<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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)
DELAWARE 65-0688619
- ------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
10302 Deerwood Park Blvd., Suite 100, Jacksonville, Florida 32256
- ----------------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(904) 996-2500
----------------------------------------------------
(Registrant's telephone number, including area code)
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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 [ ]
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NATIONAL AUTO FINANCE COMPANY, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Balance Sheets as of September 30, 1999 and December 31, 1998: 4
Statements of Operations for the Three and Nine Months
Ended September 30, 1999 and 1998: 5
Statements of Cash Flows for the Nine Months Ended September 30, 1999
and 1998: 6
Notes to Financial Statements: 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations: 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 2. Changes in Securities 24
Item 6. Exhibits and Reports on Form 8-K: 25
SIGNATURES: 26
EXHIBIT INDEX: 27
Exhibit 3.1-2 (i) Amendment to the Company's Certificate of Incorporation: 28
Exhibit 11. Computation of Earnings Per Common Share: 30
Exhibit 27. Financial Data Schedule: 31
Exhibit 99.1 Company's 1996 Share Incentive Plan, as amended: 32
Exhibit 99.2 Press Release announcing Company's second quarter, 1999 results: 38
</TABLE>
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<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," "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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<PAGE> 4
PART I
ITEM I. FINANCIAL STATEMENTS
NATIONAL AUTO FINANCE COMPANY, INC.
Balance Sheets
September 30, 1999 and December 31, 1998
(in thousands)
<TABLE>
<CAPTION>
September 30,
1999 December 31,
(unaudited) 1998
------------- ------------
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 4,650 $ 9,540
Retained interest in securitizations, at estimated fair value (Note 2) 35,623 34,117
Furniture, fixtures and equipment, net 3,496 3,277
Deferred financing costs (Note 4) 4,360 2,759
Other assets 1,204 1,039
------------ ------------
TOTAL ASSETS $ 49,333 $ 50,732
============ ============
LIABILITIES:
Accounts payable and accrued expenses $ 1,238 $ 2,444
Accrued interest payable-related parties 958 117
Junior Subordinated Notes-related parties (Notes 3 and 4) 2,138 1,940
Senior Subordinated Notes (Notes 3 and 4) 55,211 53,578
Notes payable 670 1,017
------------ ------------
60,215 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 2,536 2,415
CAPITAL DEFICIT:
Common Stock -$0.01 par value; 44,000,000 shares authorized;
17,280,762 and 9,030,762 shares outstanding, respectively
(Note 4) 173 90
Paid-in-capital (Note 4) 38,285 36,261
Accumulated deficit (51,876) (47,130)
------------ ------------
TOTAL CAPITAL DEFICIT (13,418) (10,779)
------------ ------------
TOTAL LIABILITIES, MANDATORY REDEEMABLE PREFERRED STOCK AND
CAPITAL DEFICIT $ 49,333 $ 50,732
============ ============
</TABLE>
See accompanying notes to the financial statements.
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<PAGE> 5
NATIONAL AUTO FINANCE COMPANY, INC.
Statements of Operations (unaudited)
For the Three and Nine Months Ended September 30, 1999 and 1998
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
-------------------------- --------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUE:
Securitization related income (Note 2) $ 3,071 $ (1,439) $ 7,579 $ 15
Servicing income 1,356 1,972 4,215 4,887
Interest income 319 555 1,134 1,850
Other income 128 45 570 201
---------- ---------- ---------- ----------
Total revenue 4,874 1,133 13,498 6,953
---------- ---------- ---------- ----------
EXPENSES:
Servicing expenses 818 894 2,432 5,524
Interest expense 2,127 2,107 6,336 5,750
Salaries and employee benefits 1,520 2,301 3,744 5,603
Direct loan acquisition expenses 386 188 1,083 1,411
Depreciation expense 310 245 755 664
Other operating expenses 1076 1,008 3,974 3,033
---------- ---------- ---------- ----------
Total expenses 6,237 6,743 18,324 21,985
---------- ---------- ---------- ----------
Net loss (1,363) (5,610) (4,826) (15,032)
Preferred stock dividends 40 40 120 120
---------- ---------- ---------- ----------
Loss attributed to common shareholders $ (1,403) $ (5,650) $ (4,946) $ (15,152)
========== ========== ========== ==========
PER SHARE DATA:
Loss per common share - basic and diluted $ (.08) $ (0.63) $ (0.34) $ (1.68)
========== ========== ========== ==========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic and diluted 17,281 9,031 14,347 9,031
========== ========== ========== ==========
</TABLE>
See accompanying notes to the financial statements.
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<PAGE> 6
NATIONAL AUTO FINANCE COMPANY, INC.
Statements of Cash Flows (unaudited)
For the Nine Months Ended September 30, 1999 and 1998
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------
1999 1998
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (4,826) $ (15,032)
Adjustments to reconcile net loss to net cash used in
operating activities:
Securitization related income (7,579) (59)
Depreciation expense 517 483
Purchases of loans held for sale (45,147) (84,176)
Proceeds from transfer of loans to Master Trust 45,147 84,176
Cash flows from Retained Interest released to Company 14,253 8,748
Cash deposits to Spread Accounts (6,378) (23,700)
Amortization and write-off of deferred financing costs 626 422
Amortization of warrants 803 768
Changes in other assets and liabilities:
Other assets (1,966) 1,038
Accounts payable and accrued expenses (1,206) (1,296)
Accrued interest payable-related parties 842 1,006
---------- ----------
Net cash used in operating activities (4,914) (27,583)
---------- ----------
CASH FLOWS (USED) INVESTING ACTIVITIES:
Fixed assets purchased (656) (1,937)
---------- ----------
Net cash used in investing activities (656) (1,937)
---------- ----------
CASH FLOWS (USED) FINANCING ACTIVITIES:
Proceeds from Senior Subordinated notes 831 19,220
Proceeds from Junior Subordinated notes 197 --
Principal payments on notes (348) (474)
Payment of Mandatory Redeemable Preferred Stock dividends -- (80)
---------- ----------
Net cash provided by financing activities 680 18,666
---------- ----------
Net decrease in cash and cash equivalents (4,890) (10,854)
Cash and cash equivalents at beginning of period 9,540 26,467
---------- ----------
Cash and cash equivalents at end of period $ 4,650 $ 15,613
========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 3,668 $ 3,929
========== ==========
NON-CASH FINANCING ACTIVITIES:
Accrued mandatory redeemable preferred stock dividends 120 120
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 (Note 4) 2,228 --
</TABLE>
See accompanying notes to the financial statements.
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<PAGE> 7
NATIONAL AUTO FINANCE COMPANY, INC.
Notes to Financial Statements
September 30, 1999
(unaudited)
(1) BASIS OF PRESENTATION
The accompanying unaudited interim financial statements at September 30,
1999 and 1998 and for the three and nine months ended September 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 $35.6 and $34.1 million at
September 30, 1999 and December 31, 1998, respectively.
Assumptions used to value the Retained Interests in Securitizations at
September 30, 1999 and December 31, 1998 were as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------ ------------
<S> <C> <C>
Weighted average cumulative net loss rate 14.00% 14.00%
Weighted average cumulative prepayment rate 23.21% 21.40%
Discount rate 14.00% 14.00%
Level of required Cash Spread Account 8% to 11% 11.00%
Rate of interest on Cash Spread Account 4.85% 4.85%
Weighted average interest rate on Loans 18.92% 18.67%
Weighted average yield on bonds and notes
held by securitization investors 6.64% 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, to purchase Loans.
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<PAGE> 8
NATIONAL AUTO FINANCE COMPANY, INC.
Notes to Financial Statements
September 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 and the
Company indirectly owns 100% of the Class C 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 ("ESR") 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.
In September 1999, the National Auto Finance 1999-1 Trust (the "1999-1
Trust") was formed and the Master Trust refinanced approximately $60
million of its receivables in a private placement of asset-back securities
through their transfer by the Master Trust to the 1999-1 Trust, as part of
a Permanent Securitization. Securities were issued to Pruco Life Insurance
Company, Pruco Life Insurance Company of New Jersey, The Prudential
Insurance Company of America and First Union in the amounts of $10.5
million, $7.9 million, $29.6 million and $3 million, respectively. Payment
of principal of, and interest on, the collective $48 million of the
securities issued to Prudential related entities in that transaction is
insured by a payment guarantee by FSA, and such securities are rated AAA
and Aaa by Standards & Poor's Rating Service and Moody's Investor 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
Securitizations to be consummated in the future in order to refinance
periodically amounts outstanding under such Class B Certificates.
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 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 24.0% 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 September 30, 1999 and 1998, the Company had a 24.00% and
14.00% minimum equity position investment in the Revolving Securitization.
See Note 4 - Comprehensive Financial Restructuring.
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<PAGE> 9
NATIONAL AUTO FINANCE COMPANY, INC.
Notes to Financial Statements
September 30, 1999
(unaudited)
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 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. See Note 4 -
Comprehensive Financial Restructuring.
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 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 - Comprehensive Financial Restructuring.
During the nine months ended September 30, 1999 and 1998, the following
activity took place with respect to securitizations:
<TABLE>
<CAPTION>
September 30,
1999 1998
-------- --------
(dollars in thousands)
<S> <C> <C>
Principal balance of Loans purchased $ 47,422 $ 87,118
======== ========
Weighted average coupon rate on Loans purchased during the period 18.88% 19.35%
======== ========
</TABLE>
(3) DEBT
The balance of the Senior Subordinated Notes payable was $55.2 and $53.6
million as of September 30, 1999 and December 31, 1998, respectively. Such
amounts are shown net of discounts of $5.6 million and $6.4 million. The
principal amount of the aggregate $60.8 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"). Convertible Senior Subordinated Promissory
Notes in the principle amount of approximately $800,000 were issued on
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<PAGE> 10
NATIONAL AUTO FINANCE COMPANY, INC.
Notes to Financial Statements
September 30, 1999
(unaudited)
July 1, 1999 in lieu of the payment of cash interest. See Note 4 -
Comprehensive Financial Restructuring for a discussion of the impact of
the comprehensive financial restructuring on the Senior Subordinated Debt.
(4) 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, (See
Liquidity and Capital Resources - Going Concern) (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 (the "Convertible Senior Subordinated
Promissory Notes"); (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.
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
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
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<PAGE> 11
NATIONAL AUTO FINANCE COMPANY, INC.
Notes to Financial Statements
September 30, 1999
(unaudited)
Junior Subordinated Notes that are convertible into Common Stock at the
conversion price of $.75 per share (the "Junior Convertible Subordinated
Notes"); (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 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 then existing 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 overfund 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.
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 September 30, 1999 compared to
December 31, 1998 and its results of operations for the three and nine months
ended September 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 periodically measures the fair
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<PAGE> 12
value of its Retained Interest in Securitizations based upon the performance of
its Loan portfolio. As a result, during the fourth quarter of fiscal 1998 the
Company increased the cumulative net loss estimate from 12.88% applied during
and as of the first, second and third quarters of fiscal year 1998 to 14.00% for
the year ended December 31, 1998 and during and as of the first, second and
third 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 during the first three quarters of 1999
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 nine months ended September 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 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 nine month periods ended
September 30:
<TABLE>
<CAPTION>
Three months ending Nine months ending
September 30, September 30,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
(dollars in thousands, except number of loans)
Number of Loans purchased............... 1,350 308 3,430 6,972
Principal balance of Loans purchased.... $ 19,830 $ 3,404 $ 49,014 $ 87,118
Principal amount of Loans funded (1).... $ 18,929 $ 3,072 $ 45,147 $ 84,176
Securitization related income........... $ 3,071 $ (1,439) $ 7,579 $ 15
Servicing income........................ $ 1,356 $ 1,972 $ 4,215 $ 4,887
</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 September 30, 1999.
-12-
<PAGE> 13
RESULTS OF OPERATIONS
THREE MONTH PERIOD ENDED SEPTEMBER 30, 1999 COMPARED TO THE THREE
MONTH PERIOD ENDED SEPTEMBER 30, 1998.
Income from Operations
The Company reported a net loss of $1.4 million attributed to common
stockholders for the three-month period ended September 30, 1999 compared to a
net loss of $5.7 million attributed to common stockholders for the three month
period ended September 30, 1998.
Securitization Related Income
For the three month periods ended September 30, 1999 and 1998, the Company
recognized securitization related income (loss) of $3.1 million and $(1.4)
million, respectively.
The Company's Loan purchasing volume increased during the three month period
ended September 30, 1999 compared to the three month period ended September 30,
1998. The Company purchased 1350 Loans, having a principal balance of $19.8
million, during the three month period ended September 30, 1999, compared to 308
Loans, having a principal balance of $3.4 million, for the three months ended
September 30, 1998. The Company's loan purchasing volume had decreased
significantly during the second half of 1998 and early months of 1999 as the
Restructuring was being completed. See Note 4 of the Notes to Financial
Statements - Comprehensive Financial Restructuring. 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 $3.1 million for the three month period ended
September 30, 1999 was $750,000 related to an increase in the valuation of the
Retained Interest in Securitizations. The adjustment resulted from a decrease in
estimated securitization costs accrued for future 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% to 3.0% for the
principal amount of the Loans subsequently sold to the Permanent
Securitizations, which typically offsets actual servicing expenses incurred by
the Company. This income is recognized as received. Servicing income for the
three month periods ended September 30, 1999 and 1998 was $1.4 million and $2.0
million, respectively.
Total Expenses
The Company reported total expenses for the three-month periods ended
September 30, 1999 and 1998 of $6.2 million and $6.7 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 September 30, 1999 and 1998
were $818,000 and $894,000, respectively. The decrease in servicing expense is
attributed to the reduction in the outstanding servicing portfolio. The
Company's average outstanding Servicing Portfolio was $191.3 million,
representing 20,353 outstanding Loans as of September 30, 1999, and $235.3
million, representing 23,189 outstanding Loans, as of September 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 September 30,
1999 and 1998 were $1.5 million and $2.3 million, respectively. These expenses
were lower during the three months ended September 30, 1999 as compared to the
three months ended September 30, 1998 due to the Company stabilizing its
staffing levels during the three months ended September 30, 1999. During the
three months ended September 30, 1998, the Company incurred duplicative salaries
and benefits expenses associated with its servicing conversion and phased move
of sales, originations and corporate support staff from Boca Raton, Florida to
Jacksonville, Florida.
-13-
<PAGE> 14
Interest expense for the three-month periods ended September 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 September 30, 1999
and 1998 was $1.1 million and $1.0 million, respectively.
NINE MONTH PERIOD ENDED SEPTEMBER 30, 1999 COMPARED TO THE NINE MONTH PERIOD
ENDED SEPTEMBER 30, 1998.
Income from Operations
The Company reported a net loss of $4.9 million attributed to common
stockholders for the nine month period ended September 30, 1999 compared to a
net loss of $15.2 million attributed to common stockholders for the nine month
period ended September 30, 1998.
Securitization Related Income
For the nine month periods ended September 30, 1999 and 1998, the Company
recognized securitization related income of $7.6 million and approximately
$15,000, respectively.
The Company's Loan purchasing volume decreased during the nine month period
ended September 30, 1999 compared to the nine month period ended September 30,
1998. The Company purchased 3,430 Loans, having a principal balance of $49.0
million, during the nine month period ended September 30, 1999, compared to
6,972 Loans, having a principal balance of $87.1 million, for the nine months
ended September 30, 1998. The Company's loan purchasing volume had decreased
significantly during the second half of 1998 and early months of 1999 as the
Restructuring was being completed. See Note 4 of the Notes to Financial
Statements - Comprehensive Financial Restructuring. 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 $7.6 million for the nine month period ended
September 30, 1999 was approximately $2.1 million related to an increase in the
valuation of the Retained Interest in Securitizations. The adjustment resulted
from lower defaults rates and securitization fees during the nine months ended
September 30, 1999 than previously estimated. Notwithstanding higher loan
purchasing volume during the nine months ended September 30, 1998 as compared to
the nine months ended September 30, 1999, securitization income during the nine
months ended September 30, 1998 was lower due to the first time application of a
14.0% discount rate to cash deposits as part of the evaluation of the Retained
Interest in Securitizations. The resulting adjustment reduced securitization
income 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 to 3.0% 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
nine month periods ended September 30, 1999 and 1998 was $4.2 million and $4.9
million, respectively.
Total Expenses
The Company reported total expenses for the nine-month periods ended
September 30, 1999 and 1998 of $18.3 million and $22 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 nine month periods ended September 30, 1999 and 1998
were $2.4 and $5.5 million, respectively. Servicing expenses were significantly
lower during the nine months ended September 30, 1999 as compared to the nine
month's ended September 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
-14-
<PAGE> 15
nine months ended September 30, 1998 and up to the conversion date of June 19,
1998. Additionally, the Company further stabilized its servicing expense
structure during the nine months ended September 30, 1999. The Company's average
outstanding Servicing Portfolio was $197.6 million, representing 20,935
outstanding Loans as of September 30, 1999, and $242.8 million, representing
23,189 outstanding Loans, as of September 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 through its own servicing
system with respect to its Servicing Portfolio since June 19, 1998.
Salaries and employee benefits for the nine month periods ended September 30,
1999 and 1998 were $3.7 million and $5.6 million, respectively. These expenses
were lower during the nine months ended September 30, 1999 as compared to the
nine months ended September 30, 1998 due to the Company stabilizing its staffing
levels during the nine months ended September 30, 1999. During the nine months
ended September 30, 1998, the Company incurred duplicative salaries and benefits
expenses associated with its servicing conversion and phased move of sales,
originations and corporate support staff from Boca Raton, Florida to
Jacksonville, Florida.
Interest expense for the nine-month periods ended September 30, 1999 and 1998
was $6.3 million and $5.8 million, respectively. This interest expense 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 nine-month periods ended September 30, 1999 and
1998 was $4.0 million and $3.0 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 nine months ended
September 30, 1999 associated with the Company's 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 nine
months of September 30,
1999 1998
----------- -----------
(in thousands)
<S> <C> <C>
Average Servicing Portfolio during period........... $ 197,600 $ 242,811
----------- -----------
Gross charge-offs................................... 23,699 21,115
Liquidation proceeds from repossessed assets........ 10,226 8,215
----------- -----------
Net charge-offs..................................... $ 13,473 $ 12,900
=========== ===========
Net charge-offs as a percentage of average Servicing
Portfolio (annualized).......................... 9.1% 7.1%
=========== ===========
</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 nine months ended September 30,
1999 as compared to the nine months ended September 30, 1998. After conversion,
the Company experienced an increase in the delinquency of its portfolio that
occurred in or about August 1998. 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 a high of 11.5% as of July 31, 1998, and was
approximately 8.33% as of September 30, 1999.
-15-
<PAGE> 16
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 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 September 30,
1999 1998
----------- -----------
(dollars in thousands)
<S> <C> <C>
Servicing Portfolio................................. $ 186,993 $ 233,214
----------- -----------
Period of delinquency:
31 to 60 days.................................... $ 10,358 $ 15,143
61 to 90 days.................................... 2,953 4,908
91 days or more.................................. 2,423 3,577
----------- -----------
Total delinquencies................................. $ 15,734 $ 23,628
=========== ===========
Total delinquencies as a percentage of the
Servicing Portfolio.............................. 8.33% 10.11%
Principal balance of Loans related to repossession
inventory........................................ $ 1,928 $ 5,482
Repossession inventory as a percentage of the ending
Servicing Portfolio.............................. 1.03% 2.30%
</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.)
-16-
<PAGE> 17
NATIONAL AUTO FINANCE COMPANY, INC.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
September 30, 1999
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 September 30, 1999, and includes cumulative net loss
data through September 30, 1999:
<TABLE>
* 4Q 94 1Q 95 2Q 95 3Q 95 4Q 95 1Q 96 2Q 96 3Q 96 4Q 96 1Q 97
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
2 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
3 0.00% 0.00% 0.00% 0.06% 0.05% 0.00% 0.00% 0.04% 0.00% 0.00%
4 0.05% 0.04% 0.00% 0.12% 0.25% 0.09% 0.03% 0.04% 0.01% 0.04%
5 0.31% 0.14% 0.29% 0.41% 0.48% 0.26% 0.28% 0.33% 0.07% 0.25%
6 0.47% 0.30% 0.92% 0.78% 0.86% 0.49% 0.62% 0.70% 0.69% 0.70%
7 0.51% 0.71% 1.62% 1.64% 1.27% 0.90% 1.10% 1.18% 1.25% 1.43%
8 1.08% 1.25% 2.02% 2.02% 1.67% 1.23% 2.06% 1.71% 1.85% 1.94%
9 1.36% 1.55% 2.39% 2.42% 2.25% 1.95% 2.70% 2.68% 2.50% 2.60%
10 1.75% 2.13% 2.71% 2.60% 2.46% 2.14% 3.37% 3.31% 3.27% 3.08%
11 1.72% 2.49% 3.30% 3.02% 2.84% 2.72% 4.29% 3.88% 3.77% 3.51%
12 3.12% 3.09% 3.39% 3.58% 3.33% 3.26% 5.20% 4.34% 4.12% 3.87%
13 3.21% 3.64% 3.71% 3.91% 3.97% 3.74% 5.55% 5.08% 4.57% 4.49%
14 3.80% 4.04% 4.21% 4.03% 4.28% 4.18% 6.13% 5.53% 4.97% 5.08%
15 4.45% 4.25% 4.31% 4.51% 5.07% 4.90% 6.52% 6.01% 5.46% 5.65%
16 4.55% 4.33% 4.53% 4.87% 5.09% 5.11% 6.78% 6.57% 5.94% 6.34%
17 4.91% 4.88% 4.92% 5.27% 5.65% 6.16% 7.16% 6.85% 6.40% 6.82%
18 4.91% 4.98% 5.54% 5.62% 5.96% 6.59% 7.67% 7.35% 7.17% 7.39%
19 5.05% 5.28% 5.96% 6.16% 6.61% 7.01% 8.00% 8.14% 7.78% 7.79%
20 5.05% 5.80% 6.18% 6.63% 6.78% 7.28% 8.14% 8.59% 8.25% 8.05%
21 5.79% 5.89% 6.55% 6.75% 7.15% 7.56% 8.66% 9.12% 8.66% 8.40%
22 5.78% 6.33% 7.35% 6.87% 7.42% 8.00% 9.09% 9.75% 9.05% 8.78%
23 6.20% 6.46% 7.88% 7.44% 7.99% 8.25% 9.81% 10.03% 9.23% 9.28%
24 6.80% 6.91% 8.30% 7.93% 8.21% 8.36% 10.17% 10.36% 9.43% 9.67%
25 6.99% 7.48% 8.59% 8.37% 8.49% 8.85% 10.68% 10.88% 9.67% 10.12%
26 7.49% 7.58% 8.66% 8.54% 8.77% 9.01% 11.22% 11.13% 10.02% 10.52%
27 8.06% 8.20% 9.16% 8.70% 8.98% 9.36% 11.50% 11.40% 10.35% 10.83%
28 8.23% 8.76% 9.34% 8.82% 9.35% 9.57% 11.54% 11.72% 10.80% 11.36%
29 9.07% 9.49% 9.35% 8.89% 9.97% 9.84% 11.71% 11.86% 11.25% 11.68%
30 9.17% 9.54% 9.39% 9.21% 10.16% 10.09% 11.88% 12.19% 11.42% 12.18%
31 9.71% 9.81% 9.82% 9.84% 10.61% 10.37% 12.56% 12.32% 11.78% 12.52%
32 9.99% 10.08% 9.75% 10.11% 10.74% 10.48% 12.78% 12.58% 11.89%
33 10.47% 10.19% 10.06% 10.26% 11.09% 10.61% 12.85% 12.76% 12.19%
34 11.44% 10.28% 10.53% 10.67% 11.28% 10.83% 13.10% 12.93% 12.48%
35 11.48% 10.63% 10.52% 10.85% 11.33% 11.15% 13.38% 13.14%
36 11.81% 10.66% 10.72% 10.89% 11.51% 11.20% 13.51% 13.33%
37 11.86% 10.83% 10.93% 11.15% 11.70% 11.36% 13.77% 13.60%
38 11.85% 11.01% 11.10% 11.21% 11.93% 11.48% 14.15%
39 12.37% 11.20% 11.17% 11.37% 11.94% 11.79% 14.23%
40 12.42% 11.48% 11.19% 11.46% 11.98% 11.88% 14.57%
41 12.42% 11.63% 11.22% 11.84% 12.01% 11.99%
42 12.57% 11.95% 11.26% 11.87% 12.09% 12.19%
43 12.56% 12.00% 11.55% 12.07% 12.32% 12.34%
44 12.71% 12.04% 11.54% 12.09% 12.40%
45 12.68% 12.08% 11.74% 12.24% 12.50%
46 12.75% 12.12% 11.82% 12.22% 12.50%
47 12.79% 12.21% 12.04% 12.33%
48 12.97% 12.31% 11.99% 12.43%
49 12.97% 12.27% 12.00% 12.42%
50 13.10% 12.73% 11.96%
51 13.09% 12.51% 12.16%
52 13.15% 12.61% 12.28%
53 13.17% 12.66%
54 13.07% 12.72%
55 13.08% 12.68%
56 13.15%
</TABLE>
* - Month of origination.
-17-
<PAGE> 18
NATIONAL AUTO FINANCE COMPANY, INC.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
September 30, 1999
<TABLE>
* 2Q 97 3Q 97 4Q 97 1Q 98 2Q 98 3Q 98 4Q 98 1Q 99 2Q 99 3Q 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%
3 0.00% 0.02% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
4 0.22% 0.04% 0.01% 0.02% 0.00% 0.00% 0.07% 0.00% 0.18%
5 0.66% 0.18% 0.14% 0.08% 0.13% 0.01% 0.16% 0.08%
6 1.31% 0.42% 0.42% 0.29% 0.35% 0.81% 0.56% 0.46%
7 2.11% 0.88% 0.74% 0.61% 0.72% 0.94% 0.99% 0.93%
8 2.56% 1.21% 1.29% 0.84% 0.82% 2.10% 1.41%
9 2.99% 1.60% 1.68% 1.16% 1.62% 2.40% 1.88%
10 3.71% 2.30% 2.09% 1.78% 2.03% 2.79% 2.09%
11 4.28% 2.78% 2.41% 2.28% 2.76% 3.20%
12 5.05% 3.45% 2.76% 2.76% 3.09% 4.06%
13 5.91% 3.87% 3.25% 3.25% 3.83% 4.26%
14 6.50% 4.18% 3.68% 3.67% 4.39%
15 6.96% 4.54% 4.14% 4.24% 5.09%
16 7.42% 5.24% 4.68% 4.83% 5.56%
17 7.63% 5.74% 5.02% 5.13%
18 7.93% 6.28% 5.42% 5.57%
19 8.48% 6.91% 5.93% 6.01%
20 9.01% 7.45% 6.28%
21 9.28% 7.88% 6.84%
22 9.73% 8.40% 7.19%
23 10.00% 8.73%
24 10.30% 9.12%
25 10.79% 9.55%
26 11.04%
27 11.35%
28 11.75%
</TABLE>
* - Month of origination.
-18-
<PAGE> 19
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 $22.6 million to $4.9 million
for the nine month period ended September 30, 1999 from $27.5 million for the
nine month period ended September 30, 1998, principally 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, reduction in interest
paid on Senior Subordinated Notes (See Note 4 - Comprehensive Financial
Restructuring) and the reduced net loss from operations as discussed in "Results
of Operations".
Net cash provided by (used in) financing activities decreased by $18.0 million
to $680,000 for the nine month period ended September 30, 1999 from $18.7
million for the nine month period ended September 30, 1998. Net cash provided by
financing activities for the nine month period ended September 30, 1998 was
primarily the result of the proceeds received from the March Private Placement
of $20 million of Senior Subordinated Notes.
During the nine month period ended September 30, 1999, the Company was required
to maintain a minimum equity position in the Master Trust of 19.0% to 24.0% 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 September 30, 1999, the Company retained approximately $35.6 million of
Retained Interest in Securitizations, representing 72.2% 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 September 30, 1999, the principal amount owed by the Company on the Senior
Subordinated Notes was $60.8 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 - Comprehensive Financial Restructuring.
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 the Convertible Senior Subordinated Notes; (5) the issuance to the
Senior Subordinated Noteholders of 7,071,429 shares of Common Stock as
consideration for the waivers and amendments
-19-
<PAGE> 20
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.
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 - Comprehensive
Financial Restructuring, 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 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 an interest in the
principal balance of the Loans in the trust
-20-
<PAGE> 21
(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 then existing 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 September 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 10.18% 12.00% 6.11% 25.00% 6.51% 14.00%
96-1 10.76% 12.00% 13.58% 25.00% 6.21% 14.00%
97-1 10.60% 12.00% 12.40% 25.00% 3.10% 14.00%
98-1 9.87% 12.00% 10.57% 25.00% 4.27% 13.00%
99-1 3.86% 12.00% 0% 25.00% .23% 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 - Comprehensive Financial Restructuring.
Going Concern
Since 1997, the Company has suffered significant losses from operations
and has a capital deficiency as of September 30, 1999. Such matters raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard 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.
-21-
<PAGE> 22
As discussed in Note 4 to the Financial Statements - Comprehensive Financial
Restructuring, 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 first 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; (as of September 24, 1999, pursuant to amended agreements with FSA
relative to the 99-1 Securitization (See Note 2- Retained Interest in
Securitizations), the minimum equity position has increased to 24%); (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, limited by a
borrowing base formula that currently would let the Company borrow approximately
$4.4 million. 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. The Company recognizes the need to raise additional capital
and has initiated an effort to pursue this process.
In conjunction with the Company's comprehensive financial restructuring, the
Senior Subordinated Noteholders waived the previously existing Net Worth
Covenant and established the Return on Assets 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 (the "Measurement Period") for such
covenant began as of the quarter ended September 30, 1999). The Company failed
to comply with the Return on Assets Covenant for the Measurement Period ended
September 30, 1999. The Senior Subordinated Noteholders waived compliance with
such covenant for such Measurement Period.
INFLATION
Increases in the rate of inflation of prices in the U.S. economy generally
result in higher interest rates. Typically, higher interest rates result in a
decrease in the Company's net interest margins and a corresponding decrease in
the Company's gain on sale revenue for a given Loan amount; to the extent not
offset by increases in the volume of Loans purchased, inflation can therefore
lead to decreases in the Company's profitability.
YEAR 2000
The 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 were assessed. This assessment included 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.
-22-
<PAGE> 23
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.
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 (the "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 acknowledged its contracted obligation to indemnify Raymond
James, Inc., and Cruttenden Roth, Inc., (collectively, "the Underwriter
Defendants') pursuant to the underwriting agreement entered into with the
Company in connection with its initial public offering with respect to their
legal and other costs incurred in this litigation, including but not limited to
any potential judgment against them.
On September 13, 1999, the Lead Plaintiffs filed a motion for class action
certification. Also, on September 13, 1999, the Underwriter Defendants filed a
motion to dismiss the Amended and Consolidated Complaint. On September 20, 1999,
the Company, as well as certain other individual defendants, and Gary L.
Shapiro, individually, filed a motion to dismiss Lead Plaintiffs' Amended and
Consolidated Complaint. In conjunction with such motions, the Company, as well
as certain other individual defendants, filed a request for oral argument.
-23-
<PAGE> 24
The Company has a 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, cash
flows or financial position could be materially affected by an unfavorable
outcome or settlement of the pending litigation.
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"), may be deemed to have acquired control of
the Company as a result of the issuance to them of an additional aggregate of
8,250,000 shares of Common Stock. (See Note 4 to the Financial Statements -
Comprehensive Financial Restructuring). 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, 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 2. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The regular annual meeting of stockholders of National Auto Finance
Company, Inc. was held on September 14, 1999.
(b) Proxies for the meeting were solicited pursuant to Section 14(a) of the
Securities Exchange Act of 1934 and there was no solicitation in opposition
to management's solicitations. All of management's nominees for directors
were elected.
(c) The following items were submitted to a vote of security holders as
follows:
(1) Amendment to Certificate of Incorporation.
-24-
<PAGE> 25
To increase the number of authorized shares of the Company's Common Stock
from twenty million (20,000,000) to forty-four million (44,000,000).
<TABLE>
<S> <C>
FOR 11,111,361
AGAINST 57,225
ABSTAIN 36,600
</TABLE>
(2) Election of two (2) person as Class II directors of National Auto Finance
Company, Inc. for terms expiring at the 2001 annual meeting of stockholders
and election of two (2) persons as Class III directors thereof for terms
expiring at the 2002 annual meeting of stockholders.
<TABLE>
<CAPTION>
Class II FOR WITHHELD
--------------- ---------- --------
<S> <C> <C>
Robert R. Gould 11,153,911 54,275
David Benson 11,154,411 53,775
</TABLE>
<TABLE>
<CAPTION>
Class II
---------------
<S> <C> <C>
Joseph P. Donlan 11,154,411 53,775
David W. Young 11,154,411 53,775
</TABLE>
(3) AMENDMENT TO THE 1996 SHARE INCENTIVE PLAN.
To increase the number of shares of Common Stock available for the grant of
options, stock appreciation rights, stock awards, performance awards and
stock units (collectively, the "Benefits") from five hundred thousand
(500,000) to four million (4,000,000) and to increase the maximum number of
shares of Common Stock which may be granted to any individual participant
under the 1996 Share Incentive Plan (the "1996 Plan") to two million
(2,000,000).
<TABLE>
<S> <C>
FOR 9,237,093
AGAINST 79,125
ABSTAIN 20,600
</TABLE>
(4) APPOINTMENT OF INDEPENDENT AUDITORS.
To ratify the selection of BDO Seidman, LLP as independent auditors to
audit the Company's financial statements for the year ending December 31,
1999.
<TABLE>
<S> <C>
FOR 11,191,636
AGAINST 13,250
ABSTAIN 3,300
</TABLE>
ITEM 5. OTHER INFORMATION (NONE.)
ITEM 6. EXHIBIT AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Number Description Method of Filing
------ ----------- ------------------------
<S> <C> <C>
3.1-2 (i) Amendment to Company's Certificate of Incorporation Filed with this document
11 Computation of Earnings Per Common Share Filed with this document
27 Financial Data Schedule Filed with this document
99.1 Company's 1996 Share Incentive Plan, as amended. Filed with this document
99.2 Press Release announcing Company's second quarter, 1999 results. Filed with this document
</TABLE>
(b) Reports on Form 8-K
There were no reports filed on Form 8-K during the third quarter of
1999.
-25-
<PAGE> 26
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.
(Registrant)
Date: November 15, 1999 By: Keith B. Stein
--------------------------------------
Chairman of the Board and
Chief Executive Officer
Date: November 15, 1999 By: Brian Thompson
--------------------------------------
Vice President - Finance and
Accounting, Treasurer
-26-
<PAGE> 27
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- --------- ----------- ----
<S> <C> <C>
3.1-2 (i) Admendment to the Company's Certificate of Incorporation: 28
11 Computation of Earnings per Share: 30
27 Financial Data Schedule: 31
99.1 Company's 1996 Share Incentive Plan, as amended: 32
99.2 Press Release announcing Company's second quarter, 1999 results: 38
</TABLE>
-27-
<PAGE> 1
EXHIBIT 3.1-2
NATIONAL AUTO FINANCE COMPANY, INC.
Certificate of Amendment of Certificate of Incorporation
FACSIMILE
STATE OF DELAWARE
OFFICE OF THE SECRETARY OF STATE
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF
DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT
COPY OF THE CERTIFICATE OF AMENDMENT OF "NATIONAL AUTO FINANCE
COMPANY, INC.", FILED IN THIS OFFICE ON THE TWENTY-THIRD DAY OF
SEPTEMBER, A.D. 1999, AT 4 O'CLOCK P.M.
A FILED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE
NEW CASTLE COUNTY RECORDER OF DEEDS.
/s/EDWARD J. FREEL
---------------------------------------
EDWARD J. FREEL, SECRETARY OF STATE
2670554 8100 AUTHENTICATION: 9988475
991400727 DATE: 09-24-99
-28-
<PAGE> 2
NATIONAL AUTO FINANCE COMPANY, INC.
Certificate of Amendment of Certification of Incorporation
National Auto Finance Company, Inc., a corporation organized and
existing under and by virtue of the General Corporation Law of the State of
Delaware,
DOES HEREBY CERTIFY:
FIRST: That the Board of Directors of said corporation, adopted a
resolution proposing and declaring advisable the following amendment to the
Certificate of Incorporation of said corporation:
RESOLVED, that the Certificate of Incorporation of National Auto
Finance Company, Inc. be amended by changing the Fourth Section thereof so that,
as amended, said Section shall be and read as follows:
FOURTH: (A) The total number of shares of all classes of capital stock
which the Corporation shall have authority to issue is 45,000,000 shares
("Capital Stock"), consisting of 44,000,000 shares of common stock, par value
$0.01 per share ("Common Stock"), and 1,000,000 shares of preferred stock, par
value $0.01 per share ("Preferred Stock").
SECOND: That by a duly called meeting pursuant to Section 222 of the
General Corporation Law of the State of Delaware and vote of a majority of
stockholders, the stockholders have given written approval to said amendment in
accordance with applicable provisions of Section 242 of the General Corporation
Law of the State of Delaware.
THIRD: That the aforesaid amendment was duly adopted in accordance with
the applicable provisions of Sections 222 and 242 of the General Corporation Law
of the State of Delaware.
IN WITNESS WHEREOF, said National Auto Finance Company, Inc. has caused
this certificate to be signed by Stephen R. Veth, its Vice President, Secretary
and General Counsel, this 23rd day of September, 1999.
National Auto Finance Company, Inc.
By: /s/Stephen R. Veth
--------------------------------------------
Stephen R. Veth
Vice President, Secretary and
General Counsel
-29-
<PAGE> 1
EXHIBIT 11
NATIONAL AUTO FINANCE COMPANY, INC.
Computation of Earnings per Common Share
(Unaudited, in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
------------------------
1999 1998
---------- ----------
<S> <C> <C>
Average number of common shares outstanding ......................... 17,281 9,031
Common equivalent shares outstanding:
Stock options (1) ................................................... -- --
---------- ----------
Total common and common equivalent shares outstanding ............... 17,281 9,031
========== ==========
Net income (loss) attributed to common shareholders ................. $ (1,403) $ (5,650)
========== ==========
Loss per common share (basic and diluted) ........................... $ (.08) $ (0.63)
========== ==========
</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.
-30-
<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> SEP-30-1999
<PERIOD-END> SEP-30-1999
<CASH> 4,650
<SECURITIES> 0
<RECEIVABLES> 35,623
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 40,183
<PP&E> 3,496
<DEPRECIATION> 0
<TOTAL-ASSETS> 49,333
<CURRENT-LIABILITIES> 2,196
<BONDS> 58,019
2,536
0
<COMMON> 173
<OTHER-SE> (13,591)
<TOTAL-LIABILITY-AND-EQUITY> 49,333
<SALES> 0
<TOTAL-REVENUES> 4,874
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,127
<INCOME-PRETAX> (1,363)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,363)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,403)
<EPS-BASIC> (0.08)
<EPS-DILUTED> (0.08)
</TABLE>
<PAGE> 1
EXHIBIT 99.1
NATIONAL AUTO FINANCE COMPANY, INC.
1996 Share Incentive Plan, as Amended
1. Purpose. The National Auto Finance Company, Inc. 1996 Share
Incentive Plan (the "Plan") is intended to provide incentives which will
attract, retain and motivate highly competent persons as executive management,
employees and directors of National Auto Finance Company, Inc. (the "Company")
and of any parent or subsidiary now existing or hereafter formed or acquired, by
providing them opportunities to acquire shares of the common stock, par value
$.01 per share, of the Company ("Common Stock") or to receive monetary payments
based on the value of such shares pursuant to the Benefits (as defined below)
described herein. Furthermore, the Plan is intended to assist in aligning the
interests of the Company's executive management, employees and directors to
those of its stockholders.
2. Administration.
(a) The Plan will be administered by the Board of Directors of the
Company (the "Board of Directors") or, if the Board of Directors so determines,
by a committee appointed by the Board of Directors from among its members (such
committee administering the Plan being hereinafter referred to as the
"Committee"; and the Board of Directors or the Committee administering the Plan,
as the case may be, being hereinafter referred to as the "Plan Administrator").
In the event the Board of Directors designates a Committee to administer the
Plan, the Committee (which may include members of the compensation committee of
the Board of Directors, if any) shall be comprised solely of not less than two
members who shall be (i) "Non-Employee Directors" within the meaning of Rule
16b-3(b)(3) (or any successor rule) promulgated under the Securities Exchange
Act of 1934, as amended (the "Exchange Act") and (ii) unless otherwise
determined by the Board of Directors, "outside directors" within the meaning of
Section 162 (m) of the Internal Revenue Code of 1986, as amended (the "Code").
The Plan Administrator is authorized, subject to the provisions of the Plan, to
establish such rules and regulations as it deems necessary for the proper
administration of the Plan and to make such determinations and interpretations
and to take such action in connection with the Plan and any Benefits (as defined
below) granted hereunder as it deems necessary or advisable. All determinations
and interpretations made by the Plan Administrator shall be binding and
conclusive on all participants and their legal representatives. No member of the
Board of the Directors, no member of the Committee and no employee of the
Company shall be liable for any act or failure to act hereunder, except in
circumstances involving his or her bad faith, gross negligence or willful
misconduct, or for any act or failure to act hereunder by any other member or
employee or by any agent to whom duties in connection with the administration of
this Plan have been delegated. The Company shall indemnify members of the Plan
Administrator and any agent of the Plan Administrator who is an employee of the
Company, against any and all liabilities or expenses to which they may be
subjected by reason of any act or failure to act with respect to their duties on
behalf of the Plan, except in circumstances involving such person's bad faith,
gross negligence or willful misconduct.
(b) The Plan Administrator may delegate to one or more of its members,
or to one or more agents, such administrative duties as it may deem advisable,
and the Plan Administrator, or any person to whom it has delegated duties as
aforesaid, may employ one or more persons to render advice with respect to any
responsibility the Plan Administrator or such person may have under the Plan.
The Plan Administrator may employ such legal or other counsel, consultants and
agents as it may deem desirable for the administration of the Plan and may rely
upon any opinion or computation received from any such counsel, consultant or
agent. Expenses incurred by the Plan Administrator in the engagement of such
counsel, consultant or agent shall be paid by the Company, or the subsidiary
whose employees have benefited from the Plan, as determined by the Plan
Administrator.
3. Participants. Participants will consist of such executive
management, employees and directors of the Company and of any parent or
subsidiary of the Company as the Plan Administrator in its sole discretion
determines to be significantly responsible for the success and future growth and
profitability of the Company and whom the Plan Administrator may designate from
time to time to receive Benefits under the Plan. Designation of a participant in
any year shall not require the Plan Administrator to designate such person to
receive a Benefit in any other year or, once designated, to receive the same
type or amount of Benefit as granted to the participant in any other year. The
Plan Administrator shall consider such factors as it deems pertinent in
selecting participants and in determining the type and amount of their
respective Benefits.
4. Type of Benefits. Benefits under the Plan may be granted in any one
or a combination of (a) Stock Options, (b) Stock Appreciation Rights, (c) Stock
Awards, (d) Performance Awards and (e) Stock Units (each as described below, and
collectively, the "Benefits"). Stock Awards, Performance Awards and Stock Units
may, as determined by the Plan Administrator in its discretion, constitute
Performance-Based Awards, as described in Section 11 below. Benefits shall be
evidenced by agreements (which need not be identical) in such forms as the Plan
Administrator may from time to time approve;
-32-
<PAGE> 2
provided, however, that in the event of any conflict between the provisions of
the Plan and any such agreements, the provisions of the Plan shall prevail.
5. Common Stock Available under the Plan. The aggregate number of
shares of Common Stock that may be subject to Benefits, including Stock Options,
granted under this Plan shall be 4,000,000 shares of Common Stock, which may be
authorized and unissued or treasury shares, subject to any adjustments made in
accordance with Section 12 hereof. The maximum number of shares of Common Stock
with respect to which Benefits may be granted to any individual participant
under the Plan shall be 2,000,000. Other than those shares of Common Stock
subject to Benefits that are cancelled or terminated as a result of the Plan
Administrator's exercise of its discretion with respect to Performance-Based
Awards as provided for in Section 11, any shares of Common Stock subject to a
Stock Option or Stock Appreciation Right which for any reason is cancelled or
terminated without having been exercised, any shares subject to Stock Awards,
Performance Awards or Stock Units which are forfeited, any shares subject to
Performance Awards settled in cash or any shares delivered to the Company as
part of full payment for the exercise of a Stock Option or Stock Appreciation
Right shall again be available for Benefits under the Plan. The preceding
sentence shall apply only for purposes of determining the aggregate number of
shares of Common Stock subject to Benefits.
6. Stock Options. Stock Options will consist of awards from the Company
that will enable the holder to purchase a specific number of shares of Common
Stock, at set terms and at a fixed purchase price. Stock Options may be
"incentive stock options" ("Incentive Stock Options"), within the meaning of
Section 422 of the Code, or Stock Options which do not constitute Incentive
Stock Options ("Nonqualified Stock Options"). The Plan Administrator will have
the authority to grant any participant one or more Incentive Stock Options,
Nonqualified Stock Options, or both types of Stock Options (in each case with or
without Stock Appreciation Rights). Each Stock Option shall be subject to such
terms and conditions consistent with the Plan as the Committee may impose from
time to time, subject to the following limitations:
(a) Exercise Price. Each Stock Option granted hereunder shall
have such per-share exercise price as the Plan Administrator may
determine at the date of grant; provided, however, subject to
subsection (d) below, that the per-share exercise price shall not be
less than 100% of the Fair Market Value (as defined below) of the
Common Stock on the date the option is granted.
(b) Payment of Exercise Price. The option exercise price may
be paid in cash or, in the discretion of the Plan Administrator
determined at the date of grant and set forth in the option agreement,
by the delivery of shares of Common Stock of the Company then owned by
the participant, by the withholding of shares of Common Stock for which
a Stock Option is exercisable, or by a combination of these methods. In
the discretion of the Plan Administrator determined at the date of
grant and set forth in such option agreement, payment may also be made
by delivering a properly executed exercise notice to the Company
together with a copy of irrevocable instructions to a broker to deliver
promptly to the Company the amount of sale or loan proceeds to pay the
exercise price. To facilitate the foregoing, the Company may enter into
agreements for coordinated procedures with one or more brokerage firms.
The Plan Administrator may prescribe any other method of paying the
exercise price that it determines to be consistent with applicable law
and the purpose of the Plan, including, without limitation, in lieu of
the exercise of a Stock Option by delivery of shares of Common Stock of
the Company then owned by a participant, providing the Company with a
notarized statement attesting to the number of shares owned, where upon
verification by the Company, the Company would issue to the participant
only the number of incremental shares to which the participant is
entitled upon exercise of the Stock Option. In determining which
methods a participant may utilize to pay the exercise price, the Plan
Administrator may consider such factors as it determines are
appropriate.
(c) Exercise Period. Stock Options granted under the Plan
shall be exercisable at such time or times and subject to such terms
and conditions as shall be determined by the Plan Administrator;
provided, however, that no Stock Option shall be exercisable later than
ten years after the date it is granted. All Stock Options shall
terminate at such earlier times and upon such conditions or
circumstances as the Plan Administrator shall in its discretion set
forth in such option agreement at the date of grant.
(d) Limitations on Incentive Stock Options. Incentive Stock
Options may be granted only to participants who are employees of the
Company or a parent or subsidiary of the Company at the date of grant.
The aggregate market value (determined as of the time the option is
granted) of the Common Stock with respect to which Incentive Stock
Options are exercisable for the first time by a participant during any
calendar year (under all option plans of the Company) shall not exceed
$100,000. For purposes of the preceding sentence, Incentive Stock
Options will be taken into account in the order in which they are
granted. Incentive Stock Options may not be granted to any participant
who, at the time of grant, owns stock possessing (after the application
of the attribution rules of Section 424(d) of the Code) more than 10%
of the total combined voting power of all outstanding classes of stock
of the Company or any subsidiary of the Company, unless the option
price is fixed at not less than 110% of the Fair Market Value of the
-33-
<PAGE> 3
Common Stock on the date of grant and the exercise of such option is
prohibited by its terms after the expiration of five years from the
date of grant of such option. Notwithstanding anything to the contrary
contained herein, no Incentive Stock Option may be exercised later than
ten years after the date it is granted.
7. Stock Appreciation Rights. The Plan Administrator may, in its
discretion, grant Stock Appreciation Rights to the holders of any Stock Options
granted hereunder. In addition, Stock Appreciation Rights may be granted
independently of, and without relation to, options. A Stock Appreciation Right
means a right to receive a payment, in case, Common Stock or a combination
thereof, in an amount equal to the excess of (x) the Fair Market Value, or other
specified valuation, of a specific number of shares of Common Stock on the date
the right is exercised over (y) the Fair Market Value, or other specified
valuation (which shall be no less than the Fair Market Value), of such shares of
Common Stock on the date the right is granted, all as determined by the Plan
Administrator; provided, however, that if a Stock Appreciation Right is granted
retroactively in tandem with or in substitution for a Stock Option, the
designated Fair Market Value in the award agreement may be the Fair Market Value
on the date such Stock Option was granted. Each Stock Appreciation Right shall
be subject to such terms and conditions as the Committee shall impose from time
to time.
8. Stock Awards. The Plan Administrator may, in its discretion, grant
Stock Awards (which may include mandatory payment of bonus incentive
compensation in stock) consisting of Common Stock issued or transferred to
participants with or without other payments therefor as additional compensation
for services to the Company. Stock Awards may be subject to such terms and
conditions as the Plan Administrator determines appropriate, including, without
limitation, restrictions on the sale or other disposition of such shares, the
right of the Company to reacquire such shares for no consideration upon
termination of the participant's employment within specified periods, and may
constitute Performance-Based Awards, as described below. The Plan Administrator
may require the participant to deliver a duly signed stock power, endorsed in
blank, relating to the Common Stock covered by such an Award. The Plan
Administrator may also require that the stock certificates evidencing such
shares be held in custody or bear restrictive legends until the restrictions
thereon shall lapsed. The Stock Award shall specify whether the participant
shall have, with respect to the shares of Common Stock subject to a Stock Award,
all of the rights of a holder of shares of Common Stock of the Company,
including the right to receive dividends and to vote the shares.
9. Performance Awards.
(a) Performance Awards may be granted to participants at any time and
from time to time, as shall be determined by the Plan Administrator. Performance
Awards may, as determined by the Plan Administrator in its sole discretion,
constitute Performance-Based Awards. The Plan Administrator shall have complete
discretion in determining the number, amount and timing of awards granted to
each participant. Such Performance Awards may be in the form of shares of Common
Stock or Stock Units. Performance Awards may be awarded as short-term or
long-term incentives. With respect to those Performance Awards that are intended
to constitute Performance-Based Awards, the Plan Administrator shall set
performance targets at its discretion which, depending on the extent to which
they are met, will determine the number and/or value of Performance Awards that
will be paid out to the participants, and may attach to such Performance Awards
one or more restrictions. Performance targets may be based upon, without
limitation, Company-wide, divisional and/or individual performance.
(b) With respect to those Performance Awards that are not intended to
constitute Performance-Based Awards, the Plan Administrator shall have the
authority at any time to make adjustments to performance targets for any
outstanding Performance Awards which the Plan Administrator deems necessary or
desirable at the time of establishment of goals the Plan Administrator shall
have precluded its authority to make such adjustments.
(c) Payment of earned Performance Awards shall be made in accordance
with terms and conditions prescribed or authorized by the Plan Administrator.
The participant may elect to defer, or the Plan Administrator may require or
permit the deferral of, the receipt of Performance Awards upon such terms as the
Plan Administrator deems appropriate.
10. Stock Units.
(a) The Plan Administrator may, in its discretion, grant Stock Units to
participants hereunder. Stock Units may, as determined by the Plan Administrator
in its sole discretion, constitute Performance-Based Awards. The Plan
Administrator shall determine the criteria for the vesting of Stock Units. A
Stock Unit granted by the Plan Administrator shall provide for payment in shares
of Common Stock at such time as the award agreement shall specify. Shares of
Common Stock issued pursuant to this Section 10 may be issued with or without
other payments therefor as may be required by applicable law or such other
consideration as may be determined by the Committee. The Plan Administrator
shall determine whether a participant granted a Stock Unit shall be entitled to
a Dividend Equivalent Right (as defined below).
(b) Upon vesting of a Stock Unit, unless the Plan Administrator has
determined to defer payment with respect to such unit or a Participant has
elected to defer payment under subsection (c) below, shares of Common Stock
representing the Stock
-34-
<PAGE> 4
Units shall be distributed to the participant unless the Plan Administrator,
with the consent of the participant, provides for the payment of the Stock Units
in cash or partly in cash and partly in shares of Common Stock equal to the
value of the shares of Common Stock which would otherwise be distributed to the
participant.
(c) Prior to the year with respect to which a Stock Unit may vest, the
participant may elect not to receive Common Stock upon the vesting of such Stock
Unit and for the Company to continue to maintain the Stock Unit on its books of
account. In such event, the value of a Stock Unit shall be payable in shares of
Common Stock pursuant to the agreement of deferral.
(d) A "Stock Unit" means an account representing one share of Common
Stock. A "Dividend Equivalent Right" means the right to receive the amount of
any dividend paid on the share of Common Stock underlying a Stock Unit, which
shall be payable in cash or in the form of additional Stock Units.
11. Performance-Based Awards. Certain Benefits granted under the Plan
may be granted in a manner such that the Benefits qualify for the performance
based compensation exemption of Section 162(m) of the Code ("Performance-Based
Awards"). As determined by the Plan Administrator in its sole discretion, either
the granting or vesting of such Performance-Based Awards are to be based upon
one or more of the following factors: net sales, pretax income before allocation
of corporate overhead and bonus, budget, earnings per share, net income,
division, group or corporate financial goals, return on stockholders' equity,
return on assets, attainment of strategic and operational initiatives,
appreciation in and/or maintenance of the price of the Common Stock or any other
publicly-traded securities of the Company, market share, gross profits, earnings
before interest and taxes, earnings before interest, taxes, dividends and
amortization, economic value-added models and comparisons with various stock
market indices, reductions in costs or any combination of the foregoing. With
respect to Performance-Based Awards, (i) the Plan Administrator shall establish
in writing (x) the objective performance-based goals applicable to a given
period and (y) the individual employees or class of employees to which such
performance-based goals apply no later than 90 days after the commencement of
such fiscal period (but in no event after 25% of such period has elapsed) and
(ii) no Performance-Based Awards shall be payable to or vest with respect to, as
the case may be, any participant for a given fiscal period until the Plan
Administrator certifies in writing that the objective performance goals (and any
other material terms) applicable to such period have been satisfied. With
respect to any benefits intended to qualify as Performance-Based Awards, after
establishment of a performance goal, the Plan Administrator shall not revise
such performance goal or increase the amount of compensation payable thereunder
(as determined in accordance with Section 162(m) of the Code) upon the
attainment of such performance goal. Notwithstanding the preceding sentence, the
Plan Administrator may reduce or eliminate the number of shares of Common Stock
or cash granted or the number of shares of Common Stock vested upon the
attainment of such performance goal.
12. Adjustment Provisions; Change in Control.
(a) If there shall be any change in the Common Stock of the Company,
through merger, consolidation, reorganization, recapitalization, stock dividend,
stock split, reverse stock split, split up, spinoff, combination of shares,
exchange of shares, dividend in kind or other like change in capital structure
or distribution (other than normal cash dividends) to stockholders of the
Company, an adjustment shall be made to each outstanding Stock Option and Stock
Appreciation Right such that each such Stock Option and Stock Appreciation Right
shall thereafter be exercisable for such securities, cash and/or other property
as would have been received in respect of the Common Stock subject to such Stock
Option or Stock Appreciation Right had such Stock Option or Stock Appreciation
Right been exercised in full immediately prior to such change or distribution,
and such an adjustment shall be made successively each time any such change
shall occur. In addition, in the event of any such change or distribution, in
order to prevent dilution or enlargement of participants' rights under the Plan,
the Plan Administrator will have authority to adjust, in an equitable manner,
the number and kind of shares that may be issued under the Plan, the number and
kind of shares subject to outstanding Benefits, the exercise price applicable to
outstanding Benefits, and the Fair Market Value of the Common Stock and other
value determinations applicable to outstanding Benefits. Appropriate adjustments
may also be made by the Plan Administrator in the terms of any Benefits under
the Plan to reflect such changes or distributions and to modify any other terms
of outstanding Benefits on an equitable basis, including modifications of
performance targets and changes in the length of performance periods. In
addition, other than with respect to Stock Options, Stock Appreciation Rights
and other awards intended to constitute Performance-Based Awards, the Plan
Administrator is authorized to make adjustments to the terms and conditions of,
and the criteria included in, Benefits in recognition of unusual or nonrecurring
events affecting the Company or the financial statements of the Company, or in
response to changes in applicable laws, regulations, or accounting principles.
Notwithstanding the foregoing, (i) each such adjustment with respect to an
Incentive Stock Option shall comply with the rules of Section 424(a) of the
Code, and (ii) in no event shall any adjustment be made which would render any
Incentive Stock Option granted hereunder other than an incentive stock option
for purposes of Section 422 of the Code.
-35-
<PAGE> 5
(b) Notwithstanding any other provision of this Plan, if there is a
Change in Control of the Company, all then outstanding Stock Options and Stock
Appreciation Rights shall immediately become exercisable. For purposes of this
Section 12(b), a "Change in Control" of the Company shall be deemed to have
occurred upon any of the following events:
(i) A persons or entity or group of persons or entities,
acting in concert, shall become the direct or indirect beneficial owner
(within the meaning of Rule 13d-3 of the Exchange Act) or securities of
the Company representing fifty percent (50%) or more of the combined
voting power of the issued and outstanding common stock of the Company
(a "Significant Owner"), unless such shares are originally issued to
such Significant Owner by the Company; or
(ii) The majority of the Company's Board of Directors is no
longer comprised of the incumbent directors who constitute the Board of
Directors on the Effective Date (as hereinafter defined) and any other
individual(s) who becomes a director subsequent to the date of this
Agreement whose initial election or nomination for election as a
director, as the case may be, was approved by at least a majority of
the directors who comprised the incumbent directors as of the date of
such election or nomination; or
(iii) The Company's Common Stock shall cease to be publicly
traded; or
(iv) A sale of all or substantially all of the assets of the
Company; or
(v) The Board of Directors shall approve any merger,
consolidation, or like business combination or reorganization of the
Company, the consummation of which would result in the occurrence of
any event described in clause (ii) or (iii) above, and such transaction
shall have been consummated.
The Plan Administrator, in its discretion, may determine that, upon the
occurrence of a Change in Control of the Company, each Stock Option and Stock
Appreciation Right outstanding hereunder shall terminate within a specified
number of days after notice to the holder, and such holder shall receive, with
respect to each share of Common Stock subject to such Stock Option or Stock
Appreciation Right, an amount equal to the excess of the Fair Market Value of
such shares of Common Stock immediately prior to the occurrence of such Change
in Control over the exercise price per share of such Stock Option or Stock
Appreciation Right; such amount to be payable in cash, in one or more kinds of
property (including the property, if any, payable in the transaction) or in a
combination thereof, as the Plan Administrator, in its discretion, shall
determine. The provisions set forth in the preceding sentence shall be
inapplicable to a Stock Option or Stock Appreciation Right granted within six
(6) months before the occurrence of a Change in Control if the holder of such
Stock Option or Stock Appreciation Right is subject to the reporting
requirements of Section 16(a) of the Exchange Act and no exception from
liability under Section 16(b) of the Exchange Act is otherwise available to such
holder.
13. Transferability. Each Benefit granted under the Plan to a
participant shall not be transferable otherwise than by will or the laws of
descent and distribution, and shall be exercisable, during the participant's
lifetime, only by the participant. In the event of the death of a participant,
each Stock Option or Stock Appreciation Right theretofore granted to him or her
shall be exercisable during such period after his or her death as the Plan
Administrator shall in its discretion set forth in such option agreement or
right agreement at the date of grant and then only by the executor or
administrator of the estate of the deceased participant or the person or persons
to whom the deceased participant's rights under the Stock Option or Stock
Appreciation Right shall pass by will or the laws of descent and distribution.
Notwithstanding the foregoing, at the discretion of the Plan Administrator, an
award of a Benefit other than an Incentive Stock Option may permit the
transferability of a Benefit by a participant solely to members of the
participant's immediate family or trusts or family partnerships for the benefit
of such persons, subject to any restriction included in the award of the
Benefit.
14. Other Provisions. The award of any Benefit under the Plan may also
be subject to such other provisions (whether or not applicable to the Benefit
awarded to any other participant) as the Plan Administrator determines at the
date of grant, appropriate, including, without limitation, for the installment
purchase of Common Stock under Stock Options, for the installment exercise of
Stock Appreciation Rights, to assist the participant in financing the
acquisition of Common Stock, for the forfeiture of, or restrictions on resale or
other disposition of, Common Stock acquired under any form of Benefit, for the
acceleration of exercisability or vesting of Benefits in the event of a change
in control of the Company, for the payment of the value of Benefits to
participants in the event of a change in control of the Company, or to comply
with federal and state securities laws, or understandings or conditions as to
the participant's relationship with the Company in addition to those
specifically provided for under the Plan.
15. Fair Market Value. For purposes of this Plan and any Benefits
awarded hereunder, Fair Market Value shall be the Closing price of the Company's
Common Stock on the date of calculation (or on the last preceding trading date
if Common Stock was not traded on such date) if the Company's Common Stock is
readily tradable on a national securities exchange or
-36-
<PAGE> 6
other market system, and if the Company's Common Stock is not readily tradable,
Fair Market Value shall mean the amount determined in good faith by the Plan
Administrator as the fair market value of the Common Stock of the Company.
16. Withholding. All payments or distributions of Benefits made
pursuant to the Plan shall be net of any amounts required to be withheld
pursuant to applicable federal, state and local tax withholding requirements. If
the Company proposes or is required to distribute Common Stock pursuant to the
Plan, it may require the recipient to remit to it or to the corporation that
employs such recipient an amount sufficient to satisfy such tax withholding
requirements prior to the delivery of any certificates for such Common Stock. In
lieu thereof, the Company or the employing corporation shall have the right to
withhold the amount of such taxes from any other sums due or to become due from
such corporation to the recipient as the Plan Administrator shall prescribe. The
Plan Administrator may, in its discretion and subject to such rules as it may
adopt (including any as may be required to satisfy applicable tax and/or non-tax
regulatory requirements), permit an optionee or award or right holder to pay all
or a portion of the federal, state and local withholding taxes arising in
connection with any Benefit consisting of shares of Common Stock by electing to
have the Company withhold shares of Common Stock having a Fair Market Value
equal to the amount of tax to be withheld, such tax calculated at rates required
by statute or regulation.
17. Tenure. A participant's right, if any, to continue to serve the
Company as a director, officer, employee, or otherwise, shall not be enlarged or
otherwise affected by his or her designation as a participant under the Plan.
18. Unfunded Plan. Participants shall have no right, title, or interest
whatsoever in or to any investments which the Company may make to aid it in
meeting its obligations under the Plan. Nothing contained in the Plan, and no
action taken pursuant to its provisions, shall create or be construed to create
a trust of any kind, or a fiduciary relationship between the Company and any
participant, beneficiary, legal representative or any other person. To the
extent that any person acquires a right to receive payments from the Company
under the Plan, such right shall be no greater than the right of an unsecured
general creditor of the Company. All payments to be made hereunder shall be paid
from the general funds of the Company and no special or separate fund shall be
paid from the general funds of the Company and no special or separate fund shall
be established and no segregation of assets shall be made to assure payment of
such amounts except as expressly set forth in the Plan. The Plan is not intended
to be subject to the Employee Retirement Income Security Act of 1974, as
amended.
19. No Fractional Shares. No fractional shares of Common Stock shall be
issued or delivered pursuant to the Plan or any Benefit. The Plan Administrator
shall determine whether cash, or Benefits, or other property shall be issued or
paid in lieu of fractional shares or whether such fractional shares or any
rights thereto shall be forfeited or otherwise eliminated.
20. Duration, Amendment and Termination. No Benefit shall be granted
more than ten years after the Effective Date; provided, however, that the terms
and conditions applicable to any Benefit granted prior to such date may
thereafter be amended or modified by mutual agreement between the Company and
the participant or such other persons as may then have an interest therein.
Also, by mutual agreement between the Company and a participant hereunder, under
this Plan or under any other present or future plan of the Company, Benefits may
be granted to such participant in substitution and exchange for, and in
cancellation of, any Benefits previously granted such participant under this
Plan, or any other present or future plan of the Company. The Board of Directors
may amend the Plan from time to time or suspend or terminate the Plan at any
time. However, no action authorized by this Section 20 shall reduce the amount
of any existing Benefit or change the terms and conditions thereof without the
participant's consent. No amendment of the Plan shall, without approval of the
stockholders of the Company, (i) increase the total number of shares which may
be issued under the Plan or the maximum number of shares with respect to Stock
Options, Stock Appreciation Rights and other Benefits that may be granted to any
individual under the Plan or (ii) modify the requirements as to eligibility for
Benefits under the Plan; provided, however, that no amendment may be made
without approval of the stockholders of the Company if the amendment will
disqualify any Incentive Stock Options granted hereunder.
21. Governing Law. This Plan, Benefits granted hereunder and actions
taken in connection herewith shall be governed and construed in accordance with
the laws of the State of Delaware (regardless of the law that might otherwise
govern under applicable Delaware principles of conflict of laws).
22. Effective Date. (a) the Plan shall be effective as of November 20,
1996, the date on which the Plan was adopted by the Board of Directors and
approved by the stockholders of the Company (the "Effective Date").
(c) This Plan shall terminate on November 19, 2006 (unless sooner
terminated by the Board of Directors).
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<PAGE> 1
EXHIBIT 99.2
NATIONAL AUTO FINANCE COMPANY, INC.
PRESS RELEASE
ANNOUNCES QUARTER ENDING SEPTEMBER 30, 1999 RESULTS
EARNINGS (LOSS) PER SHARE OF $(0.08) VS. $ (0.63)
JACKSONVILLE, Fla. (November 15, 1999) - National Auto Finance Company,
Inc. (OTC/BB:NAFI) announced that it filed its Quarterly Report on Form 10-Q
today, which reflects a loss of $1.4 million ($(0.08) basic loss per share) for
the quarter ended September 30, 1999 as compared to a net loss of $5.7 million
($(0.63) basic loss per share) for the quarter ended September 30, 1998. To
date, for each quarterly period during 1999, NAFI has announced improved
operating results compared to 1998.
NAFI had a net loss for the nine months ended September 30, 1999 of
$4.9 million ($(.34) basic loss per share), as compared to a net loss of $15.2
million ($(1.68) basic loss per share) during the same period in 1998. The
results for both the three and nine month periods of 1999 compared to the same
periods in 1998 reflect improved performance of the Company's loan portfolio and
reductions in overhead, particularly servicing cost.
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: Brian Thompson
Vice President Finance and
Accounting, Treasurer
(904) 996-2500
- -END-
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