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SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. __)
Filed by the Registrant / /
Filed by a Party other than the Registrant /X/
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
NATIONAL AUTO FINANCE COMPANY, INC.
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(Name of Registrant as Specified In Its Charter)
------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
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[COMPANY LETTERHEAD]
August 23, 1999
Dear Stockholder:
You are cordially invited to attend the Annual Meeting of Stockholders of
National Auto Finance Company, Inc. (the "Company") to be held at the offices of
Weil, Gotshal & Manges LLP, 767 Fifth Avenue, New York, New York, Conference
Room 25-K, on Tuesday, September 14, 1999, at 10:00 a.m., Eastern Daylight Time
(the "Annual Meeting").
As a result of reporting a net loss of $18.6 million for the fiscal year
ended December 31, 1997, the Company was in default and had breached certain
covenants of, and may have breached certain representations and warranties made
in connection with the issuance of, its Senior Subordinated Notes. After
considering the Company's deteriorating financial condition, the potential for
protracted litigation related thereto, the Company's then existing working
capital position, conditions of the capital and credit markets, emerging
weakness in the asset-backed securities market, and significant weakness in the
sub-prime auto finance industry, the Board of Directors decided it was in the
best interests of the Company and its stockholders to pursue a comprehensive
financial restructuring, involving its Senior Subordinated Notes, Junior
Subordinated Notes, revolving warehouse facility, and the financial guarantor of
its asset-backed securities. On April 30, 1998, the Board of Directors appointed
a Special Committee, consisting of Peter Offermann, Morgan Schuessler and
myself, to conduct discussions and negotiations regarding such a restructuring
of the Company, and to make a recommendation to the Board of Directors with
respect to those discussions and negotiations. The Company retained Rothschild
Inc. as its financial advisor in connection with the restructuring, and in
particular to review and evaluate the Company in order to provide an opinion
regarding the Company's value as a going concern and to determine whether the
restructuring, as finally proposed, was fair to the Company and its
stockholders.
After nearly one year of negotiations, on April 7, 1999, the Company
completed a comprehensive financial 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 for the purchase of securities (in
connection with the Company's future asset-backed securitizations) with First
Union National Bank (its warehouse facility lender), and modified certain of the
terms of the insurance guarantee arrangements with Financial Security Assurance
Inc. (the financial guarantor), related to the Company's securitized
asset-backed bonds. Rothschild rendered its opinion to the Company's Board of
Directors that the transactions contemplated by the restructuring were fair,
from a financial point of view, to the Company and the shareholders of the
Company (other than the Equityholders and the Partnership as defined in the
accompanying proxy statement as to which Rothschild expressed no opinion.
The agreements and transactions constituting the restructuring are described
in detail in the enclosed Proxy Statement and in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1998, which is incorporated by
reference in the Proxy Statement and included herewith. In particular, however,
pursuant to the restructuring, the Senior Subordinated Noteholders and the
Equityholders (as such terms are defined in the Proxy Statement) were issued an
aggregate 8,250,000 shares of common stock of the Company, as consideration for
the various waivers, covenant amendments and releases granted in connection with
the restructuring. Thus, immediately after the restructuring the Company had
(and today has) outstanding 17,280,762 shares of common stock, 58.8% of which
was (and continues to be) held by the Senior Subordinated Noteholders and the
Equityholders. In addition, as a part of the restructuring, National Auto
Finance Company, L.P., which owns directly 4,230,000 shares (the "Partnership
Shares") of the Company's common stock (representing 46.8% of the outstanding
common stock prior to the restructuring and 24.5% of the outstanding common
stock after the restructuring), granted to the Senior Subordinated Noteholders
and the Equityholders an irrevocable voting proxy with respect to the
Partnership Shares. Thus, as a result of the restructuring the Senior
Subordinated Noteholders and the Equityholders have the right to vote 83.3% of
the outstanding voting shares of common stock. Designees
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of the Senior Subordinated Noteholders and the Equityholders also currently
occupy four of the seven seats on the Board of Directors.
Furthermore, the terms of the restructuring provide that the Company may, at
its option, (i) during the two-year period ending April 7, 2001, pay 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, and (ii) during the period ending January 31, 2002, pay 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, convertible into common stock at the conversion price of
$.75 per share.
The terms of the restructuring require that the Company use its best efforts
to amend its Certificate of Incorporation to increase the number of authorized
shares available for issuance upon the conversion of such convertible notes that
may be issued in lieu of cash interest payments. At the Annual Meeting, among
other matters, you will be asked to consider and vote upon the proposal to amend
the Company's Certificate of Incorporation to increase the number of authorized
shares of the Company's common stock. If the number of authorized shares is not
so increased, the Company will not be able to avail itself of the benefits of
this interest payment option, which is an integral part of its plan for
returning to profitability. The Board of Directors of the Company recommends
that the stockholders vote in favor of this proposal, as well as all of the
other proposals contained in the Proxy Statement.
In addition to the proposal to amend the Company's Certificate of
Incorporation, you will be asked to vote on the election of directors, to amend
the Company's 1996 Share Incentive Plan and to ratify the appointment of BDO
Seidman, LLP as the Company's independent auditors. The Senior Subordinated
Noteholders and the Equityholders, as well as our executive officers and
directors, have indicated that they intend to vote all of their common stock in
favor of each of the proposals to be presented at the Annual Meeting. Because
such persons intend to vote in favor of each of the proposals, adoption of each
of the proposals is assured.
I encourage you to read carefully the enclosed Notice of Annual Meeting of
Stockholders and Proxy Statement, which more fully describe the proposals to be
considered at the Annual Meeting.
It is important that your shares be represented at the Annual Meeting,
whether or not you plan to attend personally. Therefore, you are requested to
complete, sign and date the enclosed proxy card and return it as soon as
possible in the enclosed envelope so that your shares will be represented. If
you attend the Annual Meeting in person, you may vote in person even if you have
previously returned your proxy card.
We appreciate your support.
Sincerely,
Keith B. Stein
Chairman of the Board and
Chief Executive Officer
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NATIONAL AUTO FINANCE COMPANY, INC.
10302 Deerwood Park Boulevard, Suite 100
Jacksonville, Florida 32256
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO THE STOCKHOLDERS:
The Annual Meeting of Stockholders of National Auto Finance Company, Inc., a
Delaware corporation (the "Company"), will be held at the offices of Weil,
Gotshal & Manges, LLP, 767 Fifth Avenue, New York, New York 10153, Conference
Room 25-K, on Tuesday, September 14, 1999, at 10:00 a.m, Eastern Daylight Time,
for the following purposes:
(1) Amendment to Certificate of Incorporation. To increase the number
of authorized shares of the Company's Common Stock from twenty
million (20,000,000) to forty-four million (44,000,000).
(2) Election of Directors. To elect two directors in Class II for
terms expiring at the 2001 Annual Meeting of Stockholders, and
two directors in Class III for terms expiring at the 2002 Annual
Meeting of Stockholders.
(3) Amendment to the 1996 Share Incentive Plan. To increase the
number of shares of Common Stock available for the grant of
options, stock appreciation rights, stock awards, performance
awards and stock units (collectively, the "Benefits") from five
hundred thousand (500,000) to four million (4,000,000) and to
increase the maximum number of shares of Common Stock which may
be granted to any individual participant under the 1996 Share
Incentive Plan (the "1996 Plan") to two million (2,000,000).
(4) Appointment of Independent Auditors. To ratify the selection of
BDO Seidman, LLP as independent auditors to audit the Company's
financial statements for the year ending December 31, 1999.
(5) Other Matters. To transact such other business as may properly
come before the meeting or any adjournment or adjournments
thereof.
Information regarding the matters to be acted upon at the meeting is
contained in the Proxy Statement accompanying this Notice. Only stockholders of
record at the close of business on August 2, 1999 will be entitled to notice of
and to vote at the Annual Meeting.
Please complete, date and sign the enclosed proxy and return it promptly in
the enclosed postage paid envelope. If you are able to attend the meeting and
wish to vote your shares personally, you may do so by revoking the proxy at any
time before it is exercised.
Jacksonville, Florida By Order of the Board of Directors
August 23, 1999 Stephen R. Veth
Vice President, Secretary
and General Counsel
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NATIONAL AUTO FINANCE COMPANY, INC.
10302 Deerwood Park Boulevard, Suite 100
Jacksonville, Florida 32256
(800) 448-1032
PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS
September 14, 1999
General
This Proxy Statement is being furnished to holders of common stock, par
value $.01 per share ("Common Stock"), of National Auto Finance Company, Inc., a
Delaware corporation (the "Company"), in connection with the solicitation of
proxies by the Board of Directors of the Company (the "Board of Directors") for
use at the Annual Meeting of Stockholders of the Company (the "Annual Meeting")
to be held at the offices of Weil, Gotshal & Manges, LLP, 767 Fifth Avenue, New
York, New York, Conference Room 25-K, on Tuesday, September 14, 1999, beginning
at 10:00 a.m., Eastern Daylight Time, and at any adjournment or adjournments
thereof.
This Proxy Statement and the accompanying form of proxy are first being
mailed to stockholders on August 23, 1999.
Pursuant to the Company's restructuring agreement (described in greater
detail below) with The Progressive Investment Company, Inc. ("Progressive"), PC
Investment Company ("PCI"), an affiliate of Progressive, The 1818 Mezzanine
Fund, L.P. (the "1818 Fund"), The Structured Finance High Yield Fund, LLC
("SFHY"), and Manufacturers Life Insurance Company (U.S.A.) ("ManuLife")
(collectively, the "Senior Subordinated Noteholders"), the Company has agreed to
use its best efforts to amend its Certificate of Incorporation to increase the
number of authorized shares of Common Stock available for issuance upon the
conversion of certain Convertible Notes (as defined below). To that end, among
other matters, you are being asked, for this and other reasons described in this
Proxy Statement, to consider and vote upon the proposal contained herein to
amend the Company's Certificate of Incorporation to increase the number of
authorized shares of the Company's Common Stock.
The Proxy
Keith B. Stein, Chairman of the Board of Directors and Chief Executive
Officer of the Company, and Stephen R. Veth, Vice President, Secretary and
General Counsel of the Company have been selected as proxies by the Board of
Directors with respect to the matters to be voted upon at the Annual Meeting.
All shares of Common Stock that are represented by properly executed proxies
received prior to or at the Annual Meeting, and not revoked prior to the use of
such proxies in accordance with the procedures therefor, will be voted as
specified in the instructions indicated in such proxies. If no instructions are
indicated, such proxies will be voted in accordance with the recommendations of
the Board of Directors contained in this Proxy Statement, and in the discretion
of the persons named in the proxies on such other matters as may properly come
before the Annual Meeting.
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A stockholder may revoke his, her or its proxy at any time prior to the use
of such proxy by delivering to the Secretary of the Company a signed notice of
revocation or a later dated and signed proxy, or by attending the Annual Meeting
and voting in person. Attendance at the Annual Meeting will not in itself
constitute the revocation of a proxy.
Record Date: Shares Entitled to Vote
The Board of Directors has fixed the close of business on August 2, 1999 as
the date (the "Record Date") for determining those stockholders entitled to
notice of, and to vote at, the Annual Meeting. On the Record Date, there were
17,280,762 shares of Common Stock issued and outstanding, with each share
entitled to one vote on each matter submitted to stockholders for consideration
at the Annual Meeting.
Quorum: Required Vote
The presence in person or by proxy of the holders of a majority of the
outstanding shares of Common Stock entitled to vote at the Annual Meeting is
necessary to constitute a quorum at the Annual Meeting. With respect to
abstentions and broker non-votes (as described below), the shares covered
thereby are deemed to be present at the Annual Meeting for purposes of
determining a quorum.
The affirmative vote of a majority of the shares of Common Stock present in
person or by proxy, and entitled to vote on the approval of the amendment to the
Company's Certificate of Incorporation to increase the number of authorized
shares of the Company's Common Stock from twenty million (20,000,000) to
forty-four million (44,000,000) is required to so amend the Certificate of
Incorporation.
The affirmative vote of a plurality of the shares of Common Stock present in
person or by proxy, and entitled to vote on the election of directors is
required to elect those persons nominated for director. Stockholders will
neither be allowed to cumulate their votes, nor may proxies be voted for a
greater number of persons than the number of nominees named in this Proxy
Statement.
The affirmative vote of a majority of the shares of Common Stock present in
person or by proxy and entitled to vote on the approval of amendments to the
1996 Share Incentive Plan (the "1996 Plan") is required to increase the number
of shares of Common Stock available for the grant of options, stock appreciation
rights, stock awards, performance awards and stock units (collectively, the
"Benefits") from five hundred thousand (500,000) to four million (4,000,000) and
to increase the maximum number of shares of Common Stock which may be granted to
any individual participant under the 1996 Plan to two million (2,000,000).
The affirmative vote of a majority of the shares of Common Stock present in
person or by proxy, and entitled to vote on the ratification of auditors is
required to ratify the appointment of BDO Seidman, LLP as the Company's
independent auditors to audit the Company's financial statements for the year
ending December 31, 1999.
On each matter submitted to stockholders for consideration at the Annual
Meeting, only shares of Common Stock that are voted in favor of such matter
(including proxies for which no direction is provided) will be counted toward
approval of such matter. Abstentions (i.e., shares of Common Stock present at
the Annual Meeting that are not voted on a particular matter) are counted for
purposes of determining the number of shares entitled to vote with respect to
that matter and, therefore, have the same effect as a vote against such matter.
A broker non-vote occurs when an agent holding shares for a beneficial owner
does not vote on a particular proposal because the agent does not have
discretionary voting power with respect to that proposal and has not received
instructions from the beneficial owner. The Delaware Supreme Court has held
that, while broker non-votes may be counted as present for purposes of
determining the presence or absence of a quorum for the transaction of business,
broker non-votes may not be counted for purposes of determining the number of
shares entitled to vote with respect to a particular matter for which
authorization to vote was withheld. Consequently, broker non-votes have the
practical effect of reducing the number of affirmative votes required to achieve
the requisite vote for such proposal by reducing the total number of shares of
Common Stock from which the requisite vote is calculated. Accordingly, broker
non-votes with respect to a matter will not be considered shares entitled to
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vote and, therefore, will not be counted as votes for or against such matter in
determining whether such matter is approved.
Stockholders are not entitled to appraisal rights or similar rights of
dissenters under the Delaware General Corporation Law (the "DGCL") in connection
with any of the matters to be acted upon at the Annual Meeting.
PROPOSAL ONE - TO AMEND THE CERTIFICATE OF INCORPORATION TO INCREASE THE
NUMBER OF AUTHORIZED SHARES OF THE COMPANY'S COMMON STOCK
Introduction
Pursuant to a Securities Purchase Agreement dated December 22, 1997, (i)
PCI, the 1818 Fund and Manulife purchased from the Company $40,000,000 aggregate
principal amount of the Company's Senior Subordinated Notes due December 22,
2004 (the "Senior Subordinated Notes"), and detachable warrants to purchase
1,038,924 shares of the Company's Common Stock and (ii) Progressive (an
affiliate of PCI) and the 1818 Fund purchased an aggregate 1,904,762 shares of
Common Stock (all such transactions hereinafter referred to as the "December
Private Placement"). Subsequently, pursuant to a Securities Purchase Agreement
dated March 27, 1998, SFHY purchased from the Company $20,000,000 aggregate
principal amount of the Company's Senior Subordinated Notes and detachable
warrants to purchase 593,671 shares of Common Stock (such transaction, together
with the December Private Placement, hereinafter referred to as the "Private
Placements").
From 1994 to 1996, Gary Shapiro, Edgar Otto and Stephen Gurba, and companies
controlled by Messrs. Shapiro and Otto, loaned an aggregate of $8,229,733 to the
Company. Each of such loans was made in exchange for a junior subordinated note
(the "Junior Subordinated Notes") (Messrs. Shapiro, Otto and Gurba and such
companies hereinafter collectively referred to as the "Junior Subordinated
Noteholders" and, together with the Senior Subordinated Noteholders, hereinafter
collectively referred to as the "Noteholders").
As a result of reporting a net loss of $18.6 million for the fiscal year
ended December 31, 1997, the Company was in default and had breached certain
covenants of, and may have breached certain representations and warranties made
in connection with the issuance of, its Senior Subordinated Notes. After
considering the Company's deteriorating financial condition, the potential for
protracted litigation related thereto, the Company's then existing working
capital position, conditions of the capital and credit markets, emerging
weakness in the asset-backed securities market, significant weakness in the
sub-prime auto finance industry, and the Company's various alternatives,
including the filing for protection under the federal bankruptcy laws, the Board
of Directors decided it was in the best interests of the Company and its
stockholders to pursue a comprehensive financial restructuring, involving its
Senior Subordinated Notes, Junior Subordinated Notes, revolving warehouse
facility with First Union National Bank ("First Union"), and certain insurance
policies and agreements with Financial Security Assurance Inc. ("FSA"), the
financial guarantor of its asset-backed securities. On April 30, 1998, the Board
of Directors appointed a Special Committee, consisting of Peter Offermann,
Morgan Schuessler and Keith Stein, to conduct discussions and negotiations
regarding such a restructuring, and to make a recommendation to the Board of
Directors with respect to those discussions and negotiations. The Special
Committee retained, on behalf of the Company and the Board of Directors,
Rothschild Inc. as its financial advisor in connection with the restructuring,
and in particular to review and evaluate the Company in order to provide an
opinion regarding the Company's value as a going concern and to determine
whether the restructuring, as finally proposed, was fair to the Company and its
stockholders. The Company paid Rothschild $150,000 for advising the Company's
Board of Directors and its Special Committee in connection with the
comprehensive financial restructuring and an additional $150,000 for rendering
the opinion.
After nearly one year of negotiations, on April 7, 1999, the Company
completed a comprehensive financial 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 for the purchase of securities (in
connection with the Company's future asset-backed securitizations) with First
Union, and modified certain of the terms of the insurance guarantee arrangements
with FSA (all of such tranactions and arrangements hereinafter referred to as
the "Restructuring"). Rothschild rendered its opinion to the Company's Board of
Directors that the transactions contemplated by the Restructuring were fair,
from a financial
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point of view, to the Company and the stockholders of the Company (other than
the Equityholders and the Partnership, as defined below, as to which Rothschild
expressed no opinion).
The agreements and transactions consummated in the Restructuring with the
Senior Subordinated Noteholders provide for and include, among other things: (1)
the waiver of past defaults and breaches of covenants, representations and
warranties, if any, made in connection with the Senior Subordinated Notes; (2)
the waiver of the existing adjusted interest expense and net worth covenants
until March 31, 2001; (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 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 April 7, 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 (the
"Convertible Senior Subordinated Promissory Notes"); (5) the issuance to the
Senior Subordinated Noteholders of 7,071,429 shares of Common Stock as
consideration for the waivers and amendments granted to the Company; (6) the
issuance to those Noteholders that also purchased Common Stock of the Company at
the time of their debt investment (hereinafter referred to as the
"Equityholders") of 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 potential Board representatives. Designees of
the Senior Subordinated Noteholders currently hold four of seven seats on the
Board of Directors. SFHY has not, to date, identified its two representatives to
the Board.
The agreements and transactions consummated in the Restructuring with the
Junior Subordinated Noteholders provide for and include, among other things: (1)
the waiver of 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 of the irrevocable proxy described below; (4) the execution and
delivery of full and complete releases by and among the Company, the Senior
Subordinated Noteholders, the Junior Subordinated Noteholders, the Partnership
(as defined below), 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, the Partnership,
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 consummated in the Restructuring with First
Union provide for and include, among other things: (1) the extension of the
Company's 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) the waiver of existing violations of certain covenants
with respect to the Master Trust, specifically, the covenant that the Master
Trust maintain certain interest rate hedging agreements and covenants related to
allowable repossession and recovery limits.
The agreements and transactions consummated in the Restructuring with FSA
provide for and include, among other things: (1) the resetting of the cash
spread accounts in each of the Company's term asset-backed securitizations that
have been guaranteed by FSA to 11% of the outstanding principal balance of the
receivables in each of such securitizations for the remaining term of such
securitizations; (2) the elimination of all portfolio performance maintenance
requirements that, if otherwise violated, would have resulted in the trapping of
cash flows to over fund such cash spread accounts; (3) the resetting of the
portfolio performance requirements that, if
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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 Senior Subordinated Noteholders may be deemed to have acquired control
of the Company as a result of the issuance to them of additional shares of
Common Stock in the Restructuring, as more particularly described above.
Following the Restructuring, the Senior Subordinated Noteholders held of record
an aggregate of 10,174,762 shares of the Company's outstanding Common Stock and
beneficially owned an aggregate of 17,155,689 shares of the Company's Common
Stock, in the respective amounts set forth under "Principal Stockholders" below,
representing approximately 85.7% of the Company's issued and outstanding Common
Stock (assuming the issuance of stock in respect of certain warrants, options
and Convertible Senior Subordinated Promissory Notes held by such Senior
Subordinated Noteholders). National Auto Finance Company, L.P., a Delaware
limited partnership (the "Partnership"), by and through National Auto Finance
Corporation, the general partner of the Partnership (the "General Partner") and
certain of the Partnership's limited partners, Nova Financial Corporation, Nova
Corporation, Stephen L. Gurba, Edgar A. Otto and Gary L. Shapiro, as part of the
Restructuring, granted to the Board designees of the Senior Subordinated
Noteholders an irrevocable proxy to vote the 4,230,000 shares of Common Stock
held by the Partnership in all matters as to which such shares are entitled to
vote.
Proposed Amendment
The Company's Certificate of Incorporation currently authorizes the Company
to issue up to 20,000,000 shares of Common Stock and 1,000,000 shares of
preferred stock (the "Preferred Stock"). The Board of Directors proposes that
the stockholders consider and adopt an amendment to the FOURTH section of the
Company's Certificate of Incorporation to increase the authorized number of
shares of Common Stock from 20,000,000 to 44,000,000, thereby increasing the
total authorized number of shares from 21,000,000 to 45,000,000. The wording of
the proposed amendment is included in Annex A.
Reasons for Amendment
As an integral part of the Company's Restructuring, as described above, the
Company was granted the option by the Senior Subordinated Noteholders to pay on
a quarterly basis, during the two-year period ending April 7, 2001, fifty
percent (50%) of the interest owed on the Senior Subordinated Notes (and the
interest on such interest) through the issuance of Convertible Senior
Subordinated Promissory Notes that are convertible into the Company's Common
Stock at a conversion price of $.75 per share. The Company was granted a similar
option, but as to 100% of the interest owed, by the Junior Subordinated
Noteholders. Exercise by the Company of this option has the result of increasing
cash availability for other corporate opportunities, rather than using it for
the payment of interest on such Notes. In order to avail itself of such option,
the Company is required, under the terms of the Restructuring, to use its best
efforts to amend the Certificate of Incorporation to increase the authorized
number of shares. On August 23, 1999, 2,719,238 shares of the Company's
authorized but unissued Common Stock were available for the Company to take
advantage of such option, which would limit the use of such option to the
payment of $2,039,428 of interest. (The terms of the Restructuring allow the
Company to pay approximately $7.6 million of interest using such payment option,
if enough shares are available by issuance upon conversion.)
In addition, such additional shares are necessary to satisfy the Board of
Directors' June 1999 grant of 2,105,492 stock options to certain executive
officers, non-executive officers and other management employees of the Company,
and to provide continued availability of shares for which awards under the 1996
Plan may be granted to all eligible current and future officers, directors and
employees. (See Proposal Three-Approval of Amendments to the 1996 Share
Incentive Plan below).
Approval of the proposed amendment would give the Company 26,719,238 shares
of Common Stock available for future issuance. The proposed additional
authorized shares of Common Stock could be issued for any other proper corporate
purpose, including stock splits, the payment of stock dividends or other
distributions in shares of stock, the acquisition of other businesses, the
raising of additional capital for use in the Company's business, or in
connection with other director and employee stock incentive and compensation
programs.
6
<PAGE>
Currently 2,295 shares of Preferred Stock are outstanding. No increase in
the authorized number of shares of Preferred Stock is requested.
The authorization of additional shares of Common Stock will not, by itself,
have any effect on the rights of holders of existing Common Stock. Depending on
the circumstances, any issuance of additional shares of Common Stock may dilute
the present equity ownership of current stockholders. Stockholders of the
Company have no preemptive rights to participate in any future issuance of
shares.
If the proposed amendment to the Certificate is approved, the Board of
Directors will have the authority to issue the additional authorized shares or
any part thereof to such persons and for such consideration as it may determine
without further action by the stockholders except as required by law, the
Certificate of Incorporation or the rules of any stock exchange on which the
Company's securities may then be listed.
Required Vote
The proposed amendment will be approved if the number of votes cast for the
amendment exceeds the number of votes cast against the amendment at the Annual
Meeting. Abstentions and broker non-votes will not be counted as votes either
for or against the amendment, and therefore will not have an effect on the
outcome of the vote on this proposal. Also see "Quorum: Required Vote" above.
The Senior Subordinated Noteholders and the Equityholders, as well as the
Company's executive officers and directors, have indicated that they intend to
vote all of their common stock in favor of this proposal. Because such persons
intend to vote in favor of this proposal, adoption of this proposal is assured.
Background and Purpose of the Proposal; the Restructuring Process
In April 1998, the Company learned that it had incurred an $18.6 million net
loss for the fiscal year ended December 31, 1997 and, as a result, was in
default and had breached certain covenants of, and may have breached certain
representations and warranties made in connection with the issuance of, its
Senior Subordinated Notes.
During the period from April 1998 to April 1999, the members of the Special
Committee discussed and negotiated the Restructuring with the Senior
Subordinated Noteholders, the Equityholders, the Junior Subordinated
Noteholders, First Union and FSA. Additionally, during such period, the Board of
Directors met 14 times, and at nearly all of such meetings the progress of the
Restructuring was discussed and its then proposed terms were considered.
In June 1998, Rothschild delivered to the Special Committee the first of
three reports describing the evaluative work it had performed and its
conclusions derived therefrom. Specifically, Rothschild reviewed and evaluated
the Company's operations and management plan; revised the plan to accommodate a
five-year time horizon; performed a sensitivity analysis which tested various
plan assumptions; ascertained and evaluated comparable companies in the
industry; contacted numerous industry analysts; determined appropriate trading
multiples for the industry; applied those multiples to the Company's historic
and anticipated performance; performed a discounted cash flow analysis; and
suggested an appropriate treatment for the restructuring of the Senior
Subordinated Notes based on all of such analysis.
Throughout June, July and August 1998, the members of the Special Committee,
based in part upon Rothschild's report, met with representatives of the Senior
Subordinated Noteholders to discuss and negotiate the terms of the
Restructuring. Such discussions, however, led to the conclusions that, in order
to recapitalize the Company in a manner that would enable it to successfully
pursue its business plan, it was also necessary to modify certain terms of the
warehouse loan facility and extend the maturity date of such facility and make
other financial arrangements with First Union, to modify the terms of the
insurance guaranty policies related to the Company's securitized asset-backed
bonds and make other financial arrangements with FSA, and to modify certain
terms of the Junior Subordinated Notes and arrange for certain other concessions
from the Junior Subordinated Noteholders. The Special Committee and the Board of
Directors had concluded that, in the absence of the consummation of all such
arrangements, the Company would not possess the liquidity, financial flexibility
and relief from the potential for protracted litigation that was necessary to
continue as a going concern and successfully pursue its business plan. Thus, in
September 1998, in addition to continuing its discussions and negotiations with
the Senior Subordinated
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Noteholders, the members of the Special Committee commenced discussions and
negotiations with First Union, FSA and the Junior Subordinated Noteholders
(including certain of such Junior Subordinated Noteholders in their capacities
as controlling persons of the General Partner of the Partnership). Such
discussions and negotiations, among all such parties, continued through the
first quarter of 1999.
Also, in September 1998, Rothschild delivered the second of its reports to
the Special Committee, which expanded on the first report. Specifically, in
addition to the analysis presented in the first report, this report analyzed
further the Company's business plan; reflected two discounted cash flow analyses
to ascertain sensitivity of the Company's enterprise value to revenue
volatility; suggested appropriate treatment of the Senior Subordinated Notes
based on this analysis; described the proposed treatment of the First Union
facilities and the new financial arrangements to be proposed to be entered into
with First Union; described the proposed treatment of the arrangements with FSA;
described the proposed treatment of the Junior Subordinated Notes and the other
arrangements to be entered into with the Junior Subordinated Noteholders and the
Partnership; and reviewed the proposed treatment of the Senior Subordinated
Notes and such other facilities and arrangements relative to: the other options
available to the Company; the projected cash flow needs of the Company; and the
general financial condition of the Company going forward.
In developing and finalizing the proposed terms of the Restructuring
(described in detail above under "Introduction"), the Special Committee
discussed and considered, with the assistance of Rothschild, the following:
o Cash Flow Considerations. The proposed Restructuring would result in cash
flow savings of $7.125 million in interest due on the Senior Subordinated
Notes over the 24-month restructuring period. Additionally, $465,000 of
interest on the Junior Subordinated Notes would become a non-cash
obligation over the 36-month period. Assuming the Convertible Senior
Subordinated Promissory Notes were converted to equity, the Restructuring
would lessen pre-tax losses by $3.56 million in the critical first year of
the Restructuring. Therefore, management projected a pre-tax loss of $7.3
million as opposed to $10.9 million in the absence of the Restructuring.
One goal of management was to preserve cash in order to ensure liquidity
and present as strong a balance sheet as possible, and the conversion of
cash interest to pay-in-kind interest would further that goal.
o Technical Considerations. The proposed Restructuring was indicative of the
confidence in the Company's viability of both the Senior Subordinated
Noteholders and First Union, who had agreed to a 24-month time horizon for
the Restructuring. The Restructuring had resulted in a guaranteed level of
liquidity for the Company through the proposed First Union facilities and
the pay-in-kind interest arrangements. Consequently, this indicated a
certain level of stability going forward and should result in an improved
outlook for the Company's share price.
o Business Considerations. The increased equity stake of the Senior
Subordinated Noteholders, and their collective control of the Company's
Board of Directors, would likely have positive repercussions in terms of new
business generation based on the stature of the financial players involved.
In addition to potential loan volume increases, the standing of Senior
Subordinated Noteholders within the financial services industry would likely
prove helpful to the Company in future securitizations.
Out of Bankruptcy Considerations
o Debt Conversion. The conversion of all or a portion of the debt represented
by the Senior Subordinated Notes into shares of the Company's Common Stock
would eliminate or substantially decrease the Company's obligations under
such Notes thereby increasing the Company's net worth and cash flow. Given
the trading levels of the Company's Common Stock over the second quarter of
1998 of $3.31 per share at April 1, 1998 and $1.31 per share at June 30,
1998, essentially all of the Company's Common Stock would need to be
converted to justify any meaningful conversion of debt. An extreme number
of shares would need to be issued to compensate such lenders for a
conversion of even a small portion of their debt. This would serve only to
dilute the Senior Subordinated Noteholders' existing stock and warrant
positions. This problem was exacerbated as the Noteholders would also need
to be compensated for the interest income they would surrender in
connection with any debt conversion. The then current market capitalization
of the Company was only $3.4 million, making any debt conversion proposal
unworkable for both the Senior Subordinated
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<PAGE>
Noteholders and the Company.
o 100% Pay-In-Kind Interest. The Company would benefit from the positive cash
flow effect of issuing Convertible Senior Subordinated Promissory Notes
convertible into shares of the Company's Common Stock in lieu of cash
interest payments ("Pay-In-Kind Interest") scheduled to become due under
the Senior Subordinated Notes. The trading levels of the Company's Common
Stock over the second quarter of 1998 were too low to warrant equity
compensation for a 100% pay-in-kind instrument. Alternatively,
capitalization of such Pay-In-Kind Interest would serve only to further
increase leverage and likely trigger the need for a second restructuring at
some point in the future. Assuming equity payment as compensation for the
Senior Subordinated Noteholders' agreement to accept pay-in-kind
instruments in lieu of $14.25 million of interest, Common Stock in an
amount roughly equal to the net present value of that Pay-In-Kind Interest
($12.87 million) would be required. If the Pay-In-Kind Interest were
converted at the proposed rate of $.75 per share, 19.0 million additional
shares of Common Stock would need to be issued. This share issuance would
cause existing shares to be worth approximately one-third of their then
current value.
Bankruptcy Considerations.
o Equity Considerations in Bankruptcy. If an agreement could not be reached
and a bankruptcy filing were deemed necessary, this would imply that the
Company's equity had no value and that the debt of the Company was not
worth par. Rothschild's analysis indicated that the Senior Subordinated
Notes would likely be considered worth 70% to 90% of their face value, and
equity would be required to satisfy a portion of their claim. Given the
then low current market capitalization of the Company, the Senior
Subordinated Noteholders would likely receive all of the equity in
satisfaction of their claim with any residual value going to the Junior
Subordinated Noteholders. The existing other equity would be severely
impacted and likely be offered warrants for Company Common Stock which
could only be exercised subsequent to satisfaction in full of the
Noteholders' claims. While the Company would not have to pay interest on
that portion of its debt which was considered impaired, the costs incurred
in bankruptcy (estimated by the Special Committee after consultation with
legal counsel to be between $500,000 and $1.0 million per month) would more
than offset any interest costs saved during such proceeding.
o Business Considerations in Bankruptcy. As the Company's success depends in
large part on its ability to raise financing and complete securitizations,
it was difficult to envision the Company fairing better in bankruptcy.
First, it would be extremely difficult to raise financing in bankruptcy in
order to complete securitizations. Second, building a third-party servicing
business (which was an integral part of the Company's business plan) would
be virtually impossible given mounting doubts as to the ultimate viability
of the Company. Third, auto dealer loan referrals would slow drastically,
negatively impacting volume and profitability. Finally, the Company would
likely use all of its remaining unrestricted cash and ultimately need
additional liquidity to fund losses. This liquidity could be generated from
either the sale of non-securitized loans in portfolio or through
debtor-in-possession financing. Any such financing would require security
and add another layer of creditors that would have to be satisfied prior to
any disbursement to existing equity holders. In short, the negative
momentum generated by a bankruptcy filing could ultimately result in a
liquidation of the Company to satisfy the Senior Subordinated Noteholders'
claims.
Fairness Considerations
o Senior Subordinated Noteholders. In light of the alternatives, the proposed
Restructuring was considered to appropriately compensate the Senior
Subordinated Noteholders for the concessions made with regard to their
Notes. Also, the restructuring fee as paid in Common Stock was considered
appropriate given the uncertain future trading value of the Company's
equity. The compensation of such Noteholders with equity would entitle them
only to share in the upside of an operational turnaround of the Company.
o Junior Subordinated Noteholders. While the conversion of a portion of the
Junior Subordinated Debt to equity was considered, it would serve only to
dilute the existing equity position of those holding the Junior Subordinated
Notes. Additionally, the preservation of their debt claims would assure them
downside protection as their claims were preserved in full in the event of a
future bankruptcy.
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<PAGE>
o Equityholders. The proposed Restructuring preserved the maximum amount of
equity value possible, with the least dilution to existing stockholders. The
fees proposed to be paid were deemed to be reasonable under the
circumstances, and fair value was proposed to be given for the concessions
made by lenders, especially given the uncertain future trading value of the
Company's Common Stock.
o Company. The Company would benefit from the Restructuring by: (a) expediting
the financial and operational restructuring; (b) securing two years of
financing from First Union; (c) reconstituting the Board of Directors with
additional financial experts; and (d) avoiding bankruptcy's negative
implications for the Company's business.
In March 1999, Rothschild delivered to the Special Committee the last of its
three reports; a final, updated report, which was virtually similar to the
report delivered in September 1998. Based upon the terms of the Restructuring as
finally agreed to among all the parties (which are set forth in detail above
under "Introduction"), Rothschild concluded that the transactions contemplated
by the Restructuring were fair, from a financial point of view, to the Company
and the Company's stockholders (other than the Equityholders and the Partnership
as to which Rothschild expressed no opinion). The Board of Directors unanimously
approved the Restructuring at a meeting held on April 7, 1999, and the
Restructuring was closed on that day. At the closing, Rothschild delivered its
opinion to the Board of Directors that the transactions contemplated by the
Restructuring were fair, from a financial point of view, to the Company and the
Company's stockholders (other than the Equityholders and the Partnership, as to
which Rothschild expressed no opinion).
A COPY OF THE ROTHSCHILD OPINION DATED APRIL 7, 1999 IS INCLUDED HEREIN AS
ANNEX "B" AND IS INCORPORATED HEREIN BY REFERENCE. THIS OPINION HAS NOT BEEN,
AND WILL NOT BE, UPDATED. STOCKHOLDERS ARE URGED TO READ THE ROTHSCHILD OPINION
CAREFULLY AND COMPLETELY FOR ASSUMPTIONS MADE, PROCEDURES FOLLOWED, OTHER
MATTERS CONSIDERED AND LIMITS OF THE REVIEW BY ROTHSCHILD.
The April 7, 1999 Rothschild opinion was addressed to the Company's Board of
Directors. THE ROTHSCHILD OPINION DOES NOT ADDRESS THE ADVISABILITY OF AMENDING
THE CERTIFICATION OF INCORPORATION TO INCREASE THE NUMBER OF AUTHORIZED SHARES
OF THE COMPANY'S COMMON STOCK OR ANY OTHER MATTERS TO BE CONSIDERED AT THE
ANNUAL MEETING AND SUCH OPINION DOES NOT CONSTITUTE A RECOMMENDATION TO ANY
STOCKHOLDER AS TO HOW SUCH STOCKHOLDER SHOULD VOTE ON ANY PROPOSAL PRESENTED AT
THE MEETING. Rothschild was not retained as an advisor or agent to the Company's
stockholders or any other person, other than as an advisor to the Company's
Board of Directors and its Special Committee. As part of its investment banking
business, Rothschild is regularly engaged in the valuation of businesses and
securities in connection with mergers, acquisitions, underwriting, sales and
distributions of listed and unlisted securities, private placements and
valuations for corporate and other purposes.
The Rothschild opinion does not constitute an opinion as to the prices at
which the shares of the Company's Common Stock will actually trade at any time.
The terms and conditions of the Restructuring were determined in arm's length
negotiations among the parties to the Restructuring. No restrictions or
limitations were imposed upon Rothschild by the Company, the Company's Board of
Directors or its Special Committee with respect to the investigations made or
the procedures followed by Rothschild in rendering its opinion.
In formulating its opinion, Rothschild, among other things: (i) reviewed
proposed agreements and related exhibits to be executed and delivered upon
consummation of the Restructuring (collectively, the "Restructuring Documents"):
(ii) performed site inspections; (iii) met with management of the Company; (iv)
reviewed certain publicly-available financial statements for the 1995, 1996 and
1997 fiscal years as reported on SEC Form 10-K (as amended) and the September
30, 1998, June 30, 1998 and March 30, 1998 quarterly reports on SEC Form 10-Q,
and certain other financial and operating data relating to the Company made
available to it from published sources and from the internal records of the
Company; (v) reviewed certain financial and other data with respect to the
sub-prime auto lending industry; (vi) compared the Company, from a financial
point of view, with certain other companies in the sub-prime auto industry that
it deemed relevant; (vii) considered the financial terms, to the extent
publicly-available, of selected recent business combinations of companies in the
sub-prime auto industry which it could reasonably foresee as relevant to the
Company's current situation; (viii) reviewed and discussed with management of
the Company historical and forecasted financial requirements for the execution
of the Restructuring
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<PAGE>
Documents; (ix) performed such other analyses and examination and considered
such other financial, economic and market data as it deemed relevant and
appropriate.
In connection with this review, Rothschild did not verify any information
utilized or independently assume any obligation to verify any information
utilized, reviewed or considered by it in formulating its opinion and relied on
such information being accurate and complete in all material respects. With
respect to the financial forecasts that were provided to it, Rothschild assumed,
but independently verified for purposes of its opinion, that the forecasts had
been reasonably prepared on bases reflecting the best available estimates and
judgments of management at the time of preparation as to the future financial
performance of the Company since the respective dates on which its most recent
financial statements were made available to it. Rothschild relied on advice of
the respective counsel and independent accountants to the Company as to all
legal and financial reporting matters. In addition, Rothschild neither assumed
responsibility for making an independent evaluation, appraisal or physical
inspection of any of the assets or liabilities (contingent or otherwise) of the
Company which it is agreed was beyond the scope of its assignment, nor had it
been furnished with any such appraisals.
Rothschild's opinion is based on economic, monetary and market and other
conditions as they existed on, and the information made available to it as of
the date of, its opinion. Accordingly, although subsequent developments may
affect this opinion, Rothschild has not assumed any obligations to update,
review or reaffirm this opinion.
Recommendation of the Board
The Board of Directors believes that adoption of the proposed amendment is
in the best interests of the Company and its stockholders.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" THE
PROPOSED AMENDMENT.
PROPOSAL TWO - 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 not less than four directors. The directors are
divided into three classes. The initial term of office of the Class I Directors
expires at the Annual Meeting of the Company's stockholders in 2000. The initial
term of office of the Class II directors was to expire at the Annual Meeting of
the Company's stockholders in 1998. Roy Tipton, former President of the Company,
and Stephen Gurba, who comprised all the Class II Directors, both resigned from
the Board of Directors during calendar year 1998 and the Company did not have an
Annual Meeting in 1998. The Board did not fill the vacancies created by their
resignations until the election by the Board of David Benson, of Progressive,
and Robert Gould, of the 1818 Fund, in connection with completion of the
Restructuring. The initial term of office of the Class III Directors will expire
at the Annual Meeting of the Company's stockholders scheduled on September 14,
1999.
The number of Class I Directors currently is set at three; the Class I
Directors are Keith Stein, Chairman of the Board of Directors and Chief
Executive Officer of the Company, Peter Offermann, and Evelyn Erb of
Progressive. Ms. Erb was elected by the Board of Directors on May 12, 1999, to
fill the vacancy created by the resignation of Mr. Shapiro as a Class I Director
during the calendar year 1998. The number of Class II Directors currently is set
at three, one seat of which is vacant; the Class II Directors are David Benson
and Robert Gould. The number of Class III Directors currently is set at three;
the Class III Directors are Joseph Donlan of the 1818 Fund, and David Young. Mr.
Donlan and Mr. Young were named to the Company's Board of Directors in December
1997 in connection with the completion of the Company's $50,000,000 private
placement of Senior Subordinated Notes and equity in December 1997.
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.
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The Board of Directors has nominated for election Mr. Gould and Mr. Benson
to serve for two (rather than three) year terms as Class II Directors until the
2001 Annual Meeting of Stockholders in order to establish a consistent three
year term for each respective class of directors on a rotating basis at
succeeding annual stockholder meetings of the Company in compliance with the
Company's Certificate of Incorporation and By-laws. Messrs. Young and Donlan
have been nominated for election as Class III Directors until the 2002 Annual
Meeting of Stockholders. The other three directors (Messrs. Stein and Offermann
and Ms. Erb) will continue in office as Class I Directors. With respect to the
election of directors, proxies may not be voted at the Annual Meeting for a
greater number of persons than the number of nominees named in this Proxy
Statement.
The following table lists the name, age and positions with the Company of
each of the four nominees and each of the three continuing directors, the month
and year in which each director was first elected as a director of the Company,
the year in which each such person's term of office will expire (assuming
re-election at the Annual Meeting) and the number and percentage of shares of
the Company's Common Stock beneficially held by each of them. Also listed are
the Non-Director Officers of the Company named in the Executive Compensation
Table employed by the Company at August 2, 1999.
<TABLE>
<CAPTION>
Position with Served as Term Total
Name Age the Company Director Since Expires Shares (%) (1)
<S> <C> <C> <C> <C> <C>
Nominees
Class II
Robert R. Gould 40 Director May 1999 2001 8,060,172 (44.80%) (2)
David Benson 41 Director May 1999 2001 8,372,235 (46.76%) (3)
Class III
Joseph P. Donlan 52 Director December 1997 2002 8,070,172 (44.83%) (2)
David W. Young 56 Director December 1997 2002 10,000 (4)
Continuing
Directors
Class I
Keith B. Stein 41 Chairman & CEO October 1996 2000 1,029,661 (5.62%) (5)
Evelyn Erb 40 Director May 1999 2000 8,372,235 (46.76%) (3)
Peter Offermann 54 Director October 1996 2000 10,000 (6)
Non-Director Named
Officers
William G. Magro 197,143 (7)
Brent E. Wombolt 55,535 (8)
All Directors and Executive Officers
as a group (14 in number) 13,722,390 (68.18%) (9)
</TABLE>
- ---------------------------------
(1) Total Shares are based on the beneficial ownership rules of the Securities
and Exchange Commission as described in footnote 1 under the caption
"Principal Stockholders" below. Unless otherwise indicated, the named
persons either have sole or shared voting and investment power with respect
to the shares shown for them. Percentage ownership is based on 17,280,762
shares outstanding as of August 2, 1999, the Record Date for the Annual
Meeting. Shares of Common Stock subject to options granted under the
Company's 1996 Plan, warrants issued to the Senior Subordinated Noteholders
and stock issuable upon the conversion of Convertible Senior Subordinated
Promissory Notes, in each case exercisable within 60 days of the Record
Date, are deemed outstanding for computing the beneficial ownership
percentage of the person or group of persons holding such options, warrants
or Convertible Senior Subordinated Promissory Notes, but are not deemed
outstanding for computing the beneficial ownership percentage of any other
person. Unless otherwise
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<PAGE>
indicated, ownership is less than one percent. Furthermore, such options and
warrants are exercisable within such period only to the extent the Company
has available for issuance upon such exercise authorized shares of its
Common Stock. See "Proposal One - To Amend the Certificate of Incorporation
to Increase the Number of Authorized Shares of Common Stock," and
specifically with respect to stock options, see "Proposal Three - Approval
of Amendments to the 1996 Share Incentive Plan" below. On August 2, 1999,
2,719,238 shares of the Company's Common Stock were available for such
issuance, and 237,500 of such shares were available for issuance under the
1996 Plan.
(2) Includes 3,119,047 shares held by the 1818 Fund, as to which Mr. Gould and
Mr. Donlan share voting and investment power in their respective capacities
as a partner and senior executive officer of Brown Brothers Harriman & Co.,
which manages and controls the 1818 Fund and as co-managers of the 1818
Fund. Also includes $221,666 principal amount of Convertible Senior
Subordinated Promissory Notes (which are convertible, at the rate of $.75
per share, into 295,555 shares of the Company's Common Stock) and warrants
held by the 1818 Fund to purchase 415,570 shares of the Company's Common
Stock at $0.01 per share. Also includes 4,230,000 shares of Common Stock
held by the Partnership as to which Messrs. Gould and Donlan have been
granted an irrevocable proxy as Board designees of the 1818 Fund. Also
includes, in the case of Mr. Donlan, 10,000 shares that he may purchase
pursuant to options granted to him under the 1996 Plan.
(3) Includes 3,520,000 shares held by the Progressive Entities over which Mr.
Benson and Ms. Erb share voting and investment power in their respective
capacities as Portfolio Managers of Progressive Capital Management Corp., an
affiliate of the Progressive Entities. Also includes $193,959 principal
amount of Convertible Senior Subordinated Promissory Notes (which are
convertible at the rate of $.75 per share, or into 258,612 shares of the
Company's Common Stock) and warrants held by PCI to purchase 363,623 shares
of the Company's Common Stock at $.01 per share. Also includes 4,230,000
shares of Common Stock held by the Partnership as to which Mr. Benson and
Ms. Erb have been granted an irrevocable proxy as Board designees of the
Progressive Entities.
(4) Includes 10,000 shares that Mr. Young may purchase pursuant to options
granted him under the 1996 Plan.
(5) Includes 1,000 shares held directly by Mr. Stein and 1,028,661 shares Mr.
Stein may purchase pursuant to options granted him under the 1996 Plan.
(6) Includes 10,000 shares that Mr. Offermann may purchase pursuant to options
granted him under the 1996 Plan.
(7) Includes 197,143 shares that Mr. Magro may purchase pursuant to options
granted him under the 1996 Plan.
(8) Includes 55,535 shares that Mr. Wombolt may purchase pursuant to options
granted him under the 1996 Plan.
(9) Includes 1,509,983 shares which may be purchased by all executive officers
and directors as a group under options promised pursuant to employment
agreements and granted under the Company's 1996 Plan which are exercisable
currently or within 60 days after the Record Date.
Nominees
Robert R. Gould is a partner of Brown Brothers Harriman & Co. ("BBH&Co."),
where he began his career in 1981 as a commercial banker providing lending and
advisory services to small to medium sized companies. Beginning in 1988, Mr.
Gould became engaged exclusively in the firm's selection and monitoring of
equity investments on behalf of the 1818 Equity Funds and in providing merger
and acquisition advisory services to domestic and foreign companies. In 1996, he
co-founded the 1818 Fund, a $250 million private equity fund. Mr. Gould became a
General Partner of BBH&Co. in 1996. Mr. Gould is a director of Irving Tanning
Company, DB Companies, Inc., Robert F. Driver Company, Flents Products Company,
Inc. and Magnetic Analysis Corporation.
David Benson has served since 1997 as a Portfolio Manager of Progressive
Capital Management Corp., a wholly-owned subsidiary of the Progressive
Corporation. Prior to that time, Mr. Benson served as Managing Director of Tokai
Securities from 1996 to 1997, where he engaged in proprietary trading in global
credit and currency markets. From 1985 to 1996, Mr. Benson served as Senior Vice
President and Head Trader for Aubrey G. Lanston and Co., primarily dealing in
U.S. Treasury Bonds.
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<PAGE>
Joseph P. Donlan has held a number of positions with BBH&Co. since 1970, and
is currently co-manager of the 1818 Fund, which he co-founded in 1996. Prior to
his current position, Mr. Donlan was the Manager of BBH&Co.'s 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.
David W. Young was the Chief Investment Officer of the Progressive
Corporation, a $6.5 billion property and casualty company from June 1995 until
January 1999 when he resigned to pursue other interests. Prior to that time, Mr.
Young served as Senior Managing Director of Progressive Partners, an affiliate
of the Progressive Corporation, 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.
Each of the above-named nominees has consented to being named in this Proxy
Statement and will serve as a director if elected. If at the time of the Annual
Meeting, however, any of the above-named nominees should be unable or decline to
serve, the persons named as proxies will vote for such substitute nominee or
nominees as the Board of Directors recommends, or vote to allow the vacancy
created thereby to remain open until filled by the Board of Directors, as the
Board of Directors recommends.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF ALL OF THE
NOMINEES FOR ELECTION AS DIRECTORS.
Continuing Directors
Keith B. Stein has been the Chairman of the Board of the Company since June
1999 and the Chief Executive Officer of the Company since May 1998; was Vice
Chairman, Treasurer and a Director of the Company since January 1997; and held
other positions with the Company since 1994. 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. Mr. Stein has served as a director of DVL,
Inc., a public company engaged in the real estate finance and management
business, since September 1996. Mr. Stein is a defendant in litigation related
to the Company more particularly described under the caption "Legal
Proceedings."
Peter Offermann served as Executive Vice President and Chief Financial
Officer of TLC Beatrice International Holdings, Inc., a food manufacturing and
distribution business from January 1995 to August 1999. 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. Mr. Offermann is a defendant in litigation
related to the Company more particularly described under the caption "Legal
Proceedings."
Evelyn Erb has served since 1989 as a Portfolio Manager for Progressive
Capital Management Corp., a wholly-owned subsidiary of the Progressive
Corporation. Prior to such position, she held various other positions with
Progressive Capital Management Corp. for 10 years, and spent 4 years with
Goldman Sachs.
Committees of the Board of Directors
The Board of Directors currently has an Audit Committee (the "Audit
Committee") and a Compensation Committee (the "Compensation Committee").
14
<PAGE>
Audit Committee
The Audit Committee was formed in April 1997 and met two times during the
last fiscal year ("Fiscal 1998"). The members of the Audit Committee are Mr.
Offermann, as Chairman, and Messrs. Donlan, Young and Benson. Messrs. Offermann
and Young are independent non-employee directors.
Among other things, the Audit Committee (i) reviews the internal auditing
program and internal control and accounting procedures of the Company, (ii)
consults with and reviews the reports submitted by the Company's independent
auditors, (iii) reviews, with the Company's management, compliance reporting and
accounting, and (iv) makes such reports and recommendations to the Board of
Directors as it deems appropriate.
Compensation Committee
The Compensation Committee was formed in June 1997 and met one time during
Fiscal 1998. The members of the Compensation Committee are Mr. Young, as
Chairman, Messrs. Donlan and Offermann and Ms. Erb.
The function of the Compensation Committee is to establish salaries, bonuses
and other incentive plans in order to attract persons to serve as, and to
retain, motivate and reward qualified persons serving as directors, executive
officers and key employees of the Company. In addition, the Compensation
Committee is the administrator for the 1996 Plan. See also "Executive
Compensation."
Nominating Committee
The Board of Directors has not formed a Nominating Committee.
Director Attendance
The Board of Directors held fourteen (14) meetings during Fiscal 1998. All
directors attended at least 75% of the aggregate of (1) the total number of
meetings of the Board of Directors held during the period for which such persons
served as a director; and (2) the total number of meetings held by all
committees of the Board of Directors on which the directors served in Fiscal
1998.
Director Compensation
Keith B. Stein, the sole director who is also an employee of the Company,
receives no extra compensation or retainer fees for his service as a member of
the Board of Directors or any committee thereof. Independent non-employee
directors of the Company receive an annual retainer of $10,000. In addition,
each independent non-employee director receives $1,000 for each meeting of the
Board of Directors attended in person and $500 for each meeting of the Board of
Directors attended telephonically, plus, in each case, expenses incident to
attendance at such meetings. Stock options exercisable for shares of Common
Stock are granted to independent non-employee directors of the Company pursuant
to the 1996 Plan in order to provide such directors an opportunity to acquire a
proprietary interest in the Company through 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
stock options is equal to or greater than the fair market value of such Common
Stock on the date of grant. These stock options are fully exercisable on the
first anniversary of the date of grant.
Compensation Committee Interlocks and Insider Participation
The Board of Directors formed the Compensation Committee in June 1997. Peter
Offermann has served as a member of the Compensation Committee since June 1997,
Mr. Donlan since December 1997, and Ms. Erb since June 1999. Mr. Young was
appointed Chairman in June 1999.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and any persons who own more than ten percent of the
Company's Common Stock to file reports of initial ownership of the Company's
Common Stock and subsequent changes in that ownership with the Securities and
Exchange
15
<PAGE>
Commission. Officers, directors and greater than ten-percent beneficial owners
are also required to furnish the Company with copies of all Section 16(a) forms
they file. Based solely upon a review of the copies of the forms furnished to
the Company, or written representations from certain reporting persons that no
Forms 5 were required, the Company believes that during Fiscal 1998, all Section
16(a) filing requirements were compiled with.
Limitation of Liability and Indemnification
The Company's Certificate of Incorporation authorizes the Company to
indemnify its officers, directors and other agents, by means of by-laws,
agreements, or otherwise, to the fullest extent permitted under the DGCL. The
Company has entered, or intends to enter into separate indemnification
agreements with certain of its directors and officers, which are, in some cases,
broader than the specific indemnification provisions contained in the DGCL. The
indemnification agreements require the Company, among other things, to indemnify
such officers and directors against certain liabilities that may arise by reason
of their status or service as directors or officers (other than liabilities
arising from willful misconduct of a culpable nature), to advance their expenses
incurred as a result of any proceeding against them as to which they could be
indemnified, and to obtain directors' and officers' insurance, if available on
reasonable terms.
Legal Proceedings
On October 22, 1998, Pearl Peckerman, I.R.A., on behalf of herself and all
others similarly situated, filed a putative class-action complaint (the
"Peckerman Complaint") in the United States District Court for the Southern
District of Florida against the Company and certain current and former officers
and directors of the Company, as well as the co-lead underwriters of the
Company's initial public offering. On December 4, 1998, Harvey Rooks, Rachel
Rooks and Joyce Bornstein, on behalf of themselves and all others similarly
situated, filed a putative class action complaint (the "Rooks Complaint") in the
United States District Court for the Southern District of Florida against the
Company and certain current and former officers and directors of the Company, as
well as the co-lead underwriters of the Company's initial public offering.
On February 5, 1999, the United States District Court for the Southern
District of Florida ordered that these actions be consolidated. Thereafter, on
July 29, 1999, the plaintiffs filed an amended and consolidated class-action
complaint (the "Amended and Consolidated Complaint") styled In re National Auto
Finance Company, Inc. Securities Litigation, Case Number 98-8767-CIV-Hurley.
The individual lead plaintiffs in the Amended and Consolidated Complaint are
Pearl Peckerman, Harvey Rooks, Rachel Rooks, Joyce Bornstein, Emanuel
Androulidakis, Frank Rosetti, Thomas R. Bopp, Noel V. Brodtman, Jr., Susan H.
Jacobsen, Leonard R. Carothers, Fred Gaunce, Duane Morris, Ralph Casey, Hiram
Graham, and Vance Prigge. In addition, the action was instituted on behalf of a
putative class of plaintiffs consisting of those persons who purchased or
otherwise acquired stock of the Company between January 29, 1997 and April 15,
1998 inclusive, excluding the Company, its subsidiaries and affiliates, the
individual defendants, members of the immediate families of each of the
individual defendants, and the successors and assigns of any defendant. Other
than the Company, the defendants to the action are: Gary L. Shapiro, Keith B.
Stein, Roy E. Tipton, Kevin G. Adams, Edgar A. Otto, Peter Offerman, Morgan M.
Schussler, Steven L. Gurba, and the co-lead underwriters of the Company's
January 1997 initial public offering, Raymond James & Associates, Inc. and
Cruttenden Roth, Inc.
The Amended and Consolidated Complaint sets forth allegations surrounding
the Company's 1997 restated financial statements, the interpretation of FASB No.
125 and the relationship between the Company and its prior outside service
provider, Omni Financial Services of America, Inc. The plaintiffs' allegations
of liability are based on various theories of recovery, including alleged
violations of Section 11, 12(a)(2), 15 and 20(a) of the Securities Act of 1933,
as amended, and Section 10(b) and Rule 10b-5 of the Securities Exchange Act of
1934, as amended. The plaintiffs are seeking compensatory damages as the court
deems appropriate.
The Company is presently assessing the merits of the claims and anticipates
filing a motion to dismiss the complaint in its entirety in the near future. In
addition, the two underwriter defendants, Raymond James, Inc. and Cruttenden
Roth, Inc. have asserted that pursuant to the underwriting agreement entered
into with the Company in connection with its initial public offering, the
Company is required to indemnify the underwriters for their legal and
16
<PAGE>
other costs incurred in this litigation, including but not limited to any
potential judgment against them. The Company is presently assessing the merits
of those claims.
The Company has a directors' and officers' liability insurance policy with a
liability limit of $5 million; and two excess policies with liability limits of
$2 million and $3 million, respectively. Each insurer has raised certain
coverage defenses or denied coverage. The Company has engaged, and will continue
to pursue appropriate strategies to protect and preserve its claims of full
coverage under all such policies.
Litigation is subject to many uncertainties, and it is possible that the
above action could be decided unfavorably. In addition, the Company may enter
into discussions in an attempt to settle the pending litigation if it is in the
best interests of the Company's stockholders to do so. Management is presently
unable to make a meaningful estimate of the amount or range of loss that could
result from an unfavorable outcome or settlement of the pending litigation. It
is possible that the Company's business, volume, results of operations, cash
flows or financial position could be materially affected by an unfavorable
outcome or settlement of the pending litigation.
MANAGEMENT
Executive Officers
The following individuals are the executive officers of the Company:
<TABLE>
<CAPTION>
<S> <C> <C>
Keith B. Stein................................. 41 Chairman of the Board and Chief Executive Officer
William G. Magro ........................... 50 President and Chief Operating Officer
Brent E. Wombolt ........................... 41 Senior Vice President, Operations and Loan Originations
Thomas Costanza ............................ 33 Vice President and Chief Financial Officer
Stephen R. Veth .............................. 51 Vice President, Secretary and General Counsel
James E. Shuler ............................... 38 Vice President, Sales and Marketing
Joseph P. Glick .............................. 37 Vice President, Collections and Customer Service
Frank A. Florio .............................. 48 Vice President, Information Systems
</TABLE>
For a discussion of the business experience of Mr. Stein see "Proposal Two -
Election of Directors."
William G. Magro was promoted to President in May 1999 and has been the
Chief Operating Officer of the Company since January 1998, Executive Vice
President of the Company from October 1994 to May 1999, 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 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.
Brent E. Wombolt was promoted to Senior Vice President in May 1999 and was a
Vice President of the Company from February 1998 to May 1999, and an 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.
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 Corporation 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.
17
<PAGE>
Stephen R. Veth has been the Vice President, Secretary and General Counsel
for the Company since March 1999. Mr. Veth served as Vice President and Legal
Counsel of First Street Mortgage Corporation from September 1997 to December
1998. Mr. Veth was General Counsel of EquiCredit Corporation from July 1990 to
August 1997.
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 Greentree Financial Corporation, a consumer finance
company, as a Collection Manager from March 1995 to May 1996. Prior to that
time, Mr. Shuler was employed by TransSouth Financial Services, also a consumer
finance company, as a Branch Manager from September 1994 to March 1995. Mr.
Shuler held various positions with OFSA from August 1988 to September 1994.
Joesph P. Glick has been Vice President of the Company since March 1999,
Assistant Vice President from August 1998 to March 1999, and from January 1997
to August 1998 held various positions with the Company. From October 1995 to
January 1997, Mr. Glick was involved in residential construction, and held
several positions with OFSA from September 1988 to October 1995.
Frank A. Florio was promoted to Vice President in May 1999, and was an
Assistant Vice President of the Company from February 1998 to May 1999. Prior to
that time, Mr. Florio held the senior-most position in the Company's information
systems department since his employment with the Company in April 1997. Mr.
Florio held a position with Queue Systems from June 1992 through March 1997.
Principal Stockholders
Except as set forth below, the Company knows of no stockholder who
beneficially owned more than 5% of the Company's outstanding Common Stock on the
Record Date, August 2, 1999.
Number of
Name and Address of Beneficial Owner Shares (1) Percent (1)
- --------------------------------------------------------------------------------
National Auto Finance Company, L.P. (2)............ 4,230,000 24.48%
Via Mizner Financial Plaza, Suite 200
700 South Federal Highway
Boca Raton, Florida 33432
The Progressive Entities(3)........................ 8,372,235 46.76%
3 Parklands Drive
Darien, Connecticut 06820
The 1818 Mezzanine Fund, L.P. (4).................. 8,070,172 44.83%
59 Wall Street
New York, New York 10005
The Structured Finance High Yield Fund, LLC (5).... 7,550,259 41.39%
One Gateway Center
Newark, New Jersey 07102
Manufacturers Life Insurance Company (USA) (6).... 5,853,023 33.02%
45 Milk Street, Suite 600
Boston, Massachusetts 02109
- -------------------
(1) Unless otherwise indicated, the named entities either have sole or shared
voting and investment power with respect to the shares shown for them.
Percentage ownership is based on 17,280,762 shares outstanding as of August
2, 1999, the Record Date for the Annual Meeting. Shares of Common Stock
subject to options granted under the Company's 1996 Plan, warrants issued to
the Senior Subordinated Noteholders and stock issuable upon the conversion
of Convertible Senior Subordinated Promissory Notes, in each case
exercisable within 60 days of the Record Date, are deemed outstanding for
computing the beneficial ownership percentage of the person, group of
persons or entities holding such options, warrants or Convertible Senior
Subordinated Promissory Notes, but are not deemed outstanding for computing
the beneficial ownership percentage of any other person. Furthermore, such
options and warrants are exercisable within such period only to the extent
the Company has available for issuance upon such exercise authorized shares
of its Common Stock. See "Proposal One" - To Amend the Certificate of
Incorporation to Increase the Number of Authorized Shares of
18
<PAGE>
Common Stock," and specifically with respect to stock options, see "Proposal
Three - Approval of Amendments to the 1996 Share Incentive Plan" below. On
August 2, 1999, 2,719,238 shares of the Company's Common Stock were
available for such issuance, and 237,500 of such shares were available for
issuance under the 1996 Plan. With respect to shares of the Company's Common
Stock beneficially owned by all Directors and Executive officers as a group,
see the table under "Proposal Two - Election of Directors."
(2) The General Partner holds a 1% general partner interest in the Partnership.
The Partners of the Partnership include, among others, Ironbrand Capital,
LLC, a wholly-owned subsidiary of First Union National Bank (the "First
Union Partner"), Keith B. Stein, the Chairman and Chief Executive Officer of
the Company, and William G. Magro, the President and Chief Operating Officer
of the Company. The remaining Partners of the Partnership hold the balance
of the limited partner economic interests, including certain of the Junior
Subordinated Noteholders; one of the largest such holders is Gary Shapiro,
the former Chairman and Chief Executive Officer of the Company. Except for
the First Union Partner, each Partner of the Partnership has the right to
vote on certain matters specified in the partnership agreement commensurate
with each such Partner's respective economic limited partner interest. In
accordance with the partnership agreement, the consent of the First Union
Partner is generally required before the Partnership may take certain
fundamental actions. Pursuant to the Restructuring, the 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 Partnership in all matters as to which such shares are entitled to
vote. Each of Messrs. Stein and Magro disclaims beneficial ownership of the
shares owned by the Partnership.
(3) Includes 3,520,000 shares of the Company's Common Stock over which
Progressive shares voting and dispositive power with the Progressive
Corporation, Progressive Casualty Insurance Company, and PCI, its affiliates
(collectively, the "Progressive Entities"). Also includes $193,959 principal
amount of Convertible Senior Subordinated Promissory Notes (which are
convertible, at the rate of $.75 per share, into 258,612 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. Also includes 4,230,000 shares of
Common Stock held by the Partnership over which the Progressive Entities
share voting power with the other Senior Subordinated Noteholders.
(4) Includes 3,119,047 shares of the Company's Common Stock held by the 1818
Fund. Also includes $221,666 principal amount of Convertible Senior
Subordinated Promissory Notes (which are convertible, at the rate of $.75
per share, into 295,555 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.
Also includes 4,230,000 shares of Common Stock held by the Partnership over
which the 1818 Fund shares voting power with the other Senior Subordinated
Noteholders. Also includes, in the case of Joseph Donlan, an affiliate of
the 1818 Fund, 10,000 shares of the Company's Common Stock that he may
purchase pursuant to stock options granted him under the 1996 Plan.
(5) Includes 2,357,143 shares of the Company's Common Stock held by SFHY. Also
includes $277,084 principal amount of Convertible Senior Subordinated
Promissory Notes (which are convertible, at the rate of $.75 per share, into
369,445 shares of the Company's Common Stock), and warrants to purchase
593,761 shares of the Company's Common Stock at $0.01 per share. Also
includes 4,230,000 shares of the Company's Common Stock held by the
Partnership, over which SFHY shares voting power with the other Senior
Subordinated Noteholders.
(6) Includes 1,178,572 shares over which ManuLife holds voting and dispositive
power. Also includes $138,541 principal amount of Convertible Senior
Subordinated Promissory Notes held by Gerlach & Co., as Nominee for ManuLife
(which are convertible, at the rate of $.75 per share, into 184,721 shares
of the Company's Common Stock), and warrants to purchase 259,730 shares of
the Company's Common Stock at $0.01 per share. Also includes 4,230,000
shares of the Company's Common Stock held by the Partnership over which
ManuLife shares voting power with the other Senior Subordinated Noteholders.
19
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth information concerning total compensation
earned by or paid to the Company's Chief Executive Officer, the four other most
highly compensated executive officers of the Company employed as of December 31,
1998, and Messrs. Tipton and Adams, who served as executive officers during
1998, but were not serving in such capacity as of December 31, 1998 (the "named
Executive Officers"), during Fiscal 1998, 1997 and 1996 for services rendered to
the Company.
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
Securities
Underlying All Other
Name and Principal Position Year(1) Salary Bonus(1) Options/SARs Compensation($)
<S> <C> <C> <C> <C> <C>
Keith B. Stein (2) 1998 $257,808 $150,000 85,000 --
Chairman & Chief Executive
Officer 1997 -- 75,000 37,500 --
1996 -- -- -- --
William G. Magro 1998 173,748 90,000 30,000 121,749 (4)
President & Chief 1997 130,000 55,000 35,000 31,290 (4)
Operating Officer 1996 110,571 40,839 -- 11,129 (4)
Roy E. Tipton 1998 107,660 -- -- 127,596 (5)
Former President 1997 155,000 68,750 65,000 29,350 (6)
1996 130,000 59,131 -- 700 (3)
Joel B. Ronkin (7) 1998 135,683 42,000 10,000 4,507 (3)
Former Vice President,
Secretary and General 1997 53,680 20,000 5,000 --
Counsel 1996 -- -- --
Martin E. Mattone (7) 1998 129,472 33,000 15,000 --
Former Vice President 1997 83,740 -- -- 188 (3)
Loan Originations/Asset 1996 -- -- -- --
Remarketing
Kevin G. Adams (8) 1998 110,982 -- -- 34,892 (8)
Former Senior Vice President 1997 115,000 75,000 27,000 3,357 (3)
Finance 1996 105,000 35,630 -- 810 (3)
Brent E. Wombolt (9) 1998 121,288 20,000 7,500 4,186 (3)
Senior Vice President, 1997 78,751 40,000 15,000 481 (3)
Operations and Loan 1996 -- -- -- --
Originations
</TABLE>
- -----------------
(1) Bonuses for senior management for services rendered in a given year were
finally determined by the Compensation Committee of the Board pursuant to
guidelines established in such executives' employment agreements. These
bonuses were paid by the end of March of the year following the year to
which such bonuses relate. See "--Employment Agreements."
(2) Mr. Stein was Vice Chairman, Chief Executive Officer, Treasurer and
Director in 1998. No compensation was received directly from the Company in
1997 and 1996. The Company, however, paid fees and costs to National
Financial Companies, LLC ("NFC"), pursuant to management and service
agreements, for the rendering of various services in support of the
Company's operations. Mr. Stein was formerly a Managing Director of NFC.
(3) Includes contributions made by the Company in accordance with the Company's
401(k) Plan.
20
<PAGE>
(4) Mr. Magro was Executive Vice President and Chief Operating Officer in 1998.
Includes (i) contributions made by the Company in accordance with the
Company's 401(k) Plan of $4,057, $1,213, and $87.50 in 1998, 1997 and 1996
respectively, (ii) forgiveness of indebtedness of $40,854 in 1998, and
(iii) $76,838, $30,077 and $11,041 for relocation expenses paid in 1998,
1997 and 1996, respectively.
(5) Includes contributions made by the Company pursuant to the 401(k) Plan of
$2,596 and payment of $125,000 for the severance by Mr. Tipton of his
employment agreement with the Company. Mr. Tipton resigned his position
with the Company effective June 1998.
(6) Includes contributions made by the Company pursuant to the 401(k) Plan of
$4,350 and a bonus of $25,000 for the execution by Mr. Tipton of an
extension of his employment contract with the Company.
(7) Mr. Ronkin and Mr. Mattone resigned their positions effective March 1999.
(8) Includes contributions made by the Company pursuant to the 401(k) Plan of
$4,829 and a payment to Mr. Adams for severance of his employment with the
Company in the amount of $30,063. Mr. Adams' position with the Company
terminated effective October 1998 in conjunction with the Company's move
from Boca Raton, Florida to Jacksonville, Florida.
(9) Mr. Wombolt was Vice President in 1998.
No stock appreciation rights were awarded to, earned by or paid to the named
Executive Officers during the fiscal year ended December 31, 1998.
Employment Agreements
The Company employs each of Keith B. Stein, Chairman and Chief Executive
Officer, William G. Magro, President and Chief Operating Officer, and Brent E.
Wombolt, Senior Vice President-Operations and Loan Originations (individually an
"Executive" and collectively, the "Executives"), pursuant to employment
agreements effective as of June 1, 1998, June 1, 1998 (as amended and restated)
and August 1, 1998 (as amended and restated), respectively. The term of Mr.
Stein's agreement will end on June 1, 2001, the term of Mr. Magro's agreement
will end on May 31, 2001 and the term of Mr. Wombolt's agreement will end on
February 28, 2001, unless sooner terminated pursuant to the terms of the
respective agreement. The Company formerly employed Roy E. Tipton as President,
Joel B. Ronkin as Vice President, Secretary and General Counsel, and Martin E.
Mattone, as Vice President-Loan Originations/Asset Remarketing. Messrs. Tipton,
Ronkin, and Mattone each resigned from such offices of the Company in June 1998,
March 1999, and March 1999, respectively.
Mr. Stein's annual base salary was $200,000 from January 1, 1998 to June 1,
1998, at which time he entered into an employment agreement with the Company
increasing his base salary to $300,000 effective on June 1, 1998, with such
amount to be reviewed annually by the Compensation Committee. Mr. Stein was paid
an incentive bonus in January 1999 with respect to Fiscal 1998 of $150,000,
pursuant to the terms of his employment agreement. Mr. Stein may receive from
the Company an incentive bonus in each year of his employment under such
agreement, the amount of which is payable on or before March 31 of the year
following the year to which such bonus relates. Pursuant to an Executive
Incentive Bonus Program adopted by the Board of Directors for Fiscal 1999 (the
"1999 Bonus Program"), Mr. Stein's incentive bonus for Fiscal 1999 is based upon
the Company achieving certain pre-established performance goals, which if all
attained, could result in Mr. Stein receiving a bonus of $225,000 or 75% of his
base salary for 1999.
Mr. Magro's annual base salary was $140,000 from January 1, 1998 through May
31, 1998, and from the effective date of his agreement to May 31, 1999 was
$180,000 and will be (i) no less than $192,600 from June 1, 1999 through May 31,
2000, and (ii) no less than $206,082 from June 1, 2000 through May 31, 2001. Any
increase in Mr. Magro's annual base salary in excess of seven percent (7%) for
such periods will be determined by the Compensation Committee. Mr. Magro was
paid in January 1999 an incentive bonus with respect to Fiscal 1998 of $90,000,
equal to 50% of his 1998 annual base salary, and will receive from the Company
an incentive bonus in each year of his employment agreement of not less than
fifty percent (50%) and up to 75% of his annual base salary. The incentive bonus
for Fiscal 1999 is based upon the 1999 Bonus Program and could result in Mr.
Magro receiving a bonus of $160,000 or 75% of his base salary in 1999.
21
<PAGE>
Prior to his resignation in June 1998, Mr. Tipton was being paid at an
annual base salary rate of $180,000, commencing on January 1, 1998. Mr. Tipton
did not earn an incentive bonus in 1998 and was paid severance of $125,000
pursuant to his employment agreement with the Company.
Mr. Ronkin's annual base salary was $131,366 from January 1, 1998 through
May 31, 1998, and from the effective date of his agreement through his
resignation in March 1999, Mr. Ronkin was paid at an annual base salary rate of
$140,000 commencing June 1, 1998. Pursuant to his employment agreement, Mr.
Ronkin was paid in January 1999 an incentive bonus with respect to Fiscal 1998
of $42,000.
Mr. Mattone's annual base salary was $90,000 from January 1, 1998 through
July 31, 1998, and from the effective date of his agreement through his
resignation in March 1999, Mr. Mattone was paid at an annual base salary rate of
$110,000. Pursuant to his employment agreement, Mr. Mattone was paid an
incentive bonus in January 1999 with respect to Fiscal 1998 of $33,000.
Pursuant to their employment agreements, each of the Executives may
participate in any stock option and benefit plans adopted by the Company or its
successors more particularly described under the caption, "Proposal
Three-Approval of Amendments to the 1996 Share Incentive Plan." Prior to their
resignations, such participation was also available to Messrs. Tipton, Ronkin,
Mattone and Adams. In addition, each of the Executives and Messrs. Tipton,
Ronkin, Mattone and Adams have agreed to maintain the confidentiality of the
Company's proprietary information and agreed, during the term of each of their
respective agreements, not to compete directly or indirectly with the business
of the Company.
The employment agreement of each of the Executives may be terminated by the
Company due to such Executive's disability or death, and either without "Cause"
or for "Cause" (as defined in the employment agreement). In the event that an
Executive is terminated without "Cause," he will be entitled to receive all
accrued but unpaid base salary, benefits and other compensation and, under
certain circumstances, an additional payment or payments equal to his base
salary for a twelve-month period. Each of the Executives may also terminate his
employment for Good Reason (as defined in the employment agreements). In such
event, the Executive will be entitled to receive all accrued but unpaid base
salary, benefits and other compensation.
In the event Mr. Stein terminates his employment with the Company for "Good
Reason" or is terminated by the Company without "Cause" (as such terms are
defined in his employment agreement), he will be entitled to receive a severance
payment equal to (i) $680,000 plus (ii) his target incentive bonus for the year
of such termination pro-rated for the number of days during such year in which
he was employed up to the date of termination. If Mr. Stein is terminated for
any reason within 120 days following a "Change in Control" (as such term is
defined in his employment agreement), he will be entitled to receive a severance
payment equal to the amount described in clauses (i) and (ii) above plus
$980,000.
Option Grants
The following table sets forth stock options granted in Fiscal 1998 to each
of the Company's Executives named in the Summary Compensation Table who held
office as of December 31, 1998. The Company did not issue any stock appreciation
rights. The table also sets forth the hypothetical gains that would exist for
the options at the end of their ten-year terms for the Executives named in the
Summary Compensation Table at assumed compound rates of stock appreciation of 5%
and 10%. The actual future value of the options will depend on the market value
of the Company's Common Stock.
22
<PAGE>
Option/SAR Grants in Last Fiscal Year
Individual Grants
<TABLE>
<CAPTION>
Percent
of Total
Number of Options/
Securities SARs Potential Realizable Value
Underlying Granted to Exercise at Assumed Annual Rates
Options/ Employees or Base of Stock Price Appreciation
SARs in Fiscal Price Expiration For Option Term(a)
Name Granted(#) Year ($/Sh) Date 5% ($) 10%($)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Keith B. Stein 85,000 36% $ 2.25(b) 2009 $120,276 $304,803
William G. Magro 30,000 12% 2.25 2009 $ 42,450 $107,578
Martin Mattone 15,000 6% 2.25(b) 2009 $ 21,225 $ 53,789
Joel Ronkin 10,000 4% 2.25(b) 2009 $ 14,150 $ 35,859
Brent Wombolt 7,500 3% 2.25 2009 $ 10,613 $ 26,894
</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.
(b) Mr. Stein's stock options became fully vested in June 1999 pursuant to
applicable provisions of his employment agreement contingent upon the
successful consummation of the Restructuring. Mr. Mattone's and Mr.
Ronkin's stock options expired three months after the date of their
respective resignations as officers of the Company.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Values
There were no shares acquired on exercise of stock options and no aggregate
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 stock options were not exercised on
December 31, 1998. The Company did not issue stock appreciation rights.
FY-End Option/SAR Values
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
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 -- --
(a) As of December 31, 1998, the market stock price of the Company's Common
Stock was less than the exercise price of all such options.
23
<PAGE>
Report on Repricing of Stock Options
On December 12, 1997 (the "Repricing Date"), in light of the significant
challenges facing the Company and the need to retain key executives and
directors, and to strengthen the mutuality of interests between such persons and
the Company's stockholders, the Board of Directors approved the Compensation
Committee's repricing of options then outstanding granted to executive officers
and certain directors under the 1996 Plan, to an exercise price of $2.25 per
share, which was the market price on the Repricing Date. In the Compensation
Committee's view, the repricing was in the best interest of the Company and its
stockholders and provided performance and retention incentives to key
executives, whose efforts are essential for the Company's continual progress to
achieve profitability. No other material terms of the options were revised.
Options held by Mr. Offermann and Mr. Schuessler, non-employee directors, were
also repriced in the same manner as the stock options of the Company's executive
officers.
The following table contains information concerning the repricing with
respect to the named executive officers and directors:
10-YEAR OPTION/SAR REPRICINGS
<TABLE>
<CAPTION>
Length Of
Original
Market Exercise Option Term
Number of Price Of Price At Remaining
Securities Stock At Time Of At
Underlying Time Of Repricing Date Of
Options/SARs Repricing Or Or New Repricing Or
Repriced Or Amendment Amendment Exercise Amendment
Name Date Amended ($) ($) Price ($) (Years)
<S> <C> <C> <C> <C> <C> <C>
Keith Stein December 12, 1997 22,500 $5.25 $8.50 $5.25 9.08
December 12, 1997 15,000 $5.25 $6.63 $5.25 9.75
December 12, 1997
William Magro December 12, 1997 35,000 $5.25 $8.50 $5.25 9.08
James Shuler December 12, 1997 15,000 $5.25 $7.25 $5.25 9.47
Brent Wombolt December 12, 1997 15,000 $5.25 $7.25 $5.25 9.47
Peter Offermann December 12, 1997 5,000 $5.25 $8.50 $5.25 9.08
December 12, 1997 5,000 $5.25 $6.63 $5.25 9.75
Joel Ronkin(1) December 12, 1997 5,000 $5.25 $6.75 $5.25 9.58
Morgan Schuessler(1) December 12, 1997 5,000 $5.25 $7.25 $5.25 9.47
</TABLE>
(1) Mr. Ronkin resigned from his position with the Company in March 1999. Mr.
Schuessler resigned as a director of the Company in April 1999.
Compensation Committee: Board of Directors:
David W. Young Keith B. Stein David Benson
Peter Offermann Peter Offermann Robert Gould
Joseph Donlan Joseph P. Donlan Evelyn Erb
Evelyn Erb David W. Young
24
<PAGE>
Stock Options Granted in 1999
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 1,759,018 stock options of the Company's
Common Stock, 1,546,366 of which the Company believes qualify as incentive stock
options as defined in Proposal Three of this Proxy Statement. These grants were
contingent upon the completion of the Restructuring, and subject to ratification
by the Company's Board of Directors and stockholder approval to amend the 1996
Plan to increase the number of authorized shares of stock reserved for future
issuance of such shares, 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. See "Proposal Three - Approval of Amendments
to the 1996 Share Incentive Plan" below. An additional 213,214 of incentive
stock options were granted to certain executive officers in 1999 as a result of
their employment and/or promotion and subject to the same conditions as the
above described grant of stock options. Such options are not included in the
table above.
Compensation Committee Report on Executive Compensation*
Pursuant to the rules of the Securities and Exchange Commission, set forth
below is the report of the Compensation Committee and the Board of Directors
regarding their compensation policies for the fiscal year ended December 31,
1998 for the Company's executive officers, including the Chief Executive
Officer.
General Policies.
The goals of the Company's executive compensation program for 1998 were to
attract, retain, motivate and reward qualified persons serving as executive
officers. To achieve the goals of the program, the Company relied primarily on
(1) base salary, (2) annual bonus compensation and (3) long-term incentives in
the form of Benefits granted pursuant to the 1996 Plan. Other elements of
compensation included the Company's 401(k) Plan and medical and life insurance
benefits available to employees generally.
Each element of compensation has a different purpose. Salary and bonus
payments are mainly designed to reward current and past performance. Stock
options are primarily designed to provide incentive for superior long-term
performance and are directly linked to stockholders' interest because the value
of the awards will increase or decrease based upon the future price of the
Common Stock.
The salary levels for existing executive officers depend primarily on
individual levels of responsibility within the Company. The level of salary for
newly hired executive officers, while similarly dependent on individual levels
of responsibility within the Company, also is affected by the market for
executive talent. Additional consideration in setting salary levels is given to
the Company's competitive position in its industry and the need to establish
compensation and terms of employment that will attract and retain the leadership
the Company believes necessary to maintain and improve its position.
Bonus levels for executive officers and other key employees of the Company
depend upon personal and corporate performance and are designed to encourage the
achievement of certain annual operating performance goals. Annual bonuses for
1998 for executive officers and certain other key employees were determined
pursuant to the terms of the respective individual's employment agreement or by
the Compensation Committee in those instances where the executive officer or
employee did not have an employment agreement with the Company, and in both
cases were finally approved by the Compensation Committee and the Board of
Directors.
The Company intends to rely upon the special transition rule contained in
the U.S. Treasury regulations which allows the Company, as a private corporation
that has completed an initial public offering, to deduct all
- --------
* The disclosure contained in this section of this Proxy Statement is not
incorporated by reference into any filings by the Company under the Securities
Act, or the Exchange Act that incorporate other filings or portions thereof
(including this Proxy Statement or the "Executive Compensation" section of this
Proxy Statement) without specific reference to the incorporation of this section
of this Proxy Statement.
25
<PAGE>
compensation expenses related to awards or grants made under the 1996 Plan prior
to the approval of the amendment to the 1996 Plan proposed in this Proxy
Statement. Thereafter, the deductibility of compensation expenses related to
awards or grants made under the 1996 Plan which result in total covered
compensation in excess of $1 million for the Chief Executive Officer and certain
other executive officers will depend upon whether the Company and the 1996 Plan
comply with the performance-based exception to Section 162(m) of the Code.
The Compensation Committee reviewed and approved stock option grants made by
the Company in 1997 and 1998 to all executive officers recommended by the Chief
Executive Officer. These stock option grants were based primarily on the scope
of the executive officer's responsibilities at the Company, the cash
compensation that such executive officer had received in his prior employment,
the cash compensation proposed to be paid by the Company and such executive
officer's overall contribution to the Company's success.
In June 1999, the Company reset the exercise price of all director, officer
and employee stock options to $.23 per share. The resetting of the exercise
price of all options issued under the 1996 Plan was designed to enable the
Company to maintain a high level of motivation among the Company's key
executives, and the price was in excess of the Company's then market stock
price.
The Company believes that the executive compensation program has enabled it
to attract, motivate and retain senior management by providing a competitive
total compensation opportunity based upon performance. Base salaries, combined
with annual performance-based bonus awards that reflect the individual's level
of responsibility, performance and contribution to the Company, are important
elements of the Company's cash compensation philosophy. Together with the
Company's executive stock ownership, the Company's total executive compensation
program not only aligns the interest of executive officers and stockholders, but
enables the Company to attract talented senior management. The Board of
Directors believes that this program strikes an appropriate balance between
short and long-term performance objectives.
Compensation of the Chief Executive Officer.
Keith B. Stein, the Chief Executive Officer of the Company, received
compensation from the Company in Fiscal 1998 consisting of a base salary,
incentive bonus, automobile allowance and incentive stock options. Mr. Stein's
compensation, particularly with respect to his incentive bonus and stock option
grants, was specifically predicated upon providing leadership and direction to
maintain the Company as a going concern and managing the Company through its
comprehensive financial restructuring successfully completed in April 1999. The
Company believes that Mr. Stein is committed to optimizing the overall
performance of the Company to the benefit of all stockholders and that he
demonstrated such commitment in Fiscal 1998.
Compensation Committee: Board of Directors:
David W. Young Keith B. Stein
Peter Offermann Peter Offermann
Joseph Donlan Joseph P. Donlan
Evelyn Erb David W. Young
Evelyn Erb
David Benson
Robert Gould
26
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
General
The Company, from time to time, has entered into transactions with certain
of its principals and 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.
First Union
Lending
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 to a
bankruptcy-remote master trust financed by a $85,000,000 revolving credit
facility with First Union, followed by (ii) the transfer of such warehoused
Loans from time to time by the Master Trust to a discrete trust, thereby
creating renewed availability of capital from the Master Trust. First Union is
the sole holder of the Class B Certificates that relate to the Revolving
Securitization and Master Trust.
Placement Agent and Underwriting
First Union Capital Markets Corp. ("FUCMC"), a wholly owned subsidiary of
First Union Corporation, served as placement agent for the Company's Senior
Subordinated Notes. FUCMC has also privately placed and acted as underwriter for
public offerings of asset-backed securities of the Company in connection with
the Company's securitization transactions and may 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 Partnership (no such
distribution has been made as of the date of this Proxy Statement).
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, is below that which is necessary to accomplish the purposes of such
offering and in the best interests of the Company. Furthermore, if the
contemplated offering is to be 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 Partnership (see
footnote (2) to Principal Stockholders).
27
<PAGE>
First Union Strategic Alliance
In March 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, which established a Loan origination
alliance with First Union, has been terminated. The Company will, nonetheless,
continue the relationships with auto dealerships established by the alliance.
The Company will not, however, be obligated to pay to First Union referral fees
related to business obtained through those dealers.
Senior Subordinated Notes
General
In December 1997, the Company completed the private placement of $10 million
in Common Stock and $40 million principal amount of Senior Subordinated Notes
with detachable warrants (the "December Private Placement"). 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% in year five and 14.875% in
years six and seven. The Senior Subordinated Notes and warrants were purchased
by the 1818 Fund, Progressive and ManuLife. In March 1998, the Company completed
a private placement (the "March Private Placement") of $20 million principal
amount of Senior Subordinated Notes to SFHY with detachable warrants under terms
similar to that of the December Private Placement. In connection with the
December Private Placement and the March Private Placement, the Company issued
an aggregate of 1,632,594 detachable warrants with a ten year life, exercisable
into Common Stock of the Company at $0.01 per share. See also the discussion of
the Company's Restructuring as described above under the caption "Change of
Control."
Registration Rights
Pursuant to a registration rights agreement, the Company has granted the
1818 Fund, Progressive, ManuLife, FSA and others certain rights with respect to
the registration under the Securities Act of Common Stock held by each. 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 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 such parties, 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 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 its 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
28
<PAGE>
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 $117,000 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. See also the discussion of the Company's
Restructuring as described above under the caption "Change of Control."
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. These
agreements were 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. 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. Keith B. Stein, Chairman of the Board and Chief Executive Officer of the
Company, was formerly a managing director of NFC.
The General Partner holds a 1% interest in the Partnership. A majority of
the outstanding capital stock of the General Partner is owned collectively by
Messrs. Shapiro and Otto. The limited partners of the Partnership include, among
others, S Associates, O Associates, the First Union Partner, Keith B. Stein, Roy
E. Tipton, William G. Magro and Kevin G. Adams. Messrs. Stein and Magro hold
minimal minority limited partner interests of the 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 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 in Fiscal 1998 and reimbursed Mr. Magro for his personal tax liability
associated with the forgiven loan amount in such year.
29
<PAGE>
COMPARISON OF CUMULATIVE STOCKHOLDER RETURN
The following graph compares the cumulative total stockholder return on the
Company's Common Stock from January 29, 1997, when the Company's Common Stock
began trading on the NASDAQ National Market System, to December 31, 1998, with
the cumulative return of the SNL Auto Finance Index and the NASDAQ Total U.S.
Index. The Company's Common Stock was delisted from the NASDAQ National Market
System on March 10, 1999 and is now trading on the OTC Bulletin Board. The graph
assumes a $100 investment at the beginning of the period and reinvestment of all
dividends.
National Auto Finance Company, Inc.
[LINE GRAPH]
<TABLE>
<CAPTION>
Period Ending
----------------------------------------------------
Index 1/30/97 6/30/97 12/31/97 6/30/98 12/31/98
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
National Auto Finance Company, Inc. 100.00 71.05 31.58 10.53 0.99
NASDAQ - Total US 100.00 105.29 115.29 138.63 162.45
SNL Auto Finance Index 100.00 54.68 39.65 40.42 28.26
</TABLE>
30
<PAGE>
PROPOSAL THREE - APPROVAL OF AMENDMENTS TO THE 1996 SHARE INCENTIVE PLAN
The Board of Directors has approved, and is submitting to the stockholders
for approval, the following amendments to the Company's 1996 Share Incentive
Plan (the "1996 Plan"):
1. Increase the number of shares of Common Stock available for the grant of
options, stock appreciation rights, stock awards, performance awards and
stock units (collectively, the "Benefits") from 500,000 to 4,000,000.
2. Increase the maximum number of shares of Common Stock which may be
granted to any individual participant under the 1996 Plan to 2,000,000.
Pursuant to the amendment, the Plan shall be amended by changing: (1) the
number 500,000 in the first sentence of Section 5 of the Plan to 4,000,000; and
(2) the second sentence of Section 5 to read: "The maximum number of shares of
Common Stock with respect to which Benefits may be granted to any individual
participant under the Plan shall be 2,000,000."
As of December 31, 1998, the Company had granted stock options in respect of
an aggregate of 302,500 shares of Common Stock under the 1996 Plan to certain
key officers, directors and employees of the Company all of which are intended
to qualify as "incentive stock options" ("ISO's") as defined below. The stock
options granted to officers and employees of the Company vest in equal annual
one-third installments commencing on the date of grant, except the 122,500
options included in such number granted to Mr. Stein, which have been fully
vested. The options granted to directors vest in full on the first anniversary
of the date of grant. The exercise price of all such options equaled, or
exceeded the fair market value of the Common Stock on the date of grant.
The 1996 Plan is intended to provide incentives that will attract, retain
and motivate highly competent persons, each of whom will contribute to the
success and future growth and profitability of the Company, as executive
management, employees and directors of the Company and of any parent or
subsidiary of the Company, by providing them the opportunity to acquire shares
of Common Stock, or to receive monetary payments based on the value of such
shares pursuant to certain benefits contemplated by the 1996 Plan. Furthermore,
the 1996 Plan is intended to assist in aligning the interests of the Company's
executive management, employees and directors with those of its stockholders. On
August 2, 1999, the latest practicable date, the Company employed 8 executive
officers, 1 non-executive officer, 146 Employees, and 6 non-employee directors
who may participate under the 1996 Plan. A substantial portion of the shares
currently available for granting of Benefits under the 1996 Plan was used during
Fiscal 1997 and 1998. Furthermore, on June 3, 1999 (the "Grant Date'), the Board
approved the grant of an aggregate of 2,105,492 stock options with an exercise
price of $0.23 per share, to the Executive Officers, a non-executive officer,
and other management employees of the Company in certain cases pursuant to
commitments under employment agreements, contingent upon the availability of
shares of Common Stock under the 1996 Plan. As set forth below under the caption
"New Plan Benefits" all stock options granted to Mr. Stein are fully vested and
exercisable. With respect to all other executive and management employees' stock
options, one-third of such stock options became vested and exercisable on the
Grant Date, with an additional one-third to vest and become exercisable on each
succeeding anniversary of the Grant Date.
As a consequence, the Board determined that, unless the proposed amendment
is adopted, the number of shares of Common Stock remaining under the 1996 Plan
will be insufficient to meet the Company's previously committed compensation
requirements, as well as anticipated compensation requirements, in Fiscal 1999
and beyond. Accordingly, the Board of Directors wishes to ensure the continued
availability of shares for which Benefits may be granted to all eligible current
and future officers, directors and employees.
Description of the 1996 Plan
The following is a brief description of the material features of the 1996
Plan, as amended by Proposal Three. Such description is qualified in its
entirety by reference to the full text of the 1996 Plan.
31
<PAGE>
Administration
The 1996 Plan is administered by the Compensation Committee (herein referred
to as the "Plan Administrator"), all of whose members are (i) "non-employee
directors" within the meaning of Rule 16b-3(b)(3) (or any successor rule)
promulgated under the Exchange Act and (ii) "outside directors" within the
meaning of Section 162(m) of the Code. The Plan Administrator is authorized,
subject to the provisions of the 1996 Plan, to establish such rules and
regulations as it deems necessary for the proper administration of the 1996
Plan. The Plan Administrator is authorized to delegate such administrative
duties as it deems advisable.
The 1996 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 (each as more particularly
described below). The aggregate number of shares of Common Stock that may be
currently 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).
Additionally, if there is a "Change in Control" (as such term is defined in the
1996 Plan) of the Company, all then outstanding stock options and stock
appreciation rights become immediately exercisable.
The Board of Directors may amend the 1996 Plan from time to time or may
suspend, or terminate the 1996 Plan at any time, except that unless approved by
the stockholders of the Company, no such amendment may (i) increase the total
number of shares which may be issued under the 1996 Plan or the maximum number
of shares with respect to stock options, stock appreciation rights and other
Benefits that may be granted to any individual under the 1996 Plan or (ii)
modify the requirements as to eligibility for Benefits under the 1996 Plan. In
addition, no amendment may be made without approval of the stockholders of the
Company if the amendment will disqualify any incentive stock options granted
under the 1996 Plan. By mutual agreement between the Company and a participant
under the 1996 Plan, Benefits may be granted to such participant in substitution
and exchange for, and in cancellation of, any Benefits previously granted under
the 1996 Plan. No Benefit may be granted more than ten years after the effective
date of the 1996 Plan. The terms applicable to any Benefit granted prior to such
effective date may thereafter be amended by mutual agreement between the Company
and the participant or such other persons who then have an interest in such
Benefit.
Eligibility
Executive management, employees and directors of the Company and of any
parent or subsidiary of the Company, who are responsible for or contribute to
the management, growth and/or profitability of the business of the Company are
eligible to be granted Benefits under the 1996 Plan.
Transferability
Benefits may be transferred by a participant only by will or the laws of
descent and distribution, and may be exercisable, during the participant's
lifetime, only by the participant. If a participant dies, each stock option or
stock appreciation right previously granted to him or her becomes exercisable
during such period after such participant's death as the Plan Administrator, in
its discretion, sets forth in the applicable option or right agreement.
Stock Options
Stock options granted under the 1996 Plan consist of awards from the Company
that enable the holder to purchase a specific number of shares of Common Stock
at set terms and at a fixed purchase price. Determinations with respect to the
exercise price, exercise period and method of payment of the stock options are
made in the discretion of the Plan Administrator. Stock options may be
"incentive stock options" ("Incentive Stock Options") within the meaning of
Section 422 of the Code, or stock options which do not constitute Incentive
Stock Options ("Nonqualified Stock Options"). The Plan Administrator has the
authority to grant to any participant one or more Incentive Stock Options,
Nonqualified Stock Options, or both types of stock options (in each case with or
without stock appreciation rights).
Certain limitations apply with respect to Incentive Stock Options: Incentive
Stock Options may be granted only to participants who are employees of the
Company or a parent or subsidiary of the Company at the date of
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grant. Furthermore, the aggregate market value (determined as of the time the
option is granted) of the Common Stock with respect to which Incentive Stock
Options are exercisable for the first time by a participant during any calendar
year (under all option plans of the Company) may not exceed $100,000. Except
under limited circumstances, Incentive Stock Options may not be granted to any
participant who, at the time of grant, owns stock possessing more than 10% of
the total combined voting power of all outstanding classes of stock of the
Company or any subsidiary corporation of the Company.
Stock Appreciation Rights
Stock appreciation rights may be granted, in the discretion of the Plan
Administrator, to holders of stock options granted under the 1996 Plan. Holders
of such stock appreciation rights are entitled to receive a payment in cash,
Common Stock or a combination thereof, in an amount equal to the excess of the
fair market value of a specified number of shares of Common Stock on the date
the right is exercised over the fair market value of such shares of Common Stock
on the date the right was first granted.
Stock Awards
Stock awards consisting of Common Stock issued or transferred to
participants with or without other payments therefor as additional compensation
for services rendered to the Company may be granted in the discretion of the
Plan Administrator. Stock awards (which may constitute performance-based awards,
as described in the immediately succeeding paragraph) may be subject to such
terms and conditions as the Plan Administrator determines appropriate,
including, without limitation, restrictions as to the sale or other disposition
of such shares and the right of the Company to reacquire such shares for no
consideration upon termination of the participant's employment within specific
periods.
Performance Awards
Performance awards may be granted to participants in the discretion of the
Plan Administrator and may, as determined by the Plan Administrator, constitute
performance-based awards, which, as more particularly described below, consist
of Benefits granted under the 1996 Plan in such a manner that they qualify for
the performance based compensation exemption of Section 162(m) of the Code
("Performance-Based Awards"). The number, amount and timing of Performance
Awards granted to each participant are determined in the sole discretion of the
Plan Administrator. Payment of earned Performance-Based Awards are made in
accordance with terms and conditions prescribed or authorized by the Plan
Administrator. Participants may elect to defer, or the Plan Administrator may
require the deferral of, the receipt of Performance Awards upon such terms as
the Plan Administrator deems appropriate. Performance Awards may be in the form
of shares of Common Stock or stock units and may be awarded as short-term or
long-term incentives.
With respect to those Performance Awards that constitute Performance-Based
Awards, the Plan Administrator may set performance targets which serve to
determine the number and/or value of Performance Awards paid out to the
participants, and may attach to such Performance Awards one or more
restrictions. Performance targets may be based upon, without limitation,
Company-wide, divisional and/or individual performance. With respect to those
Performance Awards that are not intended to constitute Performance-Based Awards,
the Plan Administrator has the authority at any time to make adjustments to
performance targets for any outstanding performance awards which the Plan
Administrator deems necessary or desirable, unless at the time of establishment
of goals, the Plan Administrator has precluded its authority to make such
adjustments.
Stock Units
Stock Units, accounts representing one share of Common Stock ("Stock
Units"), may be granted to participants under the 1996 Plan in the sole
discretion of the Plan Administrator. Stock Units may, as determined by the Plan
Administrator in its sole discretion, constitute performance-based awards. The
Plan Administrator is authorized to determine the criteria for the vesting of
Stock Units. A Stock Unit granted by the Plan Administrator provides payment in
shares of Common Stock at such time as the award agreement specifies. Shares of
Common Stock issued in connection with the granting of Stock Units may be issued
with or without other payments therefor, as may be required by applicable law or
such other consideration as may be determined by the Plan Administrator. The
Plan Administrator is authorized to determine whether a participant granted a
Stock Unit may be entitled to a
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right to receive the amount of any dividend paid on the share of Common Stock
underlying a Stock Unit, which is payable in cash or in the form of additional
Stock Units.
Upon vesting of a Stock Unit, unless the Plan Administrator has determined
to defer payment with respect to such unit or a participant has elected to defer
payment, shares of Common Stock representing the Stock Units may be distributed
to the participant unless the Plan Administrator, with the consent of the
participant, provides for the payment of the Stock Units in cash or partly in
cash and partly in shares of Common Stock equal to the value of the shares of
Common Stock which would otherwise be distributed to the participant. Prior to
the year with respect to which a Stock Unit may vest, the participant may elect
not to receive Common Stock upon the vesting of such Stock Unit and for the
Company to continue to maintain the Stock Unit on its books of account, in which
event, the value of a Stock Unit becomes payable in shares of Common Stock
pursuant to the agreement of deferral.
Performance-Based Awards
As determined by the Plan Administrator in its sole discretion, the granting
or vesting of "performance-based awards" ("Performance-Based Awards") will be
based upon one or more factors including, but not limited to, net sales, pretax
income before allocation of corporate overhead and bonus, budget and earnings
per share, net income, division, group or corporate financial goals, return on
stockholders' equity, return on assets, attainment of strategic and operational
initiatives, appreciation in and/or maintenance of the price of the Common Stock
or an other publicly-traded securities of the Company, market share, gross
profits, earnings before interest and taxes, earnings before interest, taxes,
dividends and amortization, economic value-added models and comparisons with
various stock market indices, reductions in costs or any combination of the
foregoing. The Plan Administrator is authorized to establish (i) the objective
performance-based goals applicable to a given period and (ii) the individual
employees or class of employees to which such performance-based goals apply. No
Performance-Based Awards are payable to or may vest with respect to any
participant for a given fiscal period until the Plan Administrator certifies
that the objective performance goals have been satisfied.
The 1996 Plan is intended to be qualified under Rule 16b-3 promulgated under
the Exchange Act.
Certain Federal Income Tax Consequences
The statements in the following paragraphs of the principal U. S. federal
income tax consequences of Benefits under the 1996 Plan are based on statutory
authority and judicial and administrative interpretations, as of the date of
this Proxy Statement, which are subject to change at any time (possibly with
retroactive effect). The law is technical and complex, and the discussion below
represents only a general summary.
Incentive Stock Options.
Incentive Stock Options ("ISOs") granted under the 1996 Plan are intended to
meet the definitional requirements of Section 422(b) of the Code for "incentive
stock options. " An employee who receives an ISO does not recognize any taxable
income upon the grant of such ISO. Similarly, the exercise of an ISO generally
does not give rise to federal income tax to the employee, provided that (i) the
federal "alternative minimum tax," which depends on the employee's particular
tax situation, does not apply and (ii) the employee is employed by the Company
from the date of grant of the option until three months prior to the exercise
thereof, except where such employment terminates by reason of disability (where
the three month period is extended to one year) or death (where this requirement
does not apply). If an employee exercises an ISO after the requisite periods
referred to in clause (ii) above, the ISO will be treated as an NSO (as defined
below) and will be subject to the rules set forth below under the caption
"Non-Qualified Stock Options and Stock Appreciation Rights." Further, if after
exercising an ISO, an employee disposes of Common Stock so acquired more than
two years from the date of grant and more than one year from the date of
transfer of Common Stock pursuant to the exercise of such ISO (the "applicable
holding period"), the employee will generally recognize capital gain or loss
equal to the difference, if any, between the amount received for the shares and
the exercise price. If, however, an employee does not hold the shares so
acquired for the applicable holding period, thereby making a "disqualifying
disposition," the employee would recognize ordinary income equal to the excess
of the fair market value of the shares at the time the ISO was exercised over
the exercise price and the balance, if any, would generally be treated as
capital gain. If the disqualifying disposition is a sale or exchange that would
permit a loss to be recognized under the Code (were a loss in fact to be
realized), and the sales proceeds are less than the fair market value of the
shares on the date of
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exercise, the employee's ordinary income therefrom would be limited to the gain
(if any) realized on the sale. An employee who exercises an ISO by delivering
Common Stock previously acquired pursuant to the exercise of another ISO is
treated as making a "disqualifying disposition" of such Common Stock if such
shares are delivered before the expiration of their applicable holding period.
Upon the exercise of an ISO with previously acquired shares as to which no
disqualifying disposition occurs, despite some uncertainty, it appears that the
employee would not recognize gain or loss with respect to such previously
acquired shares. The Company will not be allowed a federal income tax deduction
upon the grant or exercise of an ISO or the disposition, after the applicable
holding period, of the Common Stock acquired upon exercise of an ISO. In the
event of a disqualifying disposition, the Company generally will be entitled to
a deduction in an amount equal to the ordinary income included by the employee,
provided that such amount constitutes an ordinary and necessary business expense
to the Company and is reasonable and the limitations of Sections 280G and 162(m)
of the Code (discussed below) do not apply.
Non-Qualified Stock Options and Stock Appreciation Rights.
"Non-qualified stock options" ("NSOs") granted under the 1996 Plan are
options that do not qualify as ISOs. An employee who receives an NSO or a "stock
appreciation right" ("SAR') will not recognize any taxable income upon the grant
of such NSO or a SAR. However, the employee generally will recognize ordinary
income upon exercise of an NSO in an amount equal to the excess of the fair
market value of the shares of Common Stock at the time of exercise over the
exercise price. Similarly, upon the receipt of cash or shares pursuant to the
exercise of a SAR, the individual generally will recognize ordinary income in an
amount equal to the sum of the cash and the fair market value of the shares
received. As a result of Section 16(b) of the Exchange Act, under certain
circumstances, the timing of income recognition may be deferred (generally for
up to six months following the exercise of an NSO or SAR (the "Deferral
Period")) for any individual who is an executive officer or director of the
Company or a beneficial owner of more than ten percent (10%) of any class of
equity securities of the Company. Absent a Section 83(b) election (as described
below under "Other Awards"), recognition of income by the individual will be
deferred until the expiration of the Deferral Period, if any. The ordinary
income recognized with respect to the receipt of shares or cash upon exercise of
an NSO or a SAR will be subject to both wage withholding and other employment
taxes. In addition to the customary methods of satisfying the withholding tax
liabilities that arise upon the exercise of a SAR for shares or upon the
exercise of an NSO, the Company may satisfy the liability in whole or in part by
withholding shares of Common Stock from those that otherwise would be issuable
to the individual or by the employee tendering other shares owned by him or her,
valued at their fair market value as of the date that the tax withholding
obligation arises. A federal income tax deduction generally will be allowed to
the Company in an amount equal to the ordinary income included by the individual
with respect to his or her NSO or SAR, provided that such amount constitutes an
ordinary and necessary business expense to the Company and is reasonable and the
limitations of Sections 280G and 162(m) of the Code do not apply. If an
individual exercises an NSO by delivering shares of Common Stock, other than
shares previously acquired pursuant to the exercise of an ISO which is treated
as a "disqualifying disposition" as described above, the individual will not
recognize gain or loss with respect to the exchange of such shares, even if
their then fair market value is different from the individual's tax basis. The
individual, however, will be taxed as described above with respect to the
exercise of the NSO as if he or she had paid the exercise price in cash, and the
Company likewise generally will be entitled to an equivalent tax deduction.
Other Awards.
With respect to other Benefits under the 1996 Plan that are settled either
in cash or in shares of Common Stock that are either transferable or not subject
to a substantial risk of forfeiture (as defined in the Code and the regulations
thereunder), employees generally will recognize ordinary income equal to the
amount of cash or the fair market value of the Common Stock received. With
respect to Benefits under the 1996 Plan that are settled in shares of Common
Stock that are restricted as to transferability or subject to a substantial risk
of forfeiture absent a written election pursuant to Section 83(b) of the Code
filed with the Internal Revenue Service within 30 days after the date of
transfer of such shares pursuant to the award (a "Section 83(b) election") an
individual will recognize ordinary income at the earlier of the time at which
(i) the shares become transferable or (ii) the restrictions that impose a
substantial risk of forfeiture of such shares lapse, in an amount equal to the
excess of the fair market value (on such date) of such shares over the price
paid for the award, if any. If a Section 83(b) election is made, the individual
will recognize ordinary income, as of the transfer date, in an amount equal to
the excess of the fair market value of the Common Stock as of that date over the
price paid for such award, if any. The ordinary income
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recognized with respect to the receipt of cash, shares of Common Stock or other
property under the 1996 Plan will be subject to both wage withholding and other
employment taxes. The Company generally will be allowed a deduction for federal
income tax purposes in an amount equal to the ordinary income recognized by the
employee, provided that such amount constitutes an ordinary and necessary
business expense and is reasonable and the limitations of Sections 280G and
162(m) of the Code do not apply.
Dividends and Dividend Equivalents.
To the extent Benefits under the 1996 Plan earn dividends or dividend
equivalents, whether paid currently or credited to an account established under
the 1996 Plan, an individual generally will recognize ordinary income with
respect to such dividends or dividend equivalents.
Change in Control.
In general, if the total amount of payments to an individual that are
contingent upon a "Change of Control" of the Company (as defined in Section 280G
of the Code), including payments under the 1996 Plan that vest upon a "Change in
Control," equals or exceeds three times the individual's "base amount"
(generally, such individual's average annual compensation for the five calendar
years preceding the change in control), then, subject to certain exceptions, the
payments may be treated as "parachute payments" under the Code, in which case a
portion of such payments would be non-deductible to the Company and the
individual would be subject to a 20% excise tax on such portion of the payments.
Certain Limitations on Deductibility of Executive Compensation.
With certain exceptions, Section 162(m) of the Code denies a deduction to
publicly held corporations for compensation paid to certain executive officers
in excess of $1 million per executive per taxable year (including any deduction
with respect to the exercise of an NSO or SAR or the disqualifying disposition
of stock purchased pursuant to an ISO). One such exception applies to certain
performance-based compensation provided that such compensation has been approved
by stockholders in a separate vote and certain other requirements are met. If
approved by its stockholders, the Company believes that Stock Options, SARs and
Performance-Based Awards granted under the 1996 Plan, at the time when the Plan
Administrator consists solely of not less than two "Outside Directors" within
the meaning of Section 162(m) of the Code, should qualify for the
performance-based compensation exception to Section 162(m) of the Code.
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NEW PLAN BENEFITS
Plan Name: The 1996 Share Incentive Plan
Name & Position Number of Units (stock options)(1)
Keith B. Stein 906,161
Chairman and Chief
Executive Officer
William G. Magro 426,429
President and Chief
Operating Officer
Brent E. Wombolt 106,607
Senior Vice President
Operations and Servicing
Thomas Costanza 106,607
Vice President and
Chief Financial Officer
Stephen R. Veth 106,607
Vice President, Secretary
and General Counsel
Executive Group 1,972,232
(8 in number)
Non-Executive Director ________
Group (6 in number)
Non-Executive Officer 133,260
Employee Group
(144 in number)
- -----------------------------------
(1) The exercise price for all such stock options is $0.23 per share. The
expiration date for all such stock options pursuant to applicable provisions of
the 1996 Plan is June 3, 2009.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE IN FAVOR OF THE AMENDMENT TO THE
1996 SHARE INCENTIVE PLAN.
PROPOSAL FOUR - APPOINTMENT OF AUDITORS
On May 18, 1998, the Company dismissed KPMG Peat Marwick, LLP ("KPMG") as
the Company's auditor of its financial statements. On that same day, the Company
announced that it was in the process of retaining BDO Seidman, LLP ("BDO") to
audit the Company's financial statements in Fiscal 1998, which engagement was
subsequently consummated and BDO audited the Company's financial statements for
the year ended December 31, 1998. KPMG's opinion with respect to the Company's
Annual Report on Form 10-K for the year ended December 31, 1997 was qualified by
raising substantial doubt as to the Company's ability to continue as a going
concern. The decision to dismiss KPMG as the Company's auditor was recommended
and approved by the Audit Committee of the Board of Directors.
In connection with KPMG's review of the Company's financial statements for
the quarters ended March 31, 1997, June 30, 1997 and September 30, 1997, and
KPMG's audit of the Company's financial statements for the year ended December
31, 1997, certain disagreements arose between KPMG and the Company regarding:
(1) the
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periodic determination of the carrying value of the Company's retained
securitization assets, and more particularly, the assumptions and methodologies
to be employed, pursuant to Statement of Financial Accounting Standards No. 125
("SFAS No. 125"), in the computer model used to determine such carrying values,
including the determination of which components of the retained securitization
assets to be discounted to net present value and the rate at which such
components should be discounted, and the projected loan loss rate and related
collateral recovery rate to be utilized in such valuation model; and (2) the
accounting treatment of deferred income taxes recorded in connection with the
reorganization of the Company from a partnership to a corporation in connection
with the Company's initial public offering. With respect to the issues relating
to the periodic determination of the carrying value of the Company's retained
securitization assets, the Audit Committee and the Board of Directors discussed
such issues with KPMG. The Audit Committee and the Board of Directors did not
discuss the deferred income tax issue with KPMG, which was discussed between
KPMG and Company management.
While KPMG never expressed an unwillingness to be associated with any of the
financial statements prepared by management and filed with the Securities and
Exchange Commission, KPMG did indicate that it was unwilling to be associated
with the Company's initial earnings release for the quarter ended September 30,
1997. As a result, the Company, in consultation with KPMG, revised its earnings
release for the quarter ended September 30, 1997.
The Company authorized KPMG to fully and completely respond to BDO regarding
its inquiries, if any, concerning the subject matter of each of the
disagreements previously described. Each of those disagreements was resolved by
the Company acceding to the position of KPMG prior to the filing of the
Company's quarterly reports on Form 10-Q and its Annual Report on Form 10-K for
Fiscal 1997.
Representatives of BDO will be present, either in person or telephonically,
at the Annual Meeting, will be given an opportunity to make a statement if they
desire to do so, and will be expected to be available to respond to appropriate
questions.
Based upon the recommendation of the Audit Committee, and subject to
ratification by the stockholders, the Board of Directors has appointed BDO as
auditors for the Company for the fiscal year ending December 31, 1999.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE IN FAVOR OF SUCH RATIFICATION.
2000 PROPOSALS OF STOCKHOLDERS
The Company intends to hold the 2000 Annual Meeting of Stockholders in the
spring of 2000. Any stockholder of the Company wishing to include proposals in
the proxy materials for such meeting must meet the requirements of the rules of
the Securities and Exchange Commission relating to proposals of security
holders. Such proposals must be received by the Secretary of the Company in
writing at the principal executive offices of the Company on or prior to April
25, 2000.
In addition to Commission requirements, for proposals to be properly brought
before an annual meeting by a stockholder, such stockholder much give timely
notice of the proposals in proper written form to the Secretary of the
Corporation.
To be timely, a stockholder's notice to the Secretary must be delivered to,
or mailed and received at, the principal executive offices of the Corporation
not less than sixty days nor more than ninety days prior to the date of the
annual meeting; provided, however, that in the event that less than seventy
days' notice or prior public disclosure of the date of the annual meeting is
given or made to stockholders, notice by the stockholder in order to be timely
must be so received not later than the close of business on the tenth day
following the day on which such notice of the date of the annual meeting was
mailed or such public disclosure of the date of the annual meeting was made,
whichever first occurs.
To be in proper written form, a stockholder's notice to the Secretary must
set forth as to each matter such stockholder proposes to bring before the annual
meeting (i) a brief description of the business desired to be brought before the
annual meeting and the reasons for conducting such business at the annual
meeting, (ii) the name and record address of such stockholder, (iii) the class
or series and number of shares of capital stock of the Corporation which are
owned beneficially or of record by such stockholder, (iv) a description of all
arrangements or understandings between such stockholder and any other person or
persons (including their names) in connection
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with the proposal of such business by such stockholder and any material interest
of such stockholder in such business and (v) a representation that such
stockholder intends to appear in person or by proxy at the annual meeting to
bring such business before the meeting.
OTHER BUSINESS
The Board of Directors is not aware of any matters that may be presented at
the Annual Meeting other than those described in the Company's Notice of Annual
Meeting of Stockholders enclosed herewith. If, however, any other matters do
properly come before the Annual Meeting, or any adjournment or adjournments
thereof, it is intended that the person named as proxies will vote, pursuant to
their discretionary authority, according to their best judgment and in the
interest of the Company.
ADDITIONAL INFORMATION
All of the expenses involved in preparing, assembling and mailing this Proxy
Statement and the accompanying materials will be paid by the Company. In
addition to solicitation by mail, directors, officers and regular employees of
the Company may solicit proxies by telephone, telegram or by personal
interviews. Such persons will receive no additional compensation for such
services. The Company will reimburse brokers and certain other persons for their
costs and expenses in forwarding proxy materials to the beneficial owners of
Common Stock held of record by such persons.
A copy of the Company's Annual Report for Fiscal 1998 is being
mailed to the stockholders simultaneously with this Proxy Statement.
By Order of the Board of Directors,
Stephen R. Veth
Vice President, Secretary and
General Counsel
Jacksonville, Florida
August 23, 1999
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ANNEX A
Text of Proposed Amendment to the Certificate of Incorporation
National Auto Finance Company, Inc.
The Fourth section, Subsection (A) of National Auto Finance Company, Inc.'s
Certificate of Incorporation is amended to read as follows:
FOURTH: (A) The total number of shares of all classes of capital stock which
the Corporation shall have authority to issue is 45,000,000 shares ("Capital
Stock"), consisting of 44,000,000 shares of common stock, par value $0.01 per
share ("Common Stock"), and 1,000,000 shares of preferred stock, par value $0.01
per share ("Preferred Stock").
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ANNEX B
Fairness Opinion Of Rothschild
41
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[LETTERHEAD OF ROTHSCHILD INC.]
Wilbur L. Ross, Jr.
Senior Managing Director
April 7, 1999
Board of Directors
National Auto Finance Company, Inc.
10302 Deerwood Park Blvd., Suite 100
Jacksonville, FL 32256
Gentlemen:
Reference is hereby made to: (i) the Restructuring Agreement, dated as of April
7, 1999 (the "Restructuring Agreement"), by and among National Auto Finance
Company, Inc. ("NAFI"), National Auto Finance Company, L.P., Gary L. Shapiro,
Edgar A. Otto, Stephen L. Gurba, The 1818 Mezzanine Fund, L.P., PC Investment
Company, Progressive Investment Company, Inc., Manufacturers Life Insurance
Company (U.S.A.), The Structured Finance High Yield Fund, LLC, Nova Financial
Corporation and Nova Corporation, pursuant to which NAFI will, among other
things, (a) restructure its outstanding Senior Subordinated Notes by issuing
Amended and Restated Senior Subordinated Promissory Notes (which will permit
NAFI, at its option, for a period of 24 months, to pay up to 50% of scheduled
interest payments through the issuance of Convertible Senior Subordinated Notes
which may be converted into Common Stock at a conversion price of $0.75 per
share) and (b) issue an aggregate of (x) 7,071,429 shares of Common Stock to the
Noteholders and (y) 1, 178,571 shares of Common Stock to the Equityholders and
(ii) the Note Exchange Agreement dated as of April 7, 1999 (the "Note Exchange
Agreement") by and among NAFI and the Junior Noteholders, pursuant to which,
NAFI will, among other things, restructure its outstanding Junior Notes by
issuing Second Amended and Restated Promissory Notes (which will permit NAFI, to
pay scheduled interest payments through the issuance of Junior Convertible
Subordinated Notes which may be converted into Common Stock at a conversion
price of $0.75 per share). In addition, pursuant to the Restructuring Agreement
and the Note Exchange Agreement, the Noteholders, the Equityholders and the
Junior Noteholders will waive all
Rothschild Inc. Telephone: (212) 403-3581
1251 Avenue of the Americas Fax: (212) 403-3578
New York, New York 10020 E-mail: [email protected]
<PAGE>
currently existing defaults and breaches by NAFI contained in the Agreements and
the Junior Notes, as the case may be. Capitalized terms defined in the
Restructuring Agreement and the Note Exchange Agreement and used but not
otherwise defined herein are used herein as so defined.
In formulating our opinion, we have, among other things: (i) reviewed the
proposed Restructuring Agreement and Note Exchange Agreement and related
exhibits (collectively, the "Restructuring Documents"); (ii) performed site
inspections; (iii) met with management of NAFI; (iv) reviewed certain
publicly-available financial and other data with respect to NAFI, including the
consolidated financial statements for the 1995, 1996 and 1997 fiscal years as
reported on SEC Form 10-K (as amended) and the September 30, 1998, June 30, 1998
and March 30, 1998 quarterly reports on SEC Form 10-Q, and certain other
financial and operating data relating to NAFI made available to us from
published sources and from the internal records of NAFI; (v) reviewed certain
financial and other data with respect to the sub-prime auto lending industry;
(vi) compared NAFI, from a financial point of view, with certain other companies
in the sub-prime auto industry that we deemed relevant; (vii) considered the
financial terms, to the extent publicly-available, of selected recent business
combinations of companies in the sub-prime auto industry which we could
reasonably foresee as relevant to NAFI's current situation; (viii) reviewed and
discussed with management of NAFI historical and forecasted financial
requirements for the execution of the Restructuring Documents; (ix) performed
such other analyses and examination and considered such other financial,
economic and market data as we deemed relevant and appropriate.
In connection with this review, we have not verified any information utilized or
independently assumed any obligation to verify any information utilized,
reviewed or considered by us in formulating our opinion and have relied on such
information being accurate and complete in all material respects. With respect
to the financial forecasts for the Restructuring Documents that have been
provided to us, we have assumed, but independently verified for purposes of our
opinion, that the forecasts have been reasonably prepared on bases reflecting
the best available estimates and judgments of management at the time of
preparation as to the future financial performance of NAFI. We have also assumed
that there have not occurred any material changes in the assets, financial
condition, results of operations, business or prospects for NAFI since the
respective dates on which their most recent financial statements were made
available to us. We have relied on advice of the respective counsel and
independent accountants to NAFI as to all legal and financial reporting matters.
In addition, we have neither assumed responsibility for making an independent
evaluation, appraisal or physical inspection of any of the assets or liabilities
(contingent or otherwise) of NAFI which it is agreed was beyond the scope of our
assignment, nor have we been furnished with any such appraisals. Our opinion is
based on economic, monetary and market and other conditions as in effect on, and
the information made available to us as of, the date hereof. Accordingly,
although subsequent developments may affect this opinion, we have not assumed
any obligations to update, revise or reaffirm this opinion.
We have further assumed that the Restructuring Documents will be executed
substantially as presented.
2
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We have acted as financial advisor to NAFI in connection with the Restructuring
and have been compensated for so doing. We have been retained to render this
opinion and are being compensated therefor.
Based upon the foregoing and other factors we deem relevant and in reliance
thereon, it is our opinion that the transactions contemplated by the
Restructuring Documents are fair, from a financial point of view, to NAFI and
the shareholders of NAM (other than the Equityholders and the Partnership, as to
which we express no opinion).
Very truly yours,
/s/ Rothschild Inc.
Rothschild, Inc.
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NATIONAL AUTO FINANCE COMPANY, INC.
Proxy Solicited on Behalf of the Board of Directors
for the Annual Meeting of Shareholders to be Held
September 14, 1999
The undersigned, having received the Annual Report and the accompanying
Notice of Annual Meeting of Shareholders and Proxy Statement dated August 23,
1999, hereby appoints Keith B. Stein and Stephen R. Veth and each of them,
proxies, with full power of substitution, and hereby authorizes them to
represent and vote the shares of National Auto Finance Company, Inc. Common
Stock (the "Company"), which the undersigned would be entitled to vote if
personally present at the Annual Meeting of Shareholders of the Company to be
held on Tuesday, September 14, 1999, at 10:00 a.m., Eastern Daylight Time, and
any adjournment thereof, and especially to vote as set forth below.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED AS DIRECTED, OR, IF NO
CONTRARY DIRECTION IS INDICATED, WILL BE VOTED "FOR" PROPOSALS 1-4. IN THEIR
DISCRETION THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH OTHER BUSINESS AS MAY
COME BEFORE THE MEETING. EACH MATTER ABOVE WAS PROPOSED BY THE BOARD OF
DIRECTORS.
THE BOARD OF DIRECTORS RECOMENDS A VOTE FOR PROPOSALS 1, 2, 3 AND 4.
Please mark [ X ]
your vote as
indicated in
this example.
1. Amendment of the Company's FOR AGAINST ABSTAIN
Certification of Incorporation [ ] [ ] [ ]
to increase the Company's
authorized shares of Common
Stock to 44,000,000 shares
<PAGE>
FOR WITHHOLD
all nominees listed AUTHORITY
below (except as marked to vote for all
to the contrary below) nominees listed below
2. Election of Directors [ ] [ ]
Class II Class III
-------- ---------
Nominees: Robert R. Gould Joseph P. Donlan
David Benson David W. Young
(Instruction: To withhold authority to vote for any nominee, strike a line
through that nominee's name in the list above.)
3. Amendments to the Company's FOR AGAINST ABSTAIN
1996 Share Incentive Plan, [ ] [ ] [ ]
including an increase the
number of shares of Common
Stock issuable thereunder
to 4,000,000 shares.
4. Ratification of the appointment FOR AGAINST ABSTAIN
of BDO Seidman as the independent [ ] [ ] [ ]
accountants of the Company .
The undersigned hereby revokes any other proxy to vote at such Annual Meeting,
and hereby ratifies and confirms all that said attorneys and proxies, and each
of them, may lawfully do by virtue hereof. With respect to matters not known at
the time of the solicitations hereof, said proxies are authorized to vote in
accordance with their best judgment.
Please mark, sign, date and return the Proxy Card promptly using the enclosed
envelope.
The signature(s) hereon should correspond exactly with the name(s) of the
Stockholder(s) appearing on the Stock Certificate. If stock is jointly held, all
joint owners should sign. When signing as attorney, executor, administrator,
trustee or guardian, please give full title as such. If signer is a corporation,
please sign the full corporate name, and give title of signing officer.
Signature(s) Date:_____________________, 1999
