<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, 2000
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 [ ]
<PAGE> 2
NATIONAL AUTO FINANCE COMPANY, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PART 1. FINANCIAL INFORMATION PAGE
----
<S> <C> <C> <C>
Item 1. Financial Statements (unaudited)
Balance Sheets as of March 31, 2000 and December 31, 1999: 5
Statements of Operations for the Three Months
Ended March 31, 2000 and 1999: 6
Statements of Cash Flows for the Three Months Ended March 31, 2000 and 1999: 7
Notes to Financial Statements: 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations: 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Other Information 20
Item 3. Exhibits and Reports on Form 8-K: 20
SIGNATURES: 22
EXHIBIT INDEX: 23
Exhibit 3.1-2 Amendment to the Company's Certificate of Incorporation. N/A
Exhibit 10.2-1 Company's 1996 Share Incentive Plan, as amended. N/A
Exhibit 10.125 Contract Sale Agreement, dated as of February 4, 2000, by and between the
Company and Nuvell Credit Corporation. N/A
Exhibit 10.126 Servicing Agreement, dated as of February 4, 2000, by and between the
Company and Nuvell Credit Corporation. N/A
Exhibit 10.127 Amendment Number 4 to the Amended and Restated Pooling and
Administration Agreement, dated as of February 22, 2000 among National
Financial Auto Funding Trust II, the Company, and Bankers Trust Company
as Trustee. N/A
Exhibit 10.128 Second Amendment to Revolving Credit, Term Loan and Security
Agreement, dated as of February 22, 2000 among National Financial Auto
Funding Trust, the Company and First Union National Bank. N/A
Exhibit 10.129 Letter Agreement with respect to the B
Note Commitment Letter Dated as of February
22, 2000 by and between First Union National
Bank and the
Company. N/A
Exhibit 10.130 Wavier, effective as of December 31, 1999 of The 1818 Mezzanine Fund,
L.P., PC Investment Company, Progressive Investment Company, Inc.,
Manufacturers Life Insurance Company (U.S.A.), and The Structured Finance
High Yield Fund, L.L.C., for the benefit of the Company. N/A
Exhibit 10.131 First Amendment to Contract Sale Agreement effective as of
February 29, 2000, by and between the Company and Nuvell Credit
Corporation. N/A
</TABLE>
2
<PAGE> 3
<TABLE>
<S> <C> <C>
Exhibit 10.132 Sale and Purchase Agreement dated as of March 30, 2000 by and between
the Company as Guarantor, National Financial Auto Funding Trust II
as Seller, and Nuvell Credit Corporation as Purchaser. N/A
Exhibit 10.133 Amendment No. 1 to Sale and Purchase Agreement effective as of
April 5, 2000 by and between Nuvell Credit Corporation as Purchaser and
National Financial Auto Funding Trust II as Seller and the Company as
Guarantor. N/A
Exhibit 10.134 Amendment No. 2 to Contract Sale Agreement and Amendment No. 1 to
Servicing Agreement dated as of April 7, 2000 by and between the Company
and Nuvell. N/A
Exhibit 11. Computation of Earnings Per Common Share:
Exhibit 27. Financial Data Schedule:
</TABLE>
3
<PAGE> 4
FORWARD-LOOKING STATEMENTS
When used in this Quarterly Report on Form 10-Q or future filings by the
Company (as hereinafter defined) with the Securities and Exchange Commission
(the "Commission"), in the Company's press releases or other public or
stockholder communications, or in oral statements made with the approval of an
authorized executive officer, the words or phrases "will likely result," "are
expected to," "will continue," "is anticipated," "estimate," "intend,"
"foresee," "expected", "project" or similar expressions are intended to identify
"forward-looking statements" 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.
4
<PAGE> 5
PART I
ITEM I. FINANCIAL STATEMENTS
NATIONAL AUTO FINANCE COMPANY, INC.
Balance Sheets
March 31, 2000 and December 31, 1999
(in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------------ ------------
(unaudited)
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 2,343 $ 3,576
Retained interest in securitizations,
at estimated fair value (Note 2) 30,979 35,058
Furniture, fixtures and equipment, net 3,230 3,377
Deferred financing costs (Note 4) 3,888 4,117
Other assets
4,627 2,648
------------ ------------
TOTAL ASSETS $ 45,067 $ 48,776
============ ============
LIABILITIES:
Accounts payable and accrued expenses $ 1,084 $ 1,357
Accrued interest payable-related parties 1,016 986
Junior Subordinated Notes-related parties
(Notes 3 and 4) 2,224 2,181
Senior Subordinated Notes (Notes 3 and 4) 57,604 56,395
Notes payable (Note 3) 2,840 3,562
------------ ------------
TOTAL LIABILITIES 64,768 64,481
------------ ------------
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 2,616 2,576
CAPITAL DEFICIT:
Common Stock -$0.01 par value; 44,000,000
shares authorized; 17,280,762 and 9,030,762 shares
outstanding, respectively (Note 4) 173 173
Paid-in-capital (Note 4) 38,205 38,246
Accumulated deficit (60,695) (56,700)
------------ ------------
TOTAL CAPITAL DEFICIT (22,317) (18,281)
------------ ------------
TOTAL LIABILITIES, MANDATORY REDEEMABLE
PREFERRED STOCK AND CAPITAL DEFICIT $ 45,067 $ 48,776
============ ============
</TABLE>
See accompanying notes to the financial statements.
5
<PAGE> 6
NATIONAL AUTO FINANCE COMPANY, INC.
Statements of Operations
For the Three Months Ended of March 31, 2000 and 1999
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
------------- -------------
(unaudited)
<S> <C> <C>
REVENUE:
Securitization related income (Note 2) $ 683 $ 1,469
Servicing income 1,158 1,449
Origination Income 387 --
Interest income 317 442
Other income 285 362
------------- -------------
Total revenue 2,830 3,722
------------- -------------
EXPENSES:
Servicing 845 857
Interest 1,987 2,234
Salaries and employee benefits 1,562 1,206
Direct loan acquisition expenses 419 217
Depreciation and amortization 479 219
Other operating expenses 1,534 736
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Total expenses 6,826 5,469
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Net loss before preferred stock dividends (3,996) (1,747)
Preferred stock dividends 40 40
------------- -------------
Loss applicable to Common Stockholders $ (4,036) $ (1,787)
============= =============
PER SHARE DATA:
Loss per common share - basic and diluted $ (.23) $ (0.20)
============= =============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic and diluted 17,281 9,031
============= =============
</TABLE>
See accompanying notes to the financial statements.
6
<PAGE> 7
NATIONAL AUTO FINANCE COMPANY, INC.
Statements of Cash Flows
For the Three Months Ended of March 31, 2000 and 1999
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
---------- ----------
(unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,996) $ (1,747)
Adjustments to reconcile net loss to net cash used in
operating activities:
Securitization related (income) (683) (1,469)
Depreciation 250 219
Purchases of loans held for sale (6,299) (14,016)
Proceeds from transfer of loans to Master Trust 6,299 14,016
Cash flows from Retained Interest released to Company 6,474 3,976
Cash deposits to Spread Accounts (1,712) (6,820)
Issuance of Convertible Senior and Junior Subordinated Promissory
Notes 985 --
Amortization and write-off of deferred financing costs 229 146
Amortization of warrants 267 268
Changes in other assets and liabilities:
Other assets (1,979) (255)
Accounts payable and accrued expenses (273) (558)
Accrued interest payable-related parties 30 38
Other -- (17)
---------- ----------
Net cash used in operating activities (408) (6,219)
---------- ----------
CASH FLOWS (FROM) INVESTING ACTIVITIES:
Fixed assets purchased (102) (142)
---------- ----------
CASH FLOWS (FROM) FINANCING ACTIVITIES:
Principal payments on notes (723) (134)
---------- ----------
Net cash provided by financing activities (723) (134)
---------- ----------
Net decrease in cash and cash equivalents (1,233) (6,495)
Cash and cash equivalents at beginning of period 3,576 9,540
---------- ----------
Cash and cash equivalents at end of period $ 2,343 $ 3,045
========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 975 $ 1,799
========== ==========
NON-CASH FINANCING ACTIVITIES:
Accrued mandatory redeemable preferred stock dividends 40 40
</TABLE>
See accompanying notes to the financial statements.
7
<PAGE> 8
NATIONAL AUTO FINANCE COMPANY, INC.
Notes to Financial Statements
of March 31, 2000
(unaudited)
(1) BASIS OF PRESENTATION
The accompanying unaudited interim financial statements at March
31, 2000 and 1999 and for the three months ended March 31, 2000 and 1999
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 2000; 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.
(2) RETAINED INTEREST IN SECURITIZATIONS
Retained Interest in Securitizations was $31 million and $35.1 million at
March 31, 2000 and December 31, 1999 respectively.
Assumptions used to value the Retained Interests in Securitizations at
March 31, 2000 and December 31, 1999 were as follows:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---------- ------------
<S> <C> <C>
Weighted average cumulative net loss rate 14.00% 14.00%
Weighted average cumulative prepayment rate 22.60% 22.60%
Discount rate 14.00% 14.00%
Level of required Cash Spread Account 8% to 11% 8% to 11%
Rate of interest on Cash Spread Account 4.90% 4.90%
Weighted average interest rate on loans 18.70% 18.88%
Weighted average yield on bonds and notes
held by securitization investors 6.61% 6.59%
</TABLE>
Until availability of funds through the Master Trust Securitization
Credit Facility was terminated on February 23, 2000 (see Note 4), the
Company funded 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
purchases of "Class B Certificate" interests in such Trust by First Union
Trust, followed by (ii) the transfer of such warehoused loans from time
to time by the Master Trust to a Permanent Securitization Trust, thereby
creating additional availability of capital from the Master Trust
Securitization Credit Facility. More specifically, the Company sold loans
that it purchased from Dealers on a daily basis to a special-purpose
subsidiary, which then sold the loans to the Master Trust in exchange for
cash and certain residual interests in future excess cash flows from the
Master Trust. Prior to payment in full of the Class B Certificates, the
Master Trust had issued two classes of investor certificates: "Class B
Certificates," which were 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 had owned 100%
8
<PAGE> 9
NATIONAL AUTO FINANCE COMPANY, INC.
Notes to Financial Statements
of March 31, 2000
(unaudited)
of the outstanding Class B Certificates until such Certificates were paid
in full (see Note 5) and the Company indirectly owns 100% of the Class C
Certificates. Collectively, the Cash Spread Accounts and the Class C
Certificate portion of loan principal (Over-Collateralization Accounts),
were held in escrow to collateralize the Master Trust. The Spread
Accounts and Excess Spread Receivables ("ESR") are reflected collectively
on the balance sheet as a part of "Retained Interest in Securitizations."
Periodically the Master Trust transferred loans and Spread Account
balances to Permanent Securitizations in exchange for cash, which was
used to repay the Class B Certificates. Debt securities representing
interests in the Permanent Securitizations were then 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.
Subsequent to each Permanent Securitization, the Master Trust had
issued additional beneficial interests in loans purchased by the Master
Trust, as evidenced by the Class B Certificates, to finance its purchase
of loans from the Company. Under the financing structures the Company has
used to date for its securitizations, certain excess cash flows generated
by the loans are retained in the Cash Spread Accounts within the
securitization trusts to provide liquidity and credit enhancement. While
the specific terms and mechanics of the Cash Spread Accounts can vary
depending on each transaction, the Company's agreements with FSA, the
financial guaranty insurer that has provided credit enhancements in
connection with the Company's securitizations, generally provide that the
Company is not entitled to receive any excess cash flows unless the level
of certain Spread Account balances, comprised of cash and the
Overcollateralization Accounts, have been attained and/or the delinquency
or losses related to the loans in the pool are below certain
predetermined levels. Additionally, effective as of the Restructuring
Date (April 7, 1999) and until payment in full of the Class B
Certificates on April 5, 2000 (see Note 5), the Company was required to
maintain a minimum equity position in the Revolving Securitization of
24.0% of the net serviced receivables in the Master Trust, or 3.0 times
net losses, whichever was greater. This minimum equity position consisted
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 was
willing to purchase the loan from an automobile dealer ("Dealer
Discount") related to the principal balance of loans. As of March 31,
2000 and 1999, the Company had a 28.2% and 19.00% minimum equity position
investment in the Revolving Securitization. As of February 22, 2000, the
Company was in default of the required minimum equity position. See Notes
4 and 5.
Since the completion of the Restructuring, under the terms of the
Company's insurance agreements with FSA, upon the occurrence of a
Permanent Securitization failing to meet portfolio performance tests (an
"Insurance Agreement Event of Default"), the Company would be in default
under such insurance agreements. Upon an Insurance Agreement Event of
Default, FSA may: (i) permanently suspend distributions of cash flow to
the Company from the related securitization trust and all other
FSA-insured trusts until the asset-backed securities have been paid in
full; (ii) capture all excess cash flows from performing FSA-insured
trusts; (iii) increase its premiums; and (iv) replace the Company as
servicer with respect to all FSA-insured trusts.
The Company's right to service the loans sold in FSA-insured
securitizations is generally subject to the discretion of FSA.
Accordingly, there can be no assurance that the Company will continue as
servicer for such loans and receive related servicing fees. Additionally,
there can be no assurance that there will not be Insurance Agreement
Event 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.
9
<PAGE> 10
NATIONAL AUTO FINANCE COMPANY, INC.
Notes to Financial Statements
of March 31, 2000
(unaudited)
During the three months ended March 31, 2000 and 1999, the following
activity took place with respect to securitizations:
<TABLE>
<CAPTION>
March 31,
2000 1999
--------- ---------
(dollars in thousands)
<S> <C> <C>
Principal balance of Loans purchased $ 6,299 $ 14,016
========= =========
Weighted average coupon rate on Loans
purchased during the period
18.88% 19.11%
========= =========
</TABLE>
(3) DEBT
The balance of the Senior Subordinated Notes payable was $57.6 and
$56.4 million as of March 31, 2000 and December 31, 1999, respectively.
Such amounts are shown net of discounts of $5.1 million and $5.3 million.
The principal amount of the aggregate $62.7 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"). As permitted by the Restructuring,
Convertible Senior Subordinated Promissory Notes in the principle amount
of approximately $900,000 were issued on each of July 1, October 1, 1999,
January 1, and April 1, 2000, in lieu of 50% of the cash interest owed on
each of such dates.
(4) RECENT EVENTS
On February 4, 2000, the Company and Nuvell Credit Corporation
("Nuvell") entered into agreements whereby the Company, in return for
origination fees, agreed to originate loans exclusively for the benefit
of Nuvell through its existing Dealer Network and immediately assign such
contracts to Nuvell. The Company will retain servicing of all such loans
assigned to Nuvell in return for servicing fees. The Nuvell agreements
run through December 31, 2000 and are subject to further extension upon
mutual consent of both parties.
On February 22, 2000, National Financial Auto Funding Trust II
("Funding Trust II"), a special purpose wholly-owned subsidiary of NAFI,
defaulted in its obligation to deposit approximately $5 million in cash
collateral to the Master Trust Over-Collateralization Account, as
required under the Master Trust Securitization Credit Facility, thereby
giving rise to First Union's decision to terminate future funding
availability under the facility and to commence amortizing the
outstanding amounts owed to First Union under the facility.
In conjunction with such default, First Union agreed to waive until
April 21, 2000 certain rights to liquidate the portfolio of approximately
$58.9 million of auto loans that secure its loans to Funding Trust II,
thereby permitting the Company time to pursue various strategic options,
including a sale of such portfolio (see Note 5).
10
<PAGE> 11
NATIONAL AUTO FINANCE COMPANY, INC.
Notes to Financial Statements
March 31, 2000
(unaudited)
(5) SUBSEQUENT EVENTS
On April 5, 2000, Funding Trust II, the Company, and Nuvell
entered into a Sale and Purchase Agreement (the "Sale Agreement") whereby
a substantial number of the loans previously sold to the Master Trust
under the Master Trust Securitization Credit Facility in the approximate
amount of $47 million were sold by Funding Trust II to Nuvell after such
loans had been acquired by Funding Trust II from the Master Trust by an
Assignment Agreement dated as of April 5, 2000.
The Company, pursuant to the Sale Agreement, will retain
servicing of substantially all of such loans under the terms and
provisions of the Servicing Agreement. Approximately $43.9 million of the
proceeds from the sale of such loans were then used to pay in full the
Class B Certificates held by First Union. The Company has received
additional cash from the transaction and release of funds previously
required to be held in reserve of approximately $6.0 million, which will
be used for general corporate purposes, including the possible payment of
certain of the debt of the Company. In related developments, First Union
terminated its commitment to purchase up to $20 million of subordinated
asset-backed debt securities in connection with the Company's future
Permanent Securitizations and converted to a 48 month term loan
(requiring equal monthly principal payments) $2.3 million outstanding
under a revolving working capital facility secured by the Company's ESRs.
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,
2000 compared to December 31, 1999 and its results of operations for the
three months ended March 31, 2000 and 1999. 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, 1999. 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 that has,
since February 2000, focused its business strategy on performing a wide
range of loan portfolio services for third parties in the non-prime auto
loan financing industry including, but not limited to, loan product
marketing, loan underwriting, collections, customer service, asset
remarketing, and litigation handling, in return for both origination and
servicing fees.
The Company historically funded its purchases of loans primarily
through a two-step asset securitization program consisting of (i) the
securitized warehousing of all of its loans through their daily sale to
the Master Trust followed by (ii) the transfer of such warehoused loans
from time to time by the Master Trust 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, origination and other activities on its
revenues, expenses, and cash flows.
11
<PAGE> 12
NATIONAL AUTO FINANCE COMPANY, INC.
Notes to Financial Statements
March 31, 2000
(unaudited)
Revenues.
Since February 4, 2000, the Company has recognized origination
and servicing revenue received from Nuvell (see Note 4). Prior to the
Nuvell Agreements, the Company recognized origination income through
securitization accounting. The Company also receives monthly payments
from the securitization trusts in cash as a fee paid for the Company's
servicing of the loans in each trust. Servicing income is recognized when
earned and offsets in part 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 flow 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 actual loss and prepayment experience of
the Servicing Portfolio. See Note 2 of the Notes to Financial Statements
- Retained Interest in Securitizations.
The table below sets forth-certain information relating to the Company's loan
purchasing and origination activities:
<TABLE>
<CAPTION>
Three months ending
March 31,
------------------------
2000 1999
-------- --------
(dollars in thousands, except number of loans)
<S> <C> <C>
Number of loans purchased and originated ................... 1,294 1,019
Principal balance of loans purchased and originated ........ $ 20,382 $ 14,016
Principal amount of loans funded (1) ....................... 20,098 13,364
Securitization related income .............................. 683 1,469
Origination income ......................................... 387 --
Servicing income ........................................... 1,158 1,449
</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.
12
<PAGE> 13
RESULTS OF OPERATIONS
THREE MONTH PERIOD ENDED MARCH 31, 2000 COMPARED TO THE THREE MONTH
PERIOD ENDED MARCH 31, 1999.
Income from Operations
The Company reported a net loss of $4.0 million attributed to common
stockholders for the three-month period ended March 31, 2000 compared to a net
loss of $1.8 million attributed to common stockholders for the three month
period ended March 31, 1999.
Securitization Related Income
For the three month periods ended March 31, 2000 and 1999, the Company
recognized securitization and origination related income of $1.2 million and $
1.5 million, respectively.
The Company's Loan purchasing volume increased during the three month
period ended March 31, 2000 compared to the three month period ended March 31,
1999. The Company purchased 1,294 Loans, having a principal balance of $20
million, during the three month period ended March 31, 2000, compared to 1,019
Loans, having a principal balance of $13.4 million, for the three months ended
March 31, 1999. The decrease in securitization and origination income of
approximately $400,000 reflects the change from securitization accounting (FAS
125) to recognizing revenue derived from origination fees received from Nuvell.
See Note 4 to the Financial Statements - Recent Events.
Servicing Income
The Company receives a servicing fee in cash of approximately 4.0% of the
principal amount of the Loans sold to the Master Trust and 2.0% to 3.0% for the
principal amount of the Loans subsequently sold to the Permanent
Securitizations, which offsets in part actual servicing expenses incurred by the
Company. Since February 4, 2000, the Company also receives a servicing fee for
loans serviced for Nuvell (see Note 4). Servicing income is recognized as
received. Servicing income for the three month periods ended March 31, 2000 and
1999 was $1.2 million and $1.4 million, respectively. The decrease in servicing
income from last year's first quarter is due to the decrease in the total size
of the Servicing Portfolio.
Total Expenses
The Company reported total expenses for the three-month periods ended
March 31, 2000 and 1999 of $6.8 million and $5.5 million, respectively. These
expenses consisted primarily of salaries and employee benefits, servicing
expense and interest expense on long-term indebtedness, including the Senior
Subordinated Notes.
Servicing expenses for the three month periods ended March 31, 2000 and
1999 were $845,000 and $857,000, respectively. The slight decrease in servicing
expense is attributed to the reduction in the outstanding Servicing Portfolio.
The Company's average outstanding Servicing Portfolio was $171.2 million,
representing 18,768 outstanding Loans as March 31, 2000, and $206.4 million,
representing 21,232 outstanding Loans, as of March 31, 1999.
Salaries and employee benefits for the three month periods ended March
31, 2000 and 1999 were $1.6 million and $1.2 million, respectively. These
expenses were higher during the three months ended March 31, 2000 as compared to
the three months ended March 31, 1999 due to the Company's increase in employees
of approximately 10% (primarily attributable to increased sales team) and
increased wage cost.
Interest expense for the three-month periods ended March 31, 2000 and
1999 was $2.0 million and $2.2 million, respectively. These interest expenses
resulted from the long-term debt balance of the Company, including interest paid
on the outstanding Senior Subordinated Notes.
Other operating expenses for the three-month periods ended March 31, 2000
and 1999 was $1.5 million and $736,000, respectively. The increase in other
operating expense is primarily attributable to increases in legal fees related
to cost incurred resulting from the "Funding Trust II" default (See Note 4 to
the Financial Statements - Recent Events).
LOAN LOSS AND DELINQUENCY EXPERIENCE
Loan losses and loan prepayments are continuously monitored on an overall
portfolio and month-of-purchase static pool basis. Pursuant to the requirements
of SFAS No. 125, the Company reviews its actual loan loss experience in
conjunction with its quarterly revaluation of the carrying value of Retained
Interest in Securitizations. Charge-off policies are based upon an
account-by-account review of delinquent loans by the Company. The Company
generally charges off a loan at the time its
13
<PAGE> 14
related collateral is liquidated, although certain loans may be charged off
sooner if management deems them to be uncollectible.
The following table summarizes the Company's loan loss experience:
<TABLE>
<CAPTION>
As of March 31,
------------------------------
2000 1999
---------- ----------
(dollars in thousands)
<S> <C> <C>
Average Servicing Portfolio during period .................. $ 171,180 $ 206,412
========== ==========
Gross charge-off ........................................... 7,118 8,714
Liquidation proceeds from repossessed assets ............... (3,140) (3,991)
---------- ----------
Net charge-off ............................................. $ 3,978 $ 4,723
========== ==========
Net charge-off as a percentage of average Servicing
Portfolio .............................................. 2.32% 2.29%
========== ==========
</TABLE>
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) violations of Permanent
Securitization performance tests. Consequently, the Company's failure to
effectively service and collect the Servicing Portfolio could have a material
adverse effect on the Company's financial condition, results of operations and
cash flows. See Note 2 to the Financial Statements - Retained Interest in
Securitizations.
The Company considers a loan to be delinquent if the borrower fails to
make any payment substantially in full on or before the due date as specified by
the terms of the loan. The Company typically initiates contact with borrowers
whose payments are not received by the tenth day following the due date. The
following table summarizes the delinquency and repossession experience with
respect to the Servicing Portfolio:
<TABLE>
<CAPTION>
As of March 31,
-------------------------
2000 1999
-------- --------
(dollars in thousands)
<S> <C> <C>
Period of delinquency
31 to 60 days ........................................... $ 5,825 $ 9,159
61 to 90 days ........................................... 1,960 2,571
91 days or more ......................................... 2,763 3,047
-------- --------
Total delinquencies (1) .................................... $ 10,548 $ 14,777
======== ========
Total delinquencies as a percentage of the
Servicing Portfolio ..................................... 6.2% 7.24%
Principal balance of loans related to repossession
inventory ............................................... $ 2,844 $ 3,275
Repossession inventory as a percentage of the
Servicing Portfolio ..................................... 1.66% 1.62%
</TABLE>
(1) Total delinquencies include loans delinquent in payments more than thirty
days, loans in bankruptcy, and loans related to repossession inventory.
14
<PAGE> 15
Management believes that the payment practices of Non-Prime Consumers are
partially a function of seasonality. Because Non-Prime Consumers typically have
low disposable incomes, they frequently tend to fall behind in payments on their
loans during the early winter months, when the holiday season generates demands
for their limited disposable income and when these borrowers encounter
weather-related work slow-downs. As a result, absent unforeseen circumstances,
management expects delinquencies to be highest in the first calendar quarter and
the fourth calendar quarter of each year. Generally, there is a 60 to 120-day
lag between initial delinquency and charge-off.
The Company monitors historical loss experience on an overall portfolio
basis and on a monthly static pool basis. Loans acquired and sold to the Master
Trust in each calendar month are segregated into individual static pools. The
Company considers a pool of loans to be "seasoned" when it has been aged for an
average of 18 to 24 months. Actual pool losses are compared to the estimates for
net losses, and adjustments to the carrying value of Retained Interest in
Securitizations for the effect of any additional losses will be reflected in the
current period earnings.
(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.)
15
<PAGE> 16
NATIONAL AUTO FINANCE COMPANY, INC.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
March 31, 2000
<TABLE>
<CAPTION>
* 4Q 94 1Q 95 2Q 95 3Q 95 4Q 95 1Q 96 2Q 96 3Q 96 4Q 96 1Q 97 2Q 97 3Q 97 4Q 97
<S> <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%
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%
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%
4 0.05% 0.04% 0.00% 0.14% 0.25% 0.09% 0.03% 0.04% 0.01% 0.04% 0.22% 0.04% 0.01%
5 0.31% 0.14% 0.29% 0.41% 0.48% 0.26% 0.28% 0.33% 0.08% 0.25% 0.66% 0.18% 0.14%
6 0.47% 0.30% 0.92% 0.80% 0.86% 0.49% 0.62% 0.70% 0.69% 0.70% 1.31% 0.42% 0.42%
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%
8 1.08% 1.25% 2.05% 2.02% 1.69% 1.23% 2.06% 1.71% 1.85% 1.94% 2.56% 1.21% 1.29%
9 1.36% 1.55% 2.39% 2.42% 2.21% 1.95% 2.70% 2.68% 2.50% 2.60% 2.99% 1.60% 1.68%
10 1.75% 2.13% 2.72% 2.60% 2.46% 2.14% 3.37% 3.31% 3.27% 3.08% 3.71% 2.30% 2.09%
11 1.75% 2.52% 3.30% 3.02% 2.84% 2.72% 4.29% 3.88% 3.77% 3.51% 4.28% 2.78% 2.41%
12 3.12% 3.09% 3.44% 3.58% 3.33% 3.26% 5.20% 4.34% 4.12% 3.87% 5.05% 3.45% 2.76%
13 3.21% 3.64% 3.71% 3.92% 3.97% 3.72% 5.55% 5.08% 4.57% 4.49% 5.91% 3.87% 3.25%
14 3.80% 4.04% 4.21% 4.04% 4.28% 4.18% 6.13% 5.53% 4.97% 5.08% 6.50% 4.18% 3.68%
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%
16 4.55% 4.34% 4.53% 4.88% 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% 6.87% 6.40% 6.82% 7.63% 5.74% 5.02%
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% 5.42%
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% 5.93%
20 5.05% 5.80% 6.18% 6.63% 6.78% 7.28% 8.14% 8.59% 8.25% 8.05% 9.01% 7.45% 6.28%
21 5.79% 6.03% 6.55% 6.75% 7.15% 7.56% 8.66% 9.12% 8.66% 8.40% 9.28% 7.88% 6.84%
22 5.79% 6.33% 7.33% 6.88% 7.42% 8.00% 9.09% 9.75% 9.05% 8.78% 9.73% 8.40% 7.19%
23 6.20% 6.62% 7.88% 7.44% 7.99% 8.25% 9.81% 10.03% 9.23% 9.28% 10.00% 8.73% 7.47%
24 6.80% 6.91% 8.30% 7.93% 8.21% 8.41% 10.17% 10.36% 9.43% 9.68% 10.31% 9.12% 7.75%
25 6.99% 7.48% 8.59% 8.37% 8.46% 8.67% 10.68% 10.88% 9.67% 10.12% 10.79% 9.55% 8.06%
26 7.49% 7.58% 8.73% 8.54% 8.77% 9.01% 11.22% 11.13% 10.02% 10.52% 11.04% 9.97% 8.39%
27 8.06% 8.20% 9.16% 8.70% 8.98% 9.36% 11.50% 11.40% 10.35% 10.83% 11.35% 10.25% 8.69%
28 8.23% 8.76% 9.34% 8.82% 9.35% 9.57% 11.61% 11.72% 10.80% 11.36% 11.75% 10.45% 8.88%
29 9.07% 9.49% 9.36% 8.89% 9.97% 9.84% 11.71% 11.86% 11.25% 11.68% 12.05% 10.76%
30 9.17% 9.54% 9.39% 9.21% 10.16% 10.09% 11.88% 12.19% 11.42% 12.18% 12.40% 10.93%
31 9.71% 9.81% 9.82% 9.84% 10.61% 10.37% 12.56% 12.34% 11.78% 12.52% 12.72% 11.35%
32 9.99% 9.97% 9.82% 10.11% 10.74% 10.48% 12.77% 12.58% 11.94% 12.81% 13.00%
33 10.47% 10.07% 10.11% 10.26% 11.09% 10.61% 12.85% 12.72% 12.19% 13.06% 13.13%
34 11.44% 10.12% 10.52% 10.67% 11.28% 10.83% 13.10% 12.93% 12.48% 13.25% 13.45%
35 11.48% 10.31% 10.58% 10.85% 11.33% 11.09% 13.38% 13.14% 12.75% 13.37%
36 11.81% 10.55% 10.76% 10.89% 11.51% 11.20% 13.51% 13.37% 13.00% 13.53%
37 11.86% 10.83% 10.88% 11.15% 11.70% 11.37% 13.77% 13.60% 13.21% 13.80%
38 11.86% 11.01% 11.06% 11.22% 11.85% 11.50% 14.15% 13.76% 13.38%
39 12.37% 11.19% 11.13% 11.37% 11.94% 11.79% 14.29% 13.95% 13.50%
40 12.42% 11.47% 11.19% 11.46% 11.97% 11.88% 14.57% 14.11% 13.66%
41 12.42% 11.62% 11.25% 11.78% 12.01% 11.99% 14.70% 14.37%
42 12.57% 11.95% 11.30% 11.87% 12.08% 12.17% 14.80% 14.49%
43 12.57% 12.00% 11.49% 12.01% 12.32% 12.34% 14.86% 14.56%
44 12.71% 12.04% 11.54% 12.08% 12.39% 12.43% 15.00%
45 12.71% 12.08% 11.75% 12.24% 12.46% 12.52% 15.06%
46 12.75% 12.12% 11.82% 12.26% 12.50% 12.57% 15.06%
47 12.79% 12.18% 12.04% 12.35% 12.55% 12.69%
48 12.97% 12.28% 12.09% 12.42% 12.55% 12.77%
49 12.97% 12.28% 12.09% 12.42% 12.63% 12.91%
50 13.10% 12.28% 12.09% 12.45% 12.64%
51 13.10% 12.45% 12.16% 12.57% 12.70%
52 13.15% 12.52% 12.28% 12.66% 12.73%
53 13.15% 12.65% 12.36% 12.84%
54 13.15% 12.66% 12.36% 13.01%
55 13.15% 12.68% 12.36% 13.02%
56 13.15% 12.69% 12.40%
57 13.17% 12.69% 12.40%
58 13.18% 12.73% 12.42%
59 13.38% 12.78%
60 13.43% 12.73%
61 13.43% 12.73%
</TABLE>
* Month of Origination
16
<PAGE> 17
NATIONAL AUTO FINANCE COMPANY, INC.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
March 31, 2000
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
* 1Q 98 2Q 98 3Q 98 4Q 98 1Q 99 2Q 99 3Q 99 4Q 99 1Q 00
1 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
2 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
3 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.01% 0.00%
4 0.02% 0.00% 0.00% 0.07% 0.00% 0.18% 0.10% 0.04%
5 0.08% 0.13% 0.01% 0.16% 0.08% 0.47% 0.29%
6 0.29% 0.35% 0.81% 0.56% 0.46% 0.82% 0.88%
7 0.61% 0.65% 0.97% 0.99% 0.93% 1.39% 1.82%
8 0.84% 0.82% 2.10% 1.41% 1.19% 2.12%
9 1.16% 1.62% 2.40% 1.86% 1.51% 2.99%
10 1.78% 2.03% 2.79% 2.09% 2.02% 3.47%
11 2.28% 2.76% 3.20% 2.20% 2.50%
12 2.76% 3.09% 4.06% 2.93% 2.75%
13 3.25% 3.83% 4.26% 3.10% 3.58%
14 3.67% 4.39% 4.45% 3.25%
15 4.24% 5.09% 4.69% 4.26%
16 4.83% 5.56% 5.55% 4.52%
17 5.13% 6.06% 6.23%
18 5.57% 6.55% 6.23%
19 6.01% 7.00% 6.95%
20 6.48% 7.36%
21 6.77% 7.87%
22 7.09% 8.17%
23 7.34%
24 7.71%
25 8.14%
</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. On February 4,
2000, the Company entered into the Nuvell Agreements whereby the Company, with
funds made available by Nuvell, originates loans exclusively for the benefit of
Nuvell. (See Note 4 of Notes to Financial Statements).
Under the Nuvell Flow Program, loan originations are funded with capital
provided by Nuvell. Prior to implementation of the Nuvell Flow Program, the
Company's primary uses of cash were 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 $5.8 million to $.4
million for three month period ended March 31, 1999 from $6.2 million for the
three month period ended March 31, 1999, principally due to reduced
securitization volume (See Note 4 of Notes to Financial Statements) and a
resulting reduction in credit enhancement requirements of the Company's
securitization facilities and a reduction in interest paid on Senior
Subordinated Notes.
Net cash used in investing activities was $102,000 and $142,000 for the
three month period ending March 31, 2000 and 1999. This cash was principally
related to purchases of furniture and equipment for the Company's service
center.
Net cash used in financing activities increased by $589,000 to $723,000
for the three month period ended March 31, 2000 from $134,000 million for the
three month period ended March 31, 1999. Net cash used by financing activities
for the three month period ended March 31, 2000 was primarily the result of
principal payments on notes.
During the three month period ended March 31, 2000, the Company was
required to maintain a minimum equity position in the Master Trust of 24.0% of
the net serviced receivables or 3.0 times net losses, whichever was greater.
This minimum equity position consists of cash invested by the Company and
over-collateralization in the form of the Company owning certain interests in
the principal balance of loans. As of March 31, 2000, the Company had a 28.2%
equity investment in the Master Trust. (See Note 5 of Notes to Financial
Statements).
As of March 31, 2000, the Company retained approximately $31.0 million of
Retained Interest in Securitizations, representing 68.8% 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 loan losses or prepayment experience relative to the
amounts previously estimated by the Company.
As of March 31, 2000, the principal amount owed by the Company on the
Senior Subordinated Notes was $62.7 million and the principal amount owed by the
Company on the Junior Subordinated Notes was approximately $2.2 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
- - Debt, for further discussion of the Company's various debt facilities.
Going Concern
The Company has suffered significant losses from operations since 1997,
has a capital deficiency as of March 31, 2000 and its Master Trust
Securitization Credit Facility has been terminated. Such matters raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are described in the following
paragraphs.
The Company's business has historically required 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, securitized, and serviced by the Company increase. Historically, the
Company has operated on a negative operating cash flow basis. 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. The Company's current business strategy for future growth is
to focus on originating loans
18
<PAGE> 19
for other consumer finance companies, such as Nuvell, on a service retained
basis in return for both origination and servicing fee income, rather than
dedicating capital resources, particularly cash, to originate loans for its own
account and/or in anticipation of engaging in periodic asset-backed
securitization transactions.
In furtherance of such strategy, on February 4, 2000, the Company entered
into the Nuvell Agreements whereby the Company, in return for origination fees,
has agreed to originate non-prime retail motor vehicle installment sale loans
exclusively for the account of Nuvell. The Company retains servicing of all such
loans in return for servicing fees, for the term of the Nuvell Agreements and
any extension thereof. The Company originates and services loans under the
Nuvell Flow Program in the same manner as it has historically conducted its
business operations.
The Nuvell Agreements, run through December 31, 2000. During the course of
negotiating the Nuvell Agreements, the Company and Nuvell had, and continue to
have discussions regarding the potential acquisition by Nuvell of the
operational assets of the Company and its personnel including, in particular,
the assets and personnel comprising the Company's loan origination and servicing
capabilities, but there can be no assurance that such discussions will continue
or if they do continue, that they will lead to a transaction. In the event that
the Nuvell Agreements are not renewed or that no other transaction arises
between Nuvell and the Company, the Company will immediately seek to enter into
relationships similar to those represented by the Nuvell Flow Program with other
third-party auto finance companies.
Further, pursuant to the Company's current business strategy, the Company
projects over the next 12 months an increase in cash flow over 1999. The Company
projects that through cash on hand, the Nuvell Flow Program and scheduled cash
releases from the Retained Interest in Securitizations, sufficient cash flow to
operate over the next twelve months. Although there can be no assurance that the
Company will successfully execute this business plan, both the Nuvell Flow
Program and the business plan were designed and implemented to enable the
Company, among other things, to increase its cash flow and further stabilize its
financial condition.
In conjunction with the Company's comprehensive financial restructuring,
the Senior Subordinated Noteholders waived the previously existing Net Worth
Covenant and established the Return on Assets Covenant requiring that, on a
quarterly basis, the Company's net return on assets invested in loan
receivables, expressed as a percentage, exceed pre-established quarterly goals
(the first quarterly measurement period (the "Measurement Period") for such
covenant began as of the quarter ended September 30, 1999). The Company failed
to comply with the Return on Assets Covenant for the Measurement Periods ended
September 30, 1999, December 31, 1999, and March 31, 2000. The Senior
Subordinated Noteholders waived compliance with such covenant for Measurement
Periods ended September 30, 1999 and December 31, 1999. As a result of the
Company's adoption of a new business plan as implemented by the Nuvell Flow
Program, the Company anticipates that it will fail to comply with such covenant
for future Measurement Periods. The Company expects, but can give no assurance,
that the Senior Subordinated Noteholders will continue to waive compliance with
such covenant for the Measurement Period ended March 31, 2000 and for future
Measurement Periods.
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.
PART II - Other Information
ITEM 1. LEGAL PROCEEDINGS
On October 22, 1998, Pearl Peckerman, I.R.A., on behalf of herself and all
others similarly situated, filed a putative class-action complaint (the
"Peckerman Complaint") in the United States District Court for the Southern
District of Florida against the Company and certain current and former officers
and directors of the Company, as well as the co-lead underwriters of the
Company's initial public offering. On December 4, 1998, Harvey Rooks, Rachel
Rooks and Joyce Bornstein, on behalf of themselves and all others similarly
situated, filed a putative class action complaint (the "Rooks Complaint") in the
United States District Court for the Southern District of Florida against the
Company and certain current and former officers and directors of the Company, as
well as the co-lead underwriters of the Company's initial public offering.
19
<PAGE> 20
On February 5, 1999, the United States District Court for the Southern
District of Florida ordered that these actions be consolidated. Thereafter, on
July 29, 1999, the plaintiffs filed an amended and consolidated class-action
complaint (the "Amended and Consolidated Complaint") styled In re National Auto
Finance Company, Inc. Securities Litigation, Case Number 98-8767-CIV-Hurley.
The individual lead plaintiffs (the "Lead Plaintiffs") in the Amended and
Consolidated Complaint are Pearl Peckerman, Harvey Rooks, Rachel Rooks, Joyce
Bornstein, Emanuel Androulidakis, Frank Rosetti, Thomas R. Bopp, Noel V.
Brodtman, Jr., Susan H. Jacobsen, Leonard R. Carothers, Fred Gaunce, Duane
Morris, Ralph Casey, Hiram Graham, and Vance Prigge. In addition, the action was
instituted on behalf of a putative class of plaintiffs consisting of those
persons who purchased or otherwise acquired stock of the Company between January
29, 1997 and April 15, 1998 inclusive, excluding the Company, its subsidiaries
and affiliates, the individual defendants, members of the immediate families of
each of the individual defendants, and the successors and assigns of any
defendant. Other than the Company, the defendants to the action are: Gary L.
Shapiro, Keith B. Stein, Roy E. Tipton, Kevin G. Adams, Edgar A. Otto, Peter
Offerman, Morgan M. Schussler, Steven L. Gurba, and the co-lead underwriters of
the Company's January 1997 initial public offering, Raymond James & Associates,
Inc. and Cruttenden Roth, Inc., (collectively, "the Underwriter Defendants').
The Amended and Consolidated Complaint sets forth allegations surrounding
the Company's 1997 restated financial statements, the interpretation of FASB No.
125 and the relationship between the Company and its prior outside service
provider, Omni Financial Services of America, Inc. The plaintiffs' allegations
of liability are based on various theories of recovery, including alleged
violations of Section 11, 12(a)(2), 15 and 20(a) of the Securities Act of 1933,
as amended, and Section 10(b) and Rule 10b-5 of the Securities Exchange Act of
1934, as amended. The plaintiffs are seeking compensatory damages, as the court
deems appropriate.
The Company acknowledged its contracted obligation to indemnify the
Underwriter Defendants pursuant to the underwriting agreement entered into with
the Company in connection with its initial public offering with respect to their
legal and other costs incurred in this litigation, including but not limited to
any potential judgment against them.
On September 13, 1999, the Lead Plaintiffs filed a motion for class action
certification. Also, on September 13, 1999, the Underwriter Defendants filed a
motion to dismiss the Amended and Consolidated Complaint. On September 20, 1999,
the Company, as well as certain other individual defendants, and Gary L.
Shapiro, individually, filed a motion to dismiss Lead Plaintiffs' Amended and
Consolidated Complaint. In conjunction with such motions, the Company, as well
as certain other individual defendants, filed a request for oral argument, which
occurred on April 27, 2000. At the conclusion of oral argument, the court
indicated that it would review the papers and law further, and that it would
likely issue a written order dismissing the Amended and Consolidated Compliant
with leave to amend. There can be no assurance, however, that the court will
enter such an order, that any such order would dismiss the entire complaint, or
that the plaintiffs will not thereafter be able to amend and successfully state
a cause of action.
Litigation is subject to many uncertainties, and it is possible that the
above action could be decided unfavorably. The Company has entered 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, but can give no assurance that
such negotiations will result in settlement. Management is presently unable to
make a meaningful estimate of the amount or range of loss that could result from
an unfavorable outcome or settlement of the pending litigation. It is possible
that the Company's business, volume, results of operations, cash flows, or
financial position could be materially affected by an unfavorable outcome or
settlement of the pending litigation.
ITEM 2. OTHER INFORMATION (NONE.)
ITEM 3. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Number Description Method of Filing
------ ----------- ----------------
<S> <C> <C> <C>
3.1-2 Amendment to the Company's Certificate of Incorporation. (1) Incorporated by Reference
10.2-1 Company's 1996 Share Incentive Plan, as amended. (1) Incorporated by Reference
10.125 Contract Sale Agreement, dated as of February 4, 2000, by
and between the Company and Nuvell Credit Corporation. (1) Incorporated by Reference
10.126 Servicing Agreement, dated as of February 4, 2000, by and
between the Company and Nuvell Credit Corporation. (1) Incorporated by Reference
</TABLE>
20
<PAGE> 21
<TABLE>
<S> <C> <C> <C>
10.127 Amendment Number 4 to the Amended and Restated Pooling
and Administration Agreement, dated as of February 22, 2000
among National Financial Auto Funding Trust II, the Company,
and Bankers Trust Company as Trustee. (1) Incorporated by Reference
10.128 Second Amendment to Revolving Credit, Term Loan and
Security Agreement, dated as of February 22, 2000 among National
Financial Auto Funding Trust, the Company and First Union
National Bank. (1) Incorporated by Reference
10.129 Letter Agreement with respect to the B Note Commitment Letter
Dated as of February 22, 2000 by and between First Union National
Bank and the Company. (1) Incorporated by Reference
10.130 Wavier, effective as of December 31, 1999 of The 1818
Mezzanine Fund, L.P., PC Investment Company, Progressive
Investment Company, Inc., Manufacturers Life Insurance Company
(U.S.A.), and The Structured Finance High Yield Fund, L.L.C.,
for the benefit of the Company. (1) Incorporated by Reference
10.131 First Amendment to Contract Sale Agreement effective as of
February 29, 2000, by and between the Company and Nuvell
Credit Corporation. (1) Incorporated by Reference
10.132 Sale and Purchase Agreement dated as of March 30, 2000
by and between the Company as Guarantor, National Financial
Auto Funding Trust II as Seller, and Nuvell Credit Corporation
as Purchaser. (1) Incorporated by Reference
10.133 Amendment No. 1 to Sale and Purchase Agreement effective as
of April 5, 2000 by and between Nuvell Credit Corporation as
Purchaser and National Financial Auto Funding Trust II as Seller
and the Company as Guarantor. (1) Incorporated by Reference
10.134 Amendment No. 2 to Contract Sale Agreement and Amendment
No. 1 to Servicing Agreement dated as of April 7, 2000 by and
between the Company and Nuvell. (1) Incorporated by Reference
11 Computation of Earnings Per Common Share. (2) Filed with this document
27 Financial Data Schedule. (2) Filed with this document
</TABLE>
- -----------------
(1) Incorporated by reference to the Company's Form 10-K for the year ended
December 31, 1999 filed with the Securities and Exchange Commission on
April 14, 2000.
(2) Filed Herewith.
(b) Reports on Form 8-K
On February 14, 2000, the Company filed a Form 8-K announcing
execution of a Contract Sale Agreement and Servicing Agreement dated as of
February 4, 2000 between the Company and Nuvell Credit Corporation.
21
<PAGE> 22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
National Auto Finance Company, Inc.
(Registrant)
Date: May 15, 2000 By: Keith B. Stein
---------------------
Chairman of the Board and
Chief Executive Officer
Date: May 15, 2000 By: Brian Thompson
---------------------
Vice-President - Finance and
Accounting, Treasurer
22
<PAGE> 23
EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER DESCRIPTION PAGE
------ ----------- ----
<S> <C> <C> <C>
3.1-2 Amendment to the Company's Certificate of Incorporation. Incorporated by Reference
10.2-1 Company's 1996 Share Incentive Plan, as amended. Incorporated by Reference
10.125 Contract Sale Agreement, dated as of February 4, 2000, by
and between the Company and Nuvell Credit Corporation. Incorporated by Reference
10.126 Servicing Agreement, dated as of February 4, 2000, by and
between the Company and Nuvell Credit Corporation. Incorporated by Reference
10.127 Amendment Number 4 to the Amended and Restated Pooling
and Administration Agreement, dated as of February 22, 2000
among National Financial Auto Funding Trust II, the Company,
and Bankers Trust Company as Trustee. Incorporated by Reference
10.128 Second Amendment to Revolving Credit, Term Loan and
Security Agreement, dated as of February 22, 2000 among National
Financial Auto Funding Trust, the Company and First Union
National Bank. Incorporated by Reference
10.129 Letter Agreement with respect to the B Note Commitment Letter
Dated as of February 22, 2000 by and between First Union National
Bank and the Company. Incorporated by Reference
10.130 Wavier, effective as of December 31, 1999 of The 1818
Mezzanine Fund, L.P., PC Investment Company, Progressive
Investment Company, Inc., Manufacturers Life Insurance Company
(U.S.A.), and The Structured Finance High Yield Fund, L.L.C.,
for the benefit of the Company. Incorporated by Reference
10.131 First Amendment to Contract Sale Agreement effective as of
February 29, 2000, by and between the Company and Nuvell
Credit Corporation. Incorporated by Reference
10.132 Sale and Purchase Agreement dated as of March 30, 2000
by and between the Company as Guarantor, National Financial
Auto Funding Trust II as Seller, and Nuvell Credit Corporation
as Purchaser. Incorporated by Reference
10.133 Amendment No. 1 to Sale and Purchase Agreement effective as
of April 5, 2000 by and between Nuvell Credit Corporation as
Purchaser and National Financial Auto Funding Trust II as Seller
and the Company as Guarantor. Incorporated by Reference
10.134 Amendment No. 2 to Contract Sale Agreement and Amendment
No. 1 to Servicing Agreement dated as of April 7, 2000 by and
between the Company and Nuvell. Incorporated by Reference
11 Computation of Earnings Per Common Share.
27 Financial Data Schedule.
</TABLE>
<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,
---------------------
2000 1999
-------- ---------
<S> <C> <C>
Average number of common shares outstanding 17,281 9,031
Common equivalent shares outstanding:
Stock options (1) -- --
-------- ---------
Total common and common equivalent shares outstanding 17,281 9,031
======== =========
Net income (loss) attributed to common shareholders $ (4,036) $ (1,787)
======== =========
Loss per common share (basic and diluted) $ (.23) $ (0.20)
======== =========
</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, 2000 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-2000
<CASH> 2,343
<SECURITIES> 0
<RECEIVABLES> 30,979
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 33,322
<PP&E> 3,230
<DEPRECIATION> 0
<TOTAL-ASSETS> 45,067
<CURRENT-LIABILITIES> 2,100
<BONDS> 62,668
2,616
0
<COMMON> 173
<OTHER-SE> (22,490)
<TOTAL-LIABILITY-AND-EQUITY> 45,067
<SALES> 0
<TOTAL-REVENUES> 2,830
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,987
<INCOME-PRETAX> (3,996)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,966)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,036)
<EPS-BASIC> (0.23)
<EPS-DILUTED> (0.23)
</TABLE>
