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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the period from to
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Commission File Number: 0-22067
National Auto Finance Company, Inc.
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(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C>
Delaware 65-0688619
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
10302 Deerwood Park Blvd. Suite 100 Jacksonville, Florida 32256
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(Address of Principal Executive Offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (904) 996-2500
Securities registered pursuant to Section 12(b) of the Act:
None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act 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 [ ] No [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes [X] No [ ]
The aggregate market value on April 26, 1999 (based on the $.19 closing price on
the OTC Bulletin Board on that date) of the common equity held by non-affiliates
of the registrant was $3,240,143. The number of shares of the registrant's
Common Stock outstanding on April 26, 1999 was 17,280,762.
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FORWARD-LOOKING STATEMENTS
When used in this Annual Report on Form 10-K or future filings by the
Company with the Securities and Exchange Commission (the "Commission"), in our
press releases or other public or stockholder communications, or in oral
statements made with the approval of an authorized executive officer, the words
or phrases "will likely result," "are expected to," "will continue," "is
anticipated," "estimate," "project" or similar expressions are intended to
identify "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. We wish to caution readers not to
place undue reliance on any such forward-looking statements, which speak only as
of the date made, and to advise readers that various factors, including regional
and national economic conditions, substantial changes in levels of market
interest rates, credit and other risks of lending and investment activities, and
competitive and regulatory factors could affect our financial performance and
could cause our actual results for future periods to differ materially from
those anticipated by any forward-looking statement.
We do 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.
PART I
ITEM 1. BUSINESS.
GENERAL
National Auto Finance Company, Inc. (the "Company") is a specialty
consumer finance company concentrating in the business of purchasing, financing,
securitizing and servicing motor vehicle retail installment sale contracts
("Loans") originated primarily by manufacturer-franchised automobile dealers
("Dealers") in the sale of new and used automobiles. Through its Loan purchases,
the Company provides indirect financing to consumers with limited financial
resources or past credit problems ("Non-Prime Consumers"). The Company serves as
a source of financing for Dealers, allowing them to sell automobiles to
customers who otherwise may not qualify under underwriting criteria required by
more traditional sources such as commercial banks. The Company is implementing
plans to market a wide range of portfolio services for third parties including,
but not limited to, collections, customer service, asset remarketing and
litigation handling.
The Company's primary business strategy is to increase its Loan volume by:
(i) marketing its products and services to an increasing number of Dealers
throughout the United States through its regional salespersons ("Dealer
Relations Managers") located in strategic geographic areas ("Direct Dealer
Originations"); (ii) continuing to implement its existing, and developing new,
strategic referral and marketing alliances ("Strategic Alliances"); and (iii)
purchasing Non-Prime Consumer Loans that meet the Company's underwriting
criteria from third-party originators ("Third-Party Originators"), such as
consumer finance companies and other financial institutions (the "Portfolio
Acquisition Program").
THE NON-PRIME CONSUMER AUTOMOBILE FINANCE INDUSTRY
Automobile financing is the second largest sector, by dollar amount, of
consumer installment debt in the United States. According to the United States
Federal Reserve Board, as of December 31, 1998 and 1997, approximately $4.5 and
$4.2 billion of automobile finance credit was outstanding. The Company estimates
approximately 15-20% of such amounts are attributable to Non-Prime Consumers.
The market for Non-Prime Consumer credit is highly fragmented.
DEALER RELATIONSHIPS
As of December 31, 1998, the Company had contractual relationships with
over 775 Dealers located in 35 states. The Company focuses on developing
relationships with well-established Dealers. The vast majority of our
contractual relationships are with manufacturer-franchised Dealers, rather than
independent Dealers.
Each Dealer doing business with the Company enters into a written
agreement with the Company that governs purchases of Loans from the Dealer (a
"Dealer Agreement"). Although these agreements do not
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obligate a Dealer to sell or us to purchase any particular Loan, the Dealer
Agreement sets forth the terms upon which approved Loans will be purchased by
the Company. Additionally, these agreements contain representations and
warranties given by the Dealer to be made with respect to each Loan purchased by
the Company, each automobile that serves as collateral for the Loan (e.g., that
it is properly registered and designates the Company as first lienholder), and
each Loan's compliance with certain laws and regulations. Dealer Agreements
generally provide that the Loans are sold to the Company "without recourse"
(i.e., the Dealer does not assume or retain the credit risk with respect to any
Loan purchased by the Company), unless the Dealer has materially breached
certain representations and warranties in the Dealer Agreement. The Company
carefully monitors its Dealer network and will terminate its agreement with any
particular Dealer if the Company discovers material misrepresentations with
respect to any Loan, unusual repossession experience or other factors that might
indicate fraudulent conduct.
Historically, Dealers prefer financing sources that: (i) provide
value-added products and services designed to increase sales; (ii) maintain
regular contact with Dealer finance departments; (iii) communicate credit
decisions in a timely manner; (iv) have consistent underwriting standards; (v)
fund Loan purchases quickly; and (vi) offer a competitive price to purchase the
Loan. The Company seeks to meet these needs while taking efforts to ensure that
the delinquency and loss experience of the loans it finances remain at
acceptable levels.
PRODUCTS AND SERVICES
In an effort to create and maintain a strong Dealer network, the Company
provides an array of products and services. The Company's products offered to
dealers generally consist of Loan programs. For example, the Company currently
purchases Loans on automobiles that are up to five model years old with fewer
than 75,000 odometer miles and, depending on the model year, purchases Loans
having maximum terms of 60 months, with a shorter Loan term for older model-year
automobiles. The perceived credit risk of the borrower will affect the annual
percentage rate charged for a particular Loan and will also affect the discount
from the face amount of a Loan at which the Company is willing to purchase the
Loan from the Dealer (the "Dealer Discount").
The Company seeks to provide value-added services to Dealers to enhance
their financing of Non-Prime Consumer Loans by: (i) reviewing Dealer inventories
to determine adequate inventory levels based on trends the Company observes in
Non-Prime Consumer automobile purchasing; (ii) training Dealer sales people to
identify Non-Prime Consumers who meet the Company's underwriting criteria; and
(iii) working with Dealers to establish separate finance desks that specifically
service Non-Prime Consumers. The Company also has developed specific services
for Dealers that are designed to attract customers by offering flexible
financing. For example, Credit Clinic(TM) is a service pursuant to which the
Dealer advertises a sale for the "credit challenged" and the Company provides an
on-site credit counselor who advises the Non-Prime Consumer on choosing a
vehicle with a monthly payment he or she can manage. The Company believes that
this service enhances a Dealer's sales of automobiles because it encourages
Non-Prime Consumers, who might otherwise be apprehensive about their personal
credit histories, to seek financing for their vehicle purchases.
The Company regularly reviews its products and services in order to
respond to changing market conditions in the Non-Prime Consumer market.
MARKETING AND LOAN ACQUISITION STRATEGY
General
The Company's strategy to grow profitable volume includes (i) marketing
the Company's products and services to an increasing number of Dealers
throughout specific geographic regions in the United States through its Dealer
Relations Managers; (ii) maximizing its existing, and developing new, Strategic
Alliances; and (iii) purchasing from Third-Party Originators selected Non-Prime
Consumer Loans which meet the Company's underwriting criteria.
Direct Dealer Marketing
Experienced management and field sales employees, who are located in key
geographic regions, lead the Company's direct marketing strategy. Direct
marketing to Dealers is conducted by Dealer Relations Managers
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who seek to train and educate Dealers about the credit profile of the Non-Prime
Consumer who meets the Company's underwriting criteria, familiarize Dealers with
the Company's existing products and services, solicit feedback from Dealers
regarding new products and services that would enhance a Dealer's ability to
sell automobiles to Non-Prime Consumers, and generally provide Dealers with
ongoing service and support. The Company's marketing department also designs
sales incentives to motivate Dealers to submit applications to the Company. The
marketing department works closely with the Dealer Relations Managers to design
appealing incentives for the Company's Dealers. The Company believes that the
intensive on-site Dealer service provided by Dealer Relations Managers and the
Company's marketing programs enhance the effectiveness of the products and
services offered by the Company, strengthen existing Dealer relationships and
foster new business. The Company derived approximately 31.3% of its Loan volume
for the year ended December 31, 1998 from Direct Dealer originations, which
excludes Strategic Alliance originations.
Strategic Alliance Marketing
The Company has used Strategic Alliances to increase the number of Loans
it purchases by (i) using the sales force of the financial institutions and
Dealer groups with which the Company establishes such alliances to market the
Company's Non-Prime Consumer products and services and (ii) obtaining the right
to review and purchase Non-Prime Consumer Loans that do not meet a financial
institution's or Dealer group's underwriting criteria. Through these alliances,
the Company offers these financial institutions and Dealer groups the
opportunity to expand their product offerings and to earn fees based on the
number of Loans that are purchased by the Company as a result of the alliance.
Senior management of the Company conducts direct marketing to financial
institutions and Dealer groups. Senior management seeks to identify prospective
financial institutions or Dealer groups suitable for Strategic Alliances and
negotiate the terms of such alliances. The Company's Dealer Relations Managers
provide operating services and support, including training and education with
respect to both the Non-Prime Consumer market and the Company's products and
services. Upon consummation of a Strategic Alliance, the Company expects that
the financial institution's or Dealer group's sales personnel also will support
or supplement the Company's direct marketing efforts.
In April 1996, the Company entered into the First Union Strategic Alliance
with First Union National Bank of North Carolina ("First Union"), the Company's
first Strategic Alliance. The First Union Strategic Alliance provided for (i)
joint marketing of the Company's products and services by both the Company's
sales force and the sales personnel of the automobile finance division of First
Union ("First Union Auto Finance") to the approximately 3,400 Dealers throughout
twelve states and the District of Columbia with which First Union Auto Finance
had an existing relationship, and (ii) exclusive referral by First Union Auto
Finance to the Company of all applications for Loans received from Dealers that
fell below certain established credit guidelines. In consideration for these
services, First Union received a fee on each Loan purchased by the Company as a
result of the First Union Strategic Alliance. Pursuant to the referral
agreement, funded Loan referrals were without recourse to First Union. The First
Union Strategic Alliance has significantly enhanced the Company's ability to
further its market penetration and increase the size of its Dealer base. For the
year ended December 31, 1998, approximately 44.4% of the Loans the Company
purchased were attributable to the First Union Strategic Alliance. Another 1.3%
of the Loans the Company purchased was attributable to a separate alliance
relationship.
In March of 1999, First Union announced publicly that it was exiting the
indirect auto finance business due to realigned business strategies. As a
result, the Company's referral agreement with First Union has been terminated.
The Company will, nonetheless, continue the relationships it has established
with, and continue to actively service the First Union-related Dealers. The
Company will not, however, be obligated to pay to First Union referral fees
related to future business obtained through those Dealers. The Company's loan
volume may be materially adversely affected by the termination of the First
Union Strategic Alliance. The Company will continue its relationship with First
Union through certain credit facilities as described more fully in Note 13 of
the Notes to Financial Statements - Comprehensive Financial Restructuring.
The Company is pursuing other Strategic Alliances that economically
support its plans for growth in new Loan originations.
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Portfolio Acquisition Program
To enhance the Company's growth and as a natural extension of its lines of
business, the Company purchases from time to time Non-Prime Consumer Loans
meeting the Company's portfolio acquisition underwriting guidelines from
Third-Party Originators. Purchasing selected Loans from Third-Party Originators
enables the Company to acquire Loans at a lower cost than comparable quality
Dealer-originated Loans due to decreased origination expense. In many cases, the
Company has the opportunity to acquire Loans that have six-month or longer
payment histories, reducing the Company's exposure to early Loan defaults. In
addition, the Company is able to capitalize on relationships with Dealers that
have been established by other finance companies. For the year ended December
31, 1998, the Company purchased Loans with an aggregate principal amount of
$21.4 million or approximately 22.9% of its Loan volume from Third-Party
Originators. Although the purchase of Loans from Third-Party Originators is a
significant component of the Company's overall business strategy, the Company
expects to continue to focus on Direct Dealer Originations and Strategic
Alliances, and will use the Portfolio Acquisition Program opportunistically.
Client Services
The Company has established an experienced portfolio servicing management team
and invested resources in an advanced servicing system software and hardware
system for use in servicing its Servicing Portfolio. Having refined its
processes over the past year, the Company is implementing plans to market a wide
range of portfolio services for third parties including, but not limited to,
collections, customer service, asset remarketing and litigation handling. The
Company's marketing team plans to target financial institutions seeking a
stronger, cost-effective servicing solution for improved portfolio performance.
THE LOAN PURCHASE PROCESS FROM DEALERS
The Company purchases Loans directly from Dealers and presently does not
make Loans directly to purchasers of automobiles. To be eligible for purchase by
the Company, a Loan must have been originated by a Dealer that entered into a
Dealer Agreement. When a retail automobile buyer elects to obtain financing from
a Dealer, the Dealer takes an application for submission to its financing
sources. Typically, a Dealer will submit the buyer's credit application to more
than one financing source for review. The Company believes that a Dealer's
decision to finance the automobile purchase with the Company, rather than with
other financing sources, is based upon the Company's relationship with the
Dealer, the Dealer's analysis of the discounted purchase price offered by the
Company for the Loan, any incentives offered to the Dealer, the timeliness,
consistency and predictability of the Company's response, and the Company's
ability to fund Loan purchases typically within 24 hours of receipt of all
required documentation.
Upon receipt of a credit application from a Dealer, the Company orders a
credit report on the borrower from one or more of the three major national
credit bureaus, "scores" the borrower's credit status using a scoring model and
verifies the borrower's employment, residence and automobile insurance history.
If a Company loan officer determines that the credit application meets the
Company's underwriting criteria subject to further information or with
modifications to the originally proposed Loan term, the Company may request and
review further information and supporting documentation before it decides to
purchase a Loan. When presented with a credit application, the Company typically
notifies the Dealer within 75 minutes whether or not it intends to purchase the
Loan. The discounted price the Company will offer to pay the Dealer for a
particular Loan generally varies based on the perceived credit-risk of the
potential borrower as determined through the credit underwriting process.
Typically, once an application is approved or, if approved conditionally,
upon fulfillment and receipt of required stipulations, including financing
documents, the Dealer assigns the Loan to the Company, the Company purchases the
Loan and then records its lien on the vehicle. The Company then commences
servicing the Loan.
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CREDIT UNDERWRITING AND ADMINISTRATION
Target Market and Consumer Profile
The Company seeks to identify customers with stable and predictable
incomes, whose payments will be made in a timely and consistent manner and who
fall into the "B-", "C+" and "C" credit borrower categories. A description of
the credit rating categories used by the Company is set forth below:
Category
"A" A consumer who has a long credit history with no defaults, has
been in the same job for at least 18 months and can easily finance
a new automobile purchase through a bank or captive finance
subsidiary of an automobile manufacturer.
"B" A Non-Prime Consumer who may have had some minor credit problems
in his or her past, or may not have been employed at his or her
current job for 18 months. To finance a new or late-model used
automobile, the "B" credit borrower may not qualify for a loan
from a bank, but may have success borrowing from a captive finance
subsidiary and can access credit through an independent finance
company.
"C" A Non-Prime Consumer who may have an inconsistent employment
record or more significant or unresolved problems with credit in
the past such as a personal bankruptcy. To finance a late-model or
older used automobile purchase, this borrower will generally not
qualify for a loan from a captive finance subsidiary or a bank and
must use an independent finance company.
"D" A consumer who has unfavorable employment history and serious
credit problems, such as multiple personal bankruptcies. This
borrower's only choice is to finance his or her used automobile
purchase, which is often from an independent as opposed to a
franchise dealer, through an independent finance company that is
active in this market segment.
The Company targets Non-Prime Consumers who previously established good
credit records but who have subsequently experienced non-repetitive credit
problems such as a personal bankruptcy due to illness, loss of employment or
poor cash management. The Company's target customer is generally anxious to
re-establish his or her credit and obtain transportation for employment.
Credit Evaluation Procedures
The Company applies uniform underwriting standards in purchasing Loans.
These standards have been developed and refined over the course of management's
years of experience in the non-prime automobile finance industry. The two most
important criteria the Company uses in evaluating a Loan are the applicant's
creditworthiness and the automobile's collateral value. Dealers submit all
customer credit applications to the Company's headquarters in Jacksonville,
Florida, for consideration. The Company utilizes a credit scoring system to
assist it in assessing a customer's creditworthiness. Among the factors taken
into account in this scoring system are an applicant's credit bureau score
(assigned by one of the major credit reporting bureaus to all persons with
credit histories), job and residential stability, the automobile payment as a
percentage of income, the year, make and model of automobile, a positive payment
history on other loans, an acceptable level of derogatory credit and the amount
of a customer's downpayment, which must be at least 10% of the purchase price of
the automobile. The Company's senior underwriting management regularly reviews
credit decisions made by the Company's Loan buyers to ensure uniformity in
underwriting standards.
In addition to the applicant's credit score, the Company considers
relevant information about the automobile to be purchased. The Company does not
finance automobiles that are more than five model years old or that have in
excess of 75,000 odometer miles. The maximum term of any Loan purchased by the
Company is 60 months; a shorter maximum term may be applied based on the year
and mileage of the
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automobile. These criteria are subject to change from time to time as
circumstances warrant. Each Loan must be secured by a first priority lien on the
automobile. In addition, each Loan requires the borrower to maintain physical
damage insurance covering the financed automobile. The Company may, nonetheless,
suffer a loss upon theft of or physical damage to any financed automobile if the
borrower fails to maintain insurance as required by the Loan and is unable to
pay for repairs to or replacement of the automobile or is otherwise unable to
fulfill his obligations under the Loan. The Company continues to enhance its
underwriting criteria in order to evaluate effectively the creditworthiness of
Non-Prime Consumers and the adequacy of the financed automobile as security for
a Loan. See Item 7 "Management's Discussion and Analysis of Financial Condition
and Results of Operations-Loan Loss and Delinquency Experience" for a numerical
analysis of the Company's Loan loss and delinquency experience.
Approval and Funding Statistics
During the year ended December 31, 1998, the Company reviewed 64,319
applications, of which 27% were approved or conditionally approved and 8% were
funded. Conditionally approved applications are applications by Non-Prime
Consumers whose underlying credit is generally acceptable to the Company but
with respect to which the Company requires a modification of terms (typically
monthly payment levels) prior to final credit approval.
Portfolio Acquisition Underwriting
The Company's Portfolio Acquisition Program seeks to establish on-going
relationships with Third-Party Originators from which the Company may purchase
select portions of their Loan portfolio. The Company considers the most
important factor in establishing such a relationship to be the Third-Party
Originator's underwriting criteria. The Company focuses on purchasing Loans from
a Third-Party Originator whose credit scoring and other underwriting guidelines
would produce borrowers whose credit characteristics match those of the
Company's Dealer-originated borrowers as closely as possible.
Management values each prospective Loan portfolio based on a pricing
model, which estimates the value of the loans in the portfolio given certain
assumptions (i.e., the discount to the face value of the Loan). The Company
normally acquires portfolios at a discount, although in some instances, because
of the high quality of the portfolio, it has paid face value for a portfolio.
Management does not generally pay the Third-Party Originator a premium for a
portfolio, although after costs such as brokerage fees, the Company's total
acquisition cost may slightly exceed the face value of the purchased Loans. The
Company's expenses necessary to generate Portfolio Acquisition Program Loans,
however, have been generally lower than those incurred to generate Loans through
Direct Dealer Originations or Strategic Alliances.
The Company currently is pursuing Portfolio Acquisition on a limited
basis. The volume of such acquisitions is expected to range from 10-20% of
overall anticipated Loan origination volume.
Contract Servicing and Administration; Collection Policy
Prior to July 1997, the Company contracted with an outside servicer to
perform all of the servicing functions relating to its Servicing Portfolio,
including collection, customer service and management information systems
("MIS") functions. In July 1997, the Company began a staged transition of the
daily management of its Servicing Portfolio from the outside servicer to its
in-house servicing and collection department.
On June 19, 1998, the Company converted its Servicing Portfolio computer
data from its outside servicer's computer systems to an internal system, the
Consumer Loan Asset Backed Security System ("CLASS") developed by BNI, Inc.
("BNI"). As a result, the Company is now performing all collection functions
with respect to its Servicing Portfolio. The CLASS system is composed of
separate modules integrating loan origination, loan servicing, operational
accounting, portfolio performance analysis and loan securitization functions.
The installation of the CLASS system is substantially complete, however, certain
key enhancements have not been implemented and several of the modules are still
not completed or fully functioning. The continuing delays in completing the
implementation of these modules and enhancements has had and may continue to
have a negative impact on the performance of the Loans for which the Company
performs servicing
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and collections (the "Servicing Portfolio"). See Note 12 of Notes to Financial
Statements - Related Party Transactions, for a discussion of relationships with
National Financial Companies LLC.
Although there can be no assurances, management believes the potential benefits
from maintaining in-house servicing and collection capabilities include: (i)
improved portfolio performance through self-management of all aspects of its
operations, and (ii) enhanced access to portfolio data, resulting in improved
management reporting and risk analysis.
Management Information Systems
As referred to above, the Company has installed CLASS. CLASS is consumer finance
software and hardware composed of separate modules integrating loan origination,
loan servicing, operational accounting, portfolio performance analysis and loan
securitization. The Company's computer systems provide the Company with the
ability to track all Loan details and identify trends among customers. This
information provides risk management analysis capabilities, thereby refining the
credit underwriting process and mitigating Loans purchased from unacceptably
higher risk customers. The CLASS software platform is year 2000 compliant.
SERVICING PORTFOLIO PROFILE
Loan Statistical Profile
The table below sets forth an analysis of Loans purchased by the Company
from inception through the dates specified. The Company has increased the number
of Loans in its portfolio since its inception while maintaining a consistent
profile of key Loan parameters.
<TABLE>
<CAPTION>
As of
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Dec. 31 Mar. 31 June 30, Sep. 30, Dec. 31, Mar. 31, Jun.30,
1995 1996 1996 1996 1996 1997 1997
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<S> <C> <C> <C> <C> <C> <C> <C>
Cumulative
number of
Loans
purchased....... 3,886 5,071 6,557 8,423 10,675 13,553 17,382
Cumulative
average
Loan
amount
funded (in
thousands)...... $12,121 $12,023 $11,942 $11,913 $11,999 $12,026 $11,826
Weighted
average
initial
annual
percentage
rate............ 18.31% 18.41% 18.50% 18.63% 18.67% 18.80% 18.97%
Weighted
average
initial
term
(months)........ 52.5 52.0 53.6 53.7 51.7 53.6 53.3
Cumulative
average
initial
yield........... 21.45% 21.50% 21.68% 21.75% 21.80% 21.51% 21.25%
<CAPTION>
As of
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Sep. 30, Dec. 31, Mar 31, June 30, Sep 30, Dec 31
1997 1997 1998 1998 1998 1998
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Cumulative
number of
Loans
purchased....... 21,589 26,078 30,165 32,741 33,054 33,466
Cumulative
average
Loan
amount
funded (in
thousands)...... $11,842 $11,925 $11,882 $11,974 $11,986 $11,996
Weighted
average
initial
annual
percentage
rate............ 19.04% 19.01% 19.05% 19.01% 19.09% 19.09%
Weighted
average
initial
term
(months)........ 53.3 53.4 53.4 54.1 54.7 54.8
Cumulative
average
initial
yield........... 21.06% 20.87% 20.77% 20.77% 20.79% 20.81%
</TABLE>
The weighted average initial annual percentage rate has increased over the
periods shown relative to changes in the product mix offered by the Company and
the states where these products are offered. Different states allow for varying
percentage rates. The cumulative average initial yield has decreased over the
periods shown relative to changes in the product mix offered by the Company.
Certain of the Company's products have historically carried varying degrees of
dealer discount which has impacted the yield as shown.
New vs. Used Automobile Loans
The Company prefers to finance used automobiles because of the significant
depreciation on new automobiles relative to used automobiles, which has a
disproportionately negative impact on recoveries if a new automobile is
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repossessed, and because the Company is permitted to charge higher interest
rates under certain state laws on used automobile Loans. The following table
illustrates the composition of the new and used automobile collateral
represented in the Servicing Portfolio:
<TABLE>
<CAPTION>
(as of December 31, 1998)
------------------------------------------------
Percentage
Percentage of Total
of Total Number Number
Principal Principal of of
Balance Balance Loans Loans
------- ------- ----- -----
(in thousands)
<S> <C> <C> <C> <C>
New............... $ 49,498 23.37% 4,017 18.42%
Used.............. 162,314 76.63% 17,778 81.58%
--------- ------- ------ -------
Total......... $ 211,812 100.00% 21,795 100.00%
========= ======= ====== =======
</TABLE>
Geographic Distribution of Loans
As of December 31, 1998, the Company purchased Loans originated from
Dealers in 44 states and the aggregate Loan balance of the six states having the
largest concentrations of business of the Company totaled 76% of the Servicing
Portfolio compared to 71% of the Servicing Portfolio as of December 31, 1997. In
1999, the Company intends to focus primarily on increasing its volume of
business in the states in which it currently operates.
The list below indicates the geographic distribution of Loans outstanding
as of December 31, 1998 based upon the location of the Dealer originating the
Loan:
<TABLE>
<CAPTION>
Principal Percentage of Number of
Balance Principal Balance Active Loans
------- ----------------- ------------
<S> <C> <C> <C>
Georgia................................... $ 48,487 22.89% 5,030
North Carolina............................ 40,486 19.11 3,925
California................................ 20,985 9.91 2,161
Texas..................................... 17,726 8.37 1,572
South Carolina............................ 16,555 7.82 1,706
Florida................................... 16,054 7.58 2,000
Virginia.................................. 9,677 4.57 1,019
Tennessee................................. 7,663 3.62 701
Maryland.................................. 5,559 2.62 522
Illinois.................................. 4,563 2.15 414
All other states (1)...................... 23,931 14.44 2,745
-------- ------ -------
Total................................ $211,686 100.00% 21,795
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</TABLE>
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(1) No state other than those listed represents more than 2% of the Servicing
Portfolio.
SECURITIZATION PROGRAM
The Company currently funds its purchases of Loans primarily through a
two-step asset securitization program consisting of (i) the securitized
warehousing of all of its Loans through daily sales (the "Revolving
Securitization") to a bankruptcy-remote master trust (the "Master Trust")
financed by a revolving credit facility with First Union ("Master Securitization
Credit Facility"), 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 renewed availability of capital from the
Master Trust.
Specifically, using the Revolving Securitization, the Company sells Loans
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
- 9 -
<PAGE> 10
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 in connection with its role as
lender under the Master Securitization Credit Facility. See Note 12 of Notes to
Financial Statements, Related Party Transactions, for a discussion of
relationships with First Union, and Note 13 of Notes to Financial Statements for
a discussion of Subsequent Events. Collectively, the restricted cash account and
the Class C Certificate portion of Loan principal that collateralize the Master
Trust are components of the Company's cash spread accounts ("Cash Spread
Accounts"), over-collateralization accounts ("Over-Collateralization Accounts")
and excess spread receivables ("Excess Spread Receivables" or "ESRs") reflected
cumulatively on the balance sheet as Retained Interest in Securitizations.
Since the Company's inception through March 31, 1999, the Master Trust has
transferred an aggregate of $277.4 million of its receivables through Permanent
Securitizations effected pursuant to one private placement and three public
offerings of asset-backed securities. Payment of principal and interest on
$252.4 million of the securities issued in such transactions is insured by
payment guarantees issued by Financial Security Assurance Inc. ("FSA"), and such
securities are rated AAA and Aaa by Standard and Poor's Rating Group ("S&P") and
Moody's Investors Service ("Moody's"), respectively. The proceeds of each
Permanent Securitization transaction were applied by the Master Trust to repay
the 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's securitization program requires
additional Permanent Securitizations (or other forms of refinancing) to be
consummated in the future in order to periodically refinance amounts outstanding
under such Class B Certificates.
The Company has acted as master servicer for the Loans sold to each of the
trusts (the "Securitization Trusts") formed as a result of the Permanent
Securitization transitions mentioned above. As master servicer the Company is
eligible to receive monthly fees at base rates of 2.0% per annum from the
Permanent Securitization Trusts and 4.0% per annum from the Master Trust, plus
certain late fees and prepayment charges received on the Loans sold to the
Permanent Securitization Trusts (the "Securitized Loans"). All collection
functions with respect to the Loans included in the Master Trust and the
Permanent Securitization trusts are performed by the Company. Historically, the
Company's Permanent Securitizations have been credit enhanced by Financial
Security Assurance Inc. ("FSA"), the financial guaranty insurer. The insurance
agreements generally provide that the Company is not entitled to receive excess
cash flows unless the performance of the Loans in the pool meets certain
requirements.
The Company relies in large part on cash flows from the Master Trust to
support its operations. Since the Master Trust's interest rates under the
Revolving Securitization are floating and the interest rates charged on the
Loans (which are generally at or near the maximum rates permitted by applicable
state laws) are fixed, increases in the interest rates incurred with respect to
the Class B Certificates could have a material adverse effect both on cash flows
from the Master Trust and on the Company's profitability, thereby adversely
affecting the Company's financial condition and results of operations. In order
to mitigate the negative impact of rising interest rates, the Master Trust has
entered into interest rate swap agreements covering at least 60% of the
outstanding principal, which have the effect of fixing the rates charged on a
portion of the Master Trust's indebtedness. Although these agreements provide
the Master Trust (and therefore the Company) some protection against rising
interest rates, these agreements also reduce the benefits to the Master Trust
(and therefore to the Company) when interest rates decline below the rates set
forth in such agreements. In addition, upon refinancing of Loans through
Permanent Securitizations, the interest spread with respect to such refinanced
Loans may be fixed.
- 10 -
<PAGE> 11
FLOW CHART OF TWO-STEP SECURITIZATION PROGRAM
The diagram below (which omits certain intermediate steps) generally
illustrates the Company's securitization of a Loan:
[FLOW CHART]
- 11 -
<PAGE> 12
COMPETITION
The Non-Prime Consumer credit market is highly fragmented, consisting of a
few national and many regional and local competitors. Existing and potential
competitors include well-established financial institutions, such as consumer
finance companies, commercial banks, insurance companies, credit unions, savings
and loan associations, small loan companies, leasing companies and captive
finance companies owned by automobile manufacturers and others. Many of these
financial institutions do not consistently solicit business in the Non-Prime
Consumer credit market. The Company believes that captive finance companies
generally focus on new car financing and direct their marketing efforts to the
Non-Prime Consumer market only when inventory control and/or production
scheduling requirements of their parent organization dictate a need to enhance
sales volumes, and then exit the market once such sales volumes are satisfied.
Recently, however, two major captive finance companies have established
Non-Prime Consumer finance companies. The Company also believes that regulatory
oversight and capital requirements imposed by governmental agencies have limited
the activities of many banks and savings and loan associations in the Non-Prime
Consumer credit market. As a result, the Non-Prime Consumer credit market is
primarily serviced by smaller finance companies that solicit business when and
as their capital resources permit. Due to the lack of major, consistent
financing sources and the absence of significant barriers to entry, many
companies have entered this market in recent years, including well-capitalized
public companies.
The Company believes that no one competitor or group of competitors has a
dominant presence in the Non-Prime Consumer market segment of "B-," "C+" and "C"
credit consumers. The Company's strategy is designed to capitalize on the lack
of a major national financing source in this market niche.
REGULATION
The Company's business is subject to regulation and licensing under
various federal, state and local statutes and regulations. As of December 31,
1998, the Company had contractual relationships with Dealers located in 35
states and, accordingly, the laws and regulations of such states govern the
Company's operations. Most states in which the Company purchases Loans (i) limit
the interest rate, fees and other charges that may be imposed by, or prescribe
certain other terms of, the Loans that the Company purchases and (ii) define the
Company's right to repossess and sell collateral. In addition, the Company is
required to be licensed or registered to conduct its business operations in 19
of the 35 states in which the Company has contractual relationships with Dealers
and Third-Party Originators. As the Company expands its operations into other
states, it will be required to comply with the laws of such states.
Numerous federal and state consumer protection laws and related
regulations impose substantive disclosure requirements upon lenders and
servicers involved in automobile financing. Such federal laws and regulations
include the Truth-in-Lending Act and Regulation Z, promulgated thereunder by the
Federal Reserve Board, the Equal Credit Opportunity Act and Regulation B, also
promulgated thereunder by the Federal Reserve Board, the Federal Trade
Commission Act, the Fair Credit Reporting Act, the Federal Fair Debt Collection
Practices Act and similar state collection acts, the Magnuson-Moss Warranty Act,
and the Soldiers' and Sailors' Civil Relief Act.
In addition, the Federal Trade Commission ("FTC") has adopted a limitation
on the holder-in-due-course rule which may have the effect of subjecting persons
who finance consumer credit transactions (and certain related lenders and their
assignees) to all claims and defenses that the purchaser could assert against
the seller of the goods and services. With respect to used automobiles
specifically, the FTC's Rule on Sale of Used Vehicles requires that all sellers
of used automobiles prepare, complete and display a Buyer's Guide that explains
the warranty coverage for such automobiles. The Credit Practices Rules of the
FTC impose additional restrictions on sales contract provisions and credit
practices.
Certain states in which the Company operates have adopted automobile
retail installment sale acts or variations thereof. Certain states have adopted
the Uniform Consumer Credit Code, subject to certain variations. This law and
similar laws in the other states in which the Company purchases Loans regulate,
among other things, the interest rate, fees and other charges and terms and
conditions of such Loans. These laws also impose restrictions on consumer
transactions and require disclosures in addition to those required under federal
law. These requirements impose specific statutory liabilities upon creditors who
fail to comply with such laws and regulations. In addition, certain states
impose plain-language restrictions and disclosure requirements on the textual
provisions of automobile retail installment sales contracts and related
documents in the context of consumer credit transactions. Furthermore, certain
states or municipalities require that a creditor provide a purchaser of an
automobile with a foreign-language translation of the entire motor vehicle
retail installment sale contract if the contract was negotiated in a language
other than English. The
- 12 -
<PAGE> 13
plain-language and foreign-language laws impose specific liabilities on
creditors who fail to comply with such requirements.
The laws of certain states grant to the purchasers of automobiles certain
rights of rescission under so-called "lemon laws". Under such statutes,
purchasers of automobiles seek recoveries from, or assert defenses against, the
Company if such laws have been violated.
In the event of default by an obligor, the Company possesses all the
remedies of a secured party under the respective state variation of the Uniform
Commercial Code ("UCC"), except where specifically limited by other state laws.
The remedies of a secured party under the UCC include the right to repossession
by self-help means, unless such means would constitute a breach of the peace. In
the event of default by the obligor, some jurisdictions require that the obligor
be notified and be given time in which to cure the default prior to
repossession. In addition, courts have applied general equitable principles to
secured parties pursuing repossession or litigation involving deficiency
balances.
The UCC and other state laws require a secured party who has repossessed
collateral to provide an obligor with reasonable notice of the date, time and
place of any public sale and/or the date after which any private sale of the
collateral may be held. The obligor has the right to redeem the collateral prior
to actual sale.
The proceeds from the resale of financed automobiles generally will be
applied first to the expenses of repossession and resale and then to the
satisfaction of the Loan. A deficiency judgment can be sought in most states
subject to satisfaction of statutory procedural requirements by the secured
party and certain limitations as to the initial sale price of the automobile.
Certain state laws require the secured party to remit the surplus to any holder
of a subordinate lien with respect to the automobiles or, if no such lienholder
exists, the UCC requires the secured party to remit the surplus to the former
owner of the financed automobile.
In addition to laws limiting or prohibiting deficiency judgments, numerous
other statutory provisions, including federal bankruptcy laws and related state
laws, may interfere with or affect the ability of the Company to recover
collateral or enforce a deficiency judgment.
The Company believes that it is in substantial compliance with all
applicable material laws and regulations. Adverse changes in the laws or
regulations to which the Company's business is subject, or in the interpretation
thereof, could have a material adverse effect on the Company's business. Because
the Company generally charges the highest finance charges permitted by law,
reductions in statutory maximum rates could directly impair the Company's
profitability.
EMPLOYEES
At December 31, 1998, the Company had 159 full and part-time employees in
the following areas: executive/administration (11), sales (18), finance (11),
originations (23), MIS (5) and servicing (91), none of whom was represented by a
union.
ITEM 2. PROPERTIES.
The Company's principal executive offices, where all Loan origination,
servicing and collection functions are conducted and managed, are located at
10302 Deerwood Park Boulevard, Suite 100, Jacksonville, Florida 32256. The
Company currently leases approximately 44,000 square feet of office space at
that location. During 1998, the Company completed the relocation of its
corporate and administrative and Loan origination functions from its former Boca
Raton, Florida location to the current site. The Company believes its properties
are adequate for its currently anticipated future growth.
ITEM 3. 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 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.
Platintiffs' allegations of liability are based on various theories of recovery,
including alleged violations of Sections 11, 12(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.
- 13 -
<PAGE> 14
Plaintiffs are seeking compensatory damages, as the court deems appropriate. See
Form 8-K filed with the Securities and Exchange Commission on November 16, 1998.
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 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. Plaintiffs' allegations of liability are based on
various theories of recovery, including alleged violations of Sections 11,
12(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. Plaintiffs
are seeking compensatory damages, as the court deems appropriate.
Both the Peckerman and Rooks complaints focus on 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.
On February 5, 1999, the United States District Court for the Southern
District of Florida ordered that these actions be consolidated. It is
anticipated that the Plaintiffs will file a consolidated class action complaint
styled In re National Auto Finance Company, Inc. Securities Litigation. Since
the consolidated class action complaint has not yet been filed, the Company is
presently unable to assess the merits of the claims or determine whether the
Company or plaintiffs will attempt to add additional parties or claims.
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 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.
The Company has directors' and officers' liability insurance policies that
apply to this litigation with a liability limit of $5 million; 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.
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS.
No matters were submitted during 1998 to a vote of security holders,
through the solicitation of proxies or otherwise.
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<PAGE> 15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(a) Market Information.
In connection with the initial public offering (the "Initial Public
Offering") of the Company's Common Stock, par value $.01 per share (the "Common
Stock"), in January 1997, the Common Stock was accepted for quotation in the
National Association of Securities Dealers Automated Quotation System - National
Market System ("NASDAQ-NMS"), under the symbol "NAFI."
On August 12, 1998, NASDAQ advised the Company that unless the closing bid
price of the Company's Common Stock allowed for the maintenance of a greater
than $5 million public float, for at least 10 consecutive trading days during
the period ending on November 13, 1998, the Company's Common Stock would be
delisted on November 17, 1998. Further, on September 2, 1998, NASDAQ advised the
Company that if the Company's Common Stock did not trade at a minimum bid price
of $1.00 for a minimum of ten consecutive trading days, by December 1, 1998, the
Company's Common Stock would be delisted on December 3, 1998. Such delisting was
delayed until January 21, 1999, when the Company appeared before the NASDAQ
Listing Qualifications Panel ("Panel") to permit the Company the opportunity to
provide details of its business plan and restructuring, in furtherance of a
request for additional time to enable the Company to reestablish compliance with
the NASDAQ listing requirements. The Company was notified on March 9, 1999 of
the Panel's determination to delist the Company's Common Stock securities from
NASDAQ effective as of the close of business on March 9, 1999. The delisted
Common Stock shares were immediately eligible for trading on the OTC Bulletin
Board and so trade today.
Set forth below is the range of high and low bid quotations reported in
NASDAQ-NMS for the period from January 30, 1997 (the date on which trading
commenced) through and including December 31, 1998:
<TABLE>
<CAPTION>
Common Stock Market Prices
-------------------------------------------------
1998 1st Q 2nd Q 3rd Q 4th Q
----- ----- ----- -----
<S> <C> <C> <C> <C>
High $ 4.25 $ 3.38 $ 1.13 $ 0.31
Low 2.00 0.75 0.25 0.06
</TABLE>
<TABLE>
<CAPTION>
1997 1st Q* 2nd Q 3rd Q 4th Q
----- ----- ----- -----
<S> <C> <C> <C> <C>
High $ 9.88 $ 7.63 $ 7.50 $ 7.50
Low $ 7.00 $ 5.50 $ 6.13 $ 2.38
</TABLE>
*January 30 - March 31, 1997
(b) Holders.
As of April 15, 1999, there were approximately 33 registered holders of
the Common Stock.
(c) Dividends.
The Company has never paid cash dividends on its Common Stock and
currently has no intention of paying cash dividends on the Common Stock.
Pursuant to the Securities Purchase Agreement dated December 22, 1997, by and
among the Company, The 1818 Mezzanine Fund, L.P, P.C. Investment Company,
Progressive Investment Company, Inc. and Manufacturers Life Insurance Company
(U.S.A.), as amended (the "December 1997 Securities Purchase Agreement"), and
the Securities Purchase Agreement dated March 22, 1998, by and between the
Company and The Structured Finance High Yield Fund L.L.C. (the "March 1998
Securities Purchase Agreement" and collectively, with the December 1997
Securities Purchase Agreement, the "Securities Purchase Agreements"), the
Company's ability to pay dividends in excess of $250,000 to holders of the
Company's Common Stock in any twelve-month period is restricted.
(d) Recent sales of unregistered securities.
On April 7, 1999, pursuant to the Company's Restructuring (see Note 13 of
the Notes to Financial Statements - Subsequent Events), 7,071,429 shares of
Common Stock were issued to the Senior Subordinated Noteholders as consideration
for waivers and amendments granted to the Company, and 1,178,571 additional
shares of Common Stock
- 15 -
<PAGE> 16
were issued to those Noteholders that also purchased Common Stock of the Company
at the time of their debt investment, in exchange for the execution and delivery
of full and complete releases of any claims arising by virtue of those
Noteholders' equity investment. ITEM 6. SELECTED FINANCIAL DATA.
The income statement data for the years ended December 31, 1998, 1997, 1996,
1995 and 1994 and the balance sheet data as of December 31, 1998, 1997, 1996,
1995 and 1994 are derived from, and are qualified by reference to, the audited
financial statements of the Company (and from inception through January 29,
1997, it's predecessor). The following financial information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Business" and the Financial Statements and notes
thereto included elsewhere in this Form 10-K.
(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.)
- 16 -
<PAGE> 17
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996 1995 1994
--------- --------- -------- --------- ------
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Securitization related income (loss) $ (13,531) $ 323 $ 13,564 $ 7,367 (1) $ -
Servicing income 6,424 3,437 866 219 -
Interest income 2,399 817 258 11 32
Other income 377 214 103 214 (3) 95
--------- --------- -------- --------- ------
Total revenue (4,331) 4,145 14,791 7,811 127
--------- --------- -------- --------- ------
Servicing expenses 6,262 5,944 1,291 371 6
Interest expense 8,417 1,638 1,204 498 78
Salaries and employee benefits 7,705 6,346 3,634 1,666 223
Direct loan acquisition expenses 1,520 3,591 1,924 (2) 562 (2) 22
Depreciation and amortization 802 743 492 183 7 (3)
Other operating expenses 4,544 3,602 1,755 (2) 1,250 (2) 266
--------- --------- -------- --------- ------
Total expenses 29,250 21,864 10,300 4,530 602
--------- --------- -------- --------- ------
Income (loss) before income taxes and
extraordinary item (33,581) (17,719) 4,491 3,281 (475)
Income taxes - - - - -
--------- --------- -------- --------- ------
Income (loss) before extraordinary item (33,581) (17,719) 4,491 3,281 (475)
Extraordinary loss (4) - (720) - - -
--------- --------- -------- --------- ------
Net income before preferred stock dividends (33,581) (18,439) 4,491 3,281 (475)
Preferred stock dividends (160) (148) - - -
--------- --------- -------- --------- ------
Net income (loss) available for common
stockholders $ (33,741) $ (18,587) $ 4,491 $ 3,281 $ (475)
========= ========= ======== ========= ======
PER SHARE DATA:
Loss per common share before extraordinary $ (3.73) $ (2.52)
item -- basic and diluted
Extraordinary item - (0.10)
========= =========
Loss per common share -- basic and diluted $ (3.73) $ (2.62)
========= =========
Weighted average shares outstanding -
basic and diluted 9,031,000 7,087,000
PRO FORMA SHARE DATA (UNAUDITED):
Income (loss) before income taxes $ - $ - $ 4,491 $ 3,281 $ (475)
Income taxes - - 1,689 1,066 -
--------- --------- -------- --------- ------
Pro Forma net income $ - $ - $ 2,802 $ 2,215 $ (475)
========= ========= ======== ========= ======
PRO FORMA NET INCOME PER SHARE:
Basic and diluted $ - $ - $ 0.66 $ 0.52 (5) (0.11)
========= ========= ======== ========= ======
PRO FORMA WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING (6)
Basic and diluted - - 4,230 4,230 4,230
========= ========= ======== ========= ======
</TABLE>
- 17 -
<PAGE> 18
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash $ 9,540 $ 26,647 $ 5,066 $ 824 $ 1,590
Retained interest in securitizations 34,117 31,569 23,404 10,313 25
Total assets 50,732 64,875 31,201 12,003 5,800
Senior Subordinated Notes 53,578 34,546 12,000 -- --
Junior Subordinated Notes 1,940 1,940 7,122 7,457 5,324
Total debt 55,518 36,486 19,122 7,457 5,324
Total liabilities 59,096 41,581 21,650 8,556 5,775
Mandatorily Redeemable Preferred Stock 2,415 2,336 -- -- --
Partners' preferred equity -- -- 2,295 482 48
Partners' equity -- -- 7,256 2,965 (23)
Stockholders' equity (capital deficit) $ (10,779) $ 20,958 $ -- $ -- $ --
OTHER DATA:
Number of loans purchased during year 7,388 15,403 6,789 3,586 300
Principal balance of Loans purchased
during year $ 95,911 $ 187,383 $ 84,981 $ 45,972 $ 3,820
Cumulative number of loans purchased 33,466 26,078 10,675 3,886 300
Cumulative principal balance of Loans
purchased $ 415,709 $ 322,156 $ 134,773 $ 49,792 $ 3,820
Number of outstanding Loans at end of
year 21,795 20,886 9,063 3,586 300
Principal balance of the Servicing
Portfolio
at end of year $ 211,686 $ 226,846 $ 102,852 $ 43,145 $ 3,800
Delinquencies as a percentage of the
Servicing Portfolio (7) 7.65% 9.75% 7.95% 5.45% 0.00%
Repossession inventory as a percentage
of the Servicing Portfolio (8) 1.74% 2.18% 2.20% 1.28% 0.00%
Net chargeoffs during the year
as a percentage of the
average Servicing Portfolio (9) 7.85% 6.34% 4.17% 2.76% 0.00%
</TABLE>
(1) Includes $639,000 of gains on sales of Loans purchased between October 12,
1994 and January 16, 1995 and sold to the Master Trust on January 16,
1995.
(2) Expenses relating to originating a Loan such as Dealer incentive payments,
travel and entertainment costs for the Dealer Relation Managers,
advertising and printing costs for Loan documents and Dealer manuals have
been reclassified as direct loan acquisition expenses from other operating
expenses to conform with current year presentation.
(3) Other income in 1995 and other expenses in 1994 include a $182,000 loan
loss provision, representing 5.0% of the $3.6 million of Loans funded
during the three months ended December 31, 1994. The reserve was reversed
when the Loans were sold to the Master Trust on January 15, 1995.
Subsequently, the Master Trust accounts for all reserves as Loans are sold
to the trust on a daily basis.
(4) Extraordinary item due to early extinguishment of $12,000,000 aggregate
principal amount of Senior Subordinated Notes (the "Morgan Notes") held by
certain trusts and accounts managed by Morgan Guaranty and Trust Company
of New York in December 1997.
- 18 -
<PAGE> 19
(5) Includes approximately $0.15 per share attributable to gain on sales of
Loans purchased between October 12, 1994 and January 16, 1995, sold to the
Master Trust on January 16, 1995.
(6) Shares outstanding are pro forma for all periods other than the years
ended December 31, 1998 and 1997. The number of shares utilized represents
the number of shares granted to the Company's predecessor, National Auto
Finance Company LP in conjunction with the Reorganization (as defined
herein) and Initial Public Offering on January 29, 1997.
(7) Represents the principal amount of Loans more than 30 days past due as a
percentage of the principal balance of the Servicing Portfolio at end of
period.
(8) Represents the outstanding principal balance of Loans in respect of
financed automobiles that were repossessed by the Company and were held as
inventory at end of period as a percentage of the Servicing Portfolio at
end of period.
(9) Net charge-off includes the remaining principal balance of Loans written
off, after the application of the net proceeds from the liquidation of the
repossessed automobiles.
- 19 -
<PAGE> 20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following management's discussion and analysis should be read in
conjunction with the preceding "Selected Financial Data" and the Company's
Financial Statements and the notes thereto and the other financial data included
elsewhere in this Annual Report on Form 10-K. 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 under Item 8 of this Annual Report on Form 10-K.
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. In January 1997, the Company adopted Statement of Financial
Accounting Standards No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities" ("SFAS No. 125"). Since
then, the Company has undertaken a continuing process of refining the
assumptions and methodologies used to measure the estimated fair value of its
Retained Interest in Securitizations based upon the historical performance of
its Loan portfolio. Most recently, this process of refinement has resulted in
changes to certain assumptions previously employed in each of the first three
quarters of fiscal 1998. Specifically, the Company has increased the cumulative
net loss estimate from 12.88% applied during and as of the first three quarters
of fiscal year 1998 to 14.00% during and as of the fourth quarter ended December
31, 1998. The increase in the cumulative net loss estimate results primarily
from an increase in default rates expected to be experienced over the life of
the Loans, lower expected recovery rates on the underlying collateral and
changes in prepayment speeds, compared to the rates of such items estimated in
earlier periods. 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. Recent performance trends indicate the negative impact of the immediate
post conversion period has reversed and stabilized. These changes in assumptions
and methodologies are a significant factor in the loss incurred by the Company
for the year ended December 31, 1998. 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 3 of the Notes to Financial Statements
- - Retained Interest in Securitizations.
- 20 -
<PAGE> 21
The table below sets forth certain information relating to the Company's Loan
purchasing activities:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1998 1997 1996
--------- --------- ---------
(dollars in thousands, except number of loans)
<S> <C> <C> <C>
Number of Loans purchased ............................. 7,388 15,403 6,789
Principal balance of Loans purchased .................. $ 95,911 $ 187,383 $ 84,981
Principal amount of Loans funded (1) .................. 90,490 182,900 80,956
Securitization related income (loss), net of
writedown of retained interest in
securitizations ................................. (13,531) (323) 13,564
Servicing income ...................................... 6,424 3,437 866
</TABLE>
- ------------------------
(1) Amount funded represents the price at which the Company purchases a Loan
from a Dealer or Third-Party Originator (i.e., the amount actually paid to
a Dealer or Third-Party Originator), calculated as the principal of the
Loan purchased less the Dealer Discount.
RESULTS OF OPERATIONS
The Company reported a net loss available for common stockholders of $33.8
million for the year ended December 31, 1998, compared to a $18.6 million net
loss for the year ended December 31, 1997 and $2.8 million of net income
(including the pro forma impact of income taxes of $1.7 million) for the year
ended December 31, 1996. The net loss in 1998 is primarily the result of: (a)
the impact of changes in assumptions relating to the calculation of gain on sale
of loans and the valuation of Retained Interest in Securitizations, including an
increased cumulative net loss estimate from 12.88% applied during and as of the
first three quarters of fiscal year 1998 to 14.00% during and as of the fourth
quarter ended December 31, 1998; and (b) start-up and duplicative expenses,
associated with the Company's transition from an outside servicer to in-house
servicing, including the opening of its service center in Jacksonville, Florida.
The loss in 1997 is primarily the result of: (a) the impact of changes in
assumptions relating to the calculation of gain on sale of loans and the
valuation of Retained Interest in Securitizations, including an increase in
estimated cumulative net losses from 7% in 1996 to 12.88% in 1997 and an
increase in the discount rate applied to present value the Company's Retained
Interest in Securitizations from 11% in 1996 to 14% in 1997; (b) the present
valuing at December 31, 1997, in conjunction with the implementation of SFAS No.
125 on January 1, 1997, of the Company's Spread Accounts, that include the Cash
Spread Accounts and Over-Collateralization Accounts and is a component of the
Company's Retained Interest in Securitizations; (c) start-up and duplicative
expenses in the aggregate amount of $2.6 million in 1997, associated with the
Company's transition from an outside servicer to in-house servicing, including
the opening of a 44,000-square-foot service center in Jacksonville, Florida; (d)
the expensing in 1997 of $720,000 relating to the early extinguishment of
certain senior subordinated debt; and (e) the expensing in 1997 of $700,000
relating to the modification of certain terms of payment guarantee agreements
with the Company's securitized trusts insurer.
Securitization Related Income (Loss)
For the year ended December 31, 1998, the Company recognized a net
securitization-related loss of $13.5 million due to a $23.1 million writedown of
Retained Interest in Securitizations resulting from the reasons described in
"Overall-Revenues" above. The Company's Loan purchasing decreased significantly
during the year ended December 31, 1998, compared to the year ended December 31,
1997. During much of 1998, the Company curtailed its loan originations in order
to preserve its cash while undertaking a comprehensive financial restructuring.
The Company purchased 7,388 Loans, having a principal balance of $95.9 million,
during the year ended December 31, 1998, compared to 15,403 Loans, having a
principal balance of $187.4 million, for the year ended December 31, 1997 and
6,789 Loans having a principal balance of $85.0 million for the year ended
December 31, 1996. These Loan purchases consisted of 5,348 Loans purchased from
Dealers ($74.6 million principal balance) and 2,029 Loans purchased from
Third-Party Originators ($21.3 million principal balance) during the year ended
December 31, 1998. This compares to 10,354 Loans purchased from Dealers ($140.9
million principal balance) and 5,049 Loans purchased from Third-Party
Originators
- 21 -
<PAGE> 22
($46.5 million principal balance) during the year ended December 31, 1997 and
6,324 Loans purchased from Dealers ($80.2 million principal balance) during the
year ended December 31, 1996.
The Company's gain on sale model includes an estimated cumulative net loss
factor with respect to the Loans securitized. Significant changes in such
cumulative net loss estimate will result in adjustments to the carrying value of
Retained Interest in Securitizations. In 1998, the servicing of the Company's
Servicing Portfolio experienced significant disruption resulting from the
conversion from an external servicing system to an internal servicing system on
June 19, 1998. The Company believes that the conversion and resulting servicing
disruption is largely responsible for the increase in delinquency and net loss
experience of the Servicing Portfolio throughout the year ended December 31,
1998. In response thereto, the Company's estimates for Loan loss factor was
increased from 12.88% applied during and as of the first three quarters of
fiscal year 1998 to 14.00% during and as of the fourth quarter ended December
31, 1998. The Company initiated servicing for Loans more than 30 days past due
in July 1997, and initiated servicing of the entire Servicing Portfolio on
October 1, 1997. See discussion of delinquency rates under "Loan Loss and
Delinquency Experience".
In 1997, the Company experienced significant servicing and collection problems
with the Servicing Portfolio, which the Company believes resulted primarily from
deficiencies in the servicing and collection performance of its outside
servicer. The Company believes that these performance deficiencies are largely
responsible for the increase in delinquency and net loss experience of the
Servicing Portfolio throughout the year ended December 31, 1997. In response
thereto, the Company's estimates for Loan losses were increased to 12.0% as of
October 1, 1997, and 12.88% as of December 31, 1997, compared to 7.0% for the
year ended December 31, 1996.
Servicing Income
The Company receives a servicing fee in cash of approximately 4.0% of the
principal amount of the Loans sold to the Master Trust and 2.0% for the
principal amount of the Loans subsequently sold to the Permanent
Securitizations, which typically offsets actual servicing expenses incurred by
the Company. This income is recognized when earned. Servicing income for the
years ended December 31, 1998, 1997 and 1996 was $6.4 million, $3.4 million and
$866,000, respectively. The growth in servicing income during 1998 was
attributable to the outstanding Servicing Portfolio balances during the year
ended December 31, 1998. A higher concentration of the outstanding balances were
held in the Master Trust during the year ended December 31, 1998 as compared to
the year ended December 31, 1997. The Master Trust earns servicing income fees
at a rate double that of other Trusts.
Other Income
Other income consists of interest income on cash investments (including
the Cash Spread Accounts), other income and finance charges earned. The other
income for the years ended December 31, 1998, 1997 and 1996 was $2.8 million,
$1.0 million and $361,000, respectively. The increase in other income in 1998
was primarily attributable to interest earned on the outstanding cash spread
account balances and operating cash invested in money market accounts.
Total Expenses
The Company reported total expenses for the years ended December 31, 1998,
1997 and 1996 of $29.3 million, $21.9 million and $10.3 million, respectively.
These expenses consisted primarily of interest expense on long-term
indebtedness, including the Company's Senior Subordinated Notes, salaries and
employee benefits, servicing expenses and direct Loan acquisition expenses.
Total expenses, as a percentage of the average principal balance of the
Servicing Portfolio, decreased from 13.7% as of December 31, 1997 to 13.1% as of
December 31, 1998.
Total servicing expenses for the years ended December 31, 1998, 1997 and
1996 were $6.3 million, $5.9 million and $1.3 million, respectively. Servicing
costs consisted primarily of a combination of internal servicing expenses and
external fees to an outside servicer for each Loan not serviced internally on
the Company's servicing system. Additionally, the Company incurred the cost of
vendor's single interest ("VSI") insurance maintained by the Company. The
Company's Servicing Portfolio grew from a $102.9 million Servicing Portfolio,
representing 3,586 outstanding loans as of December 31, 1996, to a $226.8
million Servicing Portfolio, representing 20,886 outstanding Loans, as of
December 31, 1997, and a $211.8 million Servicing Portfolio, representing 21,795
outstanding Loans, as of December 31, 1998.
- 22 -
<PAGE> 23
Interest expense for the years ended December 31, 1998, 1997 and 1996 was
$8.4 million, $1.6 million and $1.2 million, respectively. The increase in
interest expense for each year resulted from the increasing outstanding
long-term debt balances of the Company, including in particular the Senior
Subordinated Notes.
Salaries and employee benefits for the years ended December 31, 1998, 1997
and 1996 were approximately $7.7 million, $6.3 million and $3.6 million,
respectively. The increase in each of the years resulted from the increase in
the number of full-time employees, from 67 as of December 31, 1996, to 90 as of
December 31, 1997, and to 159 as of December 31, 1998. The increase in the
number of employees resulted from the growth in the volume of Loans purchased
and serviced by the Company. These expenses consisted primarily of salaries and
wages, performance incentives, employee benefits and payroll taxes. The Company
expects that its number of full-time employees will continue to increase
commensurate with the growth of the Company.
Direct Loan acquisition expenses for the years ended December 31, 1998,
1997 and 1996 were $1.5 million, $3.6 million and $1.9 million, respectively.
These expenses consisted primarily of Dealer incentive payments, fees paid to
Strategic Alliance partners, broker fees, credit information fees and telephone
expenses. The expenses declined primarily as a result of the decrease in the
volume of Loans acquired by the Company for the year ended December 31, 1998 as
compared to the year ended December 31, 1997.
Other operating expenses for the years ended December 31, 1998, 1997 and
1996 were $4.6 million, $3.6 million and $1.9 million, respectively. These
expenses consisted primarily of telecommunications, travel, professional fees,
insurance expenses, MIS expenses, incremental rent, travel and other expenses
associated with the move of the Company's operations from its Boca Raton,
Florida location to its Jacksonville, Florida facility. Additionally, other
expenses includes an adjustment to reflect a cumulative change in accounting
principle. Balances representing $474,144 of start-up cost have been written off
in accordance with adoption of AICPA Statement of Position 98-5, "Reporting on
the Costs of Start-up Activities" for the year ended December 31, 1998. These
costs had been capitalized in conjunction with the Company establishing a
servicing center facility in Jacksonville, Florida.
LOAN LOSS AND DELINQUENCY EXPERIENCE
Loan losses and Loan prepayments are continuously monitored on an overall
portfolio and month-of-purchase static pool basis. Pursuant to the requirements
of SFAS No. 125, the Company reviews its actual Loan loss experience in
conjunction with its quarterly revaluation of the carrying value of Retained
Interest in Securitizations. Charge-off policies are based upon an
account-by-account review of delinquent Loans by the Company. The Company
generally charges 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 December 31
------------------------------------------------------------
1998 1997 1996 1995
---- ---- ---- ----
(dollars in thousands)
<S> <C> <C> <C> <C>
Average Servicing Portfolio during period ............. $ 219,266 $ 158,737 $ 69,025 $ 23,565
========= ========= ========= =========
Gross charge-off ...................................... 28,852 17,355 6,313 1,447
Liquidation proceeds from repossessed assets .......... (11,633) (7,294) (3,435) (797)
--------- --------- --------- ---------
Net charge-off ........................................ $ 17,219 $ 10,061 $ 2,878 $ 650
========= ========= ========= =========
Net charge-off as a percentage of average Servicing
Portfolio ......................................... 7.85% 6.34% 4.17% 2.76%
========= ========= ========= =========
</TABLE>
During June 1998, the Company converted its Servicing Portfolio computer
data from its outside servicer's computer system to an internal system. As a
result, the Company is now performing all collection functions with respect to
its Servicing Portfolio. The Company believes that the conversion and resulting
servicing disruption is largely responsible for the increase in delinquency and
net loss experience of the Servicing Portfolio throughout the year ended
December 31, 1998. The Company initiated servicing for Loans more than 30 days
- 23 -
<PAGE> 24
past due in July 1997, and initiated servicing of the entire Servicing Portfolio
on October 1, 1997. 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 has decreased to
approximately 7.65% of the Company's Servicing Portfolio as of December 31,
1998, from 11.5% as of July 31, 1998, and was approximately 7.0% as of February
28, 1999.
Although there can be no assurances, management believes the potential
benefits from maintaining in-house servicing and collection capabilities
include: (i) improved portfolio performance through self-management of all
aspects of its operations; and (ii) enhanced access to portfolio data, resulting
in improved management reporting and risk analysis.
The gain on sales of Loans 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. Further, the Company's underwriting
qualifications and verifications process by its originations staff has a
significant impact on future loss performance. Consequently, the Company's
failure to effectively underwrite, service and collect the Servicing Portfolio
could have a material adverse effect on the Company's financial condition,
results of operations and cash flows. See Note 3 to the Financial Statements
Retained Interest in Securitizations.
The Company maintains, at its own expense, supplemental VSI insurance that
protects the Company's interest in Loan collateral against uninsured physical
damage (including total loss) in instances where neither the automobile nor the
borrower can be found.
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 tenth day following the due date. The
following table summarizes the delinquency and repossession experience with
respect to the Servicing Portfolio:
<TABLE>
<CAPTION>
As of December 31,
----------------------------------------------------
1998 1997 1996 1995
-------- -------- ------- -------
(dollars in thousands)
<S> <C> <C> <C> <C>
Period of delinquency
31 to 60 days ...................................... $ 10,577 $ 14,316 $ 6,104 $ 2,148
61 to 90 days ...................................... 3,160 3,458 1,596 157
91 days or more .................................... 2,452 4,343 487 46
-------- -------- ------- -------
Total delinquencies ................................... $ 16,189 $ 22,117 $ 8,187 $ 2,351
======== ======== ======= =======
Total delinquencies as a percentage of the
Servicing Portfolio ................................ 7.65% 9.75% 7.95% 5.45%
Principal balance of Loans related to repossession
inventory .......................................... $ 3,692 $ 4,935 $ 2,266 $ 553
Repossession inventory as a percentage of the
Servicing Portfolio ................................ 1.74% 2.18% 2.20% 1.28%
</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 monthly 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 additional losses will be reflected in the
current period earnings.
- 24 -
<PAGE> 25
The following table summarizes the vintage static pools of the Company's
Servicing Portfolio for all Loans purchased by the Company from inception
through the period ending December 31, 1998, and includes loss data through
December 31, 1998 for Loans for which collateral has been liquidated:
PERIOD OF ORIGINATION
Cumulative Net Losses as a Percentage of Original
Principal Balance for Loans Sold During Period
(1)
<TABLE>
<CAPTION>
4Q 94 1Q 95 2Q 95 3Q 95 4Q 95 1Q 96 2Q 96 3Q 96 4Q 96 1Q 97 2Q 97 3Q 97 4Q 97 1Q 98 2Q 98 3Q 98 4Q 98
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
2 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 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% 0.00% 0.02% 0.00% 0.00% 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% 0.22% 0.04% 0.01% 0.02% 0.00% 0.00%
5 0.31% 0.14% 0.29% 0.41% 0.48% 0.26% 0.28% 0.33% 0.07% 0.25% 0.66% 0.18% 0.14% 0.08% 0.13%
6 0.47% 0.30% 0.92% 0.78% 0.86% 0.49% 0.62% 0.70% 0.69% 0.70% 1.31% 0.42% 0.42% 0.29% 0.35%
7 0.51% 0.71% 1.62% 1.64% 1.27% 0.90% 1.10% 1.18% 1.25% 1.43% 2.11% 0.88% 0.74% 0.61% 0.72%
8 1.08% 1.25% 2.02% 2.02% 1.67% 1.23% 2.06% 1.71% 1.85% 1.94% 2.56% 1.21% 1.29% 0.84%
9 1.36% 1.55% 2.39% 2.42% 2.25% 1.95% 2.70% 2.68% 2.50% 2.60% 2.99% 1.60% 1.68% 1.16%
10 1.75% 2.13% 2.71% 2.60% 2.46% 2.14% 3.37% 3.31% 3.27% 3.08% 3.71% 2.30% 2.09% 1.78%
11 1.72% 2.49% 3.30% 3.02% 2.84% 2.72% 4.29% 3.88% 3.77% 3.51% 4.28% 2.78% 2.41%
12 3.12% 3.09% 3.39% 3.58% 3.33% 3.26% 5.20% 4.34% 4.12% 3.87% 5.05% 3.45% 2.76%
13 3.21% 3.64% 3.71% 3.91% 3.97% 3.74% 5.55% 5.08% 4.57% 4.49% 5.91% 3.87% 3.25%
14 3.80% 4.04% 4.21% 4.03% 4.28% 4.18% 6.13% 5.53% 4.97% 5.08% 6.50% 4.18%
15 4.45% 4.25% 4.31% 4.51% 5.07% 4.90% 6.52% 6.01% 5.46% 5.65% 6.96% 4.54%
16 4.55% 4.33% 4.53% 4.87% 5.09% 5.11% 6.78% 6.57% 5.94% 6.34% 7.42% 5.24%
17 4.91% 4.88% 4.92% 5.27% 5.65% 6.16% 7.16% 6.85% 6.40% 6.82% 7.63%
18 4.91% 4.98% 5.54% 5.62% 5.96% 6.59% 7.67% 7.35% 7.17% 7.39% 7.93%
19 5.05% 5.28% 5.96% 6.16% 6.61% 7.01% 8.00% 8.14% 7.78% 7.79% 8.48%
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%
24 6.80% 6.91% 8.30% 7.93% 8.21% 8.36% 10.17% 10.36% 9.43%
25 6.99% 7.48% 8.59% 8.37% 8.49% 8.85% 10.68% 10.88% 9.67%
26 7.49% 7.58% 8.66% 8.54% 8.77% 9.01% 11.22% 11.13%
27 8.06% 8.20% 9.16% 8.70% 8.98% 9.36% 11.50% 11.40%
28 8.23% 8.76% 9.34% 8.82% 9.35% 9.57% 11.54% 11.72%
29 9.07% 9.49% 9.35% 8.89% 9.97% 9.84% 11.71%
30 9.17% 9.54% 9.39% 9.21% 10.16% 10.09% 11.88%
31 9.71% 9.81% 9.82% 9.84% 10.61% 10.37% 12.56%
32 9.99% 10.08% 9.75% 10.11% 10.74% 10.48%
33 10.47% 10.19% 10.06% 10.26% 11.09% 10.61%
34 11.44% 10.28% 10.53% 10.67% 11.28% 10.83%
35 11.48% 10.63% 10.52% 10.85% 11.33%
36 11.81% 10.66% 10.72% 10.89% 11.51%
37 11.86% 10.83% 10.93% 11.15% 11.70%
38 11.85% 11.01% 11.10% 11.21%
39 12.37% 11.20% 11.17% 11.37%
40 12.42% 11.48% 11.19% 11.46%
41 12.42% 11.63% 11.22%
42 12.57% 11.95% 11.26%
43 12.56% 12.00% 11.55%
44 12.71% 12.04%
45 12.68% 12.08%
46 12.75% 12.12%
47 12.79%
48 12.97%
</TABLE>
(1) Months from Origination
- 25 -
<PAGE> 26
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 increased by $7.9 million from $25.4
million in fiscal 1997 to $33.8 million in fiscal 1998, principally due to the
credit enhancement requirements of the Company's securitization facilities and
increased interest expense associated with the Company's Senior Subordinated
Notes. The $18.3 million increase in cash used in operations from fiscal 1996 to
fiscal 1997 was principally due to the increase in the volume of Loans
purchased.
Net cash used in investing activities was $1.5 million in both fiscal
years 1998 and 1997. This cash was principally related to purchases of furniture
and equipment for the Company's service center in 1998 and 1997.
Net cash provided by financing activities decreased by $29.7 million to
$18.4 million in fiscal 1998 from $48.3 million in fiscal 1997. Net cash
provided by financing activities in fiscal 1998 was primarily the result of the
proceeds received from the March Private Placement of $20 million of Senior
Subordinated Notes. Net cash provided by financing activities in fiscal 1997 was
primarily the result of the proceeds received from the Company's Initial Public
Offering and subsequent sales of Common Stock and debt, including but not
limited to $40 million of Senior Subordinated Notes in December 1997, and
indebtedness borrowed under the BankBoston Agreement.
Throughout fiscal 1998, the Company was required to maintain a minimum
equity position in the Master Trust of 14.0% of the net serviced receivables or
2.5 times net losses, whichever was greater. This minimum equity position
currently 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 December 31, 1998, the Company had a 14.0% equity investment in the
Master Trust. As of March 31, 1999, such minimum equity position has increased
to 19.0% of net serviced receivables relative to the requirements of the
restructure of the Master Trust Facility.
As of December 31, 1998, the Company retained approximately $34.1 million
of Retained Interest in Securitizations, representing 67% 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 December 31, 1998, the principal amount owed by the Company on the
Junior Subordinated Notes was approximately $2.0 million (including $116,961 of
accrued interest), and the principal amount owed by the Company on the Senior
Subordinated Notes was $60.0 million. The Senior Subordinated Notes, which
mature on December 2004, bear interest at an annual rate of 11.875% for the
first three years, and increase thereafter. See Note 4 of the Notes to Financial
Statements for further discussion of the Company's various debt facilities. See
also Note 13 of the Notes to Financial Statements - Subsequent Events.
Senior Subordinated Notes
Until completion of the Restructuring (as defined below) on April 7,
1999, the Company was in violation of the Minimum Consolidated Net Worth and
Adjusted Interest Expense covenants contained in the Securities Purchase
Agreements related to the $60.0 million of Senior Subordinated Notes. The
Minimum Consolidated Net Worth covenant required that the Company maintain
Consolidated Net Worth (as defined) of not less than (a) $25,890,000 plus (b) on
a cumulative basis commencing with the fiscal quarter ending March 31, 1998, 50%
of net income (if positive) for each fiscal quarter plus (c) 100% of the net
proceeds from any public offering or private placement of Common Stock. The
Adjusted Interest Expense covenant required generally that the sum of the
Company's Net Income (as defined), Consolidated Total Interest Expense (as
defined) and income and franchise taxes divided by its Consolidated Total
Interest Expense (as defined) for each period of four fiscal quarters ending
December 31, 1997 and thereafter be at least 1.4:1. On April 7, 1999, the
Company completed a comprehensive financial restructuring (the "Restructuring"),
- 26 -
<PAGE> 27
including its Senior Subordinated Notes and resolved certain other issues with
its Senior Subordinated Noteholders. More specifically, the agreements and
transactions with the Senior Subordinated Noteholders provide for and include,
among other things: (1) the waiver of the past defaults and breaches of
covenants, representations and warranties, if any, made in connection with the
Senior Subordinated Notes; (2) the elimination of the previously existing Net
Worth Covenant; (3) the establishment of a new covenant requiring that on a
quarterly basis, the Company's net return on assets invested in Loan
receivables, expressed as a percentage, exceed pre-established quarterly goals
(the "Return on Assets Covenant"); the first quarterly measurement period for
this covenant begins as of the quarter ending September 30, 1999; (4) the
granting to the Company of the option to pay during the two-year period ending
March 31, 2001 fifty percent (50%) of the interest owed on the Senior
Subordinated Notes (and the interest on such interest) through the issuance of
additional Senior Subordinated Notes that are convertible into Common Stock at
the conversion price of $.75 per share; (5) the issuance to the Senior
Subordinated Noteholders of 7,071,429 shares of Common Stock as consideration
for the waivers and amendments granted to the Company; (6) the issuance to those
Noteholders that also purchased Common Stock of the Company at the time of their
debt investment of an additional 1,178,571 shares of additional Common Stock in
exchange for the execution and delivery of full and complete releases of any
claims arising by virtue of those Noteholders' equity investment; and (7) the
execution and delivery of full and complete releases by and among the Company,
the Noteholders and affiliates of and other parties related to each of such
parties. In addition, the Senior Subordinated Noteholders were granted the right
to designate three additional persons to the Board of Directors of the Company,
increasing to six seats their total number of Board representatives, thereby
giving them majority control of the Board. See Note 13 to Notes to Financial
Statements - Subsequent Events.
First Union
Under the Revolving Securitization, the Company sells Loans that it has
purchased from Dealers on a daily basis to a special-purpose subsidiary, which
then sells the Loans to the Master Trust in exchange for cash and certain
residual interests in future excess cash flows from the Master Trust. The Master
Trust, to date, has issued two classes of investor certificates: "Class B
Certificates," which are variable funding (i.e., revolving) certificates bearing
interest at floating rates, and "Class C Certificates," representing a portion
of the residual interest of the Company's special-purpose subsidiary in future
excess cash flows from the Master Trust after required payments to the holders
of the Class B certificates, deposits of funds to a restricted cash account as a
reserve for future Loan losses which provides additional credit enhancement for
the holders of the Class B Certificates and payment of certain other expenses
and obligations of the Master Trust. First Union currently owns 100% of the
outstanding Class B Certificates. Collectively, the restricted cash account and
the Class C Certificate portion of Loan principal (Over-Collateralization
Accounts, which are held by the Company) that collateralize the Master Trust are
the components of the Spread Accounts. The Spread Accounts and ESRs are
reflected collectively on the balance sheet as "Retained Interest in
Securitizations."
Periodically the Master Trust transfers Loans and Spread Account balances
to Permanent Securitizations in exchange for cash, which is used to repay the
Class B Certificates. Debt securities representing interests in the Permanent
Securitizations are sold to third-party investors, who are repaid from cash
flows from the Loan receivables in the applicable Permanent Securitization.
Excess Spread Receivables and return of Spread Accounts attributable to such
Loans flow from the Permanent Securitization to the Company to the extent such
funds are available. Pursuant to the Restructuring described above, the Company
entered into several loan facilities and arrangements with First Union . As
described in Note 13 of Notes to the Financial Statements - Subsequent Events,
the restructured agreements with First Union provide for and include, among
other things: (1) the extension of the Company's warehouse line for an
additional two years (through March 31, 2001) and an increase in the amount the
Company may borrow under such facility from $75 million to $85 million; (2) the
commitment by First Union to purchase up to $20 million of subordinated
asset-backed debt securities in connection with the Company's securitizations;
and (3) a revolving credit facility enabling the Company to borrow up to $8
million for working capital purposes secured by the Company's Retained Interest
in Securitizations.
FSA
The Company's future liquidity and financial condition, and its ability to
finance the growth of its business and to repay or refinance its indebtedness,
will depend substantially on distributions of excess cash flow from the Master
Trust and Permanent Securitization trusts. The Company's agreements with FSA
provide that each Permanent Securitization trust must maintain specified levels
of cash in its Cash Spread Account during the life of the trust. These spread
accounts are funded initially out of beginning deposits and are funded
thereafter with excess cash flow from the Loan pool. During each month, excess
cash flow available to the Company from all Permanent Securitization trusts is
first used to replenish any Cash Spread Account deficiencies and then is
distributed to the Company. The timing and amount
- 27 -
<PAGE> 28
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 generally a 9% interest
in the principal balance of the Loans in the trust (the "Over-Collateralization
Accounts"), have been attained and/or the delinquency or losses related to the
Loans in the pool are below certain predetermined levels.
Until completion of the Restructuring, in the event delinquencies or
losses on the Loans exceeded certain levels in the Permanent Securitizations
("Trigger Events"), the terms of the Permanent Securitization: (i) required
increased Cash Spread Account balances to be accumulated for the particular
pool; (ii) restricted the distribution to the Company of excess cash flows
associated with the pool in which asset-backed securities are insured by FSA;
and (iii) in certain circumstances, required the transfer of servicing on some
or all of the Loans in FSA-insured pools to another servicer. Certain portfolio
performance tests were not met at various times during 1998 with respect to the
Permanent Securitization trusts formed in November 1995, November 1996, July
1997, and January 1998 resulting in additional cash retention in the Spread
Accounts related to such Permanent Securitization trusts.
Moreover, under the terms of the Company's insurance agreements with FSA,
upon the occurrence of a Permanent Securitization failing to meet portfolio
performance tests of the nature described above but at significantly higher
levels (an "Insurance Agreement Event of Default"), the Company will be in
default under 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. In 1998, the Permanent Securitization trusts formed in
November 1995, November 1996 and July 1997 experienced periodic Insurance
Agreement Events of Default. Since the occurrence of those Insurance Agreement
Events of Default, FSA has captured all excess cash flows from the four
FSA-insured trusts.
Pursuant to the Restructuring, certain of the terms of the insurance
guarantee arrangements with FSA were modified. The agreements and transactions
with FSA provide for and include, among other things: (1) the resetting of the
cash spread accounts in each of the Company's term asset-backed securitizations
that have been guaranteed by FSA to 11% of the outstanding principal balance of
the receivables in each of such securitizations for the remaining term of such
securitizations (the Company has already funded all such spread accounts above
such 11% level and, therefore, expects to receive in June 1999, from the trustee
of each such securitizations a distribution of all amounts previously funded in
excess of such 11% level, anticipated to be approximately $2.5 million); (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.
The following is a table showing the portfolio performance tests by trust
as of February 28, 1999:
<TABLE>
<CAPTION>
Delinquency Test Default Test Loss Test
----------------------------- ------------------------------ -----------------------------
Actual Maintenance Insurance Actual Maintenance Insurance Actual Maintenance Insurance
------ ----------- --------- ------ ----------- --------- ------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
95-1 8.01% 8.25% 11.00% 14.92% 14.00% 17.00% 9.69% 8.00% 10.00%
96-1 7.18% 8.25% 11.00% 18.52% 14.00% 17.00% 7.13% 6.00% 8.00%
97-1 7.36% 8.25% 11.00% 20.19% 18.00% 25.00% 9.15% 8.00% 11.00%
98-1 6.02% 8.25% 11.00% 17.33% 18.00% 25.00% 12.25% 8.00% 11.00%
</TABLE>
- 28 -
<PAGE> 29
As a result of amended agreements with FSA entered into on April 7, 1999,
going forward the Company will be subject to only an Insurance Agreement default
test as shown below. The test shown below supersedes prior test requirements as
shown in the table above. The following table shows the new performance tests:
<TABLE>
<CAPTION>
Delinquency Test Gross Default Test Loss Test
---------------- ------------------ ---------
Insurance Insurance Insurance
--------- --------- ---------
<S> <C> <C> <C>
95-1 12.00% 25.00% 14.00%
96-1 12.00% 25.00% 14.00%
97-1 12.00% 25.00% 14.00%
98-1 12.00% 25.00% 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 13
of the Notes to Financial Statements - Subsequent Events.
Going Concern
The Company has suffered significant losses from operations during 1998
and 1997, has a capital deficiency as of December 31, 1998, has experienced
Insurance Agreement Events of Default with respect to its permanent
securitizations and at December 31, 1998 was in violation of various covenants
related to its borrowings and the Master Trust. Such matters raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regards to these matters are described in the following paragraph.
The Company's business requires substantial cash to support the funding of
Cash Spread Accounts for its securitizations, issuance costs of its
securitizations, operating expenses, tax payments, debt service and other cash
requirements. These cash requirements increase as the number of Loans purchased
and serviced by the Company increase. Historically, the Company has operated on
a negative operating cash flow basis and its negative operating cash flow is
expected to continue for the foreseeable future. The Company has funded its
negative operating cash flows principally through borrowings under its secured
financing facilities, issuances of subordinated debt and sales of equity
securities.
As discussed in Note 13 - Subsequent Events, on April 7, 1999, the Company
completed a comprehensive financial restructuring. As the result of the
Restructuring, (1) the Company may pay 50% of its interest expense on its Senior
Subordinated Notes over the two-year period ending March 31, 2001 by issuing
additional senior subordinated notes, thereby reducing its cash requirements, a
reduction from $6.9 million in 1998 to $3.6 million over the four quarters
ending March 31, 2000; (2) the Company may defer cash interest payments on its
Junior Subordinated Notes until January 31, 2002; (3) the Company's receipt of
excess cash flows from its four Permanent Securitization Trusts insured by FSA
and from its Master Trust has resumed (in April 1999, the Company received a
total of $3.0 million from such Trusts); 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 (the Company estimates it will
receive an additional approximately $5 million in the aggregate from such trusts
in the months of May and June 1999); (4) the Company will be able to fund a
portion of the subordinated credit enhancements required for its future
securitizations through the sale of up to $20 million of subordinated
asset-backed securities to First Union; and (5) the Company may borrow up to $8
million for working capital purposes under its new two-year working capital
facility with First Union, secured by its ESRs. Further, the Company's business
plan for the next two years contemplates an increase in overall revenue and cash
flow over 1998 through the gradual but steady increase in loan origination
volume, the sale of ancillary Loan products (such as GAP insurance, which covers
exposure to uninsured losses, and warranty products), the aggressive collection
of late fees and deficiency balances, and increased servicing fees through the
servicing of a larger owned portfolio as well as third-party servicing. Should
the Company be successful with its business plan, it may reasonably expect to
return to profitability during the first quarter of 2000. Although there can be
no assurance that the
- 29 -
<PAGE> 30
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.
FOURTH QUARTER ADJUSTMENTS
During the fourth quarter of 1998 and 1997, the Company wrote off an
additional $14.1 million and $20.3 million of Retained Interest in
Securitizations due to impairment which increased securitization related losses
for the year ended December 31, 1998 and 1997 by the same amount. Presently, the
Company is in the process of determining whether the 1998 fourth quarter
adjustment will require restating any of the 1998 quarterly results.
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
impact the Company's ability to become profitable in the future.
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 developed a project plan for achieving year 2000
readiness. An inventory of critical hardware and software has been completed and
information technology components are being assessed. This assessment includes
major suppliers and business partners, however, the Company does not rely on any
single supplier or partner to conduct business. Additionally, the Company has
engaged an independent systems firm to evaluate year 2000 readiness. The review
will be conducted with an estimated completion date of May 31, 1999. Year 2000
project costs incurred though December 31, 1998 have been approximately $5,000.
The Company presently believes that the year 2000 issue will not pose
significant operational problems for the Company. However, if such modifications
and conversions in response to the independent review, if any, 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.
- 30 -
<PAGE> 31
ITEM 8. FINANCIAL STATEMENTS.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Reports of Independent Certified Public Accountants ............................................. 32
Balance Sheets as of December 31, 1998 and 1997................................................. 34
Statements of Operations For the Years Ended December 31, 1998, 1997 and 1996................... 35
Statements of Stockholders' Equity (Capital Deficit) For the Years Ended December 31,
1998, 1997 and 1996......................................................................... 36
Statements of Cash Flows For the Years Ended December 31, 1998, 1997 and 1996................... 38
Notes to Financial Statements.................................................................... 40
</TABLE>
- 31 -
<PAGE> 32
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
National Auto Finance Company, Inc.
Jacksonville, Florida
We have audited the accompanying balance sheet of National Auto Finance
Company, Inc. as of December 31, 1998 and the related statements of operations,
stockholders' equity (capital deficit), and cash flows for the year then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of National Auto Finance Company,
Inc. at December 31, 1998, and the results of its operations and its cash flows
for the year then ended in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 13 to the
financial statements, in 1998 the Company suffered a loss from operations,
experienced Insurance Agreement Events of Default with respect to its
securitizations, and at December 31, 1998 was in violation of various covenants
related to its borrowings, and with respect to the Master Trust and has a
capital deficiency. 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 also described in Note 13. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
West Palm Beach, Florida /s/ BDO SEIDMAN, LLP
April 30, 1999
- 32 -
<PAGE> 33
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
National Auto Finance Company, Inc.
We have audited the accompanying consolidated balance sheet of National Auto
Finance Company, Inc. and subsidiaries (formerly National Auto Finance Company,
L.P. and subsidiaries) as of December 31, 1997, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
years in the two year period ended December 31, 1997. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
National Auto Finance Company, Inc. and subsidiaries as of December 31, 1997,
and the consolidated results of their operations and their cash flows for each
of the years in the two year period ended December 31, 1997 in conformity with
generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company
adopted the provisions of the Financial Accounting Standards Board's Statement
of Financial Accounting Standards No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," in 1997.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Notes 3, 4
and 14 to the consolidated financial statements, in 1997 the Company suffered
losses from operations, experienced an Insurance Agreement Event of Default
with respect to its securitizations, and at December 31, 1997 was in violation
of various covenants related to its borrowings. Such matters raise substantial
doubt about the Company's ability to continue as a going concern. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
KPMG PEAT MARWICK LLP
April 15, 1998
Fort Lauderdale, Florida
- 33 -
<PAGE> 34
NATIONAL AUTO FINANCE COMPANY, INC.
BALANCE SHEETS
DECEMBER 31, 1998 AND DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS: 1998 1997
---- ----
<S> <C> <C>
Cash and cash equivalents $ 9,540 $ 26,467
Retained interest in securitizations, at estimated fair value (Note 3) 34,117 31,569
Furniture, fixtures and equipment, net of accumulated
depreciation of $1,065 and $403 3,277 2,262
Deferred financing costs 2,759 2,539
Other assets 1,039 2,038
-------- --------
Total assets $ 50,732 $ 64,875
======== ========
LIABILITIES:
Accounts payable and accrued expenses $ 2,444 $ 3,260
Accrued interest payable-related parties 117 39
Accrued interest payable-Senior Subordinated Notes -- 132
Accrued interest payable-notes -- 50
Junior Subordinated Notes-related parties (Note 12) 1,940 1,940
Senior Subordinated Notes (Note 4) 53,578 34,546
Notes payable (Note 4) 1,017 1,614
-------- --------
Total liabilities 59,096 41,581
-------- --------
COMMITMENTS AND CONTINGENCIES (Note 7)
MANDATORILY REDEEMABLE PREFERRED STOCK series A-$0.01 par value;
$1,000 stated value; 1,000,000 shares authorized; 2,295 shares
outstanding; redeemable in January 2005, stated at
redemption value (Note 5) 2,415 2,336
STOCKHOLDERS' EQUITY (CAPITAL DEFICIT):
Common Stock-$0.01 par value; 20,000,000 shares authorized;
9,030,762 shares outstanding (Note 5) 90 90
Paid-in-capital 36,261 34,417
Accumulated deficit (47,130) (13,549)
-------- --------
Total stockholders' equity (capital deficit) (10,779) 20,958
-------- --------
Total liabilities, mandatorily redeemable preferred stock and
stockholders' equity (capital deficit) $ 50,732 $ 64,875
======== ========
</TABLE>
See accompanying notes to the financial statements.
- 34 -
<PAGE> 35
NATIONAL AUTO FINANCE COMPANY, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
REVENUE:
Securitization related income (loss) (Note 3) $ (13,531) $ (323) $ 13,564
Servicing income 6,424 3,437 866
Interest income 2,399 817 258
Other income 377 214 103
--------- -------- --------
Total revenue (4,331) 4,145 14,791
--------- -------- --------
EXPENSES:
Servicing expenses 6,262 5,944 1,291
Interest expense 8,417 1,638 1,204
Salaries and employee benefits 7,705 6,346 3,634
Direct loan acquisition expenses 1,520 3,591 1,924
Depreciation expense 802 743 492
Other operating expenses (Note 6) 4,544 3,602 1,755
--------- -------- --------
Total expenses 29,250 21,864 10,300
--------- -------- --------
Income (loss) before income taxes and extraordinary item (33,581) (17,719) 4,491
Income taxes (Note 8) -- -- --
Income (loss) before extraordinary item (33,581) (17,719) 4,491
Extraordinary loss due to early extinguishment of debt (Note 4) -- (720) --
--------- -------- --------
Net income (loss) before preferred stock dividends (33,581) (18,439) 4,491
Preferred stock dividends (160) (148) --
--------- -------- --------
Net income (loss) available for Common Stockholders $ (33,741) $(18,587) $ 4,491
========= ======== ========
PER SHARE DATA: (NOTE 2)
Loss per common share before extraordinary item - basic and
diluted $ (3.73) $ (2.52) $ --
Extraordinary loss (Note 4) -- (0.10) --
--------- -------- --------
Loss per common share-basic and diluted $ (3.73) $ (2.62) $ --
========= ======== ========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic and diluted 9,031 7,087 --
========= ======== ========
PRO FORMA SHARE DATA (UNAUDITED):
Income before income taxes $ -- $ -- $ 4,491
Income taxes -- -- 1,689
--------- -------- --------
Pro Forma net income $ -- $ -- $ 2,802
========= ======== ========
PRO FORMA NET INCOME PER COMMON SHARE:
Basic and diluted $ -- $ -- $ 0.66
========= ======== ========
PRO FORMA WEIGHTED AVERAGE:
NUMBER OF SHARES OUTSTANDING
Basic and diluted -- -- 4,230
========= ======== ========
</TABLE>
See accompanying notes to the financial statements.
- 35 -
<PAGE> 36
NATIONAL AUTO FINANCE COMPANY, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (CAPITAL DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
Equity of
Common Paid-in Accumulated Predecessor
Stock Capital Deficit Entity Total
----- ------- ------- ----------- -----
<S> <C> <C> <C> <C> <C>
Balance as of December 31, 1995 $ -- $ -- $ -- $ 3,447 $ 3,447
Contributions -- -- -- 1,613 1,613
Net loss for year ending December 31, 1996 -- -- -- 4,491 4,491
-------- -------- -------- -------- --------
Balance as of December 31, 1996 -- -- -- 9,551 9,551
Net income from January 1, 1997
through reorganization on January 29, 1997 526 526
Assets retained by partnership -- -- -- (31) (31)
-------- -------- -------- -------- --------
Balance as of January 29, 1997 -- -- -- 10,046 10,046
Exchange of predecessor equity for Common Stock
in connection with reorganization on
January 29, 1997 (Note 1) 42 7,709 -- (10,046)(1) (2,295)
Deferred income taxes recorded in connection
with reorganization (Note 8) -- (5,416) -- -- (5,416)
Issuance of 496,000 shares of Common Stock in
exchange for deferred interest on Senior
Subordinated Notes (Note 4) 5 164 -- -- 169
Issuance of 2,300,000 shares of Common Stock
in initial public offering, net of costs (Note 1) 23 16,817 -- -- 16,840
Issuance of 100,000 shares of Common Stock to
Financial Security Assurance Inc. for certain
waivers relating to Permanent Securitizations
(Note 3) 1 699 -- -- 700
Issuance of 1,904,762 shares of Common Stock (Note 4) 19 9,138 -- -- 9,157
Issuance of 1,038,924 Warrants to purchase
Common Stock in connection with the
issuance of Senior Subordinated Notes (Note 4) -- 5,454 -- -- 5,454
Dividends on mandatorily redeemable preferred stock -- (148) -- -- (148)
Net loss subsequent to reorganization -- -- (13,549) -- (13,549)
-------- -------- -------- -------- --------
Balance as of December 31, 1997 90 34,417 (13,549) -- 20,958
Issuance of 593,671 Warrants to purchase
Common Stock in connection with the
issuance of Senior Subordinated Notes (Note 4) -- 2,004 -- -- 2,004
Dividends on mandatorily redeemable preferred stock -- (160) -- -- (160)
Net loss for year ending December 31, 1998 -- -- (33,581) -- (33,581)
-------- -------- -------- -------- --------
Balance as of December 31, 1998 $ 90 $ 36,261 $(47,130) $ -- $(10,779)
======== ======== ======== ======== ========
</TABLE>
(1) $2,295 of such amount was attributed to mandatorily redeemable preferred
stock.
See accompanying notes to the financial statements.
- 36 -
<PAGE> 37
NATIONAL AUTO FINANCE COMPANY, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (33,581) $ (18,439) $ 4,491
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Securitization related income 13,531 323 (13,564)
Depreciation expense 802 223 137
Purchases of loans held for sale (95,911) (187,383) (84,981)
Proceeds from transfer of loans to Master Trust 95,911 187,383 84,981
Cash flows from Retained Interest released to Company 12,160 10,095 4,937
Cash deposits to Spread Accounts (28,329) (18,564) (4,630)
Amortization and write-off of deferred financing costs 567 1,024 355
Amortization of Warrants 1,036 -- --
Amortization of deferred placement costs -- 254 167
Changes in other assets and liabilities:
Other assets 998 (1,516) (378)
Accounts payable and accrued expenses (998) 1,489 1,481
Accrued interest payable-related parties 75 (105) 388
Accrued interest payable-Senior Subordinated Notes
and other notes -- (157) 339
--------- --------- ---------
Net cash (used in) provided by operating activities (33,739) (25,373) 7,053
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Fixed assets purchased (1,543) (1,524) (377)
--------- --------- ---------
Net cash used in investing activities (1,543) (1,524) (377)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Junior Subordinated Notes-related parties -- -- 700
Principal payments on Junior Subordinated Notes-related parties -- (5,182) (977)
Proceeds from notes payable 81 1,018 --
Proceeds from Senior Subordinated 19,031 37,834 11,172
Principal payments on Notes Payable (677) -- --
Principal payments on Senior Subordinated Notes -- (12,000) --
Proceeds from BankBoston revolving credit facility -- 7,996 --
Principal payment on BankBoston revolving credit facility -- (8,000) --
Principal payments on capital leases -- (33) (41)
Payment of Mandatorily Redeemable Preferred Stock dividends (80) (107) --
Proceeds from initial public offering -- 17,615 (775)
Proceeds from issuance of Common Stock, net -- 9,157 --
Preferred equity partners' contributions -- -- 1,613
--------- --------- ---------
Net cash provided by financing activities 18,355 48,298 11,672
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents (16,927) 21,401 4,242
Cash and cash equivalents at beginning of period 26,467 5,066 824
--------- --------- ---------
Cash and cash equivalents at end of period $ 9,540 $ 26,467 $ 5,066
========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for income taxes $ -- $ -- $ --
========= ========= =========
Cash paid for interest $ 6,921 $ 1,656 $ 1,253
========= ========= =========
</TABLE>
See accompanying notes to the financial statements
- 37 -
<PAGE> 38
NATIONAL AUTO FINANCE COMPANY, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS)
(CONCLUDED)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
NON-CASH FINANCING ACTIVITIES:
Offering costs deferred in 1996 transferred to paid-in capital in 1997 $ -- $ 775 $ --
Accrued dividends on mandatorily redeemable preferred stock 160 41 --
Conversion of deferred interest on Senior Subordinated Notes to Common
Stock and paid-in capital -- 169 --
Conversion of predecessor entity capital to Mandatorily Redeemable Preferred Stock -- 2,295 --
Conversion of predecessor entity capital to Common Stock and
paid-in capital -- 7,225 --
Deferred income taxes from reorganization considered reduction in paid-in capital -- 5,416 --
Income earned in 1997 prior to reorganization included in
paid-in capital -- 526 --
Issuance of 1,038,924 warrants in conjunction with Senior Subordinated -- 5,454
Notes considered paid-in-capital
Issuance of 593,671 warrants in conjunction with Senior Subordinated 2,004 -- --
Notes considered paid-in-capital
</TABLE>
See accompanying notes to the financial statements
- 38 -
<PAGE> 39
NATIONAL AUTO FINANCE COMPANY, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Organization and Business
National Auto Finance Company, Inc. (the "Company") is a specialty
consumer finance company concentrating in the business of purchasing,
financing, securitizing and servicing Loans originated primarily by
manufacturer-franchised dealers ("Dealers") in the sale of new and
used automobiles. Through its Loan purchases, the Company provides
indirect financing to non-prime consumers ("Consumers"). The Company
serves as a source of financing for Dealers, allowing them to sell
automobiles to Consumers who otherwise might not qualify under
underwriting criteria required by more traditional sources such as
commercial banks. The Company is located in Jacksonville, Florida.
National Auto Finance Company, LP, a Delaware limited partnership
(the "National Auto Partnership") was organized in October 1994 and
conducted the business of the Company until January 29, 1997. On that
day, in connection with the closing of the Company's Initial Public
Offering (the "Offering"), the assets and certain liabilities of the
National Auto Partnership were transferred to the Company in exchange
for all of the Common Stock then outstanding and all of the preferred
stock of the Company then outstanding (the "Reorganization"). The
Company then issued 2,300,000 shares of stock to the public in the
underwritten Initial Public Offering. The reorganization was
accounted for in a manner similar to a pooling of interests since the
Company and National Auto Partnership were under common control at
the time of reorganization.
(b) Summary of Significant Accounting Policies
A description of the significant accounting policies that are
followed by the Company is presented below:
(i) Principles of Consolidation
The financial statements reflect the operations of the
National Auto Partnership and subsidiaries for 1996 and an
approximate one-month period of January 1997 and National
Auto Finance Company, Inc. and subsidiaries for the eleven
months ended December 31,1997. All significant
intercompany accounts and transactions have been
eliminated in consolidation. As the Company has no
subsidiaries as of December 31, 1998, such financial
statements are not consolidated.
(ii) Cash and Cash Equivalents
The Company considers money market funds and all other
highly liquid debt instruments purchased with an original
maturity of three months or less to be cash equivalents.
(iii) Furniture, Fixtures and Equipment
Furniture, fixtures and equipment are stated at cost less
accumulated depreciation and amortization. Owned
properties are depreciated on a straight-line basis over
their useful lives. Capital lease assets are amortized on
a straight-line basis over the lesser of their estimated
useful lives or their lease terms.
- 39 -
<PAGE> 40
NATIONAL AUTO FINANCE COMPANY, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(iv) Securitization of Loans and Retained Interest in
Securitizations
Effective January 1, 1997, the Company adopted Financial
Accounting Standards Board (FASB) Statement of Financial
Accounting Standards (SFAS) No. 125, "Accounting for
Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" (SFAS No. 125). Under SFAS
No. 125, an entity recognizes only assets it controls and
liabilities it has incurred, discontinues recognition of
assets only when control has been surrendered, and
discontinues recognition of liabilities only when they
have been extinguished.
Loans that are purchased by the Company are sold on a
daily basis in a two-step securitization program as
described in Note 3. Gains or losses are recognized (1)
upon transfer of Loans to the Master Trust based upon the
amount of cash received upon transfer of such Loans
generally equal to the Company's purchase price of the
Loan and (2) an estimate of the Company's residual
interest in the Master Trust (which constitute a portion
of Retained Interest in Securitizations). The value of the
Company's residual interest in the Master Trust is
determined by estimating the fair value of amounts to be
received from the Master Trust and the subsequent
"Permanent Securitizations" (Note 3).
The Retained Interest in Securitizations is classified as
a trading security for financial reporting purposes with
changes in the estimated fair value either credited or
charged to the statement of operations.
The Company is aware of a limited market for the purchase
or sale of its Overcollateralization Accounts (a portion
of its Retained Interest in Securitizations), but is not
aware of an active market for the purchase or sale of the
other components of its Retained Interest in
Securitizations (Excess Spread Receivables (ESRs) and Cash
Spread Accounts) and accordingly, the Company has
determined the estimated fair value of the Retained
Interest in Securitizations at December 31, 1998 and 1997
by the following process:
1. The Company has estimated the timing and amount of
cash flows to be received from Loans transferred to
each securitization trust based upon assumptions
relating to estimates of net losses, prepayments and
normal principal and interest amortization (cash-in).
2. The Company has calculated the timing and amount of
the total remaining principal and interest to be paid
to the securitization trusts' investors given the
assumptions noted above and the contractual
requirements of each securitization trust.
3. The Company has estimated the total amount to be paid
by each securitization trust for any servicing,
insurance and other costs and the timing of such
payments.
4. The estimated cash payments described in (2) and (3)
above have been subtracted from the estimated cash
flows to determine the estimated Excess Spread
Receivable (ESR) for each month.
5. The Company has estimated the required Cash Spread
Account balance (Note 3) for the securitization
trusts for each period given the requirements of each
trust and the impact of the assumptions noted above.
The Company then calculated the amount of Excess
Spread Receivable to be added to the Cash Spread
Account or the amount of Cash Spread Account to be
released to the Company each month.
- 40 -
<PAGE> 41
NATIONAL AUTO FINANCE COMPANY, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
6. The estimated amount of cash available to the Company
as described in (5) represents the Company's estimate
of the "cash-out" of the securitization trusts.
7. The estimated fair value of cash-out over the
remaining life of the securitization trusts has been
determined by discounting the estimated cash-out at a
rate management believed an investor would require
for a stream of cash flows with similar risk
characteristics.
8. The estimated fair value of cash-out for the
securitization trusts were compared to the Retained
Interest in Securitizations for the securitization
trusts. Adjustments to estimated fair value are
charged to securitization related income (loss).
(v) Deferred Financing Costs
Costs incurred in connection with certain borrowings are
capitalized and are amortized on a straight-line basis
over the term of the debt.
(vi) Stock-Based Compensation
The Company accounts for stock-based compensation to
employees using the intrinsic value method of accounting
prescribed by Accounting Principles Board ("APB") Opinion
No. 25.
(vii) Income Taxes
Prior to January 29, 1997, the Company's operations were
conducted through the National Auto Partnership. As such,
no provision or benefit for income taxes was recorded
since the responsibility for income taxes passed through
to, and was reportable by the individual partners.
Subsequent to the Reorganization, income taxes are
accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences
between the financial statement carrying amounts of
existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are
expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes
the enactment date. A deferred tax valuation allowance is
provided to the extent that it is more likely than not
that deferred tax assets will not be realized.
(ix) Servicing
Servicing fees are reported as income when earned.
Servicing expenses are charged to expense as incurred.
External servicing expenses include charges paid to third
parties for servicing related charges. Internal servicing
expense includes salaries and other costs associated with
the Company's service center.
(x) Use of Estimates
In preparing the financial statements, management is
required to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenue and
expense. The most significant of the estimates relate to
the calculations and modeling underlying the valuation of
the Retained Interest in Securitizations and the related
gain on sales of Loans. Actual results could differ from
these estimates in the near term and could be significant.
- 41 -
<PAGE> 42
NATIONAL AUTO FINANCE COMPANY, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(xi) Reclassifications
Certain reclassifications have been made to 1996 and
1997 amounts to conform to the 1998 presentation.
(c) New Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130"). SFAS No. 130 is effective for fiscal years
beginning after December 15, 1997. SFAS No. 130 established
standards for reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements.
SFAS No. 130 requires that all items to be recognized under
accounting standards as components of comprehensive income be
reported in a financial statement with equal prominence as other
financial statements. The adoption of SFAS No. 130 had no effect on
the Company's financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosure About
Segments of an Enterprise and Related Information" ("SFAS No. 131"),
which is effective for financial statements for years beginning after
December 15, 1997. SFAS No. 131 established standards for the way
that public business enterprises report information about operating
segments, based upon how the enterprise defines such segments. The
adoption of SFAS No. 131 had no effect on the Company's financial
position.
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities". SFAS 133 establishes
accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
and for hedging activities. SFAS is effective for periods beginning
after June 15, 1999, and is not expected to have a significant impact
on the Company's financial statements.
(2) LOSS PER COMMON SHARE (EPS)
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards SFAS No. 128, "Earnings per Share" ("SFAS No. 128")
with previous periods restated. SFAS No. 128 establishes standards for
computing and presenting earnings per share, simplifies the standards
previously found in APB No. 15, "Earnings Per Share," and makes them
comparable to international EPS standards.
Loss per common share for 1998 is calculated as follows:
<TABLE>
<CAPTION>
Weighted Average
----------------
Loss Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
(in thousands, except per share amount)
<S> <C> <C> <C>
Loss before preferred stock dividends $ (33,581) 9,031 $ (3.71)
Preferred stock dividends (160) 9,031 (.02)
---------- ----- -------
Loss attributable to Common Stockholders. $ (33,741) 9,031 $ (3.73)
========== ===== =======
</TABLE>
- 42 -
<PAGE> 43
NATIONAL AUTO FINANCE COMPANY, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
Loss per common share for 1997 is calculated as follows:
<TABLE>
<CAPTION>
Weighted Average
----------------
Loss Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
(in thousands, except per share amount)
<S> <C> <C> <C>
Loss before preferred stock dividends and extraordinary item $ (17,719)
Extraordinary item (720)
---------
Loss before preferred stock dividends (18,439) 7,087 $ (2.52)
Preferred stock dividends (148) 7,087 (0.10)
--------- -------
Loss attributable to Common Stockholders $ (18,587) 7,087 $ (2.62)
========= =======
</TABLE>
Inclusion of 611,500 and 379,000 options and 1,632,685 and 1,038,924
warrants outstanding at December 31, 1998 and 1997 would have an
antidilutive effect on the net loss for the years ending December 31, 1998
and 1997 for diluted EPS, thus, such Common Stock equivalents are excluded
from the calculation.
Pro Forma earnings per share for 1996 are based upon the 4,230,000 shares
of Common Stock issued to the National Auto Partnership in conjunction
with the Reorganization.
(3) RETAINED INTEREST IN SECURITIZATIONS
Retained Interest in Securitizations, net of writedowns, were $34.1
million and $31.6 million at December 31, 1998 and 1997. During 1998 and
1997, the Company wrotedown $23.1 million and $21.5 million of Retained
Interest in Securitizations.
Assumptions used to value the Retained Interests in Securitizations at
December 31, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
-------- -----------
<S> <C> <C>
Weighted average cumulative net loss rate 14.00 % 12.88 %
Weighted average cumulative prepayment rate 21.40 % 20.89 %
Discount rate 14.00 % 14.00 %
Level of required Cash Spread Account 11.00% 7% to 11 %
Rate of interest on Cash Spread Account 4.85 % 5.50 %
Weighted average interest rate on Loans 19.35 % 19.01 %
Weighted average yield on bonds and notes
held by securitization investors 6.12 % 6.15 %
</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.
- 43 -
<PAGE> 44
NATIONAL AUTO FINANCE COMPANY, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
Specifically, pursuant to the Revolving Securitization, the Company sells
Loans that it has purchased from Dealers on a daily basis to a
special-purpose subsidiary, which then sells the Loans to the Master Trust
in exchange for cash and certain residual interests in future excess cash
flows from the Master Trust. The Master Trust, to date, has issued two
classes of investor certificates: "Class B Certificates," which are
variable funding (i.e., revolving) certificates bearing interest at
floating rates, and "Class C Certificates," representing a portion of the
residual interest of the Company's special-purpose subsidiary in future
excess cash flows from the Master Trust after required payments to the
holders of the Class B certificates, deposits of funds to a restricted
cash account as a reserve for future Loan losses which provides additional
credit enhancement for the holders of the Class B Certificates and payment
of certain other expenses and obligations of the Master Trust. First Union
currently owns 100% of the outstanding Class B Certificates. Collectively,
the Cash Spread Accounts and the Class C Certificate portion of Loan
principal (Over-Collateralization Accounts), are held by the Company to
collateralize the Master Trust are the components of the Spread Accounts.
The Spread Accounts and Excess Spread Receivables are reflected
collectively on the balance sheet as "Retained Interest in
Securitizations."
Periodically the Master Trust transfers Loans and Spread Account balances
to Permanent Securitizations in exchange for cash, which is used to repay
the Class B Certificates. Debt securities representing interests in the
Permanent Securitizations are sold to third-party investors, who are
repaid from cash flows from the Loans in the applicable Permanent
Securitization. Excess Spread Receivables and return of Spread Accounts
attributable to such Loans flow from the Permanent Securitization to the
Company to the extent such funds are available.
Until the completion of the Restructuring (see Note 13 - Subsequent
Events), the Company was in violation 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.
Under the financing structures the Company has used to date for its
securitizations, certain excess cash flows generated by the Loans are
retained in the Cash Spread Accounts within the securitization trusts to
provide liquidity and credit enhancement. While the specific terms and
mechanics of the Cash Spread Accounts can vary depending on each
transaction, the Company's agreements with Financial Security Assurance
Inc., ("FSA") the financial guaranty insurer that has provided credit
enhancements in connection with the Company's securitizations, generally
provide that the Company is not entitled to receive any excess cash flows
unless the level of certain Spread Account balances, comprised of cash and
the Overcollateralization Accounts, have been attained and/or the
delinquency or losses related to the Loans in the pool are below certain
predetermined levels. Additionally, throughout 1998, the Company was
required to maintain a minimum equity position in the Revolving
Securitization of 14.0% of the net serviced receivables in the Master
Trust, or 2.5 times net losses, whichever was 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 December 31, 1998 and 1997, the Company had a 14.00% and
10.01% minimum equity position investment in the Revolving Securitization.
As of March 31, 1999, the Company has a 19.0% minimum equity position
investment in the Revolving Securitization.
Until the completion of the Restructuring (see Note 13 - Subsequent
Events), in the event delinquencies or losses on the Loans exceeded
certain levels in the Permanent Securitizations ("Trigger Events"), the
terms of the Permanent Securitization: (i) required increased Cash Spread
Account balances to be accumulated for the particular pool; (ii)
restricted the distribution to the Company of excess cash flows associated
with the pool in which asset-backed securities are insured by FSA; and
(iii) in certain circumstances, required the transfer of servicing on some
or all of the Loans in FSA-insured pools to another servicer. Certain
portfolio performance tests were not met at various times during 1998 with
respect to the Permanent Securitization trusts formed in November 1995,
November 1996, July 1997, and January 1998 resulting in additional cash
retention in the Spread Accounts related to such Permanent Securitization
trusts.
- 44 -
<PAGE> 45
NATIONAL AUTO FINANCE COMPANY, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
Moreover, under the terms of the Company's insurance agreements with FSA,
upon the occurrence of a Permanent Securitization failing to meet
portfolio performance tests of the nature described above but at
significantly higher levels (an "Insurance Agreement Event of Default"),
the Company will be in default under those insurance agreements. Upon an
Insurance Agreement Event of Default, FSA may: (i) permanently suspend
distributions of cash flow to the Company from the related securitization
trust and all other FSA-insured trusts until the asset-backed securities
have been paid in full; (ii) capture all excess cash flows from performing
FSA-insured trusts; (iii) increase its premiums; and (iv) replace the
Company as servicer with respect to all FSA-insured trusts. In 1998, the
Permanent Securitization trusts formed in November 1995, November 1996 and
July 1997 experienced periodic Insurance Agreement Events of Default.
Since the occurrence of those Insurance Agreement Events of Default, FSA
has captured all excess cash flows from the four FSA-insured trusts. In
April 1997, the Permanent Securitization trust formed in November 1995
experienced an Insurance Agreement Event of Default. In October 1997, the
Company entered into an agreement with FSA that: (i) permanently waived
the Insurance Agreement Event of Default; (ii) modified the portfolio
performance tests described above to increase the thresholds through June
1998 for the Permanent Securitization trusts formed in November 1995 and
1996 (temporary revisions); (iii) increased the amount required to be
retained in the Spread Account related to the November 1995 and 1996 trust
to an amount generally equal to 11% of the then outstanding balance held
by the securitization trust if the modified portfolio performance tests
are not met; (iv) required the Company to cause the Spread Account for
each FSA-insured securitization trust to be cross-collateralized to the
Spread Accounts established in connection with each of its other
FSA-insured securitization trusts; (v) permitted the Company to enter into
the $10.0 million BankBoston Agreement; (vi) provided that FSA would
consider providing credit enhancement for the Company's next Permanent
Securitization; and (vii) provided for the issuance of 100,000 shares of
Common Stock to FSA. In consideration for such agreement, the Company
issued 100,000 shares of Common Stock to FSA and reduced gain on sale by
$700,000 in 1997.
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 13 Subsequent Events and Note 14 - Liquidity and Going Concern.
During the years ended December 31, the following activity took place with
respect to securitizations:
<TABLE>
<CAPTION>
1998 1997 1996
-------- --------- --------
(dollars in thousands)
<S> <C> <C> <C>
Principal balance of Loans sold................. $ 95,911 $ 187,383 $ 84,981
======== ========= ========
Weighted average interest rate on Loans
sold during the period....................... 19.35% 19.24% 18.88%
======== ========= ========
</TABLE>
- 45 -
<PAGE> 46
NATIONAL AUTO FINANCE COMPANY, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(4) DEBT
Notes payable at December 31, are as follows:
<TABLE>
<CAPTION>
1998 1997
------- -------
(in thousands)
<S> <C> <C>
Revolving $1.5 million line of credit with First Union dated August 25,
1997; matures March, 2001; interest payable monthly at LIBOR + 2.5%
(8.07% and 8.47% at December 31, 1998 and 1997) $ 734 $ 1,018
Capital lease for equipment dated August 20, 1997 amended March 2, 1998
for additional equipment; matures
November 2001; interest at 7.05% 283 279
Other -- 317
------- -------
$ 1,017 $ 1,614
======== =======
</TABLE>
The balance of Senior Subordinated Notes payable was $53,578,000 and
$34,546,000 as of December 31, 1998 and 1997. Such amounts are shown net
of discounts as (discussed below) of $6.4 million and $5.5 million,
respectively. The principal amount of the aggregate $60 million of Senior
Subordinated Notes is due in December 2004 and bear interest at 11.875%
per annum for the first three years, 12.875% per annum for year four,
13.875% per annum for year five, and 14.875% per annum thereafter, with
interest payable quarterly.
In March 1998, the Company completed a private placement (the "March
Private Placement") of $20 million principal amount of Senior Subordinated
Notes with detachable Warrants under terms similar to that of the December
Private Placement. In December 1997, the Company completed a private
placement (the "December Private Placement") of $10 million of the
Company's Common Stock, $.01 per value ("Common Stock") and $40 million
principal amount of Senior Subordinated Notes with detachable warrants to
purchase Common Stock ("Warrants"). The December Private Placement of the
$10 million in Common Stock resulted in the issuance of 1,904,762 shares
of the Company's Common Stock at $5.25 per share. Additionally, a
representative of each of two of the Senior Subordinated Noteholders who
were also stock purchasers was elected to the Company's Board of
Directors.
In connection with the December Private Placement and the March Private
Placement, the Company issued an aggregate of 1,632,685 detachable
Warrants with a ten-year life, exercisable into Common Stock of the
Company at $0.01 per share. The fair value of such Warrants was estimated
to be based upon a share value of $5.25 for the December Private Placement
and $3.37 for the March Private Placement, for a total of $7.5 million.
Such amount is recorded as a discount to the related debt, as additional
paid-in capital, and is being amortized over the life of the debt using
the interest method. The effective interest rate, including the value of
the Warrants, is approximately 15%.
Until the completion of the Restructuring (see Note 13 - Subsequent
Events), the Company was in violation of the Minimum Consolidated Net
Worth and Adjusted Interest Expense covenants contained in the Securities
Purchase Agreements pursuant to which it issued the $60,000,000 aggregate
principal amount of Senior Subordinated Notes. The Minimum Consolidated
Net Worth covenant required that the Company maintain Consolidated Net
Worth (as defined) of not less than (a) $25,890,000 plus (b) on a
cumulative basis commencing with the fiscal quarter ending March 31, 1998,
50% of net income (if positive) for each fiscal quarter plus (c) 100% of
the net proceeds from any public offering or private placement of Common
Stock. The Adjusted Interest Expense covenant required generally that the
sum of the Company's Net Income (as defined), Consolidated Total Interest
Expense (as defined) and income and franchise taxes divided by its
Consolidated Total Interest Expense (as defined) for each period of four
fiscal quarters ending December 31, 1997 and thereafter be at least 1.4:1.
- 46 -
<PAGE> 47
NATIONAL AUTO FINANCE COMPANY, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
In December 1997, in connection with the consummation of the December
Private Placement (as described above), the Company repaid the $12,000,000
senior subordinated notes held by J.P. Morgan Investment Management, Inc.
on behalf of certain institutional investors (the "Morgan Notes"). In
connection with the repayment of such debt in 1997, the Company recorded
an extraordinary item for the write-off of related deferred financing
costs of $720,000. Prior to the Company's Initial Public Offering
(Offering) in January, 1997, the Morgan Notes had a 3% deferred interest
coupon that accrued interest on a compounded basis and was payable in
August, 2006, but was converted into 496,000 shares of common stock upon
consummation of the Initial Public Offering.
See Note 12 - Related Parties for a description of Junior Subordinated
Notes.
(5) DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 20,000,000 shares
of Common Stock and 1,000,000 shares of preferred stock, par value $0.01
per share, issuable in series (the "Preferred Stock").
COMMON STOCK
The holders of Common Stock will be entitled to receive dividends when and
as dividends are declared by the Board of Directors of the Company out of
funds legally available for such purpose, provided that if any shares of
the Preferred Stock are outstanding at the time, the payment of dividends
on the Common Stock or other distributions may be subject to the
declaration and payment of full cumulative dividends on outstanding shares
of Preferred Stock. Holders of Common Stock are entitled to one vote per
share on all matters to be voted upon by the stockholders. The holders of
Common Stock are not entitled to preemptive, conversion or subscription
rights.
In the event of liquidation, dissolution or winding-up of the Company, the
holders of Common Stock are entitled to share ratably in all assets
remaining after payment of liabilities, subject to prior distribution
rights of the Preferred Stock, if any, outstanding.
See Note 13 - Subsequent Events.
PREFERRED STOCK
The Board of Directors is authorized, without any action of the
stockholders, to provide for the issuance of one or more series of
Preferred Stock and to fix the designation, preferences, powers and
relative, participating, optional and other rights, qualifications,
limitations and restrictions thereof including, without limitation, the
dividend rate, voting rights, conversion rights, redemption price and
liquidation preference per series of Preferred Stock. Any series of
Preferred Stock so issued may rank senior to the Common Stock with respect
to the payment of dividends or amounts to be distributed upon liquidation,
dissolution or winding up. The existence of authorized but unissued
Preferred Stock may enable the Board of Directors to render more difficult
or to discourage an attempt to obtain control of the company by means of a
merger, tender offer, proxy contest or otherwise. For example, if in the
due exercise of its fiduciary obligations, the Board of Directors were to
determine that a takeover proposal is not in the Company's best interests,
the Board of Directors could cause shares of Preferred Stock to be issued
without stockholder approval in one or more private offerings or other
transactions that might dilute the voting or other rights of the proposed
acquirer or insurgent stockholder or stockholder group. The issuance of
shares of Preferred Stock pursuant to the Board of Directors' authority
described above could decrease the amount of earnings and assets available
for distribution to holders of Common Stock and adversely affect the
rights and powers, including voting rights, of such holders and may have
the effect of delaying, deferring or preventing a change in control of the
Company.
- 47 -
<PAGE> 48
NATIONAL AUTO FINANCE COMPANY, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
The Board of Directors has adopted a Certificate of Designation of the
Mandatorily Redeemable Preferred Stock, Series A (the "Series A Preferred
Stock"). The terms of 2,295 outstanding shares of Series A Preferred Stock
are 7% cumulative dividend, payable quarterly; callable at stated value
plus accrued dividends at the option of the Company; non-voting, except
under certain circumstances; and with mandatorily redemption at stated
value in January 2005. The Company has accrued approximately $120,000 and
$41,000 in preferred stock dividends as of December 31, 1998 and 1997,
which are included in the balance sheet category Mandatorily Redeemable
Preferred Stock. The Company paid approximately $80,000 and $107,000 in
preferred stock dividends during the years ended December 31, 1998 and
1997. Due to its losses, the Company has ceased paying quarterly
dividends.
(6) OTHER OPERATING EXPENSES
Other operating expenses for the years ended December 31, consisted of the
following:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Professional fees ................. $ 1,186 $ 1,037 $ 181
Rent expenses ..................... 307 367 215
Travel and entertainment .......... 311 387 68
Management fees ................... 225 540 480
Other ............................. 2,515 1,271 811
------- ------- -------
$ 4,544 $ 3,602 $ 1,755
======= ======= =======
</TABLE>
Management fees represent fees paid to National Financial Companies LLC
("National Financial") for operational, legal, administrative and other
services provided to the Company and its predecessors under a management
agreement that was terminated in June 1998. See Note 12 - Related Party
Transactions.
Other includes an adjustment to reflect a cumulative change in accounting
principle. Balances representing $474,144 of start-up have been written
off in accordance with adoption of AICPA Statement of Position 98-5,
"Reporting on the Costs of Start-up Activities" for the year ended
December 31, 1998. These costs had been capitalized in conjunction with
the Company establishing a servicing center facility in Jacksonville,
Florida.
(7) COMMITMENTS AND CONTINGENCIES
Future minimum rental payments under various office and equipment leases
as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Year Ending Operating Capital
December 31, Leases Leases Total
------------ ------ ------ -----
(in thousands)
<S> <C> <C> <C>
1999 .............................. $ 732 $ 88 $ 820
2000 .............................. 749 94 843
2001 .............................. 766 101 867
2002 .............................. 711 -- 711
2003 .............................. 438 -- 438
$3,396 $ 283 $3,679
====== ====== ======
</TABLE>
Capital leases are included as a component of notes payable. Rent expense
under operating leases was $965,000, $367,000 and $215,000 in 1998, 1997
and 1996, respectively.
- 48 -
<PAGE> 49
NATIONAL AUTO FINANCE COMPANY, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
On October 22, 1998, Pearl Peckerman, I.R.A., on behalf of herself and all
others similarly situated, filed a putative class action 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. Plaintiffs' allegations of liability are based on various
theories of recovery, including alleged violations of Sections 11, 12(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.
Plaintiffs are seeking compensatory damages, as the court deems
appropriate.
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 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. Plaintiffs' allegations of
liability are based on various theories of recovery, including alleged
violations of Sections 11, 12(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. Plaintiffs are seeking compensatory
damages, as the court deems appropriate.
Both the Peckerman and Rooks complaints focus on 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.
On February 5, 1999, the United States District Court for the Southern
District of Florida ordered that these actions be consolidated. It is
anticipated that the Plaintiffs will file a consolidated class action
complaint styled In re National Auto Finance Company, Inc. Securities
Litigation. Since the consolidated class action complaint has not yet been
filed, the Company is presently unable to assess the merits of the claims,
or determine whether the Company or the plaintiffs will attempt to add
additional parties or claims. 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 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.
The Company has directors' and officers' liability insurance policies that
apply to this litigation with a liability limit of $5 million; 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.
The Company employs its executives pursuant to employment agreements with
terms ranging from two to three years. The agreements provide for salary
and incentive compensation including bonuses and stock option grants. The
employment agreements provide for minimum compensation of $1.1 million in
each of 1999 and 2000, and $326,000 in 2001.
Pursuant to a registration rights agreement with the Company, First
Union's partnership interest (See Note 12) was granted certain rights with
respect to the registration under the Securities Act of Common Stock
distributed to it by the National Auto Partnership (no such distribution
has been made as of the date of this Form 10-K). Under the registration
rights agreement, the First Union Partner can, in certain circumstances,
require the Company to effect up to two registrations of any or all of the
First Union Partner's share of Common Stock. The Company is not required
to honor such request to register shares of Common Stock if the request is
made within 90 days of a firm commitment underwritten public offering or
before the expiration of any lock-up period required by the underwriters
in connection therewith.
- 49 -
<PAGE> 50
NATIONAL AUTO FINANCE COMPANY, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
Pursuant to a registration rights agreement, the Company has granted the
1818 Fund, Progressive, ManuLife, the First Union Partner, FSA and others
certain rights with respect to the registration under the Securities Act
of Common Stock held by it. Under the registration rights agreement, the
other entities can, in certain circumstances, require the Company to
effect up to two registrations of any or all of the their shares of Common
Stock. The Company is not required to honor such request to register
shares of Common Stock if the request is made within 90 days of a firm
commitment underwritten public offering or before the expiration of any
lock-up period required by the underwriters in connection therewith.
(8) INCOME TAXES
The Company had no current income tax provision in 1998 and 1997 due to
its losses incurred for tax purposes.
Pro Forma adjustments for income taxes represent the difference between
historical income taxes and income taxes that would have been reported had
the Partnerships filed income tax returns as taxable "C" corporations in
1996.
<TABLE>
<CAPTION>
For the Year Ended December 31,
-------------------------------
1996
----
(in thousands)
<S> <C>
Pro forma income tax adjustments (unaudited):
Federal ..................................... $1,527
State and local ............................. 162
------
1,689
======
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and tax liabilities as of December
31 were:
<TABLE>
<CAPTION>
1998 1997
-------- --------
(in thousands)
<S> <C> <C>
DEFERRED TAX ASSETS (IN THOUSANDS):
Securitized assets sold for financial statement
purposes, financed for income tax purposes $ 13,518 43
Net operating loss carryforward 6,160 1,543
Total gross deferred asset 19,678 1,586
-------- --------
Less valuation allowance (19,678) (1,457)
-------- --------
Total deferred tax assets -- 129
-------- --------
DEFERRED TAX LIABILITIES:
Other -- 129
-------- --------
Net deferred tax asset $ -- --
======== ========
</TABLE>
As of December 31, 1998, the Company had a $16.4 million net operating
loss for income tax purposes, of which $5.7 million will expire in 2012
and $10.7 million will expire in 2018. Due to the uncertainty of the
realization of the net deferred tax assets, the Company has established a
100% valuation allowance. Under Section 382 of the Internal Revenue Code,
any further significant change in ownership of the Company may limit the
annual utilization of the tax net operating loss carryforward.
- 50 -
<PAGE> 51
NATIONAL AUTO FINANCE COMPANY, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
The actual provision for income taxes for 1998, 1997 and pro forma income
taxes for 1996 differ from the amounts computed by applying federal
statutory rates to income before income taxes and extraordinary item due
to:
<TABLE>
<CAPTION>
For the Year Ended December 31,
--------------------------------------
1998 1997 1996
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Provision (benefit) computed at
federal statutory rate of 34% .................. $(11,418) $ (6,269) $ 1,527
State income taxes, net of federal
tax benefit .................................... (1,219) (669) 162
Change in deferred tax asset valuation
allowance ...................................... 12,637 1,457 --
Deferred income liability recorded in
conjunction with the reorganization ......... -- 5,416 --
Other ............................................ -- 65 --
-------- -------- --------
$ -- $ -- $ 1,689
======== ======== ========
</TABLE>
(9) EMPLOYEE BENEFIT PLANS
The Company adopted a 401(k) profit sharing plan (the "Plan") in August
1996 that is intended to be a tax-qualified defined-contribution plan. All
employees of the Company, other than employees who work less than 1,000
hours per year, are eligible to participate in the Plan once they have
completed three months of continuous service.
Participating employees may contribute up to 15% of their compensation,
with a current maximum contribution of $10,000 to the Plan on a pretax
basis. The Company may make a matching contribution to each employee's
account based on the amount of pretax contributions made by the employee.
Currently, the Company is allocating a 50% match of the first 6%
contributed by the employee, subject to certain legal limitations imposed
on tax-qualified plans. Matching contributions by the Company are made
regardless of profits and are allocated only to qualified participants on
a monthly basis. Compensation expense related to the Plan was
approximately $101,000, $75,000 and $21,000 in 1998, 1997 and 1996,
respectively.
Contributions to the Plan are invested in a variety of funds as directed
by the Plan participants. All pretax employee contributions to the Plan
are 100% vested and matching contributions by the Company are vested at
20% per annum over a five-year period from the date the employee joined
the Plan. All active employees that had completed 1,000 hours of service
as of August 30, 1996 were invited to join the Plan and have
matching-contribution vested rights predated to their date of employment.
Generally, employees may not receive distributions from the Plan until
their retirement, death, certain disability or termination of employment.
Loans are prohibited by the Plan, although distributions for certain
hardship purposes are allowed in accordance with tax regulations
promulgated under the Internal Revenue Code. All distributions from the
Plan are made in the form of a single lump-sum distribution.
- 51 -
<PAGE> 52
NATIONAL AUTO FINANCE COMPANY, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(10) STOCK OPTION PLAN
In 1996, the Board of Directors of the Company adopted the 1996 Share
Incentive Plan (the "Plan"). The Plan provides for the granting of certain
benefits in any one or a combination of (i) stock options, (ii) stock
appreciation rights, (iii) stock awards, (iv) performance awards and (v)
stock units. The aggregate number of shares of Common Stock that may be
subject to such benefits, including stock options, is 500,000 shares of
Common Stock (subject to adjustment in the event of a merger,
consolidation, reorganization, recapitalization, stock dividend, stock
split, reverse stock split, split up, spin-off, combination of shares,
exchange of shares, dividend in-kind or other like change in capital
structure or distribution).
As of December 31, 1998, outstanding stock options with respect to shares
of Common Stock under the Plan where held by the Company's directors,
officers and key employees. The strike price of these options approximates
the fair market value at the date of grant. Employee stock options vest
one-third immediately and one-third in each of the following two years,
respectively; and director stock options vest immediately. All stock
options expire 10 years from the date of grant.
A summary of stock option activity under the Plan is as follows:
<TABLE>
<CAPTION>
Shares Price Per Share
----------- -------------------
<S> <C> <C>
Balance, December 31, 1996.................... -- -- --
Granted.................................. 421,000 $ 3.25 to $ 5.25
Exercised................................ -- -- --
Canceled................................. (42,000) $ 5.25 to $ 5.25
-----------
Balance, December 31, 1997.................... 379,000
===========
Granted.................................. 232,500 $ 2.25 to $ 2.38
Exercised................................ --
Canceled................................. 223,500
-----------
Balance, December 31, 1998.................... 388,000
===========
</TABLE>
The Company accounts for stock-based compensation plans under the
intrinsic value method. The following presents, on a pro forma basis, net
loss and net loss per common share assuming the Company utilized the fair
value method of SFAS 123. The fair value of the options was estimated at
date of grant using a Black-Scholes option pricing model with the
following assumptions for 1998 and 1997: weighted average risk-free
interest rate of 5.0%, volatility factor of the expected market price of
the Company's Common Stock of 46.10 and 64.37, respectively in 1998 and
1997; and expected option lives of ten years. Fair value calculations
assume no dividends will be paid on the Company's Common Stock.
(thousands, except per share data)
For the year ended December 31, 1998
<TABLE>
<CAPTION>
Basic and diluted
-----------------
<S> <C>
Pro forma net loss............................ $ (33,998)
===========
Pro forma net loss per common share:..........
Net loss................................. $ (3.76)
===========
</TABLE>
The weighted average fair value of options granted during 1998 was $1.47.
The employee turnover factor for 1998 was none.
- 52 -
<PAGE> 53
NATIONAL AUTO FINANCE COMPANY, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
For the year ended December 31, 1997
<TABLE>
<CAPTION>
Basic and diluted
-----------------
<S> <C>
Pro forma net loss............................ $(19,029)
========
Pro forma net loss per common share:..........
Before extraordinary gain................ $ (2.58)
Extraordinary item....................... (0.10)
--------
Net loss................................. $ (2.68)
========
</TABLE>
The weighted average fair value of options granted during 1997 was $1.95.
The employee turnover factor for 1997 was none.
The Company and certain of its executive officers executed employment
agreements in which the Company agreed to grant such executive officers as
a group an aggregate of up to 2,196,292 incentive stock options of the
Company's Common Stock , subject to the ratification by the Company's
Board of Directors and shareholder approval to amend the Company's
existing stock option plan to increase the number of authorized shares of
Common Stock reserved for future issuance of such shares upon exercise of
such incentive stock options and the filing with the Securities and
Exchange Commission of appropriate amendments to the existing Registration
Statement on Form S-8 or in the alternative adoption of a new incentive
stock option plan and the filing with the Securities and Exchange
Commission of an additional Registration Statement on Form S-8.
Accordingly, these option shares are not included above.
(11) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
o The carrying amounts of cash and cash equivalents have approximate
fair value because of the short maturity of these instruments.
o Retained Interest in Securitizations is stated at estimated fair
value.
o The fair value of the Junior Subordinated Notes is determined as
the present value of expected future cash flows discounted at an
interest rate for such borrowing that is based on a spread above
the actual yield on Senior Notes. The fair value, calculated on
such basis, was $1,546,000 and $1,450,000 at December 31, 1998 and
1997, respectively. The book value of such debt was $1,940,000 and
$1,940,000 at December 31, 1998 and 1997, respectively.
o The fair value of Senior Subordinated Notes and notes payable is
determined as the present value of expected future cash flows
discounted at the interest rate currently offered to the Company,
which approximates rates currently offered for Loans of similar
terms to companies with comparable credit risk. The carrying
amount approximates fair value.
- 53 -
<PAGE> 54
NATIONAL AUTO FINANCE COMPANY, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(12) RELATED PARTY TRANSACTIONS
NATIONAL FINANCIAL COMPANIES LLC ("NFC")
The Company was previously party to a management agreement and a service
agreement pursuant to which NFC provided operational, financial, legal,
accounting, management, advisory and other administrative services
relating to the management, business operations, assets and interests of
the Company. This agreement was terminated in June 1998. Amounts paid to
NFC pursuant to such agreements were $289,000, $884,000 and $603,000 in
1998, 1997 and 1996, respectively; $333,000 of the amount paid in 1997 was
for services as described in the following paragraph. Gary L. Shapiro, the
former Chairman and Chief Executive Officer of the Company, is the
Chairman and Chief Executive Officer and a principal owner of NFC and
National Auto Finance Corporation ("National Auto"), the general partner
of the National Auto Partnership. National Auto Partnership owns a 22.1%
beneficial interest in the Company. Keith B. Stein, Chief Executive
Officer, Vice Chairman, Treasurer and a Director of the Company, was
formerly a managing director of NFC.
During 1997, NFC provided various services related to the December Private
Placement. NFC received $333,000 in fees and reimbursements related to
such services, which was treated as a cost of such offering.
During 1998, NFC acquired a controlling interest in BNI, Inc. BNI is the
vendor for the Company's Loan servicing software and hardware system. The
Company paid BNI $859,000 and $644,000 in 1998 and 1997 for this system.
JUNIOR SUBORDINATED NOTES
The Junior Subordinated Notes are payable to certain affiliates of the
Company on January 31, 2002, and accrue interest at eight percent (8%) per
annum. Such debt is subordinated to all other debt of the Company.
Interest expense recognized for this debt for the years ended December 31,
1998, 1997 and 1996 was $155,000, $201,000 and $580,000 respectively. See
Note 13 - Subsequent Events .
SENIOR SUBORDINATED NOTES
As discussed in Note 4, in conjunction with the issuance of the Senior
Subordinated Notes and Common Stock in December, 1997, representatives of
each of the stock purchasers, who were also lenders of Senior Subordinated
Notes, were elected to the Board of Directors. As discussed in Note 13,
the Senior Subordinated Noteholders were granted the right to designate
three additional representatives to the Board in conjunction with the
Company's Restructuring.
FIRST UNION
Until March 1999, the Company was party to an agreement with First Union
and certain of its affiliates (the "First Union Strategic Alliance")
whereby First Union received a fee from the Company for each purchase of a
Loan through a dealer relationship established as a result of the First
Union Strategic Alliance. Fees paid to First Union under this arrangement
were approximately $247,000, $400,000 and $137,000 in 1998, 1997 and 1996,
respectively.
For the years ended December 31, 1998 and 1997, approximately 44% and 43%
of the Loans the Company purchased were attributable to Dealers
established through the First Union Strategic Alliance.
See Note 13 - Subsequent Events for a discussion of cancellation of the
First Union Strategic Alliance.
- 54 -
<PAGE> 55
NATIONAL AUTO FINANCE COMPANY, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
First Union has also served as underwriting and placement agent related to
the Company's past securitizations. Underwriting fees paid and expense
reimbursements related to securitizations were approximately $0, $425,000
and $392,000 in 1998, 1997 and 1996, respectively.
First Union also owns 100% of the Class B or Senior Certificates related
to the Master Trust. Such investment aggregated $69 million and $96
million at December 31, 1998 and 1997.
First Union acted as placement agent related to the December 1997 Private
Placement for which First Union received fees and expense reimbursements
of $1.7 million.
First Union received a fee of $25,000 in 1997 in conjunction with
negotiation of amendments to the Company's Master Trust Agreement at
December 31, 1997. As described in Note 4, the Company has a note payable
to First Union with outstanding balances of $735,000 and $1.0 million as
of December 31, 1998 and 1997, respectively, related to equipment
financing.
A subsidiary of First Union is a limited partner of the National Auto
Partnership and holds a vested limited, minority interests in the National
Auto Partnership.
(13) SUBSEQUENT EVENTS
COMPREHENSIVE FINANCIAL RESTRUCTURING
On April 7, 1999, the Company completed a comprehensive financial
restructuring (the "Restructuring") of its Senior Subordinated and Junior
Subordinated Notes, resolved certain other issues with its Senior
Subordinated Noteholders and Junior Subordinated Noteholders, entered into
several loan facilities and arrangements with First Union, and modified
certain of the terms of the insurance guarantee arrangements with FSA,
related to the Company's securitized asset-backed bonds.
The agreements and transactions with the Senior Subordinated Noteholders
provide for and include, among other things: (1) the waiver of the past
defaults and breaches of covenants, representations and warranties, if
any, made in connection with the Senior Subordinated Notes; (2) the
elimination of the previously existing Net Worth Covenant; (3) the
establishment of a new covenant requiring that, on a quarterly basis, the
Company's net return on assets invested in loan receivables, expressed as
a percentage, exceed pre-established quarterly goals (the "Return on
Assets Covenant"); the first quarterly measurement period for this
covenant begins as of the quarter ending September 30, 1999; (4) the
granting to the Company of the option to pay during the two-year period
ending March 31, 2001 fifty percent (50%) of the interest owed on the
Senior Subordinated Notes (and the interest on such interest) through the
issuance of additional Senior Subordinated Notes, convertible into Common
Stock at the conversion price of $.75 per share; (5) the issuance to the
Senior Subordinated Noteholders of 7,071,429 shares of Common Stock as
consideration for the waivers and amendments granted to the Company; (6)
the issuance to those Noteholders that also purchased Common Stock of the
Company at the time of their debt investment 1,178,571 additional shares
of Common Stock in exchange for the execution and delivery of full and
complete releases of any claims arising by virtue of those Noteholders'
equity investment; and (7) the execution and delivery of full and complete
releases by and among the Company, the Noteholders and affiliates of and
other parties related to each of such parties. In addition, the Senior
Subordinated Noteholders were granted the right to name three additional
persons to the Board of Directors of the Company, increasing to six seats
their total number of Board representatives, thereby giving them majority
control of the Board.
- 55 -
<PAGE> 56
NATIONAL AUTO FINANCE COMPANY, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
The agreements and transactions with First Union provide for and include,
among other things: (1) the extension of the Master Trust warehouse line
for an additional two years (through March 31, 2001) and an increase in
the amount the Master Trust may borrow under such facility from $75
million to $85 million; the interest rate for this facility is established
at LIBOR + 1.5%; (2) the commitment by First Union to purchase up to $20
million of subordinated asset-backed debt securities in connection with
the Company's securitizations; the interest rate for this commitment is
established at LIBOR + 5%; (3) a revolving credit facility enabling the
Company to borrow up to $8 million for working capital purposes, secured
by the Company's Residual Interest in Securitizations; the interest rate
for this facility is established at LIBOR + 5% and (4) waiver of existing
violation of certain covenants with respect to the Master Trust,
specifically, the covenant that the Master Trust maintain certain interest
rate hedging agreements and covenants related to allowable repossession
and recovery limits.
The agreements and transactions with the Junior Subordinated Noteholders
provide for and include, among other things: (1) the waiver of the past
defaults and breaches under the Junior Subordinated Notes; (2) the
granting to the Company of the option to pay during the period ending
January 31, 2002 up to one hundred percent (100%) of the interest owed on
the Junior Subordinated Notes (and the interest on such interest) through
the issuance of additional Junior Subordinated Notes that are convertible
into Common Stock at the conversion price of $.75 per share; (3) the
granting to the designees of the Senior Subordinated Noteholders to the
Company's Board of Directors an irrevocable proxy to vote the 4,230,000
shares of Common Stock held by National Auto Finance Company, LP (a
limited partnership controlled by certain of the Junior Subordinated
Noteholders) in all matters as to which such shares are entitled to vote;
(4) the execution and delivery of full and complete releases by and among
the Company, the Senior Subordinated Noteholders, the Junior Subordinated
Noteholders, National Auto Finance Company, LP, their respective officers,
directors, affiliates, and other parties related to each of such parties;
and (5) the granting of a covenant not to sue in the future by the Junior
Subordinated Noteholders, National Auto Finance Company, LP, and
affiliates of and other parties related to each of such parties in favor
of the Company, the Senior Subordinated Noteholders, their respective
officers, directors, affiliates, and other parties related to both such
parties.
The agreements and transactions with FSA provide for and include, among
other things: (1) the resetting of the cash spread accounts in each of the
Company's term asset-backed securitizations that have been guaranteed by
FSA to 11% of the outstanding principal balance of the receivables in each
of such securitizations for the remaining term of such securitizations
(the Company has already funded all such spread accounts above such 11%
level and, therefore, expects to receive in June 1999, from the trustee of
each such securitizations a distribution of all amounts previously funded
in excess of such 11% level, anticipated to be approximately $3.0
million); (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.
- 56 -
<PAGE> 57
NATIONAL AUTO FINANCE COMPANY, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
FIRST UNION STRATEGIC ALLIANCE
In March of 1999, First Union announced publicly that it was exiting the
indirect auto finance business due to realigned business strategies. As a
result, the Company's referral agreement with First Union has been
terminated. The Company will, nonetheless, continue the relationships it
has established with, and continue to actively service the First
Union-related Dealers. The Company will not, however, be obligated to pay
to First Union referral fees related to business obtained through those
Dealers. The Company's loan volume may be materially, adversely affected
by the termination of the First Union Strategic Alliance. The Company will
continue its relationship with First Union through certain credit
facilities as described more fully above.
(14) LIQUIDITY AND GOING CONCERN
The Company has suffered significant losses from operations during 1998
and 1997, has a capital deficiency as of December 31, 1998, has
experienced Insurance Agreement Events of Default with respect to its
permanent securitizations and at December 31, 1998 was in violation of
various covenants related to its borrowings and the Master Trust. Such
matters raise substantial doubt about the Company's ability to continue as
a going concern. Management's plans in regards to these matters are
described in the following paragraph.
The Company's business requires substantial cash to support the funding of
Cash Spread Accounts for its securitizations, issuance costs of its
securitizations, operating expenses, tax payments, debt service and other
cash requirements. These cash requirements increase as the number of Loans
purchased and serviced by the Company increase. Historically, the Company
has operated on a negative operating cash flow basis and its negative
operating cash flow is expected to continue for the foreseeable future.
The Company has funded its negative operating cash flows principally
through borrowings under its secured financing facilities, issuances of
subordinated debt and sales of equity securities.
As discussed in Note 13 - Subsequent Events, on April 7, 1999, the Company
completed a comprehensive financial restructuring. As the result of the
Restructuring, (1) the Company may pay 50% of its interest expense on its
Senior Subordinated Notes over the two-year period ending March 31, 2001
by issuing additional senior subordinated notes, thereby reducing its cash
requirements, a reduction from $6.9 million in 1998 to $3.6 million over
the four quarters ending March 31, 2000; (2) the Company's may defer cash
interest payments on its Junior Subordinated Notes January 31, 2002; (3)
the Company's receipt of excess cash flows from its four Permanent
Securitization Trusts insured by FSA and from its Master Trust has resumed
(in April 1999, the Company received a total of $3.0 million from such
Trusts); 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 (the Company
estimates it will receive an additional approximately $5 million in the
aggregate from such trusts in the months of May and June 1999); (4) the
Company will be able to fund a portion of the subordinated credit
enhancements required for its future securitizations through the sale of
up to $20 million of subordinated asset-backed securities to First Union;
and (5) the Company may borrow up to $8 million for working capital
purposes under its new two-year working capital facility with First Union,
secured by its ESRs.
Further, the Company's business plan for the next two years contemplates
an increase in overall revenue and cash flow over 1998 through the gradual
but steady increase in loan origination volume, the sale of ancillary Loan
products (such as GAP insurance, which covers exposure to uninsured
losses, and warranty products), the aggressive collection of late fees and
deficiency balances, and increased servicing fees through the servicing of
a larger owned portfolio as well as third-party servicing. Although there
can be no assurance that the Company will successfully execute this
business plan, both the Restructuring and the business plan were designed
and implemented to enable the Company, among other things to increase its
cash flow and stabilize its financial condition.
- 57 -
<PAGE> 58
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
Certain information concerning the executive officers and directors of the
Company as of April 26, 1999 is set forth below:
<TABLE>
<CAPTION>
Name Age Position with the Company
- ---- --- -------------------------
<S> <C> <C>
Keith B. Stein............. 41 Vice Chairman, Chief Executive Officer, Treasurer and Director
William G. Magro............. 49 Executive Vice President, Chief Operating Officer
Thomas Costanza............ 33 Vice President and Chief Financial Officer
Stephen Veth............... 50 Vice President, Secretary and General Counsel
Brent E. Wombolt........... 40 Vice President, Operations and Loan Originations
James E. Shuler............ 38 Vice President, Sales and Marketing
Joseph Glick............... 36 Vice President, Collections and Customer Service
Joseph P. Donlan........... 52 Director
Peter Offermann............ 54 Director
David W. Young............. 56 Director
</TABLE>
Keith B. Stein has been Chief Executive Officer of the Company since May
1998, and was the Chief Financial Officer of the Company from February 1998 to
August 1998, Vice Chairman, Treasurer and a Director of the Company since
January 1997, and was Secretary of the Company from October 1994 to June 1997
and Executive Vice President of the Company from October 1994 to January 1997.
Mr. Stein was a Managing Director of National Financial Companies LLC from
January 1995 to May 1998. Mr. Stein served from March 1993 to September 1994 as
Senior Vice President, Secretary and General Counsel of WestPoint Stevens Inc.,
a textile company, after having served the same company from October 1992 to
February 1993 in the capacity of Acting General Counsel and Secretary. From May
1989 to February 1993, Mr. Stein was associated with the law firm of Weil,
Gotshal & Manges LLP, outside counsel to the Company. Mr. Stein has served as a
director of DVL, Inc., a public company engaged in the real estate finance
business, since September 1996.
William G. Magro has been the Chief Operating Officer of the Company since
January 1998, Executive Vice President of the Company since October 1994 and was
President of the Financial Services Division of the Company from September 1997
to June 1998. Mr. Magro served from January 1985 to August 1994 as a Director of
Collection and Client Services for Omni Financial Services of America ("OFSA").
Mr. Magro served from January 1972 to December 1984 as a Collection Supervisor
and a Dealer Relations Supervisor at General Motors Acceptance Corp.
Thomas Costanza has been the Vice President and Chief Financial Officer of
the Company since August 1998. Mr. Costanza served as Corporate Controller and
acting Chief Financial Officer with Golf Technology Holding Corp. from October
1996 to July 1998. Mr. Costanza held a management position with Barnett Bank
Inc.'s corporate audit group from July 1994 to October 1996.
Stephen Veth has been the Vice President, Secretary and General Counsel of
the Company since March 1999. Mr. Veth served as Vice President and Legal
Counsel of First Street Mortgage Corp. from September 1997 to December 1998. Mr.
Veth was General Counsel of EquiCredit Corporation from July 1990 to August
1997.
Brent E. Wombolt has been Vice President of the Company since February
1998 and Assistant Vice President of the Company from May 1997 to January 1998.
Mr. Wombolt held various positions with First Merchants Acceptance Corporation
from March 1995 through July 1996. Mr. Wombolt held various positions with OFSA
from December 1984 through February 1995.
James E. Shuler has been Vice President of the Company since February 1998
and from May 1996 to February 1998 held various positions with the Company. Mr.
Shuler was employed by TranSouth Financial Service, a consumer finance company,
from September 1994 to February 1998. Mr. Shuler held various positions with
OFSA from August 1988 to September 1994.
- 58 -
<PAGE> 59
Joseph Glick has been Vice President of the Company since March 1999,
Assistant Vice President since August 1998, Director since March 1998, and
Manager since January 1997. Mr. Glick held various positions with World Omni
Financial Corporation from September 1988 to October 1995 including Customer
Service Manager, Accelerated Management Training Candidate, Corporate Trainer,
and Collection Supervisor.
Joseph P. Donlan has been a Director of the Company since December 1997
and is a member of the Audit Committee and the Compensation Committee of the
Board of Directors of the Company. Mr. Donlan has held a number of positions
with Brown Brothers Harriman & Co. ("Brown Brothers") since 1970, and is
currently Co-manager of The 1818 Mezzanine Fund, L.P., a $250 million private
equity fund. Prior to his current position, Mr. Donlan was the Manager of Brown
Brothers' US Banking Department with responsibility for managing five banking
groups engaged in international trade finance, domestic commercial finance,
financial advisory service and private placement activities. Mr. Donlan is also
a Director of the J.H. Heafner Company, System One Service, Inc. and One Call
Medical, Inc.
Peter Offermann has been a Director of the Company since January 1997 and
is Chairman of the Audit Committee and a member of the Compensation Committee of
the Board of Directors of the Company. Since January 1995, Mr. Offermann has
served as Executive Vice President and Chief Financial Officer of TLC Beatrice
International Holdings, Inc., a food manufacturing and distribution business.
Since May 1994, Mr. Offermann has been President of Offermann Financial Inc., a
provider of strategic financial advice. From 1968 to April 1994, Mr. Offermann
held a number of positions with Bankers Trust Company and its affiliates,
including Manager Director of BT Investment Partners, Inc. from October 1992 to
May 1994, Managing Director of BT Securities Corporation from October 1991 to
October 1992 and Managing Director of Bankers Trust Company from 1986 to October
1991. Since April 1996, Mr. Offermann has served as a Director of Jan Bell
Marketing, Inc., a jewelry distribution company.
David W. Young has been a Director of the Company since December 1997.
From June 1995 to January 1999, Mr. Young served as the Chief Investment Officer
of The Progressive Corporation, a $4.8 billion property and casualty company.
Prior to that time, Mr. Young served as Senior Managing Director of Progressive
Partners from July 1988 to June 1995. Prior to joining Progressive Partners in
1988, Mr. Young was a Vice President with Salomon Brothers, Inc. from November
1983 to July 1988.
ELECTION OF DIRECTORS
Pursuant to the Certificate of Incorporation and By-laws of the Company,
the Board of Directors consists of such number of directors as the Board of
Directors determines from time to time. The number of directors of the Board of
Directors is currently set at nine and currently consists of four directors. The
directors are divided into three classes. The initial term of office of the
first class of directors ("Class I Directors") expired at the Annual Meeting of
the Company's stockholders in June 1997 and such directors were re-elected at
that meeting for a three-year term expiring at the Annual Meeting of the
Company's stockholders in 2000. The initial term of office of the second class
of directors ("Class II Directors") and the third class of directors ("Class III
Directors") will expire at the Annual Meeting of the Company's stockholders with
respect to the years 1998 and 1999, respectively. The terms of office of each
class of directors are staggered so that the terms of no more than one class of
directors will expire in any one year.
At each Annual Meeting of stockholders, the directors elected to succeed
those whose terms then expire are elected for a term of office to expire at the
third succeeding Annual Meeting of stockholders, with each director holding
office until his or her successor is duly elected and qualified, or until his or
her earlier resignation or removal. The number of Class I Directors currently is
set at three directors, and currently consists of Mr. Stein, Vice Chairman,
Chief Executive Officer and Treasurer of the Company, and Mr. Offermann. The
number of Class II Directors currently is set at three directors all of which
positions are currently vacant. The number of Class III Directors is currently
set at three directors, and currently consists of Mr. Donlan, Mr. Young and a
vacant seat. In conjunction with the Company's Restructuring, 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. Although such designees have not yet been identified to the Board, it is
anticipated that they will be identified and elected to the Board within the
next sixty days.
Messrs. Donlan and Young were named to the Company's Board of Directors in
December 1997, pursuant to certain rights to nominate directors granted to The
1818 Mezzanine Fund, LP (the "1818 Fund") and Progressive Investment
- 59 -
<PAGE> 60
Company (and an affiliate thereof) (collectively, "Progressive"), respectively,
under the December 1997 Securities Purchase Agreement.
The following former Directors resigned their positions in the months
indicated: Mr. Roy E. Tipton (June 1998); Mr. Stephen L. Gurba (June 1998); Mr.
Gary L. Shapiro (December 1998); and Mr. Morgan M. Schuessler (April 1999).
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
In 1997 and 1998, all stock ownership reports to be filed by officers
and directors of National Auto Finance Company, Inc. were filed timely.
(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.)
The following table sets forth information concerning total compensation earned
by or paid to the Company's Chief Executive Officer, the four other most highly
compensated executive officers of the Company employed as of December 31, 1998,
and Messrs. Tipton and Adams, who served as executive officers during 1998, but
were not serving in such capacity as of December 31, 1998 (the "named executive
officers") during fiscal 1998, 1997 and 1996 for services rendered to the
Company.
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
------------------------------------------------- ------------
Other
Annual Securities All Other
Compen- Underlying Compensa-
Name and Principal Position Year(1) Salary Bonus(1) sation Options/SARs tion
- --------------------------- ------- ------ -------- ------ ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Keith B. Stein (2) 1998 $ 257,808 $ 150,000 $ -- (3) 85,000 $ --
Chief Executive Officer 1997 -- 75,000 -- 37,500 --
1996 -- -- -- -- --
William G. Magro 1998 173,748 90,000 -- (3) 30,000 76,838 (5)
Executive Vice President, 1997 130,000 55,000 -- (3) 35,000 30,077 (5)
Chief Operating Officer 1996 110,571 40,839 -- (3) -- 11,041 (5)
Roy E. Tipton (6) 1998 107,660 -- -- (3) -- 125,000 (6)
Former President 1997 155,000 68,750 -- (3) 65,000 25,000 (4)
1996 130,000 59,131 -- (3) -- --
Joel Ronkin (8) 1998 135,683 42,000 -- (3) 10,000 --
Former Vice President, Secretary 1997 53,680 20,000 -- (3) 5,000 --
and General Counsel 1996 -- -- -- -- --
Martin Mattone (8) 1998 129,472 33,000 -- (3) 15,000 --
Former Vice President 1997 83,740 -- -- (3) -- --
Loan Originations/Asset 1998 -- -- -- -- --
Remarketing
Kevin G. Adams (7) 1998 110,982 -- -- (3) -- 30,063 (7)
Former Sr. Vice President 1997 115,000 75,000 -- (3) 27,000 --
Finance 1996 105,000 35,630 -- (3) -- --
Brent Wombolt 1998 121,288 20,000 -- (3) 7,500 --
Vice President, Operations 1997 78,751 40,000 -- (3) 15,000 --
and Loan Originations 1996 -- -- -- -- --
</TABLE>
- -----------------
(1) Bonuses for senior management for services rendered in a given year are
determined by the Compensation Committee of the Board. These bonuses are
paid by the end of March of the year following the awarding of bonuses.
See "--Employment Agreements."
- 60 -
<PAGE> 61
(2) No compensation was received directly from the Company in 1997 and 1996.
The Company, however, paid fees and costs to NFC, pursuant to a management
and service agreement, for the rendering of various services in support of
the Company's operations. Mr. Stein was formerly a Managing Director of
NFC.
(3) Reflects immaterial amounts that, in the aggregate, are below reportable
thresholds with respect to 401(k) contributions made by the Company in
accordance with the Company's 401(k) Plan and reimbursement for certain
monthly automobile expenses.
(4) Reflects a bonus for the execution by Mr. Tipton of an extension of his
employment contract with the Company.
(5) Reflects amounts paid to Mr. Magro for relocation expenses in 1998, 1997
and 1996, respectively.
(6) Reflects a payment for the severance by Mr. Tipton of his employment
contract with the Company. Mr. Tipton resigned his position with the
Company effective June 1998.
(7) Reflects a payment to Mr. Adams for severance of his employment with the
Company. Mr. Adams' position with the Company terminated effective October
1998 in conjunction with the Company's move from Boca Raton, Florida to
Jacksonville, Florida.
(8) Mr. Ronkin and Mr. Mattone resigned their positions effective March 1999.
No stock appreciation rights were awarded to, earned by or paid to the named
executive officers during the fiscal year ended December 31, 1998.
DIRECTOR COMPENSATION
Directors who are also employees of the Company (including Keith B. Stein,
Vice-Chairman and Chief Executive Officer) receive no extra compensation or
retainer fees for their service as members of the Board of Directors or any
committee thereof. Prior to 1998, independent non-employee directors of the
Company received an annual retainer of $10,000. In addition, each independent
non-employee director received $1,000 for each meeting of the Board of Directors
attended and $500 for each meeting of a committee attended, plus, in each case,
expenses incident to attendance at such meetings. Since April 1998, the Board
suspended fees payable to Directors. Stock options exercisable for shares of
Common Stock are granted to independent non-employee directors of the Company
pursuant to the Company's 1996 Share Incentive Plan in order to provide such
directors an opportunity to acquire a proprietary interest in the Company
through automatic, non-discretionary awards of Common Stock, and thus to create
in such directors an increased interest in and a greater concern for the welfare
of the Company. The purchase price of the Common Stock covered by such options
was set at the fair market value of such Common Stock on the date of grant, and
when such option shares were repriced, the purchase price was set at least at
the fair market value of the Common Stock on the date of such repricing. These
options are fully exercisable on the first anniversary of the date of grant. In
1997, the Company granted to each independent non-employee director of the
Company stock options to acquire 10,000 shares of Common Stock.
EMPLOYMENT AGREEMENTS
The Company employs each of Keith B. Stein, Vice Chairman, Chief Executive
Officer, Treasurer and Director; William G. Magro, Executive Vice President and
Chief Operating Officer; Thomas Costanza, Vice President and Chief Financial
Officer; Brent E. Wombolt, Vice President, Operations and Loan Originations; and
James E. Shuler, Vice President, Sales and Marketing pursuant to employment
agreements. The agreements provide for salary and incentive compensation
including bonuses and stock option grants. The employment agreements have been
disclosed in their entirety, filed as attachments to the Company's June 30, 1998
Form 10-Q filed with the Securities and Exchange Commission on August 14, 1998.
- 61 -
<PAGE> 62
OPTION GRANTS
The following table sets forth stock options granted in 1998 to each of
the Company's executive officers named in the Summary Compensation Table. The
Company did not issue any stock appreciation rights. The table also sets forth
the hypothetical gains that would exist for the options at the end of their
ten-year terms for the executive officers named in the Summary Compensation
Table at assumed compound rates of stock appreciation of 0%, 5% and 10%. The
actual future value of the options will depend on the market value of the
Company's Common Stock.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants
-----------------------------------------------------------------------------------
Percent
of Total
Number of Options/ Potential Realizable Value
Securities SARs at Assumed Annual Rates
Underlying Granted to Exercise of Stock Price Appreciation
Options/ Employees or Base For Option Term(a)
SARs in Fiscal Price Expiration ----------------------------
Name Granted(#) Year ($/Sh) Date 5% ($) 10% ($)
---- ---------- ---- ------ ---- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Keith B. Stein 85,000 36% $ 2.25 2009 $ 0 $ 0
William G. Magro 30,000 12 2.25 2009 0 0
Martin Mattone 15,000 6 2.25 2009 0 0
Joel Ronkin 10,000 4 2.25 2009 0 0
Brent Wombolt 7,500 3 2.25 2009 0 0
</TABLE>
(a) These amounts, based on assumed appreciation rates of 5% and 10%,
the rates prescribed by the Securities and Exchange Commission
rules, are not intended to forecast possible future appreciation, if
any, of the Company's stock price.
In conjunction with employment agreements that the Company's executive
officers executed during 1998, the Company agreed to grant such executive
officers as a group an aggregate of 3,027,222 incentive stock options of the
Company's Common Stock, subject to the ratification by the Company's Board of
Directors and shareholder approval to amend the Company's existing stock option
plan to increase the number of authorized shares of stock reserved for future
issuance of such shares upon exercise of such incentive stock options, and the
filing with the Securities and Exchange Commission of appropriate amendments to
the existing Registration Statement on Form S-8, or in the alternative adoption
of a new incentive stock option plan and the filing with the Securities and
Exchange Commission of an additional Registration Statement on Form S-8. Such
options are therefore not included in the table above shares are therefore not
included in the table above.
There were no shares acquired on exercise of stock options and no gains
realized upon exercise in 1998 by the Company's named executive officers. The
following table sets forth the number of shares covered by exercisable and
unexercisable options held by such executives on December 31, 1998 and the
aggregate gains that would have been realized had these options been exercised
on December 31, 1998, even though these options were not exercised on December
31, 1998. The Company did not issue stock appreciation rights.
FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised In-The-
Options/SARs at FY- Money Options/SAR at Fiscal
End (#) Year End (a) ($)
---------------------------- -----------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Keith B. Stein 122,500 -- $ -- $ --
William G. Magro 33,334 31,666 -- --
Brent Wombolt 12,500 10,000 -- --
Joel Ronkin 6,666 8,334 -- --
Martin Mattone 5,000 10,000 -- --
James Shuler 12,500 10,000 -- --
</TABLE>
(a) None of the options were in the money as of December 31, 1998.
- 62 -
<PAGE> 63
(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.)
- 63 -
<PAGE> 64
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of April 26, 1999, by (i) each person
who is known by the Company to own beneficially 5.0% or more of the Common
Stock; (ii) each director of the Company, (iii) each of the named executive
officers; and (iv) all directors and executive officers as a group. Unless
otherwise indicated, the Company believes all persons listed have sole voting
power and investment power with respect to such shares.
<TABLE>
<CAPTION>
Name and Address Number of
of Beneficial Ownership (1)(2) Shares(8) Percent(8)
------------------------------ --------- ----------
<S> <C> <C>
National Auto Finance Company LP (3)............................ 4,230,000 22.1%
Via Mizner Financial Plaza, Suite 200
700 South Federal Highway
Boca Raton, Florida 33432
The Progressive Investment Company, Inc......................... 3,863,623 20.2%
3 Parklands Drive
Darien, Connecticut 06820
The 1818 Mezzanine Fund, LP..................................... 3,534,618 18.4%
59 Wall Street
New York, New York 10005
The Structured Finance High Yield Fund, LLC..................... 2,950,814 15.4%
One Gateway Center
Newark, New Jersey 07102
CEDE & Co. Depository Trust Company, as trustee (4)............. 2,412,024 12.6%
7 Hanover Square - 23rd Floor
New York, New York 10004
ManuLife Financial.............................................. 1,438,302 7.5%
45 Milk Street, Suite 600
Boston, Massachusetts 02109
Keith B. Stein (5).............................................. 122,500 *
William G. Magro................................................ 43,889 *
Brent E. Wombolt................................................ 15,833 *
James E. Shuler................................................. 15,833 *
Peter Offermann................................................. 10,000 *
Joseph P. Donlan (6)............................................ 10,000 *
David W. Young (7).............................................. 10,000 *
All directors and executive officers as a group
(7 persons)............................................. 228,055 1.1%
</TABLE>
- -------------------
* Represents less than 1.0%
(1) The business address of each of the directors and current executive
officers listed in the table above is c/o National Auto Finance Company,
Inc., 10302 Deerwood Park Blvd. Suite 100, Jacksonville, Florida 32256.
(2) Except as otherwise indicated, includes total number of shares outstanding
and the number of shares that each person has the right to acquire within
60 days from April 26, 1999 through the exercise of stock options granted
to certain officers and directors (See Note 10 of the Notes to the
Financial Statements) or warrants issued to the Senior Subordinated
Noteholders. Warrants included are 593,761 for Structured Finance High
Yield Fund LLC, 415,570 for 1818 Mezzanine Fund LP, 363,623 for
Progressive Investment Company and 259,730 for ManuLife Financial. Amounts
shown exclude shares that each person has the right to acquire after 60
days from April 26, 1999 through the exercise of options.
(3) The general partner of the National Auto Partnership is National Auto
Finance Corporation ("National Auto"). National Auto holds a 1% general
partner interest in the National Auto Partnership. The limited partners of
the National Auto Partnership include, among others, Ironbrand Capital,
LLC, a wholly-owned subsidiary of First Union National Bank ("First Union
Partner"), Keith B. Stein and William G. Magro. The remaining limited
partners of the National Auto Partnership hold the balance of the limited
partner economic interests. Except for the First Union Partner, each
limited partner of the National Auto Partnership has the right to vote on
certain matters
- 64 -
<PAGE> 65
specified in the National Auto Partnership agreement commensurate with
each such limited partner's respective economic limited partner interest.
In accordance with the National Auto Partnership agreement, the consent of
the First Union Partner is generally required before the National Auto
Partnership may take certain fundamental actions. Pursuant to the
Restructuring (see Note 13 of the Notes to Financial Statements), the
National Auto Partnership has granted an irrevocable proxy to the Board
designees of the Senior Subordinated Noteholders to vote the 4,230,000
shares of Common Stock held by the National Auto Partnership in all
matters as to which such shares are entitled to vote.
(4) Includes shares held by CEDE & Co. Depository Trust Company, as trustee
and as investment manager and agent for an institutional investor.
(5) Excludes shares held by the National Auto Partnership. Each such person
disclaims beneficial ownership with respect to such shares.
(6) Mr. Donlan is the Co-manager of the 1818 Mezzanine Fund, LP, which holds
3,534,620 shares of the Company's Common Stock and Warrants to purchase
415,570 shares of the Company's Common Stock at $0.01 per share.
(7) Mr. Young was formerly the Chief Investment Officer of the Progressive
Investment Company, Inc., which holds 3,500,000 shares of the Company's
Common Stock and Warrants to purchase 363,623 shares of the Company's
Common Stock at $0.01 per share.
(8) The numbers reflected in the table do include the additional shares of
Common Stock issued pursuant to the Restructuring (see Note 13 of the
Notes to Financial Statements - Subsequent Events).
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
GENERAL
The Company, from time to time, has entered into transactions with certain
of its principals, stockholders and entities in which they have an interest. The
Company believes that each such transaction has been on terms no less favorable
to the Company than could have been obtained in a transaction with an
independent third party.
REORGANIZATION
The National Auto Partnership and Auto Credit Clearinghouse LP ("ACCH
Partnership") were organized in October 1994 and September 1995, respectively,
and conducted the business of the Company until January 29, 1997. On that day,
in connection with the closing of the Company's Initial Public Offering, (i) the
assets and liabilities of the ACCH Partnership were transferred to the National
Auto Partnership, (ii) the ACCH Partnership was dissolved, and (iii) immediately
thereafter the assets and liabilities of the National Auto Partnership were
transferred to the Company in exchange for all of the Common Stock then
outstanding and all of the preferred stock of the Company then outstanding (the
"Reorganization"). Directors and executive officers of the Company had a direct
and material interest in certain transactions that constituted the
Reorganization as described below. The Company believes that the terms of such
transactions were as favorable as those that could have been obtained from an
unaffiliated third party.
FIRST UNION
Lending
First Union is the sole holder of the Class B Certificates that relate to
the Revolving Securitization.
Placement Agent and Underwriting
First Union Capital Markets Corp. ("FUCMC"), a wholly owned subsidiary of
First Union Corporation has served as placement agent for the Senior
Subordinated Notes. FUCMC has also privately placed and acted as underwriter for
a public offering of asset-backed securities of the Company in connection with
the Company's securitization transactions
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and may continue to act as placement agent or underwriter for the
Company's future securitization and financing activities.
Registration Rights
Pursuant to a registration rights agreement with the Company, the First
Union Partner was granted certain rights with respect to the registration under
the Securities Act of Common Stock distributed to it by the National Auto
Partnership (no such distribution has been made as of the date of this Form
10-K).
Under the registration rights agreement, the First Union Partner can, in
certain circumstances, require the Company to effect up to two registrations of
any or all of the First Union Partner's share of Common Stock. The Company is
not required to honor such request to register shares of Common Stock if the
request is made within 90 days of a firm commitment underwritten public offering
or before the expiration of any lock-up period required by the underwriters in
connection therewith.
In addition, if the Company proposes to file a registration statement
under the Securities Act with respect to an offering by the Company, in certain
circumstances the First Union partner can exercise piggy-back registration
rights to request participation in the offering. The Company is not required to
honor in full, any such request to register shares of Common Stock if such
request would reduce the number or amount of securities to be issued by the
Company in any such offering to an amount which, in the opinion of the Board of
Directors of the Company, is below that which is necessary to accomplish the
purposes of such offering and in the best interests of the Company. Furthermore,
if an underwritten offering and the underwriter delivers a written opinion that
marketing considerations require a limitation on the number of securities to be
sold, then the First Union Partner's piggy-back registration rights will be
reduced pro rata to the extent necessary to comply with the underwriter's
recommendations.
First Union Partner
The First Union Partner is a limited partner of the National Auto
Partnership and holds a vested limited, minority interests in the National Auto
Partnership.
First Union Strategic Alliance
In March of 1999, First Union announced publicly that it was exiting the
indirect auto finance business due to realigned business strategies. As a
result, the Company's referral agreement with First Union has been terminated.
The Company will, nonetheless, continue the relationships it has established
with, and continue to actively service, the First Union-related Dealers. The
Company will not, however, be obligated to pay to First Union referral fees
related to business obtained through those dealers. The Company's loan volume
may be materially adversely affected by the termination of the First Union
Strategic Alliance.
SENIOR SUBORDINATED NOTES
General
In December 1997, the Company completed the December Private Placement of
$10 million in Common Stock and $40 million principal amount of Senior
Subordinated Notes with detachable Warrants. The private placement of the $10
million in Common Stock resulted in the issuance of 761,905 shares of the
Company's Common Stock, to the 1818 Fund., and 1,142,857 shares of the Company's
Common Stock to Progressive. The Senior Subordinated Notes, which mature in
seven years, bear interest at 11.875% per annum for the first three years, and
increase to 12.875% in year four, 13.875% on year five and 14.875% in years six
and seven. In connection with the December Private Placement of the Senior
Subordinated Notes, the Company issued detachable Warrants with a ten-year
maturity, exercisable into Common Stock of the Company at $0.01 per share. The
Senior Subordinated Notes and Warrants were purchased by the 1818 Fund,
Progressive and Manufacturers Life Insurance Company (USA) ("ManuLife"). In
connection with the December Private Placement, the 1818 Fund and Progressive
are entitled to nominate, collectively, two individuals to the Company's Board
of Directors. The 1818 Fund and Progressive did nominate two individuals to the
Company's Board of Directors, and, accordingly, on December 22, 1997, Joseph P.
Donlan and David W. Young were elected as Class III Board members with terms
expiring at the Company's Annual Meeting in 1999.
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On April 7, 1999, the Company completed a comprehensive financial
restructuring, including its Senior Subordinated Notes, which resolved certain
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 Asset Covenant"); the first quarterly measurement period
for this covenant begins as of the quarter ending September 30, 1999; (4) the
granting to the Company of the option to pay during the two-year period ending
March 31, 2001 fifty percent (50%) of the interest owed on the Senior
Subordinated Notes (and the interest on such interest) through the issuance of
additional Senior Subordinated Notes that are convertible into Common Stock at
the conversion price of $.75 per share; (5) the 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 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 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.
Registration Rights
Pursuant to a registration rights agreement, the Company has granted the
1818 Fund, Progressive, ManuLife, the First Union Partner, FSA and others
certain rights with respect to the registration under the Securities Act of
Common Stock held by it. Under the registration rights agreement, the other
entities can, in certain circumstances, require the Company to effect up to two
registrations of any or all of the their shares of Common Stock. The Company is
not required to honor such request to register shares of Common Stock if the
request is made within 90 days of a firm commitment underwritten public offering
or before the expiration of any lock-up period required by the underwriters in
connection therewith.
In addition, if the Company proposes to file a registration statement
(other than a Registration Statement on Form S-4 or S-8 or any successor forms
to such Forms) under the Securities Act with respect to an offering by the
Company, in certain circumstances the 1818 Fund and Progressive, among others,
can exercise incidental registration rights to request participation in the
offering. The Company is not required to honor any such request to register
shares of Common Stock if, in an underwritten offering, the underwriter(s) have
advised the Company in writing that the number of shares requested by the 1818
Fund and Progressive to be registered exceeds the number of securities that can
be sold in such offering within an acceptable price range.
JUNIOR SUBORDINATED NOTES
During 1994, Gary L. Shapiro, Edgar A. Otto and Stephen L. Gurba loaned
$1,525,000, $3,675,000 and $123,733, respectively, to the Company. During 1995,
Messrs. Shapiro and Otto loaned $539,000 and $342,000, respectively, to the
Company. During 1995, Nova Financial Corporation and Nova Corporation, each of
which is a privately-held corporation controlled by Messrs. Shapiro and Otto,
loaned $100,000 and $1,115,000, respectively, to the Company. During 1996, Nova
Corporation loaned $700,000 to the Company. All of such loans were made on a
junior subordinated basis and in exchange for the Junior Subordinated Notes.
Each of the Junior Subordinated Notes bears interest at a rate of 8.0% per annum
payable quarterly in arrears and matures on December 20, 2004. During 1996, the
Company repaid $511,000 and $461,000 to Messrs. Shapiro and Otto, respectively.
In January 1997, a portion of the Company's proceeds from the Initial Public
Offering were used to repay $2,594,186, $1,302,131, $1,122,361, $90,018 and
$72,754 to Mr. Otto, Nova Corporation, Mr. Shapiro, Mr. Gurba and Nova Financial
Corporation, respectively. During January and April 1998, the Company paid the
Junior Subordinated Noteholders interest totaling $77,406. No payments of
principal or interest have been paid since that date. As of December 31, 1998,
the Company owed approximately $2.1 million (including $155,000 of accrued and
unpaid interest) on the Junior Subordinated Notes. The Company believes that the
terms of each of the Junior Subordinated Notes are as favorable as could have
been obtained from an unaffiliated third party.
On April 7, 1999, the Company completed a comprehensive financial
restructuring including its Junior Subordinated Notes and resolved certain other
issues with its Junior Subordinated Noteholders. The agreements and
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transactions with the Junior Subordinated Noteholders provide for and include,
among other things: (1) the waiver of the past defaults and breaches under the
Junior Subordinated Notes; (2) the granting to the Company of the option to pay
during the period ending January 31, 2002 up to one hundred percent (100%) of
the interest owed on the Junior Subordinated Notes (and the interest on such
interest) through the issuance of additional Junior Subordinated Notes that are
convertible into Common Stock at the conversion price of $.75 per share; (3) the
granting to the designees of the Senior Subordinated Noteholders to the
Company's Board of Directors an irrevocable proxy to vote the 4,230,000 shares
of Common Stock held by National Auto Finance Company, LP (a 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.
MANAGEMENT AND SERVICE AGREEMENTS
The Company was previously party to a management agreement and a service
agreement pursuant to which NFC provided operational, financial, legal,
accounting, management, advisory and other administrative services relating to
the management, business operations, assets and interests of the Company. This
agreement was terminated in June of 1998. Amounts paid to NFC pursuant to such
agreements were $225,000, $884,000 and $603,000 in 1998, 1997 and 1996,
respectively; $333,000 of the amount paid in 1997 was for services as described
in the following paragraph. Gary L. Shapiro, the former Chairman and Chief
Executive Officer of the Company is the Chairman and Chief Executive Officer and
a principal owner of National Financial and National Auto Finance Corporation
("National Auto"), the general partner of the National Auto Partnership. Keith
B. Stein, Chief Executive Officer, Vice Chairman, Treasurer and a Director of
the Company, was formerly a managing director of National Financial.
National Auto holds a 1% general partner interest in the National Auto
Partnership. A majority of the outstanding capital stock of National Auto is
owned collectively by Messrs. Shapiro and Otto. The limited partners of the
National Auto Partnership include, among others, the S Associates, the O
Associates, the First Union Partner, Keith B. Stein, Roy E. Tipton, William G.
Magro, and Kevin G. Adams. Messrs. Stein and Magro, who are executive officers
of the Company (and Mr. Stein is a director of the Company) hold minimal
minority limited partner interests of the National Auto Partnership. Mr.
Shapiro, who was formerly Chairman of the Board and Chief Executive Officer of
the Company, is the trustee of a trust that owns all of the outstanding capital
stock of the general partner of S Associates. Mr. Otto owns all of the
outstanding capital stock of the general partner of O Associates. The remaining
limited partners of the National Auto Partnership hold the balance of the
limited partner economic interests.
INDEBTEDNESS OF MANAGEMENT
In 1997, the Company loaned Mr. Magro $100,000, pending the sale of his
home residence in Palm Beach County in connection with his relocation to
Jacksonville to manage the Company's Financial Services Division. As part of Mr.
Magro's agreement to relocate to Jacksonville, the Company agreed to forgive all
or a portion of that loan based on the sale price of Mr. Magro's residence. Mr.
Magro sold his residence in March 1998 and paid the Company $59,146 towards the
principal owed on the $100,000 Loan. Accordingly, the Company forgave $40,854 of
the Loan and reimbursed Mr. Magro for his personal tax liability associated with
the forgiven loan amount.
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ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
Exhibits
Number Description Method of Filing
3.1 Certificate of Incorporation of the Company.(1)
3.1-1 Certificate of the Designations, Preferences and Rights of the Series A
Preferred Stock of the Company.(3)
3.2 By-laws of the Company.(1)
4.1 Specimen Certificate of Common Stock.(4)
4.2 Promissory Note, dated October 31, 1994, payable by National Auto
Finance Company LP to the order of Gary L. Shapiro.(1)
4.2-1 Amended and Restated Promissory Note, dated as of January 3, 1997,
payable by National Auto Finance LP to the order of Gary L. Shapiro.(3)
4.3 Promissory Note, dated October 6, 1994, payable by National Auto
Finance Company LP to the order of Edgar A. Otto.(1)
4.3-1 Amended and Restated Promissory Note, dated as of January 3, 1997,
payable by National Auto Finance Company LP to the order of Edgar A. Otto.(3)
4.4 Promissory Note, dated November 8, 1994, payable by National Auto
Finance Company LP to the order of Stephen L. Gurba.(1)
4.4-1 Amended and Restated Promissory Note, dated as of January 3, 1997,
payable by national Auto Finance Company LP to the order of Stephen L. Gurba.(3)
4.5 Promissory Note, dated March 27, 1995, payable by National Auto Finance
Company LP to the order of Nova Financial Corporation.(1)
4.5-1 Amended and Restated Promissory Note, dated as of January 3, 1997,
payable by National Auto Finance Company LP to the order of Nova Financial
Corporation.(3)
4.6 Promissory Note, dated May 1, 1995, payable by National Auto Finance
Company LP to the order of Nova Corporation.(1)
4.6-1 Amended and Restated Promissory Note, dated as of January 3, 1997,
payable by National Auto Finance Company LP to the order of Nova Corporation.(3)
4.7 Securities Purchase Agreement (the "Securities Purchase Agreement") by
and among National Auto Finance Company, Inc., The 1818 Mezzanine Fund, LP, PC
Investment Company, Progressive Investment Company, Inc., and Manufacturers Life
Insurance Company (U.S.A.) dated December 22, 1997.(5)*
4.7-1 Waiver and Amendment No. 1 to the Securities Purchase Agreement, dated
March 27, 1998, by and among National Auto Finance Company, Inc., The 1818
Mezzanine Fund, LP, PC Investment Company, Progressive Investment Company, Inc.
and Manufacturers Life Insurance Company.(5)*
4.8 Form of Senior Subordinated Promissory Note issued pursuant to the
Securities Purchase Agreement.(5)*
4.9 Form of Warrant to Purchase Shares of Common Stock of National Auto
Finance Company, Inc. issued pursuant to the Securities Purchase Agreement.(5)*
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4.10 Agreement, dated March 27, 1998, by and between National Auto Finance
Company, Inc. and The Structured Finance High Yield Fund, LLC.(5)*
4.11 Senior Subordinated Promissory Note, dated March 27, 1998, executed by
National Auto Finance Company, Inc. in favor of The Structured Finance High
Yield Fund, LLC, in the amount of $20,000,000.00.(5)*
4.12 Warrant, issued March 27, 1998, executed by National Auto Finance
Company, Inc.(5)*
10.1 Second Amended and Restated Agreement of Limited Partnership of
National Auto Finance Company LP, dated as of September 1, 1995, by and among
National Auto Finance Corporation, The S Associates Limited Partnership, The O
Associates Limited Partnership, Stephen L. Gurba, Craig Schnee, Roy E. Tipton,
Blane H. MacDonald, Michael B. Colley, Irwin I. Kent, William G. Magro, Kevin G.
Adams, Kamala R. Chapman, Keith B. Stein, Colleen S. McMillen, Richard H.
Steffer, Tim Rooney, Lynn Dunham-Sirota and IronBrand Capital, LLC.(1)
10.1-1 First Amendment to Second Amended and Restated Partnership Agreement,
dated December 1, 1996.(3)
10.2 1996 Share Incentive Plan.(3)
10.3 401(k) Plan.(1)
10.4 Employment Agreement, dated as of July 1, 1996, between National Auto
Finance Company, Inc. and William G. Magro.(3)
10.4-1 First Amendment to Employment Agreement, dated as of May 27, 1997,
between National Auto Finance Company, Inc. and William G. Magro.(5)*
10.5 [ Intentionally Omitted ]
10.5-1 [ Intentionally Omitted ]
10.6 [ Intentionally Omitted ]
10.7 [ Intentionally Omitted ]
10.8 Receivables Purchase Agreement, dated as of December 8, 1994, by and
between National Auto Finance Company LP, as Seller, and NAFCO Funding Trust, as
Purchaser.(1)
10.9 Promissory Note, dated December 8, 1994, payable by NAFCO Funding Trust
to the order of National Auto Finance Company LP(1)
10.10 NAFCO Auto Receivables Master Trust Pooling and Administration
Agreement, dated as of December 8, 1994, among NAFCO Funding Trust, as
Transferor, National Auto Finance Company LP, as the Administrator, and Bankers
Trust Company, as Trustee.(1)
10.10-1 Consent and Amendment, dated as of July 2, 1996, to NAFCO Auto
Receivables Master Trust Pooling and Administration Agreement, dated as of
December 8, 1994, among NAFCO Funding Trust, as Transferor, National Auto
Finance Company LP, as the Administrator, and Bankers Trust Company, as
Trustee.(5)*
10.11 Series 1994-R, Class B Supplement, dated as of December 8, 1994, to the
Pooling and Administration Agreement, dated as of December 8, 1994, among NAFCO
Funding Trust, as Transferor, National Auto Finance Company LP, as the
Administrator, and Bankers Trust Company, as Trustee.(1)
10.12 Trust Agreement, dated as of October 5, 1994, between National Auto
Finance Corporation and Bankers Trust.(1)
10.13 First Amendment and Restated Trust Agreement of NAFCO Funding Trust,
dated as of December 8, 1994, between National Auto Finance Company LP, as
Depositor, The Chase Manhattan Bank (USA), as Owner Trustee and Gary L. Shapiro
and Edgar A. Otto, as Co-Trustees.(1)
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10.14 Amended and Restated Servicing Agreement, dated as of December 5, 1994,
by and between World Omni Financial Corp. and National Auto Finance Company
LP(1)
10.14-1 Amendment to Amended and Restated Servicing Agreement, dated as of
September 6, 1995, by and among World Omni Financial Corp. and National Auto
Finance Company LP(5)*
10.14-2 Second Amendment to Amended and Restated Servicing Agreement, dated as
of June 24, 1997, by and between Omni Financial Services of America, Inc., as
assignee of World Omni Financial Corp., and National Auto Finance Company, Inc.,
as assignee of National Auto Finance Company LP(5)*
10.14-3 Third Amendment to the Amended and Restated Servicing Agreement, dated
as of September 12, 1997, by and between Omni Financial Services of America,
Inc. and National Auto Finance Company, Inc.(5)*
10.14-4 Fourth Amendment to the Amended and Restated Servicing Agreement, dated
as of October 12, 1997, by and between Omni Financial Services of America,
Inc.(5)*
10.14-5 Supplement to the Amended and Restated Servicing Agreement, dated as of
December 5, 1994, as amended as of October 1, 1995, between World Omni Financial
Corp. ("WOFC"), as Servicer, and National Auto Finance Company LP, dated as of
November 21, 1995 by and between Omni Financial Services of America, Inc., as
assignee of WOFC ("Servicer") and NAFCO.(1)
10.14-6 Supplement to the Amended and Restated Servicing Agreement, dated as of
December 5, 1994, as amended as of October 1, 1995, between World Omni Financial
Corp. (WOFC) and National Auto Finance Company LP (NAFCO), dated as of November
13, 1996 by and between Omni Financial Services of America, Inc., as assignee of
WOFC, and NAFCO.(2)
10.14-7 Supplement to Amended and Restated Servicing Agreement, December 5,
1994, as amended as of October 1, 1995 and November 13, 1996, dated as of July
23, 1997, by and between Omni Financial Services of America, Inc. and National
Auto Finance Company, Inc.(5)*
10.14-8 Supplement to Amended and Restated Servicing Agreement, dated as of
December 5, 1994, as amended as of October 1, 1995, June 24, 1997 and July 21,
1997 and supplemented as of November 21, 1995, November 13, 1996, July 12, 1997
and September 19, 1997, by and between Omni Financial Services of America, Inc.
and National Auto Finance Company, Inc.(5)*
10.15 Certificate Purchase Agreement, dated as of December 8, 1994, among
NAFI Funding Trust, National Auto Finance Company LP, as Initial Administrator
and First Union National Bank of North Carolina.(1)
10.16 [ Intentionally Omitted ]
10.16-1 First Amendment of Management Agreement, dated as of January 1, 1996,
by and between National Auto Finance Company LP, Auto Credit Clearinghouse LP
and National Auto Finance Corporation.(1)
10.16-2 Second Amendment to Management Agreement, dated as of January 1, 1997,
by and among National Auto Finance Corporation, National Auto Finance Company,
Inc., National Auto Finance Company, LP and National Financial Companies
LLC.(5)*
10.17 [ Intentionally Omitted ]
10.17-1 First Amendment to Services Agreement, dated as of January 1, 1996, by
and between National Auto Finance Corporation and National Financial
Corporation.(1)
10.17-2 Second Amendment to Services Agreement, dated as of January 1, 1997, by
and between National Auto Finance Corporation, National Auto Finance Company,
Inc. and National Financial Companies LLC.(5)*
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10.18 Pooling and Servicing Agreement, dated as of October 1, 1995, by and
among National Financial Auto Funding Trust, as Transferor, National Auto
Finance Company LP, as Master Servicer, and Harris Trust and Savings Bank, as
Trustee.(1)
10.19 Assignment Agreement, dated as of October 1, 1995, between Bankers
Trust Company, as Trustee, and National Financial Auto Funding Trust.(1)
10.20 Transfer Agreement No. 1, dated as of October 1, 1995, between National
Financial Auto Funding Trust and Harris Trust and Savings Bank.(1)
10.21 Insurance and Indemnity Agreement, dated as of November 21, 1995, among
Financial Security Assurance, Inc., National Financial Auto Funding Trust and
National Auto Finance Company LP(1)
10.22 Indemnification Agreement, dated as of November 21, 1995, among
Financial Security Assurance Inc., National Financial Auto Funding Trust and
First Union Capital Markets Corp.(1)
10.23 Master Spread Account Agreement, dated as of November 21, 1995, among
National Financial Auto Funding Trust, Financial Security Assurance Inc. and
Harris Trust and Savings Bank, as Trustee and as Collateral Agent.(1)
10.24 Financial Guaranty Insurance Policy (Policy No.: 50522-N), together
with Endorsement No. 1 thereto, dated November 13, 1996, issued by Financial
Security Assurance Inc. in favor of Harris Trust and Savings Bank, as trustee
for the benefit of the Certificate Holders.(1)
10.25 Custodial Agreement, dated as of November 21, 1995, by and between Omni
Financial Services of America, Inc., as custodian, and National Auto Finance
Company LP, as Master Servicer.(1)
10.26 Amendment, dated as of November 21, 1995, to the First Amended and
Restated Trust Agreement of NAFCO Funding Trust, dated as of December 8, 1994,
among National Auto Finance Company LP, as Depositor, The Chase Manhattan Bank
(USA), as Owner Trustee, and Gary L. Shapiro, Edgar Otto A. and Andrew Stidd, as
Co-Trustees.(1)
10.27 Form of Indemnification Agreement.(4)
10.28 Assignment and Assumption Agreement, dated as of October 7, 1996,
between National Auto Finance Company, Inc. and National Auto Finance Company
LP(1)
10.29 Pooling and Servicing Agreement, dated as of October 21, 1996, by and
among National Financial Auto Funding Trust, as Transferor, National Auto
Finance Company LP, as Servicer, and Harris Trust and Savings Bank, as
Trustee.(2)
10.30 Purchase and Contribution Agreement, dated as of October 21, 1996, by
and between National Auto Finance Company LP and National Financial Auto Funding
Trust.(2)
10.31 Assignment Agreement, dated as of October 21, 1996, between Bankers
Trust Company and National Financial Auto Funding Trust II.(2)
10.32 Master Spread Account Agreement, dated as of November 13, 1996, among
National Financial Auto Funding Trust, Financial Security Assurance Inc. and
Harris Trust and Savings Bank, as Trustee and Collateral Agent.(2)
10.33 Insurance and Indemnity Agreement, dated as of November 13, 1996, among
Financial Security Assurance Inc., National Financial Auto Funding Trust and
National Auto Finance Company LP(2)
10.34 Sale Agreement, dated as of October 21, 1996, by and between National
Financial Auto Funding Trust and National Financial Auto Funding Trust II.(2)
10.35 Transfer Agreement No. 1, dated as of November 13, 1996, by National
Financial Auto Funding Trust as Transferor to Harris Trust and Savings Bank, as
Trustee, pursuant to a Pooling and Servicing Agreement, dated as of October 21,
1996.(2)
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10.36 Form of Financial Guaranty Insurance Policy issued by Financial
Security Assurance Inc.(2)
10.37 Lease Agreement, dated as of June 16, 1997, by and between CTC
Investments II Limited and National Auto Finance Company, Inc.(5)*
10.37-1 First Amendment to Lease Agreement dated June 16, 1997 by and between
CTC Investments II Limited and National Auto Finance Company, Inc. dated October
1, 1997.(5)*
10.38 Referral Agreement, dated as of April 15, 1996, by and between First
Union National Bank of North Carolina and Auto Credit Clearinghouse LP(4)
10.39 Trust Agreement, dated as of July 21, 1997, between National Financial
Auto Funding Trust and Wilmington Trust Company, as trustee.(5)*
10.40 Indenture, dated as of June 29, 1997, by and between National Auto
Finance 1997-1 Trust and Harris Trust and Savings Bank as Trustee.(5)*
10.41 Sale and Servicing Agreement, dated as of June 29, 1997, by and among
National Auto Finance 1997-1 Trust, as Seller, National Financial Auto Finance
1997-1 Trust, National Auto Finance Company, Inc. as Servicer, and Harris Trust
and Savings Bank, as Trust Collateral Agent and Back-up Servicer.(5)*
10.42 Financial Guaranty Insurance Policy, dated as of July 23, 1997,
delivered by Financial Security Assurance, Inc.(5)*
10.43 Purchase and Contribution Agreement, dated June 29, 1997, by and
between National Auto Finance Company, Inc. and National Financial Auto Funding
Trust.(5)*
10.44 Sale Agreement, dated as of June 29, 1997, by and between National
Financial Auto Funding Trust II and National Financial Auto Funding Trust.(5)*
10.45 Indemnification Agreement, dated as of July 23, 1997, by and among
Financial Security Assurance Inc., National Finance Auto Funding Trust and First
Union Capital Markets Corp.(5)*
10.46 Amendment No. 1 dated 1997, by and among National Financial Auto
Funding Trust, Financial Security Assurance Inc., Harris Trust and Savings Bank,
as collateral agent, and National Auto Finance Company, Inc. to Master Spread
Account Agreement dated as of November 21, 1995 and Master Spread Account
Agreement dated as of November 13, 1996, in each case among National Financial
Auto Funding Trust, Financial Security Assurance Inc. and Harris Trust and
Savings Bank, as trustee and as collateral agent.(5)*
10.47 Amendment No. 1 dated October 1, 1997, among Financial Security
Assurance Inc., National Financial Auto Funding Trust and National Auto Finance
Company, Inc. to Insurance and Indemnity Agreement dated as of November 21, 1995
and Insurance and Indemnity Agreement dated as of November 13, 1996 in each case
among Financial Security Assurance Inc., National Financial Auto Funding Trust
and National Auto Finance Company, Inc.(5)*
10.48 Amendment to First Amended and Restated Trust Agreement dated as of
December 8, 1994 among National Auto Finance Company, Inc., the Trustee, and the
Co-Trustees, and Section 10.03 of the Trust Agreement dated as of December 8,
1995 among National Auto Finance Company, Inc., the Trustee and the Co-Trustees,
made as of October 1, 1997 among National Auto Finance Company, Inc., The Chase
Manhattan Bank Delaware, as Trustee of National Financial Auto Funding Trust II
and National Financial Auto Funding Trust II and the co-trustee of such
trusts.(5)*
10.49 Investment Agreement dated as of October 1, 1997 by and between
National Auto Finance Company, Inc. and FSA Portfolio Management, Inc.(5)*
10.50 Revolving Credit Agreement dated as of September 29, 1997 among
National Auto Finance Company, Inc. and BankBoston, N.A., for itself and as
agent for the other lending institutions named therein.(5)*
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10.50-1 Amendment Agreement No. 1 to Revolving Credit Agreement dated October
1, 1997 by and between National Auto Finance Company, Inc. and BankBoston, N.A.
and the other lending institutions party thereto and BankBoston, N.A., as agent
for itself and other banking institutions.(5)*
10.50-2 Amendment Agreement No. 2 to Revolving Credit Agreement dated December
19, 1997 by and between National Auto Finance Company, Inc. and BankBoston, N.A.
and the other lending institutions party thereto and BankBoston, N.A., as agent
for itself and other banking institutions.(5)*
10.50-3 Amendment Agreement No. 3 to the Revolving Credit Agreement, dated
March 19, 1998, by and among National Auto Finance Company, Inc. BankBoston,
N.A. and the other lending institutions party thereto.(5)*
10.50-4 Amendment Agreement No. 4 to the Revolving Credit Agreement, dated
March 27, 1998, by and among National Auto Finance Company, Inc. BankBoston,
N.A. and the other lending institutions party thereto.(5)*
10.51 Trademark Collateral Security and Pledge Agreement dated as of
September 29, 1997, between National Auto Finance Company, Inc. and BankBoston,
N.A., for itself and other banking institutions.(5)*
10.52 Pledge Agreement made as of September 29, 1997 by and among National
Auto Finance Company, Inc., National Chartered Auto Corporation and BankBoston,
N.A.(5)*
10.53 Note dated as of September 29, 1997 payable by National Auto Finance
Company, Inc. to BankBoston, N.A., as agent.(5)*
10.54 [ Intentionally Omitted ]
10.55 [ Intentionally Omitted ]
10.56 [ Intentionally Omitted ]
10.57 Lease Agreement dated April 8, 1996, by and between CanPro Investments
Ltd. and National Auto Financial Corporation or its assignee Auto Credit
Clearinghouse.(5)*
10.58 Software License, Support and Usage Agreement dated as of February 14,
1997 by and between BNI, Inc. and National Auto Finance Company LP(5)*
10.58-1 First Amendment to Software License, Support and Usage Agreement dated
as of December 15, 1997 by and between BNI, Inc. and National Auto Finance
Company LP(5)*
10.59 Software Sublicense, Support and Usage Agreement dated as of February
17, 1997, by and between Pinnacle Portfolio Services LLC and National Auto
Finance Company, Inc.(5)*
10.60 Consent and Amendment, dated as of September 25, 1997, between National
Financial Auto Funding Trust, National Auto Finance Company, Inc., First Union
National Bank and Bankers Trust Company, as Trustee of National Financial Auto
Receivables Master Trust.(5)*
10.61 Security Agreement, dated as of September 29, 1997, between National
Auto Finance Company, Inc. and BankBoston, N.A., as agent for itself and other
banking institutions.(5)*
10.62 [Intentionally Omitted.]
10.63 Amendment, dated as of September 25, 1997, to Pooling and Servicing
Agreements, dated as of October 1, 1995 and October 21, 1996, each among
National Financial Auto Funding Trust, National Auto Finance Company, Inc., as
successor to National Auto Finance Company LP, and Harris Trust and Savings
Bank, as trustee.(5)*
10.64 Waiver letter of Financial Assurance Inc., dated as of September 25,
1997, to National Auto Finance Company, Inc. and National Financial Auto Funding
Trust.(5)*
10.65 [Intentionally Omitted.]
- 74 -
<PAGE> 75
10.66 Insurance and Indemnity Agreement, among Financial Security Assurance
Inc., National Auto Finance 1997-1 Trust, National Financial Auto Funding Trust
and National Auto Finance Company, Inc., dated as of July 23, 1997.(5)*
10.67 Master Spread Account Agreement, dated as July 23, 1997, among National
Financial Auto Funding Trust, Financial Security Assurance Inc. and Harris Trust
and Savings Bank, as Trustee and as Collateral Agent.(5)*
10.68 Custodial Agreement, dated as of July 23, 1997, by and between Omni
Financial Services of America, Inc., as custodian, and National Auto Finance
Company, Inc., as servicer.(5)*
10.69 $1.5 million Promissory Note, dated as of August 25, 1997, payable by
National Auto Finance Company, Inc. to First Union National Bank.(5)*
10.70 Security Agreement, dated as of August 25, 1997, delivered by National
Auto Finance Company, Inc. to First Union National Bank.(5)*
10.71 Loan Agreement, dated as of August 25, 1997, by and between First Union
National Bank and National Auto Finance Company, Inc.(5)*
10.72 Voting Agreement by and among The 1818 Mezzanine Fund, LP, PC
Investment Company, Progressive Investment Company, Inc. and National Auto
Finance Company, L.P dated December 22, 1997.(5)*
10.73 Restated Registration Rights Agreement, dated March 27, 1998, by and
among National Auto Finance Company, Inc. and Certain Investors.(5)*
10.74 Junior Subordination Agreement, dated as of March 27, 1998, among
BankBoston, N.A., The 1818 Mezzanine Fund, LP, PC Investment Company,
Manufacturers Life Insurance Company (U.S.A.), Nova Financial Corporation, Nova
Corporation, The Structured Finance High Yield Fund, LLC and National Auto
Finance Company, Inc.(5)*
10.75 Indenture, dated as of December 15, 1997, by and between National Auto
Finance 1998-1 Trust and Harris Trust and Savings Bank at Trustee.(5)* 10.76
Sale and Servicing Agreement, dated as of December 15, 1997, by and among
National Auto Finance 1998-1 Trust, as Seller, National Financial Auto Finance
1998-1 Trust, National Auto Finance Company, Inc. as Servicer, and Harris Trust
and Savings Bank, as Trust Collateral Agent and Back-up Servicer.(5)*
10.77 Insurance and Indemnity Agreement, among Financial Security Assurance
Inc., National Auto Finance 1998-1 Trust, National Financial Auto Funding Trust
and National Auto Finance Company, Inc., dated as of January 20, 1998.(5)*
10.78 Master Spread Account Agreement, dated as January 20, 1998, among
National Financial Auto Funding Trust, Financial Security Assurance Inc. and
Harris Trust and Savings Bank, as Trustee and as Collateral Agent.(5)*
10.79 Custodial Agreement, dated as of January 20, 1998, by and between Omni
Financial Services of America, Inc., as custodian, and National Auto Finance
Company, Inc., as servicer.(5)*
10.80 Sale Agreement, dated as of December 15, 1997, by and between National
Financial Auto Funding Trust Il and National Financial Auto Funding Trust.(5)*
10.81 Trust Agreement, dated as of December 15, 1997, between National
Financial Auto Funding Trust and Wilmington Trust Company.(5)*
10.82 Purchase and Contribution Agreement, dated December 15, 1997, by and
between National Auto Finance Company, Inc. and National Financial Auto Funding
Trust.(5)*
10.83 Assignment Agreement, dated as of December 15, 1997, between Bankers
Trust Company and National Financial Auto Funding Trust II.(5)*
- 75 -
<PAGE> 76
10.84 Indemnification Agreement, dated as of January 20, 1998, by and among
Financial Security Assurance Inc., National Financial Auto Funding Trust and
First Union Capital Markets Corp.(5)*
10.85 Amendment, dated as of January 20, 1998, by and among National
Financial Auto Funding Trust, Financial Security Assurance Inc., Harris Trust
and Savings Bank, as collateral agent, and National Auto Finance Company, Inc.
to Master Spread Account Agreement dated as of November 21, 1995, Master Spread
Account Agreement dated as of November 13, 1996, and Master Spread Account
Agreement dated as of July 23, 1997 in each case among National Financial Auto
Funding Trust, Financial Security Assurance Inc. and Harris Trust and Savings
Bank, as trustee and as collateral agent.(5)*
10.86 Referral Agreement, dated as of February 26, 1998, by and between U.S.
Bank, N.A. and Auto Credit Clearinghouse, a division of National Auto Finance
Company, Inc.(5)*
10.87 Restructuring Agreement, dated as of April 7, 1999 by and among the
Company, National Auto Finance Company, L.P., National Auto Finance Corporation,
The 1818 Mezzanine Fund, L.P., PC Investment Company, Progressive Investment
Company, Inc. Manufacturers Life Insurance Company (U.S.A.), and The Structured
Finance High Yield Fund, LLC. (6)
10.88 Revolving Credit, Term Loan and Security Agreement dated as of March
31, 1999 by and among National Auto Funding Trust, the Company and First Union
National Bank. (6)
10.89 Note Exchange Agreement dated as of April 7, 1999 by and among the
Company, Nova Financial Corporation, Nova Corporation, Stephen L. Gurba, Edgar
Otto and Gary L. Shapiro. (6)
10.90 Amended and Restated Junior Subordination Agreement, dated as of April
7, 1999 among The 1818 Mezzanine Fund, L.P., PC Investment Company,
Manufacturers Life Insurance Company (U.S.A.), The Structured Finance High Yield
Fund, and others, and the Company. (6)
10.91 Release and Consent Not to Sue, dated as of April 7, 1999 by National
Auto Finance Company L.P., National Auto Finance Corporation, Nova Financial
Corporation, Nova Corporation, Gary L. Shapiro, Edgar A. Otto, and Stephen L.
Gurba for itself or himself and on behalf of others, releasing the Company and
others from certain claims, etc.
10.92 Release dated as of April 7, 1999 by The 1818 Mezzanine Fund, L.P., PC
Investment Company, Progressive Investment Company, Inc., Manufacturers Life
Insurance Company (U.S.A.), and The Structured Finance High Yield Fund, LLC for
itself and other named Releasors releasing the Company and other named
Releasees. (6)
10.93 Amended and Restated Pooling and Administration Agreement, dated as of
December 8, 1994 and restated in its entirety as of April 7, 1999 by and among
National Financial Auto Funding Trust II, the Company and Bankers Trust Company.
(6)
10.94 Amendment One to Back-up Servicing Agreement, dated as of March 31,
1999 by and among CSC Logic/MSA LLP, the Company, First Union National Bank and
Bankers Trust, as trustee and National Financial Auto Funding Trust II. (6)
10.95 Consent and Amendment, dated as of March 31, 1999 by and among National
Financial Auto Funding Trust II, the Company, First Union National Bank and
Bankers Trust Company, as trustee. (6)
10.96 Reissuance of Series 1994-R class B Certificate registered in the name
of First Union National Bank as owner of a fractional undivided interest in the
National Financial Auto Receivables Master Trust. (6)
10.97 Certificate Agreement, dated as of March 31, 1999 between National
Chartered Auto Corporation and the Company. (6)
10.98 Consent and Amendment, dated as of March 31, 1999 to the Pooling and
Servicing Agreement dated as of October 1, 1995, and the Pooling and Servicing
Agreement, dated as of October 21, 1996 each among National Financial Auto
Funding Trust, the Company, and Harris Trust and Savings Bank, as trustee. (6)
- 76 -
<PAGE> 77
10.99 National Auto Finance Company, Inc. Owner Trustee and National
Financial Auto Funding Trust Indenture Trustee Irrevocable Instruction Letter
dated as of March 31, 1999 addressed to Wilmington Trust Company, as Owner
Trustee, Harris Trust and Savings Bank, as Trustee, and Chase Manhattan Bank
Delaware, as Trustee, each as trustee to various trusts. (6)
10.100 Amendment to Trust Agreement dated as of March 31, 1999 of the First
Amended and Restated Trust Agreement dated as of December 8, 1994 among the
Company, Chase Manhattan Bank Delaware, as Trustee and certain other
Co-Trustees. (6)
10.101 Agreement for Monitoring and Back-up Servicing, dated as of March 31,
1999 among the Company, CSC Logic/MSA LLP and Financial Security Assurance Inc.
(6)
10.102 Amendment to Custodian Agreement, dated as of March 31, 1999 to the
Custodian Agreement, dated as of October 15, 1998, by and among Harris Trust and
Savings Bank as Custodian, the Company as Administrator and Harris Trust and
Savings Bank as trustee of various trusts. (6)
10.103 Supplement to Back-up Servicing Agreement, dated as of March 31, 1999
by and among National Auto Funding Trust, the Company and Harris Trust and
Savings Bank to the Back-up Servicing Agreement dated as of March 31, 1999. (6)
10.104 Agreement and Amendment, dated as of March 31, 1999 among Financial
Security Assurance Inc., National Financial Auto Funding Trust, the Company,
National Auto Finance 1997-1 Trust and National Auto Finance 1998-1 Trust to
Insurance and Indemnity Agreements dated as of November 21, 1995, November 13,
1996, July 23, 1997 and January 20, 1998 in each case among Financial Security
Assurance Inc., National Financial Auto Funding Trust and the Company and with
respect to the Insurance and Indemnity Agreement dated as of July 23, 1997, also
among National Auto Finance 1997-1 Trust and with respect to the Insurance and
Indemnity Agreement dated as of January 20, 1998 also among National Auto
Finance 1998-1 Trust. (6)
10.105 Agreement and Amendment dated as of March 31, 1999 among Financial
Security Assurance Inc., National Financial Auto Funding Trust, Harris Trust and
Savings Bank, to Series 1996-1 Supplement, Series 1997-1 Supplement and Series
1998-1 Supplement each dated as of March 31, 1998 to the First Amended and
Restated Master Spread Account Agreement dated as of March 31, 1998. (6)
11.1 Earnings Per Share(5)
23.1 Consent of BDO Seidman, LLP(5)
23.2 Consent of KPMG Peat Marwick LLP(5)
27.1 Financial Data Schedule(5)
- -------------------
* Filed in the form executed.
(1) Incorporated by reference to the Company's Registration Statement on
Form S-1 (Registration No. 333-13667) as filed with the Securities and Exchange
Commission on October 8, 1996.
(2) Incorporated by reference to the Company's Amendment No. 1 to
Registration Statement on Form S-1/A (Registration No. 333-13667) as filed with
the Securities and Exchange Commission on November 25, 1996.
(3) Incorporated by reference to the Company's Amendment No. 2 to
Registration Statement on Form S-1/A (Registration No. 333-13667) as filed with
the Securities and Exchange Commission on January 9, 1997.
(4) Incorporated by reference to the Company's Amendment No. 3 to
Registration Statement on Form S-1/A (Registration No. 333-13667) as filed with
the Securities and Exchange Commission on January 28, 1997.
(5) Filed herewith.
(6) Incorporated by reference to the Company's Form 10-K/A to be filed with
the Commission as soon as practicable after the filing hereof.
Reports on Form 8-K
On November 16, 1998, the Company filed a Form 8-K announcing (a) the Company's
third quarter 1998 results; (b) the execution of a term sheet with its Senior
Subordinated Noteholders and certain of its equityholders; (c) that the Company
has requested a hearing before the NASDAQ Stock Market, Inc. regarding the
Company's listing status; and (d) the filing of a securities class action
lawsuit against the Company and certain of its current and former officers and
directors.
- 77 -
<PAGE> 78
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
April 26, 1999 By: /s/ KEITH B. STEIN
----------------------------
Name: Keith B. Stein
Title: Vice Chairman, Chief
Executive Officer and
Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
/s/ KEITH B. STEIN
- ---------------------------- Chief Executive Officer April 26, 1999
Keith B. Stein (principal executive officer)
/s/ THOMAS COSTANZA
- ---------------------------- Vice President, Chief Financial April 26, 1999
Thomas Costanza Officer (principal accounting
and financial officer)
/s/ JOSEPH P. DONLAN
- ---------------------------- Director April 26, 1999
Joseph P. Donlan
/s/ PETER OFFERMANN
- ----------------------------- Director April 26, 1999
Peter Offermann
/s/ DAVID W. YOUNG
- ---------------------------- Director April 26, 1999
David W. Young
</TABLE>
<PAGE> 79
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
3.1 Certificate of Incorporation of the Company.(1)
3.1-1 Certificate of the Designations, Preferences and Rights of the Series A
Preferred Stock of the Company.(3)
3.2 By-laws of the Company.(1)
4.1 Specimen Certificate of Common Stock.(4)
4.2 Promissory Note, dated October 31, 1994, payable by National Auto
Finance Company LP to the order of Gary L. Shapiro.(1)
4.2-1 Amended and Restated Promissory Note, dated as of January 3, 1997,
payable by National Auto Finance LP to the order of Gary L. Shapiro.(3)
4.3 Promissory Note, dated October 6, 1994, payable by National Auto
Finance Company LP to the order of Edgar A. Otto.(1)
4.3-1 Amended and Restated Promissory Note, dated as of January 3, 1997,
payable by National Auto Finance Company LP to the order of Edgar A. Otto.(3)
4.4 Promissory Note, dated November 8, 1994, payable by National Auto
Finance Company LP to the order of Stephen L. Gurba.(1)
4.4-1 Amended and Restated Promissory Note, dated as of January 3, 1997,
payable by national Auto Finance Company LP to the order of Stephen L. Gurba.(3)
4.5 Promissory Note, dated March 27, 1995, payable by National Auto Finance
Company LP to the order of Nova Financial Corporation.(1)
4.5-1 Amended and Restated Promissory Note, dated as of January 3, 1997,
payable by National Auto Finance Company LP to the order of Nova Financial
Corporation.(3)
4.6 Promissory Note, dated May 1, 1995, payable by National Auto Finance
Company LP to the order of Nova Corporation.(1)
4.6-1 Amended and Restated Promissory Note, dated as of January 3, 1997,
payable by National Auto Finance Company LP to the order of Nova Corporation.(3)
4.7 Securities Purchase Agreement (the "Securities Purchase Agreement") by
and among National Auto Finance Company, Inc., The 1818 Mezzanine Fund, LP, PC
Investment Company, Progressive Investment Company, Inc., and Manufacturers Life
Insurance Company (U.S.A.) dated December 22, 1997.(5)*
4.7-1 Waiver and Amendment No. 1 to the Securities Purchase Agreement, dated
March 27, 1998, by and among National Auto Finance Company, Inc., The 1818
Mezzanine Fund, LP, PC Investment Company, Progressive Investment Company, Inc.
and Manufacturers Life Insurance Company.(5)*
4.8 Form of Senior Subordinated Promissory Note issued pursuant to the
Securities Purchase Agreement.(5)*
4.9 Form of Warrant to Purchase Shares of Common Stock of National Auto
Finance Company, Inc. issued pursuant to the Securities Purchase Agreement.(5)*
</TABLE>
<PAGE> 80
<TABLE>
<S> <C>
4.10 Agreement, dated March 27, 1998, by and between National Auto Finance
Company, Inc. and The Structured Finance High Yield Fund, LLC.(5)*
4.11 Senior Subordinated Promissory Note, dated March 27, 1998, executed by
National Auto Finance Company, Inc. in favor of The Structured Finance High
Yield Fund, LLC, in the amount of $20,000,000.00.(5)*
4.12 Warrant, issued March 27, 1998, executed by National Auto Finance
Company, Inc.(5)*
10.1 Second Amended and Restated Agreement of Limited Partnership of
National Auto Finance Company LP, dated as of September 1, 1995, by and among
National Auto Finance Corporation, The S Associates Limited Partnership, The O
Associates Limited Partnership, Stephen L. Gurba, Craig Schnee, Roy E. Tipton,
Blane H. MacDonald, Michael B. Colley, Irwin I. Kent, William G. Magro, Kevin G.
Adams, Kamala R. Chapman, Keith B. Stein, Colleen S. McMillen, Richard H.
Steffer, Tim Rooney, Lynn Dunham-Sirota and IronBrand Capital, LLC.(1)
10.1-1 First Amendment to Second Amended and Restated Partnership Agreement,
dated December 1, 1996.(3)
10.2 1996 Share Incentive Plan.(3)
10.3 401(k) Plan.(1)
10.4 Employment Agreement, dated as of July 1, 1996, between National Auto
Finance Company, Inc. and William G. Magro.(3)
10.4-1 First Amendment to Employment Agreement, dated as of May 27, 1997,
between National Auto Finance Company, Inc. and William G. Magro.(5)*
10.5 [ Intentionally Omitted ]
10.5-1 [ Intentionally Omitted ]
10.6 [ Intentionally Omitted ]
10.7 [ Intentionally Omitted ]
10.8 Receivables Purchase Agreement, dated as of December 8, 1994, by and
between National Auto Finance Company LP, as Seller, and NAFCO Funding Trust, as
Purchaser.(1)
10.9 Promissory Note, dated December 8, 1994, payable by NAFCO Funding Trust
to the order of National Auto Finance Company LP(1)
10.10 NAFCO Auto Receivables Master Trust Pooling and Administration
Agreement, dated as of December 8, 1994, among NAFCO Funding Trust, as
Transferor, National Auto Finance Company LP, as the Administrator, and Bankers
Trust Company, as Trustee.(1)
10.10-1 Consent and Amendment, dated as of July 2, 1996, to NAFCO Auto
Receivables Master Trust Pooling and Administration Agreement, dated as of
December 8, 1994, among NAFCO Funding Trust, as Transferor, National Auto
Finance Company LP, as the Administrator, and Bankers Trust Company, as
Trustee.(5)*
10.11 Series 1994-R, Class B Supplement, dated as of December 8, 1994, to the
Pooling and Administration Agreement, dated as of December 8, 1994, among NAFCO
Funding Trust, as Transferor, National Auto Finance Company LP, as the
Administrator, and Bankers Trust Company, as Trustee.(1)
10.12 Trust Agreement, dated as of October 5, 1994, between National Auto
Finance Corporation and Bankers Trust.(1)
10.13 First Amendment and Restated Trust Agreement of NAFCO Funding Trust,
dated as of December 8, 1994, between National Auto Finance Company LP, as
Depositor, The Chase Manhattan Bank (USA), as Owner Trustee and Gary L. Shapiro
and Edgar A. Otto, as Co-Trustees.(1)
</TABLE>
<PAGE> 81
<TABLE>
<S> <C>
10.14 Amended and Restated Servicing Agreement, dated as of December 5, 1994,
by and between World Omni Financial Corp. and National Auto Finance Company
LP(1)
10.14-1 Amendment to Amended and Restated Servicing Agreement, dated as of
September 6, 1995, by and among World Omni Financial Corp. and National Auto
Finance Company LP(5)*
10.14-2 Second Amendment to Amended and Restated Servicing Agreement, dated as
of June 24, 1997, by and between Omni Financial Services of America, Inc., as
assignee of World Omni Financial Corp., and National Auto Finance Company, Inc.,
as assignee of National Auto Finance Company LP(5)*
10.14-3 Third Amendment to the Amended and Restated Servicing Agreement, dated
as of September 12, 1997, by and between Omni Financial Services of America,
Inc. and National Auto Finance Company, Inc.(5)*
10.14-4 Fourth Amendment to the Amended and Restated Servicing Agreement, dated
as of October 12, 1997, by and between Omni Financial Services of America,
Inc.(5)*
10.14-5 Supplement to the Amended and Restated Servicing Agreement, dated as of
December 5, 1994, as amended as of October 1, 1995, between World Omni Financial
Corp. ("WOFC"), as Servicer, and National Auto Finance Company LP, dated as of
November 21, 1995 by and between Omni Financial Services of America, Inc., as
assignee of WOFC ("Servicer") and NAFCO.(1)
10.14-6 Supplement to the Amended and Restated Servicing Agreement, dated as of
December 5, 1994, as amended as of October 1, 1995, between World Omni Financial
Corp. (WOFC) and National Auto Finance Company LP (NAFCO), dated as of November
13, 1996 by and between Omni Financial Services of America, Inc., as assignee of
WOFC, and NAFCO.(2)
10.14-7 Supplement to Amended and Restated Servicing Agreement, December 5,
1994, as amended as of October 1, 1995 and November 13, 1996, dated as of July
23, 1997, by and between Omni Financial Services of America, Inc. and National
Auto Finance Company, Inc.(5)*
10.14-8 Supplement to Amended and Restated Servicing Agreement, dated as of
December 5, 1994, as amended as of October 1, 1995, June 24, 1997 and July 21,
1997 and supplemented as of November 21, 1995, November 13, 1996, July 12, 1997
and September 19, 1997, by and between Omni Financial Services of America, Inc.
and National Auto Finance Company, Inc.(5)*
10.15 Certificate Purchase Agreement, dated as of December 8, 1994, among
NAFI Funding Trust, National Auto Finance Company LP, as Initial Administrator
and First Union National Bank of North Carolina.(1)
10.16 [ Intentionally Omitted ]
10.16-1 First Amendment of Management Agreement, dated as of January 1, 1996,
by and between National Auto Finance Company LP, Auto Credit Clearinghouse LP
and National Auto Finance Corporation.(1)
10.16-2 Second Amendment to Management Agreement, dated as of January 1, 1997,
by and among National Auto Finance Corporation, National Auto Finance Company,
Inc., National Auto Finance Company, LP and National Financial Companies
LLC.(5)*
10.17 [ Intentionally Omitted ]
10.17-1 First Amendment to Services Agreement, dated as of January 1, 1996, by
and between National Auto Finance Corporation and National Financial
Corporation.(1)
10.17-2 Second Amendment to Services Agreement, dated as of January 1, 1997, by
and between National Auto Finance Corporation, National Auto Finance Company,
Inc. and National Financial Companies LLC.(5)*
</TABLE>
<PAGE> 82
<TABLE>
<S> <C>
10.18 Pooling and Servicing Agreement, dated as of October 1, 1995, by and
among National Financial Auto Funding Trust, as Transferor, National Auto
Finance Company LP, as Master Servicer, and Harris Trust and Savings Bank, as
Trustee.(1)
10.19 Assignment Agreement, dated as of October 1, 1995, between Bankers
Trust Company, as Trustee, and National Financial Auto Funding Trust.(1)
10.20 Transfer Agreement No. 1, dated as of October 1, 1995, between National
Financial Auto Funding Trust and Harris Trust and Savings Bank.(1)
10.21 Insurance and Indemnity Agreement, dated as of November 21, 1995, among
Financial Security Assurance, Inc., National Financial Auto Funding Trust and
National Auto Finance Company LP(1)
10.22 Indemnification Agreement, dated as of November 21, 1995, among
Financial Security Assurance Inc., National Financial Auto Funding Trust and
First Union Capital Markets Corp.(1)
10.23 Master Spread Account Agreement, dated as of November 21, 1995, among
National Financial Auto Funding Trust, Financial Security Assurance Inc. and
Harris Trust and Savings Bank, as Trustee and as Collateral Agent.(1)
10.24 Financial Guaranty Insurance Policy (Policy No.: 50522-N), together
with Endorsement No. 1 thereto, dated November 13, 1996, issued by Financial
Security Assurance Inc. in favor of Harris Trust and Savings Bank, as trustee
for the benefit of the Certificate Holders.(1)
10.25 Custodial Agreement, dated as of November 21, 1995, by and between Omni
Financial Services of America, Inc., as custodian, and National Auto Finance
Company LP, as Master Servicer.(1)
10.26 Amendment, dated as of November 21, 1995, to the First Amended and
Restated Trust Agreement of NAFCO Funding Trust, dated as of December 8, 1994,
among National Auto Finance Company LP, as Depositor, The Chase Manhattan Bank
(USA), as Owner Trustee, and Gary L. Shapiro, Edgar Otto A. and Andrew Stidd, as
Co-Trustees.(1)
10.27 Form of Indemnification Agreement.(4)
10.28 Assignment and Assumption Agreement, dated as of October 7, 1996,
between National Auto Finance Company, Inc. and National Auto Finance Company
LP(1)
10.29 Pooling and Servicing Agreement, dated as of October 21, 1996, by and
among National Financial Auto Funding Trust, as Transferor, National Auto
Finance Company LP, as Servicer, and Harris Trust and Savings Bank, as
Trustee.(2)
10.30 Purchase and Contribution Agreement, dated as of October 21, 1996, by
and between National Auto Finance Company LP and National Financial Auto Funding
Trust.(2)
10.31 Assignment Agreement, dated as of October 21, 1996, between Bankers
Trust Company and National Financial Auto Funding Trust II.(2)
10.32 Master Spread Account Agreement, dated as of November 13, 1996, among
National Financial Auto Funding Trust, Financial Security Assurance Inc. and
Harris Trust and Savings Bank, as Trustee and Collateral Agent.(2)
10.33 Insurance and Indemnity Agreement, dated as of November 13, 1996, among
Financial Security Assurance Inc., National Financial Auto Funding Trust and
National Auto Finance Company LP(2)
10.34 Sale Agreement, dated as of October 21, 1996, by and between National
Financial Auto Funding Trust and National Financial Auto Funding Trust II.(2)
10.35 Transfer Agreement No. 1, dated as of November 13, 1996, by National
Financial Auto Funding Trust as Transferor to Harris Trust and Savings Bank, as
Trustee, pursuant to a Pooling and Servicing Agreement, dated as of October 21,
1996.(2)
</TABLE>
<PAGE> 83
<TABLE>
<S> <C>
10.36 Form of Financial Guaranty Insurance Policy issued by Financial
Security Assurance Inc.(2)
10.37 Lease Agreement, dated as of June 16, 1997, by and between CTC
Investments II Limited and National Auto Finance Company, Inc.(5)*
10.37-1 First Amendment to Lease Agreement dated June 16, 1997 by and between
CTC Investments II Limited and National Auto Finance Company, Inc. dated October
1, 1997.(5)*
10.38 Referral Agreement, dated as of April 15, 1996, by and between First
Union National Bank of North Carolina and Auto Credit Clearinghouse LP(4)
10.39 Trust Agreement, dated as of July 21, 1997, between National Financial
Auto Funding Trust and Wilmington Trust Company, as trustee.(5)*
10.40 Indenture, dated as of June 29, 1997, by and between National Auto
Finance 1997-1 Trust and Harris Trust and Savings Bank as Trustee.(5)*
10.41 Sale and Servicing Agreement, dated as of June 29, 1997, by and among
National Auto Finance 1997-1 Trust, as Seller, National Financial Auto Finance
1997-1 Trust, National Auto Finance Company, Inc. as Servicer, and Harris Trust
and Savings Bank, as Trust Collateral Agent and Back-up Servicer.(5)*
10.42 Financial Guaranty Insurance Policy, dated as of July 23, 1997,
delivered by Financial Security Assurance, Inc.(5)*
10.43 Purchase and Contribution Agreement, dated June 29, 1997, by and
between National Auto Finance Company, Inc. and National Financial Auto Funding
Trust.(5)*
10.44 Sale Agreement, dated as of June 29, 1997, by and between National
Financial Auto Funding Trust II and National Financial Auto Funding Trust.(5)*
10.45 Indemnification Agreement, dated as of July 23, 1997, by and among
Financial Security Assurance Inc., National Finance Auto Funding Trust and First
Union Capital Markets Corp.(5)*
10.46 Amendment No. 1 dated 1997, by and among National Financial Auto
Funding Trust, Financial Security Assurance Inc., Harris Trust and Savings Bank,
as collateral agent, and National Auto Finance Company, Inc. to Master Spread
Account Agreement dated as of November 21, 1995 and Master Spread Account
Agreement dated as of November 13, 1996, in each case among National Financial
Auto Funding Trust, Financial Security Assurance Inc. and Harris Trust and
Savings Bank, as trustee and as collateral agent.(5)*
10.47 Amendment No. 1 dated October 1, 1997, among Financial Security
Assurance Inc., National Financial Auto Funding Trust and National Auto Finance
Company, Inc. to Insurance and Indemnity Agreement dated as of November 21, 1995
and Insurance and Indemnity Agreement dated as of November 13, 1996 in each case
among Financial Security Assurance Inc., National Financial Auto Funding Trust
and National Auto Finance Company, Inc.(5)*
10.48 Amendment to First Amended and Restated Trust Agreement dated as of
December 8, 1994 among National Auto Finance Company, Inc., the Trustee, and the
Co-Trustees, and Section 10.03 of the Trust Agreement dated as of December 8,
1995 among National Auto Finance Company, Inc., the Trustee and the Co-Trustees,
made as of October 1, 1997 among National Auto Finance Company, Inc., The Chase
Manhattan Bank Delaware, as Trustee of National Financial Auto Funding Trust II
and National Financial Auto Funding Trust II and the co-trustee of such
trusts.(5)*
10.49 Investment Agreement dated as of October 1, 1997 by and between
National Auto Finance Company, Inc. and FSA Portfolio Management, Inc.(5)*
10.50 Revolving Credit Agreement dated as of September 29, 1997 among
National Auto Finance Company, Inc. and BankBoston, N.A., for itself and as
agent for the other lending institutions named therein.(5)*
</TABLE>
<PAGE> 84
<TABLE>
<S> <C>
10.50-1 Amendment Agreement No. 1 to Revolving Credit Agreement dated October
1, 1997 by and between National Auto Finance Company, Inc. and BankBoston, N.A.
and the other lending institutions party thereto and BankBoston, N.A., as agent
for itself and other banking institutions.(5)*
10.50-2 Amendment Agreement No. 2 to Revolving Credit Agreement dated December
19, 1997 by and between National Auto Finance Company, Inc. and BankBoston, N.A.
and the other lending institutions party thereto and BankBoston, N.A., as agent
for itself and other banking institutions.(5)*
10.50-3 Amendment Agreement No. 3 to the Revolving Credit Agreement, dated
March 19, 1998, by and among National Auto Finance Company, Inc. BankBoston,
N.A. and the other lending institutions party thereto.(5)*
10.50-4 Amendment Agreement No. 4 to the Revolving Credit Agreement, dated
March 27, 1998, by and among National Auto Finance Company, Inc. BankBoston,
N.A. and the other lending institutions party thereto.(5)*
10.51 Trademark Collateral Security and Pledge Agreement dated as of
September 29, 1997, between National Auto Finance Company, Inc. and BankBoston,
N.A., for itself and other banking institutions.(5)*
10.52 Pledge Agreement made as of September 29, 1997 by and among National
Auto Finance Company, Inc., National Chartered Auto Corporation and BankBoston,
N.A.(5)*
10.53 Note dated as of September 29, 1997 payable by National Auto Finance
Company, Inc. to BankBoston, N.A., as agent.(5)*
10.54 [ Intentionally Omitted ]
10.55 [ Intentionally Omitted ]
10.56 [ Intentionally Omitted ]
10.57 Lease Agreement dated April 8, 1996, by and between CanPro Investments
Ltd. and National Auto Financial Corporation or its assignee Auto Credit
Clearinghouse.(5)*
10.58 Software License, Support and Usage Agreement dated as of February 14,
1997 by and between BNI, Inc. and National Auto Finance Company LP(5)*
10.58-1 First Amendment to Software License, Support and Usage Agreement dated
as of December 15, 1997 by and between BNI, Inc. and National Auto Finance
Company LP(5)*
10.59 Software Sublicense, Support and Usage Agreement dated as of February
17, 1997, by and between Pinnacle Portfolio Services LLC and National Auto
Finance Company, Inc.(5)*
10.60 Consent and Amendment, dated as of September 25, 1997, between National
Financial Auto Funding Trust, National Auto Finance Company, Inc., First Union
National Bank and Bankers Trust Company, as Trustee of National Financial Auto
Receivables Master Trust.(5)*
10.61 Security Agreement, dated as of September 29, 1997, between National
Auto Finance Company, Inc. and BankBoston, N.A., as agent for itself and other
banking institutions.(5)*
10.62 [Intentionally Omitted.]
10.63 Amendment, dated as of September 25, 1997, to Pooling and Servicing
Agreements, dated as of October 1, 1995 and October 21, 1996, each among
National Financial Auto Funding Trust, National Auto Finance Company, Inc., as
successor to National Auto Finance Company LP, and Harris Trust and Savings
Bank, as trustee.(5)*
10.64 Waiver letter of Financial Assurance Inc., dated as of September 25,
1997, to National Auto Finance Company, Inc. and National Financial Auto Funding
Trust.(5)*
10.65 [Intentionally Omitted.]
</TABLE>
<PAGE> 85
<TABLE>
<S> <C>
10.66 Insurance and Indemnity Agreement, among Financial Security Assurance
Inc., National Auto Finance 1997-1 Trust, National Financial Auto Funding Trust
and National Auto Finance Company, Inc., dated as of July 23, 1997.(5)*
10.67 Master Spread Account Agreement, dated as July 23, 1997, among National
Financial Auto Funding Trust, Financial Security Assurance Inc. and Harris Trust
and Savings Bank, as Trustee and as Collateral Agent.(5)*
10.68 Custodial Agreement, dated as of July 23, 1997, by and between Omni
Financial Services of America, Inc., as custodian, and National Auto Finance
Company, Inc., as servicer.(5)*
10.69 $1.5 million Promissory Note, dated as of August 25, 1997, payable by
National Auto Finance Company, Inc. to First Union National Bank.(5)*
10.70 Security Agreement, dated as of August 25, 1997, delivered by National
Auto Finance Company, Inc. to First Union National Bank.(5)*
10.71 Loan Agreement, dated as of August 25, 1997, by and between First Union
National Bank and National Auto Finance Company, Inc.(5)*
10.72 Voting Agreement by and among The 1818 Mezzanine Fund, LP, PC
Investment Company, Progressive Investment Company, Inc. and National Auto
Finance Company, L.P dated December 22, 1997.(5)*
10.73 Restated Registration Rights Agreement, dated March 27, 1998, by and
among National Auto Finance Company, Inc. and Certain Investors.(5)*
10.74 Junior Subordination Agreement, dated as of March 27, 1998, among
BankBoston, N.A., The 1818 Mezzanine Fund, LP, PC Investment Company,
Manufacturers Life Insurance Company (U.S.A.), Nova Financial Corporation, Nova
Corporation, The Structured Finance High Yield Fund, LLC and National Auto
Finance Company, Inc.(5)*
10.75 Indenture, dated as of December 15, 1997, by and between National Auto
Finance 1998-1 Trust and Harris Trust and Savings Bank at Trustee.(5)* 10.76
Sale and Servicing Agreement, dated as of December 15, 1997, by and among
National Auto Finance 1998-1 Trust, as Seller, National Financial Auto Finance
1998-1 Trust, National Auto Finance Company, Inc. as Servicer, and Harris Trust
and Savings Bank, as Trust Collateral Agent and Back-up Servicer.(5)*
10.77 Insurance and Indemnity Agreement, among Financial Security Assurance
Inc., National Auto Finance 1998-1 Trust, National Financial Auto Funding Trust
and National Auto Finance Company, Inc., dated as of January 20, 1998.(5)*
10.78 Master Spread Account Agreement, dated as January 20, 1998, among
National Financial Auto Funding Trust, Financial Security Assurance Inc. and
Harris Trust and Savings Bank, as Trustee and as Collateral Agent.(5)*
10.79 Custodial Agreement, dated as of January 20, 1998, by and between Omni
Financial Services of America, Inc., as custodian, and National Auto Finance
Company, Inc., as servicer.(5)*
10.80 Sale Agreement, dated as of December 15, 1997, by and between National
Financial Auto Funding Trust Il and National Financial Auto Funding Trust.(5)*
10.81 Trust Agreement, dated as of December 15, 1997, between National
Financial Auto Funding Trust and Wilmington Trust Company.(5)*
10.82 Purchase and Contribution Agreement, dated December 15, 1997, by and
between National Auto Finance Company, Inc. and National Financial Auto Funding
Trust.(5)*
10.83 Assignment Agreement, dated as of December 15, 1997, between Bankers
Trust Company and National Financial Auto Funding Trust II.(5)*
</TABLE>
<PAGE> 86
<TABLE>
<S> <C>
10.84 Indemnification Agreement, dated as of January 20, 1998, by and among
Financial Security Assurance Inc., National Financial Auto Funding Trust and
First Union Capital Markets Corp.(5)*
10.85 Amendment, dated as of January 20, 1998, by and among National
Financial Auto Funding Trust, Financial Security Assurance Inc., Harris Trust
and Savings Bank, as collateral agent, and National Auto Finance Company, Inc.
to Master Spread Account Agreement dated as of November 21, 1995, Master Spread
Account Agreement dated as of November 13, 1996, and Master Spread Account
Agreement dated as of July 23, 1997 in each case among National Financial Auto
Funding Trust, Financial Security Assurance Inc. and Harris Trust and Savings
Bank, as trustee and as collateral agent.(5)*
10.86 Referral Agreement, dated as of February 26, 1998, by and between U.S.
Bank, N.A. and Auto Credit Clearinghouse, a division of National Auto Finance
Company, Inc.(5)*
10.87 Restructuring Agreement, dated as of April 7, 1999 by and among the
Company, National Auto Finance Company, L.P., National Auto Finance Corporation,
The 1818 Mezzanine Fund, L.P., PC Investment Company, Progressive Investment
Company, Inc. Manufacturers Life Insurance Company (U.S.A.), and The Structured
Finance High Yield Fund, LLC. (6)
10.88 Revolving Credit, Term Loan and Security Agreement dated as of March
31, 1999 by and among National Auto Funding Trust, the Company and First Union
National Bank. (6)
10.89 Note Exchange Agreement dated as of April 7, 1999 by and among the
Company, Nova Financial Corporation, Nova Corporation, Stephen L. Gurba, Edgar
Otto and Gary L. Shapiro. (6)
10.90 Amended and Restated Junior Subordination Agreement, dated as of April
7, 1999 among The 1818 Mezzanine Fund, L.P., PC Investment Company,
Manufacturers Life Insurance Company (U.S.A.), The Structured Finance High Yield
Fund, and others, and the Company. (6)
10.91 Release and Consent Not to Sue, dated as of April 7, 1999 by National
Auto Finance Company L.P., National Auto Finance Corporation, Nova Financial
Corporation, Nova Corporation, Gary L. Shapiro, Edgar A. Otto, and Stephen L.
Gurba for itself or himself and on behalf of others, releasing the Company and
others from certain claims, etc.
10.92 Release dated as of April 7, 1999 by The 1818 Mezzanine Fund, L.P., PC
Investment Company, Progressive Investment Company, Inc., Manufacturers Life
Insurance Company (U.S.A.), and The Structured Finance High Yield Fund, LLC for
itself and other named Releasors releasing the Company and other named
Releasees. (6)
10.93 Amended and Restated Pooling and Administration Agreement, dated as of
December 8, 1994 and restated in its entirety as of April 7, 1999 by and among
National Financial Auto Funding Trust II, the Company and Bankers Trust Company.
(6)
10.94 Amendment One to Back-up Servicing Agreement, dated as of March 31,
1999 by and among CSC Logic/MSA LLP, the Company, First Union National Bank and
Bankers Trust, as trustee and National Financial Auto Funding Trust II. (6)
10.95 Consent and Amendment, dated as of March 31, 1999 by and among National
Financial Auto Funding Trust II, the Company, First Union National Bank and
Bankers Trust Company, as trustee. (6)
10.96 Reissuance of Series 1994-R class B Certificate registered in the name
of First Union National Bank as owner of a fractional undivided interest in the
National Financial Auto Receivables Master Trust. (6)
10.97 Certificate Agreement, dated as of March 31, 1999 between National
Chartered Auto Corporation and the Company. (6)
10.98 Consent and Amendment, dated as of March 31, 1999 to the Pooling and
Servicing Agreement dated as of October 1, 1995, and the Pooling and Servicing
Agreement, dated as of October 21, 1996 each among National Financial Auto
Funding Trust, the Company, and Harris Trust and Savings Bank, as trustee. (6)
</TABLE>
<PAGE> 87
<TABLE>
<S> <C>
10.99 National Auto Finance Company, Inc. Owner Trustee and National
Financial Auto Funding Trust Indenture Trustee Irrevocable Instruction Letter
dated as of March 31, 1999 addressed to Wilmington Trust Company, as Owner
Trustee, Harris Trust and Savings Bank, as Trustee, and Chase Manhattan Bank
Delaware, as Trustee, each as trustee to various trusts. (6)
10.100 Amendment to Trust Agreement dated as of March 31, 1999 of the First
Amended and Restated Trust Agreement dated as of December 8, 1994 among the
Company, Chase Manhattan Bank Delaware, as Trustee and certain other
Co-Trustees. (6)
10.101 Agreement for Monitoring and Back-up Servicing, dated as of March 31,
1999 among the Company, CSC Logic/MSA LLP and Financial Security Assurance Inc.
(6)
10.102 Amendment to Custodian Agreement, dated as of March 31, 1999 to the
Custodian Agreement, dated as of October 15, 1998, by and among Harris Trust and
Savings Bank as Custodian, the Company as Administrator and Harris Trust and
Savings Bank as trustee of various trusts. (6)
10.103 Supplement to Back-up Servicing Agreement, dated as of March 31, 1999
by and among National Auto Funding Trust, the Company and Harris Trust and
Savings Bank to the Back-up Servicing Agreement dated as of March 31, 1999. (6)
10.104 Agreement and Amendment, dated as of March 31, 1999 among Financial
Security Assurance Inc., National Financial Auto Funding Trust, the Company,
National Auto Finance 1997-1 Trust and National Auto Finance 1998-1 Trust to
Insurance and Indemnity Agreements dated as of November 21, 1995, November 13,
1996, July 23, 1997 and January 20, 1998 in each case among Financial Security
Assurance Inc., National Financial Auto Funding Trust and the Company and with
respect to the Insurance and Indemnity Agreement dated as of July 23, 1997, also
among National Auto Finance 1997-1 Trust and with respect to the Insurance and
Indemnity Agreement dated as of January 20, 1998 also among National Auto
Finance 1998-1 Trust. (6)
10.105 Agreement and Amendment dated as of March 31, 1999 among Financial
Security Assurance Inc., National Financial Auto Funding Trust, Harris Trust and
Savings Bank, to Series 1996-1 Supplement, Series 1997-1 Supplement and Series
1998-1 Supplement each dated as of March 31, 1998 to the First Amended and
Restated Master Spread Account Agreement dated as of March 31, 1998. (6)
11.1 Earnings Per Share(5)
23.1 Consent of BDO Seidman, LLP(5)
23.2 Consent of KPMG Peat Marwick LLP(5)
27.1 Financial Data Schedule(5)
</TABLE>
- -------------------
* Filed in the form executed.
(1) Incorporated by reference to the Company's Registration Statement on
Form S-1 (Registration No. 333-13667) as filed with the Securities and Exchange
Commission on October 8, 1996.
(2) Incorporated by reference to the Company's Amendment No. 1 to
Registration Statement on Form S-1/A (Registration No. 333-13667) as filed with
the Securities and Exchange Commission on November 25, 1996.
(3) Incorporated by reference to the Company's Amendment No. 2 to
Registration Statement on Form S-1/A (Registration No. 333-13667) as filed with
the Securities and Exchange Commission on January 9, 1997.
(4) Incorporated by reference to the Company's Amendment No. 3 to
Registration Statement on Form S-1/A (Registration No. 333-13667) as filed with
the Securities and Exchange Commission on January 28, 1997.
(5) Filed herewith.
(6) Incorporated by reference to the Company's Form 10-K/A to be filed with
the Commission as soon as practicable after the filing hereof.
<PAGE> 1
EXHIBIT 11
NATIONAL AUTO FINANCE COMPANY, INC.
Computation of Earnings per Common Share
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year ended
December 31,
------------------------
1998 1997
---------- ----------
<S> <C> <C>
Average number of common shares outstanding ............ 9,031 9,031
Common equivalent shares outstanding:
Stock options (1) ...................................... -- --
---------- ----------
Total common and common equivalent shares outstanding... 9,031 9,031
========== ==========
Net income (loss) attributed to common shareholders .... $ (33,741) $ (18,587)
========== ==========
Loss per common share (basic and diluted) .............. $ (3.73) $ (2.62)
========== ==========
</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.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference in this Registration
Statement on Form S-8 relating to the registration of 500,000 shares of Common
Stock, par value $.01 per share, of National Auto Finance Company, Inc.
("Registrant") of our report dated April 30, 1999 relating to the financial
statements of the Registrant for the year ended December 31, 1998, included in
the Registrant's Annual Report on Form 10-K for the fiscal year ended December
31, 1998, which are incorporated by reference in this Registration Statement.
BDO Seidman, LLP
West Palm Beach, Florida
May 14, 1999
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
National Auto Finance Company, Inc.:
We consent to incorporation by reference in the registration statement (No.
333-23649) on Form S-8 of National Auto Finance Company, Inc. and subsidiaries
of our report dated April 15, 1998, relating to the consolidated balance sheet
of National Auto Finance Company, Inc. and subsidiaries as of December 31, 1997,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the years in the two-year period ended December 31, 1997,
which report appears in the December 31, 1998, annual report on Form 10-K of
National Auto Finance Company, Inc. and subsidiaries.
Our report dated April 15, 1998 contains an explanatory paragraph that states
that the Company has suffered losses from operations, experienced an Insurance
Agreement Event of Default with respect to its securitizations, and at December
31, 1997 was in violation of various covenants related to its borrowings, which
raise substantial doubt about its ability to continue as a going concern. The
consolidated financial statements do not include any adjustments that might
result from the outcome of that uncertainty.
Our report also refers to the adoption of the provisions of the Financial
Accounting Standards Board's Statement of Financial Accounting Standards No. 125
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities," in 1997.
KPMG LLP
Fort Lauderdale, Florida
May 11, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FOR AND AS OF THE YEAR ENDED DECEMBER 31, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 9,540
<SECURITIES> 0
<RECEIVABLES> 34,117
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 43,657
<PP&E> 3,277
<DEPRECIATION> 0
<TOTAL-ASSETS> 50,732
<CURRENT-LIABILITIES> 2,561
<BONDS> 56,535
2,415
0
<COMMON> 90
<OTHER-SE> (10,869)
<TOTAL-LIABILITY-AND-EQUITY> 50,732
<SALES> 0
<TOTAL-REVENUES> (4,331)
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,417
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> (33,581)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (33,581)
<EPS-PRIMARY> (3.73)
<EPS-DILUTED> (3.73)
</TABLE>
