<PAGE>
Filed pursuant to rule 424(b)(1)
File no. 333-13667
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'). The Common Stock has been
approved for quotation on the Nasdaq National Market under the trading symbol
'NAFI.' Prior to this offering, there has been no public market for the Common
Stock. 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
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
[CAPTION]
<TABLE>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
<S> <C> <C> <C>
Per Share.... $8.50 $0.595 $7.905
Total(3)..... $17,000,000 $1,190,000 $15,810,000
</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
$19,550,000, $1,368,500 and $18,181,500, 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 February 4, 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 January 29, 1997.
<PAGE>
[MAP OF UNITED STATES]
- Current Markets
o CORPORATE HEADQUARTERS - New Markets 1997
----------
The Company intends to furnish its stockholders with annual reports
containing 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.'
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 39,263
Senior Subordinated Notes.............................................. 12,000 12,000 12,000
Junior Subordinated Notes.............................................. 7,218 7,218 2,655
Total liabilities...................................................... 20,292 22,475 17,912
Partners' preferred equity............................................. 2,251 0 0
Partners' equity....................................................... 5,903 0 0
Stockholders' equity................................................... 0 5,970 21,351
</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
8
<PAGE>
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.'
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
9
<PAGE>
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 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
10
<PAGE>
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.
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.'
11
<PAGE>
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 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
12
<PAGE>
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.'
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.'
13
<PAGE>
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 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 $5.47 per share in net
tangible book value per share of Common Stock from the offering price. See
'Dilution.'
14
<PAGE>
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.'
15
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,000,000 shares of
Common Stock offered hereby, after deducting underwriting discounts and
commissions and expenses payable by the Company, are estimated to be
approximately $15.2 million (approximately $17.6 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 $4.6 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.
16
<PAGE>
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 $15.2
million from this Offering 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 2,655
10% senior subordinated debt (excluding $212,085 of accrued interest)...... 12,000 12,000 12,000
------- --------- -------------
Total long-term debt......................................................... 19,218 19,218 14,655
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 19,034
------- --------- -------------
Total stockholders' equity................................................... 0 5,970 21,351
------- --------- -------------
Total long-term borrowings and capitalization........................... $27,372 25,188 36,006
------- --------- -------------
------- --------- -------------
</TABLE>
- ------------------
(1) In connection with the Reorganization, $3,620,000 of retained earnings (pro
forma) and $3,791,000 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 $20,347,000, or
$3.03 per share. This represents an immediate increase in net tangible book
value per share of $1.98 to existing holders of Common Stock as a result of this
Offering and an immediate dilution of net tangible book value per share of $5.47
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........................................ $8.50
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..................................................................... 1.98
-----
Pro forma net tangible book value after this Offering.................................. 3.03
Dilution in pro forma net tangible book value to new investors......................... $5.47
-----
-----
</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 underwriting discounts and commissions and estimated
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 0.9% $0.03
New investors............................. 2,000,000 29.7 17,000,000 99.1 $8.50
--------- ------- ----------- -------
Total 6,726,000 100.0% $17,150,000 100.0%
--------- ------- ----------- -------
--------- ------- ----------- -------
</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:
[FLOW CHART]
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
43
<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.
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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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 29, 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
(Footnotes continued on next page)
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<PAGE>
(Footnotes continued from previous page)
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 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
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<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
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<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................... 1,148,000
Cruttenden Roth Incorporated...................... 492,000
Friedman, Billings, Ramsey & Co., Inc............. 30,000
J.J.B. Hilliard, W.L. Lyons, Inc.................. 30,000
Interstate/Johnson Lane Corporation............... 30,000
McDonald & Company Securities, Inc................ 30,000
Morgan Keegan & Company, Inc...................... 30,000
Piper Jaffray Inc................................. 30,000
Rauscher Pierce Refsnes, Inc...................... 30,000
The Robinson-Humphrey Company, Inc................ 30,000
Stifel, Nicolaus & Company, Incorporated.......... 30,000
Tucker Anthony Incorporated....................... 30,000
Wheat First Butcher Singer........................ 30,000
Hudson Knight Securities, Inc..................... 15,000
Sands Brothers & Co., Ltd......................... 15,000
----------
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 $0.35 per share
under the public offering price. The Underwriters may allow, and such dealers
may re-allow, a concession not in excess of $0.10 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.
55
<PAGE>
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.
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 offering price of $8.50 per share in an initial public
offering, net of related fees and expenses and (iv) repayment of $4.563 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 15,810,000(4) 19,673,368
(600,000)(5)
(4,563,000)(5)
171,000
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 39,263,495
----------- ----------- -------------
----------- ----------- -------------
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 (4,563,000)(5) 2,654,590
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 17,912,370
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 15,190,000(4) 19,034,125
3,620,125(1)(2)(3) -- 171,000(6)(8) --
Retained Earnings -- -- -- -- --
----------- ----------- -------------
Total Stockholders' Equity... 5,970,125 21,351,125
Total Ownership Equity....... 8,154,435 5,970,125 21,351,125
----------- ----------- -------------
Total Liabilities and
Ownership Equity........... $28,446,163 28,445,495 39,263,495
----------- ----------- -------------
----------- ----------- -------------
</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 (273,000)(6) 6,431,143
----------- ----------- ---------------- -------------
Total expenses...................... 6,754,143 (50,000) 6,704,143 (273,000) 6,431,143
Net income before taxes............. 3,101,814 50,000 3,151,814 273,000 3,424,814
Pro forma income taxes.............. 1,186,213(1) 1,186,213 102,000 1,288,213
----------- ----------- ---------------- -------------
Net Income.......................... $ 3,101,814 1,965,601 171,000 2,136,601
----------- ----------- ---------------- -------------
----------- ----------- ---------------- -------------
</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 $15,210,000 of net 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) $4,563,000
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 $3,791,000 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> <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 OF CONTENTS
PAGE
----
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
UNTIL FEBRUARY 23, 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
JANUARY 29, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
