
of Common Stock in exchange for the execution and delivery of full and
complete releases of any claims arising by virtue of those Noteholders'
equity investment; and (7) the execution and delivery of full and complete
releases by and among the Company, the Noteholders and affiliates of and
other parties related to each of such parties. In addition, the Senior
Subordinated Noteholders were granted the right to name three additional
persons to the Board of Directors of the Company, increasing to six seats
their total number of Board representatives, thereby giving them majority
control of the Board. The Company capitalized deferred financing costs of
$2,227,500 associated with the issuance of the 7,071,429 and 1,178,571
shares issued to the Senior Noteholders. These costs are being amortized
over the remaining term of the Senior Subordinated Notes. (See Note 3)
The agreements and transactions with First Union provide for and include,
among other things: (1) the extension of the Master Trust warehouse line
for an additional two years (through March 31, 2001) and an increase in
the amount the Master Trust may borrow under such facility from $75
million to $85 million; the interest rate for this facility is established
at LIBOR + 1.5%; (2) the commitment by First Union to purchase up to $20
million of subordinated asset-backed debt securities in connection with
the Company's securitizations; the interest rate for this commitment is
established at LIBOR + 5%; (3) a revolving credit facility enabling the
Company to borrow up to $8 million for working capital purposes, secured
by the Company's Residual Interest in Securitizations; the interest rate
for this facility is established at LIBOR + 5%; and (4) waiver of existing
violations of certain covenants with respect to the Master Trust,
specifically, the covenant that the Master Trust maintain certain interest
rate hedging agreements and covenants related to allowable repossession
and recovery limits.
The agreements and transactions with the Junior Subordinated Noteholders
provide for and include, among other things: (1) the waiver of the past
defaults and breaches under the Junior Subordinated Notes; (2) the
granting to the Company of the option to pay during the period ending
January 31, 2002 up to one hundred percent (100%) of the interest owed on
the Junior Subordinated Notes (and the interest on such interest) through
the issuance of additional Junior Subordinated Notes that are convertible
into Common Stock at the conversion price of $.75 per share; (3) the
granting to the designees of the Senior Subordinated Noteholders to the
Company's Board of Directors an irrevocable proxy to vote the 4,230,000
shares of Common Stock held by National Auto Finance Company, LP (a
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<PAGE> 11
NATIONAL AUTO FINANCE COMPANY, INC.
Notes to Financial Statements
June 30, 1999
(unaudited)
limited partnership controlled by certain of the Junior Subordinated
Noteholders) in all matters as to which such shares are entitled to vote;
(4) the execution and delivery of full and complete releases by and among
the Company, the Senior Subordinated Noteholders, the Junior Subordinated
Noteholders, National Auto Finance Company, LP, their respective officers,
directors, affiliates, and other parties related to each of such parties;
and (5) the granting of a covenant not to sue in the future by the Junior
Subordinated Noteholders, National Auto Finance Company, LP, and
affiliates of and other parties related to each of such parties in favor
of the Company, the Senior Subordinated Noteholders, their respective
officers, directors, affiliates, and other parties related to both such
parties.
The agreements and transactions with FSA provide for and include, among
other things: (1) the resetting of the cash spread accounts in each of the
Company's term asset-backed securitizations that have been guaranteed by
FSA to 11% of the outstanding principal balance of the receivables in each
of such securitizations for the remaining term of such securitizations;
(2) the elimination of all portfolio performance maintenance requirements
that, if otherwise violated, would have resulted in the trapping of cash
flows to over fund such cash spread accounts; (3) the resetting of the
portfolio performance requirements that, if violated, would constitute a
default under the insurance guaranty agreements issued by FSA, to levels
that are commensurate to the Company's expected future portfolio
performance in each of such securitizations; and (4) the waiver of all
past breaches and defaults of portfolio performance requirements, the
result of which is to enable the Company to resume the receipt of excess
cash flow under each of the Company's term asset-backed securitizations
that have been guaranteed by FSA.
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<PAGE> 12
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, 1999 compared to
December 31, 1998 and its results of operations for the three and six months
ended June 30, 1999 and 1998. This management's discussion and analysis should
be read in conjunction with (i) the Company's Financial Statements and the
related notes included elsewhere herein and (ii) the Company's Annual Report on
Form 10-K with respect to the fiscal year ended December 31, 1998. 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.
OVERALL
The Company is a specialty consumer finance company engaged in the
business of purchasing, financing, securitizing and servicing non-prime
automobile Loans.
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 the 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 moneys 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. Pursuant to Statement of Financial Accounting Standards No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities" ("SFAS No. 125"), the Company has periodically measured the fair
value of its Retained Interest in Securitizations based upon the performance of
its Loan portfolio. As a result, the Company has increased the cumulative net
loss estimate from 12.88% applied during and as of the first and second quarters
of fiscal year 1998 to 14.00% during and as of the first and second quarters of
fiscal year 1999. 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 loss timing, compared to the rates of such items estimated in
earlier periods. These factors were impacted significantly as a result of the
Company's conversion of its Loan servicing to an internal system in June of
1998. Performance trends indicate the negative impact of the immediate post
conversion period has stabilized. These changes are a significant factor in the
securitization income realized by the Company for the quarter and six months
ended June 30, 1999. See "Results of Operations."
The Company 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 when 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 (including the Cash
Spread Accounts) and from Loans it temporarily holds for sale pending their
securitization. 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.
Distributions of Cash from Securitizations. 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. Credit enhancements
include, among other things, funding and maintaining the Cash Spread Accounts
and maintaining the Over-Collateralization Accounts. The Cash Spread Accounts
are funded through initial cash deposits by the Company, plus a portion of the
excess cash flows from the Loans (that is, the difference between cash received
by the relevant trust and its interest and principal payments on the
asset-backed securities and trust expenses). Once the funds in 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
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<PAGE> 13
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 2 of the Notes to Financial Statements
- - Retained Interest in Securitizations.
The table below sets forth certain information relating to the Company's
securitization activities during the three and six month periods ended June 30:
<TABLE>
<CAPTION>
Three months ending Six months ending
1999 1998 1999 1998
---------- ---------- ---------- ----------
(dollars in thousands, except number of loans)
<S> <C> <C> <C> <C>
Number of Loans purchased ........................ 1,054 2,577 2,083 6,663
Principal balance of Loans purchased ............. $ 15,116 $ 34,723 $ 29,215 $ 83,620
Principal amount of Loans funded (1) ............. $ 14,360 $ 33,682 $ 27,752 $ 81,104
Securitization related income .................... $ 3,039 $ 1,380 $ 4,508 $ 1,454
Servicing income ................................. $ 1,411 $ 1,643 $ 2,859 $ 2,915
</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. No loans were purchased from Third Party
Originators during the three months ended June 30, 1999.
RESULTS OF OPERATIONS
THREE MONTH PERIOD ENDED JUNE 30, 1999 COMPARED TO THE
THREE MONTH PERIOD ENDED JUNE 30, 1998.
Income from Operations
The Company reported a net loss of $1.7 million attributed to common
stockholders for the three-month period ended June 30, 1999 compared to a net
loss of $4.3 million attributed to common stockholders for the three month
period ended June 30, 1998.
Securitization Related Income
For the three month periods ended June 30, 1999 and 1998, the Company
recognized securitization related income of $3.0 million and $1.4 million,
respectively.
The Company's Loan purchasing volume decreased during the three month period
ended June 30, 1999 compared to the three month period ended June 30, 1998. The
Company purchased 1,054 Loans, having a principal balance of $15.1 million,
during the three month period ended June 30, 1999, compared to 2,577 Loans,
having a principal balance of $34.7 million, for the three months ended June 30,
1998. The Company's loan purchasing volume had decreased significantly during
the second half of 1998 and early months of 1999 as the comprehensive financial
restructuring was being completed. See Note 4 of the Notes to Financial
Statements - Recent Events. Since that time, the Company is re-establishing its
loan purchasing volume at a deliberate pace with emphasis on more stringent
credit and collateral standards. Included in reported securitization related
income of $3.0 million for the three month period ended June 30, 1999 was
approximately $1.3 million related to an increase in the valuation of the
Retained Interest in Securitizations. The adjustment resulted from lower
default rates during the three months ended June 30, 1999 than previously
estimated. Notwithstanding higher loan purchasing volume during the three months
ended June 30, 1998 as compared to the three months ended June 30, 1999,
securitization income during the three months ended June 30, 1998 was lower due
to higher default rates than previously estimated as the resulting adjustment
part of the evaluation of the Retained Interest in Securitizations, reduced
securitization income by $1.8 million for that period.
-13-
<PAGE> 14
Servicing Income
The Company receives a servicing fee in cash of approximately 4.0% of the
principal amount of the Loans sold to the Master Trust and 2.0% for the
principal amount of the Loans subsequently sold to the Permanent
Securitizations, which typically offsets actual servicing expenses incurred by
the Company. This income is recognized as received. Servicing income for the
three month periods ended June 30, 1999 and 1998 was $1.4 million and $1.6
million, respectively.
Total Expenses
The Company reported total expenses for the three-month periods ended June
30, 1999 and 1998 of $6.5 million and $8.0 million, respectively. These expenses
consisted primarily of salaries and employee benefits, servicing expense and
interest expense on long-term indebtedness, including the Senior Subordinated
Notes.
Servicing expenses for the three month periods ended June 30, 1999 and 1998 were
$736,000 and $2.3 million, respectively. Servicing expenses were significantly
lower during the three months ended June 30, 1999 as compared to the three
month's ended June 30, 1998 due to the Company incurring both internal servicing
expenses and external servicing expenses paid as fees to an outside servicing
vendor during a transitional phase during which the Company implemented a
transition from such outside servicer to in-house servicing. Such transition
period, as discussed below, occurred during the three months ended June 30,
1998. Additionally, the Company further stabilized its internal servicing
expense structure during the three months ended June 30, 1999. The Company's
average outstanding Servicing Portfolio was $196.5 million, representing 20,907
outstanding Loans as of June 30, 1999, and $251.1 million, representing 23,597
outstanding Loans, as of June 30, 1998. Culminating on June 19, 1998, the
Company converted its Servicing Portfolio computer data from its outside
servicer's computer systems to an internal system. As a result, the Company has
been performing all collection functions with respect to its Servicing Portfolio
since June 19, 1998.
Salaries and employee benefits for the three month periods ended June 30, 1999
and 1998 were $1.2 million and $1.7 million, respectively. These expenses were
lower during the three months ended June 30, 1999 as compared to the three
months ended June 30, 1998 due to the Company stabilizing its staffing levels
during the three months ended June 30, 1999. During the three months ended June
30, 1998, the Company incurred duplicative salaries and benefits expenses
associated with its servicing conversion and company realignment including
phased move of sales, originations and corporate support staff from Boca Raton,
Florida to Jacksonville, Florida.
Interest expense for the three-month periods ended June 30, 1999 and 1998 was
$2.1 million and $2.1 million, respectively. These interest expenses resulted
from the long-term debt balance of the Company, including interest paid on the
outstanding Senior Subordinated Notes.
Other operating expenses for the three-month periods ended June 30, 1999 and
1998 was $1.9 million and $1.1 million, respectively. The increase in other
operating expenses was due to approximately $900,000 of restructuring legal and
professional expenses incurred by the Company during the three months ended June
30, 1999 associated with the Company's comprehensive financial restructuring.
-14-
<PAGE> 15
SIX MONTH PERIOD ENDED JUNE 30, 1999 COMPARED TO THE
SIX MONTH PERIOD ENDED JUNE 30, 1998.
Income from Operations
The Company reported a net loss of $3.5 million attributed to common
stockholders for the six month period ended June 30, 1999 compared to a net loss
of $9.5 million attributed to common stockholders for the six month period ended
June 30, 1998.
Securitization Related Income
For the six month periods ended June 30, 1999 and 1998, the Company
recognized securitization related income of $4.5 million and $1.5 million,
respectively.
The Company's Loan purchasing volume decreased during the six month period ended
June 30, 1999 compared to the six month period ended June 30, 1998. The Company
purchased 2,083 Loans, having a principal balance of $29.2 million, during the
six month period ended June 30, 1999, compared to 6,663 Loans, having a
principal balance of $83.6 million, for the six months ended June 30, 1998. The
Company's loan purchasing volume had decreased significantly during the second
half of 1998 and early months of 1999 as the comprehensive financial
restructuring was being completed. See Note 4 of the Notes to Financial
Statements - Recent Events. Since that time, the Company is reestablishing its
loan purchasing volume at a deliberate pace with emphasis on more stringent
credit and collateral standards. Included in reported securitization related
income of $4.5 for the six month period ended June 30, 1999 was approximately
$1.3 million related to the valuation of the Retained Interest in
Securitizations. The adjustment resulted from lower defaults rates during the
six months ended June 30, 1999 than previously estimated. Notwithstanding higher
loan purchasing volume during the six months ended June 30, 1998 as compared to
the six months ended June 30, 1999, securitization income during the six months
ended June 30, 1998 was lower due to higher default rates than previously
estimated as part of the evaluation of the Retained Interest in Securitizations.
The resulting adjustment reduced securitization income by $1.8 million for that
period.
Servicing Income
The Company receives a servicing fee in cash of approximately 4.0% of the
principal amount of the Loans sold to the Master Trust and 2.0% for the
principal amount of the Loans subsequently sold to the Permanent
Securitizations, which typically offsets actual servicing expenses incurred by
the Company. This income is recognized as received. Servicing income for the six
month periods ended June 30, 1999 and 1998 was $2.9 million and $2.9 million,
respectively.
Total Expenses
The Company reported total expenses for the six-month periods ended June
30, 1999 and 1998 of $12.1 million and $15.2 million, respectively. These
expenses consisted primarily of salaries and employee benefits, servicing
expense, interest expense on long-term indebtedness, including the Company's
Senior Subordinated Notes and other operating expenses.
Servicing expenses for the six month periods ended June 30, 1999 and 1998 were
$1.6 and $4.6 million, respectively. Servicing expenses were significantly lower
during the six months ended June 30, 1999 as compared to the six month's ended
June 30, 1998 due to the Company incurring both internal servicing expenses and
external servicing expenses paid as fees to an outside servicing vendor during a
transitional phase during which the Company implemented a transition from such
external servicer to in-house servicing. Such transition period, as discussed
below, occurred during the six months ended June 30, 1998 and up to the
conversion date of June 19, 1998. Additionally, the Company further stabilized
its servicing expense structure during the six months ended June 30, 1999. The
Company's average outstanding Servicing Portfolio was $201.3 million,
representing 21,189 outstanding Loans as of June 30, 1999, and $251.1 million,
representing 23,597 outstanding Loans, as of June 30, 1998. Culminating on June
19, 1998, the Company converted its
-15-
<PAGE> 16
Servicing Portfolio computer data from its outside servicer's computer systems
to an internal system. As a result, the Company has been performing all
collection functions through its own servicing system with respect to its
Servicing Portfolio since June 19, 1998.
Salaries and employee benefits for the six month periods ended June 30, 1999 and
1998 were $2.2 million and $3.3 million, respectively. These expenses were lower
during the six months ended June 30, 1999 as compared to the six months ended
June 30, 1998 due to the Company stabilizing its staffing levels during the six
months ended June 30, 1999. During the six months ended June 30, 1998, the
Company incurred duplicative salaries and benefits expenses associated with its
servicing conversion and company realignment including phased move of sales,
originations and corporate support staff from Boca Raton, Florida to
Jacksonville, Florida.
Interest expense for the six-month periods ended June 30, 1999 and 1998 was $4.2
million and $3.6 million, respectively. These interest expenses resulted from
the higher outstanding long-term debt balance of the Company, including interest
paid on the outstanding Senior Subordinated Notes.
Other operating expenses for the six-month periods ended June 30, 1999 and 1998
was $2.9 million and $2.0 million, respectively. The increase in other operating
expenses was due to approximately $900,000 of restructuring legal and
professional expenses incurred by the Company during the six months ended June
30, 1999 associated with the Company's comprehensive financial restructuring.
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 estimated valuation of its Retained Interest in
Securitizations. Charge-off of Loans are based upon an account-by-account review
of delinquent Loans by the Company. The Company's securitized 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
uncollectible. The following table summarizes the Company's loan loss
experience:
<TABLE>
<CAPTION>
As of and for the six
months of June 30,
------------------------------
1999 1998
------------ ------------
(in thousands)
<S> <C> <C>
Average Servicing Portfolio during period .................. $ 201,351 $ 249,376
Gross charge-offs .......................................... 16,717 20,683
Liquidation proceeds from repossessed assets ............... 7,492 9,949
------------ ------------
Net charge-offs ............................................ $ 9,225 $ 10,734
============ ============
Net charge-offs as a percentage of average Servicing
Portfolio (annualized) ................................. 9.10% 8.60%
============ ============
</TABLE>
The Company believes that the system conversion and resulting servicing
disruption was largely responsible for the increase in net charge-offs as a
percentage of the Servicing Portfolio for the six months ended June 30, 1999 as
compared to the six months ended June 30, 1998. After conversion, the Company
experienced an increase in the delinquency of its portfolio that occurred in or
about August 1998. This resulted in an accumulation of higher than normal
defaults. Much of the repossession inventory associated with these defaults
remained in inventory as of December 31, 1998 and was liquidated during the six
months ended June 30, 1999. Since initiating collections on its own internal
servicing system in June 1998, the resulting percentage of the outstanding
principal balance of Loans that were more than 30 days past due decreased to
approximately 7.65% of the Company's Servicing Portfolio as of December 31,
1998, from 11.5% as of July 31, 1998, and was approximately 7.5% as of June 30,
1999.
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
-16-
<PAGE> 17
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 2
to the Financial Statements - Retained Interest in Securitizations.
The Company considers a Loan to be delinquent if the borrower fails to make any
payment substantially in full on or before the due date as specified by the
terms of the Loan. The Company typically initiates contact with borrowers whose
payments are not received by the eleventh day following the due date. The
following table summarizes the delinquency and repossession experience with
respect to the Servicing Portfolio:
<TABLE>
<CAPTION>
As of June 30,
------------------------------
1999 1998
------------ ------------
(dollars in thousands)
<S> <C> <C>
Period of delinquency:
31 to 60 days ........................................... $ 9,303 $ 17,432
61 to 90 days ........................................... 2,496 3,528
91 days or more ......................................... 2,088 2,786
------------ ------------
Total delinquencies ........................................ $ 13,887 $ 23,746
============ ============
Total delinquencies as a percentage of the
Servicing Portfolio ..................................... 7.24% 9.10%
Principal balance of Loans related to repossession
inventory ............................................... $ 1,617 $ 5,752
Repossession inventory as a percentage of the ending
Servicing Portfolio ..................................... 0.84% 2.20%
</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.
(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.)
-17-
<PAGE> 18
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 ended June 30, 1999, and includes cumulative net loss data
through June 30, 1999:
<TABLE>
<CAPTION>
* 4Q 94 1Q 95 2Q 95 3Q 95 4Q 95 1Q 96 2Q 96 3Q 96 4Q 96
<S> <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%
2 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% 0.06% 0.05% 0.00% 0.00% 0.04% 0.00%
4 0.05% 0.04% 0.00% 0.12% 0.25% 0.09% 0.03% 0.04% 0.01%
5 0.31% 0.14% 0.29% 0.41% 0.48% 0.26% 0.28% 0.33% 0.07%
6 0.47% 0.30% 0.92% 0.78% 0.86% 0.49% 0.62% 0.70% 0.69%
7 0.51% 0.71% 1.62% 1.64% 1.27% 0.90% 1.10% 1.18% 1.25%
8 1.08% 1.25% 2.02% 2.02% 1.67% 1.23% 2.06% 1.71% 1.85%
9 1.36% 1.55% 2.39% 2.42% 2.25% 1.95% 2.70% 2.68% 2.50%
10 1.75% 2.13% 2.71% 2.60% 2.46% 2.14% 3.37% 3.31% 3.27%
11 1.72% 2.49% 3.30% 3.02% 2.84% 2.72% 4.29% 3.88% 3.77%
12 3.12% 3.09% 3.39% 3.58% 3.33% 3.26% 5.20% 4.34% 4.12%
13 3.21% 3.64% 3.71% 3.91% 3.97% 3.74% 5.55% 5.08% 4.57%
14 3.80% 4.04% 4.21% 4.03% 4.28% 4.18% 6.13% 5.53% 4.97%
15 4.45% 4.25% 4.31% 4.51% 5.07% 4.90% 6.52% 6.01% 5.46%
16 4.55% 4.33% 4.53% 4.87% 5.09% 5.11% 6.78% 6.57% 5.94%
17 4.91% 4.88% 4.92% 5.27% 5.65% 6.16% 7.16% 6.85% 6.40%
18 4.91% 4.98% 5.54% 5.62% 5.96% 6.59% 7.67% 7.35% 7.17%
19 5.05% 5.28% 5.96% 6.16% 6.61% 7.01% 8.00% 8.14% 7.78%
20 5.05% 5.80% 6.18% 6.63% 6.78% 7.28% 8.14% 8.59% 8.25%
21 5.79% 5.89% 6.55% 6.75% 7.15% 7.56% 8.66% 9.12% 8.66%
22 5.78% 6.33% 7.35% 6.87% 7.42% 8.00% 9.09% 9.75% 9.05%
23 6.20% 6.46% 7.88% 7.44% 7.99% 8.25% 9.81% 10.03% 9.23%
24 6.80% 6.91% 8.30% 7.93% 8.21% 8.36% 10.17% 10.36% 9.43%
25 6.99% 7.48% 8.59% 8.37% 8.49% 8.85% 10.68% 10.88% 9.67%
26 7.49% 7.58% 8.66% 8.54% 8.77% 9.01% 11.22% 11.13% 10.02%
27 8.06% 8.20% 9.16% 8.70% 8.98% 9.36% 11.50% 11.40% 10.35%
28 8.23% 8.76% 9.34% 8.82% 9.35% 9.57% 11.54% 11.72% 10.80%
29 9.07% 9.49% 9.35% 8.89% 9.97% 9.84% 11.71% 11.86% 11.25%
30 9.17% 9.54% 9.39% 9.21% 10.16% 10.09% 11.88% 12.19% 11.42%
31 9.71% 9.81% 9.82% 9.84% 10.61% 10.37% 12.56% 12.32% 11.78%
32 9.99% 10.08% 9.75% 10.11% 10.74% 10.48% 12.78% 12.58%
33 10.47% 10.19% 10.06% 10.26% 11.09% 10.61% 12.85% 12.76%
34 11.44% 10.28% 10.53% 10.67% 11.28% 10.83% 13.10% 12.93%
35 11.48% 10.63% 10.52% 10.85% 11.33% 11.15% 13.38%
36 11.81% 10.66% 10.72% 10.89% 11.51% 11.20% 13.51%
37 11.86% 10.83% 10.93% 11.15% 11.70% 11.36% 13.77%
38 11.85% 11.01% 11.10% 11.21% 11.93% 11.48%
39 12.37% 11.20% 11.17% 11.37% 11.94% 11.79%
40 12.42% 11.48% 11.19% 11.46% 11.98% 11.88%
41 12.42% 11.63% 11.22% 11.84% 12.01%
42 12.57% 11.95% 11.26% 11.87% 12.09%
43 12.56% 12.00% 11.55% 12.07% 12.32%
44 12.71% 12.04% 11.54% 12.09%
45 12.68% 12.08% 11.74% 12.24%
46 12.75% 12.12% 11.82% 12.22%
47 12.79% 12.21% 12.04%
48 12.97% 12.31% 11.99%
49 12.97% 12.27% 12.00%
50 13.10% 12.73%
51 13.09% 12.51%
52 13.15% 12.61%
53 13.17%
</TABLE>
* - Month of origination.
-18-
<PAGE> 19
<TABLE>
<CAPTION>
1Q 97 2Q 97 3Q 97 4Q 97 1Q 98 2Q 98 3Q 98 4Q 98 1Q 99 2Q 99
<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% 0.02% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
4 0.04% 0.22% 0.04% 0.01% 0.02% 0.00% 0.00% 0.07% 0.00%
5 0.25% 0.66% 0.18% 0.14% 0.08% 0.13% 0.01% 0.16% 0.04%
6 0.70% 1.31% 0.42% 0.42% 0.29% 0.35% 0.81% 0.56% 0.17%
7 1.43% 2.11% 0.88% 0.74% 0.61% 0.72% 0.94% 0.99%
8 1.94% 2.56% 1.21% 1.29% 0.84% 0.82% 2.10%
9 2.60% 2.99% 1.60% 1.68% 1.16% 1.62% 2.40%
10 3.08% 3.71% 2.30% 2.09% 1.78% 2.03% 2.79%
11 3.51% 4.28% 2.78% 2.41% 2.28% 2.76%
12 3.87% 5.05% 3.45% 2.76% 2.76% 3.09%
13 4.49% 5.91% 3.87% 3.25% 3.25% 3.83%
14 5.08% 6.50% 4.18% 3.68% 3.67%
15 5.65% 6.96% 4.54% 4.14% 4.24%
16 6.34% 7.42% 5.24% 4.68% 4.83%
17 6.82% 7.63% 5.74% 5.02%
18 7.39% 7.93% 6.28% 5.42%
19 7.79% 8.48% 6.91% 5.93%
20 8.05% 9.01% 7.45%
21 8.40% 9.28% 7.88%
22 8.78% 9.73% 8.40%
23 9.28% 10.00%
24 9.67% 10.30%
25 10.12% 10.79%
26 10.52%
27 10.83%
28 11.36%
</TABLE>
* - Month of origination.
-19-
<PAGE> 20
LIQUIDITY AND CAPITAL RESOURCES
General
Since inception, the Company has funded its operations and the growth of
its Loan purchasing activities primarily through five sources of capital: (i)
proceeds from securitization transactions; (ii) cash flows from servicing fees;
(iii) proceeds from the issuance of indebtedness; (iv) capital contributions of
certain affiliates of the Company; and (v) proceeds from the Company's Initial
Public Offering and subsequent private sales 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 decreased by $26.4 million to $2.0 million
for the six month period ended June 30, 1999 from $28.4 million for the six
month period ended June 30, 1998, principally due to due to reduced origination
volume and a resulting reduction in credit enhancement requirements of the
Company's securitization facilities, release of previously trapped excess cash
spread from the trusts due to agreements with FSA and the reduced net loss from
operations as discussed in "Results of Operations".
Net cash provided by (used in) financing activities decreased by $18.9 million
to $(85,000) for the six month period ended June 30, 1999 from $18.8 million for
the six month period ended June 30, 1998. Net cash provided by financing
activities for the six month period ended June 30, 1998 was primarily the result
of the proceeds received from the March Private Placement of $20 million of
Senior Subordinated Notes.
During the six month period ended June 30, 1999, the Company was required to
maintain a minimum equity position in the Master Trust of 19.0% of the net
serviced receivables or 3.0 times net losses, whichever was greater. This
minimum equity position consists of cash invested by the Company and
over-collateralization in the form of the Company owning certain interests in
the principal balance of Loans.
As of June 30, 1999, the Company retained approximately $34.1 million of
Retained Interest in Securitizations, representing 67.5% of the total assets of
the Company. The value of these assets, representing the net present value of
future cash flows to the Company, 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 June 30, 1998, the principal amount owed by the Company on the Senior
Subordinated Notes was $60.0 million and the principal amount owed by the
Company on the Junior Subordinated Notes was approximately $2.1 million. The
Senior Subordinated Notes, which mature on December 2004, bear interest at
11.875% per annum until December 22, 2000, 12.875% per annum for the period from
December 22, 2000 until December 21, 2001, 13.875% per annum for the period from
December 22, 2001 until December 21, 2002, and 14.875% per annum thereafter,
with interest payable quarterly. See Note 3 of the Notes to Financial Statements
for further discussion of the Company's various debt facilities. See also Note 4
of the Notes to Financial Statements - Recent Events.
Senior Subordinated Notes
On April 7, 1999, the Company completed a comprehensive financial
restructuring (the "Restructuring"), including its Senior Subordinated Notes and
resolved certain other issues with its Senior Subordinated Noteholders. More
specifically, the agreements and transactions with the Senior Subordinated
Noteholders provide for and include, among other things: (1) the waiver of the
past defaults and breaches of covenants, representations and warranties, if any,
made in connection with the Senior Subordinated Notes; (2) the elimination of
the previously existing Net Worth Covenant; (3) the establishment of a new
covenant requiring that on a quarterly basis, the Company's net return on assets
invested in Loan receivables, expressed as a percentage, exceed pre-established
quarterly goals (the "Return on Assets Covenant"); the first quarterly
measurement period for this covenant begins as of the quarter ending September
30, 1999; (4) the granting to the Company of the option to pay during the
two-year period ending March 31, 2001 fifty percent (50%) of the interest owed
on the Senior Subordinated Notes (and the interest on such interest) through the
issuance of additional Senior Subordinated Notes that are convertible into
Common Stock at the conversion price of $.75 per share; (5) the
-20-
<PAGE> 21
issuance to the Senior Subordinated Noteholders of 7,071,429 shares of Common
Stock as consideration for the waivers and amendments granted to the Company;
(6) the issuance to those Noteholders that also purchased Common Stock of the
Company at the time of their debt investment of an additional 1,178,571 shares
of additional Common Stock in exchange for the execution and delivery of full
and complete releases of any claims arising by virtue of those Noteholders'
equity investment; and (7) the execution and delivery of full and complete
releases by and among the Company, the Noteholders and affiliates of and other
parties related to each of such parties. In addition, the Senior Subordinated
Noteholders were granted the right to designate three additional persons to the
Board of Directors of the Company, increasing to six seats their total number of
Board representatives, thereby giving them majority control of the Board. See
Note 4 to Notes to Financial Statements - Recent Events.
First Union
Under 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 currently owns 100% of the
outstanding Class B Certificates. Collectively, the restricted cash account and
the Class C Certificate portion of Loan principal (Over-Collateralization
Accounts, which are held by the Company) that collateralize the Master Trust are
the components of the Spread Accounts. The Spread Accounts and ESRs are
reflected collectively on the balance sheet as "Retained Interest in
Securitizations."
Periodically the Master Trust transfers Loans and Spread Account balances to
Permanent Securitizations in exchange for cash, which is used to repay the Class
B Certificates. Debt securities representing interests in the Permanent
Securitizations are sold to third-party investors, who are repaid from cash
flows from the Loan receivables in the applicable Permanent Securitization.
Excess Spread Receivables and return of Spread Accounts attributable to such
Loans flow from the Permanent Securitization to the Company to the extent such
funds are available. Pursuant to the Restructuring described above, the Company
entered into several loan facilities and arrangements with First Union . As
described in Note 4 of Notes to the Financial Statements - Recent Events, the
restructured agreements with First Union provide for and include, among other
things: (1) the extension of the Company's warehouse line for an additional two
years (through March 31, 2001) and an increase in the amount the Company may
borrow under such facility from $75 million to $85 million; (2) the commitment
by First Union to purchase up to $20 million of subordinated asset-backed debt
securities in connection with the Company's securitizations; and (3) a revolving
credit facility enabling the Company to borrow up to $8 million for working
capital purposes secured by the Company's Retained Interest in Securitizations.
FSA
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 available 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.
Under the financing structures the Company has used to date for 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
-21-
<PAGE> 22
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 an 11%
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.
Since completion of the Restructuring, under the terms of the Company's
insurance agreements with FSA, upon the occurrence of a Permanent Securitization
failing to meet portfolio performance tests (an "Insurance Agreement Event of
Default"), the Company would be in default under such insurance agreements. Upon
an Insurance Agreement Event of Default, FSA may: (i) permanently suspend
distributions of cash flow to the Company from the related securitization trust
and all other FSA-insured trusts until the asset-backed securities have been
paid in full; (ii) capture all excess cash flows from performing FSA-insured
trusts; (iii) increase its premiums; and (iv) replace the Company as servicer
with respect to all FSA-insured trusts.
Pursuant to the Restructuring, certain of the terms of the insurance guarantee
arrangements with FSA were modified. The agreements and transactions with FSA
provide for and include, among other things: (1) the resetting of the cash
spread accounts in each of the Company's term asset-backed securitizations that
have been guaranteed by FSA to 11% of the outstanding principal balance of the
receivables in each of such securitizations for the remaining term of such
securitizations; (2) the elimination of all portfolio performance maintenance
requirements that, if otherwise violated, would have resulted in the trapping of
cash flows to over fund such cash spread accounts; (3) the resetting of the
portfolio performance requirements that, if violated, would constitute a default
under the insurance guaranty agreements issued by FSA, to levels that are
commensurate to the Company's expected future portfolio performance in each of
such securitizations; and (4) the waiver of all past breaches and defaults of
portfolio performance requirements, the result of which is to enable the Company
to resume the receipt of excess cash flow under each of the Company's term
asset-backed securitizations that have been guaranteed by FSA. As a result of
amended agreements with FSA entered into on April 7, 1999, going forward the
Company will be subject to only Insurance Agreement default tests as shown
below. The following table shows the performance tests (three month rolling
average) as of June 30, 1999:
<TABLE>
<CAPTION>
Delinquency Test Default Test Loss Test
------------------------ ------------------------ ------------------------
Actual Insurance Actual Insurance Actual Insurance
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
95-1 8.30% 12.00% 6.37% 25.00% 1.12% 14.00%
96-1 9.32% 12.00% 16.77% 25.00% 9.16% 14.00%
97-1 8.70% 12.00% 16.01% 25.00% 11.80% 14.00%
98-1 8.30% 12.00% 14.71% 25.00% 6.67% 13.00%
</TABLE>
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, if
such events of default occur, waivers will be available. If the Company's
Servicing Portfolio does not meet such performance requirements, the future
carrying value of the Company's Retained Interest in Securitizations would be
materially impacted in a negative manner. In addition, any increase in
limitations on cash flow available to the Company from Permanent Securitization
trusts, the Company's inability to obtain any necessary waivers from FSA or the
termination of servicing arrangements could materially adversely affect the
Company's financial condition, results of operations and cash flows. See Note 4
of the Notes to Financial Statements - Recent Events.
-22-
<PAGE> 23
Going Concern
Since 1997, the Company has suffered significant losses from operations
and has a capital deficiency as of June 30, 1999. Such matters raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regards to these matters are described in the following paragraph.
The Company's business requires substantial cash to support the funding of Cash
Spread Accounts for its securitizations, issuance costs of its 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.
As discussed in Note 4 to the Financial Statements - Recent Events, on April 7,
1999, the Company completed a comprehensive financial restructuring. As the
result of the Restructuring, (1) the Company may pay 50% of its interest expense
on its Senior Subordinated Notes over the two-year period ending March 31, 2001
by issuing additional Senior Subordinated notes, thereby reducing its cash
requirements, a reduction from $7.1 million in 1998 to $3.6 million over the
four quarters ending March 31, 2000; (2) the Company may defer all cash interest
payments on its Junior Subordinated Notes until January 31, 2002; (3) the
Company's receipt of excess cash flows from its four Permanent Securitization
Trusts insured by FSA and from its Master Trust has resumed; as of March 31,
1999, the minimum equity position has increased to 19.0% of net serviced
receivables relative to the requirements of the restructure of the Master Trust
Facility, and assuming no further Insurance Agreement Events of Default under
certain amended agreements with FSA (which were amended to reset the portfolio
performance requirements to levels that are commensurate to the Company's
expected future portfolio performance in each of such securitizations), such
excess cash flows will continue to be received by the Company; (4) the Company
will be able to fund a portion of the subordinated credit enhancements required
for its future securitizations through the sale of up to $20 million of
subordinated asset-backed securities to First Union; and (5) the Company may
borrow up to $8 million for working capital purposes under its new two-year
working capital facility with First Union, secured by its ESRs. Further, the
Company's business plan for the next two years contemplates an increase in
overall revenue and cash flow over 1998 through the gradual but steady increase
in loan origination volume, the sale of ancillary Loan products (such as GAP
insurance, which covers exposure to uninsured losses, and warranty products),
the aggressive collection of late fees and deficiency balances, and increased
servicing fees through the servicing of a larger owned portfolio as well as
third-party servicing. Although there can be no assurance that the Company will
successfully execute this business plan, both the Restructuring and the business
plan were designed and implemented to enable the Company, among other things to
increase its cash flow and stabilize its financial condition.
In conjunction with the Company's comprehensive financial restructuring, the
Senior Subordinated Noteholders waived the previously existing Net Worth
Covenant and established a new covenant requiring that, on a quarterly basis,
the Company's net return on assets invested in loan receivables, expressed as a
percentage, exceed pre-established quarterly goals (the first quarterly
measurement period for this covenant begins as of the quarter ending September
30, 1999.
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.
-23-
<PAGE> 24
YEAR 2000
The year 2000 issue pertains to whether the Company's or its vendors'
computer systems will properly recognize date sensitive information when the
year changes to 2000. Systems that do not properly recognize such information
could generate erroneous data or fail.
The Company has implemented a project plan for achieving year 2000 readiness. An
inventory of critical hardware and software has been completed and information
technology components are being assessed. This assessment includes major
suppliers and business partners, however, the Company does not rely on any
single supplier or partner to conduct business. Additionally, the Company
engaged an independent systems firm to evaluate year 2000 readiness. The review
was completed during the three months ended June 30, 1999 and no material
weaknesses were identified in the resulting report issued by the independent
systems' firm. The Company converted its general accounting system to a Y2K
Compliant system during August 1999.
The Company presently believes that the year 2000 issue will not pose
operational problems for the Company. However, if systems modifications and
conversions are necessary, and are not made, or are not completed in a timely
manner, the year 2000 issue could have a material impact on the operations of
the Company. In addition, there can be no assurance that unforeseen problems in
the Company's computer systems, or the systems of the third parties on which the
Company rely, would not have an adverse effect on the Company's systems or
operations.
-24-
<PAGE> 25
PART II - Other Information
ITEM 1. LEGAL PROCEEDINGS
On October 22, 1998, Pearl Peckerman, I.R.A., on behalf of herself and
all others similarly situated, filed a putative class-action complaint (the
"Peckerman Complaint") in the United States District Court for the Southern
District of Florida against the Company and certain current and former officers
and directors of the Company, as well as the co-lead underwriters of the
Company's initial public offering. On December 4, 1998, Harvey Rooks, Rachel
Rooks and Joyce Bornstein, on behalf of themselves and all others similarly
situated, filed a putative class action complaint (the "Rooks Complaint") in the
United States District Court for the Southern District of Florida against the
Company and certain current and former officers and directors of the Company, as
well as the co-lead underwriters of the Company's initial public offering.
On February 5, 1999, the United States District Court for the Southern District
of Florida ordered that these actions be consolidated. Thereafter, on July 29,
1999, the plaintiffs filed an amended and consolidated class-action complaint
(the "Amended and Consolidated Complaint") styled In re National Auto Finance
Company, Inc. Securities Litigation, Case Number 98-8767-CIV-Hurley.
The individual lead plaintiffs in the Amended and Consolidated Complaint are
Pearl Peckerman, Harvey Rooks, Rachel Rooks, Joyce Bornstein, Emanuel
Androulidakis, Frank Rosetti, Thomas R. Bopp, Noel V. Brodtman, Jr., Susan H.
Jacobsen, Leonard R. Carothers, Fred Gaunce, Duane Morris, Ralph Casey, Hiram
Graham, and Vance Prigge. In addition, the action was instituted on behalf of a
putative class of plaintiffs consisting of those persons who purchased or
otherwise acquired stock of the Company between January 29, 1997 and April 15,
1998 inclusive, excluding the Company, its subsidiaries and affiliates, the
individual defendants, members of the immediate families of each of the
individual defendants, and the successors and assigns of any defendant. Other
than the Company, the defendants to the action are: Gary L. Shapiro, Keith B.
Stein, Roy E. Tipton, Kevin G. Adams, Edgar A. Otto, Peter Offerman, Morgan M.
Schussler, Steven L. Gurba, and the co-lead underwriters of the Company's
January 1997 initial public offering, Raymond James & Associates, Inc. and
Cruttenden Roth, Inc.
The Amended and Consolidated Complaint sets forth allegations surrounding the
Company's 1997 restated financial statements, the interpretation of FASB No. 125
and the relationship between the Company and its prior outside service provider,
Omni Financial Services of America, Inc. The plaintiffs' allegations of
liability are based on various theories of recovery, including alleged
violations of Section 11, 12(a)(2), 15 and 20(a) of the Securities Act of 1933,
as amended, and Section 10(b) and Rule 10b-5 of the Securities Exchange Act of
1934, as amended. The plaintiffs are seeking compensatory damages as the court
deems appropriate.
The Company is presently assessing the merits of the claims and anticipates
filing a motion to dismiss the complaint in its entirety in the near future. In
addition, the two underwriter defendants, Raymond James, Inc. and Cruttenden
Roth, Inc. have asserted that pursuant to the underwriting agreement entered
into with the Company in connection with its initial public offering, the
Company is required to indemnify the underwriters for their legal and other
costs incurred in this litigation, including but not limited to any potential
judgment against them. The Company is presently assessing the merits of those
claims.
The Company has directors' and officers' liability insurance policy with a
liability limit of $5 million; and two excess policies with liability limits of
$2 million and $3 million, respectively. Each insurer has raised certain
coverage defenses or denied coverage. The Company has engaged, and will continue
to pursue appropriate strategies to protect and preserve its claims of full
coverage under all such policies.
Litigation is subject to many uncertainties, and it is possible that the above
action could be decided unfavorably. In addition, the Company may enter into
discussions in an attempt to settle the pending litigation if it is in the best
interests of the Company's stockholders to do so. Management is presently unable
to make a meaningful estimate of the amount or range of loss that could result
from an unfavorable outcome or settlement of the pending litigation. It is
possible that the Company's business, volume, results of operations, cashflows
or financial position could be materially affected by an unfavorable outcome or
settlement of the pending litigation.
-25-
<PAGE> 26
ITEM 2. CHANGES IN SECURITIES.
(a) Market Information.
N/A
(b) Recent sales of unregistered securities.
The Progressive Investment Company, Inc. ("Progressive"), PC Investment
Company ("PCI"), an affiliate of Progressive, The 1818 Mezzanine Fund, L.P. (the
"1818 Fund"), The Structured Finance High Yield Fund, LLC ("SFHY"), and
Manufacturers Life Insurance Company (U.S.A.) ("ManuLife") (collectively, the
"Senior Subordinated Noteholders"), acquired control of the Company as a result
of the issuance to them of additional aggregate of 8,250,000 shares of Common
Stock. (See Note 4 to the Financial Statements Recent Events). Following the
Restructuring, the Senior Subordinated Noteholders held of record an aggregate
of 10,174,762 shares of the Company's outstanding Common Stock and beneficially
owned an aggregate of 17,155,689 shares of the Company's Common Stock,
representing approximately 85.7% of the Company's issued and outstanding Common
Stock (assuming the issuance of stock in respect of certain warrants, options
and Convertible Senior Subordinated Promissory Notes, as defined below, held by
such Senior Subordinated Noteholders). National Auto Finance Company, L.P., a
Delaware limited partnership (the "Partnership"), by and through National Auto
Finance Corporation, the general partner of the Partnership (the "General
Partner") and certain of the Partnership's limited partners, Nova Financial
Corporation, Nova Corporation, Stephen L. Gurba, Edgar A. Otto and Gary L.
Shapiro, as part of the Restructuring, granted to the Board designees of the
Senior Subordinated Noteholders an irrevocable proxy to vote the 4,230,000
shares of Common Stock held by the Partnership in all matters as to which such
shares are entitled to vote. Representatives of the Senior Subordinated
Noteholders currently constitute four members of the Company's seven-member
Board of Directors.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits
Number Description Method of Filing
11 Computation of Earnings Filed with this document
Per Common Share
27 Financial Data Schedule Filed with this document
99 Press Releases Filed with this document
b) Reports on Form 8-K
On April 13, 1999, the Company filed its press release on Form 8-K, in
which it announced that it had completed a comprehensive financial restructuring
of its Senior Subordinated Notes and Junior Subordinated Notes, entered into
several loan facilities and arrangements with First Union National Bank, and
modified certain of the terms of the insurance guarantee arrangements with
Financial Security Assurance, the Company's bond insurer, related to the
Company's securitized asset-backed bonds.
On May 18, 1999, the Company filed its press release on Form 8-K in which
it announced the Company's 1998 and first quarter 1999 results.
On June 17, 1999, the Company filed its press release on Form 8-K in which
it announced that Keith B. Stein has been named Chairman of the Board, in
addition to his role as Chief Executive Officer of the Company. Mr. Stein has
been Vice Chairman since January 1997 and has held various positions with the
Company since January 1995. NAFI also announced that is has promoted William G.
Magro to President, in addition to his role as Chief Operating Officer. Mr.
Magro has been Executive Vice President and COO of the Company since January
1998 and was President of the Company's Servicing Division, which was folded
into the Company also in January 1998. Additionally, the Company announced that
it has scheduled its annual meeting for the year ended December 31, 1998.
Shareholders of record on August 2, 1999, will be entitled to vote at the annual
meeting which will be held on September 14, 1999, at the law offices of Weil,
Gotshal & Manges LLP in New York City.
-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: August 16, 1999 /s/ THOMAS COSTANZA
----------------------------------------------
Thomas Costanza
Vice President and Chief Financial Officer
-27-
<PAGE> 28
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
11 Computation of Earnings
27 Financial Data Schedule
99 Press Release
</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
June 30,
------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Average number of common shares outstanding ................ 16,731 9,031
Common equivalent shares outstanding:
Stock options (1) .......................................... -- --
------------ ------------
Total common and common equivalent shares outstanding ...... 16,731 9,031
============ ============
Net income (loss) attributed to common shareholders ........ $ (1,675) $ (4,330)
============ ============
Loss per common share (basic and diluted) .................. $ (0.10) $ (0.48)
============ ============
</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 JUNE 30, 1999 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 6,989
<SECURITIES> 0
<RECEIVABLES> 34,053
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 41,042
<PP&E> 3,483
<DEPRECIATION> 0
<TOTAL-ASSETS> 50,422
<CURRENT-LIABILITIES> 2,956
<BONDS> 56,986
2,496
0
<COMMON> 173
<OTHER-SE> (12,189)
<TOTAL-LIABILITY-AND-EQUITY> 50,422
<SALES> 0
<TOTAL-REVENUES> 4,902
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,105
<INCOME-PRETAX> (1,635)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,635)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,635)
<EPS-BASIC> (0.10)
<EPS-DILUTED> (0.10)
</TABLE>
<PAGE> 1
EXHIBIT 99
NATIONAL AUTO FINANCE COMPANY, INC.
ANNOUNCES QUARTER ENDING MARCH 31, 1999 RESULTS
EARNINGS (LOSS) PER SHARE OF $(0.10) VS. $ (0.48)
JACKSONVILLE, Fla. (August 16, 1999) - National Auto Finance Company,
Inc. (OTC/BB:NAFI) today announced that it filed its Quarterly Report on Form
10-Q today, which reflects a loss of $1.7 million or $(0.10) per share for the
quarter ended June 30, 1999 vs. a loss of $4.3 million or $(0.48) for the
quarter ended June 30, 1998. The loss of $1.7 million includes one-time
financial restructuring expenses of approximately $900,000.
Commenting on the announcement, Keith B. Stein, Chairman and Chief
Executive Officer, said, "We are pleased to see trends continue in a positive
direction. Considering the challenges this Company has seen during fiscal years
1997 and 1998, we are excited about the prospects for future profitability".
National Auto Finance is a specialized consumer finance company engaged
in the purchase, securitization and servicing of automobile loans primarily
originated by manufacturer-franchised automobile dealers for non-prime
consumers. The Company markets its products and services to dealers through the
efforts of its direct sales force and through strategic referral and marketing
alliances with financial and other institutions that have established
relationships with dealers. The Company has active contractual relationships
with approximately 775 dealers in 35 states.
Except for the historical information contained herein, this news release
contains statements that are forward-looking statements within the meaning of
applicable federal securities laws and are based upon the Company's current
expectations and assumptions which are subject to a number of risks and
uncertainties, which could cause actual results to differ materially from those
anticipated. Primary factors that could cause actual results to differ include
the availability of financing on terms and conditions acceptable to the Company,
the ability of the Company to securitize its finance contracts in the
asset-backed securities market on terms and conditions acceptable to the
Company, and changes in the quality or composition of the serviced loan
receivable portfolio. Certain of these as well as other factors are described in
more detail in the Company's Annual Report on Form 10-K for the year ended
December 31, 1998, and in certain other reports filed by the Company with the
Securities and Exchange Commission.
Contact: Stephen R. Veth
Vice President, Secretary and General Counsel
(904) 996-2500
- -END-
