<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission file number 0-22067
NATIONAL AUTO FINANCE COMPANY, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 65-0688619
- ------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
10302 Deerwood Park Blvd., Suite 100, Jacksonville, Florida 32256
- ----------------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(904) 996-2500
----------------------------------------------------
(Registrant's telephone number, including area code)
---------------------------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
There were 17,280,762 shares of Common Stock, $.01 par value, outstanding as
of May 17, 1999.
<PAGE> 2
NATIONAL AUTO FINANCE COMPANY, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited) 4
Balance Sheets as of March 31, 1999 and December 31, 1998: 4
Statements of Operations For the Three Months ended March 31, 1999 and 1998: 5
Statements of Stockholders' Equity (Capital Deficit) as of March 31, 1999 and 1998: 6
Statements of Cash Flows For the Three Months Ended March 31, 1999 and 1998: 7
Notes to Financial Statements: 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations: 13
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K: 22
SIGNATURES: 23
EXHIBIT INDEX: 24
Exhibit 11. Computation of Earnings Per Common Share: 25
Exhibit 27. Financial Data Schedule: 26
</TABLE>
2
<PAGE> 3
FORWARD-LOOKING STATEMENTS
When used in this Quarterly Report on Form 10-Q or future filings by the Company
(as hereinafter defined) with the Securities and Exchange Commission (the
"Commission"), in the Company's press releases or other public or stockholder
communications, or in oral statements made with the approval of an authorized
executive officer, the words or phrases "will likely result," "are expected to,"
"will continue," "is anticipated," "estimate," "instead," "foresee," "expected",
project" or similar expressions are intended to identify "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. The Company wishes to caution readers not to place undue reliance on
any such forward-looking statements, which speak only as of the date made, and
to advise readers that various factors, including regional and national economic
conditions, substantial changes in levels of market interest rates, credit and
other risks of lending and investment activities, competitive and regulatory
factors, and changes in generally accepted accounting principles could affect
the Company's actual and/or reported financial performance and could cause the
Company's actual and/or reported results for future periods to differ materially
from those anticipated by any forward looking statement.
The Company does not undertake and specifically disclaims any obligation to
update any forward-looking statements to reflect the occurrence of anticipated
or unanticipated events or circumstances after the date of such statements.
3
<PAGE> 4
PART I
ITEM I. FINANCIAL STATEMENTS
NATIONAL AUTO FINANCE COMPANY, INC.
BALANCE SHEETS
MARCH 31, 1999 AND DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
March 31,
1999 December 31,
ASSETS: (unaudited) 1998
----------- ------------
<S> <C> <C>
Cash and cash equivalents $ 3,045 $ 9,540
Retained interest in securitizations, at estimated fair value (Note 2) 38,430 34,117
Furniture, fixtures and equipment, net 3,218 3,277
Deferred financing costs 2,613 2,759
Other assets 1,293 1,039
-------- --------
TOTAL ASSETS $ 48,599 $ 50,732
======== ========
LIABILITIES:
Accounts payable and accrued expenses $ 1,885 $ 2,444
Accrued interest payable-related parties 155 117
Junior Subordinated Notes-related parties 1,940 1,940
Senior Subordinated Notes 53,845 53,578
Notes payable 884 1,017
-------- --------
TOTAL LIABILITIES $ 58,709 $ 59,096
-------- --------
COMMITMENTS AND CONTINGENCIES
MANDATORY REDEEMABLE PREFERRED STOCK series A-$0.01 par value; $1,000 stated
value; 1,000,000 shares authorized; 2,295 shares
outstanding; redeemable in January 2005, stated at redemption value 2,456 2,415
STOCKHOLDERS' EQUITY (CAPITAL DEFICIT):
Common Stock -$0.01 par value; 20,000,000 shares authorized;
9,031 shares outstanding 90 90
Paid-in-capital 36,221 36,261
Accumulated deficit (48,877) (47,130)
-------- --------
Total stockholders' equity (capital deficit) (12,566) (10,779)
-------- --------
Total liabilities, mandatory redeemable preferred stock and
stockholders' equity (capital deficit) $ 48,599 $ 50,732
======== ========
</TABLE>
See accompanying notes to the financial statements.
4
<PAGE> 5
NATIONAL AUTO FINANCE COMPANY, INC.
Statements of Operations (unaudited)
For the Three Months Ended March 31, 1999 and 1998
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
1999 1998
------- -------
<S> <C> <C>
REVENUE:
Securitization related income (Note 2) $ 1,469 $ 74
Servicing income 1,449 1,272
Interest income 442 696
Other income 362 78
------- -------
Total revenue 3,722 2,120
======= =======
EXPENSES:
Servicing expenses 857 2,304
Interest expense 2,234 1,530
Salaries and employee benefits 1,206 1,643
Direct loan acquisition expenses 217 651
Depreciation expense 219 187
Other operating expenses 736 937
------- -------
Total expenses 5,469 7,252
------- -------
Loss before income taxes (1,747) (5,132)
Income taxes -- --
------- -------
Net loss (1,747) (5,132)
Preferred stock dividends 40 40
------- -------
Loss attributed to common shareholders $(1,787) $(5,172)
======= =======
PER SHARE DATA:
Loss per common share - basic and diluted $ (0.20) $ (0.57)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic and diluted 9,031 9,031
</TABLE>
See accompanying notes to the financial statements.
5
<PAGE> 6
NATIONAL AUTO FINANCE COMPANY, INC.
Statements of Stockholders' Equity (Capital Deficit)(unaudited)
For the Three Months Ended March 31, 1999
(in thousands)
<TABLE>
<CAPTION>
Common Paid-in Accumulated
Stock Capital Deficit Total
-------- -------- ----------- --------
<S> <C> <C> <C> <C>
Balance as of December 31, 1998 $ 90 $ 36,261 $(47,130) $(10,779)
Dividends on mandatorily redeemable preferred stock (40) (40)
Net loss -- -- (1,747) (1,747)
-------- -------- -------- --------
Balance as of March 31, 1999 $ 90 $ 36,221 $(48,877) $(12,566)
======== ======== ======== ========
</TABLE>
See accompanying notes to the financial statements.
6
<PAGE> 7
NATIONAL AUTO FINANCE COMPANY, INC.
Statements of Cash Flows (unaudited)
For the Three Months Ended March 31, 1999 and 1998
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,747) $ (5,132)
Adjustments to reconcile net loss to net cash used in
operating activities:
Securitization related loss (1,469) (74)
Depreciation expense 219 143
Purchases of loans held for sale (13,364) (47,422)
Proceeds from transfer of loans to Master Trust 13,364 47,422
Cash flows from Retained Interest released to Company 3,976 1,768
Cash deposits to Spread Accounts (6,820) (15,227)
Amortization and write-off of deferred financing costs 146 122
Amortization of warrants 268 233
Changes in other assets and liabilities:
Other assets (255) (753)
Accounts payable and accrued expenses (558) (726)
Accrued interest payable-related parties 38 --
Accrued interest payable-Senior Subordinated notes
and other notes -- 1,020
Other (17) --
-------- --------
Net cash used in operating activities (6,219) (18,626)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Fixed assets purchased (142) (309)
-------- --------
Net cash used in investing activities (142) (309)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Senior Subordinated notes -- 19,248
Principal payments on notes (134) (16)
Payment of Mandatorily Redeemable Preferred Stock dividends -- (40)
-------- --------
Net cash provided by (used) financing activities (134) 19,192
-------- --------
Net increase (decrease) in cash and cash equivalents (6,495) 257
Cash and cash equivalents at beginning of period 9,540 26,467
-------- --------
Cash and cash equivalents at end of period $ 3,045 $ 26,724
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 1,799 $ 280
======== ========
NON-CASH FINANCING ACTIVITIES:
Accrued mandatory redeemable preferred stock dividends 40 --
Issuance of 593,671 warrants in conjunction with Senior Subordinated
notes considered paid-in-capital -- 2,004
</TABLE>
See accompanying notes to the financial statements.
7
<PAGE> 8
NATIONAL AUTO FINANCE COMPANY, INC.
Notes to Financial Statements
March 31, 1999
(unaudited)
(1) BASIS OF PRESENTATION
The accompanying unaudited interim financial statements at March 31, 1999
and 1998 and for the three months ended March 31, 1999 and 1998 have been
prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Accordingly, certain information and footnotes
required by generally accepted accounting principles for complete
financial statements are not included herein. The interim statements
should be read in conjunction with the financial statements and notes
thereto included in the Company's latest Annual Report on Form 10-K
(capitalized terms used herein and not defined shall have the meanings
ascribed to them in such Form 10-K).
Interim statements are subject to possible adjustments in connection with
the annual audit of the Company's accounts for the full year 1999; in the
Company's opinion, all adjustments necessary for a fair presentation of
these interim statements have been included and are of a normal and
recurring nature. The results for the interim periods are not necessarily
indicative of results for a full year. Certain amounts in the 1998
financial statements have been reclassified to conform with current
financial statement presentation.
(2) RETAINED INTEREST IN SECURITIZATIONS
Retained Interest in Securitizations were $38.4 and $34.1 million at March
31, 1999 and December 31, 1998.
Assumptions used to value the Retained Interests in Securitizations at
March 31, 1999 and December 31, 1998 were as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- ------------
<S> <C> <C>
Weighted average cumulative net loss rate 14.00% 14.00%
Weighted average cumulative prepayment rate 24.49% 21.40%
Discount rate 14.00% 14.00%
Level of required Cash Spread Account 11.00% 11.00%
Rate of interest on Cash Spread Account 4.85% 4.85%
Weighted average interest rate on Loans 19.35% 19.35%
Weighted average yield on bonds and notes
held by securitization investors 6.12% 6.12%
</TABLE>
The Company has historically funded loans primarily through an asset
securitization program consisting of (i) the securitized warehousing of
all of its Loans through their daily sale ("Revolving Securitization") to
a bankruptcy-remote master trust ("Master Trust") pursuant to the
Revolving Securitization, followed by (ii) the transfer of such warehoused
Loans from time to time by the Master Trust to a discrete trust
("Permanent Securitizations"), thereby creating additional availability of
capital from the Master Trust.
Specifically, pursuant to the Revolving Securitization, the Company sells
Loans that it has purchased from Dealers on a daily basis to a
special-purpose subsidiary, which then sells the Loans to the Master Trust
in exchange for cash and certain residual interests in future excess cash
flows from the Master Trust. The Master Trust, to date, has issued two
classes of investor certificates: "Class B Certificates," which are
variable funding (i.e., revolving) certificates bearing interest at
floating rates, and "Class C Certificates," representing a portion of the
residual interest of the Company's special-purpose subsidiary in future
excess cash flows from the Master Trust after required payments to the
holders of the Class B certificates, deposits of funds to a restricted
cash account as a reserve for future Loan losses which provides additional
credit enhancement for the holders of the Class B Certificates and payment
of certain other expenses and obligations of the Master Trust. First Union
currently owns 100% of the outstanding Class B Certificates. Collectively,
the Cash Spread Accounts and the Class C Certificate portion of Loan
principal (Over-Collateralization Accounts), are held by the Company to
collateralize the Master Trust are the components of the Spread Accounts.
The Spread Accounts and Excess Spread Receivables are reflected
collectively on the balance sheet as "Retained Interest in
Securitizations."
8
<PAGE> 9
NATIONAL AUTO FINANCE COMPANY, INC.
Notes to Financial Statements
March 31, 1999
(unaudited)
Periodically the Master Trust transfers Loans and Spread Account balances
to Permanent Securitizations in exchange for cash, which is used to repay
the Class B Certificates. Debt securities representing interests in the
Permanent Securitizations are sold to third-party investors, who are
repaid from cash flows from the Loans in the applicable Permanent
Securitization. Excess Spread Receivables and return of Spread Accounts
attributable to such Loans flow from the Permanent Securitization to the
Company to the extent such funds are available.
Until the completion of the Restructuring (See Note 5 - Subsequent
Events), the Company was in violation of certain covenants with respect to
the Master Trust, specifically, the covenant that the Master Trust
maintain certain interest rate hedging agreements and covenants related to
allowable repossession and recovery limits.
Under the financing structures the Company has used to date for its
securitizations, certain excess cash flows generated by the Loans are
retained in the Cash Spread Accounts within the securitization trusts to
provide liquidity and credit enhancement. While the specific terms and
mechanics of the Cash Spread Accounts can vary depending on each
transaction, the Company's agreements with Financial Security Assurance
Inc. ("FSA"), the financial guaranty insurer that has provided credit
enhancements in connection with the Company's securitizations, generally
provide that the Company is not entitled to receive any excess cash flows
unless the level of certain Spread Account balances, comprised of cash and
the Overcollateralization Accounts, have been attained and/or the
delinquency or losses related to the Loans in the pool are below certain
predetermined levels. Additionally, effective as of the Restructuring
date, the Company is required to maintain a minimum equity position in the
Revolving Securitization of 19.0% of the net serviced receivables in the
Master Trust, or 3.0 times net losses, whichever was greater. This minimum
equity position currently consists of cash invested by the Company and
overcollateralization in the form of the discount from the face amount of
a Loan at which the Company is willing to purchase the Loan from an
automobile dealer ("Dealer Discount") related to the principal balance of
Loans. As of March 31, 1999 and 1998, the Company had a 19.00% and 20.5%
minimum equity position investment in the Revolving Securitization. See
Note 5 - Subsequent Events.
Until the completion of the Restructuring (See Note 5 - Subsequent
Events), in the event delinquencies or losses on the Loans exceeded
certain levels in the Permanent Securitizations ("Trigger Events"), the
terms of the Permanent Securitizations: (i) required increased Cash Spread
Account balances to be accumulated for the particular pool; (ii)
restricted the distribution to the Company of excess cash flows associated
with the pool in which asset-backed securities are insured by FSA; and
(iii) in certain circumstances, required the transfer of servicing on some
or all of the Loans in FSA-insured pools to another servicer. Certain
portfolio performance tests were not met at various times during 1998 with
respect to the Permanent Securitization trusts formed in November 1995,
November 1996, July 1997, and January 1998 resulting in additional cash
retention in the Spread Accounts related to such Permanent Securitization
trusts.
Moreover, under the terms of the Company's insurance agreements with FSA,
upon the occurrence of a Permanent Securitization failing to meet
portfolio performance tests of the nature described above but at
significantly higher levels (an "Insurance Agreement Event of Default"),
the Company will be in default under those insurance agreements. Upon an
Insurance Agreement Event of Default, FSA may: (i) permanently suspend
distributions of cash flow to the Company from the related securitization
trust and all other FSA-insured trusts until the asset-backed securities
have been paid in full; (ii) capture all excess cash flows from performing
FSA-insured trusts; (iii) increase its premiums; and (iv) replace the
Company as servicer with respect to all FSA-insured trusts. In 1998, the
Permanent Securitization trusts formed in November 1995, November 1996 and
July 1997 experienced periodic Insurance Agreement Events of Default.
Since the occurrence of those Insurance Agreement Events of Default, and
prior to the Restructuring date, FSA captured all excess cash flows from
the four FSA-insured trusts. On April 7, 1999, the Company entered into an
agreement with FSA that: (i) permanently waived the Insurance Agreement
Event of Default; (ii) modified the portfolio performance tests described
above to increase the thresholds for each of the Permanent Securitization
trusts (permanent revisions); and (iii) increased the amount required to
be retained in the Spread Accounts related to the four trusts to an amount
equal to 11% of the then outstanding balance held by the securitization
trust. See Note 5 - Subsequent Events.
9
<PAGE> 10
NATIONAL AUTO FINANCE COMPANY, INC.
Notes to Financial Statements
March 31, 1999
(unaudited)
The Company's right to service the Loans sold in FSA-insured
securitizations is generally subject to the discretion of FSA.
Accordingly, there can be no assurance that the Company will continue as
servicer for such Loans and receive related servicing fees. Additionally,
there can be no assurance that there will not be additional Insurance
Agreement Events of Default in the future, or if such events of default
occur, waivers will be available. If the Company's Servicing Portfolio
does not meet such performance requirements, the future carrying value of
the Company's Retained Interest in Securitizations would be materially
impacted in a negative manner. In addition, any increase in limitations on
cash flow available to the Company from Permanent Securitization trusts,
the Company's inability to obtain any necessary waivers from FSA or the
termination of servicing arrangements could materially adversely affect
the Company's financial condition, results of operations and cash flows.
See Note 5 - Subsequent Events.
During the three months ended March 31, 1999 and 1998, the following
activity took place with respect to securitizations:
<TABLE>
<CAPTION>
March 31,
1999 1998
---------- ----------
(dollars in thousands)
<S> <C> <C>
Principal balance of Loans purchased $ 14,016 $ 48,991
========== ==========
Weighted average coupon rate on Loans sold during the period 19.11% 19.32%
========== ==========
</TABLE>
(3) DEBT
The balance of the Senior Subordinated Notes payable was $53.8 and $53.6
million as of March 31, 1999 and December 31, 1998. Such amounts are shown
net of discounts as (discussed below) of $6.2 and $6.4 million. The
principal amount of the aggregate $60 million of Senior Subordinated Notes
is due in December 2004 and bears interest at 11.875% per annum until
December 21, 2000, 12.875% per annum for the period from December 22, 2000
until December 21, 2001, 13.875% per annum for the period from December
22, 2001 until December 21, 2002, and 14.875% per annum thereafter, with
interest payable quarterly.
The Senior Subordinated Notes were issued in two separate private
placements, the first of which occurred in December 1997 in the principal
amount of $40 million (the "December Private Placement") and the second of
which occurred in March 1998 in the principal amount of $20 million (the
"March Private Placement"). In conjunction with the December Private
Placement, the Company also sold $10 million of the Company's Common
Stock, $.01 par value ("Common Stock"), at a price of $5.25 per share
(1,904,762 shares).
In connection with the December Private Placement and the March Private
Placement, the Company issued an aggregate of 1,632,685 detachable
Warrants with a ten-year life, exercisable into Common Stock of the
Company at $0.01 per share. The fair value of such Warrants was estimated
to be based upon a share value of $5.25 for the December Private Placement
and $3.37 for the March Private Placement, for a total of $7.5 million.
Such amount is recorded as a discount to the related debt, as additional
paid-in capital, and is being amortized over the life of the debt using
the interest method. The effective interest rate, including the value of
the Warrants, is approximately 15%.
Until the completion of the Restructuring (see Note 5 - Subsequent
Events), the Company was in violation of the Minimum Consolidated Net
Worth and Adjusted Interest Expense covenants contained in the Securities
Purchase Agreements pursuant to which it issued the $60 million aggregate
principal amount of Senior Subordinated Notes.
10
<PAGE> 11
NATIONAL AUTO FINANCE COMPANY, INC.
Notes to Financial Statements
March 31, 1999
(unaudited)
(4) RECENT EVENTS
FIRST UNION STRATEGIC ALLIANCE
In March of 1999, First Union announced publicly that it was exiting the
indirect auto finance business due to realigned business strategies. As a
result, the Company's referral agreement with First Union has been
terminated. The Company will, nonetheless, continue the relationships it
has established with, and continue to actively service the First
Union-related Dealers. The Company will not, however, be obligated to pay
to First Union referral fees related to business obtained through those
Dealers. The Company's loan volume may be materially, adversely affected
by the termination of the First Union Strategic Alliance. The Company will
continue its relationship with First Union through certain credit
facilities as described more fully in Note 5.
(5) SUBSEQUENT EVENTS
COMPREHENSIVE FINANCIAL RESTRUCTURING
On April 7, 1999, the Company completed a comprehensive financial
restructuring (the "Restructuring") of its Senior Subordinated and Junior
Subordinated Notes, resolved certain other issues with its Senior
Subordinated Noteholders and Junior Subordinated Noteholders, entered into
several loan facilities and arrangements with First Union, and modified
certain of the terms of the insurance guarantee arrangements with FSA,
related to the Company's securitized asset-backed bonds.
The agreements and transactions with the Senior Subordinated Noteholders
provide for and include, among other things: (1) the waiver of the past
defaults and breaches of covenants, representations and warranties, if
any, made in connection with the Senior Subordinated Notes; (2) the
elimination of the previously existing Net Worth Covenant; (3) the
establishment of a new covenant requiring that, on a quarterly basis, the
Company's net return on assets invested in loan receivables, expressed as
a percentage, exceed pre-established quarterly goals (the "Return on
Assets Covenant"); the first quarterly measurement period for this
covenant begins as of the quarter ending September 30, 1999; (4) the
granting to the Company of the option to pay during the two-year period
ending March 31, 2001 fifty percent (50%) of the interest owed on the
Senior Subordinated Notes (and the interest on such interest) through the
issuance of additional Senior Subordinated Notes, convertible into Common
Stock at the conversion price of $.75 per share; (5) the issuance to the
Senior Subordinated Noteholders of 7,071,429 shares of Common Stock as
consideration for the waivers and amendments granted to the Company; (6)
the issuance to those Noteholders that also purchased Common Stock of the
Company at the time of their debt investment 1,178,571 additional shares
of Common Stock in exchange for the execution and delivery of full and
complete releases of any claims arising by virtue of those Noteholders'
equity investment; and (7) the execution and delivery of full and complete
releases by and among the Company, the Noteholders and affiliates of and
other parties related to each of such parties. In addition, the Senior
Subordinated Noteholders were granted the right to name three additional
persons to the Board of Directors of the Company, increasing to six seats
their total number of Board representatives, thereby giving them majority
control of the Board.
The agreements and transactions with First Union provide for and include,
among other things: (1) the extension of the Master Trust warehouse line
for an additional two years (through March 31, 2001) and an increase in
the amount the Master Trust may borrow under such facility from $75
million to $85 million; the interest rate for this facility is established
at LIBOR + 1.5%; (2) the commitment by First Union to purchase up to $20
million of subordinated asset-backed debt securities in connection with
the Company's securitizations; the interest rate for this commitment is
established at LIBOR + 5%; (3) a revolving credit facility enabling the
Company to borrow up to $8 million for working capital purposes, secured
by the Company's Residual Interest in Securitizations; the interest rate
for this facility is established at LIBOR + 5%; and (4) waiver of existing
violations of certain covenants with respect to the Master Trust,
specifically, the covenant that the Master Trust maintain certain interest
rate hedging agreements and covenants related to allowable repossession
and recovery limits.
11
<PAGE> 12
NATIONAL AUTO FINANCE COMPANY, INC.
Notes to Financial Statements
March 31, 1999
(unaudited)
The agreements and transactions with the Junior Subordinated Noteholders
provide for and include, among other things: (1) the waiver of the past
defaults and breaches under the Junior Subordinated Notes; (2) the
granting to the Company of the option to pay during the period ending
January 31, 2002 up to one hundred percent (100%) of the interest owed on
the Junior Subordinated Notes (and the interest on such interest) through
the issuance of additional Junior Subordinated Notes that are convertible
into Common Stock at the conversion price of $.75 per share; (3) the
granting to the designees of the Senior Subordinated Noteholders to the
Company's Board of Directors an irrevocable proxy to vote the 4,230,000
shares of Common Stock held by National Auto Finance Company, LP (a
limited partnership controlled by certain of the Junior Subordinated
Noteholders) in all matters as to which such shares are entitled to vote;
(4) the execution and delivery of full and complete releases by and among
the Company, the Senior Subordinated Noteholders, the Junior Subordinated
Noteholders, National Auto Finance Company, LP, their respective officers,
directors, affiliates, and other parties related to each of such parties;
and (5) the granting of a covenant not to sue in the future by the Junior
Subordinated Noteholders, National Auto Finance Company, LP, and
affiliates of and other parties related to each of such parties in favor
of the Company, the Senior Subordinated Noteholders, their respective
officers, directors, affiliates, and other parties related to both such
parties.
The agreements and transactions with FSA provide for and include, among
other things: (1) the resetting of the cash spread accounts in each of the
Company's term asset-backed securitizations that have been guaranteed by
FSA to 11% of the outstanding principal balance of the receivables in each
of such securitizations for the remaining term of such securitizations
(the Company has already funded all such spread accounts above such 11%
level and, therefore, expects to receive in June 1999, from the trustee of
each such securitizations a distribution of all amounts previously funded
in excess of such 11% level, anticipated to be approximately $2.5
million); (2) the elimination of all portfolio performance maintenance
requirements that, if otherwise violated, would have resulted in the
trapping of cash flows to over fund such cash spread accounts; (3) the
resetting of the portfolio performance requirements that, if violated,
would constitute a default under the insurance guaranty agreements issued
by FSA, to levels that are commensurate to the Company's expected future
portfolio performance in each of such securitizations; and (4) the waiver
of all past breaches and defaults of portfolio performance requirements,
the result of which is to enable the Company to resume the receipt of
excess cash flow under each of the Company's term asset-backed
securitizations that have been guaranteed by FSA.
12
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following management's discussion and analysis provides information
regarding the Company's financial condition as of March 31, 1999 compared to
December 31, 1998 and its results of operations for the three months ended March
31, 1999 and 1998. This management's discussion and analysis should be read in
conjunction with (i) the Company's Financial Statements and the related notes
included elsewhere herein and (ii) the Company's Annual Report on Form 10-K with
respect to the fiscal year ended December 31, 1998. The ratios and percentages
provided below are calculated using detailed financial information contained in
the Company's Financial Statements, the notes thereto and the other financial
data included elsewhere in this report.
OVERALL
The Company is a specialty consumer finance company engaged in the
business of purchasing, financing, securitizing and servicing non-prime
automobile Loans.
The Company currently finances its purchases of Loans primarily through a
two-step asset securitization program that involves (i) the securitized
warehousing of substantially all of its Loans through their daily sale to the
Master Trust pursuant to the Revolving Securitization followed by (ii) the
transfer of such warehoused Loans from time to time through Permanent
Securitizations. In connection with the securitization of the Loans sold by the
Company, the Company is required to establish and maintain certain credit
enhancements to support the timely payment of interest and principal on the
bonds and notes issued to investors by the securitization trusts, which credit
enhancements include, among other things, funding and maintaining spread
accounts, which are moneys held on deposit ("Cash Spread Accounts"), and
maintaining a residual interest in the pools of receivables held by such
securitization trusts ("Over-Collateralization Accounts"). The following
discussion summarizes the effect of the Company's securitization activities on
its revenues, expenses and cash flows.
Revenues. In January 1997, the Company adopted Statement of Financial
Accounting Standards No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities" ("SFAS No. 125"). Since
then, the Company has undertaken a continuing process of refining the
assumptions and methodologies used to measure the fair value of its Retained
Interest in Securitizations based upon the historical performance of its Loan
portfolio. Most recently, this process of refinement has resulted in changes to
certain assumptions previously employed in the first quarter of fiscal 1998.
Specifically, the Company has increased the cumulative net loss estimate from
12.88% applied during and as of the first quarter of fiscal year 1998 to 14.00%
during and as of the first quarter of fiscal year 1999. The increase in the
cumulative net loss estimate results primarily from an increase in default rates
expected to be experienced over the life of the Loans, lower expected recovery
rates on the underlying collateral and changes in prepayment speeds, compared to
the rates of such items estimated in earlier periods. These factors were
impacted significantly as a result of the Company's conversion of its Loan
servicing to an internal system in June of 1998. Recent performance trends
indicate the negative impact of the immediate post conversion period has
reversed and stabilized. These changes in assumptions and methodologies are a
significant factor in the securitization income realized by the Company for the
quarter ended March 31, 1999. See "Results of Operations."
The Company receives monthly payments from the securitization trusts in
cash as a fee paid for the Company's servicing of the Loans. Servicing income is
recognized when earned and typically offsets the direct expenses the Company
incurs in connection with the servicing of the Servicing Portfolio. Finally, the
Company also earns interest income on its cash investments (including the Cash
Spread Accounts) and from Loans it temporarily holds for sale pending their
securitization. The Company earns only a nominal amount of interest on Loans
held for sale because the Company securitizes substantially all of its Loans on
a daily basis.
Distributions of Cash from Securitizations. When the Company securitizes
Loans, it is required to establish and maintain credit enhancements on a
trust-specific basis to support the timely payment of interest and principal on
the notes issued to investors by such securitization trusts. Credit enhancements
include, among other things, funding and maintaining the Cash Spread Accounts
and maintaining the Over-Collateralization Accounts. The Cash Spread Accounts
are funded through initial cash deposits by the Company, plus a portion of the
excess cash flows from the Loans (that is, the difference between cash received
by the relevant trust and its interest and principal payments on the
asset-backed securities and trust expenses). Once the funds in the Cash Spread
Accounts meet specified levels (which may be increased if the performance of the
relevant Loan pool deteriorates), any subsequent excess cash flows thereafter
will be released to the Company on a monthly basis. Any remaining cash in the
Cash Spread Accounts after the asset-backed securities have been paid in full
also will be released to the Company. The amount of excess cash available for
distribution to the Company will be affected by the Servicing Portfolio's actual
loss and prepayment experience. See Note 2 of the Notes to Financial Statements
- - Retained Interest in Securitizations.
13
<PAGE> 14
The table below sets forth certain information relating to the Company's
securitization activities during the three months ended March 31:
<TABLE>
<CAPTION>
1999 1998
------- -------
(dollars in thousands, except number of loans)
<S> <C> <C>
Number of Loans purchased .............. 1,019 4,087
Principal balance of Loans purchased ... $14,016 $48,991
Principal amount of Loans funded (1) ... 13,364 47,422
Securitization related income .......... 1,469 74
Servicing income ....................... 1,449 1,272
</TABLE>
(1) Amount funded represents the price at which the Company purchases a Loan
from a Dealer or Third-Party Originator (i.e., the amount actually paid to a
Dealer or Third-Party Originator), calculated as the principal of the Loan
purchased less the Dealer Discount.
RESULTS OF OPERATIONS
THREE MONTH PERIOD ENDED MARCH 31, 1999 COMPARED TO THE THREE MONTH
PERIOD ENDED MARCH 31, 1998.
Income from Operations
The Company reported a net loss of $1.8 million attributed to common
stockholders for the three-month period ended March 31, 1999 compared to a net
loss of $5.2 million attributed to common stockholders for the three month
period ended March 31, 1998.
Securitization Related Income
For the three month periods ended March 31, 1999 and 1998, the Company
recognized securitization related income of $1.5 million and $74,000,
respectively.
The Company's Loan purchasing volume decreased during the three month period
ended March 31, 1999 compared to the three month period ended March 31, 1998.
The Company purchased 1,019 Loans, having a principal balance of $14.0 million,
during the three month period ended March 31, 1999, compared to 4,087 Loans,
having a principal balance of $49.0 million, for the three months ended March
31, 1998. All Loans, except 85 having a principal balance of $943,000, were
purchased from Dealers during the three month period ended March 31, 1999. This
compares to 2,823 Loans purchased from Dealers ($37.7 million principal balance)
and 1,264 Loans purchased from Third-Party Originators ($11.3 million principal
balance) during the three-month period ended March 31, 1998. The Company's loan
purchasing volume had decreased significantly during the second half of 1998 and
early months of 1999 as the comprehensive financial restructuring was being
completed. See Note 5 of the Notes to Financial Statements Subsequent Events.
Notwithstanding higher purchasing volume during the three months ended March 31,
1998 as compared to the three months ended March 31, 1999, securitization income
during the three months ended March 31, 1998 was negatively impacted due to
applying a 14.0% discount rate to cash deposits as part of the evaluation of the
Retained Interest in Securitizations, which reduced securitization income
reported for that period.
Servicing Income
The Company receives a servicing fee in cash of approximately 4.0% of the
principal amount of the Loans sold to the Master Trust and 2.0% for the
principal amount of the Loans subsequently sold to the Permanent
Securitizations, which typically offsets actual servicing expenses incurred by
the Company. This income is recognized as received. Servicing income for the
three month periods ended March 31, 1999 and 1998 was $1.5 million and $1.3
million, respectively.
Total Expenses
The Company reported total expenses for the three-month periods ended
March 31, 1999 and 1998 of $5.5 million and $7.3 million, respectively. These
expenses consisted primarily of salaries and employee benefits, servicing
expense and interest expense on long-term indebtedness including the Company's
Senior Subordinated Notes.
Servicing expenses for the three month periods ended March 31, 1999 and 1998
were $900,000 and $2.3 million, respectively. Servicing expenses were
significantly lower during lower during the three months ended March 31, 1999
as compared to the three month's ended March 31, 1998 due to the Company
incurring internal servicing expenses of $1.5 million and external servicing
expenses of $840,000 during a transitional phase during which the Company
transitioned from an outside servicer to in-house servicing. Such transition
period, as discussed below, occurred during the three months ended March 31,
1998 and up to the conversion date of June 19, 1998. Additionally, the Company
stabilized its internal servicing expense structure during the three months
ended March 31, 1999.
14
<PAGE> 15
The Company's average outstanding Servicing Portfolio was $206.4 million,
representing 21,232 outstanding Loans as of March 31, 1999, and $251.1 million
representing 23,597 outstanding Loans, as of March 31, 1998. Culminating on June
19, 1998, the Company converted its Servicing Portfolio computer data from its
outside servicer's computer systems to an internal system. As a result, the
Company has been performing all collection functions with respect to its
Servicing Portfolio since June 19, 1998.
Salaries and employee benefits for the three months ended March 31, 1999 and
1998 were $1.2 million and $1.6 million, respectively. These expenses were lower
during the three months ended March 31, 1999 as compared to the three months
ended March 31, 1998 due to the Company stabilizing its overall expense
structure including staffing levels during the three months ended March 31,
1999.
Interest expense for the three-month periods ended March 31, 1999 and 1998 was
$2.1 million and $1.5 million, respectively. The increase in interest expense
resulted from the increases in the long-term debt balances of the Company,
including interest paid on the outstanding Senior Subordinated Notes.
LOAN LOSS AND DELINQUENCY EXPERIENCE
Loan losses and Loan prepayments are continuously monitored on an overall
portfolio and month-of-purchase static pool basis. Pursuant to the requirements
of SFAS No. 125, the Company reviews its actual Loan loss experience in
conjunction with its quarterly estimated valuation of its Retained Interest in
Securitizations. Charge-off of Loans are based upon an account-by-account review
of delinquent Loans by the Company. The Company's securitized trusts generally
charge off a Loan at the time its related collateral is liquidated, although
certain Loans may be charged off sooner if management deems them to be
uncollectable. The following table summarizes the Company's loan loss
experience:
<TABLE>
<CAPTION>
As of March 31,
---------------------
1999 1998
-------- --------
(in thousands)
<S> <C> <C>
Average Servicing Portfolio during period ............ $206,412 $237,864
Gross charge-offs .................................... 8,714 5,411
Liquidation proceeds from repossessed assets ......... 3,991 2,357
-------- --------
Net charge-offs ...................................... $ 4,723 $ 3,054
======== ========
Net charge-offs as a percentage of average Servicing
Portfolio (annualized) ........................... 2.29% 1.28%
======== ========
</TABLE>
The Company believes that the system conversion and resulting servicing
disruption was largely responsible for the increase in net charge-off experience
of the Servicing Portfolio for the three months ended March 31, 1999 as compared
to the three months ended March 31, 1998. After conversion, the Company
experienced an increase in the delinquency of its portfolio that occurred in or
about August 1998. This resulted in an accumulation of higher than normal
defaults. Much of the repossession inventory associated with these defaults
remained in inventory as of December 31, 1998 and where liquidated during the
three months ended March 31, 1999. Since initiating collections on its own
internal servicing system in June 1998, the resulting percentage of the
outstanding principal balance of Loans that were more than 30 days past due has
decreased to approximately 7.65% of the Company's Servicing Portfolio as of
December 31, 1998, from 11.5% as of July 31, 1998, and was approximately 7.2% as
of March 31, 1999.
The securitization income the Company recognizes from the sale of Loans to the
Master Trust, and the cash flow from its securitizations are substantially
dependent on the Servicing Portfolio's delinquency and loss performance.
Increase in delinquencies and losses may result in: (i) increased capital and/or
credit enhancement requirements for securitizations; (ii) reductions in cash
flow to the Company; and (iii) additional violations of Permanent Securitization
performance tests. Consequently, the Company's failure to effectively service
and collect the Servicing Portfolio could have a material adverse effect on the
Company's financial condition, results of operations and cash flows. See Note 2
to the Financial Statements - Retained Interest in Securitizations.
The Company maintains, at its own expense, supplemental VSI insurance that
protects the Company's interest in Loan collateral against uninsured physical
damage (including total loss) in instances where neither the automobile nor the
borrower can be found.
15
<PAGE> 16
The Company considers a Loan to be delinquent if the borrower fails to make any
payment substantially in full on or before the due date as specified by the
terms of the Loan. The Company typically initiates contact with borrowers whose
payments are not received by the eleventh day following the due date. The
following table summarizes the delinquency and repossession experience with
respect to the Servicing Portfolio:
<TABLE>
<CAPTION>
As of March 31,
--------------------
1999 1998
------- -------
(dollars in thousands)
<S> <C> <C>
Period of delinquency:
31 to 60 days ....................................... $ 9,159 $12,481
61 to 90 days ....................................... 2,571 2,624
91 days or more ..................................... 3,047 3,488
------- -------
Total delinquencies .................................... $14,777 $18,593
======= =======
Total delinquencies as a percentage of the
Servicing Portfolio ................................. 7.24% 7.40%
Principal balance of Loans related to repossession
inventory ........................................... $ 3,275 $ 5,839
Repossession inventory as a percentage of the ending
Servicing Portfolio ................................. 1.62% 2.33%
</TABLE>
Management believes that the payment practices of Non-Prime Consumers are
partially a function of seasonality. Because Non-Prime Consumers typically have
low disposable incomes, they frequently tend to fall behind in payments on their
Loans during the early winter months, when the holiday season generates demands
for their limited disposable income and when these borrowers encounter
weather-related work slow-downs. As a result, absent unforeseen circumstances,
management expects delinquencies to be highest in the first calendar quarter and
the fourth calendar quarter of each year. Generally, there is a 60 to 120-day
lag between initial delinquency and charge-off.
The Company monitors historical loss experience on an overall portfolio basis
and on a static pool basis. Loans acquired and sold to the Master Trust in each
calendar month are segregated into individual static pools. The Company
considers a pool of Loans to be "seasoned" when it has been aged for an average
of 18 to 24 months. Actual pool losses are compared to the estimates for net
losses, and adjustments to the carrying value of Retained Interest in
Securitizations for the effect of any anticipated additional losses will be
reflected in the current period earnings.
(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.)
16
<PAGE> 17
The following table summarizes the vintage static pools of the
Company's Servicing Portfolio for all Loans purchased by the company from
inception through the period ended March 31, 1999, and includes loss data
through March 31, 1999 for Loans for which the collateral has been liquidated.
PERIOD OF ORIGINATION
Cumulative Net Losses as a Percentage of Original
Principal Balance for Loans Sold during Period
<TABLE>
<CAPTION>
* 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q
94 95 95 95 95 96 96 96 96 97 97 97 97 98 98 98 98 99
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
2 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
3 0.00 0.00 0.00 0.06 0.05 0.00 0.00 0.04 0.00 0.00 0.00 0.02 0.00 0.00 0.00 0.00 0.00 0.00
4 0.05 0.04 0.00 0.12 0.25 0.09 0.03 0.04 0.01 0.04 0.22 0.04 0.01 0.02 0.00 0.00 0.01
5 0.31 0.14 0.29 0.41 0.48 0.26 0.28 0.33 0.07 0.25 0.66 0.18 0.14 0.08 0.08 0.00 0.03
6 0.47 0.30 0.92 0.78 0.86 0.49 0.62 0.70 0.69 0.70 1.31 0.42 0.42 0.29 0.21 0.07 0.06
7 0.51 0.71 1.62 1.64 1.27 0.90 1.10 1.18 1.25 1.43 2.11 0.88 0.74 0.61 0.43 0.08
8 1.08 1.25 2.02 2.02 1.67 1.23 2.06 1.71 1.85 1.94 2.56 1.21 1.29 0.84 0.49 0.15
9 1.36 1.55 2.39 2.42 2.25 1.95 2.70 2.68 2.50 2.60 2.99 1.60 1.68 1.16 0.96 0.16
10 1.75 2.13 2.71 2.60 2.46 2.14 3.37 3.31 3.27 3.08 3.71 2.30 2.09 1.78 1.21
11 1.72 2.49 3.30 3.02 2.84 2.72 4.29 3.88 3.77 3.51 4.28 2.78 2.41 2.28 1.59
12 3.12 3.09 3.39 3.58 3.33 3.26 5.20 4.34 4.12 3.87 5.05 3.45 2.76 2.76 1.72
13 3.21 3.64 3.71 3.91 3.97 3.74 5.55 5.08 4.57 4.49 5.91 3.87 3.25 3.25
14 3.80 4.04 4.21 4.03 4.28 4.18 6.13 5.53 4.97 5.08 6.50 4.18 3.68 3.53
15 4.45 4.25 4.31 4.51 5.07 4.90 6.52 6.01 5.46 5.65 6.96 4.54 4.14 3.66
16 4.55 4.33 4.53 4.87 5.09 5.11 6.78 6.57 5.94 6.34 7.42 5.24 4.68
17 4.91 4.88 4.92 5.27 5.65 6.16 7.16 6.85 6.40 6.82 7.63 5.74 4.92
18 4.91 4.98 5.54 5.62 5.96 6.59 7.67 7.35 7.17 7.39 7.93 6.28 5.08
19 5.05 5.28 5.96 6.16 6.61 7.01 8.00 8.14 7.78 7.79 8.48 6.91
20 5.05 5.80 6.18 6.63 6.78 7.28 8.14 8.59 8.25 8.05 9.01 7.23
21 5.79 5.89 6.55 6.75 7.15 7.56 8.66 9.12 8.66 8.40 9.28 7.32
22 5.78 6.33 7.35 6.87 7.42 8.00 9.09 9.75 9.05 8.78 9.73
23 6.20 6.46 7.88 7.44 7.99 8.25 9.81 10.03 9.23 9.28 9.85
24 6.80 6.91 8.30 7.93 8.21 8.36 10.17 10.36 9.43 9.67 9.97
25 6.99 7.48 8.59 8.37 8.49 8.85 10.68 10.88 9.67 10.12
26 7.49 7.58 8.66 8.54 8.77 9.01 11.22 11.13 10.02 10.30
27 8.06 8.20 9.16 8.70 8.98 9.36 11.50 11.40 10.35 10.41
28 8.23 8.76 9.34 8.82 9.35 9.57 11.54 11.72 10.80
29 9.07 9.49 9.35 8.89 9.97 9.84 11.71 11.86 11.18
30 9.17 9.54 9.39 9.21 10.16 10.09 11.88 12.19 11.22
31 9.71 9.81 9.82 9.84 10.61 10.37 12.56 12.32
32 9.99 10.08 9.75 10.11 10.74 10.48 12.78 12.51
33 10.47 10.19 10.06 10.26 11.09 10.61 12.85 12.57
34 11.44 10.28 10.53 10.67 11.28 10.83 13.10
35 11.48 10.63 10.52 10.85 11.33 11.15 13.34
36 11.81 10.66 10.72 10.89 11.51 11.20 13.33
37 11.86 10.83 10.93 11.15 11.70 11.36
38 11.85 11.01 11.10 11.21 11.93 11.47
39 12.37 11.20 11.17 11.37 11.94 11.69
40 12.42 11.48 11.19 11.46 11.98
41 12.42 11.63 11.22 11.84 11.97
42 12.57 11.95 11.26 11.87
43 12.56 12.00 11.55 12.07
44 12.71 12.04 11.54 12.12
45 12.68 12.08 11.74
46 12.75 12.12 11.82
47 12.79 12.21 11.99
48 12.97 12.31
49 12.97 12.27
50 13.10 12.73
51 13.09 12.35
</TABLE>
* - Month of origination.
17
<PAGE> 18
LIQUIDITY AND CAPITAL RESOURCES
General
Since inception, the Company has funded its operations and the growth of
its Loan purchasing activities primarily through five sources of capital: (i)
proceeds from securitization transactions; (ii) cash flows from servicing fees;
(iii) proceeds from the issuance of indebtedness; (iv) capital contributions of
certain affiliates of the Company; and (v) proceeds from the Company's Initial
Public Offering and subsequent private sales of Common Stock.
The Company's primary uses of cash are to fund: (i) Spread Accounts; (ii)
securitizations; (iii) Loan purchases; (iv) debt service; (v) issuance costs of
asset securitizations; and (vi) operating expenses.
Net cash used in operating activities decreased by $12.3 million to $6.3 million
for the three month period ended March 31, 1999 from $18.6 million for the three
month period ended March 31, 1998, principally due to reduced origination volume
and a resulting reduction in credit enhancement requirements of the Company's
securitization facilities and the reduced net loss from operations as discussed
in "Results of Operations".
Net cash provided by financing activities decreased by $19.3 million to
$(134,000) for the three month period ended March 31, 1999 from $19.2 million
for the three month period ended March 31, 1998. Net cash provided by financing
activities for the three month period ended March 31, 1998 was primarily the
result of the proceeds received from the March Private Placement of $20 million
of Senior Subordinated Notes.
During the three month period ended March 31, 1999, the Company was required to
maintain a minimum equity position in the Master Trust of 194.0% of the net
serviced receivables or 3.0 times net losses, whichever was greater. This
minimum equity position consists of cash invested by the Company and
over-collateralization in the form of the Company owning certain interests in
the principal balance of Loans.
As of March 31, 1999, the Company retained approximately $38.4 million of
Retained Interest in Securitizations, representing 79% of the total assets of
the Company. The value of these assets, representing the net present value of
future cash flows to the Company, would be reduced in the event of a future
material increase in the Loan loss or prepayment experience relative to the
amounts previously estimated by the Company.
As of March 31, 1998, the principal amount owed by the Company on the Senior
Subordinated Notes was $60.0 million and the principal amount owed by the
Company on the Junior Subordinated Notes was approximately $2.0 million. The
Senior Subordinated Notes, which mature on December 2004, bear interest at
11.875% per annum until December 22, 2000, 12.875% per annum for the period from
December 22, 2000 until December 21, 2001, 13.875% per annum for the period from
December 22, 2001 until December 21, 2002, and 14.875% per annum thereafter,
with interest payable quarterly. See Note 3 of the Notes to Financial Statements
for further discussion of the Company's various debt facilities. See also Note 5
of the Notes to Financial Statements - Subsequent Events.
Senior Subordinated Notes
Until completion of the Restructuring (as defined below) on April 7, 1999, the
Company was in violation of the Minimum Consolidated Net Worth and Adjusted
Interest Expense covenants contained in the Securities Purchase Agreements
related to the $60.0 million of Senior Subordinated Notes. On April 7, 1999, the
Company completed a comprehensive financial restructuring (the "Restructuring"),
including its Senior Subordinated Notes and resolved certain other issues with
its Senior Subordinated Noteholders. More specifically, the agreements and
transactions with the Senior Subordinated Noteholders provide for and include,
among other things: (1) the waiver of the past defaults and breaches of
covenants, representations and warranties, if any, made in connection with the
Senior Subordinated Notes; (2) the elimination of the previously existing Net
Worth Covenant; (3) the establishment of a new covenant requiring that on a
quarterly basis, the Company's net return on assets invested in Loan
receivables, expressed as a percentage, exceed pre-established quarterly goals
(the "Return on Assets Covenant"); the first quarterly measurement period for
this covenant begins as of the quarter ending September 30, 1999; (4) the
granting to the Company of the option to pay during the two-year period ending
March 31, 2001 fifty percent (50%) of the interest owed on the Senior
Subordinated Notes (and the interest on such interest) through the issuance of
additional Senior Subordinated Notes that are convertible into Common Stock at
the conversion price of $.75 per share; (5) the issuance to the Senior
Subordinated Noteholders of 7,071,429 shares of Common Stock as consideration
for the waivers and amendments granted to the Company; (6) the issuance to those
Noteholders that also purchased Common Stock of the Company at the time of their
debt investment of an additional 1,178,571 shares of additional Common Stock in
exchange for the execution and delivery of full and complete releases of any
claims arising by virtue of those Noteholders' equity investment; and (7) the
execution and delivery of full and complete releases by and among the Company,
the Noteholders and affiliates of and other parties related to each of such
parties. In addition, the Senior Subordinated Noteholders were granted the right
to designate three additional persons to the Board of
18
<PAGE> 19
Directors of the Company, increasing to six seats their total number of Board
representatives, thereby giving them majority control of the Board. See Note 5
to Notes to Financial Statements - Subsequent Events.
First Union
Under the Revolving Securitization, the Company sells Loans that it has
purchased from Dealers on a daily basis to a special-purpose subsidiary, which
then sells the Loans to the Master Trust in exchange for cash and certain
residual interests in future excess cash flows from the Master Trust. The Master
Trust, to date, has issued two classes of investor certificates: "Class B
Certificates," which are variable funding (i.e., revolving) certificates bearing
interest at floating rates, and "Class C Certificates," representing a portion
of the residual interest of the Company's special-purpose subsidiary in future
excess cash flows from the Master Trust after required payments to the holders
of the Class B certificates, deposits of funds to a restricted cash account as a
reserve for future Loan losses which provides additional credit enhancement for
the holders of the Class B Certificates and payment of certain other expenses
and obligations of the Master Trust. First Union currently owns 100% of the
outstanding Class B Certificates. Collectively, the restricted cash account and
the Class C Certificate portion of Loan principal (Over-Collateralization
Accounts, which are held by the Company) that collateralize the Master Trust are
the components of the Spread Accounts. The Spread Accounts and ESRs are
reflected collectively on the balance sheet as "Retained Interest in
Securitizations."
Periodically the Master Trust transfers Loans and Spread Account balances to
Permanent Securitizations in exchange for cash, which is used to repay the Class
B Certificates. Debt securities representing interests in the Permanent
Securitizations are sold to third-party investors, who are repaid from cash
flows from the Loan receivables in the applicable Permanent Securitization.
Excess Spread Receivables and return of Spread Accounts attributable to such
Loans flow from the Permanent Securitization to the Company to the extent such
funds are available. Pursuant to the Restructuring described above, the Company
entered into several loan facilities and arrangements with First Union . As
described in Note 13 of Notes to the Financial Statements - Subsequent Events,
the restructured agreements with First Union provide for and include, among
other things: (1) the extension of the Company's warehouse line for an
additional two years (through March 31, 2001) and an increase in the amount the
Company may borrow under such facility from $75 million to $85 million; (2) the
commitment by First Union to purchase up to $20 million of subordinated
asset-backed debt securities in connection with the Company's securitizations;
and (3) a revolving credit facility enabling the Company to borrow up to $8
million for working capital purposes secured by the Company's Retained Interest
in Securitizations.
FSA
The Company's future liquidity and financial condition, and its ability to
finance the growth of its business and to repay or refinance its indebtedness,
will depend substantially on distributions of excess cash flow from the Master
Trust and Permanent Securitization trusts. The Company's agreements with FSA
provide that each Permanent Securitization trust must maintain specified levels
of cash in its Cash Spread Account during the life of the trust. These spread
accounts are funded initially out of beginning deposits and are funded
thereafter with excess cash flow from the Loan pool. During each month, excess
cash flow available to the Company from all Permanent Securitization trusts is
first used to replenish any Cash Spread Account deficiencies and then is
distributed to the Company. The timing and amount of distributions of excess
cash from securitization trusts varies based on a number of factors, including
loan delinquencies, defaults and net losses, the rate of disposition of
repossession inventory and recovery rates, the age of Loans in the portfolio,
prepayment experience and required spread account levels.
Under the financing structures the Company has used to date for its
securitizations, certain excess cash flows generated by the Loans are retained
in the Spread Accounts within the securitization trusts to provide liquidity and
credit enhancement. While the specific terms and mechanics of the Spread
Accounts can vary depending on each transaction, the Company's agreements with
FSA, the financial guaranty insurer that has provided credit enhancements in
connection with the Company's securitizations, generally provide that the
Company is not entitled to receive any excess cash flows unless the level of
certain Spread Account balances, comprised of cash and generally a 9% interest
in the principal balance of the Loans in the trust (the "Over-Collateralization
Accounts"), have been attained and/or the delinquency or losses related to the
Loans in the pool are below certain predetermined levels.
Until completion of the Restructuring, in the event delinquencies or losses on
the Loans exceeded certain levels in the Permanent Securitizations ("Trigger
Events"), the terms of the Permanent Securitization: (i) required increased Cash
Spread Account balances to be accumulated for the particular pool; (ii)
restricted the distribution to the Company of excess cash flows associated with
the pool in which asset-backed securities are insured by FSA; and (iii) in
certain circumstances, required the transfer of servicing on some or all of the
Loans in FSA-insured pools to another servicer. Certain portfolio performance
tests were not met at various times during 1998 with respect to the Permanent
Securitization trusts formed in November 1995, November 1996, July 1997, and
January 1998 resulting in additional cash retention in the Spread Accounts
related to such Permanent Securitization trusts.
19
<PAGE> 20
Moreover, under the terms of the Company's insurance agreements with FSA, upon
the occurrence of a Permanent Securitization failing to meet portfolio
performance tests of the nature described above but at significantly higher
levels (an "Insurance Agreement Event of Default"), the Company will be in
default under such insurance agreements. Upon an Insurance Agreement Event of
Default, FSA may: (i) permanently suspend distributions of cash flow to the
Company from the related securitization trust and all other FSA-insured trusts
until the asset-backed securities have been paid in full; (ii) capture all
excess cash flows from performing FSA-insured trusts; (iii) increase its
premiums; and (iv) replace the Company as servicer with respect to all
FSA-insured trusts. In 1998, the Permanent Securitization trusts formed in
November 1995, November 1996 and July 1997 experienced periodic Insurance
Agreement Events of Default. Since the occurrence of those Insurance Agreement
Events of Default, FSA has captured all excess cash flows from the four
FSA-insured trusts.
Pursuant to the Restructuring, certain of the terms of the insurance guarantee
arrangements with FSA were modified. The agreements and transactions with FSA
provide for and include, among other things: (1) the resetting of the cash
spread accounts in each of the Company's term asset-backed securitizations that
have been guaranteed by FSA to 11% of the outstanding principal balance of the
receivables in each of such securitizations for the remaining term of such
securitizations (the Company has already funded all such spread accounts above
such 11% level and, therefore, expects to receive in June 1999, from the trustee
of each such securitizations a distribution of all amounts previously funded in
excess of such 11% level, anticipated to be approximately $2.5 million); (2) the
elimination of all portfolio performance maintenance requirements that, if
otherwise violated, would have resulted in the trapping of cash flows to over
fund such cash spread accounts; (3) the resetting of the portfolio performance
requirements that, if violated, would constitute a default under the insurance
guaranty agreements issued by FSA, to levels that are commensurate to the
Company's expected future portfolio performance in each of such securitizations;
and (4) the waiver of all past breaches and defaults of portfolio performance
requirements, the result of which is to enable the Company to resume the receipt
of excess cash flow under each of the Company's term asset-backed
securitizations that have been guaranteed by FSA.
The following is a table showing the portfolio performance tests by trust as of
March 31, 1999:
<TABLE>
<CAPTION>
Delinquency Test Default Test Loss Test
----------------------------- ------------------------------ -----------------------------
Actual Maintenance Insurance Actual Maintenance Insurance Actual Maintenance Insurance
------ ----------- --------- ------ ----------- --------- ------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
95-1 8.01% 8.25% 11.00% 14.92% 14.00% 17.00% 9.69% 8.00% 10.00%
96-1 7.18% 8.25% 11.00% 18.52% 14.00% 17.00% 7.13% 6.00% 8.00%
97-1 7.36% 8.25% 11.00% 20.19% 18.00% 25.00% 9.15% 8.00% 11.00%
98-1 6.02% 8.25% 11.00% 17.33% 18.00% 25.00% 12.25% 8.00% 11.00%
</TABLE>
As a result of amended agreements with FSA entered into on April 7, 1999, going
forward the Company will be subject to only an Insurance Agreement default test
as shown below. The test shown below supersedes prior test requirements as shown
in the table above. The following table shows the new performance tests:
<TABLE>
<CAPTION>
Delinquency Test Gross Default Test Loss Test
Insurance Insurance Insurance
---------------- ------------------ ---------
<S> <C> <C> <C>
95-1 12.00% 25.00% 14.00%
96-1 12.00% 25.00% 14.00%
97-1 12.00% 25.00% 14.00%
98-1 12.00% 25.00% 13.00%
</TABLE>
The Company's right to service the Loans sold in FSA-insured securitizations is
generally subject to the discretion of FSA. Accordingly, there can be no
assurance that the Company will continue as servicer for such Loans and receive
related servicing fees. Additionally, there can be no assurance that there will
not be additional Insurance Agreement Events of Default in the future, or, if
such events of default occur, waivers will be available. If the Company's
Servicing Portfolio does not meet such performance requirements, the future
carrying value of the Company's Retained Interest in Securitizations would be
materially impacted in a negative manner. In addition, any increase in
limitations on cash flow available to the Company from Permanent Securitization
trusts, the Company's inability to obtain any necessary waivers from FSA or the
termination of servicing arrangements could materially adversely affect the
Company's financial condition, results of operations and cash flows. See Note 5
of the Notes to Financial Statements - Subsequent Events.
Going Concern
Since 1997, the Company has suffered significant losses from operations
and has a capital deficiency as of March 31, 1999. Such matters raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regards to these matters are described in the following
paragraph.
The Company's business requires substantial cash to support the funding of Cash
Spread Accounts for its securitizations, issuance costs of its securitizations,
operating expenses, tax payments, debt service and other cash requirements.
These cash requirements increase as the number of Loans purchased and serviced
by the Company increase. Historically, the Company has operated on a
20
<PAGE> 21
negative operating cash flow basis and its negative operating cash flow is
expected to continue for the foreseeable future. The Company has funded its
negative operating cash flows principally through borrowings under its secured
financing facilities, issuances of subordinated debt and sales of equity
securities.
As discussed in Note 5 - Subsequent Events, on April 7, 1999, the Company
completed a comprehensive financial restructuring. As the result of the
Restructuring, (1) the Company may pay 50% of its interest expense on its Senior
Subordinated Notes over the two-year period ending March 31, 2001 by issuing
additional Senior Subordinated notes, thereby reducing its cash requirements, a
reduction from $6.9 million in 1998 to $3.6 million over the four quarters
ending March 31, 2000; (2) the Company may defer all cash interest payments on
its Junior Subordinated Notes until January 31, 2002; (3) the Company's receipt
of excess cash flows from its four Permanent Securitization Trusts insured by
FSA and from its Master Trust has resumed (in April 1999, the Company received a
total of $3.0 million from such Trusts); as of March 31, 1999, the minimum
equity position has increased to 19.0% of net serviced receivables relative to
the requirements of the restructure of the Master Trust Facility, and assuming
no further Insurance Agreement Events of Default under certain amended
agreements with FSA (which were amended to reset the portfolio performance
requirements to levels that are commensurate to the Company's expected future
portfolio performance in each of such securitizations), such excess cash flows
will continue to be received by the Company (the Company estimates it will
receive an additional approximately $5 million in the aggregate from such trusts
in the months of May and June 1999); (4) the Company will be able to fund a
portion of the subordinated credit enhancements required for its future
securitizations through the sale of up to $20 million of subordinated
asset-backed securities to First Union; and (5) the Company may borrow up to $8
million for working capital purposes under its new two-year working capital
facility with First Union, secured by its ESRs. Further, the Company's business
plan for the next two years contemplates an increase in overall revenue and cash
flow over 1998 through the gradual but steady increase in loan origination
volume, the sale of ancillary Loan products (such as GAP insurance, which covers
exposure to uninsured losses, and warranty products), the aggressive collection
of late fees and deficiency balances, and increased servicing fees through the
servicing of a larger owned portfolio as well as third-party servicing. Although
there can be no assurance that the Company will successfully execute this
business plan, both the Restructuring and the business plan were designed and
implemented to enable the Company, among other things to increase its cash flow
and stabilize its financial condition.
INFLATION
Increases in the rate of inflation of prices in the U.S. economy generally
result in higher interest rates. Typically, higher interest rates result in a
decrease in the Company's net interest margins and a corresponding decrease in
the Company's gain on sale revenue for a given Loan amount; to the extent not
offset by increases in the volume of Loans purchased, inflation can therefore
lead to decreases in the Company's profitability.
YEAR 2000
The year 2000 issue pertains to whether the Company's or its vendors'
computer systems will properly recognize date sensitive information when the
year changes to 2000. Systems that do not properly recognize such information
could generate erroneous data or fail.
The Company has developed a project plan for achieving year 2000 readiness. An
inventory of critical hardware and software has been completed and information
technology components are being assessed. This assessment includes major
suppliers and business partners, however, the Company does not rely on any
single supplier or partner to conduct business. Additionally, the Company has
engaged an independent systems firm to evaluate year 2000 readiness. The review
will be conducted with an estimated completion date of May 31, 1999.
The Company presently believes that the year 2000 issue will not pose
significant operational problems for the Company. However, if such modifications
and conversions in response to the independent review, if any, are not made, or
are not completed in a timely manner, the year 2000 issue could have a material
impact on the operations of the Company. In addition, there can be no assurance
that unforeseen problems in the Company's computer systems, or the systems of
the third parties on which the Company rely, would not have an adverse effect on
the Company's systems or operations.
(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.)
21
<PAGE> 22
PART II - Other Information
ITEM 1. LEGAL PROCEEDINGS
On October 22, 1998, Pearl Peckerman, I.R.A., on behalf of herself and all
others similarly situated, filed a putative class action complaint in the United
States District Court for the Southern District of Florida against the Company
and certain current and former officers and directors of the Company.
Plaintiffs' allegations of liability are based on various theories of recovery,
including alleged violations of Sections 11, 12(2), 15 and 20(a) of the
Securities Act of 1933, as amended, and Section 10(b) and Rule 10b-5 of the
Securities Exchange Act of 1934, as amended. Plaintiffs are seeking compensatory
damages, as the court deems appropriate. See Form 8-K filed with the Securities
and Exchange Commission on November 16, 1998.
On December 4, 1998, Harvey Rooks, Rachel Rooks and Joyce Bornstein, on behalf
of themselves and all others similarly situated, filed a putative class action
complaint in the United States District Court for the Southern District of
Florida against the Company and certain current and former officers and
directors of the Company. Plaintiffs' allegations of liability are based on
various theories of recovery, including alleged violations of Sections 11,
12(2), 15 and 20(a) of the Securities Act of 1933, as amended, and Section 10(b)
and Rule 10b-5 of the Securities Exchange Act of 1934, as amended. Plaintiffs
are seeking compensatory damages, as the court deems appropriate.
Both the Peckerman and Rooks complaints focus on allegations surrounding the
Company's 1997 restated financial statements, the interpretation of FASB No. 125
and the relationship between the Company and its prior outside service provider,
Omni Financial Services of America, Inc.
On February 5, 1999, the United States District Court for the Southern District
of Florida ordered that these actions be consolidated. It is anticipated that
the Plaintiffs will file a consolidated class action complaint styled In re
National Auto Finance Company, Inc. Securities Litigation. Since the
consolidated class action complaint has not yet been filed, the Company is
presently unable to assess the merits of the claims or determine whether the
Company or plaintiffs will attempt to add additional parties or claims.
Litigation is subject to many uncertainties, and it is possible that the above
action could be decided unfavorably. In addition, the Company may enter into
discussions in an attempt to settle the pending litigation if it is in the best
interests of the Company's stockholders to do so. Management is unable to make a
meaningful estimate of the amount or range of loss that could result from an
unfavorable outcome or settlement of the pending litigation.
The Company has directors' and officers' liability insurance policies that apply
to this litigation with a liability limit of $5 million; two excess policies
with liability limits of $2 million and $3 million, respectively. Each insurer
has raised certain coverage defenses or denied coverage. The Company has
engaged, and will continue to pursue appropriate strategies to protect and
preserve its claims of full coverage under all such policies.
ITEM 2. CHANGES IN SECURITIES.
(a) Market Information.
In connection with the initial public offering (the "Initial Public
Offering") of the Company's Common Stock, par value $.01 per share (the "Common
Stock"), in January 1997, the Common Stock was accepted for quotation in the
National Association of Securities Dealers Automated Quotation System - National
Market System ("NASDAQ-NMS"), under the symbol "NAFI."
On August 12, 1998, NASDAQ advised the Company that unless the closing bid
price of the Company's Common Stock allowed for the maintenance of a greater
than $5 million public float, for at least 10 consecutive trading days during
the period ending on November 13, 1998, the Company's Common Stock would be
delisted on November 17, 1998. Further, on September 2, 1998, NASDAQ advised the
Company that if the Company's Common Stock did not trade at a minimum bid price
of $1.00 for a minimum of ten consecutive trading days, by December 1, 1998, the
Company's Common Stock would be delisted on December 3, 1998. Such delisting was
delayed until January 21, 1999, when the Company appeared before the NASDAQ
Listing Qualifications Panel ("Panel") to permit the Company the opportunity to
provide details of its business plan and restructuring, in furtherance of a
request for additional time to enable the Company to reestablish compliance with
the NASDAQ listing requirements. The Company was notified on March 9, 1999 of
the Panel's determination to delist the Company's Common Stock securities from
NASDAQ effective as of the close of business on March 9, 1999. The delisted
Common Stock shares were immediately eligible for trading on the OTC Bulletin
Board and so trade today.
22
<PAGE> 23
(b) Recent sales of unregistered securities.
On April 7, 1999, pursuant to the Company's Restructuring (see Note 5 of the
Notes to Financial Statements Subsequent Events), 7,071,429 shares of Common
Stock were issued to the Senior Subordinated Noteholders as consideration for
waivers and amendments granted to the Company, and 1,178,571 additional shares
of Common Stock were issued to those Noteholders that also purchased Common
Stock of the Company at the time of their debt investment, in exchange for the
execution and delivery of full and complete releases of any claims arising by
virtue of those Noteholders' equity investment.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits
<TABLE>
<CAPTION>
Number Description Method of Filing
- --------- ----------- ----------------
<S> <C> <C>
11 Computation of Earnings Filed with this document
Per Common Share
27 Financial Data Schedule Filed with this document
</TABLE>
b) Reports on Form 8-K
On March 10, 1999, the Company filed its press release dated March 10,
1999 on Form 8-K, in which it announced it had been notified by the NASDAQ Stock
Market, Inc. that the Company's Common Stock had been delisted from trading on
the NASDAQ National Market, effective as of the close of business on March 9,
1999. NASDAQ informed the Company that it had been delisted for failure to
comply with both the public float and minimum bid price requirements. The
Company's Common stock is eligible to trade on the OTC Bulletin Board.
On April 13, 1999, the Company filed its press release dated April 13, 1999 on
Form 8-K, in which it announced that it had completed a comprehensive financial
restructuring of its Senior Subordinated Notes and Junior Subordinated Notes,
entered into several loan facilities and arrangements with First Union National
Bank, and modified certain of the terms of the insurance guarantee arrangements
with Financial Security Assurance, the Company's bond insurer, related to the
Company's securitized asset-backed bonds.
23
<PAGE> 24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NATIONAL AUTO FINANCE COMPANY, INC.
Date: May 17, 1999 /s/ Thomas Costanza
------------------------------------------
Thomas Costanza
Vice President and Chief Financial Officer
24
<PAGE> 25
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
11 Computation of Earnings
Per Common Share
27 Financial Data Schedule
</TABLE>
25
<PAGE> 1
EXHIBIT 11
NATIONAL AUTO FINANCE COMPANY, INC.
Computation of Earnings per Common Share
(Unaudited, in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
1999 1998
------- -------
<S> <C> <C>
Average number of common shares outstanding ............. 9,031 9,031
Common equivalent shares outstanding:
Stock options (1) ....................................... -- --
------- -------
Total common and common equivalent shares outstanding ... 9,031 9,031
======= =======
Net income (loss) attributed to common shareholders ..... $(1,787) $(5,172)
======= =======
Loss per common share (basic and diluted) ............... $ (0.20) $ (0.57)
======= =======
</TABLE>
- ------------------------
(1) Stock options are excluded from the computation of diluted loss per common
share as the effect of such options would be anti-dilutive.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE INTERIM
STATEMENT OF INCOME FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 3,045
<SECURITIES> 0
<RECEIVABLES> 38,430
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 41,475
<PP&E> 3,218
<DEPRECIATION> 0
<TOTAL-ASSETS> 48,599
<CURRENT-LIABILITIES> 2,924
<BONDS> 55,785
2,456
0
<COMMON> 90
<OTHER-SE> (12,566)
<TOTAL-LIABILITY-AND-EQUITY> 48,599
<SALES> 0
<TOTAL-REVENUES> 3,722
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,234
<INCOME-PRETAX> (1,747)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,747)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,787)
<EPS-PRIMARY> (0.20)
<EPS-DILUTED> (0.20)
</TABLE>
