<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 28, 1997
REGISTRATION NO. 333-13667
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
NATIONAL AUTO FINANCE COMPANY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 6141 65-0688619
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NUMBER)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
</TABLE>
------------------------
621 N.W. 53RD STREET, SUITE 200
BOCA RATON, FLORIDA 33487
(561) 997-2747
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
KEITH B. STEIN
VICE CHAIRMAN
NATIONAL AUTO FINANCE COMPANY, INC.
621 N.W. 53RD STREET, SUITE 200
BOCA RATON, FLORIDA 33487
(561) 997-2747
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
Copies to:
HOWARD CHATZINOFF, ESQ. JORGE L. FREELAND, ESQ.
WEIL, GOTSHAL & MANGES LLP GREENBERG, TRAURIG, HOFFMAN, LIPOFF,
767 FIFTH AVENUE ROSEN & QUENTEL, P.A.
NEW YORK, NEW YORK 10153 1221 BRICKELL AVENUE
(212) 310-8000 MIAMI, FLORIDA 33131
(305) 579-0500
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable after the effective date of this Registration
Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION DATED JANUARY 28, 1997
PROSPECTUS
2,000,000 SHARES
[LOGO]
COMMON STOCK
------------------------
The shares of Common Stock offered hereby are being issued and sold by
National Auto Finance Company, Inc. (the 'Company'). Application has been made
for listing of the Common Stock on the NASDAQ National Market under the trading
symbol 'NAFI.' Prior to this offering, there has been no public market for the
Common Stock. It is currently estimated that the initial public offering price
per share will be between $7 and $9. See 'Underwriting' for a discussion of
factors to be considered in determining the initial public offering price.
------------------------
SEE 'RISK FACTORS' ON PAGES 8 THROUGH 14 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMIS-
SION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
<S> <C> <C> <C>
Per Share.... $ $ $
Total(3)..... $ $ $
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933. See
'Underwriting.'
(2) Before deducting expenses estimated at $600,000, which are payable by the
Company.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 300,000 additional shares of Common Stock on the same terms and
conditions as the securities offered hereby solely to cover over-allotments,
if any. If the option is exercised in full, the total Price to Public,
Underwriting Discounts and Commissions and Proceeds to Company will be
$ , $ and $ , respectively. See 'Underwriting.'
------------------------
The shares of Common Stock are offered by the Underwriters, subject to
prior sale, when, as and if delivered to and accepted by them, and subject to
other conditions including the right of the Underwriters to withdraw, cancel,
modify or reject any order in whole or in part. It is expected that delivery of
the shares will be made on or about , 1997 at the offices of Raymond
James & Associates, Inc., St. Petersburg, Florida.
RAYMOND JAMES & ASSOCIATES, INC. CRUTTENDEN ROTH
INCORPORATED
The date of this Prospectus is , 1997.
<PAGE>
[MAP OF U.S. MARKETS SERVED BY THE COMPANY]
------------------
The Company intends to furnish its stockholders with annual reports
containing audited financial statements and quarterly reports for the first
three quarters of each fiscal year containing unaudited summary financial
information.
------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. Except as otherwise specified, all information in
this Prospectus assumes (i) the consummation of the Reorganization (as described
in 'The Reorganization') and (ii) no exercise of the Underwriters'
over-allotment option.
THE COMPANY
National Auto Finance Company, Inc. ('NAFCO' or the 'Company') is a
specialized consumer finance company engaged in the purchase, securitization and
servicing of motor vehicle retail installment sale contracts ('Loans')
originated by automobile dealers ('Dealers') for Non-Prime Consumers (i.e.,
borrowers with limited financial resources or past credit problems). The Company
purchases Loans principally from manufacturer-franchised Dealers in connection
with their sale of new and used automobiles. The Company's strategy is to
develop a network of Dealers throughout the United States that will refer
Non-Prime Consumer Loan applications to the Company. To implement this strategy,
the Company offers to Dealers products and services designed to enhance their
ability to sell vehicles to Non-Prime Consumers. The Company markets these
products and services to Dealers through the efforts of its direct sales force
and through strategic referral and marketing alliances with financial
institutions which have established relationships with Dealers.
Automobile financing is the second largest sector, by dollar amount, of
consumer installment debt in the United States. According to the United States
Federal Reserve Board, approximately $350 billion of automobile installment
credit was outstanding at the end of 1995. The Company estimates that the
outstanding automobile installment credit attributable to Non-Prime Consumers is
in excess of $60 billion. The Company believes that the portion of the
automobile finance market attributable to Non-Prime Consumers has grown
significantly in recent years and is poised for further growth. Factors
contributing to such growth include the rise of personal bankruptcy filings over
the past ten years, the rise of total consumer debt service payments as a
percentage of disposable income over the past three years, the increase in the
supply of used cars relative to new cars and the increased awareness among
Dealers of Non-Prime Consumer financing opportunities. Historically, the market
for Non-Prime Consumer credit has been highly fragmented, with no one company
controlling more than 3% of the market. The Company believes that it is
well-positioned to gain an increasing share of this market through its emphasis
on Dealer support and service.
Since the commencement of the Company's operations in October 1994, the
Company has established contractual relationships with over 1,200 Dealers. The
Company attributes its success in rapidly establishing its Dealer base to the
following:
o Dealer Products and Services--The Company seeks to differentiate itself
from its competitors by introducing products and services designed to
enhance the ability of Dealers to sell vehicles to Non-Prime Consumers.
In developing such products and services, the Company relies on its
senior management's extensive experience in automobile finance as well as
on ideas the Company solicits and receives from Dealers. The Company is
constantly seeking to improve its existing products and services and
develop new ones in order to respond to changing market conditions and
serve specific niches in the Non-Prime Consumer market.
o Dealer Assistance--The Company believes that a Dealer's ability to sell
automobiles is enhanced if a Dealer understands the product and service
offerings, underwriting criteria and financing capabilities of its
financing sources. Accordingly, the Company employs regional salespersons
located in strategic geographic areas ('Dealer Relations Managers') who
spend considerable time on-site with Dealers in order to augment Dealers'
understanding of the Non-Prime Consumer market and the Company's products
and services.
o Experienced Senior Management--Each of the Company's four senior
operating executives has over 14 years of direct experience in automobile
finance. The Company believes that this experienced management team
provides it with the ability to maintain acceptable credit quality,
supervise its operations, further expand its business in existing markets
and penetrate new markets.
o Timely Communication of Credit Decisions--In the Company's experience, a
rapid response to Dealers' requests for financing is critical to
developing strong relationships with Dealers and having frequent
3
<PAGE>
opportunities to purchase Loans from Dealers. The Company believes that
it provides this timely response to Dealers for their Non-Prime
Consumers. The Company typically communicates its credit decisions to
Dealers within 75 minutes of receipt of a Loan application and provides
next-day funding after the submission of completed Loan documentation.
o Centralized Underwriting--The Company maintains centralized control over
the underwriting and Loan approval functions. The Company believes that
this centralized control ensures consistent and efficient underwriting
and Loan approval functions. The Company's centralized underwriting
policy has enabled the Company to purchase a portfolio of Loans that
management believes will allow the Company to maintain acceptable credit
quality as its Loan portfolio grows.
o Underwriting Consistency--The Company employs a proprietary credit
scoring system and well-defined underwriting criteria to ensure
consistency in the underlying credit risks associated with the Loans it
purchases. The Company believes that this consistency enhances the
efficiency of the financing process from a Dealer's perspective by
enabling a Dealer to gauge accurately which of its Non-Prime Consumer
Loan applications will be approved by the Company.
o Financing Strategy--The Company currently finances its purchases of Loans
primarily through an asset securitization program that involves (i) the
securitized warehousing of all of its Loans through their daily sale
('Revolving Securitization') to a bankruptcy remote master trust (the
'Master Trust'), followed by (ii) the refinancing of such warehoused
Loans, from time to time, through their transfer by the Master Trust to a
discrete trust ('Permanent Securitization'), 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 certain
residual interests in future excess cash flows from the Master Trust. The
capacity of the Revolving Securitization is dependent, in part, upon the
subsequent refinancings of Loans pursuant to Permanent Securitizations.
In November 1995, the Master Trust refinanced $42 million of its
receivables in a private placement of asset-backed securities through a
Permanent Securitization rated AAA and Aaa by Standard & Poor's Rating
Services ('S&P') and Moody's Investors Service, Inc. ('Moody's'),
respectively. In November 1996, the Master Trust refinanced $68 million
of its receivables in a public offering of asset-backed securities
through a Permanent Securitization also rated AAA and Aaa by S&P and
Moody's, respectively.
The Company expects to increase the number of Loans that it purchases,
securitizes and services by (i) utilizing its Dealer Relations Managers to
market the Company's products and services directly to Dealers (including
Dealers with which the Company currently does not have a contractual
relationship) and (ii) forming strategic referral and marketing alliances with
financial institutions that have established relationships with Dealers.
Although the Company is currently doing business with Dealers in 26 states,
approximately 75% of the principal balance of the Company's Loan portfolio was
purchased through Dealers located in Georgia, North Carolina, South Carolina and
Virginia. The Company intends to increase its volume of business in the states
in which it currently operates and to expand into additional states.
In April 1996, the Company entered into its first strategic referral and
marketing alliance (the 'First Union Strategic Alliance'), with First Union
National Bank of North Carolina and certain of its national bank affiliates
(collectively, 'First Union'). The First Union Strategic Alliance initially
provided for (i) joint marketing of the Company's products and services by the
Company's sales force and the sales personnel in First Union's indirect sales
finance division ('FUSF') to the approximately 1,800 Dealers throughout seven
southeastern states and the District of Columbia (the 'Southeastern Franchise')
with which FUSF has an existing relationship, and (ii) exclusive referral by
FUSF to the Company of all applications for Non-Prime Consumer Loans falling
below certain established credit guidelines. The First Union Strategic Alliance
significantly enhances the Company's ability to further its market penetration
and increase the size of its Dealer base through the marketing assistance,
support and exclusive referrals provided by FUSF. Though still in the
introductory phase, through September 30, 1996, the Company established
relationships with over 400 additional Dealers through the First Union Strategic
Alliance and financed approximately 1,571 Loans having an aggregate principal
balance of $18.9 million. On December 13, 1996, First Union exercised its option
to expand the scope of the First Union Strategic Alliance to include
approximately 1,500 additional Dealers throughout five northeastern states (the
'Northeastern
4
<PAGE>
Franchise') with which FUSF has existing relationships. The Company anticipates
commencing the introduction of its products and services throughout the
Northeastern Franchise in March 1997.
IronBrand Capital, LLC, a subsidiary of First Union National Bank of North
Carolina (the 'First Union Partner'), is a limited partner of National Auto
Finance Company L.P., a Delaware limited partnership organized in October 1994
(the 'NAFCO Partnership'). Upon consummation of this offering (this 'Offering'),
the NAFCO Partnership will own approximately 62.89% of the Common Stock of the
Company. As a limited partner of the NAFCO Partnership, the First Union Partner
currently has an economic interest with respect to approximately 15% of the
Common Stock of the Company held by the NAFCO Partnership (or 9.43% of the
outstanding shares of Common Stock upon consummation of this Offering). Based
upon several factors, including the overall performance of the First Union
Strategic Alliance and the total market value of the Company over a specified
time period, the First Union Partner may obtain an economic interest with
respect to an approximate additional 34% of the Common Stock held by the NAFCO
Partnership. Any such increase would be non-dilutive to the public stockholders
of the Company. The national banks comprising the First Union Strategic Alliance
are subsidiaries of First Union Corporation, a bank holding company
headquartered in Charlotte, North Carolina. As of September 30, 1996, First
Union Corporation was the nation's sixth largest bank holding company in terms
of total assets.
For the fiscal year ended December 31, 1995, which was the Company's first
full year of operations, the Company generated revenues of $7.8 million and
pre-tax income of $3.28 million on annual Loan volume of $43.5 million. Through
the end of fiscal 1995, the Company had purchased 3,886 Loans with aggregate
gross receivables of $73.6 million and net receivables of $49.8 million, as
adjusted for unearned finance charges and before taking into account Dealer
discounts and allowance for possible Loan losses.
For the nine months ended September 30, 1996, the Company generated
revenues of approximately $9.9 million and pre-tax income of approximately $3.1
million on Loan volume of approximately $56.1 million. Through September 30,
1996, the Company purchased 8,423 Loans with aggregate gross receivables of
approximately $157 million and net receivables of approximately $105.9 million,
as adjusted for unearned finance charges and before taking into account Dealer
discounts and allowance for possible Loan losses.
National Auto Finance Company, Inc. was incorporated in Delaware in October
1996. The NAFCO Partnership and Auto Credit Clearinghouse L.P., a Delaware
limited partnership organized in September 1995 (the 'ACCH Partnership' and
together with the NAFCO Partnership, the 'Partnerships'), are affiliated
entities that are the predecessors to the business of the Company. Unless the
context otherwise requires, references in this Prospectus to 'NAFCO' or the
'Company' refer to National Auto Finance Company, Inc., and the business
previously conducted by the Partnerships. See 'The Reorganization.' The
Company's executive offices are located at 621 N.W. 53rd Street, Suite 200, Boca
Raton, Florida 33487 and its telephone number is (561) 997-2747.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered hereby............... 2,000,000 shares
Common Stock to be outstanding after this
Offering................................ 6,726,000 shares(1)
Use of Proceeds........................... To support securitizations and other long-term financing
arrangements; to repay a portion of the subordinated indebtedness
held by certain affiliates of the Company; and for working capital
and other general corporate purposes. See 'Use of Proceeds.'
Proposed NASDAQ National Market symbol.... NAFI
</TABLE>
- ----------------
1. Does not include 260,000 shares of Common Stock subject to outstanding stock
options.
5
<PAGE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------- -------------------
(THREE MONTHS)
1994 1995 1995 1996
-------------- ------ ------ ------
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Gain on sales of Loans.................................... $ 0 6,487 4,920 8,189
Gain on securitization of Loans purchased prior to January
16, 1995(1)............................................. 0 639 639 0
Deferred gain on sales of Loans........................... 0 241 140 491
Deferred servicing income................................. 0 219 109 587
Deferred income from 1995-1
securitization.......................................... 0 0 0 479
Interest income from cash investments..................... 32 11 8 56
Other income.............................................. 0 32 31 54
Finance charges earned.................................... 95 0 0 0
Provision for credit losses(2)............................ (182) 182 0 0
------ ------ ------ ------
Total revenue............................................. (55) 7,811 5,847 9,856
Operating expenses........................................ (420) (4,530) (3,098) (6,754)
------ ------ ------ ------
Total expenses............................................ (420) (4,530) (3,098) (6,754)
------ ------ ------ ------
Net income (loss) before pro forma income tax expense..... (475) 3,281 2,749 3,102
Pro forma income taxes(3)................................. 0 (1,066) (865) (1,167)
------ ------ ------ ------
Pro forma net income (loss)............................... $ (475) 2,215 1,884 1,935
------ ------ ------ ------
------ ------ ------ ------
Pro forma earnings (loss) per share $ (.07) .33(4) .28(4) .29
Pro forma weighted average shares outstanding(5).......... 6,726,000 6,726,000 6,726,000 6,726,000
</TABLE>
- ------------------
(1) Represents $639,000 gain on sale for Loans purchased between October 12,
1994 and January 16, 1995 and sold to the Master Trust on January 16, 1995
in connection with the Revolving Securitization.
(2) Approximately 5% or $182,000 of the $3.6 million of Loans funded during the
three months ended December 31, 1994 was set aside as a provision for
possible Loan losses. This reserve was reversed when these Loans were sold
to the Master Trust on January 16, 1995 in connection with the Revolving
Securitization. Subsequently, all reserves for Loan losses have been
accounted for by the Master Trust.
(3) The pro forma income taxes reflect the application of a combined federal and
state income tax rate of approximately 38% as if the Company had been taxed
as a C corporation for all periods presented. For the periods ended December
31, 1995 and September 30, 1995, taxes have been calculated at 38% after
netting prior years net operating losses from pro forma net income.
(4) Includes approximately $0.07 per share attributable to gains on Loans
purchased between the Company's commencement of operations on October 12,
1994 and January 16, 1995, when the Company initiated its Revolving
Securitization program.
(5) Adjusted to give effect to the sale of 2,000,000 shares of Common Stock in
this Offering.
6
<PAGE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
---------------------------------------------
PRO FORMA
(AS
ACTUAL PRO FORMA(6)(7) ADJUSTED)(6)(8)
------- --------------- ---------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Total assets........................................................... $28,446 28,445 38,602
Senior Subordinated Notes.............................................. 12,000 12,000 12,000
Junior Subordinated Notes.............................................. 7,218 7,218 2,934
Total liabilities...................................................... 20,292 22,475 18,191
Partners' preferred equity............................................. 2,251 0 0
Partners' equity....................................................... 5,903 0 0
Stockholders' equity................................................... 0 5,970 20,411
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------- NINE MONTHS ENDED
SEPTEMBER 30,
(THREE MONTHS) -------------------------
1994 1995 1995 1996
-------------- ------ ----------- -----------
<S> <C> <C> <C> <C>
LOAN PORTFOLIO INFORMATION:
Number of Loans purchased during period (not in thousands)..... 300 3,586 2,718 4,537
Principal balance of Loans purchased........................... $3,820 45,972 34,594 56,152
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF SEPTEMBER 30,
----------------------- -------------------------
1994 1995 1995 1996
-------------- ------ ----------- -----------
<S> <C> <C> <C> <C>
Aggregate number of Loans purchased (not in thousands)......... 300 3,886 3,018 8,423
Aggregate principal balance of Loans purchased................. $3,820 49,792 38,414 105,944
Number of outstanding Loans (not in thousands)(9).............. 300 3,586 2,884 7,286
Principal balance of Loans outstanding(9)...................... $3,800 43,145 35,064 82,792
Net charge-offs as a percentage of aggregate principal balance
of Loans purchased(9)........................................ 0.00% 1.31% 0.55% 2.43%
</TABLE>
- ------------------
(6) Pro forma amounts are unaudited.
(7) Reflects the Reorganization as if it had occurred on September 30, 1996. See
'The Reorganization' and 'Unaudited Pro Forma Financial Statements.'
(8) Reflects the Reorganization and the issuance of 2,000,000 shares in the
Offering, all as if they had occurred on September 30, 1996. See 'Certain
Transactions--Senior Subordinated Indebtedness' and 'Unaudited Pro Forma
Financial Statements.'
(9) Represents amounts related to Loans sold by the Company to the Master Trust.
7
<PAGE>
RISK FACTORS
Prospective investors should carefully consider the following risk factors,
together with the other information contained in this Prospectus, before
purchasing the shares offered hereby.
CREDITWORTHINESS OF NON-PRIME CONSUMERS; ECONOMIC FACTORS AFFECTING
DELINQUENCIES AND DEFAULTS
The Non-Prime Consumer automobile finance market is comprised of customers
who are deemed to be relatively high credit risks due to various factors,
including, among other things, the manner in which they have handled previous
credit, the absence or limited extent of their prior credit history and/or their
limited financial resources. Consequently, the Loans acquired by the Company
have a higher probability of delinquency and default and greater servicing costs
than Loans made to consumers who pose lesser credit risks. The Company's
profitability depends in part upon its ability to properly evaluate the
creditworthiness of Non-Prime Consumers and efficiently service its Loans. There
can be no assurance that satisfactory credit performance of a Non-Prime Consumer
will be maintained or that the rate of future defaults and/or losses will be
consistent with prior experience or at levels that will allow the Company to
maintain its profitability. Most borrowers' ability to remit payments in
accordance with the terms of the Loans is dependent on their continued
employment. An economic downturn resulting in increased unemployment could cause
a significant rise in delinquencies and defaults, which could materially
adversely affect the Company's financial condition and results of operations.
Moreover, increases in the delinquency and/or loss rates in the Company's Loan
portfolio could adversely affect the Company's ability to obtain or maintain its
financing sources. See 'Management's Discussion and Analysis of Financial
Condition and Results of Operations--Loan Loss and Delinquency Experience' and
'Business-- Credit Underwriting and Administration.'
LIMITED OPERATING HISTORY
The Company commenced operations in October 1994. Because of the Company's
limited operating history, most of the Loans in its portfolio are unseasoned.
The Company considers a Loan to be 'seasoned' when it has been aged for an
average of 18 to 24 months. The Company believes that delinquency and loss rates
in its Loan portfolio may not fully reflect the rates that would apply when such
average holding period for Loans has been achieved or when there are larger
numbers of seasoned Loans in the portfolio. The Company believes that a
significant portion of the Loans in its portfolio will, by the end of calendar
year 1997, be 'seasoned' and that the delinquency and loss rates with respect to
such Loans will then more meaningfully reflect the portfolio's overall
ongoing delinquency and loss experience. Additionally, there can be no assurance
that the Company will be able to continue to successfully implement its business
strategy, or that revenues or profitability will continue to increase in the
future. The Company's prospects must be considered in light of the risks,
expenses, difficulties and delays frequently encountered in the establishment of
a new business in an industry characterized by intense competition and an
increasing number of market participants. See 'Management's Discussion and
Analysis of Financial Condition and Results of Operations--Historical
Development and Growth' and 'Business--Competition.' Management currently
expects that operating costs will rise throughout fiscal year 1997 as the result
of anticipated growth in the number of Loans purchased and serviced by the
Company and the hiring of additional personnel in connection with the expansion
of the First Union Strategic Alliance to FUSF's Northeastern Franchise. In
addition, operating costs may also increase if the Company develops its own
in-house servicing capabilities. Increased operating expenses will decrease the
Company's operating margins and the Company's overall profitability.
ABILITY OF THE COMPANY TO MAINTAIN ITS GROWTH STRATEGY
The successful implementation of the Company's growth strategy is dependent
upon its ability to increase the number of Loans it purchases that meet its
underwriting criteria while maintaining favorable interest rate spreads. The
Company's ability to increase Loan purchases will depend largely on the ability
of the Company to: (i) maintain existing relationships with Dealers and to
establish new relationships with additional Dealers, both in existing markets
and in markets where the Company intends to expand; (ii) successfully implement
the First Union Strategic Alliance and form similar strategic referral and
marketing alliances with other financial institutions; (iii) retain qualified
employees and attract additional qualified employees to manage the Company's
expected growth; (iv) obtain adequate financing on favorable terms to fund its
growth strategy, including the securitization of its Loans; and (v) maintain
appropriate procedures, policies and systems to ensure that the Company
purchases Loans within acceptable levels of credit risk and loss. The Company's
growth strategy will also be subject to factors beyond the Company's control,
including economic downturns, changes in the automobile market and the level of
competition in the automobile finance market. The Company's inability to
successfully implement its growth strategy and increase Loan purchases could
have a material adverse effect on the Company's financial condition and results
of operations. See 'Business--Marketing Strategy' and 'Business--Credit
Underwriting and Administration.'
8
<PAGE>
NEED FOR ADDITIONAL CAPITAL
The Company's ability to continue to increase the number of Loans it
purchases depends, in part, upon its ability to continue to effect
securitization transactions or to establish alternative long-term financing
arrangements and to obtain sufficient financing upon acceptable terms under
interim credit facilities. These transactions and facilities will, in turn,
require the Company to obtain additional subordinated debt and/or equity
financing. If the Company is unable to obtain such financing, its ability to
purchase Loans will be inhibited. The Company believes that the net proceeds of
this Offering, together with the net proceeds of recent subordinated debt
borrowings from certain affiliates of the Company and third-party institutional
investors, will be sufficient to meet the Company's cash requirements and to
fund operations for approximately 12 months following this Offering, assuming
the Company completes regular securitizations during such 12-month period.
Thereafter, the Company could be required to issue additional subordinated debt
or equity, which could dilute the interests of stockholders of the Company. No
assurance can be given, however, that the Company will have access to the
capital markets in the future for debt or equity issuances or for
securitizations, or that financing through borrowings or other means will be
available on terms acceptable to the Company, to satisfy the Company's cash
requirements needed to implement its business strategy. The Company's inability
to access the capital markets or obtain financing on acceptable terms could have
a material adverse effect on the Company's financial condition and results of
operations. See 'Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources.'
DEPENDENCE ON SECURITIZATION TRANSACTIONS
The Company currently finances its purchases of Loans primarily through an
asset securitization program that involves (i) the securitized warehousing of
all of its Loans through their daily sale to the Master Trust pursuant to the
Revolving Securitization, followed by (ii) the refinancing of such warehoused
Loans, from time to time, through Permanent Securitizations, thereby creating
additional availability of capital from the Master Trust. The timing of any
future Permanent Securitization could be affected by several factors, some of
which are beyond the Company's control. Such factors include, among others,
conditions in the securities market generally, conditions in the asset-backed
securitization market specifically and approval by certain third parties of the
terms of the transactions. During the nine months ended September 30, 1996, the
Company sold $56.1 million of the Company's Loans to the Master Trust pursuant
to the Revolving Securitization facility, and gains from the sale of such Loans
represented approximately 83% of the Company's revenues. The capacity of the
Revolving Securitization is dependent, in part, upon the subsequent refinancing
of Loans pursuant to Permanent Securitizations. In the Company's two Permanent
Securitizations, completed to date, in November 1995 and November 1996, the
asset-backed securities issued were credit-enhanced by financial guaranty
insurance policies issued by Financial Security Assurance Inc. ('FSA'), which
was a significant factor in enabling S&P and Moody's to rate the senior
securities issued in each such transaction AAA and Aaa, respectively. Failure to
obtain such credit enhancement in connection with future Permanent
Securitizations would most likely result in increased costs to the Company and
could affect the timing of, or the ability to consummate, future Permanent
Securitizations. If the Company were unable to securitize Loans under the
Revolving Securitization, refinance such Loans pursuant to subsequent Permanent
Securitizations, or otherwise obtain alternative sources of capital in the
future, the Company's revenues and income could be significantly impaired and it
could experience a significant change in the timing of reported income. Further,
there can be no assurance that the Company will realize gains on future
securitizations consistent with its gains on previous securitizations.
A significant deterioration in the performance of Loans held in the Master
Trust or those held in a discrete trust pursuant to a Permanent Securitization
could result in the retention by such trusts of funds otherwise distributable to
the Company in respect of residual interests held by the Company and, under
certain circumstances, termination of the Master Trust's ability to purchase
additional Loans from the Company. A significant decline in the performance of
the Company's Loan portfolio could, therefore, have a material adverse effect on
both the Company's cash flows and reported net income, and could require the
Company to obtain alternative financing sources. There can be no assurance that
any alternative financing source would be available, or if available, that such
financing could be effected at a cost that would enable the Company to operate
profitably.
The Company's gains on sale from securitizations have been calculated using
estimates concerning borrowing costs and future loss, prepayment and present
value discount rates on securitized Loans that are
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consistent with the Company's and its industry's experience and that the Company
believes would be applied by unrelated purchasers of similar streams of
estimated cash flows. The actual rates of default and/or prepayment on such
Loans or costs of financing such Loans may exceed those estimated, necessitating
write-downs in the Company's excess spread receivables and decreases in cash
flows that could materially adversely affect the Company's financial condition
and results of operations. See 'Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources.'
The Company has accounted for the Loans securitized to date as asset sales
in accordance with FAS No. 77 and relevant pronouncements of the Emerging Issues
Task Force of the Financial Accounting Standards Board (the 'FASB'). In June
1996, the FASB issued Statement of Financial Accounting Standards No. 125 ('FAS
125'), 'Accounting for Transfers of Servicing of Financial Assets and
Extinguishments of Liabilities.' FAS 125 provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishment of
liabilities based on a financial-components approach that focuses on control.
FAS 125 is effective for transfers and servicing of financial assets and
extinguishment of liabilities occurring after December 31, 1996 and is to be
prospectively applied. The Company's assessment of the adoption of FAS 125
indicates that the accounting for the Revolving Securitization will not change
materially from the present accounting. The Company believes that its
securitization process meets the requirements for surrender of control over the
securitized assets. Additionally, the Company believes that the gain presently
deferred at the time of Permanent Securitization can be recognized under FAS
125.
DEPENDENCE ON REVOLVING SECURITIZATION
The Revolving Securitization facility is a $50 million renewable multi-year
commitment with First Union National Bank of North Carolina that expires on June
30, 1999. The Revolving Securitization facility may be increased to a $75
million facility upon request of the Company and subject to the consent of First
Union National Bank of North Carolina. The amount of funds available under the
Revolving Securitization is governed by a borrowing base formula that provides
availability as a multiple of the overcollateralization capital pledged and is
restricted by a number of financial covenants. Interest under such facility is
charged (i) during the month in which the Loan is sold to the Master Trust, at
First Union National Bank of North Carolina's prime rate of interest, and (ii)
thereafter, at the London Interbank Offered Rate ('LIBOR') plus, based upon a
formula, between 75 and 300 basis points. The Company currently has no other
credit facility pursuant to which it could sell Loans to the Master Trust or
otherwise finance the purchase of Loans. Accordingly, if the Company is unable
to finance the purchase of Loans pursuant to the Revolving Securitization,
because of a default by the Company under such facility or otherwise, or
otherwise obtain alternative sources of capital, the Company's revenues and
income could be significantly impaired and it could experience a significant
change in the timing of reported income.
GAIN ON SALES OF LOANS
A substantial portion of the Company's income is derived from the sale of
Loans to the Master Trust pursuant to the Revolving Securitization. The Company
recognized a gain on the sale of Loans of $7,125,849 for the year ended December
31, 1995 (approximately 91% of the Company's total revenue for the year ended
December 31, 1995) and $8,188,473 for the nine months ended September 30, 1996
(approximately 83% of the Company's total revenue for the nine months ended
September 30, 1996). The capacity of the Revolving Securitization is dependent,
in part, upon the subsequent refinancing of Loans pursuant to Permanent
Securitizations. In the Company's two Permanent Securitizations completed to
date, in November 1995 and November 1996, the asset-backed securities issued
were credit-enhanced by FSA. Failure to obtain such credit enhancement in
connection with future Permanent Securitizations could affect the Company's
ability to consummate future Permanent Securitizations. If the Company were
unable to purchase new Loans and subsequently sell such Loans to the Master
Trust pursuant to the Revolving Securitization, the Company's revenues and
income could be significantly impaired and the Company could experience a
significant change in the timing of reported income. Further, there can be no
assurance that the Company will recognize gains on future sales of Loans
pursuant to the Revolving Securitization consistent with the Company's gains on
previous sales.
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DEPENDENCE UPON FIRST UNION STRATEGIC ALLIANCE
The Company is dependent upon the First Union Strategic Alliance to
penetrate certain markets and significantly increase the number of Loans the
Company purchases. The Company intends to enter into similar strategic referral
and marketing alliances with other financial institutions. However, the First
Union Strategic Alliance is the first such strategic referral and marketing
alliance that the Company has formed, and there can be no assurance that the
Company can profitably purchase a significant number of Loans through the First
Union Strategic Alliance. In addition, the Company's current focus on
implementation of the First Union Strategic Alliance (including the expansion of
the scope of such alliance to FUSF's Northeastern Franchise) and the significant
involvement of First Union in the Company's business may delay or impair the
Company's ability to consummate additional strategic referral and marketing
alliances. There can be no assurance that the Company will be able to enter into
additional strategic referral and marketing alliances, or that any such alliance
will be profitable to the Company. If the First Union Strategic Alliance is
unsuccessful or if the Company is unable to form additional strategic referral
and marketing alliances, the Company's financial condition and results of
operations may be materially adversely affected. See 'Business--Marketing
Strategy.'
DEPENDENCE ON KEY PERSONNEL
The Company believes that its development and growth to date has been due
primarily to the efforts of the Company's senior management. Although the
Company has entered into employment agreements with certain key personnel, the
loss of services of one or more of the Company's senior management in the future
could have a material adverse effect on the Company's ability to maintain credit
quality, supervise its operations, further expand into existing markets,
penetrate new markets, develop its internal servicing capacity and successfully
manage the Company in other areas. See 'Management.'
COMPETITION AND MARKET CONDITIONS
The Non-Prime Consumer automobile finance market is highly competitive. The
level of competition has increased significantly in recent years and this trend
is expected to continue. Historically, commercial banks, savings and loan
associations, credit unions, captive finance subsidiaries of automobile
manufacturers and other consumer lenders, many of which have significantly
greater resources than the Company, have not competed for Non-Prime Consumer
business. To the extent that such lenders expand their activities in the
Non-Prime Consumer market, the Company's financial condition and results of
operations could be materially adversely affected. See 'Business--Competition.'
During the past two years, several companies have devoted considerable resources
to the Non-Prime Consumer market, including well-capitalized public companies.
Specifically, Ford Motor Credit Company announced that it intends to finance
Non-Prime Consumers, General Electric Capital Corporation established strategic
alliances with several regional Non-Prime Consumer automobile finance companies
and KeyCorp acquired AutoFinance Group, Inc., one of the Company's competitors.
Other companies, including Mellon Bank Corporation and Southern National
Corporation, have also entered the market.
The Company's business is also affected by certain demographic, economic
and industry trends. These trends include increased sales of used cars, rising
new car prices relative to used car prices, stability in Non-Prime Consumers'
demand for used cars, the inability of Non-Prime Consumers to find lower-cost
financing from other sources and the overall level of interest rates in general.
A reversal of any of these trends or a change in any of these conditions could
have a material adverse effect on the Company's financial condition and results
of operations. See 'Business--Competition.'
REGULATION AND LITIGATION
The Company's business is subject to extensive regulation and supervision
in the states in which the Company operates. Such regulations, among other
things, require the Company to obtain and maintain licenses and qualifications,
to limit interest rates, fees and other charges related to Loans purchased,
require specified disclosures by Dealers to consumers and to limit rights to
repossess and sell collateral. Such regulations exist primarily for the benefit
of consumers, rather than for the protection of Dealers or finance companies,
and could limit the Company's discretion in operating its business.
Noncompliance with any applicable statutes or regulations could result in
suspension or revocation of any license or registration at issue, as well as the
imposition of civil fines and criminal penalties. The Company's weighted average
annual percentage rate on
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outstanding Loans sold to the Master Trust is 18.63% with an average yield of
21.75% as of September 30, 1996. At these rates of interest, most of the
Company's Loans bear interest at or near the maximum rate allowed by law in
their respective jurisdictions. To the extent that the rates charged by the
Company are limited by the application of maximum allowable interest rates lower
than those currently charged by the Company, the Company will suffer adverse
effects on its profitability. In addition, due to the consumer-oriented nature
of the automobile finance industry, finance companies are frequently named as
defendants in litigation involving alleged violations of federal and state
consumer lending or other laws and regulations. There can be no assurance that
the Company will not become subject to such litigation in the future. A
significant judgment against the Company could have a material adverse effect on
the Company's financial condition and results of operations. See
'Business--Regulation.'
SENSITIVITY TO INTEREST RATES
A substantial portion of the Company's income is derived from the sale of
Loans to the Master Trust pursuant to the Revolving Securitization. The Company
relies in part on cash flow from the Master Trust to support its operations.
Since the Master Trust's borrowing rates under the Revolving Securitization are
floating and the interest rates charged on the Loans (which are generally at or
near the maximum rates permitted by applicable state laws) are fixed, increases
in the interest rates charged on the Master Trust's borrowings could have a
material adverse effect both on cash flows from the Master Trust to the Company
and on the Company's net income, thereby adversely affecting the Company's
financial condition and results of operations. In order to mitigate the negative
impact of rising interest rates, the Master Trust has entered into interest rate
swap agreements that have the effect of fixing the rates charged on a portion of
the Master Trust's indebtedness. Although these agreements provide the Master
Trust (and, therefore, the Company) some protection against rising interest
rates, these agreements also reduce the benefits to the Master Trust (and,
therefore, the Company) when interest rates decline below the rates set forth in
these agreements. In addition, upon refinancing of Loans through Permanent
Securitizations, the interest spread with respect to such Loans may be fixed.
Although the Company expects the Master Trust to continue to refinance Loans in
the Master Trust through Permanent Securitizations, there can be no assurance
that such securitizations will occur or that the interest rates fixed pursuant
to such securitizations will be consistent with the Company's past experience.
See 'Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources.'
DEPENDENCE ON SERVICING ARRANGEMENTS
All of the Loans purchased by the Company since it commenced business have
been serviced by Omni Financial Services of America ('World Omni'). The current
servicing agreement between the Company and World Omni contemplates that new
Loans will be accepted for servicing by World Omni until December 31, 1997,
after which date, unless the agreement is extended, World Omni would be
obligated to continue to service only the Loans then under contract for the life
of such Loans. Although the Company currently is considering its options with
respect to developing its own servicing capability, the Company currently does
not have the internal capacity to service all of its Loans. Accordingly, the
failure of World Omni to adequately service the Company's Loans or the
termination of the servicing agreement with World Omni could adversely affect
the Company until arrangements with another third-party servicer can be
implemented or until the Company develops its own servicing capability. While
there are other independent consumer loan servicing organizations that provide
servicing on a contract basis, there can be no assurance that another servicer
could be substituted at a comparable cost and quality of service, or on a timely
basis. Further, there can be no assurance that the Company would be able to
profitably implement an in-house servicing capability. See 'Business--Credit
Underwriting and Administration.'
GEOGRAPHIC CONCENTRATION
As of September 30, 1996, approximately 75% of the current principal
balance of the Company's Loan portfolio was purchased from Dealers located in
Georgia, North Carolina, South Carolina and Virginia. An economic slowdown or
recession, or a change in the regulatory or legal environment in one or more of
these states, could have a material adverse effect on the Company's financial
condition and results of operations. See 'Business--Loan Portfolio Profile.'
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BANKING AND OTHER RESTRICTIONS
To facilitate the First Union Partner's compliance with applicable banking
laws, regulations and orders (collectively, the 'Banking Laws'), the Company has
agreed that it will engage solely in activities that are permissible for
national banks as determined by Banking Laws in effect from time to time. The
First Union Strategic Alliance also generally provides that the Company may not
purchase a Loan through any arrangement with a financial institution if such
Loan is originated by an active First Union Dealer. Although the Company
believes that these restrictions are reasonable in light of the advantages
afforded by the First Union Strategic Alliance, the effect of these restrictions
may be to limit in certain respects the Company's ability to seek or to take
advantage of certain business or marketing opportunities, which may have a
material adverse effect on the Company's financial condition and results of
operation. See 'Business--Banking Regulation.'
CONTROL BY PRINCIPAL STOCKHOLDERS
Upon consummation of this Offering, the NAFCO Partnership will own
approximately 62.89% of the Company's outstanding Common Stock (60.20% if the
Underwriters' over-allotment option is exercised in full). In addition, the
First Union Partner, a limited partner of the NAFCO Partnership, currently has
an economic interest with respect to approximately 15% of the Common Stock of
the Company held by the NAFCO Partnership (or approximately 9.43% of the
outstanding shares of Common Stock upon consummation of this Offering). Based
upon several factors, including the overall performance of the First Union
Strategic Alliance and the total market value of the Company over a specified
time period, the First Union Partner may obtain an economic interest with
respect to an approximate additional 34% of the Common Stock held by the NAFCO
Partnership. Any such increase would be non-dilutive to the public stockholders
of the Company. As a result, the principals of National Auto Finance
Corporation, a Delaware corporation and the general partner of the NAFCO
Partnership ('National Auto'), will be able to determine the outcome of most
day-to-day corporate actions and the NAFCO Partnership will be able to determine
the outcome of most corporate actions requiring a stockholder vote, including
the election of directors and any matter submitted to the stockholders for
approval, including mergers, consolidations and the sale of all or substantially
all of the Company's assets. In addition, the First Union Partner, as a limited
partner of the NAFCO Partnership, may be able to influence the future operations
of the Company. See 'Principal Stockholders.'
AUTHORIZATION OF PREFERRED STOCK
The Company's Certificate of Incorporation authorizes the issuance of
preferred stock with such designations, rights and preferences as may be
determined from time to time by the Board of Directors. Accordingly, the Board
of Directors is empowered, without stockholder approval, to issue shares of
preferred stock that have preferences over the Common Stock with respect to the
payment of dividends, liquidation, conversion, voting or other rights which
could adversely affect the voting power and ownership percentages of the holders
of Common Stock. The issuance of shares of preferred stock or the issuance of
rights to purchase such shares could have the effect of discouraging, delaying
or preventing a change in control of the Company. See 'Description of Capital
Stock.'
CERTAIN ANTI-TAKEOVER PROVISIONS
The Company's Certificate of Incorporation and By-laws contain certain
provisions that may be deemed to have the effect of delaying, deferring or
preventing a change of control of the Company or a takeover attempt that a
stockholder might consider in its best interest. These provisions include a
classified board of directors and the Company's ability to issue preferred
stock. See 'Description of Capital Stock.'
ABSENCE OF PRIOR TRADING MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this Offering, there has been no public trading market for the
shares of Common Stock. There can be no assurance that an active trading market
for the Common Stock will develop or continue after this Offering. The initial
public offering price of the Common Stock offered hereby has been established
through negotiation between the Company and the Underwriters. See
'Underwriting.' The market price of the Common Stock may be highly volatile and
could be subject to wide fluctuations in response to quarterly variations in
operating results, changes in financial estimates by securities analysts or
other events or factors. Broad market fluctuations or any failure of the
Company's operating results in a particular quarter to meet market expectations
may
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adversely affect the market price of the Common Stock. In the past, following
periods of volatility in the market price of a company's securities, securities
class action litigation has often been instituted against such a company. Such
litigation could result in substantial costs and a diversion of management's
attention and resources, which could have a material adverse effect on the
Company's financial condition and results of operations.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have outstanding an
aggregate of 6,726,000 shares of Common Stock. All of the shares sold in this
Offering (plus an additional 300,000 shares if the over-allotment option granted
to the Underwriters is exercised in full) will be freely tradeable without
restriction or further registration under the Securities Act of 1933, as amended
(the 'Securities Act'), except for any shares purchased by an affiliate of the
Company that will be subject to the resale limitations of Rule 144 under the
Securities Act. Upon the expiration of lock-up agreements between each of the
executive officers, directors and existing stockholders and the Underwriters,
180 days after the date of this Prospectus (or earlier upon the written consent
of Raymond James & Associates, Inc.), 4,726,000 shares of Common Stock
outstanding prior to this Offering may be sold in the public market by
affiliates of the Company, subject to the limitations and restrictions contained
in Rule 144 under the Securities Act. In addition, 500,000 shares of Common
Stock have been reserved for issuance under the National Auto Finance Company,
Inc. 1996 Share Incentive Plan (the '1996 Share Incentive Plan'). Options to
acquire an aggregate of 260,000 of such shares have been granted to certain key
employees and directors of the Company, and upon completion of this Offering any
shares of Common Stock issuable upon the exercise of such options (subject to
certain vesting terms and other limitations on exercise with respect to such
options) will be eligible for sale in the future pursuant to registration on
Form S-8. Sales of substantial amounts of Common Stock, or the availability of
substantial amounts of Common Stock for future sale, could adversely affect the
prevailing market price of the Common Stock. Certain stockholders of the Company
holding 496,000 shares of Common Stock have the right to require the Company to
register their shares of Common Stock under the Securities Act, and to include
shares of Common Stock in registrations proposed to be effected by the Company.
Such stockholders have agreed not to exercise their registration rights prior to
180 days from the date of this Prospectus without the prior written consent of
Raymond James & Associates, Inc. See 'Shares Eligible for Future
Sale,'Management--1996 Share Incentive Plan,' 'Principal Stockholders' and
'Underwriting.'
NO CASH DIVIDENDS
Following this Offering, the Company intends to retain its earnings for use
in its business and does not anticipate paying any cash dividends in the
foreseeable future. See 'Dividend Policy.'
DILUTION
Purchasers of the Common Stock offered hereby will experience immediate and
substantial dilution per share of Common Stock of $5.11 per share (based upon an
assumed offering price of $8.00 per share) in net tangible book value per share
of Common Stock from the offering price. See 'Dilution.'
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THE REORGANIZATION
BACKGROUND
The NAFCO Partnership was formed pursuant to an agreement of limited
partnership, dated as of October 1, 1994 (as amended and restated, the 'NAFCO
Partnership Agreement'). National Auto is the general partner of the NAFCO
Partnership and holds a 1% general partner interest. The limited partners of the
NAFCO Partnership include The S Associates Limited Partnership ('S Associates'),
a limited partnership controlled by Gary L. Shapiro, Chairman of the Board of
Directors and Chief Executive Officer of the Company, The O Associates Limited
Partnership ('O Associates'), a limited partnership controlled by Edgar A. Otto,
a director of the Company, the First Union Partner and certain other individuals
(collectively, the 'NAFCO Limited Partners'). The NAFCO Limited Partners hold in
the aggregate a 99% partner interest in the NAFCO Partnership.
The ACCH Partnership was formed in September 1995. The general partner of
the ACCH Partnership, National Auto, holds a 1% general partner interest in the
ACCH Partnership. The NAFCO Partnership and two officers of the Company are the
limited partners of the ACCH Partnership (the 'ACCH Limited Partners'). The ACCH
Limited Partners hold in the aggregate a 99% limited partner interest in the
ACCH Partnership.
SENIOR SUBORDINATED INDEBTEDNESS
In August 1996, the Company completed a $12 million senior subordinated
debt financing. In connection therewith, the Company executed, as of August 9,
1996, a Note Purchase Agreement (the 'Note Purchase Agreement') with Morgan
Guaranty Trust Company of New York, as trustee of the Commingled Pension Trust
Fund (Multi-Market Special Investment Fund II) of Morgan Guaranty Trust Company
of New York ('MGTC'), Morgan Guaranty Trust Company of New York, as trustee of
the Multi-Market Special Investment Trust Fund of Morgan Guaranty Trust Company
of New York ('MGMM') and Morgan Guaranty Trust Company, as investment manager
and agent for an institutional investor ('MGAS,' and together with MGTC and
MGMM, the 'Morgan Group'). Pursuant to the Note Purchase Agreement, the Company
issued to the Morgan Group $12 million aggregate principal amount of its senior
subordinated notes due 2001 (the 'Senior Subordinated Notes') and related
deferred additional interest notes due 2006 (the 'Deferred Additional Interest
Notes' and collectively with the Senior Subordinated Notes, the 'Morgan Notes').
See 'Certain Transactions--Senior Subordinated Indebtedness.'
ASSET TRANSFERS
Immediately prior to the sale of the shares of Common Stock offered hereby,
the respective assets and liabilities of the Partnerships were
transferred to the Company in exchange for all of the Common Stock of
the Company then outstanding and all of the preferred stock of the
Company then outstanding (such transaction being referred to herein as
the 'Reorganization'). Specifically, the Reorganization entailed the
following transfers:
(a) The partners of the ACCH Partnership (other than the NAFCO
Partnership) transferred all of their partner interests in the
ACCH Partnership to the NAFCO Partnership in exchange for limited
partner interests in the NAFCO Partnership.
(b) The NAFCO Partnership transferred all of its assets, subject to
all of its liabilities, to the Company in exchange for 4,229,000
shares of Common Stock (which together with the 1,000 shares of
Common Stock acquired by the NAFCO Partnership in connection with
the initial organization of the Company in October 1996 increased
the NAFCO Partnership's holdings to 4,230,000 shares of Common
Stock) and all of the outstanding preferred stock of the Company.
(c) Upon the transfer of the assets of the NAFCO Partnership to the
Company, the Company issued to the Morgan Group 470,000 shares of
Common Stock (representing 10% of the outstanding Common Stock of
the Company immediately following the Reorganization) in exchange
for the Deferred Additional Interest Notes.
SUBSEQUENT DEVELOPMENTS
Upon completion of the Reorganization and immediately prior to this
Offering, the Company granted options to acquire an aggregate of 260,000 shares
of Common Stock to certain key employees and directors of the Company. Pursuant
to the terms of the Note Purchase Agreement, the holders of the Senior
Subordinated Notes were entitled, prior to this Offering, to receive additional
shares of Common Stock upon the grant of options to key employees and directors
of the Company. Accordingly, upon such grant of options, the Company issued to
the Morgan Group an additional 26,000 shares of Common Stock. Immediately
following the Reorganization and immediately prior to this Offering, all of the
Common Stock of the Company was directly owned by the NAFCO Partnership and the
Morgan Group. See 'Principal Stockholders,' and 'Certain Transactions--Senior
Subordinated Indebtedness.'
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USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,000,000 shares of
Common Stock offered hereby, assuming an initial public offering price of $8.00
per share and after deducting estimated underwriting discounts and commissions
and expenses payable by the Company, are estimated to be approximately $14.3
million (approximately $16.5 million if the Underwriters' over-allotment option
is exercised in full). The Company anticipates that, of the net proceeds of this
Offering, approximately $6.0 million will be used to support securitizations and
other long-term financing arrangements, approximately $4.3 million will be used
to repay a portion of the outstanding subordinated indebtedness evidenced by the
Junior Subordinated Notes (as defined in 'Certain Transactions--Junior
Subordinated Indebtedness') held by certain affiliates of the Company and the
remaining net proceeds will be used for working capital and other general
corporate purposes. As of September 30, 1996, the Company had outstanding junior
subordinated indebtedness, evidenced by such Junior Subordinated Notes, of
approximately $7.2 million, which bear interest at a rate of 8% per annum
payable quarterly. This indebtedness was incurred primarily to support the
Company's operations. Immediately prior to the consummation of this Offering,
the Junior Subordinated Notes were amended to provide (x) for a final maturity
date of January 31, 2002 and (y) for a provision allowing the Company to prepay
the debt evidenced thereby without penalty or the payment of any premium. See
'Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources' and 'Certain Transactions.'
Pending utilization as described above, the net proceeds of this Offering
will be invested in short-term,
high-grade, interest-bearing securities.
DIVIDEND POLICY
The Company has never paid cash dividends or made cash distributions and
does not anticipate paying cash dividends in the foreseeable future, but intends
to retain any future earnings for reinvestment in its business. The Note
Purchase Agreement generally prohibits the Company's payment of dividends on its
Common Stock, subject to certain conditions, following the consummation of this
Offering, so long as any amount remains unpaid on the notes issued in connection
with such Note Purchase Agreement. See 'Certain Transactions--Senior
Subordinated Indebtedness.' Subject to the restrictions contained in the Note
Purchase Agreement, any future determination to pay cash dividends will be at
the discretion of the Board of Directors and will be dependent upon the
Company's financial condition, results of operations, capital requirements and
such other factors as the Board of Directors deems relevant.
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CAPITALIZATION
The following table sets forth the long-term debt and capitalization of the
Company (i) at September 30, 1996, (ii) at September 30, 1996 to give pro forma
effect to the Reorganization and (iii) at September 30, 1996 on a pro forma
basis as adjusted to reflect receipt and application by the Company of estimated
net proceeds of $14.3 million from this Offering (based upon an assumed initial
public offering price of $8.00 per share) as described under 'Use of Proceeds.'
The information presented below should be read in conjunction with the financial
statements of the Company and the historical and pro forma financial data
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1996
-------------------------------------
PRO FORMA
ACTUAL PRO FORMA (AS ADJUSTED)
------- --------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term debt:
8% junior subordinated debt (excluding $71,791 of accrued interest)........ $ 7,218 7,218 2,934
10% senior subordinated debt (excluding $212,085 of accrued interest)...... 12,000 12,000 12,000
------- --------- -------------
Total long-term debt......................................................... 19,218 19,218 14,934
Ownership equity:
Partners' preferred equity................................................. 2,251 0 0
Partners' capital.......................................................... 5,903 0 0
------- --------- -------------
Total partners' equity.................................................. 8,154 0 0
Stockholders' equity
Common Stock, $.01 par value, 20,000,000 shares authorized; 4,726,000 pro
forma; 6,726,000 pro forma (as adjusted) issued and outstanding......... 0 47 67
Preferred Stock, $.01 par value, 1,000,000 shares authorized;
2,250 pro forma and pro forma (as adjusted) issued and outstanding...... 2,250 2,250
Additional paid-in capital (pro forma as adjusted)(1)...................... 0 3,673 18,094
--------- -------------
Total stockholders' equity................................................... 0 5,970 20,411
------- --------- -------------
Total long-term borrowings and capitalization........................... $27,372 25,188 35,345
------- --------- -------------
------- --------- -------------
</TABLE>
- ------------------
(1) In connection with the Reorganization, $3,620,000 of retained earnings (pro
forma) and $3,718,000 of retained earnings (pro forma as adjusted) were
transferred to additional paid-in capital to reflect a constructive
distribution to the partners of the NAFCO Partnership followed by a
contribution to the capital of the Company.
17
<PAGE>
DILUTION
After giving effect to the Reorganization, the pro forma net tangible book
value (total assets less deferred costs and total liabilities) of the Company as
of September 30, 1996 was approximately $4,966,000, or approximately $1.05 per
share. As used below, 'net tangible book value per share' represents the
quotient obtained by dividing the pro forma net tangible book value of the
Company at September 30, 1996 by the total number of shares of Common Stock that
would have been outstanding at September 30, 1996 had the Reorganization
occurred on such date. After giving effect to this Offering and the application
of the estimated net proceeds to the Company (after deduction of underwriting
discounts and commissions and estimated Offering expenses), the net tangible
book value of the Company at September 30, 1996 would have been $19,407,000, or
$2.89 per share. This represents an immediate increase in net tangible book
value per share of $1.84 to existing holders of Common Stock as a result of this
Offering and an immediate dilution of net tangible book value per share of $5.11
to new investors in this Offering. The following table illustrates this per
share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share........................................ $8.00
Pro forma net tangible book value before this Offering............................... 1.05
Increase in pro forma net tangible book value per share attributable to
new investors..................................................................... 1.84
-----
Pro forma net tangible book value after this Offering.................................. 2.89
Dilution in pro forma net tangible book value to new investors......................... $5.11
-----
-----
</TABLE>
The following table sets forth, on a pro forma basis (after giving effect
to the Reorganization) as of September 30, 1996, the total number of shares of
Common Stock purchased from the Company, the total consideration paid and the
average price per share paid by the existing stockholders and by new investors
(before deducting the estimated underwriting discounts and commissions and
Offering expenses payable by the Company).
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders..................... 4,726,000 70.3% $ 150,000 .9% $ .03
New investors............................. 2,000,000 29.7 16,000,000 99.1 $8.00
--------- ------- ----------- -------
Total 6,726,000 100% $16,150,000 100%
--------- ------- ----------- -------
--------- ------- ----------- -------
</TABLE>
18
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The income statement data for the three months ended December 31, 1994, the
year ended December 31, 1995 and the nine months ended September 30, 1995 and
1996, and the balance sheet data as of December 31, 1994 and 1995 and September
30, 1995 and 1996, are derived from, and are qualified by reference to, the
financial statements of the Company audited by KPMG Peat Marwick LLP,
independent auditors, which are included elsewhere in this Prospectus, and
should be read in conjunction with those financial statements and the notes
thereto. The results for the nine months ended September 30, 1996 are not
necessarily indicative of the results that may be expected for any other interim
period or for the full year.
The Company commenced operations in October 1994. Consequently, financial
information with respect to the Company is available only since October 1994.
This information is not necessarily indicative of the Company's future
performance. The data set forth below should be read in conjunction with
'Management's Discussion and Analysis of Financial Condition and Results of
Operations' and the Consolidated Financial Statements and the related notes
thereto included elsewhere herein.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED
------------------------- SEPTEMBER 30,
(THREE MONTHS) -------------------
1994 1995 1995 1996
-------------- ------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Gain on sales of Loans.................................... $ 0 6,487 4,920 8,189
Gain on securitization of Loans purchased prior to January
16, 1995(1)............................................. 0 639 639 0
Deferred gain on sales of Loans........................... 0 241 140 491
Deferred servicing income................................. 0 219 109 587
Deferred income from 1995-1 securitization................ 0 0 0 479
Interest income from cash investments..................... 32 11 8 56
Other income.............................................. 0 32 31 54
Finance charges earned.................................... 95 0 0 0
Provision for credit losses(2)............................ (182) 182 0 0
------ ------ ------ ------
Total revenue............................................. (55) 7,811 5,847 9,856
Operating expenses........................................ (420) (4,530) (3,098) (6,754)
------ ------ ------ ------
Total expenses............................................ (420) (4,530) (3,098) (6,754)
------ ------ ------ ------
Net income (loss) before pro forma
income tax expense...................................... (475) 3,281 2,749 3,102
Pro forma income taxes(3)................................. 0 (1,066) (865) (1,167)
------ ------ ------ ------
Pro forma net income (loss)............................... $ (475) 2,215 1,884 1,935
------ ------ ------ ------
------ ------ ------ ------
Pro forma earnings (loss) per share....................... $ (.07) .33(4) .28(4) .29
Pro forma weighted average shares outstanding(5).......... 6,726,000 6,726,000 6,726,000 6,726,000
</TABLE>
- ------------------
(1) Represents $639,000 gain on sale for Loans purchased between October 12,
1994 and January 16, 1995 and sold to the Master Trust on January 16, 1995
in connection with the Revolving Securitization.
(2) Approximately 5%, or $182,000, of the $3.6 million of Loans purchased during
the three months ended December 31, 1994 was set aside as a provision for
possible Loan losses. This reserve was reversed when these Loans were sold
to the Master Trust on January 16, 1995 in connection with the Revolving
Securitization. Subsequently, all reserves for Loan losses have been
accounted for by the Master Trust.
(3) The pro forma income taxes reflect the application of a combined federal and
state income tax rate of approximately 38% as if the Company had been taxed
as a C corporation for all periods presented. For the periods ended December
31, 1995 and September 30, 1995, taxes have been calculated at 38% after
netting prior years net operating loss from pro forma net income.
(4) Includes approximately $0.07 per share attributable to gains on Loans
purchased between the Company's commencement of operations on October 12,
1994 and January 16, 1995, when the Company initiated its Revolving
Securitization program.
(5) Adjusted to give effect to the sale by the Company of 2,000,000 shares of
Common Stock in this Offering.
19
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
----------------- ------------------
1994 1995 1995 1996
------ ------- ------- -------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets........................................... $5,800 12,003 10,046 28,446
Senior Subordinated Notes payable...................... 0 0 0 12,000
Junior Subordinated Notes payable...................... 5,324 7,556 6,461 7,218
Total liabilities...................................... 5,775 8,556 7,271 20,292
Partners' preferred equity............................. 48 482 400 2,251
Partners' equity....................................... (23) 2,965 2,375 5,903
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED
------------------------- SEPTEMBER 30,
(THREE MONTHS) ------------------
1994 1995 1995 1996
-------------- ------- ------- -------
<S> <C> <C> <C> <C>
LOAN PORTFOLIO INFORMATION:
Number of Loans purchased during period (not in
thousands)........................................... 300 3,586 2,718 4,537
Principal balance of Loans purchased during period..... $3,820 45,972 34,594 56,152
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
----------------- -------------------
1994 1995 1995 1996
------ ------- ------- --------
<S> <C> <C> <C> <C>
Aggregate number of Loans purchased.................... 300 3,886 3,018 8,423
Aggregate principal balance of Loans purchased......... $3,820 49,792 38,414 105,944
Number of outstanding Loans............................ 300 3,586 2,884 7,286
Principal balance of outstanding Loans................. $3,800 43,145 35,064 82,792
Net charge-offs as a percentage of aggregate principal
balance of Loans purchased........................... 0.00% 1.31% 0.55% 2.43%
</TABLE>
20
<PAGE>
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 consolidated financial condition as of September 30,
1995 and 1996 and as of December 31, 1995, and its results of operations for the
nine months ended September 30, 1995 and 1996 and the year ended December 31,
1995. A discussion of other periods is not included below because the Company
only commenced its operations in October 1994, and any comparison with the
results of the full 1995 fiscal year would not be analytically useful. This
management's discussion and analysis should be read in conjunction with the
preceding 'Selected Consolidated Financial Data' and the Company's Consolidated
Financial Statements and the notes thereto and the other financial data included
elsewhere in this Prospectus. Data for the nine months ended September 30, 1996
are not necessarily indicative of results expected for the full fiscal year. The
ratios and percentages provided below are calculated using detailed financial
information contained in the Company's Consolidated Financial Statements, the
notes thereto and the other consolidated financial data included elsewhere in
this Prospectus.
OVERVIEW
The Company is a specialized consumer finance company engaged in the
purchase, securitization and servicing of Non-Prime Consumer Loans originated by
Dealers. The Company acquires Loans principally from manufacturer-franchised
Dealers in connection with their sale of new and used automobiles to approved
Non-Prime Consumers. For all periods presented, the Company operated as two
limited partnerships. As such, the income tax effects of all earnings or losses
of the Company were passed directly to the partners and no provisions for income
taxes were required. See 'The Reorganization.'
The Company's plan of operation for the first six months of 1997 is to
increase the number of Loans that it purchases, securitizes and services by (i)
utilizing its Dealer Relations Managers to market the Company's products and
services directly to Dealers (including Dealers with which the Company currently
does not have a contractual relationship) and (ii) implementing the First Union
Strategic Alliance. The Company believes that the net proceeds of this Offering,
together with the net proceeds (which have been received) of subordinated debt
borrowings from certain affiliates of the Company and from institutional
investors, will be sufficient to meet the Company's cash requirements and fund
operations for approximately twelve months following this Offering, assuming the
Company completes additional Permanent Securitizations during such 12-month
period.
HISTORICAL DEVELOPMENT AND GROWTH
From the inception of the Company in October 1994 through January 16, 1995,
the primary source of revenue for the Company was net interest income on Loans
purchased by the Company. In January 1995, the Company began using a Revolving
Securitization pursuant to which the Company sells its Loans on a daily basis to
the Master Trust. The Revolving Securitization was implemented effective January
16, 1995. On that date, the Company sold to the Master Trust 407 Loans
(approximately $5 million principal amount) that were purchased by the Company
from October 12, 1994 through January 16, 1995. Thereafter, the Company
commenced selling Loans purchased by it to the Master Trust on a daily basis.
The Company's first Permanent Securitization, completed November 22, 1995,
involved the transfer by the Master Trust to the National Auto Finance 1995-1
Trust (the '1995-1 Trust') of Loans with an aggregate principal amount totaling
$42 million. The Company's next Permanent Securitization, completed November 13,
1996, involved the sale by the Master Trust to the National Auto Finance 1996-1
Trust (the '1996-1 Trust') of Loans with an aggregate principal amount totaling
$68 million. The Company retains a residual interest and a cash investment with
respect to each of the Master Trust, the 1995-1 Trust and the 1996-1 Trust,
which are reflected as the 'excess spread receivable' ('ESR') and the 'spread
accounts' on the Company's balance sheet. Since initiation of the Revolving
Securitization, the Company's earnings have been primarily attributable to the
gains recognized on the sale of Loans into the Master Trust. For the nine months
ended September 30, 1996, such gains accounted for approximately 83% of the
Company's revenues.
21
<PAGE>
COMPONENTS OF REVENUE AND EXPENSES
Revenues. The Company derives revenues principally from the purchase and
daily sale of Loans to the Master Trust pursuant to the Revolving
Securitization. In determining its reported gain from these securitization
activities, the Company adds the total interest payments due from borrowers and
the dollar amount of the discount at which the Loans were purchased from
Dealers. The Company then deducts an estimated reserve for future Loan losses,
prepayments, borrowing charges and deferred servicing costs and discounts the
remaining cash flow to its net present value. The resulting amount is reported
as gain on securitization of finance receivables on the Company's income
statement.
In addition to interest income from cash investments, other revenues are
earned primarily from amortization of the deferred servicing costs which are
recognized to offset the direct servicing expenses incurred by the Company.
Additional income is recognized from the monthly amortization of the deferred
gain resulting from the calculation of the net present value of the net cash
flows sold to the Master Trust.
Expenses. The Company's expenses consist of interest and operating
expenses. Interest expense is the interest incurred on notes to certain
affiliates of the Company and notes to certain institutional investors. See
'--Liquidity and Capital Resources' and 'Certain Transactions.'
Operating expenses consist primarily of personnel, general and
administrative and servicing expenses. Depreciation of the Company's capital
expenditures for furniture and equipment that is being recognized over five
years on a straight-line basis is also included in this category.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996, AS COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1995.
Income from Operations. The Company reported income from operations of
$3.1 million for the nine months ended September 30, 1996, an increase of 47%,
as compared to income from operations of $2.1 million for the nine months ended
September 30, 1995, after excluding $639,000 that represented income from Loans
purchased from October 12, 1994 to January 16, 1995 and sold to the Master Trust
in January 1995. The Company would have reported $2.0 million of pro forma net
income after a provision for income taxes for the nine months ended September
30, 1996, an increase of 43% as compared to pro forma net income of $1.4 million
for the nine months ended September 30, 1995, after excluding approximately
$439,000 of pro forma net income from Loans purchased from October 12, 1994 to
January 16, 1995 and sold to the Master Trust in January 1995.
Gain on Sales of Loans. The Company's Loan purchasing and servicing
operations expanded significantly during the nine months ended September 30,
1996, as compared to the nine months ended September 30, 1995. The Company
purchased from Dealers and subsequently sold to the Master Trust $56.1 million
principal amount of Loans, or 4,537 Loans, during the nine months ended
September 30, 1996, as compared to $34.6 million principal amount of Loans, or
2,718 Loans, purchased from Dealers and subsequently sold to the Master Trust
during the nine months ended September 30, 1995. For the nine months ended
September 30, 1996, the Company recognized a gain on securitization of $8.2
million, representing a 67.3% increase over the $4.9 million of gains recognized
for the nine months ended September 30, 1995, excluding $639,000 from the sale
of Loans purchased in 1994. This increase was primarily the result of a 62.6%
increase in the dollar volume of Loans purchased and subsequently sold to the
Master Trust for the nine months ended September 30, 1996, as compared to the
nine months ended September 30, 1995.
The table below sets forth certain information relating to the Company's
Loan purchasing activities, including specifically the number and aggregate
principal amount of Loans purchased, the aggregate amount
22
<PAGE>
funded to Dealers and the related amount of deferred gain and deferred servicing
revenue from the securitization of such Loans:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED SEPTEMBER 30,
DECEMBER 31,
---------------- --------------------------------------
1994 1995 1995 1996
------ ------ ----------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Number of Loans purchased during period................................ 300 3,586 2,718 4,537
Principal balance of Loans purchased during period..................... $3,820 45,972 34,594 56,152
Amount funded(1)....................................................... $3,596 43,505 32,716 53,216
Percent sold to trusts................................................. 0.00% 100.00% 100.00% 100.00%
Gain on sales of Loans................................................. 0 7,126(2) 5,559 8,188
Amortization of deferred gain and servicing............................ 0 460 249 1,078
Gain on sale revenue as a percent of total revenue..................... 0 91.22% 95.07% 83.08%
</TABLE>
- ------------------
(1) Amount funded represents the price at which the Company purchases a Loan
from a Dealer (i.e., the amount actually paid to a Dealer), calculated as
the principal of the Loan purchased less a negotiated discount.
(2) Includes $639,000 of gain on sale for Loans purchased between October 12,
1994 and January 16, 1995 and sold to the Master Trust in connection with
the Revolving Securitization on January 16, 1995.
Loan Loss Provision
The Company's gain on sale of loans calculation assumes potential
charge-offs from the Loan portfolio securitized. For the nine months ended
September 30, 1996, the provision for Loan losses was approximately $2.7
million, or 5.0% of the amount funded, as compared to approximately $1.7
million, or 5.1% of the amount funded for the nine months ended September 30,
1995. An increase in losses above levels provided for would result in reduced
cash flow to the Company and a possible write-down of the ESR and spread
account.
Loan Prepayment Provision
The Company's gain on sale of loans calculation assumes estimates of
potential prepayments from the Loan portfolio securitized. For the nine months
ended September 30, 1996, the provision for Loan prepayments was approximately
$7.2 million, or 13.55% of the amount funded, as compared to approximately $3.6
million, or 11.12% of the amount funded, for the nine months ended September 30,
1995.
Other Income
The Company generated approximately $1.7 million of other income for the
nine months ended September 30, 1996, as compared to $289,000 for the nine
months ended September 30, 1995. The principal sources of the Company's other
income were $491,000 of amortized deferred gain, $587,000 of servicing income
and $110,000 of interest and miscellaneous income for the nine months ended
September 30, 1996 as compared to $140,000, $109,000 and $40,000, respectively,
for the nine months ended September 30, 1995. An additional $479,000 was
recognized for the nine months ended September 30, 1996 from the amortization of
additional deferred gain that resulted from the transfer of receivables from the
Master Trust to the 1995-1 Trust. This deferred gain resulted from the fact that
the Permanent Securitization was accomplished at a lower borrowing rate than the
Company assumed in calculating its gain on the sale of such Loans to the Master
Trust.
Operating Expenses
The Company reported operating expenses of $6.4 million (net of
depreciation and amortization expense of approximately $343,000) for the nine
months ended September 30, 1996, as compared to approximately $3.0 million (net
of depreciation and amortization expense of approximately $133,000) for the nine
months ended September 30, 1995. These expenses consisted primarily of interest
on subordinated notes and personnel, general, administrative (including
origination and other operating expenses) and servicing expenses. The increase
in expenses, from 50.71% of revenues as of September 30, 1995 to 65.05% as of
September 30, 1996, reflected the growth in the number of Loans purchased and
serviced by the Company and the hiring of additional senior management and the
other start-up costs associated with implementation of the Company's strategic
referral and marketing alliance program. Management currently expects that
operating costs will continue to rise throughout fiscal year 1997 as the result
of anticipated growth in the number of Loans purchased and serviced by the
23
<PAGE>
Company and the hiring of additional personnel in connection with the expansion
of the First Union Strategic Alliance to FUSF's Northeastern Franchise. In
addition, operating costs may also increase if the Company develops its own
in-house servicing capabilities. Increased operating expenses will decrease
the Company's operating margins and the Company's overall profitability.
Personnel expenses for the nine months ended September 30, 1996 were
approximately $2.5 million, as compared to approximately $1.2 million for the
nine months ended September 30, 1995. Personnel expenses consisted primarily of
salaries and wages, performance incentives, employee benefits and payroll taxes.
The increase in expenses primarily reflected the growth in the amount of Loans
purchased and serviced by the Company, the hiring of additional senior
management and the other start-up costs associated with implementation of the
Company's strategic referral and marketing alliance program. The Company's
number of full-time employees increased from 30 as of September 30, 1995 to 67
as of September 30, 1996. The Company expects that its number of full-time
employees will continue to increase commensurate with the growth of the
Company's Loan purchasing and intended future in-house servicing activities.
General and administrative expenses for the nine months ended September 30,
1996 were approximately $2.4 million, as compared to approximately $1.2 million
for the nine months ended September 30, 1995. These expenses consisted primarily
of telecommunications, travel, professional fees, insurance expenses and
management information systems expenses. The increase in expenses primarily
reflected the growth in the amount of Loans purchased and serviced by the
Company, the hiring of additional senior management and the other start-up costs
associated with the implementation of the Company's strategic referral and
marketing alliance program.
Interest expense for the nine months ended September 30, 1996 was $676,000,
as compared to $356,000 for the nine months ended September 30, 1995. This
increase is a result of the interest expense incurred on the Company's sale of
$12,000,000 aggregate principal amount of Senior Subordinated Notes and related
Deferred Additional Interest Notes. The Junior Subordinated Notes bear interest
at a rate of 8% per annum, payable quarterly in arrears, commencing September
30, 1996. The Senior Subordinated Notes bear interest at a rate of 10% per annum
payable quarterly in arrears, commencing October 31, 1996.
Servicing expenses for the nine months ended September 30, 1996 were
$778,000 as compared to $203,000 for the nine months ended September 30, 1995.
Servicing expenses consist primarily of a monthly fee to an outside servicer for
each active Loan. Servicing fees paid to World Omni for the nine months ended
September 30, 1996 were $718,000 as compared to $181,000 for the nine months
ended September 30, 1995. The increase in expenses primarily reflected the
growth in the amount of Loans purchased and serviced by the Company. The
Company's total serviced Loan portfolio was approximately $82.8 million, or
7,286 outstanding Loans, as compared to approximately $35.0 million, or 2,884
outstanding Loans, as of September 30, 1995.
FINANCIAL CONDITION
As of September 30, 1996, the Company had total assets of $28.4 million, as
compared to $12.0 million as of December 31, 1995, and approximately $5.8
million as of December 31, 1994. For the periods ended September 30, 1996 and
December 31, 1995, these assets consisted primarily of cash, subordinated
securities and ESRs from the securitization trusts. For the period ended
December 31, 1994, these assets consisted primarily of cash and Loans held for
sale, net of allowances for Loan losses.
As of September 30, 1996, the Company had cash and cash equivalents
totaling approximately $8.9 million. As of such date, the Company also had
approximately $1.2 million in cash balances held in restricted bank accounts,
representing credit enhancement in the form of Loan loss reserves for the
securitization trusts, which amount was included in the total amount of the
Company's ESRs as of such date.
As of September 30, 1996, the Company retained approximately $10.8 million
of ESRs and approximately $6.8 million of subordinated securities. These assets
represented 62% of the total assets of the Company as of such date. The value of
these assets would be reduced in the event of a material increase in the Loan
loss and prepayment experience relative to the amounts estimated by the Company
for such items at the time of the sale of the related Loans to the Master Trust.
As of September 30, 1996, the principal amount owed by the Company on
Junior Subordinated Notes was approximately $7.3 million (including $72,000 of
accrued interest), which bear interest at an annual rate of 8%. Interest in the
amount of $886,000 accrued on such notes through August 15, 1996 was paid on
such date.
24
<PAGE>
In August 1996, the Company sold $12,000,000 aggregate principal amount of
Senior Subordinated Notes and related Deferred Additional Interest Notes. In
connection with the Reorganization, the Deferred Additional Interest Notes were
exchanged for 470,000 shares of Common Stock, representing 10% of the
outstanding Common Stock immediately following the Reorganization, and the
Senior Subordinated Notes became the obligation of the Company. The Company also
has outstanding certain junior subordinated indebtedness evidenced by its Junior
Subordinated Notes.
LOAN LOSS AND DELINQUENCY EXPERIENCE
The Company regularly reviews the adequacy of its net loss reserves on
Loans. The reserves are set at levels considered to be sufficient to cover the
expected future losses on existing Loans. Changes in reserves are based directly
on the dollar value of the Loans transferred to the Master Trust, historical
loss experience and, to a lesser extent, current economic conditions and other
factors that management deems relevant. Losses are continuously monitored on an
overall portfolio and individual month-of-purchase pool basis.
The Company's charge-off policy is based upon a Loan-by-Loan review of
delinquent accounts. The Company generally charges off a Loan at the time its
related collateral is liquidated, although certain Loans may be charged off
sooner if management determines them to be uncollectible.
As of September 30, 1996, the loans acquired and sold by the Company had
net charge-offs of $2.6 million, or 2.43%, of the aggregate principal balance of
Loans purchased since October 1994, as compared to $244,000, or 0.64%, as of
September 30, 1995.
The Company monitors historical loss experience 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 then compared to the estimates for the net loss reserve for each
pool that were established at the pools' inception and adjustments for any
additional losses will be reflected in the current period earnings. As of
September 30, 1996, no such additional loss adjustments have been made. See
'Risk Factors--Limited Operating History.'
The following table summarizes the Trusts' Loan losses and repossession
loss experience:
<TABLE>
<CAPTION>
AS OF DECEMBER AS OF SEPTEMBER
31, 30,
----------------- ------------------
1994 1995 1995 1996
------ ------ ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Aggregate number of Loans purchased............................ 300 3,886 3,018 8,423
Aggregate principal balance of Loans purchased................. $3,820 49,792 38,414 105,944
Principal balance of outstanding Loans......................... $3,800 43,145 35,064 82,792
Number of outstanding Loans.................................... 300 3,586 2,884 7,286
Gross charge-off principal balance(1).......................... 0 1,447 534 5,734
Liquidation recoveries......................................... 0 (797) (290) (3,163)
------ ------ ------ -------
Net charge-offs................................................ 0 650 244 2,571
------ ------ ------ -------
------ ------ ------ -------
Net charge-offs as a percentage of aggregate principal balance
of Loans purchased........................................... 0.00% 1.31% .64% 2.43%
------ ------ ------ -------
------ ------ ------ -------
Principal balance of Loans related to vehicles held in
inventory.................................................... $ 0 553 401 1,215
------ ------ ------ -------
------ ------ ------ -------
</TABLE>
- ------------------
(1) Does not include vehicles repossessed and held in inventory.
25
<PAGE>
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 due date on the fifth day following the due
date. The following table summarizes the delinquency experience with respect to
outstanding Loans sold to the Master Trust:
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF SEPTEMBER 30,
-------------------------- -------------------
1994 1995 1995 1996
-------------- ------- ------- -------
(THREE MONTHS) (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Number of Loans....................................... 300 3,586 2,884 7,286
Principal balance outstanding......................... $3,800 $43,145 $35,064 $82,792
Period of delinquency
31 to 60 days....................................... 0 2,148 794 4,563
61 to 90 days....................................... 0 157 145 1,081
91 days or more, average............................ 0 46 0 282
------- ------- ------- -------
Total delinquencies................................... $ 0 $ 2,351 $ 939 $ 5,926
Total delinquencies as a percentage of the current
principal balance of outstanding Loans.............. 0% 5.45% 2.68% 7.16%
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
Management of the Company believes that the payment practices of Non-Prime
Consumers are partially a function of seasonality. Since 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 and other seasonal demands on their
disposable income. 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.
Since October 1994, the Company has maintained, at its own expense,
supplemental vendor's single interest ('VSI') insurance that protects the
Company's interest in Loan collateral against uninsured physical damage
(including total loss) and instances where neither the vehicle nor the borrower
can be found.
LIQUIDITY AND CAPITAL RESOURCES
General
Since inception, the Company has funded its operations and the growth of
its Loan purchasing activities primarily through five principal sources of
capital: (i) cash flows from operating activities, (ii) proceeds from
securitization transactions, (iii) cash flows from servicing fees, (iv) proceeds
from the issuance of senior subordinated debt to institutional investors, and
(v) proceeds from the issuance of junior subordinated debt to, and from the
capital contributions of, certain affiliates of the Company.
The Company's securitization financing activities are capital-intensive and
will require significant additional capital to fund the Company's required
equity commitment to the Revolving Securitization facility and related
securitization expenses as the Company's Loan purchasing activities grow in the
future. The Company will use the proceeds of this Offering and the Senior
Subordinated Notes to fund, among other things, the Company's required equity
commitment to the Revolving Securitization. The Company believes that the net
proceeds of this Offering, together with the net proceeds received from the
issuance of the Senior Subordinated Notes and the Junior Subordinated Notes and
from the capital contributions of certain affiliates of the Company will be
sufficient to meet the Company's cash requirements and to fund operations for
approximately 12 months following the Offering, assuming the Company completes
additional Permanent Securitizations during such 12-month period.
Securitization Program
The Company currently finances its purchases of Loans primarily through an
asset securitization program that involves (i) the securitized warehousing of
all of its Loans through their daily sale to the Master Trust pursuant to the
Revolving Securitization, followed by (ii) the refinancing of such warehoused
Loans, from time to time, through Permanent Securitizations.
26
<PAGE>
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
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, deposit 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 National Bank of North Carolina currently owns 100% of the outstanding
Class B Certificates.
The Company is required to maintain a minimum equity position in the
Revolving Securitization of 10% of the net serviced receivables. This equity
currently consists of cash invested by the Company and the unamortized dealer
discount. As of September 30, 1996, the Company had an 11.6% equity investment
in the Revolving Securitization.
In November 1995, the Master Trust refinanced $42.0 million of its
receivables in a private placement of asset-backed securities through a
Permanent Securitization. In such transaction, the 1995-1 Trust was formed and
issued $42.0 million of asset-backed securities to various private investors. In
November 1996, the 1996-1 Trust was formed and the Master Trust refinanced $68.0
million of its receivables in a public offering by the 1996-1 Trust of
asset-backed securities through a Permanent Securitization. Payment of principal
of, and interest on, $38.0 million and $62.0 million, respectively, of the
securities issued in such transactions is insured by payment guarantees issued
by FSA, and such securities are rated AAA and Aaa by S&P and Moody's,
respectively. The proceeds of each of such Permanent Securitization transactions
were used by the Master Trust to repay the then-outstanding balance of the Class
B Certificates. Since such time, the Master Trust has issued additional
beneficial interests in Loans purchased by the Master Trust, as evidenced by the
Class B Certificates, to finance its purchase of Loans from the Company. The
Company expects additional Permanent Securitizations to be consummated in the
future in order to refinance periodically amounts outstanding under such Class B
Certificates.
Collection of the indebtedness evidenced by the Loans in each of the Master
Trust and the 1995-1 Trust and the 1996-1 Trust and related administration is
handled by World Omni. World Omni is primarily responsible for invoicing
customers, and collecting and processing payments. The Company acts as master
servicer for the Loans sold to each of the trusts and receives monthly fees from
the trusts at base rates of 2% per annum for the 1995-1 Trust and the 1996-1
Trust and 4% per annum for the Master Trust, plus certain late fees and
prepayment charges received on the securitized Loans.
The Company relies in part on cash flow from the Master Trust to support
its operations. Since the Master Trust's interest rates under the Revolving
Securitization are floating and the interest rates charged on the Loans (which
are generally at or near the maximum rates permitted by applicable state laws)
are fixed, increases in the interest rates incurred with respect to the Class B
Certificates could have a material adverse effect both on cash flows from the
Master Trust and on the Company's net income, thereby adversely affecting the
Company's financial condition and results of operations. In order to mitigate
the negative impact of rising interest rates, the Master Trust has entered into
interest rate swap agreements, which have the effect of fixing the rates charged
on a portion of the Master Trust's indebtedness. Although these agreements
provide the Master Trust (and therefore to the Company) some protection against
rising interest rates, these agreements also reduce the benefits to the Master
Trust (and therefore to the Company) when interest rates decline below the rates
set forth in such agreements. In addition, upon refinancing of Loans through
Permanent Securitizations, the interest spread with respect to such refinanced
Loans may be fixed.
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.
27
<PAGE>
BUSINESS
GENERAL
The Company is a specialized consumer finance company engaged in the
purchase, securitization and servicing of Loans originated by Dealers for
Non-Prime Consumers. The Company purchases Loans principally from
manufacturer-franchised Dealers in connection with their sale of new and used
automobiles. The Company's strategy is to develop a network of Dealers
throughout the United States that will refer Non-Prime Consumer Loan
applications to the Company. To implement this strategy, the Company offers to
Dealers products and services designed to enhance their ability to sell vehicles
to Non-Prime Consumers. The Company markets these products and services to
Dealers through the efforts of its direct sales force and through strategic
referral and marketing alliances with financial institutions that have
established relationships with Dealers.
Since the commencement of the Company's operations in October 1994, the
Company has established contractual relationships with over 1,200 Dealers. The
Company attributes its success in rapidly establishing its Dealer base to the
following:
o Dealer Products and Services--The Company seeks to differentiate itself
from its competitors by introducing products and services designed to
enhance the ability of Dealers to sell vehicles to Non-Prime Consumers.
In developing such products and services, the Company relies on its
senior management's extensive experience in automobile finance as well as
on ideas the Company solicits and receives from Dealers. The Company is
constantly seeking to improve its existing products and services and
develop new ones in order to respond to changing market conditions and
serve specific niches in the Non-Prime Consumer market.
o Dealer Assistance--The Company believes that a Dealer's ability to sell
automobiles is enhanced if a Dealer understands the product and service
offerings, underwriting criteria and financing capabilities of its
financing sources. Accordingly, the Company employs Dealer Relations
Managers who spend considerable time on-site with Dealers in order to
augment Dealers' understanding of the Non-Prime Consumer market and the
Company's products and services.
o Experienced Senior Management--Each of the Company's four senior
operating executives has over 14 years of direct experience in automobile
finance. The Company believes that this experienced management team
provides it with the ability to maintain acceptable credit quality,
supervise its operations, further expand its business in existing markets
and penetrate new markets.
o Timely Communication of Credit Decisions--In the Company's experience, a
rapid response to Dealers' requests for financing is critical to
developing strong relationships with Dealers and having frequent
opportunities to purchase Loans from Dealers. The Company believes that
it provides this timely response to Dealers for their Non-Prime
Consumers. The Company typically communicates its credit decisions to
Dealers within 75 minutes of receipt of a Loan application and provides
next-day funding after the submission of completed Loan documentation.
o Centralized Underwriting--The Company maintains centralized control over
the underwriting and Loan approval functions. The Company believes that
this centralized control ensures consistent and efficient underwriting
and Loan approval functions. The Company's centralized underwriting
policy has enabled the Company to purchase a portfolio of Loans that
management believes will allow the Company to maintain acceptable credit
quality as its Loan portfolio grows.
o Underwriting Consistency--The Company employs a proprietary credit
scoring system and well-defined underwriting criteria to ensure
consistency in the underlying credit risks associated with the Loans it
purchases. The Company believes that this consistency enhances the
efficiency of the financing process from a Dealer's perspective by
enabling a Dealer to gauge accurately which of its Non-Prime Consumer
Loan applications will be approved by the Company.
o Financing Strategy--The Company currently finances its purchases of Loans
primarily through an asset securitization strategy that involves (i) the
securitized warehousing of all of its Loans through their daily sale to
the Master Trust pursuant to the Revolving Securitization, followed by
(ii) the refinancing of such warehoused Loans from time to time through
Permanent Securitizations, thereby creating additional availability of
capital from the Master Trust. Specifically, pursuant to the Revolving
Securitization, the
28
<PAGE>
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 certain residual interests in future excess cash
flows from the Master Trust. The capacity of the Revolving Securitization
is dependent, in part, upon the subsequent refinancings of Loans pursuant
to Permanent Securitizations. In November 1995, the Master Trust
refinanced $42 million of its receivables in a private placement of
asset-backed securities through a Permanent Securitization rated AAA and
Aaa by S&P and Moody's, respectively. In November 1996, the Master Trust
refinanced $68 million of its receivables in a public offering of
asset-backed securities through a Permanent Securitization also rated AAA
and Aaa by S&P and Moody's, respectively.
The Company's plan of operation for the first six months of 1997 is to
increase the number of Loans that it purchases, securitizes and services by (i)
utilizing its Dealer Relations Managers to market the Company's products and
services directly to Dealers (including Dealers with which the Company currently
does not have a contractual relationship) and (ii) implementing the First Union
Strategic Alliance (including the expansion of the scope thereof to FUSF's
Northeastern Franchise). The Company believes that the net proceeds of this
Offering, together with the net proceeds received from the issuance of the
Senior Subordinated Notes and the Junior Subordinated Notes and from the capital
contributions of certain affiliates of the Company will be sufficient to meet
the Company's cash requirements and fund operations for approximately 12 months
following this Offering, assuming the Company completes additional Permanent
Securitizations during such 12-month period.
THE NON-PRIME CONSUMER AUTOMOTIVE FINANCE INDUSTRY
Automobile financing is the second largest sector, by dollar amount, of
consumer installment debt in the United States. According to the United States
Federal Reserve Board, approximately $350 billion of automobile installment
credit was outstanding at the end of 1995. The Company estimates that the
outstanding automobile installment credit attributable to Non-Prime Consumers is
in excess of $60 billion. The Company believes that the portion of the
automobile finance market attributable to Non-Prime Consumers has grown
significantly in recent years and is poised for further growth. Factors
contributing to such growth include the following:
o The number of personal bankruptcy filings in the U.S. has more than
doubled in the past ten years, with approximately 850,000 such filings
occurring in 1995. For the quarter ended September 30, 1996, there were
over 280,000 personal bankruptcy filings, a 27.5% increase from the
quarter ended September 30, 1995.
o Total consumer debt service payments as a percentage of disposable income
have risen steadily over the past three years, and as of March 31, 1996,
were at their highest level in 15 years.
o According to the American Bankers Association (the 'ABA'), credit card
delinquencies for the quarter ended September 30, 1996 reached 3.66% of
accounts, the highest ratio since the ABA began tracking overdue payments
in 1974.
o Sales of used cars grew at a compounded annual growth rate over two times
as large as the comparable growth rate for sales of new cars during the
period 1991 to 1995.
Historically, the market for Non-Prime Consumer credit has been highly
fragmented, with no one company controlling more than 3% of the market. The
Company believes that it is well-positioned to gain an increasing share of this
growth market through its emphasis on Dealer support and service.
DEALER RELATIONSHIPS
As of September 30, 1996, the Company had contractual relationships with
over 1,200 Dealers located in 26 states, including over 400 contractual
relationships established through the First Union Strategic Alliance. The
Company focuses on developing relationships with well-established Dealers. Over
98% of the Company's contractual relationships are with manufacturer-franchised
Dealers, rather than with independent Dealers. The Company will not enroll a
Dealer unless (i) it is duly licensed by the state in which it does business,
(ii) in the case of a used car Dealer, it has been in business for a minimum of
five years, (iii) the Dealer's net worth and financial stability are acceptable
to the Company and (iv) the Dealer's reputation in the industry is satisfactory
to the Company.
29
<PAGE>
Each Dealer doing business with the Company enters into a non-exclusive
written agreement with the Company that governs the Company's purchases of Loans
from such Dealer. Although these agreements do not obligate a Dealer to sell, or
the Company to purchase, any particular Loan, the agreements set forth the terms
upon which Loans will be purchased by the Company. Additionally, these
agreements contain representations and warranties to be made with respect to
each Loan purchased by the Company, each automobile that serves as collateral
for the Loan (e.g., that it is properly registered and for which the Company is
the first lienholder), and compliance with certain laws and regulations. Dealer
agreements generally provide that the Loans are sold to the Company 'without
recourse' (i.e., the Dealer does not assume or retain the credit risk with
respect to any Loan purchased by the Company) unless the Dealer has breached
certain representations and warranties in the agreement.
In the Company's experience, Dealers prefer financing sources that (i)
provide value-added products and services designed to increase Dealers' sales of
vehicles, (ii) maintain regular contact with Dealer finance departments, (iii)
communicate credit decisions in a timely manner, (iv) have consistent
underwriting standards and (v) are well capitalized. The Company's marketing and
operating strategy is designed to meet these needs while assuring that the
Company's delinquency and loss experience remain at acceptable levels.
Management believes that its strategy differentiates it from its competitors.
PRODUCTS AND SERVICES
In its efforts to build a strong Dealer network, the Company provides a
broad array of products and services to Dealers. The most commonly used sales
technique of automobile finance companies is delivery of brochures and rate
cards to Dealers by sales representatives. The Company's Dealer Relations
Managers not only use such material, but also provide services that include (i)
reviewing Dealer inventories to determine adequate inventory levels along with
suggestions about Non-Prime Consumer vehicle purchasing, (ii) training Dealer
sales people to identify Non-Prime Consumers who meet the Company's underwriting
criteria and (iii) working with Dealers to establish separate finance desks that
specifically service the Non-Prime Consumer.
The Company has also developed specific products for Dealers that are
designed to attract customers and offer flexible financing. For example, Credit
Clinic(Trademark) is a service pursuant to which the Dealer advertises a sale
for the 'credit challenged' and the Company provides an on-site credit counselor
who advises the Non-Prime Consumer on choosing a vehicle with a monthly payment
he or she can manage. The Company believes that this service enhances a Dealer's
sales of automobiles because it encourages Non-Prime Consumers who might
otherwise be apprehensive about their personal credit histories to finance their
acquisition of vehicles.
PCOP (Preferred Customer Option Plan) is a product developed for customers
who demonstrate a greater ability to meet payment requirements, but have
difficulty meeting the payment requirements of the vehicle they would like to
purchase. PCOP enables such a customer to buy the vehicle by reducing the
principal repayment amount until the maturity date of the Loan by up to 20% and
creating a balloon payment for that unpaid amount that is payable at the end of
the loan term. When the balloon payment is due, the customer has the option to
pay the remaining principal balance in cash, refinance the vehicle for up to one
year or relinquish the vehicle to the Dealer. The Dealer then has the option of
either acquiring the vehicle by paying off the balloon payment or relinquishing
the vehicle to the Company.
In addition to the specific products and services described above, the
Company has other products and services designed to enhance Dealers' sales of
automobiles to Non-Prime Consumers. The Company is constantly seeking to modify
existing products and services and to implement new ones in order to respond to
changing market conditions and serve specific niches in the Non-Prime Consumer
market.
MARKETING STRATEGY
General
The Company expects to increase the number of Loans it purchases,
securitizes and services by (i) utilizing its Dealer Relations Managers to
market the Company's products and services directly to Dealers (including
Dealers with which the Company currently does not have a contractual
relationship) and (ii) forming strategic referral and marketing alliances with
financial institutions that have established relationships with Dealers.
Although the Company is currently doing business with Dealers in 26 states,
approximately 75% of the principal balance of the Company's Loan portfolio was
purchased through Dealers located in Georgia, North Carolina,
30
<PAGE>
South Carolina and Virginia. The Company intends to increase its volume of
business in the states in which it currently operates and to expand
opportunistically into additional states.
The Company's direct marketing strategy is centered around experienced
management and field sales personnel who are located in key geographic regions.
Direct marketing to Dealers is conducted by Dealer Relations Managers who seek
to train and educate Dealers about the credit profile of the Non-Prime Consumer
who meets the Company's underwriting criteria, familiarize Dealers with the
Company's existing products and services, solicit feedback from Dealers
regarding new products and services that would enhance a Dealer's ability to
sell vehicles to Non-Prime Consumers, and generally provide Dealers with ongoing
service and support. The Company believes that the intensive face-to-face Dealer
service provided by Dealer Relations Managers enhances the effectiveness of the
products and services offered by the Company, strengthens existing Dealer
relationships, and fosters new business.
Through strategic referral and marketing alliances with financial
institutions, the Company expects to increase the number of Loans it purchases
by (i) leveraging a financial institution's existing Dealer relationships and
finance sales force to market the Company's Non-Prime Consumer products and
services and (ii) obtaining the right to review and purchase Non-Prime Consumer
Loans that do not meet a financial institution's underwriting criteria. Through
such strategic referral and marketing alliances, the Company offers financial
institutions the opportunity to provide a broader product offering to Dealers
and to earn additional income based on the number of Loans that are purchased by
the Company as a result of such alliance.
Direct marketing to financial institutions is conducted by senior
management staff and a field service staff of bank relations managers ('Bank
Relations Managers') who are experienced in the Dealer's financing policies and
the techniques of financial institutions. Generally, senior management seeks to
identify prospective financial institutions suitable for strategic alliances and
negotiate the terms of such alliances. The Bank Relations Managers provide
financial institutions with operating services and support, including training
and education with respect to both the Non-Prime Consumer market and the
Company's products and services. Upon consummation of strategic alliances, the
Company expects that financial institution sales personnel will also support the
Company's direct marketing efforts with Dealers.
First Union Strategic Alliance
In April 1996, the Company entered into the First Union Strategic Alliance.
The First Union Strategic Alliance initially provided for (i) joint marketing of
the Company's products and services by both the Company's sales force and FUSF
sales personnel to the approximately 1,800 Dealers throughout the Southeastern
Franchise with which FUSF has an existing relationship, and (ii) exclusive
referral by FUSF to the Company of all applications for Non-Prime Consumer Loans
received from Dealers located in the Southeastern Franchise that fall below
certain established credit guidelines. The First Union Strategic Alliance
significantly enhanced the Company's ability to further its market penetration
and increase the size of its Dealer base through the marketing assistance,
support and exclusive referrals provided by FUSF. Though still in the
introductory phase, through September 30, 1996, the Company had established
relationships with over 400 additional Dealers through the First Union Strategic
Alliance and financed approximately 1,571 Loans having an aggregate principal
balance of $18,905,213. For a description of the referral agreement evidencing
the First Union Strategic Alliance, see 'Certain Transactions--First Union.'
The introduction of the First Union Strategic Alliance to FUSF sales
personnel in the Southeastern Franchise was completed in October 1996. Such
introduction involved the Company's intensive training of FUSF sales personnel
with respect to both the Non-Prime Consumer market and the Company's products
and services, followed by the development of a joint marketing plan for Dealers
in each region served by FUSF. On December 13, 1996, First Union exercised its
option to expand the scope of the First Union Strategic Alliance to include
approximately 1,500 additional Dealers in FUSF's Northeastern Franchise.
31
<PAGE>
CREDIT UNDERWRITING AND ADMINISTRATION
Target Market and Customer Profile
The Company seeks to identify customers with stable and predictable
incomes, whose payments will be made in a timely and consistent manner and who
fall into the 'B-,' 'C+' and 'C' credit borrower categories. A description of
the credit rating categories used by the Company is set forth below:
<TABLE>
<CAPTION>
CATEGORY DESCRIPTION
- -------- ----------------------------------------------------------------------
<S> <C>
'A' A consumer who has a long credit history with no defaults, has been in
the same job for at least 18 months and can easily finance a new car
purchase through a bank or captive finance subsidiary of an automobile
manufacturer.
'B' A Non-Prime Consumer who may have had some minor credit problems in
his or her past, or may not have been employed at his or her current
job for 18 months. To finance a new or late-model used car, the 'B'
credit borrower may not qualify for a loan from a bank, but may have
success borrowing from a captive finance subsidiary and can access
credit through an independent finance company.
'C' A Non-Prime Consumer who may have an inconsistent employment record or
more significant or unresolved problems with credit in the past. To
finance a late-model or older used car purchase, this borrower will
generally not be able to obtain a loan from a captive finance
subsidiary or a bank and will have to access an independent finance
company that lends into this market category.
'D' A consumer who has unfavorable employment history and serious credit
problems, such as multiple personal bankruptcies. This borrower's only
choice is to finance his or her used car purchase, which is often from
an independent as opposed to a franchise dealer, through an
independent finance company that is active in this market segment.
</TABLE>
The Company targets Non-Prime Consumers who previously established good credit
records but who have subsequently experienced non-repetitive credit problems
such as a personal bankruptcy due to illness, loss of employment or poor cash
management. The Company's target customer is generally anxious to re-establish
his or her credit and obtain transportation for employment. The Company's
average customer has a gross monthly income of approximately $2,765, has an
average length of employment at their current job of approximately 5.75 years
and has resided in the same area for approximately 5.8 years.
Credit Evaluation Procedures
The Company applies uniform underwriting standards in purchasing Loans.
These standards have been developed and refined over the course of management's
years of experience in the automobile finance industry. The two most important
criteria the Company uses in evaluating a Loan are the applicant's
creditworthiness and the collateral value of the vehicle. The Dealer submits the
customer's credit application to the Company's headquarters in Boca Raton,
Florida, where the customer's creditworthiness is reviewed. The Company utilizes
a proprietary credit scoring system initially developed by Fair, Issac and
Company, Inc. to assist it in determining a customer's creditworthiness. Among
other requirements, the Company requires that each Non-Prime Consumer make a
minimum 10% downpayment on the purchase price of the vehicle. The Company's
senior management regularly reviews credit decisions made by the Company's
employees to assure uniformity in underwriting standards. See 'Management's
Discussion and Analysis of Financial Condition and Results of Operations--Loan
Loss and Delinquency Experience' for a numerical analysis of the Company's Loan
loss and delinquency experience.
Approval and Funding Statistics
The table below indicates, since the Company's inception, the number of
applications reviewed by the Company and the percentage of applications
approved, conditionally approved and funded. Conditionally approved applications
are applications by Non-Prime Consumers whose underlying credit is generally
acceptable to the Company but with respect to which the Company requires a
modification of terms (typically monthly payment levels) prior to final credit
approval.
<TABLE>
<CAPTION>
(AS OF SEPTEMBER 30, 1996)
NUMBER OF % OF APPLICATIONS
APPLICATIONS % OF APPLICATIONS CONDITIONALLY % OF APPLICATIONS
RECEIVED APPROVED APPROVED FUNDED
- ----------------- ------------------ ------------------ ------------------
<S> <C> <C> <C>
82,156 21.43% 10.10% 10.25%
</TABLE>
32
<PAGE>
Contract Servicing and Administration
The Company has contracted with World Omni for servicing and administration
of Loans. The servicing procedures have been specifically tailored to Non-Prime
Consumers and include (i) monitoring Loans and related collateral, (ii)
accounting for and posting all payments received, (iii) responding to borrowers'
inquiries, (iv) taking all necessary action to maintain the security interest
granted in the financed automobile, (v) investigating delinquencies and
communicating with borrowers to obtain timely payments, (vi) pursuing
deficiencies on Loans and (vii) when necessary, contracting licensed third-party
agents to repossess and dispose of the financed automobile. In addition, the
Company intends to expand its own capability to service Loans.
Collection Policy
The Company employs a stringent collection policy, which is implemented by
World Omni on a case-by-case basis. Rather than mailing past-due notices, the
Company's policy is to immediately begin a proactive collection effort when the
account becomes five days past due. The extent of the Company's actions with
respect to delinquent Loans is measured against the extent of the delinquency.
Generally, the Company's policy is to work with the customer to permit the
customer to keep the automobile and continue making payments. However, the
Company takes more aggressive action if the customer fails to continue making
payments. Generally, the Company reviews whether to begin the process of
repossession when payments are 50 days past due. Repossessions are handled by an
independent licensed repossession firm engaged by the Company. Generally, the
Company's collection policy permits Loan extensions twice during the term of
financing, assuming the borrower meets the following criteria: (i) no extensions
are permitted until the borrower has made the first six full payments on the
contract and (ii) a second extension is permitted if a borrower has made an
additional six payments since the first extension.
Management Information Systems
The Company uses advanced computer systems and software specifically
tailored for use by the Company to automate Loan purchasing and servicing. The
Company enters an applicant's data into the system for review by credit
investigators at the Company's office. Once investigators confirm the
applicant's information and complete the credit file, the application is
forwarded to a Company credit analyst for on-line review. After the analyst
makes a decision about the application, the result is telephoned and faxed to
the submitting Dealer. The Company believes that the capabilities and
flexibility of its application processing and its computer system provide the
Company with a competitive advantage.
The Company maintains a local-area network of workstations that has a
dedicated connection to World Omni's computer systems. This integrated system
allows the Company and World Omni to share information about a customer from the
time of Loan origination through any collection and repossession procedures, if
necessary. Such integration allows the Company to monitor its delinquencies on a
'real time' basis. Since World Omni handles collections and repossessions for
the Company, all information about each Loan is already in World Omni's database
if such actions become necessary. The Company's computer systems provide the
ability to track all Loan details, assess losses and identify trends among
customers. This information is valuable in determining which consumers are more
likely to default on Loans and lessening the chance of extending Loans to
higher-risk customers.
The Company believes that its management team possesses significant
management information systems expertise, which will enable the Company to
develop its own internal servicing capacity. Several of the Company's senior
management personnel each worked at World Omni for in excess of five years and
have in-depth knowledge relating to the development and use of management
information systems for the automobile finance industry. The Company currently
is considering its options with respect to developing its own servicing
capability and enhancing its management information systems.
33
<PAGE>
LOAN PORTFOLIO PROFILE
Loan Statistical Profile
The tables below set forth an analysis of Loans purchased by the Company
from inception through the dates specified. The Company has been able to
increase significantly the number of Loans in its portfolio since its inception
while maintaining a consistent profile of key Loan parameters.
<TABLE>
<CAPTION>
AS OF
--------------------------------------------------------------------------------------------------
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
TOTAL PORTFOLIO 1994 1995 1995 1995 1995 1996 1996 1996
- ------------------------------ ------------ --------- -------- ------------- ------------ --------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Aggregate number
of Loans purchased.......... 300 1,095 2,015 3,018 3,886 5,071 6,557 8,423
Average amount funded......... $ 11,986 $11,626 $ 11,578 $12,025 $ 12,121 $12,023 $ 11,942 $11,913
Weighted average
initial annual percentage
rate........................ 17.83% 18.38% 18.43% 18.35% 18.31% 18.41% 18.50% 18.63%
Weighted average initial term
(months).................... 54.6 52.1 51.9 52.3 52.5 52.0 53.6 53.7
Weighted average
initial yield............... 21.17% 21.73% 21.78% 21.56% 21.45% 21.50% 21.68% 21.75%
</TABLE>
New vs. Used Automobile Loans
The Company's aggregate principal balance of outstanding Loans as of
September 30, 1996 consisted of 30% new automobile Loans and 70% used automobile
Loans. The Company prefers to finance used automobiles because of the
significant depreciation on new automobiles (in case of repossession) relative
to used automobiles and the higher interest rates the Company is permitted to
charge under certain state laws on used automobile Loans.
<TABLE>
<CAPTION>
(AS OF SEPTEMBER 30, 1996)
--------------------------------------------------------
% OF
PRINCIPAL NUMBER OF PRINCIPAL % OF ACTIVE
BALANCE ACTIVE LOANS BALANCE LOANS
----------- ------------ --------- ------------
<S> <C> <C> <C> <C>
New.......... $24,635,861 1,752 29.76% 24.05%
Used......... $58,156,484 5,534 70.24% 75.95%
----------- ------ --------- ------------
Total...... $82,792,345 7,286 100.00% 100.00%
----------- ------ --------- ------------
----------- ------ --------- ------------
</TABLE>
34
<PAGE>
Geographic Distribution of Loans
The Company has purchased Loans from Dealers in 26 states. The largest
concentration of business of the Company, based on Loan balance, is in the
States of Georgia (approximately 40%), North Carolina (approximately 17%), South
Carolina (approximately 11%) and Virginia (approximately 8%). The Company's
growth strategy includes expanding its network of Dealers in existing states and
in additional states.
The list below indicates the geographic distribution of Loans outstanding
as of September 30, 1996.
<TABLE>
<CAPTION>
PRINCIPAL PERCENTAGE OF NUMBER OF
STATE BALANCE PRINCIPAL BALANCE ACTIVE LOANS
- ----------------------- ----------- ----------------- ------------
<S> <C> <C> <C>
Georgia................ $32,704,174 39.50% 2,814
North Carolina......... 14,360,301 17.34% 1,211
South Carolina......... 9,098,681 10.99% 840
Virginia............... 6,298,252 7.61% 528
Texas.................. 3,497,183 4.22% 271
Florida................ 3,118,498 3.77% 262
Tennessee.............. 2,118,985 2.56% 168
Maine.................. 1,855,349 2.24% 233
California............. 1,746,223 2.12% 165
Massachusetts.......... 1,566,792 1.89% 177
Maryland............... 1,149,709 1.39% 94
Ohio................... 1,136,046 1.37% 109
Pennsylvania........... 970,504 1.17% 112
All other states(1).... 3,171,648 3.83% 302
----------- ------- ------
Totals............... $82,792,345 100.00% 7,286
----------- ------- ------
----------- ------- ------
</TABLE>
- ------------------
(1) No state other than those listed represents more than 1% of the principal
balance of Loans outstanding.
SECURITIZATION PROGRAM
The Company currently finances its purchases of Loans primarily through an
asset securitization program that involves (i) the securitized warehousing of
all of its Loans through their daily sale to the Master Trust pursuant to the
Revolving Securitization, followed by (ii) the refinancing of such warehoused
Loans from time to time through 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
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, deposit 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 National Bank of North Carolina currently owns 100% of the outstanding
Class B Certificates.
In November 1995, the Master Trust refinanced $42 million of its
receivables in a private placement of asset-backed securities through a
Permanent Securitization. In such transaction, the 1995-1 Trust was formed and
issued $42 million of asset-backed securities to various private investors. In
November 1996, the 1996-1 Trust was formed and the Master Trust refinanced $68
million of its receivables in a public offering by the 1996-1
35
<PAGE>
Trust of asset-backed securities through a Permanent Securitization. Payment of
principal of, and interest on, $38 million and $62 million, respectively, of the
securities issued in such transactions is insured by payment guarantees issued
by FSA, and such securities are rated AAA and Aaa by S&P and Moody's,
respectively. The proceeds of each such Permanent Securitization transaction
were used by the Master Trust to repay the then-outstanding balance of the Class
B Certificates. Since such time, the Master Trust has issued additional
beneficial interests in Loans purchased by the Master Trust, as evidenced by the
Class B Certificates, to finance its purchase of Loans from the Company. The
Company expects additional Permanent Securitizations to be consummated in the
future in order to refinance periodically amounts outstanding under such Class B
Certificates.
Collection of the indebtedness evidenced by the Loans in each of the Master
Trust and the 1995-1 Trust and the 1996-1 Trust and related administration is
handled by World Omni. World Omni is primarily responsible for invoicing
customers, and collecting and processing payments. The Company acts as master
servicer for the Loans sold to each of the trusts and receives monthly fees from
the trusts at base rates of 2% per annum for the 1995-1 Trust and the 1996-1
Trust and 4% per annum for the Master Trust, plus certain late fees and
prepayment charges received on the securitized Loans.
The Company relies in part on cash flow from the Master Trust to support
its operations. Since the Master Trust's interest rates under the Revolving
Securitization are floating and the interest rates charged on the Loans (which
are generally at or near the maximum rates permitted by applicable state laws)
are fixed, increases in the interest rates incurred with respect to the Class B
Certificates could have a material adverse effect both on cash flows from the
Master Trust and on the Company's net income, thereby adversely affecting the
Company's financial condition and results of operations. In order to mitigate
the negative impact of rising interest rates, the Master Trust has entered into
interest rate swap agreements, which have the effect of fixing the rates charged
on a portion of the Master Trust's indebtedness. Although these agreements
provide the Master Trust (and therefore to the Company) some protection against
rising interest rates, these agreements also reduce the benefits to the Master
Trust (and therefore to the Company) when interest rates decline below the rates
set forth in such agreements. In addition, upon refinancing of Loans through
Permanent Securitizations, the interest spread with respect to such refinanced
Loans may be fixed.
36
<PAGE>
Flow Chart of a Securitization Transaction by the Company
The diagram below (which omits certain intermediate steps) generally
illustrates the Company's securitization of a Loan:
----------
| NAFCO | <------------
---------- |
| /|\ |
| | |
-------------------------- | | |
| lender (First Union) with| sale | | payment | servicing
| respect to revolving | of | | for | fees
| securitization facility | loans | | loans |
-------------------------- | | |
| /|\ | | |
| | Class B \|/ | |
| | Certificates ------------ |
| ------------------------- | master | |
---------------------------> | trust | -----------
funding of ------------
payment for loans | /|\
| |
| |
transfer | | payment
of | | for
loans | | loans
| |
| |
\|/ |
--------------------------
| permanent securitization |
| trust |
--------------------------
| /|\
| |
payment issuance of | | payment
guarantor (FSA) ---> asset-backed | | for
securities | | securities
| |
\|/ |
--------------
| investors |
--------------
37
<PAGE>
COMPETITION
The non-prime credit market is highly fragmented, consisting of a few
national and many regional and local competitors. Existing and potential
competitors include well-established financial institutions, such as commercial
banks, credit unions, savings and loan associations, small loan companies,
leasing companies and captive finance companies owned by automobile
manufacturers and others. Many of these financial institutions do not
consistently solicit business in the Non-Prime Consumer credit market. The
Company believes that captive finance companies generally focus on new car
financing and direct their marketing efforts to the Non-Prime Consumer market
only when inventory control and/or production scheduling requirements of their
parent organization dictate a need to enhance sales volumes, and then exit the
market once such sales volumes are satisfied. The Company also believes that
regulatory oversight and capital requirements imposed by market conditions and
governmental agencies have limited the activities of many banks and savings and
loan associations in the Non-Prime Consumer credit market. As a result, the
Non-Prime Consumer credit market is primarily serviced by smaller finance
companies that solicit business when and as their capital resources permit. Due
to the lack of major, consistent financing sources and the absence of
significant barriers to entry, many companies have entered this market in recent
years, including well-capitalized public companies. Recent entrants include
General Electric Capital Corporation, whose indirect finance program consists of
relationships with several small, regional independent non-prime automobile
finance companies. In addition, Ford Motor Credit Company, Mellon Bank
Corporation, KeyCorp and Southern National Corp. have all recently devoted
resources toward the Non-Prime Consumer market. In addition, there have been
several independent finance companies that have also recently entered the
market.
The Company believes that no one competitor or group of competitors has a
dominant presence in the Non-Prime Consumer market segment of 'B-,' 'C+' and 'C'
credit consumers. The Company's strategy is designed to capitalize on the lack
of a major national financing source in this market niche. The Company believes
that its competitors include AutoFinance Group, Inc. (recently merged into Key
Auto Inc.), Auto One Acceptance Corp. and First Merchants Acceptance Corp.
REGULATION
The Company's business is subject to regulation and licensing under various
federal, state and local statutes and regulations. The Company's business
operations are conducted with Dealers located in 26 states and, accordingly, the
laws and regulations of such states govern the Company's operations. Most states
in which the Company purchases Loans (i) limit the interest rate, fees and other
charges that may be imposed by, or prescribe certain other terms of, the Loans
that the Company purchases and (ii) define the Company's rights to repossess and
sell collateral. In addition, the Company is required to be licensed or
registered to conduct its finance operations in 11 of the 26 states in which the
Company currently purchases Loans. As the Company expands its operations into
other states, it will be required to comply with the laws of such states.
Numerous federal and state consumer protection laws and related regulations
impose substantive disclosure requirements upon lenders and services involved in
automotive financing. Some of the federal laws and regulations include the
Truth-in-Lending Act, the Equal Credit Opportunity Act, the Federal Trade
Commission Act, the Fair Debt Collection Practices Act, the Magnuson-Moss
Warranty Act, the Federal Reserve Board's Regulations B and Z and the Soldiers'
and Sailors' Civil Relief Act.
In addition, the Federal Trade Commission ('FTC') has adopted a limitation
on the holder-in-due-course rule which has the effect of subjecting persons who
finance consumer credit transactions (and certain related lenders and their
assignees) to all claims and defenses that the purchaser could assert against
the seller of the goods and services. With respect to used automobiles
specifically, the FTC's Rule on Sale of Used Vehicles requires that all sellers
of used automobiles prepare, complete and display a Buyer's Guide which explains
the warranty coverage for such automobiles. The Credit Practices Rules of the
FTC impose additional restrictions on sales contract provisions and credit
practices.
Certain states in which the Company operates have adopted motor vehicle
retail installment sales acts or variations thereof. Certain states have adopted
the Uniform Consumer Credit Code, subject to certain variations. This law and
similar laws in the other states in which the Company purchases Loans regulate,
among other things, the interest rate, fees and other charges and terms and
conditions of motor vehicle retail installment loans. These laws also impose
restrictions on consumer transactions and require disclosures in addition to
those required under federal law. These requirements impose specific statutory
liabilities upon creditors who fail to comply. In addition, certain states
impose plain-language restrictions on the textual provisions of motor vehicle
retail installment sales contracts in the context of consumer credit
transactions. Furthermore, certain states or municipalities require that a
creditor provide a purchaser of a motor vehicle with a foreign-language
translation of
38
<PAGE>
the entire motor vehicle retail installment sale contract if the contract was
negotiated in a language other than English. The plain-language and
foreign-language laws impose specific liabilities on creditors who fail to so
comply.
The laws of certain states grant to the purchasers of vehicles certain
rights of rescission under so-called 'lemon laws.' Under such statutes,
purchasers of motor vehicles may be able to seek recoveries from, or assert
defenses against, the Company.
In the event of default by an obligor, the Company has all the remedies of
a secured party under the Uniform Commercial Code ('UCC'), except where
specifically limited by other state laws. The remedies of a secured party under
the UCC include the right to repossession by self-help means, unless such means
would constitute a breach of the peace. In the event of default by the obligor,
some jurisdictions require that the obligor be notified and be given time in
which to cure the default prior to repossession. In addition, courts have
applied general equitable principles to secured parties pursuing repossession or
litigation involving deficiency balances.
The UCC and other state laws require a secured party who has repossessed
collateral to provide an obligor with reasonable notice of the date, time and
place of any public sale and/or the date after which any private sale of the
collateral may be held. The obligor has the right to redeem the collateral prior
to actual sale.
The proceeds from resale of financed vehicles generally will be applied
first to the expenses of repossession and resale and then to the satisfaction of
the Loan. A deficiency judgment can be sought in most states subject to
satisfaction of statutory procedural requirements by the secured party and
certain limitations as to the initial sale price of the motor vehicle. Certain
state laws require the secured party to remit the surplus to any holder of a
lien with respect to the vehicle or, if no such lienholder exists, the UCC
requires the secured party to remit the surplus to the former owner of the
financed vehicle.
In addition to laws limiting or prohibiting deficiency judgments, numerous
other statutory provisions, including federal bankruptcy laws and related state
laws, may interfere with or affect the ability of the Company to realize upon
collateral or enforce a deficiency judgment.
The Company believes that it is in substantial compliance with all
applicable material laws and regulations. Adverse changes in the laws or
regulations to which the Company's business is subject, or in the interpretation
thereof, could have a material adverse effect on the Company's business. Because
the Company generally charges the highest finance charges permitted by law,
reductions in statutory maximum rates could directly impair the Company's
profitability.
BANKING REGULATION
As a result of beneficial ownership in the Company by the First Union
Partner, the Company is subject to Banking Laws. For example, the Company is
subject to the supervision and examination of the Office of the Comptroller of
the Currency (the 'OCC'), one of the principal regulatory bodies having
jurisdiction over First Union and the First Union Partner. The OCC has reviewed
the First Union Strategic Alliance and the terms thereof, and the OCC's written
approval was required in order for the First Union Strategic Alliance to be
consummated (the 'OCC Approval'). To facilitate compliance by First Union and
the First Union Partner with the OCC Approval and other Banking Laws, the
Company has agreed to engage solely in activities that are permissible for
national banks as determined by Banking Laws as in effect from time to time. If
the First Union Partner determines that any proposed activities of the Company
are impermissible for national banks, such affiliate has the right to prevent
the Company from engaging in such activities. Management does not believe,
however, that the Banking Laws will impact significantly the manner in which the
Company intends to conduct or expand its business or product and service
offerings, although there can be no assurance that the Banking Laws will not
have such an effect. See 'Risk Factors--Banking and Other Restrictions.'
FACILITIES
The Company's headquarters are located at 621 N.W. 53rd Street, Suite 200,
Boca Raton, Florida 33487. The Company currently has leases on approximately
17,000 square feet of office space on favorable terms.
EMPLOYEES
At September 30, 1996, the Company had 67 employees, of whom 15 held
marketing positions, 43 held administrative positions and 9 held senior
management positions.
LITIGATION
The Company may be involved from time to time in routine litigation
incidental to its business. However, the Company believes that it is not a party
to any material pending litigation that is likely to have a significant negative
impact on the business, income, assets or operation of the Company.
39
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Certain information concerning directors and executive officers of the
Company is set forth below:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- ------------------------------------------------ --- ------------------------------------------------
<S> <C> <C>
Gary L. Shapiro................................. 46 Chairman of the Board and Chief Executive
Officer
Keith B. Stein.................................. 39 Vice Chairman, Treasurer, Secretary and Director
Roy E. Tipton................................... 42 President and Director
William G. Magro................................ 47 Executive Vice President
Blane H. MacDonald.............................. 39 Vice President and Chief Operating Officer
Kevin G. Adams.................................. 40 Vice President and Chief Financial Officer
Stephen R. Stack................................ 38 Senior Vice President--Sales and Marketing
Tim W. Carter................................... 46 Vice President--Planning and Development
Edgar A. Otto................................... 66 Director
Peter Offermann................................. 52 Director
</TABLE>
Gary L. Shapiro has been the Chairman and Chief Executive Officer of
National Financial Companies LLC (the successor to National Financial
Corporation) for more than the past five years. Mr. Shapiro has been Chairman
and Chief Executive Officer of National Auto, the general partner of the NAFCO
Partnership, since October 1994 and will continue as Chief Executive Officer and
Chairman of the Board of Directors of the Company. Mr. Shapiro served as a
partner in the firm of Mailman, Ross, Toyes and Shapiro, Certified Public
Accountants, from November 1973 to March 1982. In 1981, Mr. Shapiro founded
National Machine Tool Finance Corporation ('National Tool'), a machine tool
finance company. He served as President of National Tool until 1990.
Keith B. Stein has been the Executive Vice President and Assistant
Secretary of National Auto since January 1995, and a Managing Director of
National Financial Companies LLC since January 1995. Mr. Stein will continue as
Vice Chairman, Secretary, Treasurer and a Director of the Company. Mr. Stein
served from March 1993 to September 1994 as Senior Vice President, Secretary and
General Counsel of WestPoint Stevens Inc. after having served the same company
from October 1992 to February 1993 in the capacity of Acting General Counsel and
Secretary. From May 1989 to February 1993, Mr. Stein was associated with the law
firm of Weil, Gotshal & Manges LLP. Mr. Stein has been a director of DVL, Inc.,
a public company engaged in the real estate finance business, since September
1996.
Roy E. Tipton has been the President of the NAFCO Partnership since May
1994 and will continue as the President and a Director of the Company. Mr.
Tipton served from April 1992 to May 1994 as the President of Stanford
Automotive Financial Company, an automobile finance company. Mr. Tipton served
from April 1991 to April 1992 as a Regional Manager of Primus Auto Company, an
automobile finance company ('Primus'). Mr. Tipton served in several capacities
at each of Ford Motor Credit Company from June 1975 to September 1985 and at
World Omni from September 1985 to February 1990.
William G. Magro has been the Executive Vice President of the NAFCO
Partnership since September 1994 and will continue as the Executive Vice
President of the Company. Mr. Magro served from January 1985 to August 1994 as a
Director of Collection and Client Services for World Omni. Mr. Magro served from
January 1972 to December 1984 as a Collection Supervisor and a Dealer Relations
Supervisor at General Motors Acceptance Corp.
Blane H. MacDonald has been the Vice President and Chief Operating Officer
of the NAFCO Partnership since July 1994 and will continue as the Vice President
and Chief Operating Officer of the Company. Mr. MacDonald served from February
1994 to July 1994 as a Vice President of Operations of AutoLend Corporation, an
automobile finance concern. Mr. MacDonald served from February 1992 to February
1994 as a Vice President of Operations of Stanford Automotive Financial, an
automobile finance company. Mr. MacDonald served from October 1990 to January
1992 as Sales Representative for the State of Florida at
40
<PAGE>
Primus. Mr. MacDonald served in various positions from August 1984 to September
1990 at World Omni and from February 1982 to July 1984 at General Motors
Acceptance Corporation.
Kevin G. Adams has been a Vice President and Chief Financial Officer of the
NAFCO Partnership since October 1994 and will continue as a Vice President and
Chief Financial Officer of the Company. Mr. Adams served from December 1992 to
October 1994 as Vice President--Finance of National Financial Companies LLC. Mr.
Adams served from September 1983 to June 1992 as a Vice President and Chief
Financial Officer of National Tool.
Stephen R. Stack has been Vice President of the NAFCO Partnership since
December 1995 and will continue as a Senior Vice President of the Company. Mr.
Stack served from March 1990 through September 1995 in various executive
positions (including as executive director) with Alamo Rent-A-Car, Inc., an
automobile rental concession. From 1976 through 1989, Mr. Stack held various
positions with General Motors Acceptance Corporation.
Tim W. Carter has been a Vice President of the NAFCO Partnership since
February 1996 and will continue as a Vice President of the Company. Mr. Carter
served from July 1991 to February 1996 as the Director of Development of World
Omni. Mr. Carter held various positions with World Omni from March 1988 to July
1991.
Edgar A. Otto has been a Director of National Auto since October 1994 and
will continue as a Director of the Company. Mr. Otto was a principal of National
Financial Corporation from its inception until April 1996. From 1971 to 1994,
Mr. Otto served as President and Chief Executive Officer of Therma Systems
Corporation, a manufacturing company. He is currently Chairman of National
Healthnet Corporation, a healthcare services provider.
Peter Offermann has been a Director of the Company since January 6, 1997.
From 1968 to 1994, Mr. Offermann held a number of positions with Bankers Trust
Company and its affiliates, including as Managing Director of BT Investment
Partners, Inc. from October 1992 through May 1994, Managing Director of BT
Securities Corporation from October 1991 through October 1992 and Managing
Director of Bankers Trust Company from 1986 through 1991. From 1994 to 1995, Mr.
Offermann was President of Offermann Financial Inc., a provider of strategic
financial advice. From 1995 to date, Mr. Offermann has served as Executive Vice
President and Chief Financial Officer of TLC Beatrice International Holdings,
Inc., a food manufacturing and distribution business. Since 1996, Mr. Offermann
has served as a Director of Jan Bell Marketing, Inc., a jewelry distribution
company.
BOARD OF DIRECTORS; COMMITTEES
Pursuant to the Certificate of Incorporation and By-laws of the Company,
the Board of Directors consists of such number of directors as the Board of
Directors determines from time to time. The number of directors of the Board of
Directors is set at seven and currently consists of five directors.The directors
are divided into three classes. The initial term of office of the first class of
directors ('Class I Directors'), the second class of directors ('Class II
Directors') and the third class of directors ('Class III Directors') will expire
at the annual meeting of the Company's stockholders in 1997, 1998 and 1999,
respectively. After the expiration of such initial terms, the term of office for
each class of directors will be for 3 years, and at each annual meeting of the
Company's stockholders, directors for a particular class shall be chosen for a
full term to succeed those whose terms expire. The number of directors of the
Class I Directors currently is set at three directors consisting of Mr. Stein,
Vice Chairman, Treasurer and Secretary of the Company, Mr. Offermann and one
vacancy. The number of directors of the Class II Directors currently is set at
two directors consisting of Mr. Tipton, President of the Company, and Mr. Otto.
The number of directors of the Class III Directors currently is set at two
directors consisting of Mr. Shapiro, Chief Executive Officer of the Company, and
one vacancy. The Class I Director and Class III Director vacancies will each be
filled with one independent director following this Offering.
Following this Offering, the Board of Directors will form an Audit
Committee, Compensation Committee and Executive Committee. The functions of the
Audit Committee will be to recommend to the Board of Directors independent
auditors for the Company and to analyze the reports and recommendations of such
auditors. The Compensation Committee will review the compensation of the
Chairman and employee benefit and incentive plans and present recommendations
thereon to the Board of Directors, and will also administer the Company's 1996
Share Incentive Plan. The function of the Executive Committee will be to manage
the day-to-day business and affairs of the Company and to act on behalf of the
Board of Directors to authorize and approve actions of the Company's officers
and employees.
41
<PAGE>
COMPENSATION OF DIRECTORS
Directors who are also employees of the Company receive no remuneration for
service as members of the Board or any committee of the Board. Independent
outside directors of the Company will receive an annual retainer of $10,000 plus
$1,000 for each meeting of the Board attended and $500 for each meeting of a
Committee attended, plus, in each case, expenses incident to attendance at such
meetings and be granted stock options for 5,000 shares of Common Stock on the
date on which the annual meeting of the Company's stockholders is held each
year. The purchase price of the Common Stock covered by such options will be the
fair market value of such Common Stock on the date of grant. These options will
be fully exercisable on the first anniversary of the date of grant.
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid for services rendered
in all capacities during the last fiscal year of the Company to the Company's
Chief Executive Officer and to the four other most highly compensated executive
officers.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
1996 ANNUAL COMPENSATION
---------------------------------------
OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION(6) COMPENSATION
- ---------------------------------------------------------- -------- -------- --------------- ------------
<S> <C> <C> <C> <C>
Gary L. Shapiro(2)(3)
Chief Executive Officer................................. $ 0 $0 $ 0 $ 0
Roy E. Tipton(4)
President............................................... 130,002 (1) 700 0
William G. Magro(5)
Executive Vice President................................ 110,571 (1) 84 30,379
Blane H. MacDonald(4)
Vice President and Chief Operating Officer.............. 103,000 (1) 889 0
Kevin G. Adams(4)
Vice President and Chief Financial Officer.............. 99,403 (1) 811 0
</TABLE>
- ------------------
(1) Bonuses for the following executive officers for services rendered in a
given year are determined after the Company's Board of Directors has
approved the audited financial statements for that year. These bonuses are
paid at the end of March of the following year. Accordingly, Roy E. Tipton,
Blane H. MacDonald, and Kevin G. Adams were paid in March of 1996 a bonus
for services rendered in 1995 in the amount of $40,000, $27,500, and
$25,000, respectively. In addition, bonuses for services rendered in 1996
are expected to be paid to Messrs. Tipton, MacDonald, Magro and Adams in
March of 1997. The maximum bonus to which Messrs. Tipton, MacDonald and
Magro are entitled for services rendered in 1996 are $78,000, $51,500 and
$55,285, respectively. See '--Employment Agreements.' The bonus amount for
Mr. Adams is discretionary.
(2) No compensation was received from the Company in 1996. However, National
Auto, the general partner of the NAFCO Partnership, is paid a fee by the
Company for management services rendered pursuant to a management agreement.
National Financial Companies LLC, a limited liability company controlled by
Mr. Shapiro, is paid a fee by National Auto for management services rendered
to National Auto. See 'Certain Transactions--Management and Services
Agreements.'
(3) Mr. Shapiro is an officer, director and stockholder of National Auto.
(4) Compensation was paid by the NAFCO Partnership.
(5) Compensation was paid by the ACCH Partnership.
(6) Reflects the 401(k) contributions made by the Company in accordance with the
Company's 401(k) Plan. See '401(k) Profit Sharing Plan.'
No restricted stock awards, stock appreciation rights or long-term
incentive plan awards were awarded to, earned by or paid to the named executive
officers during the fiscal year ended December 31, 1996.
42
<PAGE>
EMPLOYMENT AGREEMENTS
Effective September 16, 1995 and October 19, 1995, the Company entered into
three-year employment agreements with each of Roy E. Tipton, President of the
Company, and Blane H. MacDonald, Vice President and Chief Operating Officer of
the Company, respectively. Mr. Tipton's annual base salary was $130,000 from
January 1, 1996 to December 31, 1996, and will be (i) $155,000 from January 1,
1997 to December 31, 1997 and (ii) $180,000 from January 1, 1998 to December 31,
1998. Mr. MacDonald's annual base salary was $103,000 from January 1, 1996 to
December 31, 1996, and will be (i) $116,000 from January 1, 1997 to December 31,
1997 and (ii) $126,000 from January 1, 1998 to December 31, 1998. Each of
Messrs. Tipton and MacDonald will receive from the Company an incentive bonus
based upon the achievement of certain performance goals and payable, in each
case, on or before March 31 of each of 1997 and 1998. Pursuant to Mr. Tipton's
agreement, the incentive bonus is computed as the lesser of a prescribed
fraction of the Company's net annual pre-tax income and (i) in 1996, $78,000,
(ii) in 1997, $96,875 and (iii) in 1998, $117,000. Pursuant to Mr. MacDonald's
agreement, the incentive bonus is computed as the lesser of a prescribed
fraction of the Company's net annual pre-tax income and (i) in 1996, $51,500,
(ii) in 1997, $58,000, and (iii) in 1998, $63,000. Each of the agreements
provides for the participation by Messrs. Tipton and MacDonald in any stock
option plan adopted by the Company or its successors.
Effective July 1, 1996, the Company entered into a three-year employment
agreement with William G. Magro, Executive Vice President of the Company. Mr.
Magro's annual base salary from the effective date of his agreement through
December 31, 1996 was $110,571 and will be (i) $118,000 from January 1, 1997 to
December 31, 1997, (ii) $127,500 from January 1, 1998 to December 31, 1998 and
(iii) $137,000 from January 1, 1999 to June 30, 1999. Mr. Magro will receive an
incentive bonus based upon the achievement of certain performance goals, payable
on or before March 31 of each of 1997, 1998, 1999 and 2000. The incentive bonus
is computed as the lesser of a prescribed fraction of the Company's net annual
pre-tax income and (i) in 1996, $55,285.50, (ii) in 1997, $64,900, (iii) in 1998
$76,500 and (iv) in 1999, $82,200. Mr. Magro's agreement provides for his
participation in any stock option plan adopted by the Company or its successors.
Effective December 30, 1996, the Company entered into a three-year
employment agreement with Stephen R. Stack, Senior Vice President of the
Company. Mr. Stack's annual base salary from the effective date of his agreement
through December 31, 1996 was $105,000 and will be (i) $115,000 from January 1,
1997 to December 31, 1997, (ii) $128,000 from January 1, 1998 to December 31,
1998 and (iii) $144,000 from January 1, 1999 to June 30, 1999. Mr. Stack will
receive an incentive bonus based upon the achievement of certain performance
goals, payable on or before March 31 of each of 1997, 1998, 1999 and 2000. The
incentive bonus is computed as the lesser of a prescribed fraction of the
Company's net annual pre-tax income and (i) in 1996, $52,500, (ii) in 1997,
$57,500, (iii) in 1998, $64,000 and (iv) in 1999, $72,000. Mr. Stack's agreement
provides for his participation in any stock option plan adopted by the Company
or its successors.
1996 SHARE INCENTIVE PLAN
On November 20, 1996, the Board of Directors of the Company adopted the
1996 Share Incentive Plan. The 1996 Share Incentive Plan is intended to provide
incentives which will attract, retain and motivate highly competent persons,
each of whom will contribute to the success and future growth and profitability
of the Company, as executive management, employees and directors of the Company
and of any parent or subsidiary of the Company, by providing them the
opportunity to acquire shares of Common Stock or to receive monetary payments
based on the value of such shares pursuant to certain benefits contemplated by
the 1996 Share Incentive Plan. Furthermore, the 1996 Share Incentive Plan is
intended to assist in aligning the interests of the Company's executive
management, employees and directors with those of its stockholders.
Administration
The 1996 Share Incentive Plan will be administered by the Board of
Directors of the Company or, if the Board of Directors of the Company so
determines, by a committee appointed by the Board of Directors of the Company
from among its members (such committee administering the 1996 Share Incentive
Plan, the 'Committee'; and the Board of Directors and the Committee
administering the 1996 Share Incentive Plan, as the case may be, the 'Plan
Administrator'). If the Board of Directors designates a Committee to administer
the 1996 Share Incentive Plan, the Committee (which may include members of the
Compensation Committee of the Board of Directors, if any) may be comprised
solely of not less than two members who are (i) 'non-employee directors' within
the meaning of Rule 16b-3(b)(3) (or any successor rule) promulgated under the
Exchange Act and (ii) unless otherwise determined by the Board of Directors,
'outside directors' within the meaning of
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Section 162(m) of the Code. The Plan Administrator is authorized, subject to the
provisions of the 1996 Share Incentive Plan, to establish such rules and
regulations as it deems necessary for the proper administration of the 1996
Share Incentive Plan. The Plan Administrator is authorized to delegate such
administrative duties as it deems advisable.
The 1996 Share Incentive Plan provides for the granting of certain benefits
in any one or a combination of (i) Stock Options, (ii) Stock Appreciation
Rights, (iii) Stock Awards, (iv) Performance Awards and (v) Stock Units (each as
more particularly described below, and collectively, the 'Benefits'). The
aggregate number of shares of Common Stock that may be subject to such Benefits,
including Stock Options, is 500,000 shares of Common Stock (subject to
adjustment in the event of a merger, consolidation, reorganization,
recapitalization, stock dividend, stock split, reverse stock split, split up,
spinoff, combination of shares, exchange of shares, dividend in kind or other
like change in capital structure or distribution). Additionally, if there is a
'change in control' (as such term is defined in the 1996 Share Incentive Plan)
of the Company all then outstanding stock options and stock appreciation rights
become immediately exercisable.
The Company granted stock options in respect of an aggregate of 260,000
shares of Common Stock under the 1996 Share Incentive Plan to certain key
employees and directors of the Company, including Gary L. Shapiro, Chairman of
the Board and Chief Executive Officer of the Company (stock options to acquire
27,500 shares of Common Stock), Roy E. Tipton, President and a Director of the
Company (stock options to acquire 50,000 shares of Common Stock), William G.
Magro, Executive Vice President of the Company (stock options to acquire 35,000
shares of Common Stock), Blane H. MacDonald, Vice President and Chief Operating
Officer of the Company (stock options to acquire 30,000 shares of Common Stock)
and Kevin G. Adams, Vice President and Chief Financial Officer of the Company
(stock options to acquire 27,000 shares of Common Stock), contemporaneously with
this Offering. See 'Principal Stockholders.'
The Board of Directors may amend the 1996 Share Incentive Plan from time to
time or may suspend or terminate the 1996 Share Incentive Plan at any time,
except that unless approved by the stockholders of the Company, no such
amendment may (i) increase the total number of shares which may be issued under
the 1996 Share Incentive Plan or the maximum number of shares with respect to
Stock Options, Stock Appreciation Rights and other Benefits that may be granted
to any individual under the 1996 Share Incentive Plan or (ii) modify the
requirements as to eligibility for Benefits under the 1996 Share Incentive Plan.
In addition, no amendment may be made without approval of the stockholders of
the Company if the amendment will disqualify any Incentive Stock Options granted
under the 1996 Share Incentive Plan. By mutual agreement between the Company and
a participant under the 1996 Share Incentive Plan, Benefits may be granted to
such participant in substitution and exchange for, and in cancellation of, any
Benefits previously granted under the 1996 Share Incentive Plan. No Benefit may
be granted more than ten years after the effective date of the 1996 Share
Incentive Plan. The terms applicable to any Benefit granted prior to such
effective date may thereafter be amended by mutual agreement between the Company
and the participant or such other persons who then have an interest in such
Benefit.
Benefits may be transferred by a participant only by will or the laws of
descent and distribution, and may be exercisable, during the participant's
lifetime, only by the participant. If a participant dies, each Stock Option or
Stock Appreciation Right previously granted to him becomes exercisable during
such period after such participant's death as the Plan Administrator, in its
discretion, set forth in the applicable option or right agreement.
Provided the 1996 Share Incentive Plan is not terminated or materially
modified, the Company intends to rely on the special transition rule contained
in the Treasury regulations for private corporations that complete an initial
public offering to deduct all compensation expenses related to awards or grants
made under the 1996 Share Incentive Plan before the annual meeting of
stockholders in 2001. Thereafter, the deductibility of compensation expenses
related to awards or grants made under the 1996 Share Incentive Plan which
result in total covered compensation in excess of $1 million for the chief
executive officer and certain other executive officers will depend on whether
the Company and the 1996 Share Incentive Plan comply with the performance-based
exception to Section 162(m).
Stock Options
Stock Options granted under the 1996 Share Incentive Plan consist of awards
from the Company that enable the holder to purchase a specific number of shares
of Common Stock at set terms and at a fixed purchase price. Determinations with
respect to the exercise price, exercise period and method of payment of the
Stock Options are made in the discretion of the Plan Administrator. Stock
Options may be 'incentive stock options' ('Incentive Stock Options') within the
meaning of Section 422 of the Code, or Stock Options which do not
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<PAGE>
constitute Incentive Stock Options ('Nonqualified Stock Options'). The Plan
Administrator has the authority to grant to any participant one or more
Incentive Stock Options, Nonqualified Stock Options, or both types of Stock
Options (in each case with or without Stock Appreciation Rights).
Certain limitations apply with respect to Incentive Stock Options:
Incentive Stock Options may be granted only to participants who are employees of
the Company or a parent or subsidiary of the Company at the date of grant.
Furthermore, the aggregate market value (determined as of the time the option is
granted) of the Common Stock with respect to which Incentive Stock Options are
exercisable for the first time by a participant during any calendar year (under
all option plans of the Company) may not exceed $100,000. Except under limited
circumstances, Incentive Stock Options may not be granted to any participant
who, at the time of grant, owns stock possessing more than 10% of the total
combined voting power of all outstanding classes of stock of the Company or any
subsidiary corporation of the Company.
Stock Appreciation Rights
Stock Appreciation Rights may be granted, in the discretion of the Plan
Administrator, to holders of Stock Options granted under the 1996 Share
Incentive Plan. Holders of such Stock Appreciation Rights are entitled to
receive a payment in cash, Common Stock or a combination thereof in an amount
equal to the excess of the fair market value of a specified number of shares of
Common Stock on the date the right is exercised over the fair market value of
such shares of Common Stock on the date the right was first granted.
Stock Awards
Stock Awards consisting of Common Stock issued or transferred to
participants with or without other payments therefor as additional compensation
for services rendered to the Company may be granted in the discretion of the
Plan Administrator. Stock Awards (which may constitute Performance-Based Awards,
as described in the immediately succeeding paragraph) may be subject to such
terms and conditions as the Plan Administrator determines appropriate,
including, without limitation, restrictions as to the sale or other disposition
of such shares and the right of the Company to reacquire such shares for no
consideration upon termination of the participant's employment within specified
periods.
Performance Awards
Performance Awards may be granted to participants in the discretion of the
Plan Administrator and may, as determined by the Plan Administrator, constitute
Performance-Based Awards, which, as more particularly described below, consist
of Benefits granted under the 1996 Share Incentive Plan in such a manner that
they qualify for the performance based compensation exemption of Section 162(m)
of the Code ('Performance-Based Awards'). The number, amount and timing of
Performance Awards granted to each participant are determined in the sole
discretion of the Plan Administrator. Payment of earned Performance Awards are
made in accordance with terms and conditions prescribed or authorized by the
Plan Administrator. Participants may elect to defer, or the Plan Administrator
may require or permit the deferral of, the receipt of Performance Awards upon
such terms as the Plan Administrator deems appropriate. Performance Awards may
be in the form of shares of Common Stock or Stock Units and may be awarded as
short-term or long-term incentives.
With respect to those Performance Awards that constitute Performance-Based
Awards, the Plan Administrator may set performance targets which serve to
determine the number and/or value of Performance Awards paid out to the
participants, and may attach to such Performance Awards one or more
restrictions. Performance targets may be based upon, without limitation,
Company-wide, divisional and/or individual performance. With respect to those
Performance Awards that are not intended to constitute Performance-Based Awards,
the Plan Administrator has the authority at any time to make adjustments to
performance targets for any outstanding Performance Awards which the Plan
Administrator deems necessary or desirable unless at the time of establishment
of goals the Plan Administrator has precluded its authority to make such
adjustments.
Stock Units
Stock Units (accounts representing one share of Common Stock) may be
granted to participants under the 1996 Share Incentive Plan in the sole
discretion of the Plan Administrator. Stock Units may, as determined by the Plan
Administrator in its sole discretion, constitute Performance-Based Awards. The
Plan Administrator is authorized to determine the criteria for the vesting of
Stock Units. A Stock Unit granted by the Plan Administrator provides payment in
shares of Common Stock at such time as the award agreement specifies. Shares of
Common Stock issued in connection with the granting of Stock Units may be issued
with or without other payments therefor, as may be required by applicable law or
such other consideration as may be determined
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<PAGE>
by the Plan Administrator. The Plan Administrator is authorized to determine
whether a participant granted a Stock Unit may be entitled to a right to receive
the amount of any dividend paid on the share of Common Stock underlying a Stock
Unit, which is payable in cash or in the form of additional Stock Units.
Upon vesting of a Stock Unit, unless the Plan Administrator has determined
to defer payment with respect to such unit or a participant has elected to defer
payment, shares of Common Stock representing the Stock Units may be distributed
to the participant unless the Plan Administrator, with the consent of the
participant, provides for the payment of the Stock Units in cash or partly in
cash and partly in shares of Common Stock equal to the value of the shares of
Common Stock which would otherwise be distributed to the participant. Prior to
the year with respect to which a Stock Unit may vest, the participant may elect
not to receive Common Stock upon the vesting of such Stock Unit and for the
Company to continue to maintain the Stock Unit on its books of account, in which
event, the value of a Stock Unit becomes payable in shares of Common Stock
pursuant to the agreement of deferral.
Performance-Based Awards
As determined by the Plan Administrator in its sole discretion, the
granting or vesting of Performance-Based Awards will be based upon one or more
factors including, but not limited to, net sales, pretax income before
allocation of corporate overhead and bonus, budget and earnings per share. The
Plan Administrator is authorized to establish (i) the objective
performance-based goals applicable to a given period and (ii) the individual
employees or class of employees to which such performance-based goals apply. No
Performance-Based Awards are payable to or may vest with respect to any
participant for a given fiscal period until the Plan Administrator certifies
that the objective performance goals have been satisfied.
The 1996 Share Incentive Plan is intended to be qualified under Rule 16b-3
promulgated under the Exchange Act.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to the Reorganization, there was no Compensation Committee of the
Board of Directors. During fiscal 1996, executive compensation decisions were
made by the Board of Directors of National Auto, the general partner of the
NAFCO Partnership, which consisted of Messrs. Gary L. Shapiro, Edgar A. Otto and
Stephen L. Gurba, a limited partner of the NAFCO Partnership.
Gary L. Shapiro, Chairman of the Board of Directors and Chief Executive
Officer of the Company, and Edgar A. Otto, a director of the Company, are
directors and officers of National Auto, the general partner of the NAFCO
Partnership and the ACCH Partnership. The NAFCO Partnership is a limited partner
of the ACCH Partnership. Mr. Shapiro is the general partner of S Associates,
which is a limited partner of the NAFCO Partnership. Mr. Otto is the general
partner of O Associates, which is a limited partner of the NAFCO Partnership.
National Auto has entered into a Services Agreement with National Financial
Companies LLC ('National Financial'). Mr. Shapiro is a member and an officer of
National Financial. Mr. Stein is a member and an officer of National Financial
and an officer of National Auto. See 'Certain Transactions--Management and
Services Agreements.'
401(K) PROFIT SHARING PLAN
The Company adopted a 401(k) Profit Sharing Plan (the 'Plan') in August
1996 that is intended to be a tax-qualified defined contribution plan
administered by NAFCO. All employees of the Company, other than part-time
employees who work less than 1,000 hours per year, are eligible to participate
in the Plan once they have completed six months of continuous service.
A participating employee may contribute up to 15% of his or her
compensation, with a maximum contribution of $9,500, to the Plan on a pre-tax
basis. The Company may make a matching contribution to each employee's account
based on the amount of pre-tax contributions made by the employee. Currently,
the Company is allocating a 50% match of the first 6% contributed by the
employee, subject to certain legal limitations imposed on tax-qualified plans.
Matching contributions by the Company are made irrespective of profits and are
allocated only to qualified participants on a monthly basis.
Contributions to the Plan are invested in a variety of funds as directed by
the Plan participants. All pre-tax employee contributions to the Plan are 100%
vested and matching contributions by the Company are vested at 20% per annum
over a five-year period from the date the employee joined the Company. All
active full-time
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employees who had completed 1,000 hours of service as of August 30, 1996 were
invited to join the Plan and have matching contribution vested rights predated
to their date of employment.
Generally, employees may not receive distributions from the Plan until
their retirement, death, certain disabilities or termination of employment.
Loans are prohibited by the Plan, although distributions for certain hardship
purposes are allowed in accordance with tax regulations promulgated under the
Code. All distributions for the Plan are made in the form of a single lump-sum
distribution.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Pursuant to the provisions of the Delaware General Corporation Law (the
'DGCL'), the Company has adopted provisions in its Certificate of Incorporation
that provide that directors of the Company shall not be personally liable for
monetary damages to the Company or its stockholders for a breach of fiduciary
duty as a director, except for liability as a result of (i) a breach of the
director's duty of loyalty to the Company or its stockholders, (ii) acts or
omissions not in good faith or that involve intentional misconduct or a knowing
violation of law, (iii) an act related to an unlawful stock repurchase or
payment of a dividend under Section 174 of the DGCL, and (iv) transactions from
which the director derived an improper personal benefit. Such limitation of
liability does not affect the availability of equitable remedies such as
injunctive relief or rescission.
The Company's Certificate of Incorporation also authorizes the Company to
indemnify its officers, directors and other agents, by means of By-laws,
agreements or otherwise, to the fullest extent permitted under the DGCL. The
Company has entered into separate indemnification agreements with its directors
and officers which are, in some cases, broader than the specific indemnification
provisions contained in the DGCL. The indemnification agreements require the
Company, among other things, to indemnify such officers and directors against
certain liabilities that may arise by reason of their status or service as
directors or officers (other than liabilities arising from willful misconduct of
a culpable nature), to advance their expenses incurred as a result of any
proceeding against them as to which they could be indemnified, and to obtain
directors' and officers' insurance, if available on reasonable terms.
At present, there is no pending litigation or proceeding involving a
director, officer, employee or other agent of the Company as to which
indemnification is being sought, and the Company is not aware of any pending or
threatened litigation that may result in claims for indemnification by any
director, officer, employee or other agent.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of January 27, 1997, and as adjusted
to reflect the sale of the 2,000,000 shares of Common Stock offered hereby by
the Company, by (i) each person who is known by the Company to own beneficially
5% or more of the Common Stock, (ii) each director of the Company, (iii) each of
the named executive officers and (iv) all directors and executive officers as a
group. Unless otherwise indicated, the Company believes all persons listed have
sole voting power and investment power with respect to such shares.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO OFFERING(1) AFTER OFFERING(1)
--------------------------- --------------------
NAME AND ADDRESS NUMBER OF NUMBER OF
OF BENEFICIAL OWNER SHARES PERCENT SHARES PERCENT
- ----------------------------------------- ----------------------- ----------------------- --------- -------
<S> <C> <C> <C> <C>
National Auto Finance Company
L.P.(2)(3)............................. 4,230,000 89.50% 4,230,000 62.89%
621 N.W. 53rd Street, Suite 200
Boca Raton, Florida 33487
Morgan Guaranty Trust Company of New
York, as trustee(4)................... 496,000 10.50% 496,000 7.37%
522 Fifth Avenue
New York, New York 10036
Gary L. Shapiro(5)(6).................... 9,167 * 9,167 *
Edgar A. Otto(5)......................... -- * -- *
Keith B. Stein(5)(7)..................... 7,500 * 7,500 *
Roy E. Tipton(5)(8)...................... 16,667 * 16,667 *
William G. Magro(5)(9)................... 11,667 * 11,667 *
Blane H. MacDonald(5)(10)................ 10,000 * 10,000 *
Kevin G. Adams(5)(11).................... 9,000 * 9,000 *
Stephen R. Stack(5)(12).................. 9,334 * 9,334 *
Tim W. Carter(5)(13)..................... 3,333 * 3,333 *
Peter Offermann(14)...................... 5,000 * 5,000 *
All directors and executive officers
as a group (10 persons)............. 76,668 1.81% 76,668 1.14%
</TABLE>
- ------------------
* Represents less than 1%.
(1) Except as otherwise indicated, includes total number of shares outstanding
and the number of shares that each person has the right to acquire within
60 days through the exercise of options. Percentage of ownership is based
on 4,726,000 shares of Common Stock outstanding prior to this Offering and
6,726,000 shares of Common Stock outstanding after this Offering.
(2) The business address of each of the directors and current executive
officers listed in the table above is c/o National Auto Finance Company,
Inc., 621 N.W. 53rd Street, Suite 200, Boca Raton, Florida 33487.
(3) The general partner of the NAFCO Partnership is National Auto. National
Auto holds a 1% general partner interest in the NAFCO Partnership. A
majority of the outstanding capital stock of National Auto is owned
collectively by Messrs. Shapiro and Otto. The limited partners of the NAFCO
Partnership include, among others, S Associates, O Associates, the First
Union Partner, Keith B. Stein, Roy E. Tipton, William G. Magro, Blane H.
MacDonald, Stephen R. Stack and Kevin G. Adams. Mr. Shapiro owns all of the
outstanding capital stock of the general partner of S Associates. Mr. Otto
owns all of the outstanding capital stock of the general partner of O
Associates. The First Union Partner holds a vested 15% limited partner
economic interest in the NAFCO Partnership. The remaining limited partners
of the NAFCO Partnership hold the balance of the limited partner economic
interests. The First Union Partner may earn up to an additional 34% limited
partner economic interest (or an aggregate of approximately 49% when added
to the First Union Partner's current vested economic limited partner
interest), thus diluting the other limited partners but not diluting the
public stockholders of the Company, over a period of time expiring on
January 31, 1999 (the 'Adjustment Period') based upon various factors
specified in the NAFCO Partnership Agreement, including the overall
performance of the First Union Strategic Alliance and the total market
value of the Company over the Adjustment Period. Except for the First
Union Partner, each limited
(Footnotes continued on next page)
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<PAGE>
(Footnotes continued from previous page)
partner of the NAFCO Partnership has the right to vote on certain matters
specified in the NAFCO Partnership Agreement commensurate with each such
limited partner's respective economic limited partner interest. In
accordance with the NAFCO Partnership Agreement, the consent of the First
Union Partner is generally required before the NAFCO Partnership may take
certain fundamental actions.
(4) Includes shares held by Morgan Guaranty Trust Company of New York, as
trustee of each of the Commingled Pension Trust fund (Multi-Market
Special Investment Fund II) of Morgan Guaranty Trust Company of New
York and the Multi-Market Special Investment Trust Fund of Morgan
Guaranty Trust Company of New York and as investment manager and
agent for an institutional investor. Of these shares, 470,000 were
issued by the Company in exchange for the Deferred Additional
Interest Notes and 26,000 were issued by the Company pursuant to
the terms of the Note Purchase Agreement upon the grant of options
to key employees and directors of the Company immediately prior to
this Offering.
(5) Excludes shares held by the NAFCO Partnership. Each such person disclaims
beneficial ownership with respect to such shares.
(6) Includes stock options to acquire an aggregate of 27,500 shares of Common
Stock, of which stock options to acquire 9,167 shares are immediately
exercisable and stock options to acquire 9,167 shares vest in 1998, and
stock options to acquire 9,166 shares vest in 1999.
(7) Includes stock options to acquire an aggregate of 22,500 shares of Common
Stock, of which stock options to acquire 7,500 shares are immediately
exercisable and stock options to acquire 7,500 shares vest in 1998, and
stock options to acquire 7,500 shares vest in 1999.
(8) Includes stock options to acquire an aggregate of 50,000 shares of Common
Stock, of which stock options to acquire 16,667 shares are immediately
exercisable and stock options to acquire 16,667 shares vest in 1998, and
stock options to acquire 16,666 shares vest in 1999.
(9) Includes stock options to acquire an aggregate of 35,000 shares of Common
Stock, of which stock options to acquire 11,667 shares are immediately
exercisable and stock options to acquire 11,667 shares vest in 1998, and
stock options to acquire 11,666 shares vest in 1999.
(10) Includes stock options to acquire an aggregate of 30,000 shares of Common
Stock, of which stock options to acquire 10,000 shares are immediately
exercisable and stock options to acquire 10,000 shares vest in 1998, and
stock options to acquire 10,000 shares vest in 1999.
(11) Includes stock options to acquire an aggregate of 27,000 shares of Common
Stock, of which stock options to acquire 9,000 shares are immediately
exercisable and stock options to acquire 9,000 shares vest in 1998, and
stock options to acquire 9,000 shares vest in 1999.
(12) Includes stock options to acquire an aggregate of 28,000 shares of Common
Stock, of which stock options to acquire 9,334 shares are immediately
exercisable and stock options to acquire 9,333 shares vest in 1998, and
stock options to acquire 9,333 shares vest in 1999.
(13) Includes stock options to acquire an aggregate of 10,000 shares of Common
Stock, of which stock options to acquire 3,333 shares are immediately
exercisable and stock options to acquire 3,333 shares vest in 1998, and
stock options to acquire 3,334 shares vest in 1999.
(14) Includes stock options to acquire an aggregate 5,000 shares of Common Stock
all of which vest in 1998.
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CERTAIN TRANSACTIONS
GENERAL
The Company, from time to time, has entered into transactions with certain
of its principals and entities in which they have an interest. The Company
believes that each such transaction has been on terms no less favorable to the
Company than could have been obtained in a transaction with an independent third
party.
THE REORGANIZATION
The NAFCO Partnership and the ACCH Partnership were organized in October
1994 and September 1995, respectively, and have conducted the business of the
Company since their inception. Directors and executive officers of the Company
will have a direct and material interest in certain transactions that will
constitute the Reorganization, as described below. The Company believes that the
terms of such transactions will be as favorable as those that could be obtained
from an unaffiliated third party. See 'The Reorganization.'
FIRST UNION
The NAFCO Partnership
The First Union Partner is a limited partner of the NAFCO Partnership and
holds a vested 15% limited partner economic interest in the NAFCO Partnership.
The remaining limited partners of the NAFCO Partnership hold the balance of the
limited partner economic interest. The First Union Partner may earn up to an
additional 34% limited partner economic interest (or an aggregate of
approximately 49% when added to the First Union Partner's current vested
economic interest) thus diluting the other limited partners but not the public
stockholders of the Company over a period of time expiring on January 31, 1999
based upon various factors, including the overall performance of the First Union
Strategic Alliance and the total market value of the Company. See 'Partnership
Agreements' and 'Principal Stockholders.'
The First Union Strategic Alliance
The First Union Strategic Alliance is evidenced by a referral agreement
dated as of April 15, 1996 (the 'Referral Agreement') between the Company and
First Union. Pursuant to the Referral Agreement, First Union will (i) have FUSF
introduce the Company to Dealers in the Southeastern Franchise and the
Northeastern Franchise for which First Union provides consumer financing and
(ii) refer on an exclusive basis to the Company certain Non-Prime Consumer
credit applications for Loans received from such Dealers. In consideration for
such services, First Union receives a fee on each Loan purchased by the Company
as a result of the First Union Strategic Alliance. Pursuant to the Referral
Agreement, funded Loan referrals are without recourse to First Union. The
parties are, however, liable to each other for any breach of their respective
representations, warranties, covenants and indemnities. The term of the Referral
Agreement is for an initial period of three years from the date of its execution
and is renewable by the Company on each anniversary of such date for an
additional year, provided that First Union consents to such renewal. The
agreement contains provisions that preclude the Company from purchasing Loans
from FUSF Dealers through alliances with other financial institutions and that
permit First Union to terminate the agreement upon, among other things, a
'change of control' of the Company.
Lending
First Union National Bank of North Carolina, a subsidiary of First Union
Corporation, is the sole holder of the Class B Certificates that relate to the
Revolving Securitization. See 'Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources.'
Placement Agent and Underwriting
First Union Capital Markets Corp., a wholly owned subsidiary of First Union
Corporation ('FUCMC'), has served as placement agent for notes issued by the
Company to the Morgan Group. FUCMC has also privately placed and acted as
underwriter for a public offering of asset-backed securities of the Company in
connection with the Company's securitization transactions and may continue to
act as placement agent or underwriter for the
50
<PAGE>
Company's future securitization activities. See 'Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources.'
Registration Rights
At any time after six months following the consummation of this Offering,
the Company shall, promptly after receiving notice from the First Union Partner
requesting the registration of a specific number of shares of the Common Stock,
file with the Securities and Exchange Commission (the 'Commission') a
registration statement with respect to such shares of Common Stock. The First
Union Partner will be entitled to two demand requests.
SENIOR SUBORDINATED INDEBTEDNESS
General
Pursuant to the Note Purchase Agreement, the Company authorized the
issuance and sale of (i) $12 million aggregate principal amount of its Senior
Subordinated Notes and (ii) the Deferred Additional Interest Notes to the Morgan
Group. In connection with the Reorganization and immediately prior to this
Offering, the Deferred Additional Interest Notes were exchanged for 470,000
shares of Common Stock representing 10% of the outstanding Common Stock of the
Company immediately following the Reorganization and the Senior Subordinated
Notes became the obligation of the Company. Immediately following the
Reorganization and immediately prior to this Offering, the Company granted to
certain key employees and directors of the Company options to acquire an
aggregate of 260,000 shares of Common Stock. Pursuant to the terms of the Note
Purchase Agreement, the holders of the Senior Subordinated Notes were entitled,
prior to this Offering, to receive additional shares of Common Stock upon the
grant of options to key employees and directors of the Company. Accordingly,
upon the grant of such options, the Company issued to the Morgan Group an
additional 26,000 shares of Common Stock. The Note Purchase Agreement generally
prohibits the Company's payment of dividends on its Common Stock, subject to
certain conditions, following the consummation of this Offering, so long as any
amount remains unpaid on the Senior Subordinated Notes. The Senior Subordinated
Notes, whose final maturity date is in July 2001, bear interest on the unpaid
principal amount thereof at a rate of 10% per annum; such interest is payable
quarterly in arrears on July 31, October 31, January 31 and April 30 of each
year commencing October 31, 1996.
Registration Rights
Following consummation of this Offering, the Company will, as promptly as
practicable after receiving notice from the Morgan Group requesting the
registration of a specific number of shares of the Common Stock, file with the
Commission a registration statement with respect to such shares of Common Stock.
The Morgan Group is entitled to two demand requests. In certain limited
circumstances (e.g., if in the Company's reasonable judgment such filing would
adversely affect, among other things, a proposed financing, reorganization or
recapitalization of the Company), the Company may delay the requested filing of
a registration statement.
The Morgan Group has agreed, upon the Underwriters' request, not to sell or
distribute shares of Common Stock during the ten-day period prior to and the
180-day period beginning on the closing date of this Offering.
JUNIOR SUBORDINATED INDEBTEDNESS
During 1994, Gary L. Shapiro, Edgar A. Otto and Stephen L. Gurba loaned
$1,525,000, $3,675,000 and $123,733 respectively, to the Company. During 1995,
Messrs. Shapiro and Otto loaned $539,000 and 342,000, respectively, to the
Company. During 1995, Nova Financial Corporation and Nova Corporation, each of
which is a privately held corporation controlled by Messrs. Shapiro and Otto,
loaned $100,000 and $1,115,000, respectively, to the Company. During 1996, Nova
Corporation loaned $700,000 to the Company. Also during 1996, $511,000 and
$461,000 was repaid to Messrs. Shapiro and Otto, respectively. All of such loans
were made on a junior subordinated basis and in exchange for promissory notes of
the Company (collectively, the 'Junior Subordinated Notes'). The Company
believes that the terms of each of the Junior Subordinated Notes are as
favorable as could have been obtained from an unaffiliated third party. Each of
the Junior Subordinated Notes
51
<PAGE>
bears interest at a rate of 8% per annum. All accrued interest on the Junior
Subordinated Notes accrued through August 15, 1996 was paid in August 1996, and
future interest will be paid quarterly in arrears. Immediately prior to the
consummation of this Offering, the Junior Subordinated Notes were amended to
provide (x) for a maturity date of January 31, 2002 and (y) for a provision
allowing the Company to prepay the debt evidenced thereby without penalty or the
payment of any premium.
MANAGEMENT AND SERVICE AGREEMENTS
The Company is party to a management agreement with National Auto pursuant
to which National Auto provides operational, administrative and analytical
nature relating to the management, business operations, assets and interests of
the Company. During fiscal 1996, the Company paid National Auto a fixed fee of
$500,000 for such services. The Company believes that the terms of such
agreement are as favorable as could have been obtained from an unaffiliated
third party for comparable services.
Pursuant to a Service Agreement, dated as of December 29, 1994, between
National Auto and National Financial Companies LLC, as amended, National
Financial Companies LLC provides to National Auto certain legal, accounting,
management and other administrative services necessary to support National
Auto's performance of its obligations under the Management Agreement. The
Services Agreement expires on the earlier of December 31, 2015 or the date on
which National Auto is liquidated and its certificate of incorporation is
cancelled.
PARTNERSHIP AGREEMENTS
The NAFCO Partnership was formed pursuant to the NAFCO Partnership
Agreement. The principal limited partners of the NAFCO Partnership are S
Associates, O Associates, the First Union Partner and Stephen L. Gurba. In
addition, certain members of the management of the Company, and certain
employees of National Financial Companies LLC, own minority limited partner
interests in the NAFCO Partnership. All such persons and entities own, in the
aggregate, 99% of the partner interests in the NAFCO Partnership.
The NAFCO Partnership Agreement provides, in part, that upon the occurrence
of certain named events (collectively, the 'Put Events'), the First Union
Partner has the right to cause the NAFCO Partnership to redeem the First Union
Partner's partner interest. The Put Events include: (i) the withdrawal of
National Auto from the NAFCO Partnership or the addition of one or more persons
as general partners thereof (except that such withdrawal and subsequent addition
are not considered a Put Event if any of National Auto, Gary L. Shapiro or Edgar
A. Otto is in control of the then general partner of the NAFCO Partnership),
(ii) any ownership exchanges which have specified tax consequences with respect
to National Auto, (iii) any merger, consolidation or other reorganization of the
NAFCO Partnership or its business (except that no Put Event will be deemed to
have occurred if there is no change in the business of the NAFCO Partnership or
the substantive terms of the NAFCO Partnership Agreement and the First Union
Partner's interests in the NAFCO Partnership are not adversely affected), (iv)
the classification of the NAFCO Partnership as an association taxable as a
corporation or a publicly traded partnership, (v) December 2002, (vi) subject to
certain exceptions, a transfer of partner interests which, when added to all
prior transfers, if any, represents aggregate changes in ownership of more than
29% of the total partner interests and (vii) the existence of a regulatory
requirement that prevents the First Union Partner from owning its ownership
interest in the NAFCO Partnership. The Partnership Agreement provides, further,
that upon the NAFCO Partnership's receipt from the First Union Partner of a put
notice pursuant to which First Union requests redemption of its interest in the
NAFCO Partnership, National Auto has the right to (i) dissolve the NAFCO
Partnership, (ii) sell or exchange 100% of the interests of the NAFCO
Partnership, (iii) sell or exchange 100% of the property of the NAFCO
Partnership or (iv) offer publicly the equity securities of the NAFCO
Partnership. In addition, in December 1996, the NAFCO Partnership Agreement was
amended to provide that upon receipt from the First Union Partner of a put
notice referred to in the immediately preceding sentence, the NAFCO Partnership
may redeem the First Union Partner's interest in shares of Common Stock or in
such other form of consideration as may be agreed upon.
The Partnership Agreement provides for certain adjustments to the First
Union Partner's interest in the NAFCO Partnership. See '--First Union.'
52
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 20,000,000 shares
of Common Stock and 1,000,000 shares of preferred stock, par value $0.01 per
share, issuable in series (the 'Preferred Stock'). The following summary
description of the capital stock of the Company is qualified in its entirety by
reference to the Certificate of Incorporation and the By-laws of the Company,
copies of which have been filed as exhibits to the Registration Statement of
which this Prospectus forms a part.
COMMON STOCK
Dividends. The holders of Common Stock will be entitled to receive
dividends when and as dividends are declared by the Board of Directors of the
Company out of funds legally available therefor, provided that if any shares of
the Preferred Stock are outstanding at the time, the payment of dividends on the
Common Stock or other distributions may be subject to the declaration and
payment of full cumulative dividends on outstanding shares of Preferred Stock.
Voting Rights. Holders of Common Stock are entitled to one vote per share
on all matters to be voted upon by the stockholders.
No Preemptive Rights. The holders of Common Stock are not entitled to
preemptive, conversion or subscription rights.
Dissolution. In the event of liquidation, dissolution or winding-up of the
Company, the holders of Common Stock are entitled to share ratably in all assets
remaining after payment of liabilities, subject to prior distribution rights of
the Preferred Stock, if any, outstanding.
Transfer Agent and Registrar of Common Stock. The transfer agent and
registrar for the Common Stock is The Bank of Boston.
PREFERRED STOCK
The Board of Directors is authorized, without any action of the
stockholders, to provide for the issuance of one or more series of Preferred
Stock and to fix the designation, preferences, powers and relative,
participating, optional and other rights, qualifications, limitations and
restrictions thereof including, without limitation, the dividend rate, voting
rights, conversion rights, redemption price and liquidation preference per
series of Preferred Stock. Any series of Preferred Stock so issued may rank
senior to the Common Stock with respect to the payment of dividends or amounts
to be distributed upon liquidation, dissolution or winding up. There are no
agreements or understandings for the issuance of Preferred Stock, and the Board
of Directors has no present intent to issue any Preferred Stock. The existence
of authorized but unissued Preferred Stock may enable the Board of Directors to
render more difficult or to discourage an attempt to obtain control of the
Company by means of a merger, tender offer, proxy contest or otherwise. For
example, if in the due exercise of its fiduciary obligations, the Board of
Directors were to determine that a takeover proposal is not in the Company's
best interests, the Board of Directors could cause shares of Preferred Stock to
be issued without stockholder approval in one or more private offerings or other
transactions that might dilute the voting or other rights of the proposed
acquirer or insurgent stockholder or stockholder group. The issuance of shares
of Preferred Stock pursuant to the Board of Directors' authority described above
could decrease the amount of earnings and assets available for distribution to
holders of Common Stock and adversely affect the rights and powers, including
voting rights, of such holders and may have the effect of delaying, deferring or
preventing a change in control of the Company.
The Board of Directors has adopted a Certificate of Designation of the
Preferred Stock, Series A (the 'Series A Preferred Stock'). The 2,250
outstanding shares of Series A Preferred Stock have certain dividend,
liquidation and redemption rights. See Note 11 to the financial statements
included herein.
BUSINESS COMBINATION STATUTE
Section 203 of the DGCL prohibits certain transactions between a Delaware
corporation and an 'interested stockholder,' which is defined as a person who,
together with any affiliates and/or associates of that person, beneficially
owns, directly or indirectly, 15% or more of the outstanding voting shares of a
Delaware corporation.
53
<PAGE>
This provision prohibits certain business combinations (defined broadly to
include mergers, consolidations, sales or other dispositions of assets having an
aggregate value in excess of 10% of the consolidated assets of the corporation,
and certain transactions that would increase the interested stockholder's
proportionate share ownership in the corporation) between an interested
stockholder and a corporation for a period of three years after the date the
interested stockholder acquired its stock, unless (i) the business combination
is approved by the corporation's board of directors prior to the date the
interested stockholder acquired shares, (ii) the interested stockholder acquired
at least 85% of the voting stock of the corporation in the transaction in which
it became an interested stockholder, or (iii) the business combination is
approved by a majority of the board of directors and by the affirmative vote of
two-thirds of the votes entitled to be cast by disinterested stockholders at an
annual or special meeting.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have 6,726,000 shares of
Common Stock outstanding and an additional 13,274,000 shares of Common Stock
authorized for possible future issuance. The Common Stock sold in the Offering
(plus an additional 300,000 shares if the over-allotment option granted by the
Underwriters is exercised in full) will be freely tradeable without restriction
or further registration under the Securities Act, except for any shares
purchased by an 'affiliate' of the Company, which will be subject to the resale
limitations of Rule 144 under the Securities Act ('Rule 144'). Sales of
substantial amounts of Common Stock in the public market following this Offering
could adversely affect the market price of the Common Stock.
Under Rule 144, 'restricted securities' that have been held for two years
may be publicly sold, provided that the amount of securities sold within any
three-month period does not exceed the greater of 1% of the then-outstanding
Common Stock or the average weekly trading volume in the Common Stock in
composite trading on all exchanges during the four calendar weeks preceding that
sale. Sales under Rule 144 are also subject to certain manner-of-sale
provisions, notice requirements and availability of current public information
about the Company. If three years have elapsed since the date of acquisition of
restricted securities from the Company or from any affiliate of the Company, and
the acquiror or subsequent holder thereof is deemed not to have been an
affiliate of the Company for at least three months immediately preceding the
sale, that person may sell those securities under Rule 144 without regard to the
volume and other limitations described above. The foregoing summary of Rule 144
is not intended to be a complete description thereof.
Upon consummation of this Offering, 496,000 shares of Common Stock will be
entitled to registration rights, which rights will be exercisable after 180 days
from the consummation of this Offering. See 'Certain Transactions--Senior
Subordinated Indebtedness.' The Company may in the future file a registration
statement on Form S-8 covering all shares of Common Stock issuable under the
Company's 1996 Share Incentive Plan in effect on the date hereof. The Company
has granted options to acquire up to 260,000 shares of Common Stock under the
Company's 1996 Share Incentive Plan.
Upon completion of this Offering, 4,230,000 shares of Common Stock will be
held by the NAFCO Partnership. The NAFCO Partnership has agreed for a period of
180 days, without the prior consent of Raymond James & Associates, Inc., not to
issue, sell or contract to sell or otherwise dispose of any shares of Common
Stock or any securities convertible into or exchangeable for Common Stock or to
grant options or warrants to purchase any shares of Common Stock (other than in
connection with employee benefit plans). See 'Underwriting.'
Prior to the Offering there has been no public market for the Common Stock,
and no prediction can be made as to the effect, if any, that sales of shares of
Common Stock under Rule 144 or the future availability of such shares for sale
will have on the market price of the Common Stock prevailing from time to time
following this Offering. Nevertheless, sales of substantial amounts of Common
Stock in the public market, or the perception that such sales could occur, could
adversely affect prevailing market prices for the Common Stock.
54
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement between
the Company and the Representatives (as defined below) (the 'Underwriting
Agreement'), the underwriters named below (the 'Underwriters'), through their
representatives, Raymond James & Associates, Inc. and Cruttenden Roth
Incorporated (the 'Representatives'), have severally agreed to purchase from the
Company the following respective numbers of shares of Common Stock at the public
offering price less the underwriting discounts and commissions set forth on the
cover page of this Prospectus:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
- -------------------------------------------------- ----------
<S> <C>
Raymond James & Associates, Inc...................
Cruttenden Roth Incorporated......................
----------
TOTAL.............................. 2,000,000
----------
----------
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to approval of certain legal matters by their counsel
and to certain other conditions. The Underwriters are obligated to take and pay
for all shares of Common Stock offered hereby (other than those covered by the
over-allotment option described below) if any such shares are purchased.
The Underwriters, through the Representatives, propose to offer part of the
shares of Common Stock directly to the public at the public offering price set
forth on the cover page of this Prospectus and part of the shares to certain
dealers at a price that represents a concession not in excess of $ per
share under the public offering price. The Underwriters may allow, and such
dealers may re-allow, a concession not in excess of $ per share to certain
other dealers. The Representatives of the Underwriters have advised the Company
that the Underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.
The Company has granted the Underwriters an option exercisable not later
than 30 days after the date of this Prospectus, to purchase up to an aggregate
of 300,000 additional shares of Common Stock, at the public offering price, less
the underwriting discounts and commissions set forth on the cover page of this
Prospectus. To the extent that the Underwriters exercise such option, each of
the Underwriters will have a firm commitment to purchase approximately the same
percentage thereof as the number of shares of Common Stock to be purchased by it
shown in the above table bears to the total shown, and the Company will be
obligated, pursuant to the option, to sell such shares to the Underwriters. The
Underwriters may exercise their option only to cover over-allotments made in
connection with the sale of the shares of Common Stock offered hereby. If
purchased, the Underwriters will sell such additional shares on the same terms
as those on which the shares are being offered.
The Company has agreed to indemnify the Underwriters against, or to
contribute to, losses arising out of certain liabilities in connection with this
Offering, including liabilities under the Securities Act.
Each of the directors and officers and shareholders of the Company has
agreed not to offer, sell or otherwise dispose of any shares of Common Stock for
a period of 180 days after the date of this Prospectus without the prior written
consent of Raymond James & Associates, Inc.
Prior to this Offering, there has been no public market for the Common
Stock of the Company. The initial public offering price for the Common Stock was
determined by negotiation between the Company and the Representatives. Among the
factors considered in such negotiations were the prevailing market conditions,
the value of publicly traded companies believed to be comparable to the Company,
the results of operations of the Company in recent periods, estimates of the
business potential of the Company, the present state of the Company's
development and other factors deemed relevant.
The foregoing includes a summary of certain principal terms of the
Underwriting Agreement and does not purport to be complete. Reference is made to
the copy of the Underwriting Agreement that is on file on an exhibit to the
Registration Statement on Form S-1 under the Securities Act and filed by the
Company with the Commission with respect to the shares of Common Stock offered
hereby, of which this Prospectus is a part.
Lynn Dunham-Sirota, a 0.41% limited partner of the NAFCO Partnership, is
the spouse of a Managing Director of Raymond James & Associates.
55
<PAGE>
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Weil, Gotshal & Manges LLP, New York, New York (a
partnership including professional corporations). Certain legal matters will be
passed upon for the Underwriters by Greenberg, Traurig, Hoffman, Lipoff, Rosen &
Quentel, P.A.
EXPERTS
The consolidated financial statements of the Company as of September 30,
1996, December 31, 1995 and 1994, and for the nine months ended September 30,
1996 and 1995, the year ended December 31, 1995 and for the period from October
1, 1994 (date of inception) to December 31, 1994, have been included herein and
in the Registration Statement in reliance upon the report of KPMG Peat Marwick
LLP, independent certified public accountants, appearing elsewhere herein, and
upon the authority of said firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Commission, a Registration Statement on Form
S-1 (the 'Registration Statement') pursuant to the Securities Act covering the
Common Stock offered hereby. This Prospectus does not contain all the
information set forth in the Registration Statement, certain parts of which are
omitted in accordance with the rules and regulations of the Commission.
Statements made in this Prospectus as to the contents of any contract, agreement
or other document are summaries of the material terms of such contract,
agreement or other document. With respect to each such contract, agreement or
other document filed as an exhibit to the Registration Statement, reference is
made to the exhibits for a more complete description of the matter involved. The
Registration Statement (including the exhibits and schedules thereto) filed with
the Commission by the Company may be inspected and copied at the public
reference facilities of the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, DC 20549 and at the regional offices of the Commission located at
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and Seven World Trade Center, 13th Floor, New York, New York
10048. Copies of such material may also be obtained from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, DC 20549 at
prescribed rates. The Commission also maintains a Web Site at
http://www.sec.gov, which contains reports and other information regarding
registrants that file electronically with the Commission.
The Company is not currently subject to the informational requirements of
the Exchange Act. As a result of this Offering, the Company will become subject
to the informational requirements of the Exchange Act. The Company will fulfill
its obligations with respect to such requirements by filing periodic reports
with the Commission. In addition, the Company intends to furnish to its
stockholders annual reports containing audited financial statements certified by
its independent auditors and quarterly reports containing unaudited financial
information for the first three quarters of each fiscal year.
56
<PAGE>
NATIONAL AUTO FINANCE COMPANY, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
Unaudited Pro Forma Consolidated Balance Sheet as of September 30, 1996.................................... F-3
Unaudited Pro Forma Statement of Income for the nine-month period ended September 30, 1996................. F-4
Notes to Unaudited Pro Forma Consolidated Financial Statements............................................. F-5
HISTORICAL FINANCIAL STATEMENTS
Independent Auditors' Report............................................................................... F-6
Consolidated Balance Sheets as of September 30, 1996, December 31, 1995
and December 31, 1994.................................................................................... F-7
Consolidated Statements of Income for the nine months ended September 30, 1996 and 1995, and the year ended
December 31, 1995, and the period from October 1, 1994 (inception) to December 31, 1994.................. F-8
Consolidated Statements of Partners' Capital for the nine months ended September 30, 1996, the year ended
December 31, 1995, and the period from October 1, 1994 (inception) to December 31, 1994.................. F-9
Consolidated Statements of Cash Flows for the nine months ended September 30, 1996 and 1995, the year ended
December 31, 1995, and the period from October 1, 1994 (inception) to December 31, 1994.................. F-10
Notes to Financial Statements.............................................................................. F-11
</TABLE>
F-1
<PAGE>
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The following pro forma financial information sets forth historical
information which has been adjusted to reflect the Reorganization which
includes, among other things, (i) certain transactions associated with the
reorganization of the business of the Partnerships into corporate form, (ii) the
income tax effects of the Reorganization assuming the Reorganization occurred on
September 30, 1996, (iii) the issuance by the Company of 2,000,000 shares of
Common Stock at an assumed offering price of $8.00 per share in an initial
public offering, net of related fees and expenses and (iv) repayment of the
$4.284 million of subordinated debt. The effects of the Reorganization are
reflected in the first pro forma column in the Unaudited Pro Forma Financial
Statements titled 'NAFCO, Inc. Pro Forma.' The effects of the issuance of Common
Stock by the Company, as well as the effects of the Reorganization, will be
reflected in the last column of the Unaudited Pro Forma Financial Statements
titled 'NAFCO, Inc. Pro Forma (As Adjusted).'
The Unaudited Pro Forma Statements of Income assume the Reorganization took
place at the beginning of the periods presented. The Unaudited Pro Forma Balance
Sheet assumes the Reorganization took place on the date presented. See 'Notes to
Unaudited Pro Forma Financial Statements.' The pro forma information is based on
certain assumptions and estimates that management believes are reasonable in the
circumstances and does not purport to be indicative of the results which
actually would have been attained had the above transactions occurred at the
dates indicated or the results which may be attained in the future. This
information should be read in conjunction with the Company's financial
statements and related notes included elsewhere in this Prospectus.
F-2
<PAGE>
NATIONAL AUTO FINANCE COMPANY, INC.
UNAUDITED PRO FORMA BALANCE SHEET
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
NAFCO REORGANIZATION RECAPITALIZATION NAFCO, INC.
LIMITED PRO FORMA NAFCO, INC. PRO FORMA PRO FORMA
PARTNERSHIP ADJUSTMENTS PRO FORMA ADJUSTMENTS (AS ADJUSTED)
----------- -------------- ----------- ---------------- -------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents...... $ 8,856,036 (668) (3) 8,855,368 14,880,000(4) 19,012,368
(600,000)(5)
(4,284,000)(5)
161,000
Net interest spread
receivable................... 10,849,874 10,849,874 10,849,874
Fixed assets (net of
depreciation)................ 466,133 466,133 466,133
Investment in trusts........... 6,823,764 6,823,764 6,823,764
Deferred financing costs....... 1,003,747 1,003,747 1,003,747
Due from Related Parties....... 185,754 185,754 185,754
Other assets................... 260,855 260,855 260,855
----------- ----------- -------------
Total Assets................. $28,446,163 28,445,495 38,602,495
----------- ----------- -------------
----------- ----------- -------------
LIABILITIES AND OWNERSHIP EQUITY
Liabilities
Senior subordinated debt....... $12,000,000 12,000,000 12,000,000
Junior subordinated debt....... 7,217,590 7,217,590 (4,284,000)(5) 2,933,590
Subordinated Debt Interest..... 283,876 283,876 283,876
Due to Related Parties......... 75,237 75,237 75,237
Pro forma Deferred Taxes....... 2,233,642(1) 2,233,642 2,233,642
Accounts payable............... 715,025 (50,000)(8) 665,025 665,025
----------- ----------- -------------
Total Liabilities............ 20,291,728 22,475,370 18,191,370
Ownership Equity
Preferred Equity............... 2,250,668 (2,250,668)(3) -- --
Partners' Equity............... 5,903,767 (5,903,767)(2) -- --
----------- ----------- -------------
Total Partners' Equity....... 8,154,435 -- --
Stockholders' Equity
Common Stock................... 47,000(3)(8) 47,000 20,000(4) 67,000
Preferred Stock................ 2,250,000(3) 2,250,000 2,250,000
Paid-in Capital(9)............. 53,000(2) 3,673,125 14,260,000(4) 18,094,125
3,620,125(1)(2)(3) -- 161,000(6)(8) --
Retained Earnings -- -- -- -- --
----------- ----------- -------------
Total Stockholders' Equity... 5,970,125 20,411,125
Total Ownership Equity....... 8,154,435 5,970,125 20,411,125
----------- ----------- -------------
Total Liabilities and
Ownership Equity........... $28,446,163 28,445,495 38,602,495
----------- ----------- -------------
----------- ----------- -------------
</TABLE>
F-3
<PAGE>
NATIONAL AUTO FINANCE COMPANY, INC.
UNAUDITED PRO FORMA STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
NAFCO REORGANIZATION RECAPITALIZATION NAFCO, INC.
LIMITED PRO FORMA NAFCO, INC. PRO FORMA PRO FORMA
PARTNERSHIP ADJUSTMENTS PRO FORMA ADJUSTMENTS (AS ADJUSTED)
----------- -------------- ----------- ---------------- -------------
<S> <C> <C> <C> <C> <C>
Revenue
Gain on sale of loans.................. $ 8,188,473 8,188,473 8,188,473
Interest income from cash
investments......................... 56,412 56,412 56,412
Deferred gain on sales of loans........ 491,286 491,286 491,286
Deferred servicing income.............. 586,985 586,985 586,985
Deferred income from 1995-1
securitization...................... 478,914 478,914 478,914
Other income........................... 53,887 53,887 53,887
----------- ----------- -------------
Total revenues...................... 9,855,957 9,855,957 9,855,957
Operating expenses..................... 6,754,143 (50,000)(8) 6,704,143 (257,000)(6) 6,447,143
----------- ----------- ---------------- -------------
Total expenses...................... 6,754,143 (50,000) 6,704,143 (257,000) 6,447,143
Net income before taxes............. 3,101,814 50,000 3,151,814 257,000 3,408,814
Pro forma income taxes.............. 1,186,213(1) 1,186,213 96,000 1,282,213
----------- ----------- ---------------- -------------
Net Income.......................... $ 3,101,814 1,965,601 161,000 2,126,601
----------- ----------- ---------------- -------------
----------- ----------- ---------------- -------------
</TABLE>
F-4
<PAGE>
NATIONAL AUTO FINANCE COMPANY, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(1) Adjustment to reflect a deferred income tax liability (assuming an
approximate rate of 38%) as if the Company had operated as a taxable 'C'
corporation from inception.
<TABLE>
<S> <C>
Year ended December 31, 1994................................ $ 0
Year ended December 31, 1995................................ 1,066,429
Nine months ended September 30, 1996........................ 1,167,213
----------
$2,233,642
----------
----------
</TABLE>
(2) Adjustment to reflect the exchange of certain general and limited
partnership interests for 4,700,000 shares of the Common Stock with a par
value of $.01, as part of the Reorganization.
(3) Adjustment to reflect the exchange of certain preferred equity partnership
interests for 2,250 shares of Series 'A' 7% Cumulative Preferred Stock and
the payment of $668 in lieu of the issuance of a fractional share of
Preferred Stock, as part of the Reorganization.
(4) Adjustment to reflect the $14,280,000 of proceeds obtained through the sale
of 2,000,000 shares of Common Stock with a par value of $.01.
(5) Adjustment to give effect to the use of proceeds from the issuance of the
Common Stock being offered by the Company for the payment of (i) $4,284,000
in Junior Subordinated Debt, and (ii) the payment of $600,000 of costs
associated with the issuance of the Common Stock of the Company.
(6) Adjustment to reflect the reduction in interest expense that would result
from payment of Junior Subordinated Debt described above.
(7) Reflects annual dividend rate of $70/share for 2,250 shares of Series A
Preferred Stock issued to Preferred Equity Partners in conjunction with the
reorganization.
(8) Reflects the exchange of accrued Deferred Additional Interest on Senior
Subordinated Debt of $50,000 for 470,000 shares of common stock in
conjunction with the Reorganization.
(9) In connection with the Reorganization, $3,620,000 of retained earnings (pro
forma) and $3,718,000 of retained earnings (pro forma as adjusted) were
transferred to additional paid-in capital to reflect a constructive
distribution to the partners of the NAFCO Partnership followed by a
contribution to the capital of the Company.
F-5
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
National Auto Finance Corporation, General Partner
National Auto Finance Company L.P.:
We have audited the accompanying consolidated balance sheets of National Auto
Finance Company L.P. and subsidiary as of September 30, 1996, December 31, 1995
and 1994, and the related consolidated statements of income, and cash flows for
the nine months ended September 30, 1996 and 1995, for the year ended December
31, 1995 and for the period from October 1, 1994 (date of inception) to December
31, 1994 and the related consolidated statements of partners' capital for the
nine months ended September 30, 1996, for the year ended December 31, 1995, and
for the period from October 1, 1994 (date of inception) to December 31, 1994.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of National Auto
Finance Company L.P. and subsidiary as of September 30, 1996 and December 31,
1995 and 1994, and the results of their operations and their cash flows for the
nine months ended September 30, 1996 and 1995, for the year ended December 31,
1995 and for the period from October 1, 1994 (date of inception) to December 31,
1994 in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Ft. Lauderdale, Florida
November 15, 1996
F-6
<PAGE>
NATIONAL AUTO FINANCE COMPANY L.P. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1996, DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1996 1995 1994
------------- ------------ ------------
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents............................................ $ 8,856,036 824,388 1,590,021
Loans................................................................ -- -- 3,660,064
Less allowance for credit losses..................................... -- -- (182,000)
------------- ------------ ------------
Net loans....................................................... -- -- 3,478,064
Excess spread receivable............................................. 10,849,874 5,140,006 --
Spread accounts:
Master Trust....................................................... 3,454,469 1,804,469 25,000
1995-1 Trust....................................................... 3,369,295 3,369,295 --
Fixed assets, net.................................................... 466,133 273,330 61,574
Deferred financing costs............................................. 1,003,747 434,135 533,543
Due from National Auto Finance Corporation........................... -- -- 99,500
Due from related parties............................................. 185,754 -- --
Other assets......................................................... 260,855 157,207 12,776
------------- ------------ ------------
Total assets.................................................... $ 28,446,163 12,002,830 5,800,478
------------- ------------ ------------
------------- ------------ ------------
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses................................ 715,025 421,434 324,209
Due to National Auto Finance Corporation............................. 75,237 46,744 49,303
Accrued interest payable--related parties............................ 71,791 531,850 77,949
Accrued interest payable--senior subordinated notes.................. 212,085 -- --
Junior subordinated notes--related parties........................... 7,217,590 7,555,991 5,323,733
Senior subordinated notes............................................ 12,000,000 -- --
------------- ------------ ------------
Total liabilities............................................... 20,291,728 8,556,019 5,775,194
------------- ------------ ------------
Total partners' capital......................................... 8,154,435 3,446,811 25,284
------------- ------------ ------------
Total liabilities and partners' capital......................... $ 28,446,163 12,002,830 5,800,478
------------- ------------ ------------
------------- ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
NATIONAL AUTO FINANCE COMPANY L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995,
FOR THE YEAR ENDED DECEMBER 31, 1995 AND FOR THE PERIOD FROM
OCTOBER 1, 1994 (DATE OF INCEPTION) TO DECEMBER 31, 1994
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED YEAR ENDED OCTOBER 1 TO
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1996 1995 1995 1994
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Revenue:
Gain on sales of loans.............................. $ 8,188,473 5,559,234 7,125,849 --
Deferred gain on sales of loans..................... 491,286 139,763 240,869 --
Deferred servicing income........................... 586,985 108,740 218,665 --
Deferred income from 1995-1 securitization.......... 478,914 -- -- --
Interest income from cash investments............... 56,412 7,907 10,828 32,097
Other income........................................ 53,887 31,734 32,768 --
Finance charges earned.............................. -- -- -- 94,729
Provision for credit losses......................... -- -- 182,000 (182,000)
------------- ------------- ------------ ------------
Total revenue.................................... 9,855,957 5,847,378 7,810,979 (55,174)
------------- ------------- ------------ ------------
Expenses:
Interest expense.................................... 676,153 356,008 498,460 77,950
Salaries and employee benefits...................... 2,510,062 1,176,370 1,665,968 222,874
Direct loan acquisition expenses.................... 614,857 328,898 502,064 22,172
Servicing costs..................................... 778,398 203,436 370,506 6,104
Depreciation and amortization....................... 343,108 132,631 182,999 6,841
Other operating expenses............................ 1,831,565 900,630 1,310,156 83,601
------------- ------------- ------------ ------------
Total expenses................................... 6,754,143 3,097,973 4,530,153 419,542
------------- ------------- ------------ ------------
Net income (loss)................................ $ 3,101,814 2,749,405 3,280,826 (474,716)
------------- ------------- ------------ ------------
------------- ------------- ------------ ------------
Pro forma data (unaudited) (note 10):
Pro forma income (loss) before income taxes......... 3,101,814 2,749,405 3,280,826 (474,716)
Pro forma income taxes.............................. 1,167,213 864,852 1,066,429 --
------------- ------------- ------------ ------------
Pro forma net income............................. $ 1,934,601 1,884,553 2,214,397 (474,716)
------------- ------------- ------------ ------------
------------- ------------- ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
NATIONAL AUTO FINANCE COMPANY L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
FOR NINE MONTHS ENDED SEPTEMBER 30, 1996, FOR THE
YEAR ENDED DECEMBER 31, 1995 AND FOR THE PERIOD FROM
OCTOBER 1, 1994 (DATE OF INCEPTION) TO DECEMBER 31, 1994
<TABLE>
<CAPTION>
PREFERRED
GENERAL LIMITED EQUITY
PARTNER PARTNERS PARTNERS TOTAL
-------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Balance as of October 1, 1994 (date of inception)........... $ -- -- -- --
Contributions............................................. 1,000 99,000 400,000 500,000
Net loss.................................................. (38,717) (83,836) (352,163) (474,716)
-------- ---------- ---------- ----------
Balance as of December 31, 1994............................. (37,717) 15,164 47,837 25,284
Contributions............................................. -- -- 140,701 140,701
Net income................................................ 67,375 2,955,308 258,143 3,280,826
Preferred equity earnings................................. -- (35,000) 35,000 --
-------- ---------- ---------- ----------
Balance as of December 31, 1995............................. 29,658 2,935,472 481,681 3,446,811
Contributions............................................. -- -- 1,605,810 1,605,810
Net income................................................ 29,380 2,909,257 163,177 3,101,814
-------- ---------- ---------- ----------
Balance as of September 30, 1996............................ $ 59,038 5,844,729 2,250,668 8,154,435
-------- ---------- ---------- ----------
-------- ---------- ---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-9
<PAGE>
NATIONAL AUTO FINANCE COMPANY L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995,
THE YEAR ENDED DECEMBER 31, 1995 AND FOR THE PERIOD FROM
OCTOBER 1, 1994 (DATE OF INCEPTION) TO DECEMBER 31, 1994
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS THREE MONTHS
ENDED ENDED YEAR ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1996 1995 1995 1994
------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).................................... $ 3,101,814 2,749,405 3,280,826 (474,716)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Gain on sales of loans........................... (8,188,473) (5,559,234) (7,125,849) --
Depreciation and amortization.................... 217,522 132,631 191,896 6,841
Provision for credit losses...................... -- (87,326) (182,000) 182,000
Loss from the sale of fixed assets............... -- 1,415 1,415 --
Purchases of loans held for sale................. (51,076,666) (32,289,778) (43,146,025) (3,690,004)
Proceeds from sale of loans...................... 51,540,362 31,146,862 41,773,945 29,940
Cash received from spread account................ 3,450,727 1,202,999 2,242,751 --
Deferred gain and servicing...................... (1,078,271) (248,503) (456,811) --
Deferred income from 1995-1 securitization....... (478,914) -- -- --
Amortization of deferred financing costs......... 121,367 -- -- --
Changes in other assets and liabilities:
Due from related parties...................... (185,754) -- -- --
Other assets.................................. (103,648) (2,973) (144,431) (12,776)
Accounts payable and accrued expenses......... 293,591 23,560 97,225 324,209
Accrued interest payable-related parties...... (460,059) 344,866 453,901 77,949
Accrued interest payable-senior subordinated
debt........................................ 212,085 -- -- --
------------- ------------- ------------ -------------
Net cash used in operating activities......... (2,634,317) (2,586,076) (3,013,157) (3,556,557)
------------- ------------- ------------ -------------
Cash flows from investing activities:
Capitalized start-up costs and deferred structuring
fees............................................... (696,594) (35,000) (45,086) (533,543)
Fixed assets purchased............................... (283,343) (207,597) (265,285) (68,415)
Fixed assets sold.................................... -- 13,328 13,328 --
Net received from (invested in) National Financial
Auto Receivable Master Trust....................... (1,650,000) -- 3,186,395 (25,000)
Investment in National Auto Finance 1995-1 Trust..... -- -- (3,369,295) --
Cash received from 1995-1 Trust...................... -- -- 257,567 --
Due from National Auto Finance Corporation........... -- 99,500 99,500 (99,500)
------------- ------------- ------------ -------------
Net cash used in investing activities......... (2,629,937) (129,769) (122,876) (726,458)
------------- ------------- ------------ -------------
Cash flows from financing activities:
Proceeds from senior subordinated debt............... 12,000,000 -- -- --
Proceeds from junior subordinated notes-related
parties............................................ 700,000 1,233,556 2,336,745 5,323,733
Payments of junior subordinated notes-related
parties............................................ (1,038,401) (96,058) (104,487) --
Preferred equity partners' contributions............. 1,605,810 -- 140,701 400,000
General and limited partners' contributions.......... -- -- -- 100,000
Due to National Auto Finance Corporation............. 28,493 (10,000) (2,559) 49,303
------------- ------------- ------------ -------------
Net cash provided by financing activities..... 13,295,902 1,127,498 2,370,400 5,873,036
------------- ------------- ------------ -------------
Net increase (decrease) in cash and cash equivalents... 8,031,648 (1,588,347) (765,633) 1,590,021
Cash and cash equivalents at beginning of period....... 824,388 1,590,021 1,590,021 --
------------- ------------- ------------ -------------
Cash and cash equivalents at end of period............. $ 8,856,036 1,674 824,388 1,590,021
------------- ------------- ------------ -------------
------------- ------------- ------------ -------------
Noncash investing and financing activities:
On January 16, 1995, the Company transferred
receivables of $4,875,979 to the spread account.
Cash paid for interest................................. $ 897,578 -- -- --
------------- ------------- ------------ -------------
------------- ------------- ------------ -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-10
<PAGE>
NATIONAL AUTO FINANCE COMPANY L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Organization and Business
National Auto Finance Company L.P. (the 'NAFCO Partnership'), a Delaware
limited partnership, was established in October 1994 with approximately
$5,800,000 of partners' equity and junior subordinated debt from certain
partners and affiliates (the 'Junior Subordinated Notes'). The general partner,
National Auto Finance Corporation (the 'General Partner'), a Delaware
corporation, was appointed to manage the businesses. The NAFCO Partnership owns
97% of the limited partnership interest and 100% of the preferred equity
partnership interest in Auto Credit Clearinghouse L.P. (the 'ACCH Partnership'),
a Delaware limited partnership. The general partner of the NAFCO Partnership is
also the general partner of the ACCH Partnership. The ACCH Partnership was
established in September 1995 with approximately $140,000 of partners' equity.
As described below in note (1)(b)(i), the consolidated partnerships are referred
to as the 'Company' in the following notes to the consolidated financial
statements.
The Company purchases non-prime motor vehicle retail installment sales
contracts ('Loans') from manufacturer-franchised automobile dealers on a
nonrecourse basis. As of September 30, 1996, approximately 40% of the
outstanding principal balance of Loans relates to Loans originated in Georgia,
17% in North Carolina, and 11% in South Carolina. No single dealer originates
more than 5% of the Loans.
Through strategic referral and marketing alliances with financial
institutions, the Company seeks to increase the number of Loans it purchases by
(i) leveraging a financial institution's existing dealer relationships and
finance sales force to market the Company's non-prime consumer products and
services and (ii) obtaining the right to review and purchase non-prime consumer
loans which do not meet a financial institution's underwriting criteria. Through
such strategic referral and marketing alliances, the Company offers the
financial institution the opportunity to provide a broader product offering to
dealers and to earn additional income based on the number of Loans which are
purchased by the Company.
In April 1996, the Company entered into its first strategic referral and
marketing alliance (the 'First Union Strategic Alliance'), with First Union
National Bank of North Carolina ('FUNB') and certain of its national bank
affiliates (collectively, 'First Union'). The First Union Strategic Alliance
provides for (i) joint marketing of the Company's products and services by both
the Company's sales force and the marketing and sales personnel in First Union's
indirect sales finance division ('FUSF') to dealers throughout seven
southeastern states and the District of Columbia with whom FUSF has an existing
relationship, and (ii) exclusive referral by FUSF to the Company of all
applications for Non-Prime Consumer Loans falling below certain established
credit guidelines.
As a result of the strategic alliance with FUNB and an affiliate of FUNB
having a beneficial ownership interest in the Company, the Company has agreed to
engage solely in activities that are permissible for national banks. Management
does not believe that the banking laws, orders and regulations significantly
impact the manner in which the Company intends to conduct or expand its business
or product or service offerings, although there can be no assurance that such
laws will not have such an effect. An affiliate of First Union also serves as a
placement agent for the Company's Securitization and Financing Transactions. The
First Union Partner may, under certain circumstances, cause the NAFCO
Partnership to redeem the First Union Partner's interest.
Profits and losses of the ACCH Partnership and the NAFCO Partnership are
allocated to the partners as follows: If a net loss has been previously
incurred, the income in future periods goes first to the preferred equity
partners and then to the general partner up to the amount of their initial
contribution, provided, however, that losses related to the Junior Subordinated
Notes shall be allocated to the partners bearing the risk of loss with respect
to such notes. Next, a seven percent return on the preferred equity partners'
initial investment is allocated to them. Any remainder is allocated based on the
partnership agreement.
F-11
<PAGE>
NATIONAL AUTO FINANCE COMPANY L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
(b) Summary of Significant Accounting Policies
A description of the significant accounting policies that are followed by
the Company is presented below:
(i) Principles of Consolidation
The consolidated financial statements include the accounts of the
NAFCO Partnership and the ACCH Partnership. All significant intercompany
accounts and transactions have been eliminated in consolidation.
(ii) Cash and Cash Equivalents
The Company considers money market funds and all other highly
liquid debt instruments purchased with an original maturity of less than
three months to be cash equivalents.
(iii) Loans
Loans are held for sale until packaged and sold through
asset-backed securitization. The Loans are carried at the lower of their
principal amount outstanding (amortized cost), or market value. The
Loans, which mature at various dates through 2001, are carried as either
precomputed interest or simple interest Loans. On precomputed (or
discount) Loans, the amount of cash loaned to the borrower is less than
the face amount of the Loan; the difference represents unearned interest
earned by the Company over the life of the loan. The face amount of a
simple interest loan equals the amount of cash advanced to the borrower.
Interest income on simple interest loans is calculated based on the
principal outstanding. Precomputed interest Loans are carried at the
aggregate of receivable payments less unearned finance charges and the
deferred dealer discount. Simple interest Loans are reported at the net
amount advanced plus the accrued unpaid finance charges. All Loans are
at a fixed rate of interest and are secured by vehicles. The Company
provides an allowance for credit losses from the date of purchase to the
date of securitization.
Revenue from Loans is recognized based upon the method of interest
calculation of each loan type. Unearned finance income from precomputed
interest Loans is accreted as interest income using a level-yield
interest method. Interest income from simple interest Loans is
recognized as earned. The related deferred dealer discount income, for
both classifications, is recognized on the actuarial method.
(iv) Securitizations of Loans
The Company sells its Loans to a Master Trust through revolving
asset-backed securitizations and recognizes a gain at the time of sale
of the Loans, based upon the net present value of the excess spread
receivable from the cash flow stream over the life of the Loans. The net
present value calculation is based upon a discount rate which the
Company believes is consistent with industry practice and would be
applied by an unrelated purchaser of similar cash flows. The Company
retains a residual ownership interest in the Loans sold through
securitizations. This residual interest represents the cash flows from
the securitized Loans, including principal and interest, expected to
remain after (i) all amounts passed through to the securitization
investor, (ii) credit losses, (iii) lost interest attributable to
prepayments of Loans over the life of the securitization, (iv) servicing
fees, and (v) recovery of the spread account. The residual interest is
discounted and carried on the balance sheet as excess spread receivable.
Periodically, the Master Trust may sell loans to another trust in a
permanent securitization. At the time of permanent securitization, the
Company calculates an additional gain in the same manner described
above, based upon the terms of the permanent securitization. Such gain
is deferred and amortized over the life of the permanent securitization
using the interest method.
The Company is the master servicer and servicer of record for the
securitized Loans and utilizes an unrelated entity to provide the actual
servicing. A normal servicing fee of 2 percent is assumed in the gain
calculation; this amount is passed through to the servicer of record by
the Master Trust (see note 3).
F-12
<PAGE>
NATIONAL AUTO FINANCE COMPANY L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
(v) Excess Spread Receivable
The excess spread receivable is established for each securitization
and represents the present value of the gross interest income on the
Loans securitized less the pass-through interest paid to the
securitization investors, less provisions for credit losses and
prepayments over the life of the respective securitization, less normal
servicing fees and recovery of the spread account. The excess spread
receivable consists of the gain recognized on the sale of Loans through
securitization, deferred servicing income and a deferred gain
attributable to the time value of money. Deferred servicing income is
recognized as earned over the life of the related Loans in proportion to
the principal paydown of the Loans outstanding. The deferred gain
attributable to the time value of money is recognized as earned in
relation to the balance of securitized Loans outstanding. The excess
spread receivable is reduced by the receipt of cash from the trusts and
the amortization of the deferred gain and deferred servicing costs.
Deferred servicing costs are amortized over the life of the related
Loans as a percentage of Loans outstanding. Prepayment and loss
experience rates are based upon the nature of the receivables and
historical information available to the Company. Prepayment assumptions
and credit loss provisions are periodically reviewed. Deficiencies, if
any, in excess of estimated reserves, are charged to operations.
Favorable experience is recognized prospectively as realized.
(vi) Spread Account
This account represents an over-collateralization pool of the
securitization facility to protect securitization investors against
credit losses. Funds in excess of specified percentages are available to
be remitted to the Company over the life of the securitization. For each
securitization, there is no recourse to the Company beyond the amounts
maintained in this account. However, the excess spread receivable noted
above is only available to the Company to the extent that there is no
impairment of the spread account that relates to the securitization. The
Company analyzes the spread account quarterly to determine if impairment
exists. Impairment, if any, is charged to operations.
(vii) Fixed Assets, Net
Purchases of capital equipment in excess of $500 are capitalized
and depreciated on a straight-line basis over the estimated life of the
equipment, which is generally five years.
(viii) Deferred Financing Costs
A structuring fee incurred in connection with the placement of a
securitized credit facility was also capitalized and will be amortized
on a straight-line basis over the initial term of the facility, which is
three years.
A structuring fee incurred in connection with the financing of the
Senior Subordinated Debt was also capitalized and will be amortized on a
straight-line basis over the initial term of the debt, which is five
years.
In accordance with Financial Accounting Standards Board Statement
No. 7, 'Development Stage Enterprises,' various organizational expenses
of the Company have been capitalized for these financial statements and
will be amortized over five years on a straight-line basis.
(ix) Income Taxes
No provision or benefit for income taxes has been included in these
financial statements since taxable income or loss passes through to, and
is reportable by, the partners individually. The Company's tax returns
are subject to examination by federal and state taxing authorities.
(x) Use of Estimates
In preparing the financial statements, management is required to
make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenue and expense. The most significant of the
F-13
<PAGE>
NATIONAL AUTO FINANCE COMPANY L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
estimates relate to the components of the excess spread receivable and
the related gain on sales of Loans. Actual results could differ from
these estimates.
(c) New Accounting Pronouncement
(i) Accounting for Stock-Based Compensation
On October 23, 1995, the FASB issued Statement No. 123, 'Accounting
for Stock-Based Compensation' ('FAS 123'). This Statement applies to all
transactions in which an entity acquires goods or services by issuing
equity instruments or by incurring liabilities where the payment amounts
are based on the entity's common stock price. The Statement covers
transactions with employees and nonemployees and is applicable to both
public and nonpublic entities. Entities are allowed (1) to continue to
use the Accounting Principles Board Opinion No. 25 method ('APB 25'), or
(2) to adopt the FAS 123 fair value based method. Once the method is
adopted, an entity cannot change and the method selected applies to all
of an entity's compensation plans and transactions. For entities not
adopting the FAS 123 fair value based method, FAS 123 requires pro forma
net income and earnings per share information as if the fair value based
method has been adopted. For entities not adopting the fair value based
method, the disclosure requirements of FAS 123, including the pro forma
information, are effective for financial statements for fiscal years
beginning after December 15, 1995 (calendar year 1996). The pro forma
disclosures are to include all awards granted in fiscal years that begin
after December 15, 1994 (calendar year 1995). However, the disclosures,
including the pro forma net income and earnings per share disclosures,
for the fiscal year beginning after December 15, 1994 (calendar year
1995) will not be included in that year's financial statements but will
be included in the following year-end (calendar year 1996) financial
statements if the first fiscal year is presented for comparative
purposes. Management has not yet determined the impact of FAS 123 on the
Company.
(ii) Accounting for Transfers of Servicing of Financial Assets and
Extinguishments of Liabilities
In June 1996, the FASB issued Statement of Financial Accounting
Standards No. 125 ('FAS 125'), 'Accounting for Transfers of Servicing of
Financial Assets and Extinguishments of Liabilities.' FAS 125 provides
accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities based on a
financial-components approach that focuses on control. FAS 125 is
effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996 and is
to be prospectively applied. The Company's assessment of the adoption of
FAS No. 125 indicates that the accounting for the revolving
securitizations will not change materially from the present accounting.
The Company believes that its securitization process meets the
requirements for surrender of control over the securitized assets.
Additionally, the Company believes that the gain presently deferred at
the time of permanent securitization can be recognized under FAS 125.
(2) EXCESS SPREAD RECEIVABLE
Activity in the excess spread receivable is as follows:
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
1996 1995 1995
------------- -------------- ------------
<S> <C> <C> <C>
Balance at beginning of period.................. $ 5,140,006 -- --
Gain on sales of loans.......................... 8,188,473 5,559,234 7,125,849
Cash received and other reductions during the
period net of amortization.................... (2,478,605) (1,122,169) (1,985,843)
------------- -------------- ------------
Balance at end of period........................ $ 10,849,874 4,437,065 5,140,006
------------- -------------- ------------
------------- -------------- ------------
</TABLE>
F-14
<PAGE>
NATIONAL AUTO FINANCE COMPANY L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
(2) EXCESS SPREAD RECEIVABLE--(CONTINUED)
Activity related to the allowance for credit losses recorded at the trust
level is as follows:
<TABLE>
<CAPTION>
UNAUDITED
-----------------------------------------------
NINE MONTHS NINE MONTHS
ENDED ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
1996 1995 1995
------------- -------------- ------------
<S> <C> <C> <C>
Balance at beginning of period.................. $ 1,761,288 182,000 182,000
Provision for credit losses..................... 2,663,812 1,686,745 2,222,196
Charge-offs, net................................ (1,799,602) (229,912) (642,908)
------------- -------------- ------------
Balance at end of period........................ $ 2,625,498 1,638,833 1,761,288
------------- -------------- ------------
------------- -------------- ------------
</TABLE>
(3) SECURITIZATION OF LOANS
In January 1995, the Company began using a revolving securitization
facility pursuant to which the Company sells its Loans on a daily basis to a
bankruptcy remote special purpose subsidiary trust ('Funding Trust I'), which in
turn transfers such Loans to the National Financial Auto Receivables Master
Trust (the 'Master Trust'). The Company retains, through Funding Trust I,
certain residual interests in future excess cash flows from the Master Trust, in
exchange for the transfer of Loans to 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, and 'Class C Certificates,' representing a portion of such
residual interest retained by the Company. FUNB owns 100% of the outstanding
Class B Certificates. The Company is required to maintain a minimum equity
position in the Master Trust of 10% of the net serviced receivables. The Company
has pledged a portion of the Class C Certificates and a cash reserve account to
protect against future credit losses.
Interest on the Class B Certificates is charged (i) during the month in
which the Loan is sold to the Master Trust, at FUNB's prime rate of interest,
and (ii) thereafter, based upon a formula of the London Interbank Offered Rate
('LIBOR') plus between 75 and 300 basis points. The amount of funds available
under the Class B Certificates is governed by a borrowing base formula that
provides availability as a multiple of the over-collateralization capital
pledged and is restricted by a number of financial covenants. Since the Master
Trust's borrowing rates under the securitization are floating and the interest
rates charged on the loans are fixed, increases in the interest rates charged on
the Master Trust's borrowings could have an effect both on cash flows from the
Master Trust to the Company and on the Company's reported net income. In order
to mitigate the negative impact of rising interest rates, the Master Trust has
entered into interest rate swap agreements which have the effect of fixing the
rates charged on a portion of the Master Trust's indebtedness.
In November 1995, the Master Trust refinanced $42,000,000 of its
receivables through the transfer of the related Loans to a separate trust, the
National Auto Finance 1995-1 Trust (the '1995-1 Trust'), which issued in a
private placement to various third-party investors $42,000,000 of fixed-rate
asset-backed securities. The payment of the principal and interest on
$38,000,000 of those securities is insured by a payment guaranty issued by
Financial Security Assurance, Inc. ('FSA'). The proceeds of the transaction were
used by the Master Trust to repay the then-outstanding balance of the Class B
Certificates. The Master Trust then commenced re-borrowing against the Class B
Certificates to finance its purchase of additional Loans from the Company
through Funding Trust I.
The 1995-1 Trust securitization was accomplished by Funding Trust I
re-acquiring the Loans and transferring them to the 1995-1 Trust. In addition to
offering fixed-rate financing, the 1995-1 Trust securitization as insured by FSA
offered lower over-collateralization levels than that required by the Master
Trust facility. The Company retains, through a second bankruptcy remote special
purpose subsidiary trust ('Funding Trust II'), certain residual interest in
future excess cash flows from the 1995-1 Trust.
F-15
<PAGE>
NATIONAL AUTO FINANCE COMPANY L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
(3) SECURITIZATION OF LOANS--(CONTINUED)
The Master Trust organizational documents required the consent of all
certificate holders to transfer (sell) the Loans. In November 1995,
substantially all eligible Loans in the Master Trust were transferred to the
1995-1 Trust. The 1995-1 Trust acquired the Loans from the Master Trust at par
with the net proceeds of the offering of certificates by the 1995-1 Trust, which
are guaranteed by FSA.
The terms of the transactions between the Company and the Master Trust
which resulted in the issuance of the Class B and Class C Certificates were
negotiated by the Company with FUNB. The terms of the reacquisition of the Loans
from the Master Trust were negotiated with FSA, the certificate holders, and
FUNB at the time of acquisition.
The 1995-1 Trust transaction did not affect the accounting sale treatment
previously extended to the transfers of the Loans to the Master Trust, inasmuch
as the transaction required the consent of all certificate holders as provided
in the Master Trust documents, and therefore was consistent with the sale
treatment.
During the nine months ended September 30, 1996, and 1995, and the year
ended December 31, 1995, the following activity took place with respect to
securitization:
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
1996 1995 1995
---------------- ---------------- ------------
<S> <C> <C> <C>
Original customer principal balance of loans sold... $ 91,741,229 38,346,397 49,814,996
---------------- ---------------- ------------
---------------- ---------------- ------------
Gain on sales....................................... $ 8,188,473 5,559,234 7,125,849
---------------- ---------------- ------------
---------------- ---------------- ------------
Remaining principal balance of loans sold since
inception, at period end............................ $ 82,792,345 35,064,001 43,144,670
---------------- ---------------- ------------
---------------- ---------------- ------------
Weighted average coupon rate........................ 19.7% 18.3% 18.3%
---------------- ---------------- ------------
---------------- ---------------- ------------
Weighted average original term (months)............. 54 54 53
---------------- ---------------- ------------
---------------- ---------------- ------------
Weighted average discount rate of excess spread..... 11% 11% 11%
---------------- ---------------- ------------
---------------- ---------------- ------------
</TABLE>
Both of the consolidated companies utilize the securitization facilities.
(4) JUNIOR SUBORDINATED NOTES
The debt is payable on demand to principal equity holders of the Company
and certain affiliates and carries interest at 8 percent. Interest expense
recognized for this debt for the period from December 31, 1995 through September
30, 1996, the year ended December 31, 1995 and the period October 1, 1994
(inception) to December 31, 1994 was $332,327, $497,260, and $77,950,
respectively.
(5) SENIOR SUBORDINATED DEBT
In August 1996, the Company completed a $12 million senior subordinated
debt financing with J.P. Morgan Investment Management, Inc., acting on behalf of
certain institutional investors (the 'Morgan Group'). The principal amount of
the Senior Subordinated Debt is due in August 2001 and carries a 10% coupon
payable quarterly. There is also an additional 3% deferred interest coupon that
accrues on a compounded basis and is payable in August 2006, if not earlier
automatically converted into a 10% equity interest in the Company upon the
occurrence of certain events, including the consummation of an intitial public
offering. The Senior Subordinated Debt generally prohibits the payment of
dividends on common stock following consummation of an initial public offering
of common stock so long as any amount remains outstanding on this debt. The
Company has accrued the additional 3% interest. Such amounts totaled
approximately $50,000 at September 30, 1996. If converted to an equity interest,
such accrued amounts would be considered as paid-in capital of the Company.
F-16
<PAGE>
NATIONAL AUTO FINANCE COMPANY L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
(6) OTHER OPERATING EXPENSES
Other operating expenses consist of the following:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
------------------------------ YEAR ENDED OCTOBER 1 TO
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1996 1995 1995 1994
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Dealer incentives........................... $ 195,769 97,622 169,782 --
Legal expenses.............................. 172,772 56,056 102,706 5,815
Rent expenses............................... 159,416 63,899 93,673 5,404
Travel and entertainment.................... 302,994 140,254 233,061 25,657
Management fees............................. 365,310 257,590 342,428 11,900
Other....................................... 635,304 285,209 368,506 34,825
------------- ------------- ------------ ------------
$ 1,831,565 900,630 1,310,156 83,601
------------- ------------- ------------ ------------
------------- ------------- ------------ ------------
</TABLE>
Management fees represent fees paid to National Auto Finance Corp., an
affiliate, for operational, legal, administrative and other services provided to
the Company under a management agreement that expires December 21, 2015.
(7) COMMITMENTS AND CONTINGENCIES
The Company has entered into various office and equipment leases for the
NAFCO and ACCH partnerships. Future minimum rental payments as of September 30,
1996, are as follows:
<TABLE>
<CAPTION>
YEAR ENDING OPERATING CAPITAL
DECEMBER 31, LEASES LEASES TOTAL
- ---------------------------------------------------------------------- --------- ------- -------
<S> <C> <C> <C>
1996.................................................................. $ 27,256 8,921 36,177
1997.................................................................. 130,182 35,683 165,865
1998.................................................................. 136,694 35,683 172,377
1999.................................................................. 103,089 35,683 138,772
2000.................................................................. 99,836 22,942 122,778
Thereafter............................................................ 42,440 -- 42,440
--------- ------- -------
Total lease commitment................................................ $ 539,497 138,912 678,409
--------- ------- -------
--------- ------- -------
</TABLE>
Capital leases are included as a component of accounts payable and accrued
expenses.
(8) EMPLOYEE BENEFIT PLANS
The Company adopted a 401(k) Profit Sharing Plan (the 'Plan') in August
1996 that is intended to be a tax qualified defined contribution plan. All
Employees of the Company, other than employees who work less than 1,000 hours
per year, are eligible to participate in the Plan once they have completed six
months of continuous service.
A participating employee may contribute up to 15 percent of his/her
compensation, with a maximum contribution of $9,500 to the Plan on a pre-tax
basis. The Company may make a matching contribution to each employee's account
based on the amount of pre-tax contributions made by the employee. Currently,
the Company is allocating a 50 percent match of the first 6 percent contributed
by the employee, subject to certain legal limitations imposed on tax-qualified
plans. Matching contributions by the Company are made irrespective of profits
and are allocated only to qualified participants on a monthly basis.
Contributions to the Plan are invested in a variety of funds as directed by
the Plan participants. All pre-tax employee contributions to the Plan are 100
percent vested and matching contributions by the Company are vested at 20
percent per annum over a five-year period from the date the employee joined the
Plan. All active employees that had completed 1,000 hours of service as of
August 30, 1996 were invited to join the Plan and have matching contribution
vested rights predated to their date of employment.
F-17
<PAGE>
NATIONAL AUTO FINANCE COMPANY L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
(8) EMPLOYEE BENEFIT PLANS--(CONTINUED)
Generally, employees may not receive distributions from the Plan until
their retirement, death, certain disability or termination of employment. Loans
are prohibited by the Plan, although distributions for certain hardship purposes
are allowed in accordance with tax regulations promulgated under the Code. All
distributions for the Plan are made in the form of a single lumpsum
distribution.
(9) FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 107, 'Disclosures about Fair Value of Financial Instruments' ('FAS
107') as of January 1, 1995. FAS 107 defines the fair value of a financial
instrument as the amount at which the instrument could be exchanged in a current
transaction between willing parties.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
o Cash and cash equivalents, trade accounts receivables, due from
officers and employees, other current assets, notes payable to
banks, trade accounts payables, due to affiliated company, and
accrued expenses (nonderivatives) have carrying amounts which
approximate fair value because of the short maturity of these
instruments.
o The fair value of notes payable is determined as the present value
of expected future cash flows discounted at the interest rate
currently offered to the Company, which approximates rates currently
offered for loans of similar terms to companies with comparable
credit risk. The carrying amount approximates fair value.
o The fair value of the excess spread receivable: the fair value is
determined by taking the net present value of the expected future
cash flows discounted at a rate which approximates the rate a
willing investor would pay for a comparable interest-only strip. The
carrying amount approximates fair value.
(10) UNAUDITED PRO FORMA INFORMATION
Pro forma adjustments for income taxes represent the difference between
historical income taxes and income taxes that would have been reported had the
companies filed income tax returns as taxable C corporations for each of the
years presented.
F-18
<PAGE>
NATIONAL AUTO FINANCE COMPANY L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following summarizes historical and pro forma income taxes:
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1996 1995 1995 1994
----------------- ----------------- ------------ ------------
<S> <C> <C> <C> <C>
Historical income taxes:
Federal................................... $ -- -- -- --
State and local........................... -- -- -- --
----------------- ----------------- ------------ ------------
-- -- -- --
----------------- ----------------- ------------ ------------
Pro forma income tax adjustments
(unaudited):
Federal................................... $ 1,054,617 773,845 963,555 --
State and local........................... 112,596 91,007 102,874 --
1,167,213 864,852 1,066,429 --
----------------- ----------------- ------------ ------------
$ 1,167,213 864,852 1,066,429 --
----------------- ----------------- ------------ ------------
----------------- ----------------- ------------ ------------
</TABLE>
If the Company terminated its partnership status (see note 9), as of
September 30, 1996 the Companies would be required to record a deferred tax
liability for the tax effect of temporary differences between financial
reporting and tax reporting. The tax effect of such temporary differences
existing on September 30, 1996 consist of:
<TABLE>
<S> <C>
Securitized assets sold for financial statement purposes, financed for
income tax purposes................................................. $2,204,127
Fixed assets.......................................................... 9,914
Other................................................................. 19,601
----------
$2,233,642
----------
----------
</TABLE>
Pro forma income taxes differ from the amounts computed by applying Federal
statutory rates due to:
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1996 1995 1995 1994
----------------- ----------------- ------------ ------------
<S> <C> <C> <C> <C>
Pro forma provision computed at Federal
statutory rate of 34%.................. $ 1,054,617 934,798 1,115,481 (161,404)
State income taxes, net of Federal tax
benefit................................ 112,596 99,803 119,094 (17,232)
Valuation allowance....................... -- (178,045) (178,045) 178,045
Other..................................... -- 8,296 9,899 591
----------------- ----------------- ------------ ------------
$ 1,167,213 864,852 1,066,429 --
----------------- ----------------- ------------ ------------
----------------- ----------------- ------------ ------------
</TABLE>
F-19
<PAGE>
NATIONAL AUTO FINANCE COMPANY L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(11) PROPOSED INITIAL PUBLIC OFFERING (IPO)
On October 8, 1996, National Auto Finance Company, Inc. ('NAFCO, Inc.')
filed a registration statement with the Securities and Exchange Commission for
an initial public offering of its common stock.
Prior to the sale of the shares of common stock, the respective assets and
liabilities of the NAFCO and ACCH Partnerships will be transferred to NAFCO,
Inc. in exchange for all the common stock of NAFCO, Inc. then outstanding and
all of the preferred stock of NAFCO, Inc. then outstanding (such transaction
being referred to herein as the 'Reorganization'). Specifically, the
Reorganization will entail the following transfers:
(a) The partners of the ACCH Partnership (other than the NAFCO
Partnership) will transfer all of their partner interests in the
ACCH Partnership to the NAFCO Partnership in exchange for limited
partner interests in the NAFCO Partnership.
(b) The NAFCO Partnership will transfer all of its assets, subject to
all of its liabilities, to the Company in exchange for 4,229,000
shares of common stock (which together with the 1,000 shares of
Common Stock acquired by the NAFCO Partnership in connection with
the initial organization of the Company in October 1996, will
increase the NAFCO Partnership's holdings to 4,230,000 shares of
Common Stock) and all of the outstanding preferred stock of the
Company.
(c) Upon the transfer of the assets of the NAFCO Partnership to the
Company, the Company will issue to the Morgan Group 470,000
shares of Common Stock (representing 10% of the outstanding
Common Stock of the Company immediately following the
Reorganization) in exchange for the Deferred Additional Interest
Notes.
It is anticipated that the NAFCO Partnership will become the owner of
preferred stock of NAFCO, Inc. The proposed terms of the preferred stock are as
follows: 7% cumulative dividend, payable quarterly; callable at par plus accrued
dividends at the option of the Company; non-voting, except under certain
circumstances; and mandatory redemption 8 years from the issue date.
It is anticipated that the Board of Directors of the Company will adopt a
share incentive plan (the '1996 Share Incentive Plan'). The 1996 Share Incentive
Plan is intended to provide incentives which will attract, retain and motivate
highly competent persons, each of whom will contribute to the success and future
growth and profitability of the Company, as executive management, employees and
directors of the Company and of any parent or subsidiary of the Company, by
providing them the opportunity to acquire shares of Common Stock or to receive
monetary payments based on the value of such shares pursuant to certain benefits
contemplated by the 1996 Share Incentive Plan. Furthermore, the 1996 Share
Incentive Plan is intended to assist in aligning the interests of the Company's
executive management, employees and directors with those of its stockholders.
The 1996 Share Incentive Plan provides for the granting of certain benefits
in any one or a combination of (i) Stock Options, (ii) Stock Appreciation
Rights, (iii) Stock Awards, (iv) Performance Awards and (v) Stock Units. The
aggregate number of shares of Common Stock that may be subject to such Benefits,
including Stock Options, is 500,000 shares of Common Stock (subject to
adjustment in the event of a merger, consolidation, reorganization,
recapitalization, stock dividend, stock split, reverse stock split, split up,
spinoff, combination of shares, exchange of shares, dividend in kind or other
like change in capital structure or distribution).
The 1996 Share Incentive Plan will be administered by the Board of
Directors of the Company or, if the Board of Directors of the Company so
determines, by a committee appointed by the Board of Directors of the Company
from among its members (such committee administering the 1996 Share Incentive
Plan, the 'Committee'; and the Board of Directors and the Committee
administering the 1996 Share Incentive Plan, as the case may be, the 'Plan
Administrator'). If the Board of Directors designates a Committee to administer
the 1996 Share Incentive Plan, the Committee (which may include members of the
Compensation Committee of the Board of Directors, if any) may be comprised
solely of not less than two members who are (i) 'non-employee directors' within
the meaning of Rule 16b-3(b)(3) (or any successor rule) promulgated under the
Exchange Act and (ii) unless otherwise determined by the Board of Directors,
'outside directors' within the meaning of
F-20
<PAGE>
Section 162(m) of the Code. The Plan Administrator is authorized, subject to the
provisions of the 1996 Share Incentive Plan, to establish such rules and
regulations as it deems necessary for the proper administration of the 1996
Share Incentive Plan. The Plan Administrator is authorized to delegate such
administrative duties as it deems advisable.
(12) SELECTED QUARTERLY RESULTS (UNAUDITED)
The following tables summarize the quarterly results of operations for the
periods indicated.
<TABLE>
<CAPTION>
1996
-----------------------------------------
NINE MONTHS
THREE MONTHS ENDED ENDED
----------------------------------------- SEPTEMBER 30,
MARCH 31 JUNE 30 SEPTEMBER 30 1996
---------- ---------- ------------- -------------
<S> <C> <C> <C> <C>
Gain on sales of Loans.................. $2,097,247 2,530,932 3,560,294 8,188,473
Other revenue........................... 494,100 513,533 659,851 1,667,484
---------- ---------- ------------- -------------
Total revenue.................... 2,591,347 3,044,465 4,220,145 9,855,957
Total expenses................... 1,789,284 2,178,331 2,786,528 6,754,143
---------- ---------- ------------- -------------
Net income....................... $ 802,063 866,134 1,433,617 3,101,814
---------- ---------- ------------- -------------
---------- ---------- ------------- -------------
Pro forma income before income taxes.... $ 802,063 866,134 1,433,617 3,101,814
Pro forma income taxes.................. 301,816 325,927 539,470 1,167,213
---------- ---------- ------------- -------------
Pro forma net income.................... $ 500,247 540,207 894,147 1,934,601
---------- ---------- ------------- -------------
---------- ---------- ------------- -------------
<CAPTION>
1995
----------------------------------------------------------
THREE MONTHS ENDED YEAR ENDED
---------------------------------------------------------- DECEMBER 31,
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 1995
---------- ---------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Gain on sales of Loans.................. $1,763,672 1,732,447 2,063,115 1,566,615 7,125,849
Other revenue........................... 17,634 92,249 178,261 396,986 685,130
---------- ---------- ------------- ------------- ------------
Total revenue.................... 1,781,306 1,824,696 2,241,376 1,963,601 7,810,979
Total expenses................... 856,168 1,058,182 1,183,623 1,432,180 4,530,153
---------- ---------- ------------- ------------- ------------
Net income....................... $ 925,138 766,514 1,057,753 531,421 3,280,826
---------- ---------- ------------- ------------- ------------
---------- ---------- ------------- ------------- ------------
Pro forma income before taxes........... 925,138 766,514 1,057,753 531,421 3,280,826
Pro forma income taxes.................. 173,273 293,547 398,032 201,577 1,066,429
---------- ---------- ------------- ------------- ------------
Pro forma net income.................... $ 751,865 472,967 659,721 329,844 2,214,397
---------- ---------- ------------- ------------- ------------
---------- ---------- ------------- ------------- ------------
</TABLE>
F-21
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY
TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER
TO BUY ANY SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
------------------------
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
----
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 8
The Reorganization............................. 15
Use of Proceeds................................ 16
Dividend Policy................................ 16
Capitalization................................. 17
Dilution....................................... 18
Selected Consolidated Financial Data........... 19
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 21
Business....................................... 28
Management..................................... 40
Principal Stockholders......................... 48
Certain Transactions........................... 50
Description of Capital Stock................... 53
Shares Eligible for Future Sale................ 54
Underwriting................................... 55
Legal Matters.................................. 56
Experts........................................ 56
Available Information.......................... 56
Index to Consolidated Financial Statements..... F-1
</TABLE>
UNTIL , 1997, ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON
STOCK OFFERED HEREBY, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE
REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2,000,000 SHARES
[NAFCO LOGO]
COMMON STOCK
------------------------
P R O S P E C T U S
------------------------
RAYMOND JAMES &
ASSOCIATES, INC.
CRUTTENDEN ROTH
INCORPORATED
, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The table below sets forth the expenses expected to be incurred and borne
solely by the Company in connection with the registration of the Common Stock
offered hereby (other than underwriting commissions and discounts, if any).
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee........... $ 6,273
NASD Filing Fee............................................... 2,570
Printing and Engraving Expenses............................... 150,000
Blue Sky Fees and Expenses.................................... 15,000
Legal Fees and Expenses....................................... 250,000
Accountants' Fees and Expenses................................ 100,000
NASDAQ National Market Listing Fee............................ 35,000
Transfer Agent and Registrar Fees and Expenses................ 8,000
Miscellaneous................................................. 33,157
--------
Total.................................................... $600,000
--------
--------
</TABLE>
- ------------------
All such fees and expenses have been or will be paid by the Registrant.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Certificate of Incorporation and the By-laws of the Company provide for
the indemnification of its officers and directors to the fullest extent
permitted by the DGCL. Pursuant to Section 145 of the DGCL, a Delaware
corporation generally has the power to indemnify its present and former
directors and officers against expenses incurred by them in connection with any
suit to which such directors and officers are, or are threatened to be made, a
party by reason of their serving in such positions, so long as they acted in
good faith and in a manner they reasonably believed to be in, or not opposed to,
the best interests of the corporation for which they served in such positions,
and with respect to any criminal action, they had no reasonable cause to believe
their conduct was unlawful. The indemnity may include expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding, provided that such directors or officers acted in good faith and in
a manner such directors or officers reasonably believed to be in or not opposed
to the best interests of the corporation and, with respect to any criminal
action or proceeding, had no reasonable cause to believe such directors' or
officers' conduct was unlawful. Indemnification is not available if such person
is adjudged to be liable to the corporation for which he or she served in such
positions, unless and only to the extent the court in which such action is
brought determines that, despite the adjudication of liability, and in view of
all the circumstances, the person is reasonably and fairly entitled to
indemnification for such expenses as the court shall deem proper. Where a
director or officer is successful on the merits or otherwise in the defense of
any action referred to above or in defense of any claim, issue or matter
therein, the corporation must indemnify such director or officer against the
expenses (including attorneys' fees) that he or she actually and reasonably
incurred in connection therewith. The Company has the power to purchase and
maintain insurance for such persons. The statute also expressly provides that
the power to indemnify authorized thereby is not exclusive of any rights granted
under any by-law, agreement, vote of stockholders or disinterested directors, or
otherwise.
The above discussion of the Certificate of Incorporation and By-laws of the
Company and of Section 145 of the DGCL is not intended to be exhaustive and is
qualified in its entirety by such Certificate of Incorporation and By-laws and
the DGCL.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
In October 1996, prior to the filing of the Registration Statement, the
NAFCO Partnership agreed to transfer all of its assets, subject to all of the
liabilities, of the Partnerships to a newly formed corporation in exchange for
shares of Common Stock. As part of the Reorganization described under 'The
Reorganization' in the Prospectus, the transaction was exempt from registration
under Section 4(2) of the Securities Act as not involving a public offering. No
underwriter was involved in the transaction.
In connection with the reorganization and immediately prior to this
Offering, the Deferred Additional Interest Notes were exchanged for 470,000
shares of the Common Stock representing 10% of the outstanding Common Stock at
that time. In addition, 26,000 shares of Common Stock were issued to the holders
of the Senior Subordinated Notes upon the grant to key employees and directors
of options to acquire an aggregate of 260,000 shares of Common Stock.
ITEM 16. EXHIBITS AND FINANCIAL SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
*1.1 -- Form of Underwriting Agreement.
*3.1 -- Certificate of Incorporation of the Company.
*3.1-1 -- Certificate of the Designations, Preferences and Rights of the Series A Preferred Stock of the
Company.
*3.2 -- Form of By-laws of the Company.
**4.1 -- Specimen Certificate of Common Stock.
**5.1 -- Opinion of Weil, Gotshal & Manges LLP with respect to the legality of the Common Stock.
*10.1 -- Second Amended and Restated Agreement of Limited Partnership of National Auto Finance Company
L.P., dated as of September 1, 1995, by and among National Auto Finance Corporation, The S
Associates Limited Partnership, The O Associates Limited Partnership, Stephen L. Gurba, Craig
Schnee, Roy E. Tipton, Blane H. MacDonald, Michael B. Colley, Irwin I. Kent, William G. Magro,
Kevin G. Adams, Kamala R. Chapman, Keith B. Stein, Colleen S. McMillen, Richard H. Steffer, Tim
Rooney, Lynn Dunham-Sirota and IronBrand Capital, LLC.
*10.2 -- 1996 Share Incentive Plan.
*10.3 -- Form of 401(k) Plan.
*10.4 -- Employment Agreement, dated as of July 1, 1996, between National Auto Finance Company, Inc. and
William G. Magro.
*10.5 -- Employment Agreement, dated as of September 16, 1995, between National Auto Finance Company,
Inc. and Roy E. Tipton.
*10.6 -- Employment Agreement, dated as of October 19, 1995, between National Auto Finance Company, Inc.
and Blane H. MacDonald.
*10.7 -- Promissory Note, dated October 31, 1994, payable by National Auto Finance Company L.P. to the
order of Gary L. Shapiro.
*10.8 -- Promissory Note, dated October 6, 1994, payable by National Auto Finance Company L.P. to the
order of Edgar A. Otto.
*10.9 -- Promissory Note, dated November 8, 1994, payable by National Auto Finance Company L.P. to the
order of Stephen L. Gurba.
*10.10 -- Promissory Note, dated March 27, 1995, payable by National Auto Finance Company L.P. to the
order of Nova Financial Corporation.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
*10.11 -- Promissory Note, dated May 1, 1995, payable by National Auto Finance Company L.P. to the order
of Nova Corporation.
*10.12 -- Note Purchase Agreement, dated as of August 9, 1996, between National Auto Finance Company L.P.
and Morgan Guaranty Trust Company of New York, as Trustee of the Commingled Pension Trust Fund
(Multi-Market Special Investment Fund II) of Morgan Guaranty Trust Company of New York, Morgan
Guaranty Trust Company of New York, as Trustee of the Multi-Market Special Investment Trust
Fund of Morgan Guaranty Trust Company of New York and Morgan Guaranty Trust Company, as
investment manager and agent for the Alfred P. Sloan Foundation (Multi-Market Account).
*10.13 -- Promissory Note (No. 101), dated August 9, 1996, payable by National Auto Finance Company L.P.
to the order of Kelly & Co., as nominee for Morgan Guaranty Trust Company of New York.
*10.14 -- Promissory Note (No. 201), dated August 9, 1996, payable by National Auto Finance Company L.P.
to the order of Kelly & Co., as nominee for Morgan Guaranty Trust Company of New York.
*10.15 -- Promissory Note (No. 102), dated August 9, 1996, payable by National Auto Finance Company L.P.
to the order of Kelly & Co., as nominee for Morgan Guaranty Trust Company of New York.
*10.16 -- Registration Rights Agreement, dated as of August 9, 1996, among National Auto Finance Company
Inc. and Morgan Guaranty Trust Company of New York, as Trustee of the Commingled Pension Trust
Fund (Multi-Market Special Investment Fund II) of Morgan Guaranty Trust Company of New York,
Morgan Guaranty Trust Company of New York, as Trustee of the Multi-Market Special Investment
Trust Fund of Morgan Guaranty Trust Company of New York and Morgan Guaranty Trust Company, as
investment manager and agent for the Alfred P. Sloan Foundation (Multi-Market Account).
*10.17 -- Receivables Purchase Agreement, dated as of December 8, 1994, by and between National Auto
Finance Company L.P., as Seller, and NAFCO Funding Trust, as Purchaser.
*10.18 -- Promissory Note, dated December 8, 1994, payable by NAFCO Funding Trust to the order of
National Auto Finance Company L.P.
*10.19 -- NAFCO Auto Receivables Master Trust Pooling and Administration Agreement, dated as of December
8, 1994, among NAFCO Funding Trust, as Transferor, National Auto Finance Company L.P., as the
Administrator, and Bankers Trust Company, as Trustee.
*10.20 -- Series 1994-R, Class B Supplement, dated as of December 8, 1994, to the Pooling and
Administration Agreement, dated as of December 8, 1994, among NAFCO Funding Trust, as
Transferor, National Auto Finance Company L.P., as the Administrator, and Bankers Trust
Company, as Trustee.
*10.21 -- Trust Agreement, dated as of October 5, 1994, between National Auto Finance Corporation and
Bankers Trust.
*10.22 -- First Amended and Restated Trust Agreement of NAFCO Funding Trust, dated as of December 8,
1994, between National Auto Finance Company L.P., as Depositor, The Chase Manhattan Bank (USA),
as Owner Trustee and Gary L. Shapiro and Edgar A. Otto, as Co-Trustees.
*10.23 -- Servicing Agreement, dated July 25, 1994, by and between World Omni Financial Corp. and
National Auto Finance Corporation.
*10.24 -- Certificate Purchase Agreement, dated as of December 8, 1994, among NAFCO Funding Trust,
National Auto Finance Company L.P., as Initial Administrator and First Union National Bank of
North Carolina.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
*10.25 -- Management Agreement, dated as of December 29, 1994, by and between National Auto Finance
Company L.P. and National Auto Finance Corporation.
*10.25-1 -- First Amendment of Management Agreement, dated as of January 1, 1996, by and between National
Auto Finance Company L.P., Auto Credit Clearinghouse L.P. and National Auto Finance
Corporation.
*10.26 -- Services Agreement, dated as of December 29, 1994, by and between National Auto Finance
Corporation and National Financial Corporation.
*10.26-1 -- First Amendment to Services Agreement, dated as of January 1, 1996, by and between National
Auto Finance Corporation and National Financial Corporation.
*10.27 -- Pooling and Servicing Agreement, dated as of October 1, 1995, by and among National Financial
Auto Funding Trust, as Transferor, National Auto Finance Company L.P., as Master Servicer, and
Harris Trust and Savings Bank, as Trustee.
*10.28 -- Assignment Agreement, dated as of October 1, 1995, between Bankers Trust Company, as Trustee,
and National Financial Auto Funding Trust.
*10.29 -- Transfer Agreement No. 1, dated as of October 1, 1995, between National Financial Auto Funding
Trust and Harris Trust and Savings Bank.
*10.30 -- Insurance and Indemnity Agreement, dated as of November 21, 1995, among Financial Security
Assurance Inc., National Financial Auto Funding Trust and National Auto Finance Company L.P.
*10.31 -- Indemnification Agreement, dated as of November 21, 1995, among Financial Security Assurance
Inc., National Financial Auto Funding Trust and First Union Capital Markets Corp.
*10.32 -- Master Spread Account Agreement, dated as of November 21, 1995, among National Financial Auto
Funding Trust, Financial Security Assurance Inc. and Harris Trust and Savings Bank, as Trustee
and as Collateral Agent.
*10.33 -- Financial Guaranty Insurance Policy (Policy No.: 50522-N), together with Endorsement No. 1
thereto, dated November 13, 1996, issued by Financial Security Assurance Inc. in favor of
Harris Trust and Savings Bank, as trustee for the benefit of the Certificate Holders.
*10.34 -- Amended and Restated Servicing Agreement, dated as of December 5, 1994, by and between World
Omni Financial Corp. and National Auto Finance Company L.P.
*10.35 -- Assignment and Assumption Agreement, dated as of October 23, 1995, among World Omni Financial
Corp. and Omni Financial Services of America, Inc.
*10.36 -- Supplement to the Amended and Restated Servicing Agreement, dated as of December 5, 1994, as
amended as of October 1, 1995, between World Omni Financial Corp. ('WOFC'), as Servicer, and
National Auto Finance Company L.P. ('NAFCO') is made as of November 21, 1995 by and between
Omni Financial Services of America, Inc., as assignee of WOFC ('Servicer') and NAFCO.
*10.37 -- Custodial Agreement, dated as of November 21, 1995, by and between Omni Financial Services of
America, Inc., as custodian, and National Auto Finance Company L.P. as Master Servicer.
*10.38 -- Placement Agent Agreement, dated as of November 20, 1995, between First Union Capital Markets
Corp. and National Financial Auto Funding Trust.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
*10.39 -- Amendment, dated as of November 21, 1995, to the First Amended and Restated Trust Agreement of
NAFCO Funding Trust, dated as of December 8, 1994, among National Auto Finance Company L.P., as
Depositor, The Chase Manhattan Bank (USA), as Owner Trustee, and Gary L. Shapiro, Edgar Otto A.
and Andrew Stidd, as Co-Trustees.
**10.40 -- Form of Indemnification Agreement.
*10.41 -- Assignment and Assumption Agreement, dated as of October 7, 1996, between National Auto Finance
Company, Inc. and National Auto Finance Company L.P.
*10.42 -- Pooling and Servicing Agreement, dated as of October 21, 1996, by and among National Financial
Auto Funding Trust, as Transferor, National Auto Finance Company L.P., as Servicer, and Harris
Trust and Savings Bank, as Trustee.
*10.43 -- Purchase and Contribution Agreement, dated as of October 21, 1996, by and between National Auto
Finance Company L.P. and National Financial Auto Funding Trust.
*10.44 -- Assignment Agreement, dated as of October 21, 1996, between Bankers Trust Company and National
Financial Auto Funding Trust II.
*10.45 -- Master Spread Account Agreement, dated as of November 13, 1996, among National Financial Auto
Funding Trust, Financial Security Assurance Inc. and Harris Trust and Savings Bank, as Trustee
and Collateral Agent.
*10.46 -- Insurance and Indemnity Agreement, dated as of November 13, 1996, among Financial Security
Assurance Inc., National Financial Auto Funding Trust and National Auto Finance Company L.P.
*10.47 -- Sale Agreement, dated as of October 21, 1996, by and between National Financial Auto Funding
Trust and National Financial Auto Funding Trust II.
*10.48 -- Purchase Agreement, dated as of October 21, 1996, by and between Auto Credit Clearinghouse L.P.
and National Auto Finance Company L.P.
*10.49 -- Supplement to the Amended and Restated Servicing Agreement, dated as of December 5, 1994, as
amended as of October 1, 1995 (the 'Servicing Agreement'), between World Omni Financial Corp
(WOFC) and National Auto Finance Company L.P. (NAFCO) is made as of November 13, 1996 by and
between Omni Financial Services of America, Inc., as assignee of WOFC, and NAFCO.
*10.50 -- Transfer Agreement No. 1, dated as of November 13, 1996, by National Financial Auto Funding
Trust as Transferor to Harris Trust and Savings Bank, as Trustee, pursuant to a Pooling and
Servicing Agreement, dated as of October 21, 1996.
*10.51 -- Form of Financial Guaranty Insurance Policy issued by Financial Security Assurance Inc.
*10.52 -- Employment Agreement, dated as of December 31, 1996, between National Auto Finance Company,
Inc. and Stephen R. Stack.
*10.53 -- Amended and Restated Promissory Note, dated as of January 3, 1997, payable by National Auto
Finance Company L.P. to the order of Gary L. Shapiro.
*10.54 -- Amended and Restated Promissory Note, dated as of January 3, 1997, payable by National Auto
Finance Company L.P. to the order of Edgar A. Otto.
*10.55 -- Amended and Restated Promissory Note, dated as of January 3, 1997, payable by National Auto
Finance Company L.P. to the order of Stephen L. Gurba.
*10.56 -- Amended and Restated Promissory Note, dated as of January 3, 1997, payable by National Auto
Finance Company L.P. to the order of Nova Financial Corporation.
*10.57 -- Amended and Restated Promissory Note, dated as of January 3, 1997, payable by National Auto
Finance Company L.P. to the order of Nova Corporation.
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
*10.58 -- Form of First Amendment, dated as of December 1, 1996, to Second Amended and Restated Limited
Partnership of National Auto Finance Company L.P.
**10.59 -- Form of Amended and Restated Assignment and Assumption Agreement between National Auto Finance Company, Inc.
and National Auto Finance Company L.P.
**10.60 -- Referral Agreement, dated as of April 15, 1996, by and between First Union National Bank of
North Carolina and Auto Credit Clearinghouse L.P.
**10.61 -- Referral Contract, dated as of November 14, 1996, by and between Community Bank and Auto Credit
Clearinghouse L.P.
**23.1 -- Consent of KPMG Peat Marwick LLP.
**23.2 -- Consent of Weil, Gotshal & Manges LLP (included in the opinion filed as Exhibit 5.1)
*24.1 -- Power of Attorney (included on the signature page of the Registration Statement).
*27.1 -- Financial Data Schedule for the year ended December 31, 1995.
*27.2 -- Financial Data Schedule for the nine months ended September 30, 1996.
</TABLE>
- ------------------
* Filed previously
** Filed herewith
(b) Financial Statement Schedules:
All Schedules have been omitted because the information is not applicable
or is presented in the financial statements or the notes thereto.
II-6
<PAGE>
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions or otherwise, the registrant has
been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Boca Raton,
State of Florida on January 28, 1997.
NATIONAL AUTO FINANCE COMPANY, INC.
(Registrant)
By: /s/ KEITH B. STEIN
-------------------------------
Name: Keith B. Stein
Title: Vice Chairman
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ----------------------------------------------- ----------------
<S> <C> <C>
* Chief Executive Officer andChairman of the January 28, 1997
- ------------------------------------------ Board (principal executive officer)
Gary L. Shapiro
* Vice President and ChiefFinancial Officer January 28, 1997
- ------------------------------------------ (principal financial and accounting officer)
Kevin G. Adams
/s/ KEITH B. STEIN Vice Chairman and Director January 28, 1997
- ------------------------------------------
Keith B. Stein
* Director January 28, 1997
- ------------------------------------------
Edgar A. Otto
* Director January 28, 1997
- ------------------------------------------
Roy E. Tipton
* By: /s/ KEITH B. STEIN
Keith B. Stein
(Attorney-in-Fact)
</TABLE>
II-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
- ------------- ------------------------------------------------------------------------------------------------------ -----------
<S> <C> <C>
*1.1 -- Form of Underwriting Agreement.
*3.1 -- Certificate of Incorporation of the Company.
*3.1-1 -- Certificate of the Designations, Preferences and Rights of the Series A Preferred
Stock of the Company.
*3.2 -- Form of By-laws of the Company.
**4.1 -- Specimen Certificate of Common Stock.
**5.1 -- Opinion of Weil, Gotshal & Manges LLP with respect to the legality of the Common Stock.
*10.1 -- Second Amended and Restated Agreement of Limited Partnership of National Auto Finance Company
L.P., dated as of September 1, 1995, by and among National Auto Finance Corporation, The S
Associates Limited Partnership, The O Associates Limited Partnership, Stephen L. Gurba, Craig
Schnee, Roy E. Tipton, Blane H. MacDonald, Michael B. Colley, Irwin I. Kent, William G. Magro,
Kevin G. Adams, Kamala R. Chapman, Keith B. Stein, Colleen S. McMillen, Richard H. Steffer, Tim
Rooney, Lynn Dunham-Sirota and IronBrand Capital, LLC.
*10.2 -- 1996 Share Incentive Plan.
*10.3 -- Form of 401(k) Plan.
*10.4 -- Employment Agreement, dated as of July 1, 1996, between National Auto Finance Company, Inc. and
William G. Magro.
*10.5 -- Employment Agreement, dated as of September 16, 1995, between National Auto Finance Company,
Inc. and Roy E. Tipton.
*10.6 -- Employment Agreement, dated as of October 19, 1995, between National Auto Finance Company, Inc.
and Blane H. MacDonald.
*10.7 -- Promissory Note, dated October 31, 1994, payable by National Auto Finance Company L.P. to the
order of Gary L. Shapiro.
*10.8 -- Promissory Note, dated October 6, 1994, payable by National Auto Finance Company L.P. to the
order of Edgar A. Otto.
*10.9 -- Promissory Note, dated November 8, 1994, payable by National Auto Finance Company L.P. to the
order of Stephen L. Gurba.
*10.10 -- Promissory Note, dated March 27, 1995, payable by National Auto Finance Company L.P. to the
order of Nova Financial Corporation.
*10.11 -- Promissory Note, dated May 1, 1995, payable by National Auto Finance Company L.P. to the order
of Nova Corporation.
</TABLE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------- -----------------------------------------------------------------------------------------------------
<S> <C>
*10.12 -- Note Purchase Agreement, dated as of August 9, 1996, between National Auto Finance Company L.P.
and Morgan Guaranty Trust Company of New York, as Trustee of the Commingled Pension Trust Fund
(Multi-Market Special Investment Fund II) of Morgan Guaranty Trust Company of New York, Morgan
Guaranty Trust Company of New York, as Trustee of the Multi-Market Special Investment Trust
Fund of Morgan Guaranty Trust Company of New York and Morgan Guaranty Trust Company, as
investment manager and agent for the Alfred P. Sloan Foundation (Multi-Market Account).
*10.13 -- Promissory Note (No. 101), dated August 9, 1996, payable by National Auto Finance Company L.P.
to the order of Kelly & Co., as nominee for Morgan Guaranty Trust Company of New York.
*10.14 -- Promissory Note (No. 201), dated August 9, 1996, payable by National Auto Finance Company L.P.
to the order of Kelly & Co., as nominee for Morgan Guaranty Trust Company of New York.
*10.15 -- Promissory Note (No. 102), dated August 9, 1996, payable by National Auto Finance Company L.P.
to the order of Kelly & Co., as nominee for Morgan Guaranty Trust Company of New York.
*10.16 -- Registration Rights Agreement, dated as of August 9, 1996, among National Auto Finance Company
Inc. and Morgan Guaranty Trust Company of New York, as Trustee of the Commingled Pension Trust
Fund (Multi-Market Special Investment Fund II) of Morgan Guaranty Trust Company of New York,
Morgan Guaranty Trust Company of New York, as Trustee of the Multi-Market Special Investment
Trust Fund of Morgan Guaranty Trust Company of New York and Morgan Guaranty Trust Company, as
investment manager and agent for the Alfred P. Sloan Foundation (Multi-Market Account).
*10.17 -- Receivables Purchase Agreement, dated as of December 8, 1994, by and between National Auto
Finance Company L.P., as Seller, and NAFCO Funding Trust, as Purchaser.
*10.18 -- Promissory Note, dated December 8, 1994, payable by NAFCO Funding Trust to the order of
National Auto Finance Company L.P.
*10.19 -- NAFCO Auto Receivables Master Trust Pooling and Administration Agreement, dated as of December
8, 1994, among NAFCO Funding Trust, as Transferor, National Auto Finance Company L.P., as the
Administrator, and Bankers Trust Company, as Trustee.
*10.20 -- Series 1994-R, Class B Supplement, dated as of December 8, 1994, to the Pooling and
Administration Agreement, dated as of December 8, 1994, among NAFCO Funding Trust, as
Transferor, National Auto Finance Company L.P., as the Administrator, and Bankers Trust
Company, as Trustee.
*10.21 -- Trust Agreement, dated as of October 5, 1994, between National Auto Finance Corporation and
Bankers Trust.
*10.22 -- First Amended and Restated Trust Agreement of NAFCO Funding Trust, dated as of December 8,
1994, between National Auto Finance Company L.P., as Depositor, The Chase Manhattan Bank (USA),
as Owner Trustee and Gary L. Shapiro and Edgar A. Otto, as Co-Trustees.
*10.23 -- Servicing Agreement, dated July 25, 1994, by and between World Omni Financial Corp. and
National Auto Finance Corporation.
*10.24 -- Certificate Purchase Agreement, dated as of December 8, 1994, among NAFCO Funding Trust,
National Auto Finance Company L.P., as Initial Administrator and First Union National Bank of
North Carolina.
*10.25 -- Management Agreement, dated as of December 29, 1994, by and between National Auto Finance
Company L.P. and National Auto Finance Corporation.
*10.25-1 -- First Amendment of Management Agreement, dated as of January 1, 1996, by and between National
Auto Finance Company L.P., Auto Credit Clearinghouse L.P. and National Auto Finance
Corporation.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
- ------------- ------------------------------------------------------------------------------------------------------ -----------
<S> <C> <C>
*10.26 -- Services Agreement, dated as of December 29, 1994, by and between National Auto Finance
Corporation and National Financial Corporation.
*10.26-1 -- First Amendment to Services Agreement, dated as of January 1, 1996, by and between National
Auto Finance Corporation and National Financial Corporation.
*10.27 -- Pooling and Servicing Agreement, dated as of October 1, 1995, by and among National Financial
Auto Funding Trust, as Transferor, National Auto Finance Company L.P., as Master Servicer, and
Harris Trust and Savings Bank, as Trustee.
*10.28 -- Assignment Agreement, dated as of October 1, 1995, between Bankers Trust Company, as Trustee,
and National Financial Auto Funding Trust.
*10.29 -- Transfer Agreement No. 1, dated as of October 1, 1995, between National Financial Auto Funding
Trust and Harris Trust and Savings Bank.
*10.30 -- Insurance and Indemnity Agreement, dated as of November 21, 1995, among Financial Security
Assurance Inc., National Financial Auto Funding Trust and National Auto Finance Company L.P.
*10.31 -- Indemnification Agreement, dated as of November 21, 1995, among Financial Security Assurance
Inc., National Financial Auto Funding Trust and First Union Capital Markets Corp.
*10.32 -- Master Spread Account Agreement, dated as of November 21, 1995, among National Financial Auto
Funding Trust, Financial Security Assurance Inc. and Harris Trust and Savings Bank, as Trustee
and as Collateral Agent.
*10.33 -- Financial Guaranty Insurance Policy (Policy No.: 50522-N), together with Endorsement No. 1
thereto, dated November 13, 1996, issued by Financial Security Assurance Inc. in favor of
Harris Trust and Savings Bank, as trustee for the benefit of the Certificate Holders.
*10.34 -- Amended and Restated Servicing Agreement, dated as of December 5, 1994, by and between World
Omni Financial Corp. and National Auto Finance Company L.P.
*10.35 -- Assignment and Assumption Agreement, dated as of October 23, 1995, among World Omni Financial
Corp. and Omni Financial Services of America, Inc.
*10.36 -- Supplement to the Amended and Restated Servicing Agreement, dated as of December 5, 1994, as
amended as of October 1, 1995, between World Omni Financial Corp. ('WOFC'), as Servicer, and
National Auto Finance Company L.P. ('NAFCO') is made as of November 21, 1995 by and between
Omni Financial Services of America, Inc., as assignee of WOFC ('Servicer') and NAFCO.
*10.37 -- Custodial Agreement, dated as of November 21, 1995, by and between Omni Financial Services of
America, Inc., as custodian, and National Auto Finance Company L.P. as Master Servicer.
*10.38 -- Placement Agent Agreement, dated as of November 20, 1995, between First Union Capital Markets
Corp. and National Financial Auto Funding Trust.
*10.39 -- Amendment, dated as of November 21, 1995, to the First Amended and Restated Trust Agreement of
NAFCO Funding Trust, dated as of December 8, 1994, among National Auto Finance Company L.P., as
Depositor, The Chase Manhattan Bank (USA), as Owner Trustee, and Gary L. Shapiro, Edgar Otto A.
and Andrew Stidd, as Co-Trustees.
**10.40 -- Form of Indemnification Agreement.
*10.41 -- Assignment and Assumption Agreement, dated as of October 7, 1996, between National Auto Finance
Company, Inc. and National Auto Finance Company L.P.
*10.42 -- Pooling and Servicing Agreement, dated as of October 21, 1996, by and among National Financial
Auto Funding Trust, as Transferor, National Auto Finance Company L.P., as Servicer, and Harris
Trust and Savings Bank, as Trustee.
*10.43 -- Purchase and Contribution Agreement, dated as of October 21, 1996, by and between National Auto
Finance Company L.P. and National Financial Auto Funding Trust.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
- ------------- ------------------------------------------------------------------------------------------------------ -----------
<S> <C> <C>
*10.44 -- Assignment Agreement, dated as of October 21, 1996, between Bankers Trust Company and National
Financial Auto Funding Trust II.
*10.45 -- Master Spread Account Agreement, dated as of November 13, 1996, among National Financial Auto
Funding Trust, Financial Security Assurance Inc. and Harris Trust and Savings Bank, as Trustee
and Collateral Agent.
*10.46 -- Insurance and Indemnity Agreement, dated as of November 13, 1996, among Financial Security
Assurance Inc., National Financial Auto Funding Trust and National Auto Finance Company L.P.
*10.47 -- Sale Agreement, dated as of October 21, 1996, by and between National Financial Auto Funding
Trust and National Financial Auto Funding Trust II.
*10.48 -- Purchase Agreement, dated as of October 21, 1996, by and between Auto Credit Clearinghouse L.P.
and National Auto Finance Company L.P.
*10.49 -- Supplement to the Amended and Restated Servicing Agreement, dated as of December 5, 1994, as
amended as of October 1, 1995 (the 'Servicing Agreement'), between World Omni Financial Corp
(WOFC) and National Auto Finance Company L.P. (NAFCO) is made as of November 13, 1996 by and
between Omni Financial Services of America, Inc., as assignee of WOFC, and NAFCO.
*10.50 -- Transfer Agreement No. 1, dated as of November 13, 1996, by National Financial Auto Funding
Trust as Transferor to Harris Trust and Savings Bank, as Trustee, pursuant to a Pooling and
Servicing Agreement, dated as of October 21, 1996.
*10.51 -- Form of Financial Guaranty Insurance Policy issued by Financial Security Assurance Inc.
*10.52 -- Employment Agreement, dated as of December 31, 1996, between National Auto Finance Company,
Inc. and Stephen R. Stack.
*10.53 -- Amended and Restated Promissory Note, dated as of January 3, 1997, payable by National Auto
Finance Company L.P. to the order of Gary L. Shapiro.
*10.54 -- Amended and Restated Promissory Note, dated as of January 3, 1997, payable by National Auto
Finance Company L.P. to the order of Edgar A. Otto.
*10.55 -- Amended and Restated Promissory Note, dated as of January 3, 1997, payable by National Auto
Finance Company L.P. to the order of Stephen L. Gurba.
*10.56 -- Amended and Restated Promissory Note, dated as of January 3, 1997, payable by National Auto
Finance Company L.P. to the order of Nova Financial Corporation.
*10.57 -- Amended and Restated Promissory Note, dated as of January 3, 1997, payable by National Auto
Finance Company L.P. to the order of Nova Corporation.
*10.58 -- Form of First Amendment, dated as of December 1, 1996, to Second Amended and Restated
Limited Partnership of National Auto Finance Company L.P.
**10.59 -- Amended and Restated Assignment and Assumption Agreement between National Auto Finance Company, Inc. and
National Auto Finance Company L.P.
**10.60 -- Referral Agreement, dated as of April 15, 1996, by and between First Union National Bank of
North Carolina and Auto Credit Clearinghouse L.P.
**10.61 -- Referral Contract, dated as of November 14, 1996, by and between Community Bank and Auto Credit
Clearinghouse L.P.
**23.1 -- Consent of KPMG Peat Marwick LLP.
**23.2 -- Consent of Weil, Gotshal & Manges LLP (included in the opinion filed as Exhibit 5.1)
*24.1 -- Power of Attorney (included on the signature page of the Registration Statement).
*27.1 -- Financial Data Schedule for the year ended December 31, 1995.
*27.2 -- Financial Data Schedule for the nine months ended September 30, 1996.
</TABLE>
- ------------------
* Filed previously
** Filed herewith
<PAGE>
NUMBER SHARES
NAFI
National Auto Finance Company, Inc.
[LOGO]
Common Stock
(See Reverse For Certain Restrictions)
THIS CERTIFICATE IS TRANSFERRABLE IN CUSIP 632528 10 5
THE CITIES OF BOSTON OR NEW YORK See Reverse For Certain Definitions
THIS CERTIFIES THAT
is the owner of
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, $0.01 PAR VALUE
PER SHARE, OF NATIONAL AUTO FINANCE COMPANY, INC. (the "Corporation"), a
Delaware corporation. The shares represented by this certificate are
transferable only on the stock transfer books of the Corporation by the holder
of record hereof, or by his duly authorized attorney or legal representative,
upon the surrender of this certificate properly endorsed. This certificate is
not valid until countersigned and registered by the Transfer Agent and
Registrar.
IN WITNESS WHEREOF, the Corporation has caused this certificate to be
executed by the facsimile signature of its duly authorized officers and has
caused a facsimile of its corporate seal to be hereunto affixed.
NATIONAL AUTO FINANCE COMPANY, INC.
Dated: By:
Secretary Chairman of the Board
National Auto Finance Company, Inc.
1996
Delaware
Countersigned and Registered:
THE FIRST NATIONAL BANK OF BOSTON
(Boston)
Transfer Agent
and Registrar
By:
Authorized Officer
<PAGE>
NATIONAL AUTO FINANCE COMPANY, INC.
The shares represented by this certificate are issued subject to all
the provisions of the certificate of incorporation and bylaws of National Auto
Finance Company, Inc. (the "Corporation") as from time to time amended (copies
of which are on file at the principal executive office of the Corporation), to
all of which the holder by acceptance hereof assents.
The Corporation will furnish to any stockholder upon request and
without charge a full statement of the powers, designations, preferences and
relative, participating, optional or other special rights of each authorized
class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights, to the extent that the same have
been fixed, and of the authority of the Board of Directors to designate the same
with respect to other series. Such request may be made to the Corporation or to
its Transfer Agent and registrar.
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT - ... Guardian ...
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with rights of under Uniform Gifts to Minors
survivorship and not as tenants Act______________________________
in common (State)
Additional abbreviations may also be used
though not in the above list.
For value received ________________________ hereby sell, assign and
transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
_________________________________________________
________________________________________________________________________________
Please Print or Typewrite Name and Address including Postal Zip Code of Assignee
________________________________________________________________________________
__________________________________________________________________________Shares
represented by the within certificate, and do hereby irrevocably constitute and
appoint
________________________________________________________________________________
________________________________________________________________________Attorney
to transfer the said Shares on the books of the Corporation with full power of
substitution in the premises.
Date______________________, 19___ Signature:
________________________________________
Notice: The signature to this assignment
must correspond with the names as written
upon the face of the certificate in
every particular, without alteration or
enlargement or any change whatever.
Signature guaranteed:
_________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY
AN ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN
ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE
GUARANTEE MEDALLION PROGRAM), PURSUANT
TO S.E.C. RULE 17Ad-15.
<PAGE>
WEIL, GOTSHAL & MANGES LLP
A Limited Liability Partnership Including Professional
Corporations
767 Fifth Avenue, New York, NY 10153-0119
(212) 310-8000
Fax: (212) 310-8007
January 27, 1996
National Auto Finance Company, Inc.
621 N.W. 53rd Street
Suite 200
Boca Raton, Florida 33487
Gentlemen:
We have acted as counsel to National Auto Finance Company, Inc., a
Delaware corporation (the "Company"), in connection with the preparation and
filing with the Securi- ties and Exchange Commission, under the Securities Act
of 1933, as amended, of the Company's Registration Statement on Form S-1, File
No. 333-13667 (the "Registration Statement"), relating to the proposed initial
public offering (the "Offering") of up to 2,300,000 shares of common stock, par
value $.01 per share (the "Common Stock"), of the Company. Terms defined in the
Registration Statement and not otherwise defined herein are used herein with the
meanings as so defined.
In so acting, we have examined originals or copies, certified or
otherwise identified to our satisfaction, of the Registration Statement, and
such corporate records, agreements, documents and other instruments, and such
certificates or comparable documents of public officials and of officers and
representatives of the Company, and have made such inquiries of such officers
and representatives as we have deemed relevant and necessary as a basis for the
opinion hereinafter set forth.
In such examination, we have assumed the genuineness of all
signatures, the legal capacity of natural persons, the authenticity of all
documents submitted to us as originals, the conformity to original documents of
all documents submitted to us as certified, conformed or photostatic copies and
the authenticity of the originals of such latter documents. As to all questions
of fact material to this opinion that have not been independently established,
we have relied upon certificates or comparable documents of officers and
representatives of the Company.
<PAGE>
National Auto Finance Company
January 27, 1997
Page 2
Based on the foregoing, and subject to the qualifications stated
herein, we are of the opinion that the shares of Common Stock to be issued and
sold by the Company as contemplated by the Prospectus have been duly authorized
and, when issued and sold as contemplated by the Underwriting Agreement, will be
validly issued, fully paid and non-assessable.
The opinion expressed herein is limited to the corporate laws of the
State of Delaware, and we express no opinion as to the effect on the matters
covered by this letter of the laws of any other jurisdiction.
The opinions expressed herein are rendered solely for your benefit in
connection with the transactions described herein. Those opinions may not be
used or relied upon by any other person, nor may this letter or any copies
thereof be furnished to a third party, filed with a governmental agency, quoted,
cited or otherwise referred to without our prior written consent.
We hereby consent (a) to be named in the Prospectus included in the
Registration Statement as the attorneys who have passed upon the legality of the
securities being offered thereby and (b) to the filing of this opinion as an
exhibit to the Registration Statement.
Very truly yours,
/s/ Weil, Gotshal & Manges LLP
<PAGE>
FORM OF INDEMNIFICATION AGREEMENT
THIS INDEMNIFICATION AGREEMENT is made and entered
into as of the day of January, 1997 by and among
National Auto Finance Company, Inc., a Delaware corporation
(the "Company"), and (the "Indemnitee").
W I T N E S S E T H
WHEREAS, each of the Certificate of Incorporation
and By-laws of the Company contains provisions requiring the
Company to indemnify its directors, officers, employees and
agents or any person who is serving at the Company's request
as a director, officer, employee or agent of another
corporation, partnership, joint venture, employee benefit
plan, trust or other enterprise (each, an "Other Entity")
for certain losses and expenses incurred by such person who
was, is or is threatened to be a defendant in a proceeding
because such person is or was a director, officer, employee
or agent of the Company;
WHEREAS, at this time there are no suits, actions
or claims or threatened suits, actions or claims pending
against the Indemnitee with respect to his or her serving as
a director and/or officer of the Company or serving at the
request of the Company as a director, officer, employee or
agent of an Other Entity; and
WHEREAS, in order to induce the Indemnitee to
serve or to continue to serve as a director and/or officer
of the Company or any Affiliate (as defined below) or as a
director, officer, employee or agent of an Other Entity, the
Company has agreed to provide the Indemnitee with the
additional indemnification contemplated by this Agreement;
NOW, THEREFORE, in consideration of the premises
and mutual covenants and agreements contained herein, and
for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company
and the Indemnitee hereby agree as follows:
1. Definitions. The following terms, as used herein,
shall have the following respective meanings:
(a) "Affiliate" means any person that directly,
or indirectly through one or more intermediaries,
controls, or is controlled by, or is under common
control with, the Company.
<PAGE>
(b) "Claim" means any threatened, pending or
completed action, suit, arbitration or proceeding, or
any inquiry or investigation, whether brought by or in
the right of the Company or otherwise, that the
Indemnitee in good faith believes might lead to the
institution of any such action, suit, arbitration or
proceeding, whether civil, criminal, administrative,
investigative or other, or any appeal therefrom.
(c) "control" (including the terms "controlling,"
"controlled by" and "under common control with") means
the possession, direct or indirect, of the power to
direct or cause the direction of the management and
policies of a person, whether through the ownership of
voting securities, by contract, or otherwise.
(d) "D&O Insurance" means any valid directors'
and officers' liability insurance policy maintained by
the Company for the benefit of the Indemnitee, if any.
(e) "Excluded Claim" means any payment for Losses
or Expenses in connection with any Claim resulting from
the Indemnitee's knowingly fraudulent, dishonest or
willful misconduct or gross negligence.
(f) "Expenses" means any reasonable expenses
incurred by the Indemnitee as a result of a Claim or
Claims made against the Indemnitee for Indemnifiable
Events including, without limitation, reasonable
attorneys' fees and all other costs, expenses and
obligations paid or incurred in connection with
investigating, defending, being a witness in or
participating in (including on appeal), or preparing to
defend, any Claim relating to any Indemnifiable Event.
(g) "Indemnifiable Event" means any act, event or
occurrence, whether occurring prior to, on or after the
date of this Agreement, related to or arising out of
the Indemnitee's serving as a director and/or officer
of the Company.
(h) "Losses" means any amounts or sums which the
Indemnitee is legally obligated to pay as a result of a
Claim or Claims made against the Indemnitee for
Indemnifiable Events including, without limitation,
damages, judgments and sums or amounts paid in
settlement of a Claim or Claims.
(i) "person" means an individual, a corporation,
a partnership, an association, a joint-stock company, a
trust, any unincorporated organization, or a government
or political subdivision thereof.
2
<PAGE>
2. Basic Indemnification Agreement. The Company
agrees that in the event the Indemnitee is or becomes a
party to or witness or other participant in a Claim by
reason of (or arising in part out of) an Indemnifiable
Event, the Company will indemnify the Indemnitee to the
fullest extent permitted by law, against any and all
Expenses and Losses (including all interest, assessments and
other charges paid or payable in connection with or in
respect of such Expenses and Losses) of such Claim, whether
or not such Claim proceeds to judgment or is settled or
otherwise is brought to a final disposition, subject in each
case, to the further provisions of this Agreement.
3. Limitations on Indemnification. Notwithstanding
the provisions of Section 2 hereof, the Indemnitee shall not
be indemnified and held harmless from any Expenses or Losses
(a) which are determined by the Company to constitute an
Excluded Claim or (b) to the extent the Indemnitee is indem-
nified by the Company and has actually received payment
pursuant to the Company's Certificate of Incorporation, D&O
Insurance, or otherwise.
4. Indemnification Procedures.
(a) Promptly after receipt by the Indemnitee of
notice of any Claim, the Indemnitee shall, if indemni-
fication with respect thereto may be sought from the
Company under this Agreement, notify the Company of the
commencement thereof.
(b) If, at the time of receipt of such notice,
the Company has D&O Insurance in effect, the Indemnitee
shall thereafter take all necessary or desirable action
to cause the insurer(s) to pay, on behalf of the
Indemnitee, all Expenses and Losses payable as a result
of such Claim.
(c) To the extent that the Company does not, at
the time of the Claim, have applicable D&O Insurance,
or if a determination is made by the Company that any
Expenses arising out of such Claim will not be payable
under the D&O Insurance then in effect and, in either
case, the Company is otherwise unable or unwilling to
indemnify the Indemnitee with respect to such Claim,
the Company shall be obligated to pay the Expenses of
any Claim from time to time as incurred.
(d) All payments on account of the Company's
indemnification obligations under this Agreement shall
be made within thirty (30) days of the Indemnitee's
written request therefor unless a determination is made
by the Company that the Claims giving rise to the
3
<PAGE>
Indemnitee's request are Excluded Claims or otherwise
not payable under this Agreement. In the event the
Company takes the position that the Indemnitee is not
entitled to indemnification in connection with the
proposed settlement of any Claim, the Indemnitee shall
have the right at its own expense to undertake the
defense of any such Claim. If it is subsequently
determined that the Indemnifiable Events are not
Excluded Claims and that the Indemnitee, therefore, is
entitled to be indemnified under the provisions of
Section 2 hereof, the Company shall promptly indemnify
the Indemnitee.
(e) The Indemnitee hereby expressly undertakes
and agrees to reimburse the Company for all Expenses
and Losses paid by the Company in connection with any
Claim against the Indemnitee in the event and only to
the extent that a determination shall have been made by
a court of competent jurisdiction that the Indemnitee
is not entitled to be indemnified by the Company for
such Expenses and Losses because the Claim is an
Excluded Claim or because the Indemnitee is otherwise
not entitled to payment under this Agreement or
applicable law.
5. Non-exclusivity. The rights of the Indemnitee
hereunder shall be in addition to any other rights the
Indemnitee may have under the Company's Certificate of
Incorporation, By-Laws and any agreement with the Company,
both as to action in the Indemnitee's official capacity and
as to action in any other capacity by holding such office,
and shall continue for so long as the Indemnitee shall be
subject to any Claim by reason of (or arising in part out
of) an Indemnifiable Event.
6. Partial Indemnity. If the Indemnitee is entitled
under any provision of this Agreement to indemnification by
the Company for some or a portion of the Expenses and Losses
of a Claim but not, however, for all of the total amount
thereof, the Company shall nevertheless indemnify the
Indemnitee for the portion thereof to which the Indemnitee
is entitled.
7. Severability. Wherever possible, each provision
of this Agreement shall be interpreted in such manner as to
be effective and valid under applicable law, but if any
provision of this Agreement shall be prohibited by or
invalid under applicable law, such provision shall be
ineffective to the extent of such prohibition or invalidity,
without invalidating the remainder of such provision or the
remaining provisions of this Agreement.
4
<PAGE>
8. Governing Law. This Agreement shall be governed
by and construed in accordance with the laws of the State of
New York applicable to agreements made and to be performed
entirely within such State, without regard to its principles
of conflicts of law.
9. Notices. Any notice or other communication
required to be made pursuant to the provisions of this
Agreement shall be sufficiently given or made if in writing
and either delivered in person with receipt acknowledged or
sent by registered or certified mail, return receipt
requested, postage prepaid, or by telecopy and confirmed by
telecopy answerback, addressed as follows:
If to the Company, at:
National Auto Finance Company, Inc.
621 N.W. 53rd Street, Suite 200
Boca Raton, Florida 33487
Attention: General Counsel
If to the Indemnitee, at:
c/o National Auto Finance Company, Inc.
621 N.W. 53rd Street, Suite 200
Boca Raton, Florida 33487
or at such other address as may be substituted by notice
given as herein provided. The giving of any notice required
hereunder may be waived in writing by the party entitled to
receive such notice. Every notice or other communication
hereunder shall be deemed to have been duly given or served
on the date on which personally delivered, with receipt
acknowledged, or ten (10) days after the same shall have
been deposited in the mail.
10. Headings. The headings in this Agreement are for
convenience of reference only and shall not limit or other-
wise affect the meaning hereof.
11. Entire Agreement. This Agreement, subject to
Section 5 hereof, represents the complete agreement and
understanding of the parties hereto in respect of the
subject matter contained herein. This Agreement supersedes
all prior agreements and understandings between the parties
with respect to the subject matter hereof.
12. Successors and Assigns. Except as set forth in
the following sentence, neither of the parties hereto may
assign any of its or his duties or obligations under this
Agreement without the prior written consent of the other
party hereto. Any entity which acquires substantially all
5
<PAGE>
of the assets of the Company shall assume the Company's
obligations under the Agreement, whereupon the Company shall
have no further liability hereunder.
13. Amendment; Waiver. No amendment, modification,
termination or cancellation of this Agreement shall be
effective unless made in a writing signed by each of the
parties hereto. No waiver of any of the provisions of this
Agreement shall be deemed or shall constitute a waiver of
any other provision hereof (whether or not similar) nor
shall such waiver constitute a continuing waiver.
14. Counterparts. This Agreement may be executed in
several counterparts, each of which shall be considered an
original, but all of which taken together shall constitute
one and the same Agreement.
6
<PAGE>
IN WITNESS WHEREOF, the Company and the Indemnitee have
duly executed this Agreement as of the date first above
written.
NATIONAL AUTO FINANCE COMPANY, INC.
By: -------------------------------
Name:
Title:
INDEMNITEE
-----------------------------------
7
<PAGE>
AMENDED AND RESTATED ASSIGNMENT AND ASSUMPTION AGREEMENT
ASSIGNMENT AND ASSUMPTION AGREEMENT, dated as of _________, 1997 (this
"Agreement"), between National Auto Finance Company, Inc., a Delaware
corporation (the "Company"), and National Auto Finance Company L.P., a Delaware
limited partnership (the "NAFCO Partnership").
W I T N E S S E T H
WHEREAS, the NAFCO Partnership is organized and existing pursuant to a
Second Amended and Restated Agreement of Limited Partnership, dated as of
September 1, 1995 (the "NAFCO Partnership Agreement"; terms defined therein and
not otherwise defined herein being used herein with the meanings as so defined),
among National Auto Finance Corporation, as general partner, and the limited
partners party thereto;
WHEREAS, the Company was formed on October 4, 1996, for the purpose of
acquiring all of the assets, subject to all of the liabilities, of the NAFCO
Partnership in exchange (the "NAFCO Exchange") for shares of common stock, par
value $.01 per share, of the Company (the "Common Stock") and shares of
preferred stock of the Company (the "Preferred Stock" and, together with the
Common Stock, the "Capital Stock");
WHEREAS, immediately prior to the NAFCO Exchange, all of the partners of
Auto Credit Clearinghouse (other than the NAFCO Partnership) will transfer their
partner interests in Auto Credit Clearinghouse to the NAFCO Partnership
in exchange for limited partner interests in the NAFCO Partnership (such
transaction being referred to herein as the "ACCH Exchange").
NOW THEREFORE, in consideration of the premises and other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, the
parties hereto hereby agree as follows:
1. (a) The NAFCO Partnership shall assign, transfer, convey and deliver all
of its right, title and interest in all of its assets, subject to all of its
liabilities, to the Company, and the Company shall accept the assignment and
shall assume all of the duties, obligations and liabilities relating thereto.
(b) In consideration for the transfer of all of the assets, subject to
all of the liabilities, of the NAFCO Partnership, the Company will issue to the
NAFCO Partnership
<PAGE>
on the Closing Date (as defined below), the number of shares of Capital Stock
set forth on Schedule I hereto, which shares, together with the shares of
Capital Stock currently owned by the NAFCO Partnership, shall constitute all of
the issued and outstanding shares of Capital Stock of the Company; provided,
that the number of shares of Capital Stock set forth on Schedule I hereto may be
modified by the Company prior to the Closing Date; provided, further, that such
shares of Capital Stock shall constitute, together with the shares of Common
Stock owned by the NAFCO Partnership, all of the issued and outstanding shares
of Capital Stock.
(c) Notwithstanding anything to the contrary contained herein, the
parties hereto agree that fulfillment by the NAFCO Partnership of its
obligations hereunder is subject to prior Consent of the Limited Partners.
2. The closing of the transactions contemplated by this Agreement shall
take place at the offices of Weil, Gotshal & Manges LLP in New York City, or
such other place as the parties shall agree, immediately prior to the closing of
the initial public offering and sale by the Company of shares of Common Stock
(the "Offering") pursuant to a Registration Statement on Form S-1 under the
Securities Act of 1933, as amended (the "Act"), to be filed with the Securities
and Exchange Commission following the execution and delivery of this Agreement
(such date being referred to herein as the "Closing Date").
3. In the event the Closing Date shall not have occurred or the Offering
shall have been abandoned by the Company on or prior to March 31, 1997, this
Agreement shall terminate and be of no further force or effect and the Company
shall give notice of such abandonment to the parties hereto promptly thereafter.
4. The Company represents, warrants and covenants to the NAFCO Partnership
as follows:
(a) The Company is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware and has all requisite
corporate power to own, lease and operate its properties and to carry on its
business as the same is now being conducted and will be conducted following the
Closing Date.
(b) The Company is authorized to issue 20,000,000 shares of Common
Stock, of which 1,000 shares are issued and
2
<PAGE>
outstanding as of the date hereof and registered in the name of the NAFCO
Partnership, and 1,000,000 shares of Preferred Stock, par value $0.01, of which
no shares are issued and outstanding as of the date hereof. On the Closing Date
and prior to the consummation of the Offering, (a) the Company will have issued
to the NAFCO Partnership a number of shares of Common Stock and Preferred Stock
which, when taken together with all of the shares of Common Stock then owned by
the NAFCO Partnership, will constitute 100% of the then outstanding Capital
Stock, and (b) no other shares of capital stock of the Company will then be
outstanding.
(c) On the Closing Date after giving effect to the transactions
contemplated hereby, there will be no outstanding rights of subscription,
warrants, calls, options, contracts or other agreements of any kind issued or
granted by the Company to purchase or otherwise to receive any capital stock of
the Company, except (i) for shares of Common Stock issuable upon the exchange of
deferred additional interest notes held by Morgan Guaranty Trust Company of New
York, as trustee of (A) the Commingled Pension Fund Trust (Multi-Market Special
Investment Fund II) of Morgan Guaranty Trust Company of New York and (B)
Multi-Market Special Investment Trust Fund of Morgan Guaranty Trust Company of
New York) and Morgan Guaranty Trust Company of New York, as investment manager
and agent for the Alfred P. Sloan Foundation, (ii) the underwriting agreement
with respect to the shares of Common Stock to be issued and sold in the Offering
and (iii) stock options issued pursuant to the Company's 1996 Share Incentive
Plan.
(d) Since its formation, the Company has not been engaged in the conduct
of any business except for the activities incident to the transactions
contemplated hereunder and in connection with the Offering.
5. The NAFCO Partnership represents and warrants to the Company as follows:
(a) Upon the transfer of the assets of the NAFCO Partnership to the
Company on the Closing Date, title to such assets will be acquired by the
Company, free and clear of any pledge, lien, security interest or other
encumbrances, other than any lien securing obligations of the NAFCO Partnership.
(b) The NAFCO Partnership acknowledges that: (i) it has no present plan
or intention to sell, exchange,
3
<PAGE>
transfer, distribute or otherwise dispose of (whether by gift or by means of any
hedging or similar transaction that would reduce its risk of loss on) any of the
shares of Capital Stock or rights to acquire shares of Capital Stock that it
will receive on the Closing Date; and (ii) it has been informed by the Company
of the restrictions contained in Section 6 hereof and that it is acquiring the
Capital Stock for its own account with no present intention of distributing
the same, except in compliance with the Act.
(c) The NAFCO Partnership acknowledges that it has such knowledge and
experience in financial and business matters that such party is capable of
evaluating the merits and risks of the acquisition of the Capital Stock pursuant
to this Agreement. The NAFCO Partnership recognizes that the Capital Stock has
not been registered under the Act or applicable state securities laws, and that,
accordingly, such securities will not be transferable except upon satisfaction
of the registration and prospectus delivery requirements of such laws or
pursuant to an available exemption therefrom, and such party must bear the
economic risk of its investment for an indefinite period of time. The NAFCO
Partnership acknowledges it has received or been given access to financial
information and other documents and records necessary to make a well-informed
investment decision and has had an opportunity to discuss the Company's
business, management and financial affairs with the Company's management.
(d) The NAFCO Partnership acknowledges that nothing in this Agreement
shall obligate the Company or any proposed underwriter to commence the Offering,
nor create any liability on the part of the Company or any proposed underwriter
to the parties hereto if (i) the Company shall elect for any reason not to file
a registration statement or withdraw any registration statement subsequent to
its filing or if any underwriter shall decline to participate in the Offering,
regardless of any action that any party hereto may have taken in connection
therewith or (ii) the ACCH Exchange shall not have occurred. The NAFCO
Partnership acknowledges that no representation is being made by the Company or
any proposed managing underwriter, nor can there be any assurance, that the
Offering will be made or consummated.
(e) The NAFCO Partnership shall, prior to the initial filing of the
registration statement for the Offering, maintain the confidentiality of, and
not disclose to any person, the pendency of the Offering except as may be
4
<PAGE>
required by applicable law or authorized by the Company and except on a
confidential basis to any agents or employees of such party to the extent
reasonably necessary in order to effectuate the transactions contemplated
hereby.
6. (a) The NAFCO Partnership shall not, directly or indirectly, at any time
transfer, sell, assign, convey or otherwise dispose of any shares of Common
Stock held by it or any right, title or interest therein (each a "Transfer")
except in compliance with the Act, and the certificates representing the Capital
Stock issued pursuant hereto shall be so restricted and a restrictive legend
placed on the certificates therefor in the following form:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933. SUCH SHARES MAY NOT
BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF
SUCH REGISTRATION OR AN OPINION OF COUNSEL SELECTED BY THE
HOLDER AND SATISFACTORY TO THE ISSUER THAT SUCH REGISTRATION IS
NOT REQUIRED BY SAID ACT."
(b) Until 180 days after the effective date of the registration
statement for the Offering, the NAFCO Partnership shall not offer to sell, sell,
contract to sell or otherwise dispose of any shares of Capital Stock, or
securities convertible into or exchangeable or exercisable for, or rights to
acquire shares of Capital Stock (including the right to acquire Capital Stock
arising out of this Agreement) without the prior written consent of the
underwriter of the Offering.
(c) Each of the parties shall execute such documents and other
instruments and take such further actions as may be reasonably required or
desirable or as may be reasonably be requested by the Company to give effect to
the transactions contemplated hereby or carry out its obligations hereunder in
consummating the transactions contemplated hereby. The Company may issue "stop
transfer" instructions to the transfer agent for the Capital Stock and take such
other actions as it may deem appropriate to prevent transfers in violation of
this Paragraph 6(c).
7. On the Closing Date, the Company shall deliver to the NAFCO Partnership
a stock certificate or certificates representing the shares of Capital Stock to
be issued to the NAFCO Partnership pursuant to this Agreement.
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8. Any notice or other communication required or permitted hereunder shall
be in writing and shall be delivered personally, telegraphed, telexed, sent by
facsimile transmission, sent by a recognized national courier service, postage
or charges prepaid or sent by first class registered or certified mail, return
receipt requested, postage prepaid. Any such notice shall be deemed given when
so delivered personally, telegraphed, telexed or sent by facsimile transmission,
or in the case of delivery by a courier service, on the date of confirmation of
delivery or, if by first class registered or certified mailed, return receipt
requested, three days after the date of deposit in the United States mails, as
follows:
(i) If to the Company, to:
National Auto Finance Company, Inc.
621 N.W. 53rd Street
Suite 200
Boca Raton, Florida 33487
Attn: Keith B. Stein
Vice Chairman and Secretary
with a copy to:
Weil, Gotshal & Manges LLP
767 Fifth Avenue
New York, NY 10153
Attn: Howard Chatzinoff, Esq.
(ii) If to the NAFCO Partnership, to the address set forth on Schedule I
hereto.
Any party may by notice given in accordance with this Section to the other
parties designate another address or person for receipt of notices hereunder.
9. (a) This Agreement contains the entire agreement among the parties with
respect to the subject matter hereof and supersedes all prior agreements,
written or oral, with respect thereto.
(b) This Agreement may be amended, superseded, canceled, renewed or
extended, and the terms and conditions hereof may be waived, only by a written
instrument signed by the parties. No delay on the part of any party in
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exercising any right, power or privilege hereunder shall operate as a waiver
thereof, nor shall any waiver on the part of any party of any such right, power
or privilege, nor any single or partial exercise of any such right, power or
privilege, preclude any further exercise thereof or the exercise of any other
such right, power or privilege. The rights and remedies herein provided are
cumulative and are not exclusive of any rights or remedies that any party may
otherwise have at law or in equity.
(c) This Agreement shall be governed and construed in accordance with
the laws of the State of New York, without regard to the conflict of laws
principles thereof.
(d) This Agreement shall be binding upon and inure to the benefit of the
parties and their respective successors and permitted assigns.
(e) This Agreement may be executed by the parties hereto in separate
counterparts, each of which when so executed and delivered shall be an original,
but all such counterparts shall together constitute but one and the same
instrument. Each counterpart may consist of a number of copies hereof each
signed by less than all, but together signed by all of the parties hereto.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first above.
NATIONAL AUTO FINANCE COMPANY L.P.
by National Auto Finance
Corporation,
its general partner
By: _________________________________
Name:
Title:
NATIONAL AUTO FINANCE COMPANY, INC.
By: _________________________________
Name:
Title:
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REFERRAL AGREEMENT
THIS REFERRAL AGREEMENT (this "Agreement) is made as of this 15th day
of April, 1996, by and between FIRST UNION NATIONAL BANK OF NORTH CAROLINA, a
national banking association in its individual capacity and as agent and
attorneyin4act for each of its national bank affiliates described in Section
13(m) hereof (collectively, "First Union"), and AUTO CREDIT CLEARINGHOUSE L.P.,
a Delaware limited partnership ("ACCH").
STATEMENT OF PURPOSE
ACCH engages in the business of financing, securitizing and servicing
non-prime motor vehicle retail installment contracts originated by motor vehicle
dealers. First Union receives credit applications of borrowers from motor
vehicle dealerships and makes loans to approved borrowers but generally does not
finance non-prime motor vehicle retail installment contracts.
First Union desires to (a) refer on an exclusive basis to ACCH certain
credit applications for motor vehicle retail installment contracts from
dealerships and (b) have its sales finance division introduce ACCH to
dealerships in certain states for whom it currently provides consumer financing,
all in consideration of (i) a fee on each such motor vehicle retail installment
Contract purchased or financed by ACCH and (ii) an equity interest in the parent
company of ACCH as more particularly described in the partnership agreement of
such parent company.
ACCH desires to receive such referrals and introductions to make credit
underwriting decisions, to fund motor vehicle retail installment contracts and
to pay such fees on file terms and conditions provided herein.
NOW, THEREFORE, in consideration of file foregoing premises and the
mutual agreements and covenants contained herein, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
file parties hereto, intending legally to be bound, hereby agree as follows:
Section 1. Definitions. The following terms used in this Agreement
shall have the meanings set forth in this Section 1:
"ACCH" means Auto Credit Clearinghouse L.P., a Delaware limited
partnership.
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"ACCH Program" means a program of ACCH by which ACCH solicits and
evaluates credit applications and purchases from, or provides financing to, FU
Dealers for the purchase of Motor Vehicles by their customers, and the
marketing, training and other activities described herein related to such
purchases or financings. The ACCH Program shall be substantially similar to the
current pilot referral program by which First Union National Bank of Georgia
refers certain non-prime loans to ACCH as modified by file terms and conditions
hereof.
"Active FU Dealer" means (a) as of the date hereof, the FU Dealers
listed on Exhibit A hereto and (b) after the date hereof, (i) any FU Dealer such
Dealer has been introduced to ACCH and (ii) thereafter, any FU Dealer with
respect to which (A) ACCH shall have purchased or financed at least one (1)
Motor Vehicle retail installment contract during the first ninety (90) days
after file introduction of such Dealer to ACCH and (B) ACCH shall have purchased
or financed at least three (3) Motor Vehicle retail installment contracts during
each ConseCutive ninety (90) day period thereafter. A FU Dealer set forth on
Exhibit A shall cease to be an Active FU Dealer at such time as such FU Dealer
no longer satisfies the requirements set forth in clauses (A) and (B) of this
definition.
"Affiliate" of a specified Person means any other Person who (a)
directly or indirectly Controls, is Controlled by, or is under common Control
with, such specified Person, (b)owns or Controls either ten percent (10%) or
more of the outstanding voting stock or other voting equity or beneficial
interests of such specified Person or twenty percent (20%) or more of the value
of the total outstanding stock or other equity securities of such specified
Person determined on a billy diluted basis, (c) is an executive officer,
director, general partner, trustee, manager, administrator, or representative or
agent (with respect to any matter for which such representative or agent has
been engaged by such Person) of such specified Person, or (d) is an executive
officer, director, trustee, manager, administrator, or representative or agent
or owns or Controls ten percent (10%) or more of the outstanding voting
interests of such other Person described in clause (a), (b) or (c) of this
Sentence, except that neither First Union nor ACCH shall be considered an
Affiliate of each other.
"Application" means a credit application of a potential purchaser
(excluding potential lessees) of a Motor Vehicle that is either (a) submitted to
FU Sales Finance by a FU Dealer for financing of a Motor Vehicle and thereafter
submitted to ACCH or (b) otherwise originated by a FU Dealer and submitted to
ACCH for financing.
"Bureau Score" means the proprietary score assigned to credit
applicants by TRW, Trans Union or Equifax, or as may otherwise be agreed to in
writing between ACCH and First Union.
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"Business" means the business of ACCH, including, the business of
purchasing, financing, securitizing and servicing Motor Vehicle retail
installment contracts.
"Business Day" means any day other than Saturday, Sunday or any other
day on which national banking associations in the State of North Carolina
generally are closed for commercial banking business.
"C Applications" means those Applications submitted to FU Sales Finance
by a PU Dealer that have a Bureau Score of less than 600, or comparable
Applications should such scoring system hereafter be amended, revised, modified,
discontinued or restated.
"Change of Control" means (a) neither Gary L. Shapiro nor Edgar Otto
have direct or indirect Control of ACCH, (b) NAFCO ceases to own at least
ninety-five percent (95%) of the aggregate equity interests in ACCH or Cc) any
"Put Event" shall occur as set forth in Section 11.5(i), (ii), (iii) or (vi) of
the Second Amended and Restated Agreement of Limited Partnership of NAFCO, as in
effect on the date hereof.
"Control" of a Person means possession, directly or indirectly (through
one or more intermediaries), of the power to direct or Cause the direction of
management and policies of such Person through ownership of voting securities
(or other ownership interests) , contract, voting trust or Otherwise.
"Default" is defined in Section 10(b).
"PU Dealer" means, as of any date of determination, any Motor Vehicle
dealership in the Relevant States (a) which has entered into a written
contractual arrangement with First Union whereby such dealership agrees to offer
for sale, assignment or financing Motor Vehicle retail installment contracts or
Motor Vehicle retail lease contracts and such contractual arrangement has not
ended or been terminated or canceled as of such date and (b) with whom First
Union has purchased or financed at least one (1) Motor Vehicle retail
installment contract or Motor Vehicle retail lease contract since April 15, 1995
"FU Sales Finance" means the division of First Union which administers
substantially all of the indirect Motor Vehicle finance operations of First
Union consisting of the purchase or financing of Motor Vehicle retail
installment contracts originated by Motor Vehicle dealerships.
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<PAGE>
"First Union" means First Union National Bank of North Carolina, a
national banking association, in its individual capacity and each of its
national bank affiliates described in Section 13(m) hereof.
"Funded Referral" means any Motor Vehicle retail installment contract
purchased or financed by ACCH with respect to which an Application for such
financing was made.
"GAAP" means generally accepted accounting principles, conventions,
rules and procedures in the United States set forth in the opinions and
pronouncements of the Accounting Principles Board of the American Institute of
Certified Public Accountants and statements and pronouncements of the Financial
Accounting Standards Board (or any success or organization) that are applicable
to the circumstances as of the date of determination.
"Governmental Authority" means any foreign, federal, state or local
government, political subdivision Or governmental or regulatory authority,
agency, board, commission, instrumentality or court or quasi-governmental
authority.
"Law" or "Laws" means any or all federal, state and local statutes,
laws, codes, ordinances, judicial decisions, proclamations, interpretive
releases, regulations, published requirements, guidelines, orders, directives,
judgments, decrees and rules of any Governmental Authority, in each case as
amended and in effect from time to time.
"Licenses" means all licenses, permits and other authorizations issued,
or which upon due application would be issued, by any Governmental Authority to
ACCH which are used or useful in the Business.
"Material Adverse Effect" means, with respect to a particular Person, a
material adverse change, effect or development (or any change, effect or
development that could reasonably likely have a material adverse effect) on the
assets, business, revenues, expenses, operations, condition (financial or
otherwise), or prospects or ability to perform under or with respect to the
material contracts (including, for the parties hereto, this Agreement) of the
specified Person.
"Motor Vehicle" means any automobile, van, sport utility vehicle or
light duty truck.
"NAFCO" means National Auto Finance Company L. P., a Delaware limited
partnership, prior to an initial public offering, and the successor entity, if
any, thereof after an initial public offering to which all or a substantial
portion of the assets or operations of
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<PAGE>
National Auto Finance Company L.P. are directly or indirectly transferred to
effect such initial public offering.
"Northeast States" means Massachusetts, New York, Connecticut, New
York, Delaware and Pennsylvania.
"Person" means an individual, corporation, association, partnership,
joint venture, trust, estate, limited liability company, limited liability
partnership, Governmental Authority or other entity or organization.
"Regulatory Requirement" is defined in Section 7(f).
"Relevant States" means (a) Florida, Georgia, Maryland, North Carolina,
South Carolina, Tennessee, Virginia and the District of Columbia, (b) the
Northeast States if so elected pursuant to Section 9(g), and (c) any other
States which are mutually agreed to for such purpose by ACCH and First Union by
a written addendum to this Agreement.
"Roll-Out Period" means the period of nine (9) months commencing on the
date hereof.
Section 2. Referrals. On the terms and subject to the conditions set
forth in this Agreement, (a) First Union shall cause FU Sales Finance to refer
to ACCH all C Applications which by their terms may be so referred, (b)First
Union, through FU Sales Finance, may in its sole discretion refer any other
Application which FU Sales Finance declines and (c) ACCH shall pay First Union
$65 in immediately available funds in accordance with Section 7(a) hereof for
each Funded Referral.
Section 3. No Financing by First Union. The parties hereto intend that
all Motor Vehicle retail installment contracts that constitute Funded Referrals
shall be financed directly by ACCH and not refinanced or purchased from First
Union, nor shall such Motor Vehicle retail installment Contracts in any way be
characterized as being refinanced or purchased from First Union.
Section 4. No Recourse. All Funded Referrals shall be without recourse
to First Union, and First Union shall not have any obligation or liability that
is in any way related to such Funded Referrals; provided, that the parties
hereto shall be liable to each other for breach of their respective
representations, warranties, covenants and indemnitIes under the terms of this
Agreement, any of which obligations of First Union are limited so as not to
constitute recourse to First Union for the credit risk of any Funded Referrals.
5
<PAGE>
Section 5. Representations and Warranties of ACCH. ACCH represents and
warrants to First Union, as of the date hereof, as follows:
(a) Organization and Standing. ACCH is a limited partnership
duly organized, validly existing and in good standing under the laws of the
State of Delaware and is duly qualified in each jurisdiction where the conduct
of the Business requires such qualification.
(b) Authorization and Binding Obligation. ACCH has full power
and authority to execute and deliver this Agreement and to perform and comply
with all terms, covenants and conditions to be performed and complied with by
ACCH hereunder. The execution, delivery and performance of this Agreement by
ACCH have been duly and validly authorized by all necessary action on the part
of AC CM. This Agreement has been duly and validly executed and delivered by
ACCH and constitutes a legal, valid and binding agreement of ACCH enforceable
against ACCH in accordance with its terms, except as the same may be limited by
bankruptcy, insolvency, reorganization, moratorium and other similar laws and
related court decisions of general applicability relating to or affecting
creditors' rights generally and by the application of general principles of
equity.
(c) No Conflict. The execution, delivery and performance of
this Agreement by ACCH does not (i) violate, conflict with or result in any
breach of any provision of the organizational documents of ACCH, (ii) violate,
conflict with or result in a breach or default (or give rise to any right of
termination, cancellation or acceleration) under any of the terms, conditions or
provisions of any note, bond, mortgage, deed of t:rust, agreement, indenture,
lease or other instalment or obligation to which ACCH is a party or by which any
of its assets may be bound, or (iii) violate or conflict in any material respect
with any law, order, writ, injunction, rule or decree applicable to ACCH or any
of the assets thereof.
(d) Governmental Authorizations. All authorizations, consents,
orders and approvals of, or other action by, any Governmental Authority that are
required to be obtained by ACCH, and all notices to and filings with any
Governmental Authority that are required to be made by ACCH, including in the
case of each of the foregoing those pertaining to the ACCH Program and the
executiOn of this Agreement, have been obtained or made and are in full force
and effect, except where the failure to obtain or to make any such
authorization, consent, order, approval, notice or filing, individually or in
the aggregate for all such failures, would not have a reasonable likelihood of
having a Material Adverse Effect on ACCH. ACCH is the authorized legal holder of
the Licenses, none of which is subject to any restriction or Condition which
could materially adversely affect the ACCH
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<PAGE>
Program. The Licenses are valid for the full term thereof and are in good
standing and full force and effect. ACCH has not engaged, and does not engage,
in any activity which could cause the revocation or suspension of any License.
(e) Compliance with Laws. The operations of the Business are
in Compliance in all respects with all Licenses and all applicable Laws, except
to the extent that any such non compliance, individually or in the aggregate,
would not reasonably be expected to have a Material Adverse Effect on ACCH
(including the ACCH Program).
Section 6. Representations and Warranties of First Union. First Union
represents and warrants to ACCH, as of the date hereof, as follows:
(a) Organization and Standing. First Union is a national
banking association duly Organized, validly existing and in good Standing under
the laws of the United States of America.
(b) Authorization and Binding Obligation. First Union has full
corporate power and authority to execute and deliver this Agreement and to
perform and comply with all terms, covenants and conditions to be performed and
complied with by it hereunder The execution, delivery and performance of this
Agreement by First Union have been duly and validly authorized by all necessary
corporate action on the part of First Union. This Agreement has been duly and
validly executed and delivered by First Union and constitutes a legal, valid and
binding agreement of First Union, enforceable against First Union in accordance
with its terms, except as the Same may be limited by bankruptcy, insolvency,
reorganization, moratorium and other similar laws and related Court decisions of
general applicability relating to or affecting creditors' rights generally and
by the application of general principles of equity.
(c) No Conflict. The execution, delivery and performance of
this Agreement by First Union does not (i) violate, conflict with or result in
any breach of any provision of the organization documents of First Union, (ii)
violate, conflict with or result in a breach or default (or give rise to any
right of termination, cancellation or acceleration) under any of the terms,
conditions or provisions of any note, bond, mortgage, deed of tflL5t, agreement
indenture, lease or other instrument or obligation to which First Union is a
party or by which any of its assets may be bound, or (iii) violate or conflict
in any material respect with any law, order, writ, injunction, rule or decree
applicable to First Union or any of the assets thereof.
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(d) FU Dealers and PU Sales Finance. To the best knowledge of
First Union after due inquiry, Exhibit A sets forth a t:rue and Correct list of
all FU Dealers as of the date hereof. Such FU Dealers represent substantially
all of the Motor Vehicle dealerships in the Relevant States with respect to
which First Union engages in the purchase or finance of Motor Vehicle retail
installment contracts originated by Motor Vehicle dealerships. As of the date
hereof, First Union National Bank of North Carolina and its Affiliate Banks (as
defined in Section 13(m)) are all of the national banks through which FU Sales
Finance operates its business.
Section 7. Covenants of ACCH. So long as this Agreement remains in
effect, ACCH shall perform and comply with the covenants contained in this
Section.
(a) Payment. On or before the tenth (10th) Business Day of
each calendar month, ACCH shall pay to First Union $65.00 for each Funded
Referral during the previous calendar month.
(b) Training. ACCH shall provide reasonable training to sales
representatives of FU Sales Finance in the marketing of the ACCH Program.
(c) Reports. ACCH shall maintain true and complete books and
records of account in accordance with GAAP and shall comply with the following
requirements:
(i) ACCH shall maintain and implement, or cause to be
maintained and implemented, administrative and operating procedures and
shall keep and maintain on a timely basis, or cause to be kept or
maintained, all documents, books, records, accounts and other
information relating to the ACCH Program which are reasonably required
to monitor the results of the ACCH Program.
(ii) On or before the tenth (10th) Business Day of
each Calendar month, ACCH shall furnish to First Union a report (which
may include certain information on Computer diskette) setting forth;
(A) (1) the number of Applications delivered
by FU Sales Finance to ACCH ("SF Applications") during the
previous calendar month and (2) the number of Applications,
other than SF Applications, delivered to ACCH during the
previous calendar month,
(B) (1) the number of SF Applications
approved by ACCH during the previous calendar month and
(2) the number of
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Applications, other than SF Applications, approved by ACCH
during the previous calendar month,
(C) (1) the number of Motor Vehicle retail
installment contracts funded by ACCH during the previous
calendar month in respect of SF Applications delivered to ACCH
and (2) the number of Motor Vehicle retail installment
contracts funded by ACCH during the previous calendar month in
respect of Applications, other than SF Applications, delivered
to ACCH,
(D) (1) the percentage of SF Applications
delivered to ACCH which were approved by ACCH during the
previous calendar month and (2) the percentage of
Applications, other than SF Applications, delivered to ACCH
which were approved by ACCH during the previous calendar
month,
(E) (1) the percentage of SF Applications
delivered to ACCH which were funded by ACCH during the
previous calendar month and (2) the percentage of
Applications, other than SF Applications, delivered to ACCH
which were funded by ACCH during the previous calendar month,
(F) the number and names of Motor Vehicle
dealerships from whom ACCH has purchased, or with respect to
whom has originated, loans,
(G) the number and names of Motor Vehicle
dealerships which have become FU Dealers during the previous
calendar month,
(H) a list describing any Defaults of ACCH
not previously disclosed in writing to First Union and a
description of any developments in respect of any such
previously disclosed Defaults
(I) a management report related to the
operations of ACCH during the previous calendar month
substantially in the form of Exhibit C hereto,
(J) to the extent permitted by law and
available with commercially reasonable, good faith efforts by
ACCH, a list of the names and social security numbers of all
current obligors of Motor Vehicle retail installment contracts
financed by ACCH (provided that such list shall be
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provided on the tenth (10th) Business Day after the end of
each calendar quarter),
(K) all reports delivered by NAFCO and ACCH
pursuant to the letter agreement dated as of April 15, 1996
between NAFCO and ACCH, a copy of which is attached hereto as
Exhibit ID; and
(L) such other information, documents,
records or reports with respect to the ACCH Program as First
Union may reasonably request.
(iii) As soon as possible, and in any event within
ten (10) Business Days after an executive officer, member or partner of
ACCH, as the case may be, has knowledge thereof, ACCH shall give First
Union written notice of (A) any material litigation, investigation or
proceeding pending or to the best knowledge of ACCH, threatened by or
against ACCH in connection with or related to the ACCH Program at law
or in equity, or before any Governmental Authority, (B) any judgment,
settlement or other final disposition with respect to any such
previously disclosed litigation, investigation or proceeding, and (C)
of any action or event constituting an event of default or violation of
ally License or material contract to which ACCH is a party or by which
ACCH is bound, or any investigation, assertion, claim or challenge
relating thereto.
(iv) ACCH will keep its principal place of business
and the offices where it keeps all records described in this Section
7(c) at the address given in Section 13(b) or such other address as may
be changed by notification pursuant to Section 13(b).
(d) Inspection. At all reasonable times, ACCH shall permit any
authorized representatives designated by First Union to visit and inspect, and
conduct accounting reviews of, any of the properties of ACCH and its books and
records pertaining to the ACCH Program, and to take abstracts therefrom and make
copies thereof, and to discuss ACCH's affairs, finances and accounts with the
management, employees and independent accountants of ACCH; provided, that unless
there shall have occurred and be continuing any Default hereunder, neither First
Union nor any of its representatives shall conduct any such inspection more than
four (4) times during any calendar year. If First Union or any third party
retained by First Union prepares any written report of its investigation and no
Default shall have occurred and be continuing, First Union shall offer
representatives of ACCH the opportunity to discuss the contents of such report
before such report is completed in final
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form. First Union shall be responsible for (i) its own out-of-pocket costs in
conducting such visits and inspections and (ii) any extraordinary expenses in
excess of $5,000 per year incurred to third parties in connection with such
visits and inspections (including extraordinary expenses incurred to third party
auditors or consultants retained at the request of First Union).
(e) Compliance with Laws. ACCH shall comply with all Licenses
(including the renewal thereof) and all applicable Laws, except to the extent
that any such non-compliance, individually or in the aggregate, could not have a
Material Adverse Effect on ACCH. Without limiting the generality of the
foregoing, ACCH shall comply in all material respects with all laws related to
fair credit and lending practices and consumer protection that are applicable to
the ACCH Program.
(f) Regulatory Compliance. If First Union reasonably
determines that, by reason of any Law hereafter enacted, promulgated, issued,
decided, ordered, adopted, made, initiated or rendered (collectively, a
"Regulatory Requirement"), it is restricted or prohibited from performing its
obligations or exercising its rights hereunder in any material respect, or being
a party hereto, ACCH shall take such action, at the expense of First Union, as
may be reasonably requested by First Union to permit First Union to comply with
such Regulatory Requirement.
(g) Performance and Compliance With Contracts. ACCH will, at
its expense, timely and fully perform and comply with all provisions, covenants
and other promises required to be observed by it under the Applications, the
Funded Referrals and all Contracts with respect to which it is a party related
to the Funded Referrals, the breach of which provisions, covenants or promises
would have a reasonable likelihood of having a Material Adverse Effect on ACCH.
ACCH shall consider all Applications in good faith and in accordance with the
purpose and intent of the ACCH Program; provided, notwithstanding anything to
the contrary set forth in this Agreement1 ACCH shall have the absolute,
unconditional right and authority to approve, conditionally approve or reject
any Application and to make any other credit decision with respect to any Motor
Vehicle retail installment contract, without notice to, or consent by, First
Union or any other Person. In no event shall First Union have the right (whether
express or implied) to require ACCH or any other Person to purchase or close any
Motor Vehicle installment credit transaction.
(h) Accuracy of Information. All written information furnished
on or after the date hereof by ACCH to First Union pursuant to or in connection
with this Agreement or any transaction contemplated herein shall be true,
accurate and complete in all material respects.
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(i) Diligence. Subject to Section 7(g), ACCH shall receive and
promptly evaluate all Applications received from FU Dealers and shall provide to
such Dealers such information, forms and other documents and materials relative
to such Applications and any Funded Referrals with respect thereto that First
Union may reasonably request.
(j) Conduct. Subject to Section 7(g), ACCH shall conduct its
operations in the manner that comports with sound business practices and shall
not take any willful or intentional actions intended to alienate any FU Dealer
or prejudice the relationship of First Union with any FU Dealer.
(k) Roll-Out of ACCH Program. ACCH, with the assistance of
First Union as provided in Section 9(a), shall roll out the ACCH Program in each
regional center of FU Sales Finance in the Relevant States during the Roll-Out
Period. Upon the introduction of the ACCH Program in each regional center, ACCH
shall give written notice of such introduction to First Union.
(l) Restricted Activities.
(i) ACCH shall not solicit, purchase or finance Motor
Vehicle retail installment Contracts (including directly from any Motor
Vehicle dealership) except through a contract with a third party
financial institution providing for referrals and introductions of such
institution's Motor Vehicle dealership customers to ACCH.
(ii) In order to effectively implement the ACCH
Program in the Relevant States and in consideration of the exclusive
referral arrangement offered hereunder by First Union, ACCH agrees
that, for a period of twelve (12) months commencing on the date hereof,
the business activities of ACCH in the Relevant States shall be limited
to the ACCH Program and arrangements with third party financial
institutions providing for the referral of credit applications, on a
non-exclusive basis, by such institutions to ACCH and the funding of
such applications accepted by ACCH; provided, that the business
activities of ACCH shall not be so limited if for any month commencing
with the seventh (7th) month and ending with the twelfth (12th) month
during such twelve (12) month period, ACCH has purchased or financed
less than three hundred (300) Motor Vehicle retail installment
contracts from FU Dealers in the Relevant States.
(iii) In order to effectively implement the ACCH
Program in the Northeast States and in consideration of the exclusive
referral arrangement offered hereunder by First Union, ACCH agrees
that, for a period commencing on the date
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hereof and ending on the later of (A) nine (9) calendar months after
the date hereof or (B) if the election set forth in Section 9(g) hereof
is made by First Union, twelve (12) calendar months after the date of
the roll-out notice given to First Union pursuant to Section 9(g), the
business activities of ACCH in the Northeast States shall be limited to
the ACCH Program and arrangements with third party financial
institutions providing for the referral of credit applications, on a
non-exclusive basis, by such institutions to ACCH and the funding of
such applications accepted by ACCH; provided, that the business
activities of ACCH shall not be so limited if for any month commencing
with the seventh (7th) month and ending with the twelfth (12th) month
during the twelve (12) month period referred to in clause (3), ACCH has
purchased or financed less than three hundred (300) Motor Vehicle
retail installment contracts from FU Dealers in the Northeast States.
(iv) In no event shall ACCH purchase or finance Motor
Vehicle retail installment contracts through any agreement or
arrangement with a third party financial institution if any such
contract is originated by an Active FU Dealer. In the event of any
violation of this subsection (iv) through error or inadvertence, ACCH
shall pay First Union the referral fee in respect of such contract and
such contract shall be deemed a Funded Referral for all purposes
hereunder.
(v) In no event stall ACCH enter into any agreement
or arrangement with a third party financial institution which would
restrict or prohibit ACCH from purchasing or financing Motor Vehicle
retail installment contracts originated by any FU Dealer.
Section 8. Covenants of First Union. So long as this Agreement remains
in effect, First Union shall perform and comply with the covenants contained in
this Section.
(a) Referral of Applications. Upon receipt of each notice
referred to in Section 7(k) with respect to any region, First Union:
(i) shall refer to ACCH all C Applications which
by their terms may be so referred,
(ii) shall exercise its reasonable, good faith
efforts to cause all C Applications to contain such provisions as may
be necessary to enable First Union to refer such C Applications to
ACCH; and
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(iii) may, in its sole discretion, refer any other
Applications that it has declined.
(b) Duties of First Union. First Union shall cooperate with
ACCH in the implementation of the ACCH Program including taking appropriate
action to introduce ACCH sales representatives to Active FU Dealers, to act as
liaison with such Dealers with respect to the Services provided by ACCH to such
Dealers, and to provide ongoing maintenance of, and sales representative
assistance with respect to, the business relationship among First Union, ACCH
and such Dealers.
(c) Marketing. First Union shall market the ACCH Program as
part of its general marketing efforts to FU Dealers.
(d) Reports and Access. On or before the tenth (10th) Business
Day of each calendar month, First Union shall furnish to ACCH a list of all FU
Dealers (including the name, address, telephone number and contact person for
each such Dealer). In addition, for the sole purpose of validating the active
status of dealers and compliance by First Union with its obligations in Section
8(a)(i) and (ii), First Union shall provide ACCH, upon five (5) Business Days
prior written notice and at reasonable times, access to the records of First
Union containing the written contracts evidencing First Union's relationship
with FU Dealers and other records reasonably necessary for the above described
purposes.
(e) Minimize Adverse Regulatory Impact. If First Union
reasonably determines that, by reason of any Regulatory Requirement, First Union
is materially restricted or prohibited from performing its obligations or
exercising its rights hereunder, First Union shall use its reasonable, good
faith efforts to comply with, and to minimize, to the extent reasonably
possible, the adverse impact of such Regulatory Requirement upon this Agreement
and the rights and obligations of the parties hereunder.
(f) Compliance with Laws. First Union shall comply with all
Laws to the extent strictly applicable to First Union's duties and obligations
under the ACCH program, except to the extent that any such non-compliance,
individually or in the aggregate, does not have a material adverse effect on the
ACCH Program.
(g) Accuracy of Information. All written information furnished
on or after tile date hereof by First Union to ACCH pursuant to or in connection
with this Agreement or any transaction contemplated herein shall be true,
accurate and complete in all material respects.
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Section 9. Implementation of ACCH Program. So long as this Agreement
remains in effect, First Union and ACCH shall use their reasonable good faith
efforts to cooperate in performing and complying with the covenants set forth
below:
(a) First Union and ACCH shall develop a plan for phased
implementation of the ACCH Program during the Roll-Out Period, including the
introduction of the ACCH Program in each regional center of FU Sales Finance in
each of the Relevant States and the order of priority of FU Dealers to whom ACCH
sales representatives should be introduced.
(b) First Union and ACCH shall develop and implement incentive
programs, special promotions and related sales and marketing devices, as
appropriate, relating to the ACCH Program, including premium marketing
promotions relating to the ACCH Program and the costs of such development and
implementation shall be borne by ACCH. The parties shall cooperate to develop
guidelines for the use of the name or logo of Fust Union and ACCH. Each party
agrees that it shall not use the logo or name of the other party or any of the
Affiliates of such other party, or any confusingly similar logo or name, on any
promotional materials, brochures, applications, contract forms or any other
written material used in connection with the ACCH Program or for any other
purpose without the prior written approval of such party. ACCH shall provide all
applications, contracts and other forms reasonably required for the
implementation of the ACCH Program at ACCH's expense and according to format
provided by First Union.
(c) First Union and ACCH shall develop and publish specific
guidelines, policies and procedures, as appropriate, governing the operation of
the ACCH Program and the interrelationship between First Union and ACCH and
shall approve changes, as appropriate from time to time, to such published
guidelines, policies and procedures.
(d) The parties hereto acknowledge that they have had, and may
in the future have, access to certain confidential and proprietary information
(written, oral or observed) of - the other relating to certain proprietary
corporate information of a type typically not disclosed to the public,
including, for example, strategic marketing plans, budgets, customer lists and
proprietary financial information, and such information constitutes valuable,
special and unique property of the parties and shall be deemed to be
confidential. This information may only be used in the proviSion of services
under this Agreement. The parties hereto agree that they will not, for any
reason or purpose whatsoever, use or allow to be used any such information or
reveal or disclose any such information to any Person other than the parties
hereto and those agents, employees and representatives thereof to t4e extent
that access to such information is necessary for a particular agent, employee
and representative (including attorneys, auditors and other
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<PAGE>
professionals) to perform such functions contemplated by this Agreement (who
shall also agree not to disclose such information except as permitted by this
Section 9(d)), except (i) as expressly consented to by the parties, (ii) as
required by Law, or (iii) to the extent such information becomes generally
available to the public under circumstances which do not involve a breach of the
terms hereof. Without limiting the generality of the foregoing provisions of
this Section 9(d), and subject to the exceptions provided above in this Section
9(d), neither ACCH nor First Union (or any Affiliate of either ACCH or First
Union) shall issue a press release or make any disclosure regarding the ACCH
Program in any offering memorandum or similar document or outside the ordinary
course of business, without the written consent of such other party hereto,
which consent shall not be unreasonably withheld.
(e) On or prior to the tenth (10th) Business Day of each
calendar month, ACCH and First Union shall amend Exhibit A to include additional
Active FU Dealers and to eliminate FU Dealers which are not Active FU Dealers;
no negative inference shall be drawn by the failure of the parties to amend
Exhibit A.
(f) On or before March 1 of each calendar year, ACCH and FU
Sales Finance shall mutually engage a professional survey firm to conduct a
survey of dealers participating in the ACCH Program. The out-of-pocket costs of
preparing such dealer surveys shall be shared equally by ACCH and First Union;
provided, that such costs shall not exceed $10,000 per year unless mutually
agreed by ACCH and First Union.
(g) At any time prior to nine (9) calendar months after the
date hereof, First Union shall have the Option, by written notice to ACCH, to
add the Northeast States as additional Relevant States for all purposes of this
Agreement. Upon receipt of such notice from First Union, ACCH shall, prior to
the date which is fifteen (15) calendar months after the date hereof, roll out
the ACCH Program with respect to each FU Dealer in the Northeast States in the
Same manner as provided herein with appropriate modification for roll-out period
and similar matters. ACCH shall give written notice to First Union of the
initiation of the roll-out in the Northeast States as provided above. Exhibit B
lists the FU Dealers in the Northeast States as of the date hereof.
Section 10. Termination of Agreement.
(a) Termination. The term (the "Term") of this Agreement shall
be for an initial period of three years from the date hereof, renewable by ACCH
with the written consent of First Union on each anniversary of the date hereof
for an additional one year such that, if so renewed, the term of this Agreement
shall be extended one year for a remaining period upon renewal of three years
from such anniversary date. ACCH shall renew this
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<PAGE>
Agreement by giving written notice to First Union of its desire to renew at
least thirty (30) but no more than sixty (60) days prior to each anniversary of
the date hereof whereupon First Union shall have a period of fifteen (15) days
after receipt of such notice to notify ACCH in writing of its approval or
disapproval of such renewal. Any failure of First Union to give such written
notification to ACCH shall be deemed a disapproval. Notwithstanding the
foregoing, subject to Section 1OC), the Term of this Agreement shall be
terminated upon the happening of any of the following events, which remain
un-Cured in accordance with Section 10(b):
(i) at any time by mutual written consent of
First Union and ACCH;
(ii) by First Union, if ACCH is in default, breach or
noncompliance in any material respect of its representations,
warranties, Covenants or agreements under this Agreement;
(iii) by ACCH, if First Union is in default, breach
Or noncompliance in any material respect of its representations,
warranties, covenants or agreements under this Agreement;
(iv) if either party makes an assignment for the
benefit of creditors or admits in writing its inability to pay its
debts when due, or if any liquidation, dissolution, bankruptcy,
reorganization, insolvency, or other proceeding for the relief of
financially distressed debtors is commenced by or against such party,
or a receiver, liquidator, custodian or trustee is appointed for such
party or a substantial part of such party's assets (but if any of the
foregoing occurs involuntarily, dissolution shall not occur unless the
same is not dismissed, stayed or discharged within ninety (90) days) or
if an offer for relief is entered against such party under Title 11 of
the United States Code;
(v) by either party, if in the opinion of First
Union's regulatory counsel, First Union is restricted or prohibited, by
reason of any Regulatory Requirement, from performing its obligations
or exercising its rights hereunder in any material respect, following
First Union's exercise of its reasonable, good faith efforts to comply
with and minimize the adverse impact of such Regulatory Requirement; or
(vi) by First Union, upon a Change of Control except
to the extent contemplated by Section 5.10 of the Second Amended and
Restated Partnership Agreement of NAFCO, as in effect on the date
hereof.
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(b) Cure Rights. Any right to terminate this Agreement that
either First Union or ACCH (the "Terminating Party") may have under Section
1O(a)(ii), 1O(a)(iii) or 1O(a)(v), as the case may be, with respect to the
default under, breach of or non-compliance with the representations, warranties,
covenants or agreements under this Agreement (collectively, a "Default") of such
other party (the "Defaulting Party"), shall not be effective unless (i) the
Terminating Party delivers written notice to the Defaulting Party in the manner
provided in Section 13(b) of the Default that is alleged to have occurred (a
"Default Notice") and (ii) the Defaulting Party fails to cure and rectify in all
material respects the effect and consequences of such Default to the reasonable
satisfaction of the Terminating Party ("Cure") within thirty (30) days after its
receipt of such Default Notice; Ruled, that if such Defaulting Party shall
within such thirty (30) day period commence action to Cure such failure but is
unable, by reason of the nature of the performance required, to Cure same within
such period, and if such Defaulting Party continues such action thereafter
diligently and without unnecessary delays, such Defaulting Party shall not be in
default hereunder until the expiration of a period of time as may be reasonably
necessary to C ire such failure; provided, further, that extending the Cure
period will not have a Material Adverse Effect on the Terminating Party and
provided, further, that in all events such Cure shall be completely effectuated
no later than the sixtieth (60th) day after the receipt by the Defaulting Party
of the Default Notice.
(c) Arbitration of Disputes. Any dispute, controversy or claim
arising out of, or in connection with, or relating to, whether a Default exists
or whether a Default has been Cured in accordance with this Section 10(b) shall,
upon the request of any party involved, be submitted to, and settled by, binding
arbitration. All arbitration proceedings conducted pursuant to this Section
10(b) shall be administered by the office of the American Arbitration
Association ("AAA") in Wilmington, Delaware (or, if such office has ceased to
exist as of the time arbitration is demanded, the AAA office geographically
closest to Wilm4ington, Delaware), and all hearings shall be held in Wilmington,
Delaware; provided, that the parties involved in such dispute may at any time
agree to settle such dispute, controversy or claim by any other form of dispute
resolution (including mediation or another form of arbitration) that is mutually
acceptable.
(i) Procedure. Arbitration proceedings shall be
conducted in accordance with the commercial arbitration rules of the
AAA in force as of the date demand for arbitration is made, with the
following exceptions if in conflict:
(A) Single Arbitrator. If, within 10 days
of the date demand for arbitration is made, the two parties
thereto are able to agree upon the appointment of a single
person as the arbitrator, the person so agreed upon
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<PAGE>
shall be appointed as the sole arbitrator and notice of such
appointment shall be given to the AAA by the parties.
(B) Arbitration Panel. In the event the
parties are unable to agree upon the appointment of a single
arbitrator as provided in Section 1O(c)(i)(A) hereof, then,
within 15 days of the date demand for arbitration is made,
each party shall appoint one member of an arbitration panel
(each such member being refereed to herein as a
"Party-Appointed Arbitrator") and, within 30 days of the date
demand for arbitration is made, such Party-Appointed
Arbitrators shall appoint a third arbitrator who shall serve
as the chair of the arbitration panel. In the event the
Party-Appointed Arbitrators are unable within such 30 day
period to appoint a third arbitrator, the commercial
arbitration rules referred to in Section 1O(c)(i) shall govern
the appointment of the third arbitrator. In the event a party
fails or neglects to appoint such party's Party-Appointed
Arbitrator within the time period set forth in this
subsection, such Party shall be deemed to have consented to
the selection of the other party's Party-Appointed Arbitrator
as the sole arbitrator for the arbitration proceeding.
(C) Arbitration Decisions. If there is a
single arbitrator, the decisions and awards of such arbitrator
shall be binding. In the event a panel of arbitrators is
conStituted, the decisions and awards of a majority of the
arbitrators on the panel shall be binding. As hereinafter
used, the term "arbitrator" refers either to a single
arbitrator or to an arbitration panel, as the case may be.
(D) Costs. During the pendency of any
arbitration proceeding, the cost and fees of such proceeding
-- other than the attorney's fees incurred by each of the
parties in connection with such proceeding, which shall be the
independent responsibility of such party -- shall be shared
equally by the Parties. However, as pan of the final award or
any interim award agreed to by the parties or found by the
arbitrator to be final for confirmation and enforcement
purposes, the prevailing party shall be entitled to recover
the costs and fees of the arbitration proceeding, other than
attorneys' fees as provided above.
(E) Discovery. The discovery provisions of
the Delaware Rules of Civil Procedure in effect as of the
date demand for arbitration is
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made shill govern the conduct of discovery in any arbitration
proceeding commenced hereunder.
(F) AAA Rules. Arbitration may proceed in
the absence of any party if written notice (pursuant to the
AAA's rules and regulations) of the proceedings has been
given to such party.
(ii) Binding Effect of Arbitration. The parties to
this Agreement agree to abide and be bound by all decisions and awards
rendered by the Arbitrator. judgment upon such decisions and awards may
be entered in any court of competent jurisdiction.
(iii) All Disputes Subject to Arbitration. Claims or
disputes governed by this Section 10(c) shall be resolved in the manner
set forth herein, in lieu of any action at law or equity. Except as
otherwise provided herein, this arbitration clause constitutes an
explicit waiver of defenses against enforcement and execution of any
judgment on the arbitrators' award; provided, the parties shall not be
deemed to have waived defenses based upon: (A) fraud or corruption in
the procuring of an award, (B) misconduct on the part of an arbitrator,
or (C) action by an arbitrator in excess of his authority Defenses
relating to the validity of scope of this arbitration clause will be
deemed waived unless raised during arbitration. The arbitrators'
decision regarding any issue, controversy, dispute, claim or
counterclaim involving the validity or scope of this arbitration clause
shall be final and binding upon the parties.
(d) Procedure and Effect of Termination
(i) In the event of termination of this Agreement by either or
both of First Union or ACCH pursuant to Section 10(a), prompt written
notice thereof shall forthwith be given to the other parties hereto and
this Agreement shall terminate without other action by any party
hereto; provided, that the obligations of ACCH (A) to make payments for
Funded Referrals made during the previous calendar month as required by
Section 7(a), (B) to make such reports as required by Section 7(c) and
(C) to indemnify First Union as provided in Section 11(a) and the
obligations of First Union to indemnify ACCH as provided in Section
11(b) shall survive. If this Agreement is terminated as provided in
Section 10(a), all information received by a party hereto with respect
to the business of the other party or its affiliates or divisions
(other than information which is a matter of public knowledge at the
time of disclosure to the other party or which has been disclosed to
the general public by mutual agreement of the parties or which is
required to be filed as public information
20
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with any Governmental Authority or stock exchange, or which is required
to be disclosed by Law (but only to the extent that such disclosure is
required)) shall not at any time be used for the advantage of, or
disclosed to third parties by, such party for any reason whatsoever.
(ii) Notwithstanding anything to the contrary in this
Agreement, other than Section 10(b), if either ACCH or First Union is
in default, breach or noncompliance in any respect of its
representations, warranties, covenants or agreements under this
Agreement (and such default, breach or noncompliance remains un-Cured
in accordance with Section 10(b)), then and in that event, such other
patty shall have the right to seek all remedies available to it as
provided hereunder or at law Or equity.
(iii) In addition to such continuing obligations
described above in this Section 10(d), the termination of this
Agreement shall not discharge any party hereto from any obligation
which it owes to the other party immediately prior to or as a result of
such termination.
Section 11. Indemnification.
(a) Indemnification by ACCH. ACCH shall indemnify and bold
harmless First Union, each of its successors and all officers, directors,
shareholders, employees and agents of First Union from and against any loss,
liability, expense, damage or injury suffered or sustained by reason of any
claim or other action brought by any third party and arising out of any acts,
omissions or alleged acts or omissions which constitute a breach by ACCH of any
of its representations, warranties and covenants hereunder, including any
judgment, award, settlement, reasonable attorneys' fees and other costs Or
expense incurred in connection with the defense of any actual or threatened
action, proceeding or claim; provided, that no indemnification shall be required
under this Section 11(a) if such acts, omissions or alleged acts or omissions
constitute fraud, gross negligence or willful misconduct by First Union. Any
indemnification under this Section 11(a) shall survive the termination of this
Agreement.
(b) Indemnification by First Union. First Union shall
indemnify and hold harmless ACCH, each of its successors and all officers,
partners, shareholders, directors, employees and agents of ACCH from and against
any loss, liability, expense, damage or injury suffered or sustained by reason
of any claim or other action brought by any third party and arising out of any
acts, omissions or alleged acts or omissions which constitute a breach by First
Union of any of its representations, warranties and covenants hereunder,
including
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<PAGE>
any judgment, award, settlement, reasonable attorneys' fees and other costs or
expense incurred in connection with the defense of any actual Or threatened
action, proceeding or claim; provided, that no indemnification shall be required
under this Section 11(b) if such acts, omissions or alleged acts or omissions
constitute fraud, gross negligence or willful misconduct by ACCH. Any
indemnification under this Section 11(b) shall survive the termination of this
Agreement.
Section 12. Assignment. This Agreement and all of the provisions hereof
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and permitted assigns, but neither this Agreement nor any
of the rights, interests or obligations hereunder shall be assigned by either
First Union or ACCH without the prior written consent of the other party. Any
attempted assignment by one party without the prior written consent of tile
other party shall be null and void; provided, that ACCH shall be entitled to
assign this Agreement to NAFCO (without the consent of First Union), provided
that NAFCO assumes all of the obligations of ACCH under this Agreement arising
from and after such assignment and NAFCO shall be prohibited under this Section
12 from making any subsequent assignment without the prior written consent of
First Union; provided, further, that ACCH shall be entitled to assign this
Agreement as provided in Section 5.10 of the Second Amended and Restated
Partnership Agreement of NAFCO, as in effect on the date hereof.
Section 13. Miscellaneous.
(a) Entire Agreement. This Agreement embodies the entire
agreement and understanding of the parties hereto in respect of the subject
matters hereof. This Agreement supersedes all prior negotiations, agreements and
understandings between the parties with respect to the subject matters hereof
and all letters of intent and other writings relating to such negotiations,
agreements and understandings.
(b) Notices. Any notice, demand or request required or
permitted to be given under the provisions of this Agreement shall be in writing
and delivered personally, by facsimile, reputable overnight courier service or
by registered or certified mail to the following addresses, or to such other
address as any patty may request by notifying the other parties hereto:
22
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To First Union:
To each of the individuals listed below:
Marion A. Cowell, Jr., Esq.
First Union Corporation
Legal Division
301 South College Street, Tw-40
Charlotte, N.C. 28288-0630
Telephone: (704) 374-6828
Facsimile: (704) 374-3105
Betty T. Trautwein
Mark A. Roberts
First Union National Bank
Sales Finance Division, NC-0374
8740 Research Dr., 2d Floor
Charlotte, N.C. 28262
Telephone: (704) 593-3001
Facsimile: (704) 593-3099
Reginald H. Imamura
First Union Capital Markets Corp.
Asset Securitization Division
301 5. College St., TW-10
Charlotte, N.C. 28288-0610
Telephone: (704) 374-6501
Facsimile: (704) 374-3254
To ACCH:
Gary L. Shapiro
One Park Place, 3rd Floor
621 NW 53rd Street
Boca Raton, Florida 33487
Telephone: (407) 241-7790
Facsimile: (407) 241-7797
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Keith B. Stein
One Park Avenue, 12th Floor
New York, New York 10016
Telephone: (212) 545-2446
Facsimile: (212) 545-2448
Steve Stack
One Park Place, Suite 390
621 NW 53rd Street
Boca Raton, Florida 33487
Telephone: (800) 856-6190
Facsimile: (800) 856-6192
Bill Magro
One Park Place, Suite 390
621 NW 53rd Street
Boca Raton, Florida 33487
Telephone: (800) 856-6190
Facsimile: (800) 856-6192
(c) Waiver. The failure of any party at any time to insist
upon strict performance of any promise, agreement, or understanding set forth in
this Agreement shall not be construed as a waiver or relinquishment of the right
TO insist upon strict performance of the same or any other promise, agreement,
or understanding at a future time.
(d) Covenant of Further Assurances. Each party shall execute
and deliver such farther instruments and do such further acts and things as may
be reasonably required to carry out the intent and purposes of this Agreement.
(e) Rights of Third Parties. Nothing herein shall be
construed to be to the benefit of or enforceable by any Person other than the
parties hereto.
(f) Severability. If any provision of this Agreement or its
application to any party or circumstances shall be determined by any court of
Competent jurisdiction to be invalid and unenforceable to any extent, the
remainder of this Agreement, or the application of such provision to Persons or
circumstances other than those as to which it is so determined invalid or
unenforceable, shall not be affected thereby, and each provision hereof shall be
valid and shall be enforced to the fullest extent permitted by law.
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<PAGE>
(g) GOVERNING LAW. THIS AGREEMENT SHAI1 BE GOVERNED BY THE
LAWS OF THE STATE OF DELAWARE (WITHOUT REGARD TO ITS LAWS PERTAINING TO
CONFLICTS OF LAW) AS TO ALL MATTERS, INCLUDING BUT NOT LIMITED TO MATTERS OF
VALIDITY, CONSTRUCTION, EFFECT, PERFORMANCE AND REMEDIES EACH OF THE PARTIES
HERETO AGREES THAT (A) THIS AGREEMENT INVOLVES AT LEAST $100,000, AND (B) THIS
AGREEMENT HAS BEEN ENTERED INTO BY THE PARTIES IN EXPRESS RELIANCE UPON 6 DEL.
C. ss. 2708.
(h) Amendment and Modification. This Agreement may be
amended, modified or supplemented only by written agreement of First Union and
ACCH.
(i) Headings. The headings are for convenience only and shall
not affect the meaning or construction of this Agreement.
(j) Construction. Common nouns and pronouns and any variations
thereof shall be deemed to refer to masculine, feminine or neuter, singular or
plural, as the identity of the Person, Persons or other reference in the context
requires whenever used herein; the adjective "any" with respect to a Person,
act, thing or concept shall mean and refer to one or more of such Persons, acts,
things or concepts; and "including" shall be read to mean "including without
limitation." The illustration of a concept herein by including examples thereof
shall not be Construed as a limitation of such concept to the examples given.
Unless otherwise indicated, Section" means and refers to the referenced section
of this Agreement. Words such as "herein, "hereby," "hereinafter," "hereof,"
"hereto," and "hereunder" refer to this Agreement as a whole, unless the context
requires otherwise.
(k) Counterparts. This Agreement may be executed in
counterparts, each of which, when so executed, shall be deemed an original, and
all such Counterparts together shall constitute one and the same instrument.
(l) No Partnership. The parties hereto do not intend by this
Agreement to create a joint venture, partnership or other entity or any agency
or representative relationship between or among the parties, and no party hereto
shall make any representatIons (written or otherwise) that implies or suggests
that any such relationship exists.
(m) First Union as Ant. First Union National Bank of North
Carolina hereby represents and warrants that it is the duly authorized agent of
its national banking affiliates (the "Affiliate Banks") for purposes of this
Agreement and that, as of the date hereof, such Affiliate Banks shall include
First Union National Bank of Georgia, First Union
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<PAGE>
National Bank of Florida, First Union National Bank of South Carolina, First
Union National Bank of Tennessee, First Union National Bank of Virginia, First
Union National Bank of the District of Columbia, First Union National Bank of
Maryland and First Union National Bank (f/k/a First Fidelity Bank, N.A.). First
Union National Bank of North Carolina, in its individual capacity and as agent
for the Affiliate Banks, represents and warrants that it is entitled to accept
all payments from ACCIl hereunder, give all consents and waivers and make all
amendments hereunder and conduct all business under this Agreement on behalf of
itself and its Affiliate Banks.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
signed by their duly authorized officers as of the date first above written.
"FIRST UNION"
FIRST UNION NATIONAL BANK OF
NORTH CAROLINA, in its individual
capacity and as agent and
attorney-in-fact for the Affiliate
Banks described in Section 13(m)
By:
Name: Mark Roberts
Title: Vice President
"ACCH"
AUTO CREDIT CLEARINGHOUSE L.P.
By: National Auto Finance
Corporation, General Partner
By:
Name:
Title:
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<PAGE>
ACCH REFERRAL CONTRACT
THIS REFERRAL CONTRACT ("Agreement") is made as of this 14th day November, 1996,
by and between Community Bank ("BANK"), a corporation and Auto Credit
Clearinghouse L.P. ("ACCH"), a limited partnership.
WITNESSETH:
WHEREAS, ACCH engages in the business of purchasing, securitizing and servicing
non-prime motor vehicle retail installment contracts originated by automobile
dealers and/or BANKS;
WHEREAS, BANK receives credit applications of borrowers from automobile dealers
and makes loans to approved borrowers but generally does not finance non-prime
motor vehicle retail installment contracts;
WHEREAS, BANK desires to refer to ACCH motor vehicle credit applications that it
declines (and introduce ACCH to those Dealers in their trading area for whom
BANK provides consumer financing in exchange for a fee based on the number of
loans made by ACCH with respect to the credit applications and Dealers BANK
refers or introduces to ACCH; and
WHEREAS, ACCH desires to receive such referrals and introductions and to pay
such fee, all on the terms and conditions provided herein.
NOW THEREFORE, in consideration of the foregoing premises and the mutual
agreements and covenants contained herein, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto1 intending legally to be bound, hereby agree as follows:
Section 1. Definitions.
The following terms used in this Agreement shall have the meanings set
forth in this Section:
"Affiliate" of a specified person means any other person who (i)
directly or indirectly controls, is controlled by, or is under common
control with, such specified person; (ii) owns or controls either ten
percent (10%) or more of the outstanding voting stock or other voting
equity or beneficial interests of such specified person or twenty
percent (20%) or more of the value of the total outstanding stock or
other equity securities of such specified person determined on a fully
diluted basis; (iii) is an officer, director, general partner, trustee,
manager, administrator, representative or agent of such specified
person; or (iv) is an officer, director, trustee, manager,
administrator, representative or agent or owns or controls ten percent
(10%) or more of the outstanding voting interests of such other person
described in clause (i), (ii) or (iii) of this sentence, except that
neither BANK (or any of its Affiliates) nor ACCH (or any of its
Affiliates) shall be considered an Affiliate of such other party (or
the Affiliates of such other party). For purposes of the preceding
sentence, "control" of a person means possession, directly or
indirectly (through one or more intermediaries), of the power to direct
or cause the direction of management and policies of such person
through ownership of voting securities (or other ownership interests),
contract voting trust or otherwise.,
"Application" means either a ACCH Auto Application or BANK
Application. "Applications means both ACCH Applications and BANK
Applications.
"Business Day" means any day other than Saturday, Sunday or any other
day on which national banking associations in the State of Florida or
California generally are closed for commercial banking business.
<PAGE>
"C Applications" means those BANK Applications that BANK declines to
accept and or fund.
"BANK Application" means a loan or lease application by a potential
purchaser (or lessee) of a Motor Vehicle that is submitted to BANK by a
Dealer for financing of such Motor Vehicle.
"Dealer" means any Motor Vehicle dealer in California or in such other
states as the parties hereto may mutually agree, from whom, as of the
date hereof BANK, purchases Motor Vehicle retail installment contracts
or receives customer credit applications.
"Direct Referral" means any loan which is actually made and funded by
ACCH with respect to which a BANK Application was received by BANK (and
not funded by the Bank) and referred to ACCH for such loan.
"GAAP" means generally accepted accounting principles, conventions,
rules and procedures in the United States set forth in the opinions and
pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board (or any
successor organization) that are applicable to the circumstances as of
the date of determination.
"Governmental Authority" means any foreign, federal, state or local
government, political subdivision or governmental or regulatory
authority, agency, board, commission, instrumentality or court or
quasi-governmental authority.
"Implementation Period" means the first 180 days after the date hereof.
"National Auto Application" means a loan or lease application by a
potential purchaser (or lessee) of a Motor Vehicle that is submitted
directly to ACCH by a Dealer for financing of such Motor Vehicle.
"Imputed Referral" means (i) any loan which is actually made and funded
by ACCH to which a National Auto Application for such loan was received
by BANK and referred to ACCH and (ii) any other loan (other than loans
attributable to BANK Applications) sold or refinanced by a Dealer to
ACCH.
"Law" or "Laws" means any or all federal, state or local statutes,
laws, codes, ordinances, judicial decisions, proclamations,
interpretive releases, regulations, published requirements, orders,
judgments, decrees and rules of any Governmental Authority, in each
case as amended and in effect from time to time.
"Licenses" means all material licenses, permits and other
authorizations issued by any Governmental Authority to ACCH which are
used or useful in the ACCH Program.
"Material Adverse Effect" means, with respect to a particular Person, a
material adverse change, effect or development (or any change, effect
or development that could reasonably likely have a material adverse
effect) on the assets, business, revenues, expenses, operations,
condition (financial or otherwise), or prospects or ability to perform
under or with respect to the material contracts (including, for the
parties hereto, this Agreement) of the specified Person.
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"Motor Vehicle" means any automobile, sport utility vehicle or light
duty truck.
"Person" means an individual, corporation, association, partnership,
joint venture, trust, estate, limited liability company, limited
liability partnership, Governmental Authority or other entity or
organization.
"Referral" means any Imputed Referral or Direct Referral.
"ACCH Program" means the program of ACCH by which ACCH or any of its
Affiliates solicits and evaluates Applications and provides (or causes
to be provided) financing; constituting Referrals hereunder, to Dealers
and their customers for the purchase or lease of motor vehicles, and
the marketing, training and other activities described herein related
to such financing.
Section 2. Referrals.
Subject to the terms and conditions set forth in this Agreement, (a)
BANK (i) shall refer to ACCH all C Applications, which by their terms
may be so referred and (ii) may, in its sole discretion, refer any
other BANK Application that it declines, and (b) ACCH shall pay to BANK
the sum of $125 if amount financed is below $10,000 or 1.5% of amount
financed if amount financed is $10,000 or higher for each Referral made
which is actually closed and funded by ACCH. Notwithstanding anything
to the contrary set forth in this Agreement, ACCH may in its sole and
absolute discretion choose not to accept any particular Referral, and
nothing in this Agreement shall be construed to impose any funding
requirement on ACCH.
Section 3. No Indirect Financing.
The parties hereto intend that all loans made and purchased with
respect to a Referral shall be made by ACCH and purchased directly by
ACCH from the Dealers or the Dealers' customers, as the case may be,
and shall not be refinanced or purchased from BANK or any of its
Affiliates, nor shall such loans in any way be characterized as being
refinanced or purchased from BANK or any of its Affiliates.
Section 4. No Recourse.
All Referrals, and any loans made and purchased by ACCH, and any of its
Affiliates, shall be without recourse to BANK or any of its Affiliates,
and BANK and its Affiliates shall not have any obligation or liability
that is in any way related to such Referrals, loans; provided, however,
that the parties hereto shall be liable to each other for breach of
their respective representations, warranties, covenants and indemnities
under the terms of this Agreement; provided, further, that the
obligations of BANK under this Agreement shall not constitute recourse
to BANK for the credit risk of any loan made or purchased by ACCH or
any Affiliate of ACCH.
Section 5. Representations and Warranties of ACCH.
ACCH represents and warrants to BANK as follows:
A. Organization and Standing. ACCH is a limited partnership duly
organized, validly existing and in good standing under the laws
of the State of California and is duly qualified in each
jurisdiction where the conduct of the ACCH Program requires such
qualification.
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B. Authorization and Binding Obligation. ACCH has full power and
authority to execute and deliver this Agreement and to perform and
comply with all terms, covenants and conditions to be performed and
complied with by ACCH hereunder. The execution, delivery and
performance of this Agreement by ACCH has been duly and validly
authorized by all necessary action on the part of ACCH. This
Agreement has been duly and validly executed and delivered by ACCH
and constitutes a legal, valid and binding agreement of ACCH
enforceable against ACCH in accordance with its respective terms,
except as the same may be limited by bankruptcy, insolvency,
reorganization, moratorium and other similar laws and related court
decisions of general applicability relating to or affecting
creditors' rights generally and by the application of general
principles of equity.
C. Consents and Approvals; No Violation.
(i) There is no requirement applicable to ACCH that has not been
previously satisfied without qualification to make any filing
with, or to obtain any permit, authorization, consent or
approval of, any Governmental Authority or other Person (A) in
connection with the ACCH Program or (B) to maintain the
continuing validity and effectiveness of (and to prevent any
default under or violation of) any License from and after the
date hereof.
(ii) The execution, delivery and performance of this Agreement by
ACCH will not (A) violate, conflict with or result in any
breach of any provision of the organizational documents of
ACCH, (B) violate, conflict with or result in a breach or
default (or give rise to any right of termination,
cancellation or acceleration) under any of the terms,
conditions or provisions of any note, bond, mortgage, deed of
trust, agreement, indenture, lease or other instrument or
obligation to which ACCH is a party or by which any of its
assets may be bound, or(C)violate or conflict with, in any
material respect, any Law, order, writ, injunction, rule or
decree applicable to ACCH or any of is assets.
D. Governmental Authorizations. All authorizations, consents,
orders and approvals of, or other action by, any Governmental
Authority that are required to be obtained by ACCH, and all notices
to and filing with any Governmental Authority that are required to
be made by ACCH, including in the case of each of the foregoing
those pertaining to the ACCH Program and the execution of this
Agreement, have been obtained or made and are in full force and
effect, except where the failure to obtain or to make any such
authorization, consent, order, approval, notice or filing,
individually or in the aggregate for all such failures, would have
a reasonable likelihood of having a Material Adverse Effect on
ACCH. ACCH is the authorized legal holder of the Licenses, none of
which is subject to any restriction or condition which could
materially adversely affect the ACCH Program. The Licenses are
valid for the full term thereof, are in good standing and full
force and effect and are not subject to any liens, encumbrances,
charges or other claims. ACCH has not engaged, and does not
engage, in any activity which could cause the revocation or
suspension of any License.
E. Compliance with Laws. The operations of the ACCH Program are in
compliance in all respects with all Licenses and all applicable
Laws, except to the extent that any such non-compliance,
individually or in the aggregate, could not have a Material Adverse
Effect on ACCH or the ACCH Program.
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<PAGE>
F. Litigator. Except in the ordinary course of the recovery of
obligations of third parties to ACCH, no action, suit, litigation,
arbitration, dispute, proceeding, governmental investigation or
governmental audit is pending against, or to the knowledge of ACCH
is threatened against, ACCH or any of its assets or businesses that
is reasonably likely to have a material adverse effect on the
obligations contemplated by this Agreement, and to the knowledge of
ACCH, there is no basis therefore.
Section 6. Representations and Warranties of BANK.
BANK represents and warrants to ACCH as follows:
A. Organization and Standing. BANK is a corporation duly organized,
validly existing and in good standing under the laws of the State
of California.
B. Authorization and Binding Obligation. BANK has full corporate
power and authority to execute and deliver this Agreement and to
perform and comply with all terms, covenants and conditions to be
performed and complied with by it hereunder. The execution,
delivery and performance of this Agreement by BANK have been duly
and validly authorized by all necessary corporate action on the
part of BANK. This Agreement has been duly and validly executed
and delivered by BANK and constitutes a legal, valid and binding
agreement of BANK, enforceable against BANK in accordance with its
terms, except as the same may be limited by bankruptcy, insolvency,
reorganization, moratorium and other similar laws and related court
decisions of general applicability relating to or affecting
creditors' rights generally and by the application of general
principles of equity.
Section 7. Covenants of ACCH.
So long as this Agreement remains in effect, ACCH shall perform and
comply with the covenants contained in this Section.
A. Payment. Each month, ACCH shall pay to BANK the sum of $126.00
if amount financed is below $10,000 or 1.5% of amount financed if
amount financed is $10,000 or higher for each Referral which is
actually closed and funded during the previous month.
B. Training. ACCH shall provide initial and on-going training to
BANK sales representatives with respect to the marketing of the
ACCH Program.
C. Reports. ACCH shall maintain true and complete books and records
of account in accordance with GAAP and shall comply with the
following delivery and notice requirements:
(i) ACCH shall maintain and implement, or cause to be maintained
maintained and implemented, administrative and operating
procedures (including records evidencing its loans and all
Applications reviewed by it) and shall keep and maintain, or
cause to be kept and maintained, all documents, books,
records and other information which, in the reasonable
determination of BANK, are necessary or advisable to
monitor the results of
the ACCH Program. BANK shall maintain or cause to be
maintained at all times, accurate and complete books, records
and
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<PAGE>
accounts relating to the ACCH Program, including all loans,
Applications and Referrals in which timely entries shall be
made.
(ii) Each week, ACCH shall furnish to BANK (a) the number of BANK
of BANK Applications delivered to ACCH, (b) the number of
BANK Applications approved by ACCH, (c) the number of Direct
Referrals, (d) the number of Imputed Referrals, (e) the
number and names of motor vehicles dealers who have
become Dealers during the previous week and (f) such
other information as BANK may reasonably request.
(iii) As soon as possible and in any event within five Business
Days after an executive officer, member or partner of ACCH
has knowledge thereof, ACCH shall give BANK written notice
of (a) any litigation, investigation or proceeding pending
or to the best knowledge of ACCH, threatened by or against
ACCH or any Affiliate in connection with or related to the
ACCH Program at law or in equity, or before any Governmental
Authority; (b) any judgment, settlement or other final
disposition with respect to any such previously disclosed
litigation, investigation or proceeding; and (c) of any
action or event constituting an event of default or
violation of any License or material contract to which
either ACCH or any Affiliate of either is a party or by
which any of them is bound, or any investigation,
assertion, claim or challenge relating thereto.
(iv) ACCH will keep its principal place of business and the
the offices where it keeps all records described in this
Section 7(c) at the address given in Section 13(B).
D. Information and Inspection. ACCH shall furnish to BANK from time
to time, upon written request, such reasonable information
requested by BANK pertaining to any covenant, provision or
condition hereof. At all reasonable times, ACCH shall permit any
authorized representatives designated by BANK to visit and inspect,
conduct accounting reviews of, any of the properties of ACCH and
their books and records (including those pertaining to the ACCH
Program), and to take abstracts therefrom and make copies thereof,
and to discuss ACCH's affairs, finances and accounts with the
management, employees and independent accountants of ACCH,
provided, however, that neither BANK nor any of its
representatives shall conduct any such inspection more than
semi-annually.
E. Compliance with Laws. ACCH shall comply in all respects with all
Licenses and all applicable Laws (including, without limitation,
all applicable commercial consumer Laws), except to the extent that
any such non-compliance, individually or in the aggregate, could
not have a Material Adverse Effect on ACCH.
F. Regulatory Compliance. If BANK reasonably determines that, by
reason of any future federal or state rule, regulation, guideline,
order, interpretive release, ruling, request, or directive (having
the force of law and where the failure to comply therewith would be
unlawful) (collectively, a "Regulatory Requirement"), it is
effectively restricted or prohibited from performing its
obligations or exercising its rights hereunder, ACCH shall take
such action as may be deemed reasonably necessary by BANK to
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<PAGE>
permit ACCH to comply with such Regulatory Requirement or ACCH
shall be entitled to terminate this Agreement by sending written
notice to BANK.
G. Performance and Compliance with Referrals, Receivables and
Applications. ACCH will, at its expense, timely and fully perform
and comply with all provisions, covenants and other promises
required to be observed by it under this Agreement, the
Applications, the Referrals and all contracts with respect to which
it is a party related to the Referrals, the breach of which
provisions, covenants or promises would have a reasonable
likelihood of having a Material Adverse Effect on ACCH.
H. Accuracy of Information. All written information furnished on and
after the date hereof by ACCH to BANK pursuant to or in connection
with this Agreement or any transaction contemplated herein shall
not contain any untrue statement of a material fact or omit to
state material facts necessary to make the statements made and
other information provided not misleading, in each case on the date
such statement was made and in light of the circumstances under
which such statements were made or such information was furnished.
I. Other Information. Promptly from time to time ACCH shall provide
BANK (a) such other information, documents, records or reports
respecting the Applications, Referrals and the ACCH Program or (b)
such other available information respecting the condition or
operation of ACCH in each case as BANK may from time to time
reasonably request in order to protect its interests under or as
contemplated by this Agreement.
J. Exclusivity. Whereas, ACCH agrees to a one year exclusive
territory right to BANK. Territory boundary is defined as all
dealers within a two hundred mile radius of Pasadena, California.
Section 8. Covenants of BANK.
So long as this Agreement remains in effect, BANK shall perform and
comply with the covenants contained in this Section.
A. Referral of Applications. BANK:
(i) shall refer to ACCH all "C" Applications as previously
defined, which by their terms may be so referred.
(ii) may, in its sole discretion, refer any other BANK
Applications that BANK has declined.
B. Marketing. BANK shall market the ACCH Program as part of its
general marketing efforts to Motor Vehicle dealers.
C. Records and Reports. BANK shall maintain complete and accurate
records of all applications received and all applications referred
to ACCH. BANK will, upon request by ACCH, promptly furnish a copy
of such records. BANK shall furnish to ACCH such information
concerning dealer's financial and business affairs as ACCH may
request.
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Section 9. Joint Covenants of SANK and ACCH.
So long as this Agreement remains in effect, BANK and ACCH shall use
their best efforts to cooperate in performing and complying with the
covenants contained in this Section.
A. BANK and ACCH shall determine a plan for phased implementation
of the ACCH Program during the Implementation Period, including
without limitation, the introduction of the ACCH Program in each
office, branch, center and Affiliate of BANK.
B. BANK and ACCH shall determine the order of priority of Dealers to
whom BANK sales representatives should be introduced.
C. BANK and ACCH shall develop incentive programs, special
promotions and related sales and marketing devices, as appropriate,
relating to the ACCH Program.
D. BANK and ACCH shall develop and publish specific guidelines,
policies and procedures, as appropriate, governing the operation of
the ACCH Program.
E. BANK and ACCH shall approve changes, as appropriate, to published
guidelines, policies and procedures governing the operation of the
ACCH Program.
F. The parties hereto acknowledge that they have had, and may in the
future have, access to certain confidential and proprietary written
information of the other in connection with or related to the ACCH
Program, and such information constitutes valuable, special and
unique property of the parties and shall be deemed to be
confidential. This written information may only be used in the
provision of services under this Agreement. The parties hereto
agree that they will not, for any reason or purpose whatsoever, use
or allow to be used any such written information or reveal or
disclose any such written information to any Person other than the
parties hereto and those agents, employees and representatives
thereof to the extent that access to such written information is
necessary for a particular agent, employee and representative to
perform such functions contemplated by this Agreement (who shall
also agree not to disclose such written information except as
permitted by this Section 9F, except (i) as expressly consented to
by all of the other parties, (ii) as required by Law, or (iii) is
or becomes generally available to the public under circumstances
which do not involve a breach of the terms hereof. Without limiting
the generality of the foregoing provisions of this Section 9F, no
party hereto shall issue a press release or make other public (or
private) disclosure regarding the ACCH Program, without the written
consent of the other parties hereto.
Section 10. Termination of Agreement.
A. Termination. The term (the "Term") of this Agreement shall be
for an initial period of three years from the date hereof,
renewable by ACCH with the written consent of BANK on or before
each anniversary of the date hereof for additional one year terms
thereafter, except that this Agreement shall be terminated prior
thereto upon the happening of any of the following events:
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(i) at any time by mutual written consent of BANK and ACCH;
(ii) by BANK, if ACCH is in default, breach or noncompliance in
any respect of its representations, warranties, covenants or
agreements under this Agreement and ACCH fails to cure such
default, breach or noncompliance after the expiration of
thirty days after written notice is received by ACCH from
BANK;
(iii) by ACCH if BANK is in default, breach or noncompliance in
any respect of its representations, warranties, covenants or
agreements under this Agreement and BANK fails to cure such
default, breach or noncompliance after the expiration of
thirty days after written notice is received by BANK from
ACCH;
(iv) if either party makes an assignment for the benefit of
creditors or admits in writing its inability to pay its debts
when due, or if any liquidation, dissolution, bankruptcy,
reorganization, insolvency, or other proceeding for the
relief of financially distressed debtors is commenced by or
against such party, or a receiver, liquidator, custodian or
trustee is appointed for such party or a substantial part of
such party's assets (but if any of the foregoing occurs
involuntarily, dissolution shall not occur unless the same is
not dismissed, stayed or discharged within ninety (90) days,
or if an offer for relief is entered against such party under
Title 11 of the United States Code;
(v) if ACCH determines that, by reason of any Regulatory
Requirement, it is effectively restricted or prohibited
from performing its obligations or exercising its rights
hereunder, following BANK's exercise of its best efforts to
overcome such Regulatory Requirement.
B. Procedure and Effect of Termination.
(i) In the event of termination of this Agreement by either
or both of BANK and/or ACCH pursuant to Section 10A (except
for termination as a result of the expiration of the Term, in
which case this Agreement shall terminate without any further
action), prompt written notice thereof shall forthwith be
given to the other party and this Agreement shall terminate
without further action by either party hereto; provided,
however, that the obligations of ACCH (a) to make payments
for Referrals made during the previous month as required by
Section 7A and B to make such reports regarding the previous
month as required by Section 7C shall survive. If this
Agreement is terminated as provided in Section 10A, all
written information received by a party hereto with respect
to the business of the other party or its Affiliates or
divisions (other than information which is a matter of public
knowledge at the time of disclosure to the other party or
which has been disclosed to the general public by mutual
agreement of the parties or which is required to be filed as
public information with any Governmental Authority) shall not
at any time be used for the advantage of, or disclosed to
third parties by, such party for any reason whatsoever.
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(ii) Notwithstanding anything to the contrary in this Agreement,
if either party is in default. breach or noncompliance in any
material respect of its representations, notice, warranties,
covenants or agreements under this Agreement (and such party
fails to cure such default, breach or noncompliance within
the cure period set forth in Section 10A), then and in that
event, the other party shall have the right to seek all
remedies available to it as provided hereunder or at law or
equity.
(iii) In addition to such continuing obligations described above
in this Section 10B, the termination of this Agreement shall
not discharge any party hereto from any obligation which it
owes to the other parties immediately prior to or as a result
of such termination.
Section 11. Indemnification.
ACCH shall indemnity and hold harmless BANK, each of its successors and
all officers, directors, shareholders, employees and agents of BANK and
its Affiliates from and against any loss, liability, expense, claim,
damage or injury suffered or sustained by reason of any acts, omissions
or alleged acts or omissions arising out of activities of ACCH pursuant
to this Agreement arising out of or based on the arrangement created by
this Agreement and the activities of any such Persons taken pursuant
thereto, including any judgment, award, settlement, reasonable
attorneys' fees and other costs or expense incurred in connection with
the defense of any actual or threatened action, proceeding or claim or
if any party to a Referral of a C Application by BANK alleges any
actual or threatened action, proceeding or claim against BANK alleging
that the execution of this Agreement as of the date first above written
is in violation of any state or federal statutes, laws or regulations
affecting the validity of this Agreement; provided, however, that no
indemnification shall be required under this Section 11 if such acts,
omissions or alleged acts or omissions constitute violations of Law,
fraud, gross negligence or willful misconduct by BANK or its
Affiliates; and provided, further, that no indemnification shall be
required for any liabilities, cost or expense of BANK and its
Affiliates with respect to any federal, state or local income or
franchise taxes (or any interest or penalties with respect thereto)
required to be paid by BANK or any of its Affiliates in connection
herewith to any taxing authority. Any indemnification under this
Section 11 shall survive the termination of this Agreement.
Section 12. Assignment.
This Agreement and all of the provisions hereof shall be binding upon
and inure to the benefit of the parties hereto and their respective
successors and permitted assigns, but neither this Agreement nor any of
the rights, interests or obligations hereunder shall be assigned by
BANK without the prior written consent of ACCH. ACCH shall be entitled
to assign this Agreement without the consent of BANK Any attempted
assignment by BANK without the prior written consent of ACCH shall be
null and void.
Section 13. Miscellaneous.
A. Entire Agreement. This Agreement embodies the entire agreement
and understanding of the panties hereto in respect of the subject
matters hereof. This Agreement supersedes all prior negotiations,
agreements and understandings between the parties with respect to
the subject matters hereof and all letters of intent and other
writings relating to such negotiations, agreements and
understandings.
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B. Notices. Any notice, demand or request required or permitted to
be given under the provisions of this Agreement shall be in writing
and delivered personally, by facsimile, reputable overnight courier
service or by registered or certifIed mail to the following
addresses, or to such other address as any party may request by
notifying the other parties hereto:
TO BANK: Deborah G. Gallagher
First Vice President
Community Bank
17700 Castleton St., #300, City of Industry, CA 91748
Telephone: (818) 935-1781
Facsimile: (818) 935-1785
TO ACCH: _____________________________
_____________________________
_____________________________
Telephone: _____________________________
Facsimile: _____________________________
C. Waiver. The failure of any party at any time to insist upon
strict performance of any promise, agreement, or understanding set
forth in this Agreement shall not be construed as a waiver or
relinquishment of the right to insist upon strict performance of
the same or any other promise, agreement, or understanding at a
future time.
D. Covenant of Further Assurances. Each party shall execute and
deliver such further instruments and do such further acts and
things as may be required to carry out the intent and purposes of
this Agreement.
E. Rights of Third Parties. Nothing herein shall be construed to be
to the benefit of or enforceable by any Person other than the
parties hereto.
F. Waiver of Trial by Jury. To the maximum extent permitted by law,
the parties hereby waive any right that they may have to a trial
by jury of any dispute (whether a claim in tort, contract, equity
or otherwise) arising under or relating to this Agreement, and
agree that any such dispute shall be tried before a judge sitting
without a jury.
G. Damages. The extent of any liability under this Agreement to the
the Bank should not exceed the amount of the consideration and
referral fees received by the Bank under this Agreement.
Furthermore, incidental, consequential, and punitive damages should
be prohibited, provided that incidental, consequential and punitive
damages will not be prohibited hereunder arising from violations of
fraud, law, gross negligence or willful misconduct of the Bank as
determined by a court of competent jurisdiction.
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H. Legal Fees and Expenses. Should any of the parties hereto
institute any action or proceeding in court to enforce any
provision hereof or for damages by reason of any alleged breach of
any provision of this Agreement or for any other judicial remedy,
the prevailing party shall be entitled to receive from the losing
party all reasonable attorneys' fees and all court costs in
connection with said proceeding. Except as otherwise expressly
provided in this Agreement each party will bear its respective
expenses incurred in connection with the preparation, execution,
and performance thereby, including all fees and expenses of agents,
representatives, counsel and accountants.
I. Severability. If any provision of this Agreement or its
application to any party or circumstances shall be determined by
any court of competent jurisdiction to be invalid and unenforceable
to any extent, the remainder of this Agreement, or the application
of such provision to Persons or circumstances other than those as
to which it is so determined invalid or unenforceable, shall not be
affected thereby, and each provision hereof shall be valid and
shall be enforced to the fullest extent permitted by law.
J. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE
STATE OF DELAWARE (WITHOUT REGARD TO ITS LAWS PERTAINING TO
CONFLICTS OF LAW) AS TO ALL MATTERS, INCLUDING BUT NOT LIMITED TO
MATTERS OR VALIDITY, CONSTRUCTION, EFFECT, PERFORMANCE AND
REMEDIES. EACH OF THE PARTIES HERETO AGREES THAT (A) THIS AGREEMENT
INVOLVES AT LEAST $100,000 AND (B) THIS AGREEMENT HAS BEEN ENTERED
INTO BY THE PARTIES HERETO IN EXPRESS RELIANCE UPON 6 DEL. C
SECTION 2708.
K. Amendment and Modification. This Agreement may be amended,
modified or supplemented only by written agreement of BANK and
ACCH.
L. Headings. The headings are for convenience only and shall not
affect the meaning or construction of this Agreement.
M. Counterparts. This Agreement may be executed in counterparts,
each of which, when so executed, shall be deemed an original, and
all such counterparts together shall constitute one and the same
instrument.
N. No Partnership. The parties hereto do not intend by this
Agreement to create a joint venture, partnership or other entity or
any agency or representative relationship between or among the
parties, and no party hereto shall make any representations
(written or otherwise) that implies or suggests that any such
relationship exists.
O. Arbitration. The parties hereto agree that they will attempt
through good faith negotiation to resolve their disputes. The term
"disputes" includes, without limitation, any disagreements between
the parties pertaining to this agreement. If the parties hereto are
unable to resolve their disputes by negotiation, the parties hereto
agree to resolve their disputes by Arbitration. Either party may
commence Arbitration by sending a written Demand For Arbitration to
J.A.M.S. Endispute ("JAMS") or to the American Arbitration
Association ("AAA") by registered or certified mail to the other
party and to
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JAMS or AAA, as Arbitrator. The Demand For Arbitration must
contain a description of the dispute, the amount involved, and the
remedy sought. The Arbitrator must be an individual possessing a
current valid California State Bar license and must be experienced
in automobile finance matters. The Arbitrator shall be selected by
agreement of the parties from lists supplied by JAMS or AAA. If the
parties hereto are unable to agree, JAMS or AAA will provide the
names of three (3) qualified Arbitrators, and each party shall
strike one (1) name. The remaining Arbitrator shall serve as the
Arbitrator in the Arbitration proceedings. The Arbitration shall be
conducted in Los Angeles County in accordance with the Rules
promulgated by JAMS or AAA. Pursuant to California Code of Civil
Procedure Section 1283.1(b), the provisions of California Code of
Civil Procedure Section 1283.05 are incorporated into the
Arbitration. Further, the Arbitration shall be conducted with the
widest rights of discovery as provided in the California Code of
Civil Procedure by all parties, and each party shall have the right
to cross-examine the opposing party's witnesses, either through
legal counsel, expert witnesses or both. As part of the
Arbitrator's decision, the Arbitrator shall allocate the costs of
Arbitration, including fees of attorneys and experts as he or she
deems fair and equitable in light of all relevant circumstances,
including the costs of in-house legal services provided on behalf
of the Bank. The decision of the Arbitrator shall be final, binding
and conclusive on all parties. The only ground for appeal shall be
that the Arbitrator committed an error or errors of law and those
grounds set forth in California Code of Civil Procedure Section
1286.2.
WAIVER OF STATUTE OF LIMITATIONS
ARBITRATION MUST BE INITIATED WITHIN ONE (1) YEAR AFTER EITHER
PARTY' KNOWS OR SHOULD HAVE KNOWN THAT THE CLAIMED DISPUTE
OCCURRED. FAILURE OF EITHER PARTY TO INITIATE ARBITRATION WITHIN
ONE (1) YEAR CONSTITUTES AN ABSOLUTE BAR TO THE INSTITUTION OF ANY
NEW PROCEEDINGS. IN LIMITING INITIATION OF ARBITRATION TO ONE (1)
YEAR, THE PARTIES SPECIFICALLY WAIVE AND GIVE UP THEIR RESPECTIVE
RIGHTS UNDER THE CALIFORNIA CODE OF CIVIL PROCEDURE, CALIFORNIA
COMMERCIAL CODE AND ANY OTHER LAW WHICH MAY ALLOW A GREATER AMOUNT
OF TIME WIThIN WHICH TO BRING AN ACTION UNDER THIS AGREEMENT.
WAIVER OF JURY TRIAL
NOTICE: BY SIGNING IN THE SPACE PROVIDED BELOW, THE PARTIES ARE
AGREEING TO HAVE ANY DISPUTE ARISING OUT OF ANY OF THE MATTERS
REFERENCED ABOVE DECIDED BY NEUTRAL ARBITRATION AS PROVIDED BY
CALIFORNIA LAW AND THE PARTIES ARE GIVING UP ANY RIGHTS THE PARTIES
MIGHT POSSESS TO HAVE ANY DISPUTE LITIGATED IN A COURT OR JURY
TRIAL, BY SIGNING IN THE SPACE BELOW, THE PARTIES ARE GIVING UP
THEIR JUDICIAL RIGHTS TO DISCOVERY AND APPEAL, UNLESS THOSE RIGHTS
ARE SPECIFiCALLY INCLUDED HEREIN. IF THE PARTIES REFUSE TO SUBMIT
TO ARBITRATION AFTER EXECUTING THIS AGREEMENT, THE PARTIES MAY BE
COMPELLED TO ARBITRATE UNDER THE AUTHORITY OF THE
13
<PAGE>
CALIFORNIA CODE OF CIVIL PROCEDURE. IT IS HEREBY UNDERSTOOD AND
AGREED THAT THE EXECUTION OF THIS AGREEMENT BY THE PARTIES HERETO
IS VOLUNTARY.
WE HAVE READ AND UNDERSTAND THE FOREGOING AND AGREE TO SUBMIT ANY
DISPUTES ARISING OUT OF THE MATTERS INCLUDED HEREIN TO NEUTRAL
ARBITRATION AS PROVIDED ABOVE.
P. Time of Essence. With regard to all dates and time periods set
forth or referred to in this Agreement, time is of the essence.
Q. Further Assurances. The parties agree (a) to furnish upon
request to each other such further information (b) to execute and
deliver to each other such other documents and (c) to do such other
acts and things, all as any other party may reasonably request for
the purpose of carrying out the intent of this Agreement and the
documents referred to in each of such agreements.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed
by their duly authorized officers as of the date first above written.
COMMUNITY BANK
By: /s/ John C. Getzelman
------------------------------------------
Name: John C. Getzelman
------------------------------------------
Title: President & Chief Executive Officer
------------------------------------------
AUTO CREDIT CLEARINGHOUSE L.P.
By: /s/ Bill Magro
------------------------------------------
Name: Bill Magro
------------------------------------------
Title: Executive Vice President
------------------------------------------
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Exhibit 23.1
Consent of Independent Auditors' Report
The Partners
National Auto Finance Company L.P.:
We consent to the use of our reports included herein and to the reference to our
firm under the headings "Selected Consolidated Financial Data" and "Experts" in
the prospectus.
/s/ KPMG Peat Marwick LLP
Miami, Florida
January 27, 1997
