<PAGE>
As filed with the Securities and Exchange Commission on November 22, 1996
Registration No. 333-15787
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
PRE-EFFECTIVE AMENDMENT NO. 1 TO
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
--------------------
NAL FINANCIAL GROUP INC.
(Exact name of registrant as specified in its charter)
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<S> <C> <C>
Delaware 6141 23-2455294
- ------------------------------- --------------------------- -------------------------------
(State or other jurisdiction of (Primary Standard (I.R.S. Employer Identification
incorporation or organization) Classification Code Number) Number)
</TABLE>
500 Cypress Creek Road West
Suite 590
Fort Lauderdale, FL 33309
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(Address, including zip code, and telephone number, including area code,
of registrant's principal executive office and principal place of business)
Mr. Robert R. Bartolini
500 Cypress Creek Road West
Suite 590
Fort Lauderdale, FL 33309
(954) 938-8200
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(Name, address, including zip code, and telephone number, including
area code, of agent for service)
with a copy to:
Stephen M. Cohen, Esquire Peter H. Darrow, Esquire
Buchanan Ingersoll Professional Corporation Cleary, Gottlieb, Steen & Hamilton
Two Logan Square, 12th Floor One Liberty Plaza
18th & Arch Streets New York, NY 10006
Philadelphia, PA 19103 (212) 225-2000
(215) 665-3800
--------------------
Approximate date of proposed sale to the public: As soon as practicable
following the date on which this Registration Statement becomes effective.
--------------------
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box: [ ]
<PAGE>
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement in the same offering: [ ] ____________________
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering: [ ]____________________
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box: [ ]
------------------------------------------------
The registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
NAL FINANCIAL GROUP INC.
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
Registration Statement Item Number and Caption Location in Prospectus or Page
- ---------------------------------------------- ------------------------------
<S> <C>
1. Forepart of the Registration
Statement and Outside Front
Cover Page of Prospectus................. Forepart of the Registration Statement;
Outside Front Cover Page of
Prospectus
2. Inside Front and Outside Back
Cover Pages of Prospectus................ Inside Front and Outside Back Cover
Pages of Prospectus
3. Summary Information and Risk
Factors.................................. Prospectus Summary; Summary
Financial Information; Risk Factors
4. Use of Proceeds.......................... Use of Proceeds
5. Determination of Offering Price.......... Cover Page of Prospectus;
Underwriting
6. Dilution................................. Not Applicable
7. Selling Security Holders................. Selling Stockholders
8. Plan of Distribution..................... Cover Page of Prospectus;
Underwriting
9. Legal Proceedings........................ The Company - Legal Proceedings
10. Directors, Executive Officers,
Promoters and Control Persons............ Management; Certain Transactions
11. Security Ownership of Certain
Beneficial Owners and
Management............................... Principal Stockholders
12. Description of Securities................ Description of Securities
13. Interest of Named Experts and
Counsel.................................. Not Applicable
14. Disclosure of Commission Position
on Indemnification for Securities
Act Liabilities.......................... Statement on Indemnification; Part II;
Item 24 - Indemnification of Directors
and Officers
15. Organization within Last Five Years The Company
16. Description of Business.................. The Company
17. Management's Discussion and Management's Discussion and
Analysis or Plan of Operation............ Analysis of Financial Condition and
Results of Operations
18. Description of Property.................. The Company - Facilities
19. Certain Relationships and Related
Transactions............................. Certain Transactions
20. Market for Common Equity and
Related Stockholder Matters.............. Price Range of Common Stock
21. Executive Compensation................... Management
22. Financial Statements..................... Summary Financial Information;
Capitalization; Financial Statements
23. Changes In and Disagreements with
Accountants on Accounting and
Financial Disclosure..................... Not Applicable
</TABLE>
<PAGE>
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION -- DATED NOVEMBER 22, 1996
PROSPECTUS
- --------------------------------------------------------------------------------
2,500,000 Shares
[LOGO] NAL FINANCIAL GROUP INC.
Common Stock
- --------------------------------------------------------------------------------
Of the 2,500,000 shares of Common Stock, $.15 par value per share (the 'Common
Stock') offered hereby (the 'Offering'), 2,281,855 are being sold by NAL
Financial Group Inc. (the 'Company') and 218,145 shares are being sold by
certain stockholders of the Company (the 'Selling Stockholders'). The Company
will not receive any of the proceeds from the sale of the shares of Common Stock
by the Selling Stockholders. See 'Selling Stockholders.'
The Company's Common Stock is included in The Nasdaq Stock Market's National
Market (the 'Nasdaq National Market') under the symbol 'NALF.' On November 19,
1996, the last reported sales price for the Common Stock on the Nasdaq National
Market was $11.625 per share. See 'Price Range of Common Stock.'
SEE 'RISK FACTORS' ON PAGES 8 TO 15 FOR A DISCUSSION OF CERTAIN MATERIAL FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK
OFFERED HEREBY.
- --------------------------------------------------------------------------------
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.
<TABLE>
<CAPTION>
Underwriting Proceeds to
Price to Discounts and Proceeds to Selling
Public Commissions (1) Company (2) Stockholders
-------- --------------- ----------- ------------
<S> <C> <C> <C> <C>
Per Share.... $ $ $ $
Total (3).... $ $ $ $
</TABLE>
- ---------------
(1) The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities
under the Securities Act of 1933, as amended. See 'Underwriting.'
(2) Before deducting expenses payable by the Company estimated to be $ .
(3) The Company has granted the several Underwriters a 30-day over-allotment
option to purchase up to 375,000 additional shares of Common Stock on the
same terms and conditions as set forth above. If all such additional shares
are purchased by the Underwriters, the total Price to Public will be $ ,
the total Underwriting Discounts and Commissions will be $ , the total
Proceeds to Company will be $ and the total Proceeds to Selling
Stockholders will be $ . See 'Underwriting.'
- --------------------------------------------------------------------------------
The shares of Common Stock are offered by the several Underwriters, subject to
delivery by the Company and the Selling Stockholders and acceptance by the
Underwriters, to prior sale and to withdrawal, cancellation or modification of
the offer without notice. Delivery of the shares to the Underwriters is expected
to be made at the office of Prudential Securities Incorporated, One New York
Plaza, New York, New York on or about December , 1996.
PRUDENTIAL SECURITIES INCORPORATED
PIPER JAFFRAY INC.
SANDS BROTHERS & CO., LTD.
December , 1996
<PAGE>
[MAP OF HEADQUARTERS AND STATES OF OPERATION]
States of Operation
Currently Currently Licensed
State Operating but not Operating
-------------- --------- -----------------
Arizona X
California X
Colorado X
Connecticut X
Delaware X
Florida X
Georgia X
Illinois X
Indiana X
Kansas X
Kentucky X
Louisiana X
Maryland X
Michigan X
Mississippi X
Missouri X
Nevada X
New Hampshire X
New Jersey X
New Mexico X
New York X
North Carolina X
Ohio X
Oklahoma X
Oregon X
Pennsylvania X
Rhode Island X
South Carolina X
Tennessee X
Texas X
Vermont X
Utah X
Virginia X
Washington X
West Virginia X
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET
MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN
ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE
'UNDERWRITING.'
------------------------
AVAILABLE INFORMATION
The Company is subject to the information reporting requirements of the
Securities Exchange Act of 1934, as amended (the 'Exchange Act') and in
accordance therewith files reports and other information with the Securities and
Exchange Commission (the 'Commission'). Copies of these reports may be inspected
and copied at the Public Reference Facilities maintained by the Commission at
Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's regional offices at 7 World Trade Center, Suite 1300, New York, New
York 10048, and at Northwest Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such materials can be obtained upon written
request addressed to the Commission's Public Reference Section, 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. In addition, the
Commission maintains a Web site at http://www.sec.gov containing reports, proxy
and information statements and other information regarding registrants that file
electronically with the Commission, including the Company.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the detailed
information and financial statements (including the notes thereto) appearing
elsewhere in this Prospectus. Unless otherwise indicated, all information in
this Prospectus assumes that the Underwriters' over-allotment option will not be
exercised. Investors should carefully consider the information set forth under
the caption 'Risk Factors.' Unless the context otherwise requires, the 'Company'
or 'NAL' refers to NAL Financial Group Inc. and its wholly-owned subsidiaries.
THE COMPANY
NAL is a specialized automobile finance company engaged in the purchase and
servicing of loan and lease contracts (the 'Contracts') originated by franchised
and select independent dealers ('Dealers') in connection with sales or leases of
used and new automobiles to consumers with non-prime credit. Consumers with
non-prime credit are perceived to be relatively high credit risks due to various
factors, including the manner in which they have handled previous credit, the
absence or limited extent of their prior credit history and their limited
financial resources. The Company purchases Contracts relating principally to the
'C' credit segment of the automobile finance market. In addition to purchasing
Contracts directly from Dealers, the Company has established diverse programs
that enable it to increase the volume of Contracts purchased from a variety of
Dealers with whom the Company does not maintain a direct relationship. As of
September 30, 1996, the Company serviced 1,594 Dealers in 23 states and more
than 90% of all Contracts acquired by the Company during the nine months ended
September 30, 1996 were originated by franchised Dealers. The Company generated
net income of approximately $394,000 and $2.8 million in 1994 and 1995,
respectively. For the nine months ended September 30, 1995 and September 30,
1996, the Company generated net income of approximately $1.1 million and $6.1
million, respectively.
The Company has experienced significant growth in its portfolio of
purchased and serviced Contracts since June 1994, when the acquisition of
Contracts became the principal focus of its business. Total Contracts purchased,
which includes both loan contracts ('Loan Contracts') and lease contracts
('Lease Contracts'), increased from approximately $28.1 million through December
31, 1994 and $165.7 million through December 31, 1995, to approximately $205.8
million through September 30, 1996. As a result, the Company's servicing
portfolio increased from approximately $44.4 million at December 31, 1994 and
$153.8 million at December 31, 1995, to approximately $283.9 million at
September 30, 1996. The Company's overall growth during this period was
attributable to an increase in its Dealer relationships from 196 Dealers at
December 31, 1994 to 1,594 Dealers at September 30, 1996, and an expansion of
the sources and amounts of financing available to purchase Contracts. Loan
Contracts purchased during the nine months ended September 30, 1996 had an
average principal balance of $12,300, a weighted average annual percentage rate
('APR') of 19.44%, a weighted average purchase discount of 6.14% and a weighted
average initial contract term of 53.9 months. Lease Contracts purchased during
the nine months ended September 30, 1996 had an average principal balance of
$15,800, a weighted average yield of 18.10%,which is based on the residual value
assigned by the Company at the inception of the Lease Contract, and a weighted
average initial contract term of 45.4 months.
The Company has historically funded the purchase of its Contracts with
borrowings from banks and other lenders. Currently, the Company's primary
financing sources include a $100 million warehouse facility, $45 million of
revolving credit facilities, including a $25 million facility with General
Electric Capital Corporation ('GECC') and a specialized borrowing facility.
Beginning in December 1995, the Company began securitizing the majority of its
portfolio of Loan Contracts to increase the Company's liquidity, provide for the
redeployment of capital, reduce risks associated with interest rate fluctuations
and provide the Company with access to a cost-effective, diversified source of
financing. During the last four fiscal quarters, the Company completed
securitization transactions aggregating approximately $200 million. During this
period, gains on sale from the securitization transactions have constituted the
principal source of the Company's revenues. The Company plans to
3
<PAGE>
continue to employ its securitization program as an integral component of its
funding strategy and anticipates that it will generally complete securitization
transactions on a quarterly basis. The Company also generates revenues from
interest income and fees earned on Contracts held in portfolio, as well as
servicing fees from Loan Contracts sold in securitization transactions. In
addition, the Company receives revenues from the sale of insurance and related
products through its insurance subsidiary, NAL Insurance Services, Inc. ('NIS').
The Company purchases Contracts directly from Dealers through its Dealer
Program and through select third party entities that participate in the
Company's Captive Program, Affinity Program, Correspondent Program, Recourse
Program and Wholesale Program (collectively, the 'Origination Programs').
Participants in these Origination Programs offer Contracts to the Company under
a variety of arrangements and allow the Company to increase its access to
Dealers. The Company's main sources of Contracts are its Dealer Program and its
Captive Program. The Captive Program includes the Company's arrangements with
Special Finance, Inc. ('SFI'), which recently became a wholly-owned subsidiary
of the Company. Under its Affinity Program, the Company has an agreement with
General Electric Capital Auto Lease, Inc. ('GECAL') to purchase non-prime Lease
Contracts through GECAL's network of Dealers in the Southeast region of the
United States. As of September 30, 1996, the Company's servicing portfolio
consisted of Contracts purchased through its Dealer Program (32%), Captive
Program (46%), Affinity Program (5%), Correspondent Program (2%), Recourse
Program (9%) and Wholesale Program (6%). Each of these programs, other than the
Recourse Program, is designed to purchase Contracts relating primarily to the
'C' credit segment of the market, and the Recourse Program is designed to
purchase Contracts relating to the 'D' credit segment.
The Company's principal objectives are to sustain controlled growth of its
business and to maximize its profit potential. To achieve these objectives, the
Company is currently implementing the following strategies:
Expanding and Strengthening Relationships with Origination
Sources. The Company plans to achieve a greater volume of business by
expanding its origination sources in existing markets, by entering into new
geographic markets and by strengthening its current relationships. The
Company develops strong relationships with its Dealers and other
origination sources by providing a high level of service specifically
tailored to meet their needs. The Company typically responds to credit
applications on the date received and in most cases within two to four
hours, and generally pays for Contracts purchased within twenty-four hours
of receipt of a complete funding package. In addition, the Company provides
training to Dealer personnel on the use of the Company's credit
underwriting guidelines.
Providing Diverse Products and Services to Dealers. In addition to
providing prompt, flexible service and a reliable source of financing, the
Company increases its volume of business from Dealers by offering a
'one-stop shop' service. This service includes purchasing both Loan and
Lease Contracts on used and new automobiles, addressing a broad range of
credit profiles and offering insurance and related products.
Employing Detailed Underwriting Guidelines. In order to evaluate
effectively and measure the risks associated with lending to non-prime
consumers, the Company's underwriting guidelines and approval procedures
focus on balancing the creditworthiness of the borrower with the adequacy
of the vehicle as collateral. The guidelines provide a high degree of
credit and pricing specificity to Dealers, which enable them to improve
service to their customers by increasing the efficiency of the credit
application and funding process.
Maintaining Effective Collection and Asset Disposition Systems. The
Company employs efficient and aggressive collection policies and
procedures. The Company contacts a borrower typically within 24 hours of a
payment delinquency and manages accounts based on geographic regions. The
Company also uses its subsidiary, Performance Cars of South Florida, Inc.
('PCSF'), with a J.D. Byrider car dealership franchise ('JDBR Franchise')
to maximize recovery on some of its repossessed and off-lease vehicles. As
geographic expansion requires, the
4
<PAGE>
Company intends to establish full service regional centers, which will
include servicing and collection operations.
Diversifying its Financing Sources. The Company plans to continue to
expand and diversify its financing sources. The Company intends to continue
to sell Loan Contracts through securitization transactions on a quarterly
basis. Securitization enables the Company to increase its liquidity,
redeploy capital, mitigate interest rate risk and reduce credit risk.
Continuing the Growth of Related Businesses. The Company's related
businesses, through NIS and PCSF, complement the purchasing and servicing
of Loan and Lease Contracts and enhance the Company's profitability. The
Company intends to continue to offer insurance and related products to
Dealers, which provide an additional source of revenue to the Company. As
the volume of Contracts purchased increases, the Company plans to open
additional PCSF sites with JDBR Franchises to maximize recovery from
remarketing activities.
Recruiting and Retaining Experienced Management. Members of the
Company's management team have an average of over 20 years of experience in
automobile finance, consumer finance or banking. Management believes that
hiring experienced management personnel is critical to the formulation and
implementation of its strategies and the maintenance of its growth and
profitability. The Company intends to continue to provide incentive
compensation arrangements, including stock option plans, to attract and
retain members of the management team.
According to CNW Marketing/Research, an independent automobile finance
market research firm, the automobile finance industry (which includes new and
used vehicle lending and leasing) is the second largest consumer finance
industry in the United States with over $410 billion in loan and lease
originations in 1995. Management believes that captive finance companies, such
as General Motors Acceptance Corporation, Ford Motor Credit Company and Chrysler
Credit Corporation, financed between 25% and 30% of automobile purchases and
leases nationwide in 1995, while the balance was provided by banks, credit
unions and independent finance companies. The industry is generally segmented
according to the type of car sold (new or used) and the credit characteristics
of the borrower (prime or non-prime). Management believes that the non-prime
segment of the automobile finance market is in the range of $80 billion to $100
billion in annual loan and lease originations.
The Company was founded in February 1991 as a specialized consumer finance
company. It became publicly held by virtue of a merger (the 'Merger') with a
previously inactive public company on November 30, 1994. Until June 1994, the
Company's principal activities involved the bulk purchase and servicing of
seasoned and non-performing portfolios of consumer and mortgage loan and
automobile loan and lease receivables. The principal focus of the Company's
business since June 1994 has shifted to the purchase and servicing of automobile
Loan and Lease Contracts.
The Company's principal executive office is located at 500 Cypress Creek
Road West, Suite 590, Fort Lauderdale, Florida 33309. Its telephone number is
(954) 938-8200.
5
<PAGE>
THE OFFERING
Common Stock Offered by the Company.............. 2,281,855 shares
Common Stock Offered by the Selling
Stockholders.................................... 218,145 shares
Common Stock to be Outstanding after the
Offering(1)(2).................................. 9,629,222 shares
Use of Proceeds by the Company................... The proceeds will be used to
support growth and for
general corporate purposes,
including working capital,
future acquisitions and the
repayment of certain advances
totaling $1,763,869 to the
Company's Chief Executive
Officer. Pending such use,
the net proceeds will be used
to repay indebtedness under
the Company's warehouse and
other credit facili-
ties. The Company will not
receive any proceeds from the
sale of Common Stock by the
Selling Stockholders. See
'Use of Proceeds.'
Nasdaq National Market Symbol.................... NALF
- ------------------
(1) As of November 19, 1996.
(2) Excludes the potential conversion of $25.0 million principal amount of
outstanding debentures and the exercise of 2,913,625 outstanding related
warrants. Assuming the conversion of $25.0 million of outstanding debentures
into 2,525,595 shares of Common Stock (principal and interest) and the
issuance of 2,913,625 shares upon the exercise of outstanding warrants, the
Company would have 15,068,442 shares of Common Stock outstanding after the
Offering. Of the 5,439,220 shares of Common Stock issuable upon the
conversion of outstanding debentures and the exercise of outstanding related
warrants, substantially all of such shares are subject to the terms of a
lock-up agreement for a period of 180 days after the date of this
Prospectus. In addition, assuming the conversion of such debentures and the
exercise of such warrants, the Company would be released from its obligation
to repay approximately $28.3 million of principal and interest, and the
Company would secure additional working capital of approximately $33.1
million. See 'Risk Factors' and 'Description of Securities.'
6
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SUMMARY FINANCIAL INFORMATION
The financial data set forth below should be read in conjunction with the
Consolidated Financial Statements of the Company and related notes thereto and
'Management's Discussion and Analysis of Financial Condition and Results of
Operations' included elsewhere herein. In the opinion of management, the interim
financial information for the nine-month periods ended September 30, 1996 and
1995 includes all of the adjustments necessary to fairly present the results of
such interim periods and all such adjustments which are of a normal recurring
nature. The interim financial information includes the accounts of the Company
and its wholly-owned subsidiaries and should be read in conjunction with the
audited financial statements, and the footnotes thereto, for the year ended
December 31, 1995. Certain 1995 and 1994 amounts have been reclassified to
conform with the current year presentation. Operating results for the nine-month
period ended September 30, 1996 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1996.
<TABLE>
<CAPTION>
FOR THE NINE FOR THE
MONTHS ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
---------------------- ---------------------
1996 1995 1995 1994
-------- -------- -------- -------
(DOLLARS IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net interest income............................... $ 8,936 $ 6,363 $ 8,319 $ 3,430
Gain on sale of Contracts......................... 13,427 128 4,600 2,292
Servicing fees and other income................... 4,670 1,241 2,651 454
-------- -------- -------- -------
Total revenue..................................... 27,033 7,732 15,570 6,176
Provision for credit losses....................... (2,801) (1,412) (2,762) (573)
Operating expenses................................ (13,844) (4,514) (7,805) (4,946)
Non-cash charge for escrow shares................. (301) (80) (280) --
-------- -------- -------- -------
Income before taxes............................... 10,087 1,726 4,723 657
Provision for income taxes........................ (3,945) (656) (1,926) (263)
-------- -------- -------- -------
Net income........................................ $ 6,142 $ 1,070 $ 2,797 $ 394
-------- -------- -------- -------
-------- -------- -------- -------
Primary EPS....................................... $ .81 $ .18 $ .45 $ .08
Fully diluted EPS................................. $ .75 $ .18 $ .45 $ .07
PRO FORMA EPS:(1)
Net income........................................ $ 7,004 $ 4,434
Primary EPS....................................... $ .72 $ .52
Fully diluted EPS................................. $ .69 $ .52
OPERATING DATA:
Loan Contracts purchased during the period........ $191,718 $ 92,368 $145,657 $23,382
Average Loan Contract purchased during the
period(2)....................................... $ 12.3 $ 11.8 $ 12.0 $ 9.1
Weighted average Loan Contract APR................ 19.44% 19.89% 19.68% 20.98%
Weighted average Loan Contract term (months)...... 53.9 48.1 50.0 41.9
Lease Contracts purchased during the period....... $ 14,071 $ 16,059 $ 20,048 $ 4,683
Average Lease Contract purchased during the period $ 15.8 $ 17.0 $ 17.0 $ 17.4
Weighted average Lease Contract yield............. 18.10% 17.56% 17.66% 16.90%
Weighted average Lease Contract term (months)..... 45.4 44.8 44.8 45.5
Principal balance of Contracts securitized during
the period...................................... $160,302 -- $ 40,136 --
Number of states served (at end of period)........ 23 4 8 1
Number of Dealers (at end of period)(3)........... 1,594 787 909 196
Operating expenses as a percentage of average
servicing portfolio during the period(4)........ 8.78% 7.90% 8.41% 14.33%
SELECTED PORTFOLIO DATA:
Servicing portfolio (at end of period)............ $283,887 $111,888 $153,764 $44,415
Delinquencies as a percentage of the servicing
portfolio (at end of period)(5)................. 11.70% 9.39% 13.97% 8.61%
Net charge-offs as a percentage of the average
servicing portfolio during the period(4)(5)..... 6.46% .79% 3.15% 2.23%
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and cash equivalents......................... $ 4,572 $ 1,136 $ 1,953 $ 1,726
Contracts receivable, net(6)...................... 87,739 99,278 101,214 29,984
Excess servicing receivable....................... 22,898 -- 4,999 --
Total assets...................................... 144,833 112,206 122,035 34,518
Debt(7)........................................... 96,873 87,077 91,794 22,502
Total liabilities................................. 107,575 91,177 98,175 23,663
Stockholders' equity.............................. 37,258 21,029 23,860 10,855
</TABLE>
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(1) Pro forma net income and pro forma primary and fully diluted earnings per
share as adjusted to give effect to the sale by the Company of 2,281,855
shares of the Common Stock offered hereby based on a public offering price
of $11.625 per share, the last reported sales price on the Nasdaq National
Market on November 19, 1996, after deducting the underwriting discounts and
commissions and estimated offering expenses, and the application of the net
proceeds therefrom to the repayment of a portion of the Company's debt as if
such transaction had been consummated at the beginning of the periods
presented.
(2) Excludes Recourse Program Loans.
(3) Includes Dealers with whom SFI has relationships.
(4) The percentages for the nine months ended September 30, 1996 and 1995 have
been annualized.
(5) Excludes non-automobile bulk purchase contracts. Delinquency information
reflects Contract delinquency greater than 30 days.
(6) Net of reserve available for credit losses.
(7) Amounts include discount arising from the issuance of common stock purchase
warrants.
7
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RISK FACTORS
An investment in the shares of Common Stock involves a high degree of risk.
Prospective investors should carefully consider the following risk factors in
addition to the other information set forth in this Prospectus in connection
with the investment in the shares of Common Stock.
When used in this Prospectus, the words 'may,' 'will,' 'expect,'
'anticipate,' 'continue,' 'estimate,' 'project,' 'intend' and similar
expressions are intended to identify forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 regarding events, conditions and financial
trends that may affect the Company's future plans of operations, business
strategy, operating results and financial position. Prospective investors are
cautioned that any forward-looking statements are not guarantees of future
performance and are subject to risks and uncertainties and that actual results
may differ materially from those included within the forward-looking statements
as a result of various factors. Such factors are described under the headings
'Management's Discussion and Analysis of Financial Condition and Results of
Operations,' 'The Company' and in the risk factors set forth below.
DEPENDENCE UPON ADEQUATE SOURCES OF FINANCING. The Company is dependent
upon its warehouse facility, revolving credit facilities and other financing
arrangements to finance the purchase of its automobile Loan and Lease Contracts.
See 'Management's Discussion and Analysis of Financial Condition and Results of
Operations.' Accordingly, the Company's ability to maintain and expand its
portfolio of Loan and Lease Contracts, while dependent upon a number of factors,
relies predominantly upon the availability of adequate financing at rates and
upon terms acceptable to the Company. The Company also relies on the proceeds
from its securitization transactions to pay down its warehouse facility, thereby
permitting the purchase of additional Loan Contracts.
The Company employs its securitization program as an integral component of
its funding strategy. During the period from December 1995 through September
1996, the Company completed the sale of approximately $200 million of Loan
Contracts in four privately-placed securitization transactions. The Company has
historically applied the net proceeds from securitization transactions to repay
indebtedness under its warehouse facility, thereby increasing the amounts
available under such facility to fund future purchases of Loan Contracts. Any
failure by the Company to effect additional securitizations of Loan Contracts on
terms acceptable to the Company would restrict the Company's financing
capabilities, could require the Company to curtail the purchase of Loan
Contracts and could have a material adverse effect on the Company. Furthermore,
the timing of any securitization transaction is affected by a number of factors
beyond the Company's control, including, among others, conditions in the
asset-backed securities markets, interest rates and approvals from third
parties. Although the Company expects to complete future securitization
transactions on a quarterly basis, some or all of these factors may cause delays
in closing a securitization or may prevent such transactions entirely. Gains
from the sale of Loan Contracts in securitization transactions constituted a
significant portion of the net earnings of the Company during the nine months
ended September 30, 1996 and are likely to continue to represent a significant
portion of the Company's net earnings. If the Company were unable to securitize
Loan Contracts in a financial reporting period, the Company would incur a
significant decline in total revenues and net earnings for such period. In
addition, in order for the Company to continue to fund the purchase of Contracts
in accordance with its growth strategy, the Company will require financing in
excess of that provided by its cash flow from operations, the net proceeds from
the Offering and its credit facilities (or any successor facilities). No
assurance can be given that additional financing sources, including
securitization transactions, will be available on terms acceptable to the
Company.
The Company currently finances its Lease Contracts principally through its
agreements with GECC. There can be no assurances that such financing would be
available from another source upon similar terms and conditions. The inability
of the Company to arrange new credit facilities or to extend its existing credit
facilities would have a material adverse effect upon the Company's ability to
purchase Lease Contracts.
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The Company remains in compliance with the terms of its existing credit
facilities and other financing agreements. A default under any of these
agreements in the future could have a material adverse effect on the Company's
financial condition. The Company's ability to keep these financing sources in
place depends on its continued compliance with the terms thereof. There can be
no assurance that the Company's sources of financing will continue to remain
available on terms acceptable to the Company, or that the Company will be able
to secure increased sources of financing. See 'Management's Discussion and
Analysis of Financial Condition and Results of Operations.'
SUSPENSION OR LOSS OF EXCESS SERVICING CASH FLOWS AND SERVICING FEE. The
gain on sale of Contracts and the amount of the excess servicing receivable
recognized by the Company in each securitization reflects management's estimate
of future credit losses and prepayments for the Contracts included in that
securitization. If the actual rates of credit losses, prepayments, or both, on
such Contracts exceeded those estimated by management, the timing and the amount
of the excess servicing cash flows could be adversely affected and the value of
the excess servicing receivable impaired. On a quarterly basis, the Company
updates its credit loss and prepayment assumptions for the remaining life of
each securitization based on the past performance of the Loan Contracts within
the securitization and market conditions. If the Company concludes that its
ability to realize the excess servicing receivable has been impaired, the
Company reduces the amount of the excess servicing receivable by recording a
charge to earnings. To date, no such adjustment has been made. However, the
Company's results of operations and liquidity could be adversely affected if
credit losses or prepayment levels, or both, on Contracts substantially exceed
anticipated levels. See 'Management's Discussion and Analysis of Financial
Condition and Results of Operations.'
Under the terms of each securitization, the Company is required to maintain
a reserve account at specific levels during the life of the securitization. Upon
the occurrence of certain trigger events, which relate to delinquency,
repossession or credit loss rates exceeding certain levels, the terms of the
securitization transactions require the Company to maintain the reserve account
at higher levels by restricting the distribution of both contractual servicing
cash flows and excess servicing cash flows to the Company. Once the reserve
account is maintained at the higher level and the trigger events cease to occur
for a specified period, the Company would continue to receive its contractual
servicing fees and excess servicing cash flows. The occurrence of trigger events
could materially adversely affect the Company's liquidity and results of
operations. Two of the Company's securitizations have recently experienced
trigger events. As a result, the Company's rights to receive contractual
servicing fees and excess servicing cash flows have been suspended from these
two securitizations. Continued occurrence of the trigger events could delay cash
flows to the Company which may have a material adverse impact. Although, based
upon management's analysis, there has been no impairment of the excess servicing
receivable to date, there can be no assurance that the excess servicing
receivable will not be impaired in the future.
NEGATIVE OPERATING CASH FLOWS. The Company's business requires substantial
cash to support the funding of reserve accounts in connection with
securitizations, the purchase of Contracts and other cash requirements, in
addition to debt service. These cash requirements increase as the volume of
Contracts purchased increases. The Company has operated historically on a
negative operating cash flow basis and expects to continue to do so for so long
as the Company's volume of Contracts purchased continues to grow at a
significant rate. As a result of the Company's historical growth rate, the
Company has used increasingly larger amounts of cash than it has generated from
its operating activities. The Company has funded these negative operating cash
flows principally through borrowings from financial institutions and private
placements of debt and equity securities. The Company's ability to execute its
growth strategy depends upon its continued ability to obtain substantial
additional long-term debt and equity capital through access to the capital
markets or otherwise. There can be no assurance that the Company will have
access to the capital markets when needed or will be able to obtain financing
upon terms reasonably satisfactory to the Company. Factors that could affect the
Company's access to the capital markets, or the costs of such capital, include
changes in interest rates, general economic conditions, the perception in the
capital markets of the Company's business, results of operations, leverage,
financial condition and business prospects, and
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the performance of the Company's securitization trusts. In addition, covenants
with respect to the Company's credit facilities may restrict the Company's
ability to incur additional indebtedness.
DEFAULT AND PREPAYMENT RISK. The Company's results of operations,
financial condition and liquidity depend, to a material extent, on the
performance of the Contracts. The performance of Contracts depends upon such
factors as the underwriting criteria, the collection efforts employed to prevent
defaults, and the proceeds from the sale of repossessed vehicles. The Company
bears the risk of losses resulting from defaults on Contracts. In the event of a
default, the liquidation proceeds from repossessed vehicles may not be
sufficient to cover the outstanding Contract balance and costs of recovery. The
Company, therefore, maintains a reserve for credit losses on its Contracts. The
reserve reflects management's estimate of anticipated credit losses based upon
expectations and historical performance of Contracts.
Based on static pool analyses of the performance of Contracts, management
has, from time to time, modified its credit underwriting criteria. In view of
the performance of Contracts purchased during the six months ended December 31,
1995, the Company modified its underwriting criteria during the fourth quarter
of 1995. Notwithstanding management's approach for establishing a reserve for
credit losses, its estimates for anticipated credit losses may not be adequate
because the Company has a limited operating history and its Contract portfolio
is unseasoned. If the reserve is inadequate, the Company would recognize as an
expense the losses in excess of such reserve and results of operations would be
adversely affected. Additionally, such losses may impair the Company's ability
to secure credit facilities and/or securitize its Contracts. While the Company
believes that it maintains a reserve adequate to cover potential credit losses,
there can be no assurance to that effect.
The Company's servicing income can be adversely affected by defaults and
prepayments on Contracts. The Company's servicing income is based on the
outstanding balance of Contracts. If Contracts are prepaid or charged-off, the
Company's servicing income will decline to the extent of such prepaid and
charged-off Contracts. There can be no assurance as to what level of prepayment,
if any, will occur on the Contracts. Prepayments may be influenced by a variety
of economic, geographic, social and other factors, including borrowers' job
transfers, casualty, trade-ins and declines in interest rates.
IMPLEMENTATION OF BUSINESS STRATEGIES. The Company's ability to sustain
the growth of its business and maximize its profit potential is dependent upon
the implementation of its business strategies. The Company's strategies include:
(i) expanding and strengthening relationships with its origination sources in
order to increase the volume of Contracts purchased; (ii) providing diverse
products and services to Dealers; (iii) employing detailed underwriting
guidelines to ensure that the Company purchases and services Contracts within
acceptable levels of credit risk and loss; (iv) maintaining effective
collections and asset disposition systems; (v) diversifying financing sources;
(vi) continuing the growth of related businesses; and (vii) recruiting and
retaining experienced management. The Company's failure with respect to any or
all of these strategies could impair its ability to increase the volume of
Contracts purchased, which could have a material adverse effect on the Company's
results of operations and financial condition. See 'The Company -- Business
Strategy.'
RELATIONSHIPS WITH DEALERS AND OTHER ORIGINATION SOURCES. The Company's
business depends in large part upon its ability to establish and maintain
relationships with Dealers and other origination sources. While the Company
believes that it has been successful in developing and maintaining relationships
with Dealers and other origination sources, these relationships are not long-
standing, and there can be no assurance that the Company will be successful in
maintaining such relationships or increasing the number of Dealers and other
origination sources with which it does business, or that its existing Dealer
base, and other origination sources, will continue to generate a volume of
Contracts comparable to the volume of such Contracts historically generated by
such Dealers and other origination sources. See 'The Company -- Business
Strategy.'
RISKS ASSOCIATED WITH THE NON-PRIME MARKET. The principal focus of the
Company's business is the purchase of Contracts involving consumers with
non-prime credit. The non-prime market is
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comprised of consumers who are perceived to be relatively high credit risks.
Consequently, the Contracts acquired by the Company typically bear a higher rate
of interest than contracts made to consumers with prime credit and are purchased
at a discount. However, these Contracts involve a higher probability of default,
higher delinquency rates and greater servicing costs than contracts made to
consumers with prime credit. The Company's profitability depends on its ability
to evaluate properly the credit risks, to price its Contracts accordingly and to
service efficiently its Contracts. However, there can be no assurance that the
rates of future defaults and losses will be consistent with prior experience or
at levels that will maintain the Company's profitability, that the credit
performance of its customers will be maintained, that the Company's credit
analysis, servicing and collection systems and controls will continue to be
adequate, or that the current interest rates and discount levels can be
maintained in the face of competitive pressures.
SENSITIVITY TO INCREASES IN INTEREST RATES. The Company's profitability is
determined largely by the difference, or 'spread,' between the rate of interest
collected from customers on their Contracts and the rate of interest on the
funds obtained by the Company under its existing credit facilities and through
securitization transactions to finance its Contracts. Generally, interest rates
received by the Company on the Contracts it purchases are determined by many
factors beyond the Company's control, including competition, state usury
statutes and other consumer laws prohibiting or limiting the Company's ability
to impose various charges on its borrowers. Significant increases in the
interest rates at which the Company borrows under its revolving credit
facilities could reduce the Company's spread and thereby adversely affect the
Company's profitability with respect to the Contracts it purchases. In the case
of securitization transactions, the interest rate demanded by investors is a
function of prevailing market rates for comparable transactions and the general
interest rate environment. Because the Contracts purchased by the Company have
fixed interest rates, the Company bears the risk of interest rate increases
during the period from the date the Contracts are purchased until the closing of
its securitization for Contracts that are sold and for the entire term for
Contracts that are held by the Company and are not match-funded. Moreover, the
Company's warehouse facility gives the lender the right to make margin calls in
the event of a specified decrease in the market value in the Contracts held for
repurchase. The Company does not presently employ a hedging strategy. There can
be no assurances that the Company will not sustain losses as a result of its
policy relative to hedging. See 'Management's Discussion and Analysis of
Financial Condition and Results of Operations.'
RECOVERY OF RESIDUAL VALUE. As of September 30, 1996, Lease Contracts
represented approximately 10% of the Company's servicing portfolio. In
connection with these Lease Contracts, the Company faces risks arising from its
estimate at lease inception of the projected value of the vehicle at the end of
the scheduled lease term (the 'Residual Value'). Although the Company uses
industry guidelines to estimate the Residual Value and periodically reviews and
updates the Residual Values as considered necessary throughout the lease term,
there can be no assurance that the Residual Value will approximate the ultimate
proceeds received on the disposition of the vehicle. At the end of the scheduled
lease term, if the lessee does not purchase the vehicle, the Company generally
sells the vehicle through wholesale auctions or through the Company's
subsidiary, PCSF. To the extent that the Company realizes proceeds from such
disposition in an amount less than the Residual Value, whether due to changes in
the market for that vehicle, the used automobile market in general or otherwise,
the Company will realize a loss on the disposition of the vehicle. Significant
aggregate losses on the disposition of off-lease vehicles would have a material
adverse effect on the Company's financial condition and results of operations.
The Company's ability to realize a gain on the disposition of a vehicle will be
substantially determined by the accuracy of the Residual Value previously
estimated and by the Company's ability to remarket its off-lease vehicles in a
cost-efficient manner. Due to the continued growth in the volume of Lease
Contracts purchased and the trend towards shorter lease terms, the Company will
likely be required to remarket increasing numbers of vehicles in the future.
There can be no assurance that such increased remarketing volume will not have a
material adverse effect on the Company's financial condition and results of
operations. See 'The Company -- Lease Contracts.'
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COMPETITION. The Company is subject to a high level of competition in the
retail automobile finance industry. The market is highly fragmented and
historically has been serviced by a variety of financial entities, including the
captive finance affiliates of major automobile manufacturers, banks, savings
associations, independent finance companies, credit unions and leasing
companies. Many of these competitors have greater financial resources than the
Company and have significantly lower cost of funds. Many of these competitors
may also have long-standing relationships with automobile dealerships and may
offer dealerships or their customers other forms of financing or services not
provided by the Company. Furthermore, during the past two years, a number of
automobile finance companies have completed public offerings of securities, the
proceeds from which are to be used, at least in part, to fund expansion and
finance increased purchases of contracts. There can be no assurance that the
Company will be able to compete successfully with such competitors in the
future.
GEOGRAPHIC AND CONTRACT PURCHASE CONCENTRATIONS. As of September 30, 1996,
the Company purchased 54.0% of its outstanding Contracts from Florida, 14.4%
from Georgia, 7.2% from Louisiana and 6.8% from North Carolina. As a result, the
Company's profitability may be influenced by the general economic conditions
prevailing in any of these states, particularly Florida.
As of September 30, 1996, 9.0% of the Company's portfolio were Loan
Contracts purchased through its Recourse Program, which consists of Loans to
consumers with 'D' credit. While Loans to 'D' credit consumers involve higher
credit risks than those to 'C' credit consumers, management believes that it
mitigates the credit risk through large discounts on the purchase of such Loan
Contracts and full recourse to the originating entity to repurchase certain
delinquent accounts. To date, the Company has not experienced any losses arising
out of the failure of the originating entities to repurchase any such delinquent
Loan Contracts. There can be no assurances, however, that the originating
entities will continue to have sufficient resources to cover recourse
obligations under this program; nor can there be any assurances that the level
of discounts associated with Loan Contracts originated under this program would
be sufficient to cover potential losses should the originating entity be unable
to satisfy its recourse obligations thereunder. See 'The Company -- Recourse
Program.'
Prior to the acquisition by the Company of the business of SFI, it
historically represented a significant source of Contracts for the Company. As
of September 30, 1996, Loan Contracts purchased through SFI represented
approximately 46% of the Company's outstanding Contracts purchased. Since the
acquisition, SFI has continued to generate Loan Contract volume comparable to
historic levels. As a result of a management contract with the former principals
of SFI, and the retention by SFI of substantially all of the personnel necessary
to the operation of the business, management believes that SFI will continue to
generate Loan Contracts at a comparable volume to historic levels. However,
there can be no assurance to that effect. In light of the volume of Loan
Contracts purchased through SFI prior to the acquisition, a significant decline
in the volume of Loan Contracts purchased through SFI could have a material
adverse effect on the Company.
MANAGEMENT OF RAPID GROWTH. The Company has experienced rapid growth and
expansion of its business. The Company's ability to support, manage and control
continued growth is dependent upon, among other things, its ability to train,
supervise and manage increased personnel. The success of the Company's growth
strategy is also dependent upon the Company's ability to maintain credit quality
as its Contract portfolio grows, which requires, among other things, the
maintenance of efficient collection procedures and adequate collection staffing,
internal controls and automated systems. There can be no assurance that the
Company will be successful in maintaining credit quality as its Contract
portfolio grows or that the Company's personnel, procedures, staff, internal
controls or systems will be adequate to support such growth.
RELIANCE ON KEY PERSONNEL. The Company's future operating results depend
in significant part upon the continued service of its executive officers. Should
one or more of these individuals cease to be affiliated with the Company before
acceptable replacements are found, there could be a material adverse effect on
the Company's business and prospects. Mr. Robert R. Bartolini, the Company's
Chairman and Chief Executive Officer, is the only executive officer with whom
the Company has an employment agreement. Should any of the Company's executive
officers elect to terminate their
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employment, there can be no assurance that suitable replacements could be hired
without substantial additional costs. The Company does not presently maintain
key-man insurance on any of its executives. The Company's continued success also
depends on its ability to attract and retain a sufficient number of qualified
employees to support its growth strategy. There can be no assurance that the
Company will be able to recruit and retain such personnel. See 'Management.'
CONTROL BY DIRECTORS AND OFFICERS. After the Offering, the Company's
officers and directors will own approximately 24.79% of the Common Stock of the
Company. See 'Principal Stockholders.' By virtue of the concentration of a
substantial block of shares with the Company's directors and officers, these
stockholders are in a position to elect all of the Company's directors and
control the outcome of other corporate matters without the approval of the
Company's other stockholders. In addition, applicable statutory provisions and
the ability of the Board of Directors to issue one or more series of Preferred
Stock without stockholder approval could deter or delay unsolicited changes in
control of the Company by discouraging open market purchases of the Company's
stock or a non-negotiated tender or exchange offer for such stock, which may be
disadvantageous to a majority of the Company's stockholders who may otherwise
desire to participate in such a transaction and receive a premium for their
shares. See 'Description of Securities.'
REGULATION. The Company's business is subject to numerous federal and
state consumer protection laws and regulations, which, among other things,
require the Company to obtain and maintain certain licenses and qualifications,
to limit the interest rates, charges and other fees the Company is allowed to
charge, to provide specified disclosures, and to define the Company's rights to
repossess and sell collateral. A change in existing laws or regulations, or in
the interpretation thereof, or the promulgation of any additional laws or
regulations could have an adverse effect on the Company's business. See 'The
Company -- Government Regulation.'
Due to the consumer-oriented nature of the industry in which the Company
operates, industry participants frequently are named as defendants in litigation
involving alleged violations of federal and state consumer lending or other
similar laws and regulations. A significant judgment against the Company or
another industry participant in connection with any litigation could have a
material adverse effect on the Company's financial condition and results of
operations. See 'The Company -- Government Regulation.'
SUBSTANTIAL DILUTION FROM CONVERTIBLE SECURITIES. The Company is presently
authorized to issue 50,000,000 shares of Common Stock, of which 7,347,367 shares
are outstanding as of the date of this Prospectus. During the period from April
1995 through September 1996, the Company sold in the aggregate $38.8 million
principal amount of convertible debentures ('Debentures') in private placement
transactions. Primarily in connection with the sale of such Debentures, the
Company issued 2,873,625 common stock purchase warrants (the 'Warrants'). The
Company has granted 40,000 Warrants in connection with directors joining the
Board of Directors. The Company may be caused to issue 2,525,595 additional
shares upon the conversion of the principal and interest due under the
outstanding Debentures and 2,913,625 shares upon the exercise of the Warrants,
thus increasing the number of shares outstanding from 7,347,367 to 12,786,587.
This number may be subject to increase by virtue of certain price protection and
adjustment features contained within certain Debentures and Warrants. See
'Description of Securities.'
The holders of the Debentures may exercise their rights of conversion, and
the holders of the Warrants may choose to exercise the Warrants, at prices below
the trading price of the Company's Common Stock at the time of conversion or
exercise and at a time when the Company might be able to obtain additional
capital through a new offering of securities at prevailing market prices. The
terms on which the Company may obtain additional financing during this period
may be adversely affected by the existence of such below market conversion and
exercise prices.
Conversion of all of the outstanding Debentures would, however, have the
effect of releasing the Company from its obligation to repay approximately $28.3
million of principal and interest on the Debentures. In addition, the exercise
of all of the Warrants would have the effect of securing for the Company
additional working capital of up to approximately $33.1 million.
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As its rate of growth continues, the Company must secure increasing amounts
of financing to fund the acquisition of additional Contracts. This may entail
the sale of additional shares of Common Stock or Common Stock equivalents, which
would have the effect of further increasing the number of shares outstanding.
In connection with other business matters deemed appropriate by the
Company's management, there can be no assurance that the Company will not
undertake the issuance of more shares of Common Stock without notice to
stockholders. This may be done in order to facilitate a business combination,
acquire assets or stock of another business, compensate employees or consultants
or for other valid business reasons in the discretion of the Company's Board of
Directors. The Company has a stock option plan, which is presently authorized to
grant options for the issuance of up to 1,000,000 shares of Common Stock. As of
September 30, 1996, the Company had 589,166 options outstanding under such plan.
See 'Management -- Executive Compensation.'
SHARES ELIGIBLE FOR FUTURE SALE. Upon completion of the Offering, the
Company will have a total of 9,629,222 shares of Common Stock outstanding
(10,004,222 shares if the Underwriters' over-allotment option is exercised in
full). Of these shares, a total of approximately 6,111,825 shares (6,486,825
shares if the Underwriters' over-allotment option is exercised in full) will be
freely tradeable without restriction or further registration under the
Securities Act of 1933 (the 'Securities Act'). The remaining 3,517,397 shares of
Common Stock outstanding are 'Restricted Securities' as that term is defined in
Rule 144 under the Securities Act, of which approximately 2,396,752 are held by
'affiliates' (as defined in the Securities Act) of the Company.
The Restricted Securities are subject to all of the limitations on resale
imposed by Rule 144. In general, under Rule 144 as currently in effect, any
affiliate of the Company or any person (or persons whose shares are aggregated
in accordance with the Rule) who has beneficially owned Restricted Securities
for at least two years would be entitled to sell, within any three-month period,
a number of shares that does not exceed the greater of 1.0% of the outstanding
shares of Common Stock (approximately 96,474 shares based upon the number of
shares outstanding after the Offering) and the reported average weekly trading
volume in the over-the-counter market for the four weeks preceding the sale.
Sales under Rule 144 are also subject to certain manner of sale restrictions and
notice requirements and to the availability of current public information
concerning the Company. Persons who have not been affiliates of the Company for
at least three months and who have held their shares for more than three years
are entitled to sell Restricted Securities without regard to the volume, manner
of sale, notice and public information requirements of Rule 144. Substantially
all of the Restricted Securities were issued in November 1994. Accordingly,
under Rule 144 (and subject to the conditions thereof), the Restricted
Securities are eligible for public resale. However, a majority of such shares
are held by executive officers and directors of the Company and Selling
Stockholders who have agreed to certain restrictions upon the resale of such
shares.
A substantial influx of shares into the market may have a significant
depressive effect upon the trading price of the Company's Common Stock. This may
occur upon the public resale of up to 2,525,595 shares issuable upon the
conversion of outstanding Debentures or 2,913,625 shares issuable upon the
exercise of outstanding Warrants. See 'Description of Securities.'
As a result of certain registration rights granted by the Company in
connection with the shares issuable upon the conversion of outstanding
Debentures or upon the exercise of outstanding Warrants, the Company may have an
obligation to register for public resale up to 4,970,820 shares of Common Stock.
The holders of substantially all of such shares have agreed to defer their
registration rights for a period of 120 or 180 days after the date of this
Prospectus. See 'Description of Securities -- Registration Rights.'
The Company, its executive officers and directors, the Selling
Stockholders, certain debenture holders and certain warrant holders have each
agreed that they will not, directly or indirectly, offer, sell, offer to sell,
contract to sell, pledge, grant any option to purchase or otherwise sell or
dispose of (or announce any offer, sale, offer of sale, contract of sale,
pledge, grant of any option to purchase or other sale or disposition) any shares
of Common Stock or other capital stock or any securities
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convertible into, or exercisable or exchangeable for, any shares of Common Stock
or other capital stock of the Company, for a period of 180 days after the date
of this Prospectus, without the prior written consent of Prudential Securities
Incorporated, on behalf of the Underwriters, except for bona fide gifts or
private transfers effected by such stockholders other than on any securities
exchange or in the over-the-counter market to donees or transferees that agree
to be bound by similar agreements. See 'The Company -- Underwriting.'
The Company is unable to predict the effect, if any, that future sales of
shares, or the availability of shares for future sale, will have on the market
price for the Common Stock prevailing from time to time. Sales of substantial
amounts of Common Stock, or the perception that such influx of shares into the
market could occur, could adversely affect the market price for the Common Stock
and could impair the Company's future ability to obtain capital through
offerings of equity securities.
VOLATILITY OF STOCK PRICE. The market price of the Common Stock could be
subject to significant fluctuations in response to influxes of shares into the
market upon the conversion or exercise of outstanding convertible securities,
variations in financial results or announcements of material events by the
Company or its competitors. Developments in the automobile finance industry or
changes in general conditions in the economy or the financial markets could also
adversely affect the market price of the Common Stock.
EFFECTS OF CERTAIN ANTI-TAKEOVER PROVISIONS. Certain provisions of the
Company's Certificate of Incorporation, Bylaws and Delaware law may delay, defer
or prevent a change in control of the Company and may adversely affect the
voting and other rights of the holders of Common Stock. In particular, the
existence of the Company's classified Board of Directors, the ability of the
Board of Directors to issue 'blank check' preferred stock without further
stockholder approval and the inability of stockholders to take action by written
consent may have the effect of delaying, deferring or preventing a change in
control of the Company. See 'Management -- Directors and Executive Officers' and
'Description of Securities.'
DIVIDENDS. No dividends have been declared or paid by NAL since the
Merger. The declaration or payment of dividends is not contemplated in the
foreseeable future. Earnings are expected to be retained to finance the
development of the Company's business. The declaration or payment of future
dividends will be directly dependent upon the earnings of the Company, its
financial needs and other similarly unpredictable factors.
USE OF PROCEEDS
The net proceeds to the Company from the sale of 2,281,855 shares of Common
Stock offered hereby, based on an offering price of $11.625 per share (the last
reported sales price on the Nasdaq National Market on November 19, 1996) after
deducting underwriting discounts and commissions and estimated offering
expenses, are estimated to be approximately $23,919,705 (approximately
$27,973,924 if the Underwriters over-allotment option is exercised in full). The
net proceeds will be used to support the growth of the Company's operations and
for general corporate purposes, including working capital, and future
acquisitions and the repayment of advances totaling $1,763,869 to the Company's
Chief Executive Officer. See 'Certain Transactions -- Loans to the Company.'
Pending such use, the net proceeds to the Company from the Offering will be used
to repay indebtedness under the Company's warehouse and other credit facilities.
The Company will not receive any proceeds from the sale of Common Stock by the
Selling Stockholders.
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<PAGE>
PRICE RANGE OF COMMON STOCK
Commencing December 1994, the Company's Common Stock was quoted on the
Over-the-Counter Bulletin Board under the symbol 'NALF.' In May 1995, the
Company's Common Stock was included in the Nasdaq National Market under the same
symbol.
The following table sets forth the high and low market prices of the Common
Stock for the period from January 1995 through November 19, 1996.
<TABLE>
<CAPTION>
1995 HIGH LOW
- --------------------------------------------- ------ ------
<S> <C> <C>
First Quarter................................ $12.00 $ 9.50
Second Quarter............................... $13.38 $10.25
Third Quarter................................ $18.38 $11.25
Fourth Quarter............................... $17.38 $ 9.75
<CAPTION>
1996
- ---------------------------------------------
<S> <C> <C>
First Quarter................................ $14.75 $10.63
Second Quarter............................... $16.13 $12.38
Third Quarter................................ $14.88 $11.75
Fourth Quarter (through November 19, 1996)... $14.50 $10.88
</TABLE>
On November 19, 1996, the last reported sales price of the Common Stock on
the Nasdaq National Market was $11.625 per share.
As of November 19, 1996, the Company had approximately 145 holders of
record of its Common Stock. Since a number of the shares of the Company are held
by financial institutions in 'street name,' it is likely that the Company has
more stockholders than indicated above.
DIVIDEND POLICY
No dividends have been declared or paid by NAL since the Merger. The
declaration or payment of dividends is not contemplated in the foreseeable
future. Earnings are expected to be retained to finance and develop the
Company's business. The declaration or payment of future dividends will be
directly dependent upon the earnings of the Company, its financial needs and
other similarly unpredictable factors.
16
<PAGE>
CAPITALIZATION
The following table sets forth, as of September 30, 1996, the actual
capitalization of the Company and the capitalization of the Company as adjusted
to give effect to the issuance and sale of 2,281,855 shares of Common Stock by
the Company in the Offering and the application of the estimated net proceeds
therefrom as described in 'Use of Proceeds.'
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
---------------------------
ACTUAL AS ADJUSTED (1)
-------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Debt:
Warehouse and other credit facilities........... $ 49,191 $ 25,271
Specialized borrowing facility.................. 21,682 21,682
Convertible subordinated debentures............. 25,843 25,843
-------- ---------------
Total debt................................... 96,716 72,796
-------- ---------------
Stockholders' Equity:.............................
Preferred Stock, $1,000 par value, 10,000,000
shares authorized; none issued and
outstanding.................................. -- --
Common Stock, $0.15 par value, 50,000,000 shares
authorized;
7,252,935 issued and outstanding;
9,534,790 shares issued and outstanding as
adjusted..................................... 1,088 1,430
Paid in capital................................... 25,698 49,276
Retained earnings................................. 10,472 10,472
-------- ---------------
Total stockholders' equity........................ 37,258 61,178
Total capitalization.............................. $133,974 $ 133,974
-------- ---------------
-------- ---------------
</TABLE>
- ------------------
(1) Reflects the capitalization of the Company on a pro forma basis as adjusted
to give effect to the partial repayment of the Company's warehouse and other
credit facilities and the sale of 2,281,855 shares of Common Stock offered
by the Company hereby (based upon a public offering price of $11.625 per
share, the last reported sales price on the Nasdaq National Market on
November 19, 1996 after deducting the underwriting discounts and commissions
and estimated offering expenses by the Company) and the receipt of the
estimated net proceeds therefrom.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following information should be read in conjunction with the
Consolidated Financial Statements (including the notes thereto) and other
financial data included elsewhere in this Prospectus.
The Company is a specialized automobile finance company engaged in the
purchase and servicing of Contracts originated by franchised and select
independent Dealers in connection with sales or leases of used and new
automobiles to consumers with non-prime credit. Consumers with non-prime credit
are perceived to be relatively high credit risks due to various factors,
including the manner in which they have handled previous credit, the absence or
limited extent of their prior credit history and their limited financial
resources. The Company purchases Contracts relating principally to the 'C'
credit segment of the automobile finance market. More than 90% of all Contracts
acquired by the Company during the nine months ended September 30, 1996 were
originated by franchised Dealers. The Company is also engaged in offering
insurance and related products to its Dealers and customers through its
insurance subsidiary, NIS. The Company has a remarketing subsidiary, PCSF with a
JDBR Franchise, which provides a cost-effective means of disposing of some of
the Company's repossessed and off-lease vehicles.
Contract Acquisition
The Company acquires Contracts from diverse sources through its Origination
Programs. In order to adjust for credit risk and achieve an acceptable rate of
return, the Company typically purchases Loan Contracts from Dealers at a
discount from the principal amounts of such Contracts. This discount is
non-refundable to the Dealer. Currently, the discount is being allocated to the
reserve for credit losses. See 'Acquisition Discounts.' During the period from
July 1, 1994 through September 30, 1996, the Company purchased $360.8 million in
Loan Contracts and $38.8 million in Lease Contracts through its Origination
Programs. The following table provides certain material information relative to
the Contracts acquired by the Company and its servicing portfolio during each of
the last nine quarters.
<TABLE>
<CAPTION>
FOR THE QUARTERS ENDED
------------------------------------------------------------------------------------------------
SEP. 30, JUN. 30, MAR. 31, DEC. 31, SEP. 30, JUN. 30, MAR. 31, DEC. 31, SEP. 30,
1996 1996 1996 1995 1995 1995 1995 1994 1994
OPERATING DATA: -------- -------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Contracts purchased during the
period:
Loan Contracts:
Dealer Program.............. $ 23,001 $ 15,019 $ 12,143 $ 26,522 $ 16,540 $ 5,267 $ 4,805 $ 1,809 $ 395
Other Origination
Programs(1)(2)............ 46,555 35,952 36,183 20,071 15,084 16,097 13,980 10,279 --
Recourse Program............ 7,091 10,568 5,206 6,696 8,203 6,554 5,838 5,415 5,484
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total Loan Contracts...... 76,647 61,539 53,532 53,289 39,827 27,918 24,623 17,503 5,879
Lease Contracts............... 6,776 3,609 3,686 3,989 4,085 5,241 6,733 3,446 1,237
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total Contracts........... $ 83,423 $ 65,148 $ 57,218 $ 57,278 $ 43,912 $33,159 $31,356 $20,949 $ 7,116
Number of Dealers (at end of
period)(3).................. 1,594 1,381 1,271 909 787 406 296 196 83
Servicing portfolio (at end of
period):
Owned....................... $108,208 $111,928 $117,210 $113,830 $111,888 $87,938 $65,824 $44,415 $33,028
Serviced for securitization
trusts.................... 175,679 118,818 73,741 39,934 -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total servicing
portfolio............... $283,887 $230,746 $190,951 $153,764 $111,888 $87,938 $65,824 $44,415 $33,028
-------- -------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- -------- --------
</TABLE>
- ------------------
(1) Includes Contracts purchased during the period through the Company's
Captive, Affinity, Correspondent and Wholesale Programs.
(2) Includes Contracts purchased through the Company's Captive Program with SFI.
(3) Includes Dealers for the Company's Captive Program with SFI.
The Company has experienced significant growth in the volume of Contracts
purchased. Contract volume has increased to $83.4 million for the quarter ended
September 30, 1996 from $7.1 million for the quarter ended September 30, 1994,
representing an average quarterly growth rate of 35%. The growth in Contract
volume is attributable primarily to the increase in the number of Dealers
participating in the Company's Dealer and Captive Programs, as well as an
expansion of the sources and amounts of financing available to purchase
Contracts. The Dealers participating in these two
18
<PAGE>
programs increased to 1,594 Dealers at September 30, 1996 from 83 Dealers at
September 30, 1994, representing an average quarterly growth rate of 44%. The
growth in Contract volume has resulted in an increase in the Company's servicing
portfolio, which at September 30, 1996 was $283.9 million compared to $33.0
million at September 30, 1994, representing an average quarterly growth rate of
29%.
The Company experienced a significant increase in the volume of Loan
Contracts purchased under its Dealer Program during the six months ended
December 31, 1995, partly as a result of the relaxation of certain underwriting
criteria. As a result of its analysis of the performance of the Loan Contracts
originated under the Dealer Program during this period, the Company decided to
strengthen its underwriting criteria during the fourth quarter of 1995 and, upon
phasing-in these standards, the Company experienced a significant decline in the
volume of Loan Contracts purchased under its Dealer Program during the first
quarter of 1996. The volume of Loan Contracts purchased through its Dealer
Program increased during the second and third quarters of 1996, however, not to
the level achieved during the fourth quarter of 1995. Management expects that
the volume of Loan Contracts in this program will continue to increase and may
achieve, during the fourth quarter of 1996, the levels realized during the
fourth quarter of 1995. The Company experienced an increase in the volume of
Loan Contracts purchased through its Recourse Program for the quarters ended
June 30 and September 30, 1996, when compared to the quarter ended March 31,
1996, due primarily to the addition of a participant to the program during this
period.
Revenues
The increase in Contract volume and the servicing portfolio has led to an
increase in revenues as demonstrated in the following table:
<TABLE>
<CAPTION>
FOR THE QUARTERS ENDED
--------------------------------------------------------------------------------------------------------
SEP. 30, JUN. 30, MAR. 31, DEC. 31, SEP. 30, JUN. 30, MAR. 31, DEC. 31, SEP. 30,
1996 1996 1996 1995 1995 1995 1995 1994 1994
REVENUE DATA: -------- -------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Loan Contracts......... $ 4,072 $ 4,054 $3,326 $ 3,573 $2,978 $1,847 $ 978 $ 192 $ 5
Lease Contracts........ 1,284 1,206 1,101 1,020 919 796 587 335 118
Recourse Programs...... 763 650 644 662 660 603 492 482 277
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total interest
income............. 6,119 5,910 5,071 5,255 4,557 3,246 2,057 1,009 400
Non-automobile interest
income................. 92 133 114 222 319 346 476 541 831
Gain on sale of Loan
Contracts.............. 7,147 3,283 2,997 4,123 478 -- -- 155 697
Servicing fees, net...... -- 302 557 104 -- -- -- -- --
Insurance fees........... 460 407 236 280 155 43 102 17 7
Other fees............... 760 1,225 722 580 372 167 53 214 94
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total revenues....... $14,578 $11,260 $9,697 $10,564 $5,881 $3,802 $2,688 $1,936 $2,029
-------- -------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- -------- --------
</TABLE>
The Company generates revenues primarily through the purchase, sale and
ongoing servicing of Contracts. The Company earns interest income and fees on
Contracts purchased and held in portfolio, including those awaiting
securitization. Upon the sale of Loan Contracts through the Company's
securitization program, the Company recognizes a gain on sale on the Loan
Contracts. The Company continues to service these Loan Contracts and earns a
servicing fee currently equal to three percent per year of the outstanding
principal balance of the Loan Contracts sold. The Company also receives revenues
from the sale of insurance and related products, and other miscellaneous fees.
During the quarter ended March 31, 1996, interest income declined slightly
from that reported during the quarter ended December 31, 1995, due primarily to
a decrease in the average balance of the Contracts held in the portfolio. This
decrease was associated with the Company's first sale of Loan Contracts under a
securitization transaction in December 1995.
19
<PAGE>
Interest income on the non-automobile portfolio consists of interest earned
on mortgage loans, marine loans and other consumer loans acquired by the Company
through bulk purchases prior to June 30, 1994. The decline in interest income is
due to the run-off of this portfolio.
Gain on sale of Loan Contracts decreased during the quarters ended March
31, and June 30, 1996 when compared to that for the quarter ended December 31,
1995. The decrease was due primarily to a decline in the net spread on the March
and June 1996 securitization transactions when compared to that for the December
1995 securitization transaction. See 'Gain on Sale of Loans.' The decline is
also attributable to an increase in the required level of reserve account
necessary to credit enhance the March and June 1996 securitization transactions
when compared to the reserve account for the December 1995 transaction. The
reserve account is funded upon the closing of a securitization transaction,
whereby a portion of the proceeds from the sale is set aside in the reserve
account to protect the purchasers of the asset-backed securities from potential
losses. Gain on sale subsequently increased during the quarter ended September
30, 1996, reflecting a larger securitization with a higher net spread than the
previous two securitizations. See 'Liquidity and Capital Resources --
Securitization.'
The Company experienced a decline in servicing fee income since the quarter
ended March 31, 1996 despite the completion of two additional securitization
transactions. During the quarters ended June 30 and September 30, 1996, the
Company did not receive its distribution of servicing cash flows associated with
two of its securitization trusts due to an increase in the rates of delinquency,
repossession and losses beyond those allowable by the structure of the
securitization transaction. Consequently, the reduced level of servicing fee
income was entirely offset by amortization of the Excess Servicing Receivable.
The Company will receive these servicing cash flows, which are currently
accumulating in the relevant reserve accounts, if the delinquency, repossession
and loss rates fall below the allowable levels for a specified period.
Management believes that these factors do not currently result in an impairment
to the Excess Servicing Receivable relating to these securitization
transactions. See 'Risk Factors.'
Net Interest Income
Net interest income ('Net Interest Income') is the difference between the
interest earned on Contracts held in portfolio, including those awaiting
securitization and the interest costs associated with the Company's borrowings
to finance such Contracts. Net Interest Income will fluctuate and be impacted by
the spread between the portfolio yield and the cost of the Company's borrowings,
changes in overall Contract acquisition volume and the timing of securitization
transactions. The following table illustrates the weighted average net interest
rate spread (expressed as a percentage) earned on Contracts acquired:
<TABLE>
<CAPTION>
FOR THE QUARTERS ENDED
--------------------------------------------------------------------------------------------------------
SEP. 30, JUN. 30, MAR. 31, DEC. 31, SEP. 30, JUN. 30, MAR. 31, DEC. 31, SEP. 30,
NET INTEREST SPREAD: 1996 1996 1996 1995 1995 1995 1995 1994 1994
-------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:(1)
Loan Contracts......... 22.72% 22.72% 20.95% 21.76% 22.01% 23.02% 26.62% 21.36% 22.22%
Lease Contracts........ 18.02 18.85 17.88 18.77 19.90 20.58 19.13 21.06 19.60
Recourse Program....... 18.75 19.20 18.97 19.95 20.42 20.11 19.71 22.95 17.85
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total automobile
Contracts.......... 21.00 21.11 19.94 20.88 21.31 21.80 22.26 21.99 18.47
Non-automobile
Contracts.............. 13.27 17.41 13.18 22.21 29.20 27.55 27.12 23.46 35.37
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total.................. 20.82 21.01 19.70 20.93 21.70 22.25 23.04 22.49 27.15
Interest expense(2)...... 10.32 10.80 10.12 10.94 10.97 11.11 11.45 11.11 13.75
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net interest spread...... 10.50% 10.21% 9.58% 9.99% 10.73% 11.14% 11.59% 11.38% 13.40%
-------- -------- -------- -------- -------- -------- -------- -------- --------
</TABLE>
- ------------------
(1) Represents interest income plus discount accretion (if any) and fees less
amortization of capitalized costs, expressed as a percentage of average
receivables outstanding.
(2) Represents interest expense as a percentage of average total debt
outstanding.
During the period from September 30, 1994 to March 31, 1996, the Company
has generally experienced a decline in the net interest spread. This reflected
the shift in the composition of the Company's portfolio from bulk purchase
non-automobile contracts purchased prior to 1995 at large
20
<PAGE>
discounts, which yielded higher rates, to a gradually greater concentration in
automobile Contracts, which yielded lower rates. The net interest spread
subsequently increased during the quarter ended June 30, 1996 as the Company
began to benefit from the expansion into additional states with higher allowable
rates of interest when compared to the allowable rate of interest in Florida,
where the Company has a large concentration. See 'The Company -- Origination
Sources.' This increase was partially offset by an increase in the cost incurred
on borrowings in connection with the additional placement of convertible
subordinated debentures during the quarter ended June 30, 1996.
Gain on Sale of Loans
The Company has sold Loan Contracts through its securitization program in
each of the last four quarters. The Company recognizes a gain on sale of Loan
Contracts in an amount equal to: (i) the excess servicing receivable ('Excess
Servicing Receivable') from the trust during the life of the securitization,
plus (ii) the net proceeds received from the securitization less the aggregate
book value of the Loan Contracts transferred to the trust. The Excess Servicing
Receivable represents the estimated present value of excess servicing cash flows
('Excess Servicing Cash Flows') based on the Company's estimates for loss and
prepayments during the life of the securitization transaction. Quarterly, the
Company reviews the assumptions made in determining the Excess Servicing
Receivable. If the present value of future aggregate Excess Servicing Cash Flows
is less than the aggregate capitalized amount, a valuation adjustment would be
recorded. Excess Servicing Cash Flows represent the difference between the cash
flows on Loan Contracts in a securitization trust and the sum of (i) payments of
principal and interest required to be made to investors in the securitized pool,
(ii) the contractual servicing fee, currently at the rate of three percent per
year, and (iii) other on-going expenses of such trust. See 'Liquidity and
Capital Resources -- Securitization.'
The gain on sale of Loan Contracts is affected by, among other things, the
amount of Loan Contracts sold in the securitization transaction, the net spread
on the transaction, the up-front costs of the transaction and estimated losses
and prepayments on the Loan Contracts. Net spread is the major component of the
total gain on sale. The following table illustrates the net spread for each of
the Company's securitizations:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE INTEREST RATE
ORIGINAL CONTRACT PAID TO GROSS NET
BALANCE RATE INVESTORS(1) SPREAD(2) SPREAD(3)
SECURITIZATION: -------- -------- ------------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
1996-3 Securitization Trust... $ 70,052 19.37% 7.42% 11.95% 8.95%
1996-2 Securitization Trust... 49,500 19.20% 7.58% 11.62% 8.62%
1996-1 Securitization Trust... 40,750 19.26% 7.47% 11.79% 8.79%
1995-1 Securitization Trust... 40,136 19.58% 7.10% 12.48% 9.48%
--------
Total....................... $200,438
--------
--------
</TABLE>
- ------------------
(1) Weighted average interest rate paid to investors in the securitization
transaction.
(2) Difference between weighted average Contract rate and weighted average
interest rate paid to investors.
(3) Difference between gross spread less contractual servicing fees.
The increase in the net spread for the 1996-3 Securitization Trust,
compared to the prior two securitization transactions, was attributable to a
higher weighted average coupon rate due primarily to the Company's expansion
outside the State of Florida. A corresponding decrease in the interest rate paid
to investors, due primarily to a decrease in market rates, also contributed to a
higher net spread.
The decrease in the net spread from the 1995-1 Securitization Trust to the
1996-1 Securitization Trust, and the further decline in the net spread on the
1996-2 Securitization Trust, was primarily due to an increase in the interest
rate paid to investors, due primarily to an increase in market interest rates.
Servicing Fee Income
Throughout the life of the Loan Contract, the Company earns a contractual
servicing fee from the securitization trust, currently equal to three percent
per year of the principal balance outstanding of the Loan Contracts sold to the
trust. Servicing fee income increased from $104,000 for the quarter ended
December 31, 1995, representing one month's servicing income from the December
securitization transaction, to $557,000 for the quarter ended March 31, 1996,
and then decreased to $302,000 for the
21
<PAGE>
quarter ended June 30, 1996. During the quarters ended June 30 and September 30,
1996, the Company did not receive its distribution of servicing cash flows
associated with two of its securitization trusts due to an increase in the rates
of delinquency, repossession and losses beyond those allowable by the structure
of the securitization transaction. Consequently, the reduced level of servicing
fee income was entirely offset by amortization of the Excess Servicing
Receivable. The Company will receive these servicing cash flows, which are
currently accumulating in the relevant reserve accounts, if the delinquency,
repossession and loss rates fall below the allowable levels for a specified
period. Management believes that these factors do not currently result in an
impairment to the Excess Servicing Receivable relating to these securitization
transactions. See 'Risk Factors.'
Servicing fee income and the Excess Servicing Receivable may be impacted by
changes in the amount of losses and levels of prepayments from those assumed by
the Company at the time of the securitization. To the extent the assumptions
used are materially different from actual results, the amount of Excess
Servicing Cash Flows received by the Company over the remaining life of the
securitization could be significantly affected. See 'Risk Factors.'
Other Income
The Company generates revenues from the sale of a variety of insurance and
related products to Dealers and its customers, acting as agent for third party
insurance companies. The Company recognizes as revenue the commissions or fees
received upon the sale of these products to customers. Other fees consist
primarily of late fees earned on the Company's servicing portfolio. Insurance
and other fees have continued to increase due primarily to the increase in the
volume of Contracts purchased and the growth in the servicing portfolio.
RESULTS OF OPERATIONS
The following table provides the principal components of the Company's net
income for the periods presented:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED FOR THE YEARS ENDED
------------------------------ ----------------------------
SEP. 30, SEP. 30, DEC. 31, DEC. 31,
1996 1995 1995 1994
RESULTS OF OPERATIONS: ------------- ------------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Net interest income.......................... $ 8,936 $ 6,363 $ 8,319 $3,430
Gain on sale of Loan Contracts............... 13,427 128 4,600 2,292
Servicing fees and other income.............. 4,670 1,241 2,651 454
------------- ------ ------------ ------
Total revenue.............................. 27,033 7,732 15,570 6,176
Provision for credit losses.................. (2,801) (1,412) (2,762) (573)
Operating expenses........................... (13,844) (4,514) (7,805) (4,946)
Non-cash charge for escrow shares............ (301) (80) (280) --
------------- ------ ------------ ------
Income before taxes.......................... 10,087 1,726 4,723 657
Provision for income taxes................... (3,945) (656) (1,926) (263)
------------- ------ ------------ ------
Net income................................. $ 6,142 $ 1,070 $ 2,797 $ 394
------------- ------ ------------ ------
------------- ------ ------------ ------
</TABLE>
Nine Months Ended September 30, 1996 and 1995.
Net Interest Income. Net Interest Income for the nine months ended
September 30, 1996 was $8.9 million compared to $6.4 million for the nine months
ended September 30, 1995, representing a 40% increase. This increase was
primarily a result of the growth in average Contracts held in portfolio and
those awaiting securitization from $72.7 million for the nine months ended
September 30, 1995 to $110.5 million for the nine months ended September 30,
1996.
Gain on Sale of Loans. Gain on Sale of Loans for the nine months ended
September 30, 1996 was $13.4 million compared to $128,000 for the nine months
ended September 30, 1995 because no securitizations were completed during the
nine months ended September 30, 1995.
Servicing Fees and Other Income. During the period from December 1995
through September 1996, the Company completed four securitization transactions
aggregating approximately $200.4 million. As a result, the Company received
servicing fee income of $859,000 for the nine months ended September 30, 1996.
Prior to this period, the Company did not complete a securitization transaction.
Other income, consisting primarily of insurance and other fees, increased from
$1.2
22
<PAGE>
million to $3.3 million for the nine months ended September 30, 1995 and 1996,
respectively. These increases were primarily due to an increase in the volume of
Contracts purchased and the growth in the servicing portfolio to $283.9 million
at September 30, 1996 from $111.9 million at September 30, 1995. In addition,
the Company recorded approximately $550,000 to other income relating to the
settlement of outstanding litigation during June 1996.
Provision for Credit Losses. The Company's provision for credit losses for
the nine months ended September 30, 1996 was $2.8 million compared to $1.4
million for the nine months ended September 30, 1995. This increase related
primarily to provisions recorded for an estimate of possible losses that may be
incurred in connection with the acquisition of new Contracts during 1996 and the
performance of previously purchased Contracts.
Operating Expenses. Operating expenses increased to $13.8 million for the
nine months ended September 30, 1996 compared to $4.5 million for the nine
months ended September 30, 1995. This increase was attributable to the hiring of
additional personnel in almost all areas of the Company's operations to support
its growth. The increase is also due to the absorption of the operating expenses
of SFI, which was acquired in June 1996. As a percentage of average total
servicing portfolio, operating expenses were approximately 9% and 8% for the
nine months ended September 30, 1996 and 1995, respectively, on an annualized
basis.
Non-Cash Charge For Escrow Shares. The Company recorded a non-cash charge
to earnings of $301,000 for the nine months ended September 30, 1996 compared to
$80,000 for the nine months ended September 30, 1995 for shares released from
the escrow arrangement that was established in connection with the Merger. See
'Principal Stockholders.'
Net Income. The Company reported net income of $6.1 million or $0.75 per
fully diluted share for the nine months ended September 30, 1996 compared to net
income of $1.1 million or $0.18 per fully diluted share for the nine months
ended September 30, 1995. Net income, excluding the non-cash charge for
releasing escrow shares, was $6.4 million or $.78 per share for the nine months
ended September 30, 1996, in comparison to $1.2 million or $0.19 per fully
diluted share for the nine months ended September 30, 1995.
Years Ended December 31, 1995 and 1994.
Net Interest Income. Net interest income for the year ended December 31,
1995 was $8.3 million compared to $3.4 million for the year ended December 31,
1994, representing a 143% increase. This increase was primarily a result of the
growth in average Contracts held in portfolio and those awaiting securitization
from $24.0 million for the year ended December 31, 1994 to $76.0 million for the
year ended December 31, 1995.
Gain on Sale of Loans. The Company completed a $40 million securitization
during the fourth quarter of 1995 resulting in a $4.0 million gain. Total gain
on sale for the year ended December 31, 1995 was $4.6 million compared to $2.3
million for the year ended December 31, 1994. Although no securitization
transactions were completed during 1994, the Company recognized gains from
selling loan portfolios through bulk sale arrangements.
Servicing Fees and Other Income. During the period from December 31, 1994
to December 31, 1995, the Company completed a securitization transaction
aggregating $40 million. As a result, servicing fee income was $119,000 for the
year ended December 31, 1995 compared to $0 for the preceding year. Other
income, consisting of insurance and other fees, increased from $397,000 for the
year ended December 31, 1994 to $1.7 million for the year ended December 31,
1995. These increases were primarily due to an increase in the volume of
Contracts purchased and the growth in the servicing portfolio to $153.8 million
for the year ended December 31, 1995 from $44.4 million for the year ended
December 31, 1994.
Provision for Credit Losses. The Company's provision for credit losses for
the year ended December 31, 1995 was $2.8 million compared to $573,000 for the
year ended December 31, 1994. This increase related primarily to provisions
recorded for an estimate of possible losses that may be incurred in connection
with the acquisition of new Contracts during 1995 and the performance of
previously purchased Contracts.
23
<PAGE>
Operating Expenses. Operating expenses increased to $7.8 million for the
year ended December 31, 1995 compared to $4.9 million for the year ended
December 31, 1994, a 59% increase. This increase was attributable to the hiring
of additional personnel in almost every area of the Company's operations to
support its growth. As a percentage of average total servicing portfolio,
operating expenses decreased to 8.41% in 1995 from 14.33% in 1994.
Non-Cash Charge For Escrow Shares. The Company recorded a charge to
earnings of $280,000 for the year ended December 31, 1995 for shares released
from the escrow arrangement that was established in connection with the Merger.
Net Income. The Company reported net income of $2.8 million or $0.45 per
fully diluted share for the year ended December 31, 1995 compared to net income
of $394,000 or $0.07 per fully diluted share for the year ended December 31,
1994. Net income, excluding the non-cash charge for releasing escrow shares, was
$3.0 million, or $0.50 per share for the year ended December 31, 1995.
DELINQUENCY AND CREDIT LOSS EXPERIENCE
The Company's profitability depends largely upon its ability to effectively
manage delinquency and credit losses. The Company maintains a reserve available
to absorb future credit losses on Contracts that are held in portfolio and on
Loan Contracts while they are awaiting securitization. The Company evaluates
historical charge-off experience against the reserve and performs analyses of
portfolio performance and delinquency trends to determine if the reserve is
adequate to absorb estimated future losses.
Collection and Charge-off Procedures. Typically within 24 hours of an
account becoming delinquent, a collector establishes contact with the customer.
If the delinquency is not promptly resolved, the collector pursues a resolution
through additional telephone contacts with the customer followed by demand
letters as appropriate. In the event that a delinquency cannot be resolved, the
account is turned over for repossession of the vehicle by an outside agency,
typically within 45 days. When a vehicle is repossessed and not redeemed by the
customer within a period prescribed by statute, the vehicle is assigned for
disposal. At the time of repossession, the vehicle is reviewed by management and
its carrying value is written down, if necessary, to its net realizable value.
Write-downs of carrying value, which include costs of disposition, are charged
against the Company's reserve available for credit losses. Vehicles typically
are disposed of at wholesale auctions, or remarketed through PCSF or through the
JDBR Franchise. The Company may establish a dialogue with a delinquent borrower
and formulate a short-term payment arrangement that would allow the borrower to
retain the automobile beyond a delinquency of 45 days. Accounts that reach 90
days of delinquency are placed on non-accrual status and any previously accrued
interest income is reversed. In the event that the Company is unable to locate
the customer or the vehicle by the time an account reaches 150 days of
delinquent status, the account is fully charged off against reserves available
for credit losses. If the customer declares bankruptcy, the account is charged
off to the lesser of any court-ordered settlement or the wholesale value of the
vehicle. The Company's collection staff continues to pursue customers, to locate
and repossess vehicles and to collect losses incurred. Any amount received after
a Contract has been charged-off is recorded as a recovery and an increase in the
reserves available for credit losses.
Acquisition Discounts. The Company purchases Contracts from Dealers at
discounts from their stated principal amount to provide for credit risk. The
discounts typically range from 3% to 10%. The amount of the discount varies
primarily based on the credit risk and the terms of the Contract and the quality
of the collateral. See 'The Company -- Underwriting.' Any discount that
management considers necessary to absorb future credit losses is allocated to
the reserves available for credit losses. The remaining portion of the discount,
if any, is recognized as income using the level-yield method of accretion.
Currently, the Company allocates the entire discount to the reserve available
for credit losses and expects to do so for the foreseeable future. However, the
Company will continue to evaluate the collectibility of its Contracts in
conjunction with the allocation of discounts.
Reserve Available for Credit Losses. In the event of a payment default,
proceeds from the liquidation of the vehicle may not cover the outstanding
Contract balance and costs of recovery. The Company maintains a reserve
available for credit losses in an amount that management believes is
24
<PAGE>
adequate to absorb future credit losses on Contracts. The reserve available for
credit losses is comprised of the acquisition discounts, an allowance for credit
losses and, in limited cases, dealer reserves. On a monthly basis, the Company
evaluates the adequacy of the reserve available for credit losses by analyzing
the Contract portfolios in their entirety using a 'static pool analysis' method
in which the historical charge-offs are stratified according to the Contract
origination date. These Contracts are grouped together by calendar month of
origination, and the related historical charge-off experience on such Contracts
is analyzed to evaluate the reasonableness and adequacy of the reserve available
for credit losses. This analysis takes into consideration historical loss
experience, current economic conditions, levels of repossessed assets,
delinquency experience, seasoning of Contracts, and other relevant factors.
Should management deem the level of acquisition discounts and dealer reserves,
in limited cases, to be inadequate, an additional provision for credit losses
will be recorded to increase the allowance for credit losses and, therefore,
increase the overall level of the reserve available for credit losses.
The Company has prepared analyses of its Contracts, based on its credit
experience and available industry data, to identify the delinquency and default
rates at the various stages of a Contract's repayment term. The results of the
analyses suggest that the probability of a Contract becoming delinquent or going
into default is highest during the 'seasoning period,' which begins 3 to 4
months, and ends 12 to 14 months, after the origination date. If the volume of
Contracts purchased by the Company continues to grow, an increasingly greater
portion of the Company's portfolio is expected to fall into the 'seasoning
period' described above, causing a rise in the overall portfolio delinquency and
default rates. Assuming no changes in any other factors that may affect
delinquency and default rates, the Company's management believes that this trend
should stabilize or reverse when the volume of mature Contracts (with lower
delinquency and default rates) is sufficient to offset the delinquency and
default rates on newer Contracts.
The following table sets forth information regarding credit loss experience
of the total servicing portfolio for the periods presented:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED FOR THE YEAR ENDED
-------------------------------- ------------------
SEP. 30, SEP. 30, DEC. 31,
1996 1995 1995
CREDIT LOSSES:(1)(4) ------------- ------------- ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Loan Contracts serviced:.......................... $ 220,108 $ 68,543 $107,926
Gross charge-off percentage(2).................. 10.65% 1.07% 3.68%
Net charge-off percentage(3).................... 7.69% 1.07% 3.68%
Lease Contracts serviced:......................... $ 29,808 $ 19,699 $ 22,518
Gross charge-off percentage(2).................. 6.09% 0.91% 4.19%
Net charge-off percentage(3).................... 4.09% 0.91% 4.19%
Total Loan and Lease Contracts serviced:.......... $ 249,916 $ 88,242 $130,444
Gross charge-off percentage(2).................. 10.02% 1.02% 3.78%
Net charge-off percentage(3).................... 7.20% 1.02% 3.78%
Recourse Contracts serviced:...................... $ 24,412 $ 16,322 $ 18,129
Gross charge-off percentage(2).................. -- -- --
Net charge-off percentage(3).................... -- -- --
Total servicing portfolio:........................ $ 274,328 $ 104,564 $148,573
Gross charge-off percentage(2).................. 9.00% 0.79% 3.15%
Net charge-off percentage(3).................... 6.46% 0.79% 3.15%
</TABLE>
- ------------------
(1) This table excludes non-automobile bulk purchase contracts.
(2) Gross charge-offs are computed as principal balance less liquidation
proceeds received expressed as a percentage of average balance outstanding
during the period.
(3) Net charge-offs are computed as gross charge-offs less any recoveries
expressed as a percentage of average balance outstanding during the period.
(4) Percentages for the nine months ended September 30, 1996 and 1995 have been
annualized.
The increase in the level of credit losses is due primarily to the
seasoning of the Company's servicing portfolio when comparing the net charge-off
percentage for the nine months ended
25
<PAGE>
September 30, 1996 to that for the nine months ended September 30, 1995 and the
year ended December 31, 1995.
Delinquency Experience. The following table reflects the Company's
delinquency experience for the periods presented:
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, AS OF DECEMBER 31,
-------------------- --------------------
1996 1995 1995 1994
DELINQUENCY:(1) -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Loan Contracts serviced...................... $219,787 $ 67,484 $107,191 $ 8,175
Delinquencies:
31-60 days................................. 7.36% 6.42% 8.83% 2.17%
61-90 days................................. 2.62% 2.24% 2.99% 0.18%
Greater than 90 days....................... 2.14% 1.53% 2.18% 0.13%
-------- -------- -------- --------
Total.................................... 12.12% 10.19% 14.00% 2.48%
Lease Contracts serviced..................... $ 29,014 $ 18,324 $ 21,361 $ 5,918
Delinquencies:
31-60 days................................. 4.70% 5.12% 7.51% 6.88%
61-90 days................................. 1.39% 1.19% 1.90% 1.21%
Greater than 90 days....................... 2.66% 1.46% 1.83% 1.28%
-------- -------- -------- --------
Total.................................... 8.75% 7.77% 11.24% 9.37%
Total Loan and Lease Contracts serviced...... $248,801 $ 85,808 $128,552 $ 14,093
Delinquencies:
31-60 days................................. 7.05% 6.14% 8.61% 4.15%
61-90 days................................. 2.47% 2.01% 2.81% 0.61%
Greater than 90 days....................... 2.20% 1.52% 2.12% 0.61%
-------- -------- -------- --------
Total.................................... 11.72% 9.67% 13.54% 5.37%
Recourse Contracts serviced.................. $ 24,412 $ 16,322 $ 18,129 $ 14,521
Delinquencies:
31-60 days................................. 11.52% 7.89% 16.99% 11.75%
61-90 days(2).............................. N/A N/A N/A N/A
Greater than 90 days(2).................... N/A N/A N/A N/A
-------- -------- -------- --------
Total.................................... 11.52% 7.89% 16.99% 11.75%
Total Contracts serviced..................... $273,213 $102,130 $146,681 $ 28,614
Delinquencies:
31-60 days................................. 7.45% 6.42% 9.65% 8.01%
61-90 days................................. 2.25% 1.69% 2.46% 0.30%
Greater than 90 days....................... 2.00% 1.28% 1.86% 0.30%
-------- -------- -------- --------
Total.................................... 11.70% 9.39% 13.97% 8.61%
-------- -------- -------- --------
</TABLE>
- ------------------
(1) This table excludes non-automobile bulk purchase contracts. In addition,
this table excludes two automobile bulk purchase portfolios which were
non-performing at the time of purchase in 1994 and are accounted for on a
cost recovery basis, whereby income is recognized only to the extent that
the Company's investment in these portfolios has been fully recouped. As of
September 30, 1996, the combined investment in these portfolios totaled
$1,115,000.
(2) Contracts delinquent 61 days or more are repurchased by the originator of
the Contracts under the Recourse Program.
Management believes that the increase in the overall delinquency from
December 31, 1994 to December 31, 1995 is primarily the result of an increase in
the percentage of Contracts falling in the 'seasoning period.'
LIQUIDITY AND CAPITAL RESOURCES
The Company's business requires substantial cash to support the growth in
Contracts purchased. In general, the Company finances the purchase of Contracts
through various credit facilities. The Company funds through these facilities
between 80% and 90% of the principal balance of the Contracts. The Company funds
the remainder of the purchase price through its capital. As the Company
continues to increase the volume of Contracts purchased, it must secure
additional capital to support its growth. The Company's growth has been
facilitated by its ability to complete private placements of debt and equity
securities and through securitization transactions.
Through September 30, 1996, the Company had secured its principal sources
of financing through senior indebtedness comprised of its warehouse facility,
revolving credit facilities and its specialized
26
<PAGE>
borrowing facility, as well as subordinated indebtedness consisting of unsecured
subordinated debentures. In addition, the Company secures liquidity through the
securitization of its Loan Contracts. During the last four quarters, the Company
has completed an aggregate of approximately $200 million of securitization
transactions.
<TABLE>
<CAPTION>
AS OF AS OF
SEPTEMBER 30, DECEMBER 31,
------------------ ------------------
1996 1995 1995 1994
SOURCES OF FINANCING: ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Warehouse Facility:
Available line............................. $50,000 $50,000 $50,000 $ --
Outstanding balance........................ 21,457 10,000 11,585 --
Revolving Credit Facilities:
Available line............................. 45,000 45,000 45,000 30,000
Outstanding balance........................ 27,231 21,733 21,844 11,998
Revolving Line of Credit Facility:
Available line............................. 3,500 -- -- --
Outstanding balance........................ 503 -- -- --
Specialized Borrowing Facility:
Outstanding balance........................ 21,682 47,144 42,381 10,212
Subordinated Debentures:
Issued -- cumulative....................... 38,825 15,400 21,325 --
Converted to Common Stock -- cumulative.... (12,825) (7,200) (8,260) --
------- ------- ------- -------
Outstanding balance........................ 26,000 8,200 13,065 --
Unsecured notes.............................. -- 35 -- 230
Note due to stockholder...................... -- 854 2,919 62
------- ------- ------- -------
Total outstanding borrowings................. $96,873 $87,966 $91,794 $22,502
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
Warehouse Facility. During September 1995, the Company entered into a $50
million warehouse facility (the 'Warehouse Facility') with Greenwich Capital
Financial Products, Inc. ('Greenwich'). In November 1996, the Warehouse Facility
was increased to $100 million. This facility is structured as a reverse
repurchase agreement, which is characterized as a borrowing for financial
reporting purposes. Under the terms of this facility, the Company receives an
advance of approximately 90% of the outstanding principal balance of the Loan
Contract at an interest rate of 2.25% over 30-day LIBOR. If, at any time during
the financing period, 90% of the market value of the Contract is less than the
amount advanced, Greenwich may require the Company to transfer funds or
additional Contracts to Greenwich until the deficiency ('margin') amount is
satisfied. Market value of Loan Contracts may be affected by such factors as
changes in interest rates, delinquency rates and credit losses. Although
management believes that this is unlikely to occur to any significant degree, a
margin call could require an allocation of certain of the Company's liquidity
and capital resources. The Warehouse Facility expires in September 1997 and is
renewable for an additional year subject to certain conditions. At September 30,
1996, the Company had $21.5 million outstanding under this facility.
The Warehouse Facility includes certain financial and operational
covenants, including the maintenance of a minimum net worth of $30 million, the
prohibition of a debt to equity ratio in excess of 8 to 1, and maintenance of
certain loan portfolio performance criteria. For the purpose of the Warehouse
Facility, net worth has been defined as total stockholders' equity plus
subordinated indebtedness not due within 90 days. At September 30, 1996, the
Company was in compliance with all relevant financial and operational covenants.
Management continues to monitor closely the performance of its Loan portfolios
in order to ensure compliance with all financial and operational covenants.
An event of default is also deemed to occur under the Warehouse Facility in
the event of the death of two of the Company's executive officers (or if both of
these individuals cease serving as officers) or if the Company is unable to
securitize at least $250 million of loans over a two-year period, with at least
$100 million securitized in any 365-day period.
27
<PAGE>
The Company uses the Warehouse Facility to purchase Loan Contracts with the
objective of selling such Contracts through securitization transactions. Since
the fourth quarter of 1995, the Company has completed in the aggregate the sale
of approximately $200 million of Loan Contracts through privately-placed
securitization transactions. The proceeds from the securitization transactions
have been used to pay down the Warehouse Facility, thereby making the Warehouse
Facility available to fund purchases of additional Contracts.
Revolving Credit Facilities. In March 1993, the Company entered into a $20
million three-year revolving credit facility (the 'Congress Facility') with
Congress Financial Corporation ('Congress'), which has been extended until March
1997. The Congress Facility bears interest at a floating rate of 2% over the
prime rate of CoreStates Bank, N.A., with interest payable monthly, and the
facility is secured by Loan and Lease Contracts. The facility can be utilized
for the financing of additional Contract purchases that meet certain credit
guidelines established by Congress, in its sole discretion. As of September 30,
1996, the Company had $3.5 million outstanding under this facility.
During February 1994, the Company entered into a $5 million one-year
revolving credit facility with GECC (the 'GECC Facility'). In September 1994 and
March 1995, the GECC Facility was increased to $10 million and $25 million,
respectively. The GECC Facility bears interest payable monthly at rates fixed at
the time of financing and is secured by certain Lease Contracts. Principal is
repaid monthly according to an agreed-upon schedule. At September 30, 1996, the
Company had drawn down approximately $23.7 million under the facility. The GECC
Facility is automatically renewed annually unless GECC provides the Company with
notice of termination 90 days prior to such renewal date.
The Congress Facility and the GECC Facility (collectively, the 'Revolving
Credit Facilities') are also subject to certain financial and operational
covenants that are similar to those imposed under the Warehouse Facility.
Revolving Line of Credit Facility. During September 1996, the Company
entered into a one-year $3.5 million revolving line of credit (the 'LOC
Facility') with a private third party. The LOC Facility bears interest at a
fixed rate of 13% with interest payable monthly. The LOC Facility is secured by
certain Loan Contracts. As of September 30, 1996, the Company had drawn down
approximately $503,000 under this facility. The LOC Facility is renewable at the
lender's discretion for an additional one-year period, provided that the Company
meets certain conditions.
Specialized Borrowing Facility. The Company historically has secured a
significant amount of its financing through borrowings classified as debt
participation agreements, in which the Company has sold an undivided interest,
typically 80% to 90%, in portfolios of receivables to financial institutions and
individual lenders on a full recourse basis. As of September 30, 1996, the
Company had an existing series of borrowings under a specialized borrowing
facility (the 'Specialized Borrowing Facility') with Fairfax Savings, a Federal
Savings Bank ('Fairfax') in the approximate amount of $21.7 million.
Approximately $21 million of the Fairfax financing has been used to acquire
Contracts. Borrowings under this facility are subject to interest at prime plus
2.5% fixed at the time of financing. Approximately $700,000 of the remaining
advances under the Specialized Borrowing Facility were used to acquire bulk
purchase portfolios prior to 1995. These amounts are subject to interest at
fixed rates from 10% to 13.5%, respectively.
In general, under the terms of the participation agreements, the lender's
principal advance is repaid in proportion to the principal received from the
underlying collateral. Interest on the outstanding principal balance of the
advance is due monthly. Collections received in excess of the principal and
interest due Fairfax are allocated to a restricted cash reserve account on
deposit with Fairfax until certain specified balances are maintained, generally
calculated as a percentage of the outstanding balance of the advance. Any
remaining collections are paid to the Company.
Private Placement of Convertible Subordinated Debentures, Warrants and
Common Stock. The Company has secured a significant component of its capital
through the private placement of equity and debt securities. During the period
from April 1995 through September 1996, the Company issued: (i) 176,500 shares
of its Common Stock, which yielded net proceeds of approximately $2.1 million;
(ii) $38.8 million principal amount of convertible subordinated debentures (the
'Debentures'); and (iii) 2,913,625 common stock purchase warrants (the
'Warrants'). The Warrants were issued to Debenture
28
<PAGE>
holders in connection with the sale of the Debentures, to certain consultants
and advisors in consideration for financial advisory services and to certain
members of the Board of Directors in connection with joining the Board.
In April and September 1996, the Company concluded institutional placements
of $10 million principal amount of 9% Debentures with 675,000 Warrants, and $5
million principal amount of 10% Debentures with 62,500 Warrants, respectively.
Through November 15, 1996, an aggregate of approximately $13.8 million
principal amount of the Debentures was converted into 1,456,849 shares of Common
Stock. The principal amount and accrued interest due under the remainder of the
Debentures is convertible into shares of Common Stock (at the option of the
holders thereof) at conversion prices ranging from $9 to $12.
The following table provides a summary of the Company's outstanding
Debentures.(1)
<TABLE>
<CAPTION>
PRINCIPAL MATURITY INTEREST CONVERSION SHARES
AMOUNT ISSUE DATE DATE RATE PRICE(2) ISSUABLE(3)
- ----------- ---------- ---------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C>
$ 750,000 Nov. 1995 Nov. 1996 9% $11.00 74,318
1,250,000 Dec. 1995 May 1997 9% 11.00 128,977
2,500,000 Dec. 1995 Dec. 1996 9% 11.00 247,727
10,000,000 Apr. 1996 Oct. 1997 9% 12.00 945,936
2,000,000 Jul. 1995 Jul. 1998 9% 9.00 282,222
1,000,000 Aug. 1995 Aug. 1998 9% 9.00 141,111
5,000,000 Sep. 1996 Sep. 1998 (4) 10%(4) 12.00 416,667
2,500,000 Jan. 1996 Jan. 1999 9% 11.00 288,637
- ----------- -----------
$25,000,000 2,525,595
- ----------- -----------
- ----------- -----------
</TABLE>
- ------------------
(1) Reflects information as of November 19, 1996.
(2) These Debentures are convertible into shares of the Company's Common Stock
at the lesser of the amount indicated and a discount to the market price of
the Company's Common Stock, which ranges from 75% to 85% pursuant to the
terms of the Debentures.
(3) Represents shares of Common Stock issuable upon conversion of the Debentures
(principal and interest at maturity).
(4) The Debentures bear interest at a rate of 10% for 2 years and at a rate of
9% thereafter. Maturity is subject to extension by the holder.
As of November 15, 1996 the Company had $25.0 million principal amount of
Debentures outstanding with maturity dates as follows: (i) $3.25 million from
November 1996 to December 1996; (ii) $1.25 million in May 1997; (iii) $10.0
million in October 1997; (iv) $3.0 million in July/August 1998; (v) $5.0 million
in September 1998 (subject to extension by holder) and (vi) $2.5 million in
January 1999. See 'Description of Securities -- Debentures.'
If the Company's Common Stock achieves certain trading prices ranging from
$18 to $25, the Company has the right to serve notice of redemption on the
holders of approximately $15 million of the Debentures for the principal amount
thereof (together with accrued interest). A notice to redeem would likely yield
conversion of the Debentures (since the average trading price of the stock
necessary to redeem would yield a greater profit to the Debenture holders upon
conversion rather than redemption). Notwithstanding rights of redemption,
management believes that a substantial number of the remaining Debentures will
be subject to conversion prior to their maturity, however, a possibility exists
that the Company could be required to allocate liquidity and capital resources
to the retirement of these Debentures.
The Company may also secure certain amounts of capital in the future from
the exercise of existing Warrants. The Company has issued 2,913,625 Warrants at
exercise prices between $9 and $15. To date, none of the Warrants have been
exercised. If exercised, the Company would receive aggregate gross proceeds of
approximately $33.1 million.
29
<PAGE>
The following table provides a summary of outstanding Warrants.(1)
<TABLE>
<CAPTION>
SHARES PROCEEDS TO
ISSUE DATE EXPIRATION DATE EXERCISE PRICE ISSUABLE(2) THE COMPANY(3)
- ------------------- ------------------- --------------- ----------- --------------
<S> <C> <C> <C> <C>
Apr.-Aug. 1995 Apr.-Aug. 1998 $ 9.00 1,360,000 $ 12,240,000
Dec. 1995-Feb. 1996 Dec. 1998-Feb. 1999 14.00 to 14.38 370,000 5,187,500
Jul.-Aug. 1995 Jul.-Aug. 1998 12.00 to 12.30 62,500 765,000
Jul.-Dec. 1995 Jul.-Dec. 1998 15.00 363,625 5,454,375
Mar. 1996 Mar. 1999 11.50 20,000 230,000
Apr. 1996 Apr. 1999 12.00 to 12.63 615,000 7,442,500
Apr. 1996 Apr. 2001 14.52 60,000 871,200
Sep. 1996 Sep. 2001 13.92 62,500 870,000
----------- --------------
2,913,625(4) $ 33,060,575(5)
----------- --------------
----------- --------------
</TABLE>
- ------------------
(1) Reflects information as of November 15, 1996.
(2) Represents shares of Common Stock issuable upon exercise of the Warrants.
(3) Represents proceeds to the Company upon the exercise of the Warrants.
(4) Includes 40,000 Warrants in the aggregate issued to Mr. DeVoe and Mr. Jones
in connection with joining the Board of Directors.
(5) Includes proceeds of $517,500 from Warrants issued to Mr. DeVoe and Mr.
Jones. See Footnote 4.
Exercise of the Warrants is largely a function of the spread between the
trading price of the Company's Common Stock and the exercise price of the
Warrants. Thus, there can be no assurances that the future trading prices of the
Company's Common Stock will be sufficient to encourage the exercise of a
material number of the Warrants in the near term, if at all.
Exercise of the Warrants is also a function of other factors such as the
term of the Warrant and any associated rights of redemption. Substantially all
of the outstanding Warrants remain outstanding until 1998 and 1999, and some
remain outstanding until 2001. In addition, certain of the Warrants contain
features that permit redemption (at $.001 per Warrant) based upon average
trading prices of the Company's Common Stock between $15 and $25. Any call for
redemption will have the likely effect of causing the exercise of these
Warrants.
The Company's liquidity and capital resources may continue to be affected
by the trading price of the Company's Common Stock. Trading prices at levels
consistently higher than the conversion prices of the Debentures will likely
facilitate conversion of the Debentures in the near term. A conversion of the
Debentures would positively affect the Company's liquidity by eliminating the
need to repay the principal amount (and in certain instances, interest) due
thereunder. Trading prices at levels consistently lower than the conversion
prices of the Debentures, however, will make conversion of the Debentures less
likely, thus requiring the Company to allocate certain of its capital resources
towards the retirement of the Debentures at maturity. If all of such Debentures
were converted, the Company would not be required to repay approximately $28.3
million of principal and interest as of November 15, 1996. In addition, an
exercise of all of the Warrants would have the effect of securing approximately
$33.1 million of additional working capital. However, there can be no assurances
that the issuance of such shares would not have a depressive effect upon the
market for the Company's Common Stock. See 'Risk Factors.'
Securitization. Securitization of Loan Contracts is an integral part of
the Company's continuing financing strategy. Securitization: (i) provides a
lower cost of financing; (ii) allows the Company to increase its liquidity;
(iii) provides for redeployment of capital; (iv) reduces risks associated with
interest rate fluctuations; (v) reduces credit risk; and (vi) properly matches
the duration of the financing to the assets financed. The Company uses the net
proceeds from a securitization to repay the advances outstanding under its
Warehouse Facility, thereby creating availability to purchase additional Loan
Contracts. The Company has completed four securitization transactions totaling
approximately $200 million. The following is a summary of the basic structure of
the Company's last four securitization transactions. There can be no assurances,
however, that the Company will continue to use this structure for future
securitizations.
The Company transfers a pool of Loan Contracts to a trust (the 'Trust'),
which simultaneously issues one or more classes of securities (the 'Securities')
backed by the assets of the Trust. The assets
30
<PAGE>
of the Trust include the Loan Contracts and a reserve account. Initially, the
Company makes a deposit into the reserve account; and thereafter, it maintains
the reserve account at certain levels (the 'Maintenance Level') during the life
of the securitization by depositing certain cash flows from the Trust that the
Company would otherwise have received. The Company continues to service the Loan
Contracts and earns a contractual servicing fee, currently equal to 3.0% per
year (the 'Contractual Servicing Fee').
The Securities were rated 'A', 'BBB' and 'BB' in the first three
securitization transactions and 'A' and 'BBB' in the last securitization by Duff
and Phelps Credit Rating Co. and Fitch Investors Services L.P., and are sold to
investors in a private offering. These Securities carry fixed interest rate
coupons, payable quarterly. Generally, all collections of interest and principal
from Loan Contracts are used to pay interest due on the Securities and to reduce
the principal balance of the Securities. Collections of interest in excess of
that required to pay for (i) the interest due on the Securities, (ii) ongoing
fees and expenses of the Trust, and (iii) the Contractual Servicing Fees (the
'Excess Servicing Cash Flows') are deposited into the reserve account only to
the extent necessary to maintain it at the required Maintenance Level. The
remaining Excess Servicing Cash Flows, if any, are paid to the Company. In the
event that the collections of interest and principal from the Loan Contracts are
not sufficient to cover the required distributions of interest and principal on
the Securities, the trustee may withdraw funds from the reserve account to make
up for the shortfall.
The Company recognizes a gain on sale of the Loan Contracts from the
securitization in an amount equal to (i) the Excess Servicing Receivable from
the Trust during the life of the securitization, plus (ii) the net proceeds
received from the securitization less the aggregate book value of the Loan
Contracts transferred to the Trust. The Excess Servicing Receivable represents
the present value of the Excess Servicing Cash Flows after taking into account
the Company's estimates for the net credit loss and prepayment on the Loan
Contracts in the Trust.
The gain on sale through securitization has been a significant component of
the Company's revenues in each of the four quarters in which the securitization
transactions have been completed. Management believes that such gain on sale
will continue to represent a significant source of the Company's revenues in all
financial reporting periods in which the Company completes a securitization. If,
for any reason whatsoever, the Company is unable to complete a securitization
during a quarter, the Company's revenues for such period would decline. Also,
failure to complete a securitization of the Loan Contracts or delays in
completing such securitization could further subject the Company to interest
rate risk since the Company finances the Loan Contracts through a floating
interest rate Warehouse Facility.
The Company continues to explore alternative structures for the
securitization of its Loan Contracts in order to achieve a lower cost of
financing and to maximize the net proceeds from the securitization. Management
believes that it would lower the cost of financing by structuring the
securitization in a manner that results in the issuance of triple-A rated
Securities backed by the assets of the Trust, and then by selling such
Securities in a public offering. However, there can be no assurance that the
Company will be able to achieve this in the near future.
OTHER USES OF CAPITAL
In June 1996, the Company purchased certain assets constituting the
business of SFI pursuant to the exercise of an option agreement entered into on
August 1, 1995 for the purchase price of $1,000,000, plus 125,000 shares of the
Company's Common Stock and options to purchase 65,000 shares of Common Stock at
$6.00 per share. The option price of $250,000 paid on August 1, 1995 was
credited against the purchase price. This acquisition was recorded utilizing the
purchase method of accounting and the Company recognized goodwill in the amount
of $3.8 million. In conjunction with the acquisition, the Company entered into a
management agreement with the former principals of SFI and retained
substantially all of its operating personnel. Since the acquisition, SFI has
continued to generate Loan Contract volume comparable to historic levels. While
management believes that such levels of Contract volume will continue, there can
be no assurances to that effect. See 'Risk Factors.'
During June 1996, the Company repaid an outstanding stockholder loan in the
amount of approximately $3.0 million. See 'Certain Transactions -- Loan to the
Company.'
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<PAGE>
EFFECTS OF INFLATION
Inflationary pressures may have an effect on the Company's internal
operations and on its overall business. The Company's operating costs are
subject to general economic and inflationary pressures. Operating costs have
increased during the past years due primarily to the expansion of the Company's
operations. The Company's business is subject to risk of inflation. Significant
increases in interest rates that are normally associated with strong periods of
inflation may have an impact upon the number of individuals that are likely or
able to finance the purchase or lease of an automobile.
RECENT ACCOUNTING PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board ('FASB') issued
Statement of Financial Accounting Standards No. 123 ('SFAS No. 123'),
'Accounting for Stock Based Compensation.' SFAS No. 123 establishes financial
accounting and reporting standards for stock-based employee compensation plans.
The statement defines a 'fair value based method' of accounting for employee
stock options or similar equity instruments and encourages all entities to adopt
that method of accounting for all of their employee stock compensation plans.
However, SFAS No. 123 also allows an entity to continue to measure compensation
costs for those plans using the 'intrinsic value based method' of accounting,
which the Company currently uses. The accounting requirements of SFAS No. 123
are effective for transactions entered into during fiscal years beginning after
December 15, 1995. The disclosure requirements are effective for financial
statements for fiscal years beginning after December 15, 1995, or for an earlier
fiscal year for which SFAS No. 123 is initially adopted for recognizing
compensation cost. Management has determined that the Company will continue to
measure compensation costs using the 'intrinsic value based method' and will
disclose the effect on net income and earnings per share using the 'fair value
based method' in the footnotes to the Company's financial statements upon the
adoption of SFAS No. 123.
In June 1996, the FASB issued Statement of Financial Accounting Standards
No. 125 ('SFAS No. 125'), 'Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities.' SFAS No. 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. SFAS No. 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. However, a proposal has recently been
developed to defer, for one year, certain provisions of SFAS No. 125. Management
is currently assessing the impact of the adoption of SFAS No. 125 on the
Company's financial position and results of operations.
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<PAGE>
THE COMPANY
GENERAL
NAL is a specialized automobile finance company engaged in the purchase and
servicing of Contracts originated by franchised and select independent Dealers
in connection with sales or leases of used and new automobiles to consumers with
non-prime credit. Consumers with non-prime credit are perceived to be relatively
high credit risks due to various factors, including the manner in which they
have handled previous credit, the absence or limited extent of their prior
credit history and their limited financial resources. The Company purchases
Contracts relating principally to the 'C' credit segment of the automobile
finance market. The Company is also engaged in providing insurance and related
products to its Dealers and customers through its insurance subsidiary, NIS. The
Company has a remarketing subsidiary, PCSF, with a JDBR Franchise, which
provides a cost-effective means of disposing of some of the Company's
repossessed and off-lease vehicles.
The Company purchases Contracts directly from Dealers through its Dealer
Program and through select third party entities that participate in the
Company's Captive Program, Affinity Program, Correspondent Program, Recourse
Program and Wholesale Program. Participants in these Origination Programs offer
Contracts to the Company under a variety of arrangements and allow it to
increase the volume of Contracts purchased from Dealers with whom the Company
does not maintain a direct relationship. The Company's main sources of Contracts
are its Dealer Program and its Captive Program. The Captive Program includes the
Company's arrangements with SFI, which recently became a wholly-owned subsidiary
of the Company. Under its Affinity Program, the Company has an agreement with
GECAL to purchase non-prime Lease Contracts through GECAL's network of Dealers
in the Southeast region of the United States. As of September 30, 1996, the
Company's servicing portfolio consisted of Contracts purchased through its
Dealer Program (32%), Captive Program (46%), Affinity Program (5%),
Correspondent Program (2%), Recourse Program (9%) and Wholesale Program (6%).
Each of these programs, other than the Recourse Program, is designed to purchase
Contracts relating primarily to the 'C' credit segment of the market, and the
Recourse Program is designed to purchase Contracts relating to the 'D' credit
segment.
The Company has experienced significant growth in its portfolio of
purchased and serviced Contracts since June 1994, when the acquisition of
Contracts became the principal focus of its business. Total Contracts purchased,
which includes both Loan Contracts and Lease Contracts, increased from
approximately $28.1 million through December 31, 1994 and $165.7 million through
December 31, 1995, to approximately $205.8 million through September 30, 1996.
As a result, the Company's servicing portfolio increased from approximately
$44.4 million at December 31, 1994 and $153.8 million at December 31, 1995, to
approximately $283.9 million at September 30, 1996. The Company's overall growth
during this period was attributable to an increase in the Company's Dealer
relationships from 196 Dealers at December 31, 1994 to 1,594 Dealers at
September 30, 1996, and an expansion of the sources and amounts of financing
available to purchase Contracts. The Company currently purchases Contracts from
Dealers in 23 states, with a major concentration in Florida. More than 90% of
all Contracts acquired by the Company during the nine months ended September 30,
1996 were originated by franchised Dealers.
The Company has historically funded the purchase of its Contracts with
borrowings from banks and other lenders. Currently, the Company's primary
financing sources include a $100 million Warehouse Facility, $45 million of
Revolving Credit Facilities, including the $25 million GECC Facility, and a
Specialized Borrowing Facility. Beginning in December 1995, the Company began
securitizing the majority of its portfolio of Loan Contracts to increase the
Company's liquidity, provide for the redeployment of capital, reduce risks
associated with interest rate fluctuations and provide the Company with access
to a cost-effective, diversified source of financing. During the last four
fiscal quarters, the Company completed securitization transactions aggregating
approximately $200 million. During this period, gains on sale from the
securitization transactions have constituted the principal source of the
Company's revenues. The Company plans to continue to employ its securitization
program as an integral component of its funding strategy and anticipates that it
will generally complete
33
<PAGE>
securitization transactions on a quarterly basis. The Company also generates
revenues from interest income and fees earned on Contracts held in portfolio, as
well as servicing fees from Loan Contracts sold in securitization transactions.
In addition, the Company receives revenues from the sale of insurance and
related products through its insurance subsidiary, NIS.
BACKGROUND
NAL was founded in February 1991 as a specialized consumer finance company.
It became publicly held by virtue of the Merger on November 30, 1994 with a
previously inactive public company, which was incorporated in Delaware on
November 14, 1986. Effective upon completion of the Merger, the Company assumed
the historic operations of NAL and changed its name to 'NAL Financial Group
Inc.'
Because of the opportunities presented by the insolvency and reorganization
of many financial institutions at the time, the Company's principal activities
until the second quarter of 1994 involved the bulk purchase and servicing of
seasoned and non-performing portfolios of consumer and mortgage loans and
automobile lease receivables that had been administered by the Resolution Trust
Corporation or the Federal Deposit Insurance Corporation. The principal focus of
the Company's business since June 1994 has shifted to the purchase and servicing
of automobile Loan and Lease Contracts originated by Dealers in connection with
the sale or lease of automobiles to consumers with non-prime credit.
INDUSTRY AND COMPETITION
According to CNW Marketing/Research, an independent automobile finance
market research firm, the automobile finance industry is the second largest
consumer finance industry in the United States with over $410 billion in loan
and lease originations in 1995. Management believes that captive finance
companies, such as General Motors Acceptance Corporation, Ford Motor Credit
Company and Chrysler Credit Corp., financed between 25% and 30% of automobile
purchases and leases nationwide in 1995, while the balance of automobile
financing was provided by banks, credit unions and other independent finance
companies. The industry is generally segmented according to the type of car sold
(new or used) and the credit characteristics of the borrower (prime or
non-prime).
Sales information for new and used vehicles indicates that the market for
used cars increased at approximately three times the rate for new cars for the
period from 1990 to 1995. According to industry analysts, sales of used
automobiles, excluding private sales, increased from 24.9 million vehicles in
1990 to 29.8 million vehicles in 1995, an increase of 19.7%. In contrast, sales
of new automobiles, excluding private sales, increased from 13.9 million
vehicles in 1990 to 14.8 million vehicles in 1995, an increase of 6.5%. Industry
analysts have concluded that the market for retail sales of used automobiles
will expand further due to a combination of increases in the average useful life
of automobiles, the number of late-model used automobiles in service and the
number of late-model used automobiles available for sale (including off-lease
and former rental cars).
In the leasing market, according to CNW Marketing/Research, used-car
leasing has followed the lead of new-car leasing and shown growth. According to
their findings, this growth is likely to amount to more than one million used
vehicles being leased by the year 2000. The reason for this growth is the same
as for the growth in new car leasing, which is that customers can receive a
higher quality vehicle for their budgeted amount, lower monthly payments and the
ability to have a better secondary vehicle in the household. The vast majority
of used cars being leased prior to 1994 were luxury models. However, there has
recently been a growing number of non-luxury automobiles being leased.
The Company primarily focuses on the 'C' credit segment of the automobile
finance market and to a limited extent, on the 'D' credit segment through its
Recourse Program. Management believes that the non-prime segment of the
automobile finance market is in the range of $80 billion to $100 billion in
annual loan and lease originations.
Competition in the field of retail automobile finance is intense. The
market is highly fragmented and historically has been serviced by a variety of
financial entities, including the captive finance
34
<PAGE>
affiliates of major automobile manufacturers, banks, savings associations,
independent finance companies, credit unions and leasing companies. Many of
these competitors have greater financial resources than the Company and may have
significantly lower cost of funds. Many of these competitors also have
long-standing relationships with automobile dealerships and may offer
dealerships or their customers other forms of financing or services not provided
by the Company. Furthermore, during the past two years, a number of automobile
finance companies have completed public offerings of common stock, the proceeds
from which are to be used, at least in part, to fund expansion.
The Company's ability to compete successfully depends largely upon its
relationships with its origination sources, particularly Dealers, and the
ability and willingness of such origination sources to offer Contracts that meet
the Company's underwriting criteria for purchase. Management believes that by
diversifying its origination sources through its Affinity Program, Correspondent
Program, Recourse Program and Wholesale Program, the Company increases the
number of Contracts purchased without significantly increasing its marketing
costs. Management believes that its multi-tier underwriting quidelines which
balances the creditworthiness of the borrower with the value of the collateral,
enables it to evaluate effectively and measure the risks associated with lending
to consumers with non-prime credit. The Company also believes that its servicing
and collection procedures, specialized servicing functions and asset disposition
enable it to manage its portfolio of Contracts profitably and in a cost-
effective manner. However, there can be no assurance that the Company will be
able to continue to compete successfully in the markets that it serves.
BUSINESS STRATEGY
The Company's business is to purchase and service non-prime Loan and Lease
Contracts through its Origination Programs. The Company's principal objectives
are to sustain controlled growth of its business and to maximize its profit
potential. To achieve these objectives, the Company is currently employing the
following key strategies:
Expanding and Strengthening Relationships with Origination
Sources. The Company plans to achieve a greater volume of business by
expanding its origination sources in existing markets, entering into new
geographic markets and strengthening current relationships. The Company
plans to expand its origination sources through strategic arrangements with
independent entities and relationships with individual Dealers and networks
of Dealers. The Company develops strong relationships with its Dealers and
other origination sources by providing a high level of service specifically
tailored to meet their needs. The Company typically responds to credit
applications on the date received, and in most cases, within two to four
hours, and generally pays the Dealer for Contracts purchased within
twenty-four hours of receipt of a complete funding package. In addition,
the Company provides training to Dealer personnel to effectively utilize
the Company's credit underwriting and pricing guidelines.
Among its origination sources, Dealers, including those with whom SFI
has relationships, represent a principal source of business for the
Company. To service the Dealers, the Company employs a value-added
approach. Specifically, the Company's local representatives provide
training on the Company's products and services to their respective
Dealers. The Company's offices are open six days a week, and sales and
marketing personnel attend Dealer-sponsored promotional sales events to
provide 'on-site' financing approval. The Company's regional sales
representatives and senior management maintain an ongoing dialogue with
Dealers to enhance such relationships. In addition, the Company has sales
and marketing resources dedicated to expanding its origination sources.
Providing Diverse Products and Services to Dealers. In addition to
providing prompt, flexible service and a reliable source of financing, the
Company increases its volume of business from Dealers by offering a
'one-stop shop' service. This service includes purchasing both Loan and
Lease Contracts on used and new automobiles from a broad range of credit
profiles and offering insurance and related products.
35
<PAGE>
Employing Detailed Underwriting Guidelines. In order to evaluate and
measure the risks associated with lending to consumers with non-prime
credit, the Company uses multi-tiered credit underwriting and pricing
guidelines for purchasing both Loan and Lease Contracts. These guidelines
balance, among other factors, the creditworthiness of the borrower with the
adequacy of the vehicle as collateral. These guidelines are designed to
enable Dealers to: (i) assess a borrower's credit risk category; (ii)
determine the maximum term of the loan or lease for used and new
automobiles; (iii) calculate the maximum payment affordable by the
borrower; and (iv) estimate their profit from selling the Contracts to the
Company.
By providing a high degree of credit and pricing specificity to the
Dealer, the Company's underwriting guidelines aid in the assessment of
credit risk and the development of financing terms for a borrower. These
guidelines not only enhance the rapid execution of the transaction for the
Dealer, but enable the Dealer to provide improved service to its customers.
Maintaining Effective Collection and Asset Disposition Systems. To
minimize delinquencies and losses, the Company employs aggressive
collection policies and procedures, which typically include contacting a
borrower within 24 hours of a payment delinquency and managing accounts
based on geographic regions. The Company also uses collection specialists
to address certain servicing functions, such as insurance claims,
deficiency collection, bankruptcy, skip tracing and asset management. In
addition, the Company uses its subsidiary, PCSF and its JDBR Franchise, to
maximize its recovery on some of its repossessed and off-lease vehicles by
providing an alternate means of disposition.
The Company currently has a servicing operation that utilizes both
local area and wide area network systems for servicing its portfolio. In
order to accommodate future growth, the Company plans to enhance its
current systems, which will facilitate the decentralization of collection
activities to regions based upon the concentration of business in those
areas. As geographic expansion requires, the Company intends to establish
full service regional centers. The Company expects to open regional centers
in Orlando, Florida and Atlanta, Georgia.
Diversifying its Financing Sources. The Company plans to continue to
expand and diversify its financing sources, and to increase the amount of
financing available. The Company intends to continue to securitize its Loan
Contracts on a quarterly basis. Current financing sources include a $100
million Warehouse Facility, $45 million of Revolving Credit Facilities,
including the $25 million GECC Facility, a securitization program and a
Specialized Borrowing Facility.
During each of the last four quarters, the Company has sold a
significant portion of its Loan Contracts in securitization transactions to
increase the Company's liquidity, to provide for redeployment of capital
and to mitigate interest-rate risk. The Company has completed four private
placement securitization transactions totaling approximately $200 million.
When the quarterly volume of Loan Contracts reaches over $100 million, the
Company intends to complete securitization transactions through the public
market, which management believes will reduce its financing cost. The
Company plans to complete securitization transactions of its Lease
Contracts when the volume of Lease Contracts reaches a level that is
cost-effective for securitization.
Continuing the Growth of Related Businesses. The Company's related
businesses complement the purchasing and servicing of Loan and Lease
Contracts and enhance the Company's profitability. The Company's insurance
subsidiary, NIS, offers insurance and related products. In 1995, NIS
generated revenues of $580,000. For the nine months ended September 30,
1996, NIS generated revenues of $1.1 million. The Company plans to continue
to market its insurance and related products to its Dealers and customers.
The Company uses its subsidiary, PCSF (including its JDBR Franchise),
as an efficient means of disposing of some of its repossessed and off-lease
vehicles. For the nine months ended September 30, 1996, PCSF generated
revenues of $971,000. As the volume of Contracts purchased increases, the
Company plans to open additional PCSF sites with JDBR Franchises in
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<PAGE>
Florida and other markets. Currently, the Company expects to open a PCSF
site with a JDBR Franchise in Orlando, Florida.
Recruiting and Retaining Experienced Management. Members of the
Company's management team have an average of over 20 years of experience in
automobile finance, consumer finance or banking. Management believes that
hiring experienced management personnel is critical to the formulation and
implementation of its strategies, and the maintenance of its growth and
profitability. The Company intends to continue to provide incentive
compensation arrangements, including stock option plans, to retain members
of the management team.
BUSINESS
The Company's lines of business include the purchase and servicing of Loan
and Lease Contracts on used and new automobiles relating to consumers with
non-prime credit from Dealers and other origination sources, and the sale of
insurance and related products to its customers directly and through Dealers.
Loan Contracts
The following table provides certain material information relative to the
Loan Contracts acquired by the Company during each of the last nine quarters.
<TABLE>
<CAPTION>
FOR THE QUARTERS ENDED
-----------------------------------------------------------------------------------------------
SEP. JUN. MAR. DEC. SEP. JUN. MAR. DEC. SEP.
30, 30, 31, 31, 30, 30, 31, 31, 30,
1996 1996 1996 1995 1995 1995 1995 1994 1994
LOANS:(1) ------- ------- ------- ------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Contracts purchased...... $69,556 $50,971 $48,326 $46,593 $31,624 $21,364 $18,785 $12,088 $ 395
Weighted average
Contract amount........ $ 12.3 $ 12.3 $ 12.1 $ 12.5 $ 12.0 $ 11.2 $ 12.2 $ 10.8 $ 7.3
Weighted average initial
term (months).......... 54.4 53.6 53.7 53.0 51.3 48.0 42.8 41.9 42.9
Weighted average
APR.................... 19.50% 19.33% 19.47% 19.35% 19.95% 20.57% 19.03% 20.73% 28.51%
Weighted average
discount............... 8.24% 4.21% 4.73% 5.53% 5.93% 5.27% 5.30% 4.30% 4.30%
Percentage of
Contracts secured
by new vehicles........ 19.61% 29.72% 38.39% 34.62% 31.05% 21.30% 18.43% 8.17% 0.00%
Percentage of
Contracts secured
by used vehicles....... 80.39% 70.28% 61.61% 65.38% 68.95% 78.70% 81.57% 91.83% 100.00%
</TABLE>
- ------------------
(1) Excludes Loan Contracts purchased under the Company's Recourse Program.
The Company purchases Loan Contracts, which are secured by used and new
automobiles, from diverse sources through its Origination Programs. Loan
Contracts relate to borrowers which, according to the Company's underwriting
guidelines, fall within the 'C' credit segment of the automobile finance market,
except in the case of its Recourse Program, which is designed for 'D' credit
borrowers. Contracts generally have terms of 36 to 60 months and carry interest
rates ranging from 16% to 30% per year. A majority of the loans are based on the
Rule of 78's method; however, a small portion are simple interest loans and
actuarial loans.
The Company purchases Loan Contracts at discounts to the face amount of the
Loans. The discounts are nonrefundable and vary depending upon the credit
category of the borrower, as determined by the Company's underwriting
guidelines, and any special arrangements between the Company and the origination
source. In addition to the discount, the Company generally charges an
administration fee. The purchase price of the Loan Contracts is, therefore,
reduced from its face amount by both the discount and the administration fee.
The purchase price of the Loan Contracts
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<PAGE>
generally ranges from 110% to 120% of the collateral value of the underlying
vehicle, except in the case of the Recourse Program where it ranges from 60% to
75% of the principal amount of the Loan Contract, which approximates the value
of the vehicle.
The Company purchases Loan Contracts in 23 states with a concentration in
Florida (46.6% of the Company's Loan portfolio as of September 30, 1996). The
average size of the Loan Contract acquired for the nine months ended September
30, 1996 was $12,300. The Company finances Loan Contracts on both a floating and
fixed rate basis through its credit facilities. The Company has sold, for the
last four quarters, a substantial majority of its Loan Contracts through
securitization transactions and services all Loan Contracts including those sold
through securitization transactions.
In the event of a default by a borrower, the Company repossesses the
vehicle and remarkets the vehicle through one of the following four channels:
(i) wholesale auctions; (ii) on a wholesale basis through the Company's
subsidiary, PCSF; (iii) on a retail basis through the Company's subsidiary,
PCSF; or (iv) on a retail basis through the JDBR Franchise, depending on, among
other factors, the age and condition of the vehicle. To the extent that the net
proceeds from remarketing a vehicle exceed the Company's book value of the Loan
Contract, the Company recognizes a gain, and to the extent such net proceeds are
less, the Company recognizes a loss. As a result, employing an efficient
remarketing channel for repossessed vehicles is an important aspect of the
Company's operations.
Lease Contracts
The following table provides certain material information relative to the
Lease Contracts acquired by the Company during each of the last nine quarters.
<TABLE>
<CAPTION>
FOR THE QUARTERS ENDED
-----------------------------------------------------------------------------------------
SEP. JUN. MAR. DEC. SEP. JUN. MAR. DEC. SEP.
30, 30, 31, 31, 30, 30, 31, 31, 30,
1996 1996 1996 1995 1995 1995 1995 1994 1994
LEASES: ------- ------ ------- ------ ------ ------ ------- ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Contracts purchased...... $6,776 $3,609 $3,686 $3,989 $4,085 $5,241 $6,733 $3,446 $1,237
Weighted average
Contract amount........ $ 15.9 $15.9 $ 15.8 $16.3 $16.6 $16.8 $ 17.3 $17.9 $16.9
Weighted average initial
term (months).......... 45.8 44.9 45.3 44.7 44.9 44.0 45.3 45.4 45.7
Weighted average yield... 17.93% 18.03% 18.36% 18.07% 18.08% 18.11% 16.82% 17.30% 15.87%
Percentage of
Contracts secured
by new vehicles........ 40.47% 43.61% 41.63% 54.43% 64.92% 67.11% 64.67% 64.92% 76.06%
Percentage of
Contracts secured
by used vehicles....... 59.53% 56.39% 58.37% 45.57% 35.08% 32.89% 35.33% 35.08% 23.94%
</TABLE>
The Company purchases substantially all of its Lease Contracts from its
Dealer Program and Affinity Program. Generally, Lease Contracts involve
customers with better credit than customers relating to Loan Contracts. Lease
Contracts relate to many makes and models of both used and new vehicles. As of
September 30, 1996, the Company's lease portfolio consisted of 55.5% new and
44.5% used automobiles. The Leases are closed-end leases and generally have
terms of 24, 36 and 48 months, with 48 months as the most common term. A vast
majority of the Lease Contracts are amortized according to the Rule of 78's
method. The Lease Contracts also require that the lessee pay all fees and
expenses relating to the use and maintenance of the vehicle.
The Company purchases Lease Contracts from its origination sources at the
implied principal amount of the Lease less an administration fee. The
administration fee is nonrefundable and varies depending upon the credit
category of the borrower, as determined by the Company's underwriting
guidelines, and any special arrangements between the Company and the origination
source. The purchase price of the Lease Contract ranges from 110% to 120% of the
collateral value of the underlying vehicle.
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<PAGE>
The Company purchases Lease Contracts in 23 states with a concentration in
Florida (78.3% of the Company's Lease portfolio as of September 30, 1996). The
average size of Lease Contracts is $18,000 for new and $15,300 for used
automobiles. The Company uses its GECC Facility to finance all of its Lease
Contracts. Under this facility, GECC provides fixed-rate financing for the full
term of the Lease Contract and generally advances 100% of the Company's
investment in the Lease Contract. The Company currently holds all Lease
Contracts on its books and services them for their full term.
The Company purchases both direct finance leases and operating leases, with
the vast majority of the Lease Contracts being direct finance leases. Generally,
Lease Contracts having a term in excess of 48 months are classified as direct
finance leases, and Lease Contracts having a term of less than 48 months are
classified as operating leases. The Company's sources of revenues from Lease
Contracts include: (i) an administration fee; (ii) interest income in the case
of direct finance leases and rental revenue in the case of operating leases; and
(iii) proceeds from the sale of the vehicle in excess of the Residual Value at
the end of the lease term.
In establishing the amount of the lease payments, the Company makes an
estimate of the Residual Value of the vehicle at the end of the lease term. The
Company's ability to realize proceeds approximating the Residual Value will be
substantially determined by the accuracy of the Residual Value previously
estimated and the Company's ability to effectively remarket its off-lease
vehicles. The Company uses Automobile Leasing Guide guidelines in estimating the
Residual Value, which are based on, among other things, the lease term, the
vehicle's make and model, the vehicle's remarketing and mechanical history, new
automobile price increases for the model and how the vehicle is equipped.
Furthermore, the Company periodically reviews and updates the Residual Values as
necessary throughout the lease term.
The Company remarkets the vehicle at the end of the lease term by
attempting to sell the vehicle to the lessee. In the event that the lessee does
not purchase the vehicle, the Company remarkets the vehicle through the same
channels it uses for the disposition of its repossessed vehicles under its loan
program, which include wholesale auctions and the Company's subsidiary PCSF and
its JDBR Franchise. To the extent the proceeds from remarketing a vehicle exceed
the Residual Value of the vehicle, the Company recognizes a gain, and to the
extent such proceeds are less than the Residual Value, the Company recognizes a
loss. As a result, the estimation of the Residual Value at lease inception is an
important aspect of the Company's operations. As of September 30, 1996, the
Company had a Residual Value exposure of approximately $16.8 million,
representing an average of 34% of the original aggregate gross Lease Contracts
receivable. Management believes that it adequately reserves against exposure to
risks associated with realizing the underlying Residual Value. See 'Risk
Factors.'
In the event of an early termination of the Lease or default by the lessee,
the lessee is generally obligated to pay the remaining payments due under the
Lease, plus the Residual Value, less any unearned lease income calculated using
the Rule of 78's method, and less the proceeds received from the disposition of
the vehicle.
Sales and Marketing
The Company focuses its sales and marketing efforts on developing strong
relationships with Dealers and expanding and diversifying its other origination
sources. Since Dealers represent the Company's primary source of Contracts
through the Company's Dealer Program and through SFI, the Company's sales and
marketing team focuses on increasing the number of Contracts purchased from
existing Dealers and developing relationships with new Dealers. Management
believes that it increases its Contract volume from Dealers by providing both
Loan and Lease financing alternatives and insurance and related products. The
Company develops strong relationships with its Dealers by providing a high level
of service specifically tailored to meet their needs. The Company offers its
Dealers fast turnaround of Contract approval and funding, consistent and
detailed credit underwriting and pricing guidelines and feedback on the
performance of their portfolios. The Company's offices are open six days a week
and sales and marketing personnel attend Dealer-sponsored promotional sales
events to provide 'on-site' financing approval. In an effort to attract
additional non-prime borrowers,
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the Company provides advertising subsidies to key Dealers. The Company's
regional sales representatives and senior management maintain an ongoing
dialogue with Dealers to enhance relationships. With respect to its other
origination sources, the Company's special program manager, who has 30 years of
experience in the automobile finance industry, focuses his sales and marketing
efforts on developing and expanding the Captive Program, Affinity Program,
Correspondent Program, Recourse Program and Wholesale Program.
The Company solicits business from Dealers through its sales and marketing
team, which principally consists of regional managers, area sales managers and
dealer service representatives. As of September 30, 1996, the sales and
marketing team had 70 members. Each regional sales manager manages approximately
6 area sales managers. The regional sales managers, in conjunction with area
sales managers, are responsible for maintaining and expanding existing Dealer
relationships and developing new Dealer relationships, including educating
Dealer personnel in the area of non-prime automobile finance.
The area sales managers are each assigned to a territory of approximately
75 to 100 franchised new car Dealers. The area sales managers are responsible
for making initial contact with Dealers in their territory with the goal of
establishing a minimum origination volume of 45 Contracts per month from a group
of 5 to 8 Dealers. Once this volume goal is achieved, the primary responsibility
for maintaining day-to-day contact with the newly-established Dealer group
shifts from the area sales manager to a dealer service representative who is
responsible for visiting the Dealers, coordinating the submission of the funding
packages and assisting the Dealers in Contract closing. The sales and marketing
team receives a daily list indicating the credit application approvals for the
prior day designated by the submitting Dealer. In order to increase the
likelihood that an approved application results in a completed Contract, a
member of the team responsible for servicing the submitting Dealer visits that
Dealer to request submission of the Contract to the Company and to assist in
Contract closing.
Members of the Company's sales and marketing staff are trained by the
Company's training manager, who is also responsible for training the finance
personnel of Dealers. The training manager periodically conducts formal two-day
training sessions for Dealer personnel focusing on the Company's underwriting
policies, procedures and documentation.
The sales and marketing team of the Company's wholly-owned subsidiary, SFI,
operates substantially as described above. As of September 30, 1996, the sales
and marketing staff of SFI consisted of 61 persons, including regional managers,
area sales managers and dealer service representatives. The sales and marketing
team of SFI coordinates with the Dealer Program its activities in maintaining
and expanding its network of Dealers in existing and new markets in order to
maximize Dealer relationships and the volume of Contracts generated.
Origination Sources
The Company purchases Contracts directly from Dealers through its Dealer
Program and through select third party entities that participate in its other
Origination Programs. Although the Dealer Program and the Captive Program are
the primary sources of Contracts, the other programs offer the Company the
opportunity to purchase Contracts with a minimal increase in sales and marketing
costs. Generally, under each program, the entity from which the Company
purchases Contracts makes certain representations and warranties to the Company
with respect to the Contracts purchased. Under the terms of the agreement
between the Company and a Dealer in the Dealer Program, the Dealer agrees to
repurchase any Contracts from the Company if certain conditions are not met.
Under this program, the Dealer also indemnifies the Company for certain breaches
of the dealer agreement.
Dealer Program. In its Dealer Program, the Company enters into a
non-exclusive agreement with a Dealer, under which the Company purchases Loan
and Lease Contracts originated by the Dealer in accordance with the Company's
underwriting guidelines and procedures. Under this program, a Dealer submits
loan and lease applications that it believes would satisfy the Company's
underwriting guidelines. The Company applies its underwriting guidelines and
procedures to determine whether to
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approve or decline the application. If the Company approves the application, it
will seek to purchase the Contract. The Company's sales and marketing team
establishes and maintains direct relationships with Dealers, and when necessary,
a member of the team works with the Dealer throughout every stage of the
application approval and the Contract purchase process.
As of September 30, 1996, the Company purchased Contracts through its
Dealer Program in 23 states with concentrations in Florida (54.0%), Georgia
(14.4%), Louisiana (7.2%) and North Carolina (6.8%). For the nine-month period
ended September 30, 1996, the Dealer Program generated a volume of 4,509
Contracts, which represented 27.8% of the Contracts purchased during the period.
Captive Program. In its Captive Program, the Company enters into an
exclusive agreement with an entity (the 'Captive') whereby the Captive
originates, through its Dealer relationships, Loan and Lease Contracts in
accordance with the Company's underwriting guidelines; and the Company has the
right of first refusal to purchase such Contracts. Under this program, the
Captive submits the Contracts and the Company verifies that each Contract meets
its underwriting guidelines prior to the purchase of such Contracts.
The Company currently has two Captive relationships, one with SFI and the
other with First Financial Acceptance, Inc. ('FFA'), a company which originates
Contracts exclusively from a network of Dealers who have ownership interests in
FFA.
SFI, a Florida-based finance business founded in 1987, is engaged in
originating and selling non-prime automobile Loan Contracts. From September 1994
to August 1995, the Company purchased Loan Contracts originated by SFI with an
aggregate volume of $37.9 million. In August 1995, the Company entered into an
exclusive agreement with SFI under its Captive Program whereby SFI originated,
through its Dealer relationships, Loan Contracts in accordance with the
Company's underwriting guidelines and the Company had the right of first refusal
to purchase such Contracts.
In June 1996, the Company acquired the business of SFI by exercising its
purchase option. SFI became a wholly-owned subsidiary of the Company without any
material change in the operations of SFI. The Company entered into a management
agreement with the former principals of SFI and retained substantially all of
the operating personnel of SFI. SFI has continued its operations consistent with
historic practice and the Company has continued to account for the origination
of Loan Contracts by SFI as part of the Captive Program. SFI has continued to
maintain its relationships with Dealers in coordination with the Company's own
Dealer relationships.
SFI has originated under the Captive Program increasing volume of Loan
Contracts. During the period from October 1, 1994 to September 30, 1996, the
Company purchased an aggregate volume of $165.9 million of Loan Contracts
through SFI, representing approximately 42.0% of the total volume of Loan
Contracts purchased by the Company during this period through all of its
Origination Programs. For the nine-month period ended September 30, 1996, the
Company's Captive Program generated a volume of 8,199 Contracts, which
represents 48.8% of the Contracts purchased during the period.
Affinity Program. In its Affinity Program, the Company enters into an
agreement with an independent entity (the 'Affinity'), which typically lends to
consumers with 'A' and 'B' credit. Under this program, the Affinity originates,
through its Dealer relationships, Loan and Lease Contracts that do not meet its
own underwriting guidelines but may satisfy the Company's underwriting
guidelines. The Company has the right of first refusal to purchase such
Contracts. The Affinity submits such Loan and Lease applications and the Company
applies its underwriting guidelines and procedures to determine whether to
approve or decline the application. Upon approval, the Company purchases the
Contract. The purpose of this program is primarily to develop strategic
relationships with third party financing sources that do not otherwise finance
consumers with non-prime credit.
The Company currently has three Affinity relationships. One of the
relationships is with GECAL, an affiliate of GECC. In July 1995, the Company
entered into a two-year agreement, automatically renewable for successive
one-year periods thereafter, under which the Company is given the opportunity to
evaluate all applications that do not meet GECAL's underwriting criteria. The
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Company, utilizing its underwriting guidelines, then approves or declines the
submissions. While not an exclusive arrangement, management believes that the
Company continues to be the only non-prime company operating this program with
GECAL in the Southeast. The program currently includes all of GECAL's dealers in
Florida and the Company is in the process of initiating the program in North
Carolina, South Carolina and Tennessee, with the long-term plan of establishing
the program in the entire Southeast region during fiscal 1997. The Company
anticipates that the relationship with GECAL will give it access to GECAL's
network of 1,500 dealerships in 11 Southeastern states with minimal increases in
sales and marketing costs.
For the nine-month period ended September 30, 1996, the Affinity Program
generated a volume of 903 Contracts, which represented 3.0% of the Contracts
purchased during the period.
Correspondent Program. In its Correspondent Program, the Company enters
into an agreement with an independent entity (the 'Correspondent') whereby the
Correspondent originates, through its Dealer relationships, Loan Contracts that
the Correspondent believes would satisfy the Company's underwriting guidelines;
but the Company does not have the right of first refusal to purchase such
Contracts. Under this program, the Correspondent submits loan and lease
applications which it believes would satisfy the Company's underwriting
guidelines. The Company applies its underwriting guidelines and procedures to
determine whether to approve or decline the application. Upon approval, the
Company purchases the Contract.
The Company currently has four Correspondent relationships. During the
nine-month period ended September 30, 1996, the Correspondent Program generated
a volume of 673 Contracts, which represented 1.0% of the Contracts purchased
during the period.
Recourse Program. In its Recourse Program, the Company enters into an
arrangement with an independent entity (the 'Originating Entity') that
originates, through its Dealer relationships, Loan Contracts that meet
pre-established credit criteria; and the Company purchases such Contracts with
full recourse to the Originating Entity. The Company accounts for the
arrangement as a financing to the Originating Entity. Under this program, the
Originating Entity submits the Contracts and the Company verifies that each
Contract meets the pre-established credit criteria prior to the purchase of such
Contract. The Company purchases the Contracts typically at 60% to 70% of the
principal amount of the Contracts. The pre-established credit criteria generally
relate to 'D' credit borrowers.
The Company currently has two Recourse relationships, which include a
finance company and a large used-car dealer. Management believes that the
Recourse Program offers the Company the opportunity to purchase Contracts
outside its 'C' credit target market and, at the same time, to mitigate the
credit risk through a large discount and full recourse. The advance rate is
determined based upon, among other factors, the credit of the Originating Entity
and the value of the underlying collateral. For the nine-month period ended
September 30, 1996, the Recourse Program generated a volume of 3,928 Contracts,
which represented 11.0% of the Contracts purchased during the period.
Wholesale Program. The Company engages in opportunistic purchases of
portfolios of Loan Contracts that meet the Company's underwriting guidelines and
Contract documentation requirements. The Company purchases such portfolios at a
discount and subject to verification that: (i) a sample of the Contracts,
typically 10% to 15% of the portfolio, complies with the Company's underwriting
guidelines; and (ii) each Loan Contract in the portfolio satisfies the
documentation requirements of the Company.
For the nine-month period ended September 30, 1996, the Company purchased
one $15 million portfolio of Contracts as part of its Wholesale Program.
Underwriting
The Company evaluates and purchases Loan and Lease Contracts in accordance
with its underwriting guidelines and procedures. The underwriting guidelines
focus on balancing the credit risk of the borrower or lessee with the adequacy
of the vehicle as collateral, as well as the purchase price of the Contract on a
case by case basis. The underwriting procedure focuses upon ensuring the
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compliance of the Contract with the underwriting guidelines, the completeness of
the documentation required for the Contract and the timely response of the
Company's decision to the entity submitting the Contract (the 'Originator').
Underwriting Guidelines. The Company's basic criteria for assessing credit
risk takes into account principally the following factors: (i) Stability: the
applicant's history with regard to his or her residency, occupation and
employment; (ii) Credit History: the applicant's history with regard to timely
payments on his or her past and present obligations, defaults, bankruptcies and
repossessions; (iii) Affordability: a monthly debt service-to-gross income ratio
test not to exceed 50%, and monthly payment not to exceed 20% of the monthly
gross income; (iv) Risk Exposure: the ratio of the principal amount of the
Contract net of the purchase discount and the administration fee to the market
value of the vehicle; and (v) Downpayment: the downpayment on the vehicle, which
is generally a minimum of 10% of the vehicle's sale price. The Company's
underwriting guidelines also incorporate certain criteria for the vehicle
underlying the Loan or Lease Contract, the maximum term of the Loan or Lease
Contract and the level of discount and administration fee required for the
purchase of such Contract.
Management believes that gradations exist with respect to the credit
profiles of non-prime consumers in the automobile finance market according to
the above generalized factors. The Company's underwriting guidelines provide for
four tiers of credit profiles: Tier I, Tier II, Tier III and Tier IV (the
'Multi-tier Underwriting Guidelines'). Management believes that its Tier I and
Tier II credits correspond to the 'B' credit segment and Tier III and Tier IV
correspond to the 'C' credit segment of the automobile finance market. Consumers
who do not meet the profile of a Tier IV credit are classified by the Company as
consumers with 'D' credit. While such gradations are by nature inexact, the
Company primarily focuses on the 'C' credit segment of the automobile finance
market. Furthermore, the Company believes that its Multi-tier Underwriting
Guidelines provide a greater degree of specificity to the Originator than its
competition in assessing the credit risk of, and developing the financing terms
for, the applicant, enhancing the rapid execution of the transaction for the
Originator and enabling the Originator to provide improved service to its
customers.
As of September 30, 1996, the Company's servicing portfolio of Loan
Contracts (excluding the Recourse Program) consisted of approximately 2% Tier I
and Tier II combined, 18% Tier III and 80% Tier IV, and Lease Contracts
consisted of approximately 6% Tier I and Tier II combined, 48% Tier III and 46%
Tier IV.
Underwriting Procedure. The Company has an underwriting department with an
underwriting staff, which is organized into teams based upon geographic regions.
Each team consists of a processor, credit analyst, funder and senior funder.
Management believes that this regional team approach promotes efficient
communication and expedites the underwriting process, giving the Company a
competitive edge while maintaining consistent underwriting performance. As
geographic expansion requires, the Company intends to establish full service
regional centers, which will include an underwriting department. The
underwriting procedure consists of three steps: Step I -- Application
Processing, Step II -- Credit Review and Step III -- Contract Funding, as
described below.
STEP I -- Application Processing: Upon receipt of an application from an
Originator, the processor enters the information into the Company's computer
system, which automatically provides for the tracking and processing of the
application. The application sets forth, among other things, the applicant's
income, liabilities, credit and employment history, proposed downpayment and a
description of the vehicle. Simultaneously with the processing of the
application, the processor obtains credit reports from Equifax and TRW through
its computer system, and immediately proceeds to: (i) verify the employment of
the applicant and his or her spouse/co-signer, if applicable, with their
respective employers; (ii) verify credit references, if applicable; (iii) verify
current residence and duration of current and past residence; (iv) verify and
evaluate the value of the vehicle as collateral through the use of the 'Black
Book' or NADA Book, as appropriate; and (v) review a budget screen automatically
produced by the computer system, which estimates funds the applicant will have
available for paying his or her monthly payment. Once this process is completed,
the application is passed on-line to the team's credit analyst.
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STEP II -- Credit Review: The credit analyst reviews the application and
evaluates the applicant's credit risk with respect to the Company's Multi-tier
Underwriting Guidelines. Regardless of the decision on the application, the
credit analyst will promptly respond to the Originator, typically within two to
four hours of receipt of the application, indicating that the application is
approved with or without stipulations, or declined. If the application is
declined, the credit analyst will give a detailed explanation as to what
circumstances dictated the rejection of the application and what, if any,
changes could be made in order to make a subsequent application more likely to
be approved. Typical items that the Company might require to be amended include
proving additional income, requiring a co-applicant, amending the length of the
proposed term, requiring additional downpayment, substantiating credit
information and requiring proof of the resolution of certain credit deficiencies
as noted on the customer's credit history. Approximately 44% of applications are
approved or conditionally approved, of which approximately 25% are ultimately
funded. Management believes that this direct contact between the credit analyst
and the Originator and the development of a relationship over time results in a
better understanding by the Originator of the underwriting guidelines and leads
to more accurate pre-screening by the Originator of applicants and higher
approval rates of Contracts.
STEP III -- Contract Funding: If the credit analyst approves the
application, the Originator provides a funding package to the Company, which
includes legal documentation and the credit information. Upon receipt by the
Company, the funding package is referred to the team's funder. At that time, all
information concerning the funding package, including both legal documentation
and credit are reverified by the funder. Any deficiencies are noted and the
Originator is advised. The funder works directly with the Originator to complete
the funding package. While the funding package is being processed, the team's
interviewer conducts a customer telephone interview with the applicant to verify
the information provided in the application and the funding package. The
telephone interview with the applicant typically concentrates on verifying the
downpayment, the monthly payment amount, the payment due date, the Dealer
add-ons, and the make, model and mileage of the vehicle. If there are any
discrepancies, the file is referred back to the credit analyst who then contacts
the Originator and/or the applicant to see if the discrepancy is capable of
being resolved. If the problem is not capable of being resolved, the application
is terminated.
Prior to final approval for funding the Contract, the computer system
automatically verifies the Contract information, such as the APR, verifies the
proceeds to be distributed to the Originator and alerts the funder to any
discrepancies between the calculations automatically performed by the computer
system and the information included in the funding package. Prior to issuance of
a check to the Originator, the team's senior funder reviews the entire funding
package including any discrepancies between the computer analysis and the
funding package, verifies the completeness of the legal and credit
documentation, confirms that the applicant has adequate insurance as verified by
NIS (see 'NAL Insurance Services, Inc.') and that the telephone interview was
successfully completed. After approval by the senior funder, the Contract is
referred to the accounting department and the funds are delivered to the
Originator by check or wire transfer. The Company typically funds within 24
hours of receipt of a properly completed funding package.
Underwriting for Origination Programs. The Company applies the Mutli-tier
Underwriting Guidelines to each of the Origination Programs, except in the case
of the Recourse Program. The underwriting and pricing guidelines for the
Recourse Program are pre-agreed upon between the Originator of the Contracts
under this program and the Company. The terms of the Contract are based upon,
among other factors, the credit history of the borrower or lessee and the value
of the underlying collateral. The Company also applies its underwriting
procedure to each of the Origination Programs as appropriate, except in the case
of the Wholesale Program. The underwriting procedure for the Wholesale Program
involves evaluating the overall quality of the portfolio for compliance with the
Company's underwriting guidelines based upon a sample review of generally 10% to
15% of the Contracts in the portfolio prior to purchase. In addition, the
Company conducts a documentation review of each Contract in the portfolio for
accuracy and completeness prior to purchasing the portfolio.
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SFI, a Captive Program participant, applies the Company's underwriting
guidelines and procedures from application to the preparation of the funding
package through its independent staff of 22 processors, credit analysts, funders
and senior funders. Prior to purchase, the Company verifies that the Contract
meets its underwriting guidelines and conducts the customer telephone interview.
Quality Control
The Company's quality control group conducts a post-funding credit review
of its Contracts on a monthly basis. The staff reviews all of the Contract files
for completeness of documentation. The staff also conducts a credit review of
approximately 15% to 20% of the Contracts purchased each month to determine
whether the Contracts comply with the Company's underwriting guidelines and
procedures and records the nature and frequency of all exceptions that were
approved. In the event that a Contract contains unapproved exceptions to the
Company's underwriting guidelines, it is referred to management for resolution.
The quality control group also performs a monthly trend analysis to determine
whether any adjustments should be made to the Company's underwriting guidelines
based upon recurring approved exceptions and the performance of Contracts with
these exceptions.
Asset Servicing and Collections
The Company has a servicing and collections operation that utilizes
experienced staff and computer technology and software tailored to the Company's
specific needs. Servicing and collections functions are organized into
departments, which consist principally of Customer Service, Collections,
Repossession, Asset Management and Disposition, and Asset Recovery. To minimize
losses and delinquencies, the Company: (i) employs pro-active collection
policies and procedures based upon each collector managing the contract from
origination to settlement; (ii) manages the accounts based upon geographic
regions; (iii) employs experienced personnel with proven expertise whose
performance is continuously evaluated and rewarded based upon performance of the
Contracts serviced; and (iv) utilizes servicing and collection specialists to
provide technical expertise as required to address specific circumstances.
Customer Service. The Company's customer service department is responsible
for resolving customer problems, quoting customer pay-off amounts, arranging
substitutions of collateral, re-leasing vehicles at lease-end and processing
customer payments.
The Company also uses its customer service department to enhance the
efficiency of its account management by routing all incoming calls through the
collection department. Management believes that this procedure promotes
efficient account management through continuous updating of information prior to
the provision of other services to the customer. The Company facilitates
collections from customers by using Western Union 'Quick Collect,' which allows
a customer to make payments at numerous locations. The Company also accepts
walk-in payments. However, any delinquent customer making a walk-in payment must
be interviewed by a collector.
Collections. The Collectors are organized into five regions consisting of
South Florida, North Florida, East Coast states, Central states and West Coast
states. Within each region, the Collectors are organized into teams of four,
which include three collectors and a team leader. Management believes that this
regional team approach enables the Company to identify and efficiently tailor
its servicing and collection activities to each region, and permits accounts to
be monitored more closely by management, thereby enhancing collector performance
and minimizing delinquencies and losses. The collections staff has 54 persons,
including collectors and collection specialists, and management. As the volume
of Contracts increases, the Company continues to expand to maintain its
collection and servicing staff at a level that provides for approximately one
collector for every 500 Contracts serviced. As geographic expansion requires,
the Company intends to establish full service regional centers, which will
include asset servicing and collections departments. The Company expects to open
regional centers in Orlando, Florida and Atlanta, Georgia. See 'Facilities.'
Collection Procedures. The collections staff uses its management
information systems to process and track the accounts in order to ensure that
data is immediately available for continuous
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evaluation and collection of accounts. See 'Management Information Systems.'
Within 24 hours of a delinquency, a collector will telephone the customer to
resolve the delinquency. If the collector fails to reach the customer, the
collector attempts to contact the customer by calling the customer's employers
and credit references. If the delinquency is not resolved, the collector will
send demand letters as appropriate. The Company's policy permits Contracts to be
extended or revised payment schedules to be made no more than once a year on a
case-by-case basis, as determined by its collection supervisors. In the event
that the delinquency cannot be resolved, the collector typically recommends
repossession within 45 days. Authorization for repossession typically requires
the approval of the collector, the team leader and the team supervisor.
Management believes that this team approach prevents premature repossession and
prevents the collector from improving the delinquency experience of his or her
accounts through repossession by terminating his or her responsibility for the
account. Accounts that are approved for repossession are turned over to outside
agencies for repossession. Repossession is typically accomplished within 72
hours of repossession approval and the vehicle is assigned to the Company's
asset management staff. See 'Asset Management and Disposition.'
Collector Training and Incentives. The Company's servicing and collection
program emphasizes continuous evaluation and training of its collection staff;
and a compensation system for collectors, supervisors and managers that rewards
efficient management of the accounts through salary and bonuses. Management
believes that this incentive compensation system motivates employees to
effectively manage accounts by increasing collections and minimizing
delinquencies and losses.
Collectors, supervisors and collection managers are continuously trained
and evaluated. Team leaders audit approximately 15 to 20 accounts of each
collector on his or her team per month. Supervisors are required to review an
additional 20 accounts of each collector resulting in each collector having
approximately 40 accounts per month audited by management. Each account is
audited for compliance with the Company's servicing and collection policies and
performance in order to ensure that the accounts are in compliance with the
Company's goals and objectives relating to delinquencies, repossessions and
losses. All team members are required to attend classes held at the Company and
outside seminars provided by credit bureaus and collection agencies. Each
collector also participates in the Company's cross-training program which
requires rotating through the Company's other departments to continually educate
the collector on the Company's operations. In addition, the Company utilizes the
experience of its collectors through a policy of promoting from within the
Company whereby collectors have the opportunity to be promoted from the
Collections Department to other areas of the Company's operations.
The performance of each collector's accounts is available on a daily basis.
The performance and compensation of the collector is evaluated on a monthly
basis. The evaluations and the bonus program are based upon a rating system that
encompasses individual delinquency rates, team delinquency rates, the
delinquency mix, the repossession rate and the volume of calls handled.
Management believes that the bonus program provides the collector with an
incentive to manage his or her accounts more efficiently.
Collection Specialists. The Company supports its collection teams by
providing collection specialists in the areas of bankruptcy, insurance claims,
skip-tracing and repossession. In the event that an account involves bankruptcy
issues, insurance issues, skip-tracing or repossession, the account remains the
responsibility of the collector, and a collection specialist in the relevant
area works with the collector providing technical expertise in order to use
efficiently the collectors' time, maximize collections and minimize delinquency
and loss. The collector does not relinquish care, control or custody of the
account until the account is terminated by payment in full, repossession or is
charged-off and assigned to the asset recovery department. Management believes
that the origination to settlement servicing approach provides continuity and
enhances accountability of the collector for the performance of the accounts
serviced, rather than a 'roll-up' approach that routes the account to different
collectors as the account ages.
Repossession. The Company's repossession department is responsible for
making a final attempt to collect the delinquent account, skip tracing and
assigning the account to an approved
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repossession agent. The department is also responsible for following up on
delivery of the repossessed vehicle, coordinating all customer redemptions of
repossessed vehicles and maintaining files on repossession agents, including
proof of licenses, bonding and insurance.
Asset Management and Disposition. When a vehicle is repossessed and not
redeemed by the customer in the prescribed time, or the vehicle is returned at
the end of a lease, the vehicle is assigned to the asset management department
for disposal. The vehicles are reviewed by management at the time of
repossession or return and at that time written down to their net realizable
value and a determination is made of the appropriate disposition channel. The
vehicle is typically: (i) disposed of at wholesale auctions; (ii) remarketed on
a wholesale basis through PCSF; (iii) remarketed on a retail basis through PCSF;
or (iv) remarketed on a retail basis through the JDBR Franchise. See 'Related
Businesses.' During 1996, the Company hired a staff of auction representatives
to monitor the disposal of vehicles at the used car auctions. These
representatives seek to maximize the amount realized on the vehicles through:
(i) inspecting the vehicles for reimbursable insurance damage; (ii) setting
auction price floors; and (iii) enforcing proper auction procedures. The
Company's auction representatives have significantly improved sales prices on
its vehicles.
Asset Recovery. The asset recovery department uses collection specialists
to collect on any loss the Company may incur on an account. Losses may occur in
several ways, including: (i) proceeds received upon liquidation of the asset are
less than the customer's balance on the account and liquidation costs; (ii) the
amount of insurance pay-off or settlement is less than the customer's balance on
the account, and (iii) delinquent accounts are charged-off upon 150-days
delinquency. These balances are collected by various means, including: (i)
lump-sum settlement with the customer; (ii) reduced payment plans; or (iii)
referral to a collection agency or an attorney for action, including wage
garnishment, judgment and asset searches. Any amount received after a contract
has been charged off is recorded as a recovery. For the nine months ended
September 30, 1996, the Company's recoveries resulted in an annualized net
charge-off percentage of 6.46% in comparison to an annualized gross charge-off
percentage of 9.00%.
Management Information Systems
The Company employs information systems, including computer software
programs and a Voice Information Management System, which enable it to manage
more effectively its business activities. The Company's software programs, which
have been specifically modified for the Company, operate on a local area and
wide area network. The Company's COIN system expedites elements of the contract
purchase process, including entry and verification of credit application data,
credit analysis, communication to Dealers of credit decisions, contract
purchases, and contract-related cash disbursements. The Company's Leasetek
system facilitates elements of asset servicing and management, including
monitoring account activities and maintaining customer contact, expediting
collection and referring delinquent accounts for repossession. The Company's
Voice Information Management System, through continuous routing of incoming
calls, maximizes the efficiency of the Company's asset servicing and collections
department.
These systems also provide functions that increase productivity, such as
computer faxing of credit decisions, automatic credit bureau retrieval,
automatic retrieval of NADA and 'Black Book' values for financed vehicles,
on-line inquiry for all Contract information to aid in collections,
verification, processing, tracking and solicitation, as applicable, of insurance
and related products. These systems provide for the prompt collection and
retrieval of data concerning the composition of the receivables portfolio, the
characteristics and performance status of the underlying receivables and other
information necessary for management to increase Contract volume, maximize
Contract performance, evaluate and manage personnel and minimize delinquency and
losses.
Management believes that it has adequate information systems in place to
permit significant growth in the volume of Contracts processed without any
near-term material additional investments. To increase productivity through
automation, the Company is currently evaluating enhancements to its systems.
47
<PAGE>
RELATED BUSINESSES
The Company continues to develop its related businesses consisting of NIS,
which offers insurance services and products, and PCSF, which principally
remarkets repossessed and off-lease vehicles. Management believes that these
businesses increase the efficiency of purchasing Loan and Lease Contracts and
provide independent sources of revenue to the Company.
NAL Insurance Services, Inc.
The Company's wholly-owned subsidiary, NIS, is a full service insurance
agency selling a variety of insurance and related products to the Dealers as
well as to the Company's customers. The staff of NIS consists of 10 persons. The
staff uses specialized computer software to verify insurance in connection with
the Company's underwriting of Contracts, to track cancellation of existing
insurance policies and to solicit insurance and related products. See
'Management Information Systems.' Management believes that these insurance and
related products complement its core business, and enhance the Company's
relationship with its Dealers by enabling the Dealers to better service their
customers.
Management believes that these products, which are as described below,
enhance its ability to provide a 'one-stop shop' service to the Dealer and
thereby increase the efficiency of the Company's purchase of Loan and Lease
Contracts while establishing an additional revenue source. In 1995, NIS
generated revenues of $580,000 and for the nine-month period ended September 30,
1996, NIS generated revenues of $1.1 million.
GAP Plan. The Company offers its customers an opportunity to participate
in the Company's guaranteed auto protection ('GAP') plan, a non-insurance
product. In the event of an insurance loss, the GAP plan pays the Company the
difference between the actual cash value protection afforded by the insurer and
the customer balance due the Company. The Company's risk in these transactions
is eliminated through reinsurance. The Company pays a flat premium per contract
to unaffiliated major insurers to reinsure this risk. The Company also pays the
Dealer a commission for each plan sold.
Primary Auto Insurance. As part of the Company's underwriting procedures,
NIS verifies the existence of insurance prior to funding of the Contracts and
also assures that the customer maintains adequate primary auto insurance during
the term of the Contract. The Company solicits sales of primary auto insurance
policies through brochures distributed to Dealers, on-site training for Dealers
and through Dealer personnel. However, the majority of the Company's sales of
primary auto insurance policies result from the cancellation of a customer's
existing insurance policy, which the Company tracks through its computer system.
Collateral Protection Insurance. If a customer does not continue to carry
primary auto insurance, the Company is authorized under the Loan or Lease
Contract to provide Collateral Protection Insurance ('CPI') upon notice of
cancellation of the existing insurance of the customer. CPI provides coverage
for the actual cash value of the vehicle in the event of physical damages to the
vehicle up to a total loss, which typically averages 84% of the loan balance.
Payments are automatically included in the monthly car payment on the customer's
contract for which the Company receives a 15% commission on each policy.
Extended Warranty. NIS also offers an extended warranty policy to its
customers directly or through Dealers. The extended warranty covers the customer
for repairs on their used vehicle where the manufacturer's warranty has expired.
Typically, an extended warranty covers the vehicle for an additional 12 months
or 12,000 miles, or for 24 months or 24,000 miles. NIS receives a commission on
all extended warranty policies sold.
Company Insurance Services. NIS provides the Company with internal
insurance services, such as workers compensation, employee dental and health
insurance, contingent and excess liability insurance coverage required in
connection with the Company's leasing operation, key employee life insurance,
and liability and casualty insurance. Management believes that by purchasing
these
48
<PAGE>
insurance products through NIS, the Company meets its insurance needs and
recoups commissions that would otherwise be paid in connection with such
products.
Performance Cars of South Florida, Inc.
The Company conducts a vehicle remarketing operation through PCSF, a
wholly-owned subsidiary, and its JDBR Franchise at a retail sales facility
located in Palm Beach County, Florida. The staff of PCSF and the JDBR Franchise
consists of 22 persons, including senior management with an average of over 40
years of experience in the retail automobile business. The Company commenced
this remarketing operation principally as a means of providing a more
cost-effective method of remarketing some of the Company's repossessed and
off-lease vehicles. PCSF operates the JDBR Franchise, pursuant to which the
Company licenses the J.D. Byrider name, trademarks and business system. This
franchise provides national brand name recognition, national advertising,
comprehensive operative systems, ongoing franchise support, as well as employee
and management training in the JDBR system.
Sales at the facility are conducted through either the JDBR Franchise or
directly through PCSF based upon the model, condition, age and mileage of the
vehicle. Some of the vehicles sold by the JDBR Franchise are financed through
its affiliate, Car Now Acceptance Corporation. Typically, less than 10% of the
vehicles sold by PCSF, independent of the JDBR Franchise, are financed through
the Company. Management believes that remarketing vehicles through PCSF offers
several advantages over wholesale auctions (which historically has been the
Company's principal method of disposing of vehicles), including the following:
(i) the vehicles receive an extended period of resale exposure, as the
remarketing operation is open 7 days a week, as opposed to the limited period
(typically 4 days) available at auctions; (ii) the vehicles are available for
visible inspections for staff assessment rather than condition reports available
from auctions; (iii) the vehicles may be resold at retail or wholesale instead
of at wholesale through auctions; (iv) the staff has an opportunity to perform
appearance and mechanical repairs at reduced prices; and (v) auction fees of
approximately $300 per vehicle are not incurred. Management believes that PCSF
provides a cost-effective alternative to wholesale disposition of vehicles at
auction. The Company currently disposes of an average of 32% of its repossessed
and off-lease vehicles through PCSF, including the JDBR Franchise. In addition
to increasing the efficiency of the Company's Asset Management and Disposition
Department, PCSF, and in particular the JDBR Franchise, has been an additional
source of revenue to the Company. For the period commencing January 1996 and
ending September 30, 1996, PCSF generated revenues of $971,000.
As the Company's Contract volume increases, it plans to open additional
PCSF sites with JDBR Franchises based on any resulting geographic concentration.
Currently, the Company's management anticipates opening a PCSF site with a JDBR
Franchise in Orlando, Florida. However, there can be no assurances to that
effect. Management believes that the used car market is an expanding market and
offers the Company an opportunity to further the growth of its JDBR Franchise,
increase the recovery on its vehicles and obtain additional sources of revenue
for the Company.
GOVERNMENT REGULATION
The Company and the origination sources are subject to regulation and
licensing under various federal, state and local statutes, regulations and
ordinances. Most states in which the Company operates: (i) require the Company
and/or the origination sources to obtain and maintain certain licenses and
qualifications; (ii) limit the interest rate and other charges that may be
imposed by, or prescribe certain other terms of, the Contracts that the Company
purchases; (iii) regulate the sale and type of insurance products offered by the
Company and the insurers for which it acts as agent; (iv) require the Company
and/or the origination sources to provide specified disclosures; and (v) define
the Company's rights to repossess and sell collateral. The Company's agreement
with its origination sources provides that the origination source must indemnify
the Company with respect to any loss or expense the Company incurs as a result
of violations by the origination source of any federal, state or local consumer
credit and insurance laws, regulations or ordinances.
49
<PAGE>
The Company is subject to numerous federal laws, including the Truth in
Lending Act, the Equal Credit Opportunity Act and the Fair Credit Reporting Act
and the rules and regulations promulgated thereunder, and certain rules of the
Federal Trade Commission. These laws require the Company to provide certain
disclosures to applicants, prohibit misleading advertising and protect against
discriminatory financing or unfair credit practices. The Truth in Lending Act
and Regulation Z promulgated thereunder require disclosure of, among other
things, the terms of repayment, the final maturity, the amount financed, the
total finance charge and the annual percentage rate charged on each retail
installment contract. The Equal Credit Opportunity Act prohibits creditors from
discriminating against loan applicants (including retail installment contract
obligors) on the basis of race, color, sex, age or marital status. Under the
Equal Credit Opportunity Act, creditors are required to make certain disclosures
regarding consumer rights and advise consumers whose credit applications are not
approved of the reasons for the rejection. The Fair Credit Reporting Act
requires the Company to provide certain information to consumers whose credit
applications are not approved on the basis of a report obtained from a consumer
reporting agency. The rules of the Federal Trade Commission limit the types of
property a creditor may accept as collateral to secure a consumer loan and its
holder-in-due-course rules provide for the preservation of the consumer's claims
and defenses when a consumer obligation is assigned to a subject holder. With
respect to used vehicles specifically, the Federal Trade Commission's Rule on
Sale of Used Vehicles requires that all sellers of used vehicles prepare,
complete and display a Buyer's Guide that explains any applicable warranty
coverage for such vehicles. The Credit Practices Rule of the Federal Trade
Commission imposes additional restrictions on loan provisions and credit
practices.
Certain of the states in which the Company operates prohibit Dealers from
charging a finance charge in excess of statutory maximum rates. Finance charges
include interest and any cash sale differential. The Company's agreements and
other communications with Dealers stress the importance of the Dealers'
compliance with all applicable laws and specifically prohibit the Dealer from
agreeing to a cash sale differential. The Company's contractual agreements with
Dealers obligate Dealers to comply with all applicable laws, and provide that
each Dealer must indemnify the Company for any violation of law relating to a
contract originated by the Dealer. Every borrower (as part of the standard
financing documentation) currently is required to sign a written acknowledgment
that (a) the borrower is aware, and approves, of the Dealer's intended sale of
the contract at a discount to the Company, and (b) the borrower was not quoted a
lower price for a cash purchase. Further, it is the Company's policy to
terminate its relationship with any Dealer where the Company becomes aware of
such incidents perpetrated either with the knowledge or tacit assent of the
Dealer, or by more than one salesperson at a particular Dealer. Dealers are
advised of this policy during the initial contacts with the Company's
representatives before the first contract is purchased. As of September 30,
1996, no Dealer has been so terminated. To the knowledge of the Company, no
action has been brought or is currently threatened or contemplated alleging that
Dealers regularly charge cash sale differentials. Nevertheless, if it were
determined that a material number of the Contracts involved violations of
applicable lending laws by the Dealers, the Company's financial position could
be materially adversely affected and a widespread pattern of violation by
Dealers could have a material adverse effect on the Company's future prospects.
In the event of default by a borrower on a contract, the Company is
entitled to exercise the remedies of a secured party under the Uniform
Commercial Code ('UCC'). The UCC remedies of a secured party include the right
to repossession by self-help means, unless such means would constitute a breach
of peace. Unless the borrower voluntarily surrenders a vehicle, self-help
repossession by an independent repossession specialist engaged by the Company is
usually employed by the Company when a borrower defaults. None of the states in
which the Company presently does business has any law that would require the
Company, in the absence of a probable breach of peace, to obtain a court order
before it attempts to repossess a vehicle.
In most jurisdictions, the UCC and other state laws require the secured
party to provide the obligor with reasonable notice of the date, time and place
of any public sale or the date after which any private sale of collateral may be
held. Unless the obligor waives his rights after default, the obligor has the
right to redeem the collateral prior to actual sale by paying the secured party
the unpaid
50
<PAGE>
installments (less any required discount for prepayment) of the receivable plus
reasonable expenses for repossessing, holding, and preparing the collateral for
disposition and arranging for its sale, plus in some jurisdictions, reasonable
attorney's fees, or in some states, by payment of delinquent installments.
Repossessed vehicles are generally resold by the Company through wholesale
auctions or remarketed through PCSF or its JDBR Franchise.
Management believes that it is in compliance with all applicable laws and
regulations. The Company maintains an internal compliance staff to review and
inform management of changes in applicable law and to act as liaison between the
Company and the various attorneys it has retained in each of the states in which
it conducts business.
EMPLOYEES
The Company employs personnel experienced in all areas of loan origination,
documentation, collection, administration and securitization. As of September
30, 1996, the Company had 445 full-time employees.
FACILITIES
The Company's executive offices and operations occupy approximately 37,183
square feet of leased office space in The Uptown Office Park at 500 Cypress
Creek Road West, Suite 590, Fort Lauderdale, Florida, for which the Company pays
an aggregate of $72,200 of base rent and common area maintenance per month
pursuant to four leases, with annual increases of approximately 5%. The leases
expire in 2002.
The Company's lease agreements offer rights of first refusal on available
space adjacent to the original offices, which the Company has used to
accommodate the staff required for continued growth. There can be no assurance
that any additional space will be available on terms favorable to the Company.
Management believes that the Company's facilities are appropriate for its needs.
The Company leases approximately 8,825 square feet of office space in
Orlando, Florida, which the Company intends to use as a regional office. The
Company pays $5,661 per month pursuant to a fifteen-year lease that expires in
October 2011.
The Company leases approximately 800 square feet of office space in
Atlanta, Georgia, which the Company intends to use as a temporary regional
office. The Company pays $4,779 per month for a six-month lease that expires in
February 1997.
The Company through PCSF leases a used car lot in Palm Beach County,
Florida at a base rent of $11,600 per month. The lease expires on December 31,
2000. See 'Related Businesses -- Performance Cars of South Florida, Inc.'
LEGAL PROCEEDINGS
The Company is currently not a party to any material litigation, although
it is involved from time to time in routine litigation incident to its business.
51
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The present members of the Board of Directors and executive officers, their
respective ages and positions with the Company are set forth below:
<TABLE>
<CAPTION>
NAME AGE POSITIONS WITH THE COMPANY
- ------------------------- --- ------------------------------------------------
<S> <C> <C>
Robert R. Bartolini...... 52 Chairman of the Board, President and Chief
Executive Officer of NAL; Chairman and Chief
Executive Officer of NAC
John T. Schaeffer........ 50 Director and Executive Vice President of NAL;
Director, President and Chief Operating Officer
of NAC
Robert J. Carlson........ 41 Vice President and Principal Accounting Officer
of NAL and NAC
Dennis R. LaVigne........ 52 Vice President and Treasurer of NAL and NAC
Ngaire E. Cuneo(1)(2).... 45 Director
James F. DeVoe(1)(2)..... 52 Director
David R. Jones(1)(2)..... 47 Director
</TABLE>
- ------------------
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
The Company's Certificate of Incorporation provides for the division of the
Board of Directors into three classes, with each class to be as nearly equal in
number of directors as possible. At each annual meeting of the stockholders, the
successors to the class of directors whose term expires at the time are elected
to hold office for a term of three years, and until their respective successors
are elected and qualified, so that the term of one class of directors expires at
each such annual meeting. The terms of office expire as follows: Ms. Cuneo and
Mr. DeVoe, 1997; Mr. Jones and Mr. Schaeffer, 1998; and Mr. Bartolini, 1999. See
'Description Of Securities -- Certain Provisions of the Company's Certificate of
Incorporation and Bylaws.'
Officers are elected by, and serve at the discretion of, the Board of
Directors. There are no family relationships among the directors or executive
officers. In August 1995, the Company established an Audit Committee, and in May
1996, the Company established a Compensation Committee.
The following is a summary of the business experience of the Company's
directors and executive officers during the past five years and their
directorships, if any, with companies with a class of securities registered with
the Securities and Exchange Commission:
Robert R. Bartolini. Mr. Bartolini has been Chairman and Chief Executive
Officer of the Company since its inception in 1991 and became President in
conjunction with the Merger in November 1994. Prior to founding NAL Financial
Group Inc., he was President and Chief Operating Officer of Financial Federal
Savings & Loan Association ('FinFed' -- Miami, Florida), a $1.8 billion mutual
savings and loan. From 1984 to 1987, Mr. Bartolini was Executive Vice President
at CenTrust Savings Bank, an $11 billion institution based in Miami, Florida,
with 60 branches. Prior to 1984, Mr. Bartolini was with First Pennsylvania Bank,
NA (assets of $6 billion; 75 branches), where he served as Senior Vice
President. Mr. Bartolini serves as a member of the Board of Directors of J.D.
Byrider Systems, Inc., from which the Company operates the JDBR Franchise.
John T. Schaeffer. Mr. Schaeffer has been President and Chief Operating
Officer of NAC since its inception. He became a director of the Company in
conjunction with the Merger and became Executive Vice President in May 1996.
Prior to joining the Company, Mr. Schaeffer was President and
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<PAGE>
Chief Operating Officer of FinancialFed Services, Inc., the automobile lease
origination and servicing unit of FinFed. From 1986 through 1989, Mr. Schaeffer
was Executive Vice President and Chief Operating Officer of CenTrust Leasing
Corporation, the leasing unit of CenTrust Savings Bank, where he was responsible
for the overall activities of the leasing subsidiary. Prior to 1986, he was with
First Pennsylvania Bank, N.A., where he served as Vice President for 16 years.
Robert J. Carlson. Mr. Carlson has been Vice President and Principal
Accounting Officer of the Company since April 1992. Prior to joining the Company
in 1992, Mr. Carlson served 4 years as Senior Vice President -- Controller of
FinFed. Prior to 1992, he served as Senior Vice President and Chief Financial
Officer of Miami Savings Bank, a $175 million asset savings institution in
Miami, Florida. Mr. Carlson also served 3 years at CenTrust as Vice President --
Accounting Operations and Reporting, and 6 years as an auditor at Deloitte
Haskins & Sells (now Deloitte & Touche LLP). He is a certified public accountant
and holds a Bachelor of Science Degree in business administration from the
University of Florida.
Dennis R. LaVigne. Mr. LaVigne has been Vice President and Treasurer of
the Company since August 1995. Mr. LaVigne has substantial experience in the
automobile finance industry, having served as Senior Vice-President of Union
Acceptance Corporation (an automobile finance company) from December 1993 to
September 1994; an independent consultant to the industry from October 1994 to
August 1995; and having previously served as Senior Vice President
Asset/Liability Manager of Union Federal Savings Bank of Indianapolis from 1989
to December 1993. Prior to joining Union Federal, Mr. LaVigne held positions
with Columbia Savings, a federal savings and loan association, from 1981 to
1989, including Senior Vice President, Chief Investment Officer, Treasurer and
Asset/Liability Committee Chairman. Mr. LaVigne holds a Ph.D. in economics from
the University of Illinois.
Ngaire E. Cuneo. Ms. Cuneo has been a director of the Company since April
1996. She has been Executive Vice President, Corporate Development of Conseco,
Inc., a financial services holding company, since 1992. From 1986 to 1992, Ms.
Cuneo was Senior Vice President and Corporate Officer of General Electric
Capital Corporation. Ms. Cuneo is also a director of Conseco, Inc., Bankers Life
Holding Corporation, American Life Holdings, Inc., American Life Holding Company
and Duke Realty Investments, Inc. See 'Material Stockholder Arrangements.'
James F. DeVoe. Mr. DeVoe has been a director of the Company since March
1996. He is the founder, Chief Executive Officer and Chairman of the Board of
Directors of J.D. Byrider Systems, Inc. ('J.D. Byrider'), a used
vehicle-operation franchisor since 1989 with 86 franchised and 4 company-owned
locations in 28 states. The Company operates the JDBR Franchise as a franchisee
of J.D. Byrider. Mr. DeVoe has been President and Chairman of the Board of DeVoe
Chevrolet Cadillac, Inc., an automobile dealership, since 1975. Mr. DeVoe holds
a Bachelor of Science Degree and a Masters Degree in business from Indiana
University.
David R. Jones. Mr. Jones has been a director of the Company since
February 1996. He has been President and Chief Executive Officer of DR Jones
Financial, Inc., a privately-held consulting firm since its formation in
September 1995. Prior to forming DR Jones Financial, Inc., Mr. Jones was Senior
Vice President -- Asset Backed Finance of Greenwich Capital Markets, Inc. from
1989 to 1995. Mr. Jones served as a Managing Director of The First Boston
Corporation, an investment banking firm, from 1982 to 1989 and as Manager --
Product Development of General Electric Credit Corp., an asset-based lender and
financial services company, from 1981 to 1982. Mr. Jones is a graduate of
Harvard College and has a Masters Degree in business administration from The
Amos Tuck School of Business Administration.
DIRECTORS' FEES
The employee-directors of the Company receive no fees or other compensation
in connection with their services as directors. Mr. Jones and Mr. DeVoe were
each granted Warrants to purchase 20,000 shares of the Company's Common Stock in
connection with joining the Board of Directors. The non-
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<PAGE>
employee directors each receive $1,000 for each meeting of the Board and any
committee meeting attended in person and $500 for each meeting attended
telephonically.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
--------------------------------
ANNUAL COMPENSATION AWARDS
(1) ---------------- PAYOUTS
---------------------- SECURITIES ------------
SALARY BONUS UNDERLYING ALL OTHER
NAME AND POSITION YEAR ($) ($) OPTIONS/SARS (#) COMPENSATION
- ---------------------------------------- ---- -------- ---------- ---------------- ------------
<S> <C> <C> <C> <C> <C>
Robert R. Bartolini 1995 $300,000 $ 0 50,000(4) $ 30,900(6)
Chairman of the Board, President and 1994 $281,916 $ 298,985 75,000(2) $ 30,900(6)
Chief Executive Officer of NAL; 1993 $250,000 $1,248,100 0 $ 30,900(6)
Chairman and Chief Executive Officer
of NAC
John T. Schaeffer 1995 $160,000 $ 0 25,000(4) $ 10,300(6)
Director and Executive Vice President 1994 $160,000 $ 0 40,000(3) $ 10,300(6)
of NAL; President and Chief Operating 1993 $160,000 $ 161,302 0 $ 10,300(6)
Officer of NAC
Robert J. Carlson 1995 $ 80,000 $ 0 15,000(4) $ 0
Vice President and Principal 1994 $ 74,231 $ 86,015 15,000(3) $ 0
Accounting Officer of NAL and NAC 1993 $ 72,500 $ 18,124 0 $ 0
Dennis R. LaVigne 1995 $ 48,461 $ 0 25,000(5) $ 0
Vice President and Treasurer of NAL
and NAC
</TABLE>
- ------------------
(1) Based upon the fiscal years ended December 31, 1995, 1994, and 1993.
(2) Represents stock options granted as of December 15, 1994 pursuant to the
Company's Amended and Restated 1994 Stock Option Plan (the '1994 Plan'), of
which 66,666 options vest pro-rata over four years commencing January 1,
1996 and 8,334 options vest pro-rata over three years commencing January 1,
1996.
(3) Represents stock options granted as of December 15, 1994 pursuant to the
1994 Plan, which vest pro-rata over three years commencing January 1, 1996.
(4) Represents stock options granted as of December 6, 1995 pursuant to the 1994
Plan, which vest pro-rata over three years commencing January 1, 1997.
(5) Represents stock options granted as of December 6, 1995 pursuant to the 1994
Plan, which vest on December 6, 1998.
(6) Represents insurance premiums on whole life insurance policies paid by the
Registrant for the benefit of the named executive officer.
54
<PAGE>
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/SARS EXERCISE
UNDERLYING GRANTED TO OR
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION
NAME GRANTED (#) FISCAL YEAR(1) ($/SHARE) DATE
- ---------------------------------------- ------------ --------------- ---------- -----------------
<S> <C> <C> <C> <C>
Robert R. Bartolini 50,000(2)(6) 15.22% $16.50(7) Dec. 6, 2005
Chairman of the Board, President and
Chief Executive Officer of NAL;
Chairman and Chief Executive Officer
of NAC
John T. Schaeffer 25,000(3)(6) 7.61% $15.00(7) Dec. 6, 2005
Director and Executive Vice President
of NAL; President and Chief Operating
Officer of NAC
Robert J. Carlson 15,000(4)(6) 4.57% $15.00(7) Dec. 6, 2005
Vice President and Principal
Accounting Officer of NAL and NAC
Dennis R. LaVigne 25,000(5)(6) 7.61% $13.25(7) Dec. 6, 2005
Vice President and Treasurer of NAL
and NAC
</TABLE>
- ------------------
(1) Based upon the grant during the year ended December 31, 1995 of options to
purchase an aggregate of 328,500 shares of Common Stock pursuant to the 1994
Plan.
(2) Represents non-qualified stock options granted as of December 6, 1995
pursuant to the 1994 Plan, which vest and become exercisable pro-rata over
three years commencing January 1, 1997 and are subject, with respect to each
one-third installment, to meeting a performance goal based on the Company's
earnings.
(3) Represents 9,332 incentive stock options and 15,668 non-qualified stock
options granted as of December 6, 1995 pursuant to the 1994 Plan, which vest
and become exercisable pro-rata over three years commencing January 1, 1997
and are subject, with respect to each one-third installment, to meeting a
performance goal based on the Company's earnings.
(4) Represents 14,332 incentive stock options and 668 non-qualified stock
options granted as of December 6, 1995 pursuant to the 1994 Plan, which vest
and become exercisable pro-rata over three years commencing January 1, 1997
and are subject, with respect to each one-third installment, to meeting a
performance goal based on the Company's earnings.
(5) Represents 7,547 incentive stock options and 17,453 non-qualified stock
options granted as of December 6, 1995 pursuant to the 1994 Plan, which vest
and become exercisable on December 6, 1998.
(6) Each stock option includes tandem stock appreciation rights, which entitle
the holder of the option to receive upon exercise shares of the Company's
Common Stock with a fair market value on the date of exercise equal to the
excess of the fair market value of the shares issuable upon exercise of the
option as of the date of exercise over the exercise price. Exercise of a
stock appreciation right results in the cancellation of the related option
with respect to the same number of shares, and exercise of an option results
in the cancellation of the related stock appreciation right with respect to
the same number of shares.
(7) The closing price of the Company's Common Stock as of December 6, 1995 was
$13.25 per share as reported on the Nasdaq National Market.
55
<PAGE>
AGGREGATED OPTIONS/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
SHARES NUMBER OF SECURITIES
ACQUIRED UNDERLYING UNEXERCISED VALUE IF UNEXERCISED IN-THE-MONEY
ON VALUE OPTIONS/SARS AT FY-END (#) OPTIONS/SARS AT FY-END ($)
NAME EXERCISE (#) REALIZED EXERCISABLE/UNEXERCISABLE (1) EXERCISABLE/UNEXERCISABLE (1)
- ----------------------------------- ------------ -------- ------------------------------ ---------------------------------
<S> <C> <C> <C> <C>
Robert R. Bartolini -0- -0- 19,445(E)/105,555(U) $138,365(E)/$393,885(U)
Chairman of the Board, President
and Chief Executive Officer of
NAL; Chairman and Chief Executive
Officer of NAC
John T. Schaeffer -0- -0- 13,333(E)/51,667(U) $101,731(E)/$203,469(U)
Director and Executive Vice
President of NAL; President and
Chief Operating Officer of NAC
Robert J. Carlson -0- -0- 5,000(E)/25,000(U) $38,150(E)/$76,300(U)
Vice President and Principal
Accounting Officer of NAL and NAC
Dennis R. LaVigne -0- -0- 0(E)/25,000(U) $0(E)/$9,500(U)
Vice President and Treasurer of
NAL and NAC
</TABLE>
- ------------------
(1) Based upon the closing price of the Company's Common Stock ($13.63 per
share) as of December 29, 1995 on the Nasdaq National Market.
EMPLOYMENT ARRANGEMENTS
Effective November 30, 1994, the Company entered into an employment
agreement with Mr. Robert R. Bartolini. Such agreement, as subsequently amended,
provides for a base salary of $300,000 per year together with discretionary
bonuses, if any, to be declared by the Board of Directors. The agreement also
provides for certain benefits, including vacation, life and disability
insurance, use of an automobile and certain related expenses, certain other
expenses and stock option plan participation, as well as a confidentiality
agreement and a two-year noncompetition agreement in favor of the Company. This
agreement provides for an initial term of 3 years and is annually renewable for
successive three-year periods unless either Mr. Bartolini or the Company
provides at least 60 days' notice of an intent not to renew. The agreement
provides that the Company may terminate Mr. Bartolini's employment at any time
with or without cause and that Mr. Bartolini may terminate the agreement upon
written notice on the earlier of one year from the date of such notice or 90
days after his replacement is hired by the Company. If Mr. Bartolini's
employment were to be terminated by the Company without cause, he generally
would receive his base salary and benefits for the remainder of the term of the
agreement. If he were to be terminated because substantially all of the assets
of the Company are sold or a controlling interest in the Company is sold, Mr.
Bartolini would receive an additional payment of 299% of his base salary unless
the agreement is assumed by the buyer or Mr. Bartolini is offered substantially
identical duties and compensation with the buyer for at least the remaining term
of the agreement. Mr. Bartolini may not cause the agreement to terminate prior
to three years from the date of the agreement.
56
<PAGE>
STOCK OPTION PLAN
The Company's Amended and Restated 1994 Stock Option Plan (the '1994 Plan')
covers 1,000,000 shares of the Company's Common Stock. Under its terms,
officers, directors, key employees and consultants of the Company are eligible
to receive incentive stock options within the meaning of Section 422 of the
Internal Revenue Code, as well as non-qualified stock options and stock
appreciation rights ('SARs'). The 1994 Plan is administered by the Board of
Directors or a committee consisting of no less than three members designated by
the Board of Directors. Incentive stock options granted under the 1994 Plan are
exercisable for a period of up to 10 years from the date of grant and at an
exercise price that is not less than the fair market value of the Common Stock
on the date of the grant, except that the term of an incentive stock option
granted under the 1994 Plan to a stockholder owning more than 10% of the
outstanding Common Stock may not exceed five years and the exercise price of an
incentive stock option granted to such stockholder may not be less than 110% of
the fair market value of the Common Stock on the date of the grant.
Non-qualified stock options may be granted on terms determined by the Board of
Directors or a committee designated by the Board of Directors. SARs, which give
the holder the privilege of surrendering such rights for the appreciation in the
Company's Common Stock between the time of grant and the surrender, may be
granted on any terms determined by the Board of Directors or committee
designated by the Board of Directors.
Incentive stock options granted under the 1994 Plan are non-transferable,
except upon death, by will or by operation of the laws of descent and
distribution, and may be exercised during the employee's lifetime only by the
optionee. There is no limit on the number of shares with respect to which
options may be granted under the 1994 Plan to any participating employee.
However, under the terms of the 1994 Plan, the aggregate fair market value
(determined as of the date of grant) of the shares of Common Stock with respect
to which incentive stock options are exercisable for the first time by an
employee during any calendar year (under all such plans of the Company and any
parent and subsidiary corporation of the Company) may not exceed $100,000.
Options granted under the 1994 Plan may be exercised within 12 months after
the date of an optionee's termination of employment by reason of his death or
disability, or within three months after the date of termination by reason of
retirement or voluntary termination approved by the Board of Directors, but only
to the extent the option was otherwise exercisable at the date of termination.
The 1994 Plan provides that, in general, the Board of Directors or the
Administrative Committee of the 1994 Plan, shall, consistent with the Plan,
determine the terms and conditions, including vesting provisions, of any option
granted under the 1994 Plan, and may accelerate the exercisability of any
option.
The 1994 Plan will expire on November 1, 2004, unless terminated earlier by
the Board of Directors. The 1994 Plan may be amended by the Board of Directors
without stockholder approval, except that, in general, no amendment that
increases the maximum aggregate number of shares that may be issued under the
1994 Plan, decreases the minimum exercise price of options provided under the
Plan, or changes the class of employees who are eligible to participate in the
1994 Plan, shall be made without the approval of a majority of the stockholders
of the Company.
As of November 15, 1996, the Company had granted 644,500 options under the
1994 Plan, of which 589,166 options are outstanding. The outstanding options
include 245,000 options granted to executive officers. See 'Options/SAR Grants
in Last Fiscal Year Table'. The outstanding options also include 65,000 options
granted by the Company in connection with the exercise of the SFI purchase
option. See 'Management's Discussion and Analysis of Financial Condition and
Results of Operations.'
57
<PAGE>
CERTAIN TRANSACTIONS
LOANS TO THE COMPANY
Mr. Robert R. Bartolini, Chairman and Chief Executive Officer of the
Company, has on occasion provided advances at market interest rates to the
Company.
In order to provide it with additional working capital, Mr. Bartolini
advanced approximately $1.0 million to the Company on June 30, 1995 and later
increased this amount to approximately $2.9 million during December 1995. The
advance was repaid in full as of June 30, 1996. During November 1996, Mr.
Bartolini provided advances totaling $1,763,869 to the Company, repayable on the
earlier of February 18, 1997 or upon the completion of the Offering. See 'Use of
Proceeds.'
SALE OF PORTFOLIO TO EXECUTIVE OFFICER
As of November 30, 1994, the Company sold a portfolio of 14 unsecured
installment loans with a total principal balance of $1,055,000 to Mr. Bartolini,
Chairman and Chief Executive Officer of the Company, in consideration for
$590,965. This portfolio was part of a larger portfolio purchased by the Company
in March 1994 from the Federal Deposit Insurance Corporation at a purchase price
equal to 22.5% of principal balance. The purchase price paid by Mr. Bartolini
was equal to 56% of principal balance which, in management's opinion, was the
approximate fair market value of the loans determined from a review of the
expected collectability of the loans. This price, which reduced a previously
established liability owed by the Company to Mr. Bartolini for bonuses and
dividends, was considered by the Company to be equal to the fair market value
and was based on the estimated cash flows anticipated for the portfolio. The
method used for estimating the cash flows was the same used by the Company in
evaluating the fair value of all of its portfolio acquisitions.
TRANSACTION WITH AFFILIATE OF FORMER DIRECTOR
Mr. Andrew Panzo was a member of the Company's Board of Directors from
August 1995 until his resignation in March 1996. Following the Merger, American
Maple Leaf Financial Corporation ('AMLF'), an affiliate of Mr. Panzo, rendered
certain investment banking advisory services to the Company for which AMLF
received 33,000 common stock purchase warrants. The Warrants permit the purchase
of additional shares at an exercise price of $9.00 per share through the later
of May 1996 or the registration of the underlying shares of Common Stock.
During April 1995, AMLF purchased $1,200,000 principal amount of 9%
Convertible Subordinated Debenture Units for an aggregate purchase price of
$1,200,000. $810,000 principal amount of these Debenture Units, as well as the
accrued interest due thereon, was converted into 95,692 shares of the Company's
Common Stock during January 1996. The remaining principal amount of these
Debenture Units ($390,000) was converted in April 1996.
SALE OF BOAT TO EXECUTIVE OFFICER
In October 1994, the Company sold a repossessed boat to Mr. John T.
Schaeffer, a director of NAL and President and Chief Operating Officer of NAC,
in consideration for a note in the amount of $89,000, which bore interest at 10%
per annum for a period of one year, and the offset by the Company of $21,000
payable to Mr. Schaeffer. The note was repaid prior to June 30, 1995. In
management's opinion, the sale was at the approximate fair market value of the
boat.
TRANSACTIONS WITH FORMER PRINCIPAL STOCKHOLDER
In 1991, the Company entered into an agreement with FTM Holdings, Inc.
('FTM'), a former principal stockholder, to provide the Company with consulting
and other business-related services. Under the agreement, the Company agreed to
pay FTM $50,000 per month through March 1995. The payments for consulting
services continued through May 1994, whereupon the Company made a lump sum
settlement with FTM through a final payment of $475,000 under the agreement.
This amount
58
<PAGE>
reflects a $75,000 discount from the cumulative payments required under the
agreement. Including the lump sum settlement, payments of $675,000 were made to
FTM in 1994. Payments of $600,000 were made to FTM in 1993.
During 1994, the Company paid FTM $428,000 as a commission on the sale of
certain loan portfolios.
The Company previously subleased a portion of the space occupied by its
headquarters at 500 Cypress Creek Road West, Fort Lauderdale, Florida from FTM.
However, in January 1995, the Company entered into a lease directly with the
landlord for such space. Thereafter, the Company entered into a sublease
agreement with FTM, under which FTM subleased from the Company certain space
that it previously leased directly from the landlord. The sub-lease was
terminated on October 31, 1996.
PURCHASE OF SHARES OF COMMON STOCK
In October 1993, Mr. Bartolini, Chairman and Chief Executive Officer of the
Company, purchased 2,143 shares of the Company's Common Stock, representing all
outstanding shares not previously owned by Mr. Bartolini or Mr. Schaeffer. Such
purchase resulted in Mr. Bartolini owning 95% of the Company's Common Stock as
of such date. Mr. Bartolini financed the entire purchase price of such shares
through a loan from the Company, represented by a note in the amount of
$2,034,638 which bore interest at 5% per annum and was reflected as a 'Note
Receivable from a Stockholder' and as a reduction of Stockholders' equity on the
Company's consolidated balance sheet as of December 31, 1993. In June 1994, the
Company redeemed the 2,143 shares from Mr. Bartolini in consideration for
canceling the note.
GRANT OF OPTIONS AND WARRANTS
In December 1994 and December 1995, the Company granted certain options to
purchase shares of the Company's Common Stock to executive officers under the
Company's Stock Option Plan. See 'Summary Compensation Table.' In conjunction
with the appointment of Mr. Jones to the Board of Directors on February 5, 1996,
the Company granted to him 20,000 Common Stock purchase warrants with an
exercise price of $14.38 per share. In conjunction with the appointment of Mr.
DeVoe to the Board of Directors on March 11, 1996, the Company granted to him
20,000 Common Stock purchase warrants with an exercise price of $11.50 per
share.
RELATIONSHIP WITH J.D. BYRIDER SYSTEMS, INC.
Mr. Bartolini, Chairman and Chief Executive Officer of the Company, serves
as a member of the Board of Directors of J.D. Byrider, from which the Company
operates the JDBR Franchise. Mr. James F. DeVoe, a director of the Company, is
the Chairman and Chief Executive Officer of J.D. Byrider.
TRAVEL SERVICES
IYS Travel, Inc. ('IYS'), a travel agency of which the spouse of Mr. Robert
Bartolini is a principal stockholder, provides business and personal travel
services to the Company and its employees at prevailing market prices. IYS
receives customary industry commissions from airlines, hotels, and cruise
agencies for services provided. During the years ended December 31, 1995 and
1994 and the nine months ended September 30, 1996, the Company paid IYS
approximately $105,000, $84,000 and $133,000, respectively, for airline tickets
booked by IYS for travel by the Company's employees at the prevailing prices
charged by the airlines.
During 1994, the Company advanced to IYS approximately $66,000 for payroll,
which IYS subsequently repaid.
59
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information known to the Company
with respect to the beneficial ownership of the Company's Common Stock as of
November 19, 1996 and as adjusted to reflect the sale of the 2,500,000 shares of
Common Stock being offered hereby by: (i) each person (or group of affiliated
persons) who is known by the Company to own beneficially 5% or more of any class
of the Company's Common Stock; (ii) each of the Company's directors; (iii) the
Company's Chief Executive Officer and each of the named executive officers; and
(iv) the Company's directors and executive officers as a group.
<TABLE>
<CAPTION>
SHARE BENEFICIALLY SHARE BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
OFFERING(1) OFFERING(1)
---------------------- ----------------------
NAME AND ADDRESS NUMBER PERCENT NUMBER PERCENT
- ------------------------------------------- --------- ------- --------- -------
<S> <C> <C> <C> <C>
Robert R. Bartolini 2,028,643(2) 27.54% 2,028,643 21.03%
500 Cypress Creek Road West, Suite 590
Fort Lauderdale, FL 33309
John T. Schaeffer 302,913(3) 4.12% 302,913 3.14%
500 Cypress Creek Road West, Suite 590
Fort Lauderdale, FL 33309
Robert J. Carlson 65,196(4) * 65,196 *
500 Cypress Creek Road West, Suite 590
Fort Lauderdale, FL 33309
Dennis R. LaVigne --(5) * --(5) *
500 Cypress Creek Road West, Suite 590
Fort Lauderdale, FL 33309
Ngaire E. Cuneo --(6) * --(6) *
745 Fifth Avenue, Suite 2700
New York, NY 10151
James F. DeVoe --(7) * --(7) *
5780 West 71st Street
Indianapolis, IN 46278
David R. Jones --(8) * --(8) *
2 Ocean Avenue
Scituate, MA 02066-1624
Conseco, Inc. (9)(13) 1,460,936 16.59% 1,460,936 13.17%
11815 N. Pennsylvania Street
P. O. Box 1911
Carmel, IN 46032
Florence Karp(10) 1,440,303(11) 16.59% 1,440,303 13.13%
3418 Sansom Street
Philadelphia, PA 19104
Merrill Lynch Asset Management(13) 479,167(12) 6.12% 479,167 4.74%
800 Scudders Mill Road
Plainsboro, NJ 08536
All Directors and Officers
as a group (7 persons) 2,396,752 32.45% 2,396,752 24.79%
</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, warrants or debentures, pursuant
to Item 403 of Regulation S-B and Rule 13d-3(d)(1),
60
<PAGE>
promulgated under the Exchange Act. Percentage of ownership is based on
7,347,367 shares of Common Stock outstanding prior to the Offering and
9,629,222 shares of Common Stock outstanding after the Offering.
(2) Includes 1,440,000 shares held by Robert R. Bartolini and Marcia G.
Bartolini, Co-Trustees of the Robert R. Bartolini Revocable Trust dated
July 27, 1992, 10,000 shares of which are subject to options granted by Mr.
Bartolini during May 1995. Also includes 305,176 shares presently held by
English, McCaughan & O'Bryan, P.A. pursuant to the terms of the Voting
Trust Agreement. See 'Material Voting Arrangements.' Includes 264,022
shares held by Marcia G. Bartolini and Robert R. Bartolini, Co-Trustees of
the Marcia G. Bartolini Revocable Trust dated July 27, 1992. Does not
include 50,000 shares owned beneficially by Edward M. Bartolini, the adult
brother of Robert R. Bartolini. Also does not include 264,022 shares held
by George Schnabel, Trustee of the Robert R. Bartolini and Marcia G.
Bartolini Irrevocable Trust dated July 27, 1992. Includes vested Incentive
Stock Options to purchase 19,445 shares of Common Stock granted December
1994. Does not include Incentive Stock Options to purchase 105,555 shares
of Common Stock granted December 1994 and December 1995, which have not
vested. See 'Summary Compensation Table.'
(3) Includes 34,628 shares held by English McCaughan & O'Bryan, P.A. for the
benefit of Mr. Schaeffer pursuant to the terms of the Voting Trust
Agreement. See 'Material Voting Arrangements.' Includes 13,333 vested
Incentive Stock Options granted to Mr. Schaeffer in December 1994. Does not
include 51,667 vested Incentive Stock Options granted to Mr. Schaeffer in
December 1994 and December 1995, which remain subject to vesting. Includes
4,952 shares held by Mr. Schaeffer's spouse. See 'Summary Compensation
Table.'
(4) Includes 60,196 shares held by English, McCaughan & O'Bryan, P.A. for the
benefit of Mr. Carlson pursuant to the terms of the Voting Trust Agreement.
See 'Material Voting Arrangements.' Includes 5,000 vested Incentive Stock
Options granted to Mr. Carlson in December 1994. Does not include 25,000
Incentive Stock Options granted to Mr. Carlson in December 1994 and
December 1995, which remain subject to vesting. See 'Summary Compensation
Table.'
(5) Does not include 25,000 Incentive Stock Options granted to Mr. LaVigne in
December 1995, which remain subject to vesting. See 'Summary Compensation
Table.'
(6) Ms. Cuneo joined the Board of Directors effective April 23, 1996 in
conjunction with the sale by the Company of certain Debentures. See
'Material Stockholder Arrangements.'
(7) Does not include Warrants to purchase 20,000 shares of Common Stock at an
exercise price of $11.50 per share granted to Mr. DeVoe in connection with
his appointment as a director on March 11, 1996, which have not vested.
(8) Does not include Warrants to purchase 20,000 shares of Common Stock at an
exercise price of $14.38 per share granted to Mr. Jones in connection with
his appointment as a director on February 5, 1996, which have not vested.
(9) Represents 515,000 shares issuable upon the exercise of Warrants held by
Conseco, Inc. Also includes 472,968 shares of Common Stock (416,667 shares
representing principal and 56,301 shares representing interest at maturity)
issuable upon conversion, if at all, of $5 million principal amount of
Debentures held by Great American Reserve Insurance Company ('GARCO') and
472,968 shares of Common Stock (416,667 shares representing principal and
56,301 shares representing interest at maturity) issuable upon the
conversion, if at all, of $5 million principal amount of Debentures held by
Beneficial Standard Life Insurance Company ('BSLIC'). GARCO and BSLIC are
wholly-owned subsidiaries of Conseco, Inc. (the 'Conseco Subsidiaries').
This table has been prepared assuming a fixed $12.00 conversion price for
the Debentures. Additional shares may be issued to the holder upon
conversion based on a conversion price equal to the lesser of: (i) $12.00
per share; and (ii) 80% of the closing bid price of the Company's Common
Stock on the date of conversion.
(10) As custodian for Ms. Karp's minor grandchildren.
(11) Includes 103,333 shares of Common Stock. Also includes 625,000 shares of
Common Stock issuable upon the exercise, if at all, of Warrants. Includes
711,970 shares of Common Stock
61
<PAGE>
(560,606 shares representing principal and 151,364 shares representing
interest at maturity) issuable upon the conversion, if at all, of $5.5
million principal amount of Debentures. This table has been prepared
assuming a fixed $9.00 conversion price for $3.0 million principal amount
of the Debentures. Additional shares may be issued to the holder upon
conversion based on a conversion price equal to the lesser of: (i) $9.00
per share; and (ii) 75% of the closing bid price of the Company's Common
Stock on the date of conversion.
(12) Represents 229,167 shares of Common Stock issuable upon conversion, if at
all, of $2.75 million principal amount of Debentures and 34,375 shares of
Common Stock issuable upon the exercise of Warrants held by Convertible
Holdings, Inc. Also represents 187,500 shares of Common Stock issuable upon
conversion, if at all, of $2.25 million principal amount of Debentures and
28,125 shares of Common Stock issuable upon the exercise of Warrants held
by Merrill Lynch World Income Fund, Inc. Convertible Holdings, Inc. is
advised by Merrill Lynch Asset Management, an investment adviser registered
under the Investment Advisers Act of 1940 ('MLAM'). Merrill Lynch World
Income Fund, Inc. is advised by Fund Asset Management, Inc., an investment
adviser registered under the Investment Advisers Act of 1940 ('FAM'). FAM
and MLAM are affiliates and both disclaim beneficial ownership of the
Common Stock referred herein. This table has been prepared assuming a fixed
$12.00 conversion price for the Debentures. Additional shares may be issued
to the holder upon conversion based on a conversion price equal to the
lesser of: (i) $12.00 per share; and (ii) 80% of the closing bid price of
the Company's Common Stock on the date of conversion.
(13) In connection with the issuance of the Debentures and Warrants, the Company
granted price protection to the holder(s) such that in the event the
Company issues securities during the term of the Debentures and Warrants at
an issuance price of less than $12.00 per share (the 'Issuance Price'), the
conversion price of such Debentures and the exercise price of such Warrants
would be reduced to the Issuance Price. This may result in the issuance of
additional shares of Common Stock upon the conversion of the Debentures and
the exercise of the Warrants.
MATERIAL VOTING ARRANGEMENTS
Concurrent with the completion of the Merger in November 30, 1994, Messrs.
Bartolini, Schaeffer and Carlson entered into a Voting Trust Agreement (the
'Voting Trust Agreement') pursuant to which 400,000 shares were placed in a
voting trust. The Voting Trust Agreement provides that, on any matter requiring
stockholder vote, the trustee will vote such shares in the same percentage as
the other then issued and outstanding shares of Common Stock are voted. Such
shares may be released from the Voting Trust Agreement pursuant to an earn-out
formula under which for the years 1995, 1996 and 1997, 10,000 trust shares will
be released for each $150,000 of cumulative net income after taxes of the
Company up to $3,000,000 and 5,000 shares will be released for each $150,000 of
cumulative net income after taxes in excess of $3,000,000, less the number of
trust shares previously transferred to the stockholders under this formula. The
trust shares will be released pro rata in accordance with the number of trust
shares beneficially owned by each stockholder. As of September 30, 1996, all of
the shares had been earned. See 'Management's Discussion and Analysis of
Financial Condition and Results of Operations.' If the shares are not released
pursuant to the earn-out formula within three years, such shares will be
canceled. The trustee under the Voting Trust Agreement is English, McCaughan &
O'Bryan, P.A., counsel to the Company.
MATERIAL STOCKHOLDER ARRANGEMENTS
In connection with the purchase of $10 million principal amount of
Debentures in April 1996, the Conseco Subsidiaries are entitled to designate a
nominee to the Company's Board of Directors and the Audit Committee of the Board
of Directors pursuant to the terms of the agreements governing such Debentures.
Ms. Ngaire E. Cuneo, an executive officer and director of Conseco and the
Conseco Subsidiaries, is the designated nominee. Pursuant to these arrangements,
Messrs. Bartolini and Schaeffer entered into a Stockholders' Agreement as of
April 23, 1996 with the Company, pursuant to which they agreed to certain
limitations upon the resale of their shares of Common Stock until October 1997.
62
<PAGE>
SELLING STOCKHOLDERS
218,145 of the shares of Common Stock offered by this Prospectus are being
sold for the account of the selling stockholders identified in the following
table (the 'Selling Stockholders').
The following table sets forth the number of shares being held of record or
beneficially (to the extent known by the Company) by such Selling Stockholders
and provides (by footnote reference) any material relationship between the
Company and such Selling Stockholder, all of which is based upon information
currently available to the Company.
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY SHARES TO BE SHARE BENEFICIALLY
OWNED PRIOR TO SOLD IN THE OWNED AFTER
OFFERING(1) OFFERING OFFERING(1)
------------------ ------------ ------------------
NAME NUMBER PERCENT NUMBER NUMBER PERCENT
- ----------------------------------- ------- ------- ------------ ------- -------
<S> <C> <C> <C> <C> <C>
Arnold D. Flam, DDS and Harvey
Glicker, DDS Profit Sharing Trust
dated 5/1/76..................... 5,500 * 5,500 0 0
APP Investments, Inc.(2)........... 58,000 * 58,000 0 0
Centaur Financial Corp.(3)......... 264,000 3.51% 58,000 206,000 2.10%
Cranbourne Investments, Inc.(4).... 31,666 * 20,000 11,666 *
Diamond Import Group, Inc.......... 5,500 * 5,500 0 0
Bruce Ginsburg..................... 1,645 * 1,645 0 0
Edward J. Hance.................... 65,000 * 64,000 1,000 *
Anita Rosner....................... 5,500 * 5,500 0 0
</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, warrants or debentures, pursuant to
Item 403 of Regulation S-B and Rule 13d-3(d)(1), promulgated under the
Exchange Act. Percentage ownership is based on 7,347,367 shares of Common
Stock outstanding prior to the Offering and 9,629,222 shares of Common Stock
outstanding after the Offering.
(2) Owned by Mr. Andrew P. Panzo, a former officer and director of the Company.
(3) Owned by Mr. Steven B. Rosner. Includes 43,000 shares issuable upon the
exercise of outstanding Warrants and 58,000 shares held by Centaur Financial
Corp. Includes 28,000 shares and 115,000 shares issuable upon the exercise
of outstanding Warrants held by Mr. Rosner. Also includes 15,000 shares
issuable upon the exercise of outstanding Warrants held by the Steven B.
Rosner Money Purchase Pension Plan and 5,000 shares issuable upon the
exercise of outstanding Warrants held by Diversified Investment Fund, LP, a
limited partnership of which Mr. Rosner is the general partner.
(4) All shares in issue of this company are owned by a Gibraltan Discretionary
Settlement ('Trust'), the trustee of which is Audley Fidelity Company
Limited. The class of beneficiaries defined in the settlement deed consists
of a number of British and international charities. Until such time as the
trustee elects, none of the beneficiaries have any legal entitlement. In the
event of a failure by the trustee to appoint beneficiaries, all members of
the class would share the Trust assets equally. Includes 31,666 shares of
Common Stock.
63
<PAGE>
DESCRIPTION OF SECURITIES
COMMON STOCK
The Company is authorized to issue 50,000,000 shares of Common Stock, $.15
par value per share, of which 7,347,367 are outstanding as of the date of this
Prospectus.
Holders of Common Stock have equal rights to receive dividends when, as and
if declared by the Board of Directors, out of funds legally available therefor.
Holders of Common Stock have one vote for each share held of record and do not
have cumulative voting rights.
Holders of Common Stock are entitled upon liquidation of the Company to
share ratably in the net assets available for distribution, subject to the
rights, if any, of holders of any preferred stock then outstanding. Shares of
Common Stock are not redeemable and have no preemptive or similar rights. All
outstanding shares of Common Stock are fully paid and nonassessable.
PREFERRED STOCK
Within the limits and restrictions provided in the Certificate of
Incorporation, the Board of Directors has the authority, without further action
by the stockholders, to issue up to 10,000,000 shares of preferred stock (the
'Preferred Stock'), in one or more series, and to fix, as to any such series,
the dividend rate, redemption prices, preferences on liquidation or dissolution,
sinking fund terms, conversion rights, voting rights, and any other preference
or special rights and qualifications. There are presently no shares of Preferred
Stock outstanding.
Shares of Preferred Stock issued by the Board of Directors could be
utilized, under certain circumstances, to make an attempt to gain control of the
Company more difficult or time consuming. For example, shares of Preferred Stock
could be issued with certain rights that might have the effect of diluting the
percentage of Common Stock owned by a significant stockholder or issued to
purchasers who might side with management in opposing a takeover bid that the
Board of Directors determines is not in the best interest of the Company and its
stockholders. This provision may be viewed as having possible anti-takeover
effects. A takeover transaction frequently affords stockholders the opportunity
to sell their shares at a premium over current market prices. The Board of
Directors has not authorized any series of Preferred Stock.
64
<PAGE>
CONVERTIBLE SECURITIES
Debentures
The following table provides a summary of the Company's outstanding
Debentures.(1)
<TABLE>
<CAPTION>
PRINCIPAL MATURITY INTEREST CONVERSION SHARES
AMOUNT ISSUE DATE DATE RATE PRICE(2) ISSUABLE(3)
- ----------- ---------- ---------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C>
$ 750,000 Nov. 1995 Nov. 1996 9% $11.00 74,318
1,250,000 Dec. 1995 May 1997 9% 11.00 128,977
2,500,000 Dec. 1995 Dec. 1996 9% 11.00 247,727
10,000,000 Apr. 1996 Oct. 1997 9% 12.00 945,936
2,000,000 Jul. 1995 Jul. 1998 9% 9.00 282,222
1,000,000 Aug. 1995 Aug. 1998 9% 9.00 141,111
5,000,000 Sep. 1996 Sep. 1998 (4) 10%(4) 12.00 416,667
2,500,000 Jan. 1996 Jan. 1999 9% 11.00 288,637
- ----------- -----------
$25,000,000 2,525,595
- ----------- -----------
- ----------- -----------
</TABLE>
- ------------------
(1) Reflects information as of November 15, 1996.
(2) These Debentures are convertible into shares of the Company's Common Stock
at the lesser of the amount indicated and a discount to the market price of
the Company's Common Stock, which ranges from 75% to 85% pursuant to the
terms of the Debentures.
(3) Represents shares of Common Stock issuable upon conversion of the Debentures
(principal and interest at maturity).
(4) The Debentures bear interest at a rate of 10% for 2 years and at a rate of
9% thereafter. Maturity is subject to extension by the holder.
The Company has issued and sold in private placement transactions to
accredited and institutional investors, an aggregate of $38,825,000 principal
amount of convertible subordinated debentures (the 'Debentures'). Interest is
payable monthly on $5.0 million principal amount, quarterly on $17.0 million
principal amount and semi-annually on $3.0 million principal amount of
Debentures. With the exception of the holder of $5.0 million principal amount of
Debentures which require monthly interest payments, all of the holders of the
outstanding Debentures have elected to accrue such interest payments. In
conjunction with the sale of the Debentures, the Company issued Warrants to
purchase 2,873,625 shares of the Company's Common Stock. The terms of the
Debentures and the Warrants are described below and in the table above.
The indebtedness evidenced by the Debentures is subordinated to the prior
payment when due of the principal and interest on senior indebtedness of the
Company. Therefore, upon any distribution of its assets in a liquidation or
dissolution of the Company, or in bankruptcy, reorganization, insolvency,
receivership or similar proceedings relating to the Company, the holders of the
Debentures will not be entitled to receive payment until the holders of the
Company's senior indebtedness are paid in full. Furthermore, upon the occurrence
of any event of default with respect to any senior indebtedness of the Company,
no payments may be made to the holders of the Debentures until the Company has
cured such event of default.
As of November 15, 1996, Debentures with principal balances in the
aggregate of $13,825,000 had been converted into 1,452,849 shares of the
Company's Common Stock with $25.0 million principal amount of Debentures
remaining outstanding.
Conversion Feature. At the option of the holders, the principal and
accrued interest due under the Debentures is convertible into shares of Common
Stock. Prior to such conversion, the holders thereof are not entitled to voting
rights or other rights provided by law to stockholders.
Of the outstanding Debentures: (i) $3.0 million principal amount are
convertible into shares of the Company's Common Stock at a conversion price
equal to the lesser of 75% of the average closing bid price of the Company's
Common Stock as reported by the Nasdaq National Market for the 10
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<PAGE>
consecutive trading days immediately preceding the date of conversion; and $9.00
per share; (ii) $7.0 million are convertible into shares of Common Stock at a
conversion price equal to the lesser of 85% of the average closing bid price of
the Company's Common Stock as reported by the Nasdaq National Market for the 10
consecutive trading days immediately preceding the date of conversion and $11.00
per share; and (iii) $15.0 million are convertible into shares of Common Stock
at a conversion price equal to the lesser of 80% of the closing bid price on the
conversion date as reported by the Nasdaq National Market and $12.00 per share.
Redemption Feature. Certain Debentures are subject to redemption by the
Company at the principal amount thereof, together with any accrued interest, on
30 days written notice upon the following conditions: (i) a registration
statement covering the resale of the shares issuable upon conversion of the
Debentures is effective as of that date; and (ii) the average of the closing bid
prices of the Company's Common Stock as reported by the Nasdaq National Market
exceeds a designated redemption price (the 'Debenture Redemption Price') for 10
consecutive trading days ending within 15 days of the notice of redemption.
Of the redeemable outstanding Debentures: (i) $3.0 million principal amount
bear a Debenture Redemption Price of $15.00, (ii) $2.5 million principal amount
bear a Debenture Redemption Price of $18.00 and (iii) $9.5 million principal
amount bear a Debenture Redemption Price of $25.00. Of the Debentures subject to
redemption, $3.0 million principal amount of the Debentures provide the holder
with the option to elect not to have the Debentures subject to redemption,
however, from the point of such election and thereafter, the Debentures become
non-interest bearing. $5.0 million principal amount of Debentures are redeemable
after two years and bear a Debenture Redemption Price of $25.00 provided that
the trading price of the Company's Common Stock as reported by the Nasdaq
National Market equals or exceeds $25.00 per share for 60 consecutive trading
days prior to redemption. Of the outstanding Debentures, $10.0 million principal
amount are not redeemable by the Company.
Warrants
The following table provides a summary of the Company's outstanding
Warrants.(1)
<TABLE>
<CAPTION>
SHARES PROCEEDS TO
ISSUE DATE EXPIRATION DATE EXERCISE PRICE ISSUABLE(2) THE COMPANY(3)
- ------------------- ------------------- --------------- ----------- --------------
<S> <C> <C> <C> <C>
Apr.-Aug. 1995 Apr.-Aug. 1998 $ 9.00 1,360,000 $ 12,240,000
Dec. 1995-Feb. 1996 Dec. 1998-Feb. 1999 14.00 to 14.38 370,000 5,187,500
Jul.-Aug. 1995 Jul.-Aug. 1998 12.00 to 12.30 62,500 765,000
Jul.-Dec. 1995 Jul.-Dec. 1998 15.00 363,625 5,454,375
Mar. 1996 Mar. 1999 11.50 20,000 230,000
Apr. 1996 Apr. 1999 12.00 to 12.63 615,000 7,442,500
Apr. 1996 Apr. 2001 14.52 60,000 871,200
Sep. 1996 Sep. 2001 13.92 62,500 870,000
----------- --------------
2,913,625(4) $ 33,060,575(5)
----------- --------------
----------- --------------
</TABLE>
- ------------------
(1) Reflects information as of November 15, 1996.
(2) Represents shares of Common Stock issuable upon exercise of the Warrants.
(3) Represents proceeds to the Company upon the exercise of the Warrants.
(4) Includes 40,000 Warrants in the aggregate issued to Mr. DeVoe and Mr. Jones
in connection with joining the Board of Directors.
(5) Includes proceeds of $517,500 from Warrants issued to Mr. DeVoe and Mr.
Jones. See Footnote 4.
The Company has issued 2,913,625 common stock purchase warrants (the
'Warrants'). Of the Warrants issued: (i) 2,873,625 of the Warrants were granted
in connection with the sale of the Debentures, including 190,000 Warrants issued
to certain consultants and advisers in consideration for financial advisory
services and 160,000 Warrants issued as commission, and (ii) 40,000 Warrants
were
66
<PAGE>
issued by the Company to Board members in connection with joining the Board of
Directors. See 'Certain Transactions.' To date, none of the Warrants have been
exercised.
Exercise. Of the outstanding Warrants, 737,500 of the Warrants permit the
holder to purchase a share of the Company's Common Stock at a designated
exercise price for a period of 5 years from the date of grant, while the
remaining Warrants have a term of 3 years from the date of grant. Prior to
exercise, holders of the Warrants are not entitled to voting rights or other
rights provided by law to stockholders of the Company. A complete exercise of
the Warrants, if at all, would yield to the Company proceeds of $33,060,575.
There can be no assurances that all or a substantial percentage of the Warrants
will be exercised.
Redemption. Of the outstanding Warrants issued, 1,547,000 of the Warrants
are subject to redemption by the Company commencing with the date of issuance
and 489,125 are subject to redemption by the Company commencing two (2) years
from the date of issuance, all at a price of $.001 per Warrant on 30-days
written notice upon the following conditions: (i) a registration statement
covering the resale of the shares issuable upon exercise of the Warrants is
effective as of that date; and (ii) the average of the closing bid prices of the
Company's Common Stock as reported by the Nasdaq National Market exceeds a
designated price (the 'Warrant Redemption Price') for 10 consecutive trading
days ending within 15 days of the notice of redemption. Of the outstanding
Warrants, 877,500 Warrants are not subject to redemption.
The present trading price of the Company's Common Stock (see 'Price Range
For Common Stock') would not be sufficient to effectuate a redemption of any of
the Warrants. There can be no assurances that the trading price of the Company's
Common Stock will attain a level sufficiently high to effectuate a redemption.
There also can be no assurances that even with a sufficiently high trading price
the Company will elect to cause a redemption of the Warrants. Any call for
redemption would have the likely effect of causing the exercise of these
Warrants.
PRICE PROTECTION
The Company has granted certain price protection and adjustment features to
the holders of certain Debentures and Warrants pursuant to which the Company has
agreed that in the event that the Company issues securities at an Issuance Price
of less than $12.00 per share, the conversion price of such Debentures and the
exercise price of such Warrants would be reduced to the Issuance Price. See
'Principal Stockholders -- Footnote 13 to the Principal Stockholders' Table.'
REGISTRATION RIGHTS
The Company has granted certain registration rights to the holders of the
Debentures and the Warrants pursuant to which the Company has agreed to register
for resale the shares of Common Stock issued or issuable upon the conversion of
the Debentures and the exercise of the Warrants. The resale of certain of these
shares has been included in the Registration Statement of which this Prospectus
is a part. See 'Selling Stockholders.'
Exclusive of the shares whose resale is offered by this Prospectus, the
Company has granted registration rights in connection with the resale of up to
2,870,717 shares issuable or issued upon conversion of certain Debentures
(principal and interest) and upon exercise of certain Warrants. Pursuant to such
rights, the Company has agreed to use its best efforts to file with the
Commission a registration statement covering the resale of such shares upon the
earlier of January 31, 1997 and 120 days from completion of this Offering. The
holders of such Warrants have also agreed not to effect the public sale of
shares issuable or issued upon exercise of the Warrants for a period of 90 days
from the effective date of a registration statement covering such shares.
Substantially all of the holders of these Debentures and Warrants have agreed to
defer their registration rights for a period of 120 days after the date of this
Prospectus.
The Company has also granted certain demand and piggyback registration
rights commencing January 1, 1997 in connection with the resale of up to
1,620,936 shares issuable upon conversion of
67
<PAGE>
certain Debentures (principal and interest) and upon the exercise of certain
Warrants issued during April 1996. In the event that such shares are not
otherwise included within a registration statement, the Company has agreed to
use its best efforts to file with the Commission a registration statement(s)
covering the resale of: (i) 1,460,936 of such shares upon the request of the
holder(s) of such securities commencing at any time after October 23, 1997; and
(ii) 160,000 of such shares upon request of the holder(s) of such securities
commencing at any time after December 23, 1997. Substantially all of the holders
of these Debentures and Warrants have agreed to defer their registration rights
for a period of 180 days after the date of this Prospectus.
The Company has also granted mandatory registration rights in connection
with the resale of up to 479,167 shares issuable upon conversion of certain
Debentures and upon the exercise of certain Warrants issued during September
1996. The Company has agreed to use its best efforts to file with the Commission
a registration statement(s) covering such shares upon the earlier of: (i) 120
days after completion of this Offering; (ii) March 31, 1997; and (iii) the date
upon which certain other institutional holders exercise their registration
rights. Substantially all of the holders of these Debentures and Warrants have
agreed to defer their registration rights for a period of 180 days after the
date of this Prospectus.
RESERVATION OF SHARES
The Company has reserved a sufficient number of shares of Common Stock for
issuance upon conversion of the Debentures and exercise of the Warrants. Such
shares when issued will be fully paid and nonassessable.
TRANSFER AGENT
The transfer agent for the Company's securities is StockTrans, Inc., 7 East
Lancaster Avenue, Ardmore, Pennsylvania 19003, (610) 649-7300.
DELAWARE ANTI-TAKEOVER LAW
The Company will be governed by the provisions of Section 203 of the
General Corporation Law of the State of Delaware (the 'GCL'), an anti-takeover
law. In general, the law prohibits a public Delaware corporation from engaging
in a 'business combination' with an 'interested stockholder' for a period of
three years after the date of the transaction in which the person became an
interested stockholder, unless the business combination is approved in a
prescribed manner. 'Business combination' includes mergers, asset sales and
other transactions resulting in a financial benefit to the stockholder. An
'interested stockholder' is a person who, together with its affiliates and
associates, owns (or within three years, did own) 15% or more of the
corporation's voting stock.
The provisions regarding certain business combinations under the GCL could
have the effect of delaying, deferring or preventing a change in control of the
Company or the removal of existing management. A takeover transaction frequently
affords stockholders the opportunity to sell their shares at a premium over
current market prices.
CERTAIN PROVISIONS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS
General
Certain provisions of the Company's Certificate of Incorporation and Bylaws
may make more difficult the acquisition of control of the Company by a tender
offer, open market purchases not approved by the Company's Board of Directors, a
proxy contest or otherwise. The provisions are designed to reduce the
vulnerability of the Company to an unsolicited proposal for a takeover that does
not contemplate the acquisition of all outstanding shares of the Company or
which is otherwise unfair to stockholders of the Company.
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<PAGE>
Set forth below is a description of such provisions of the Company's
Certificate of Incorporation and Bylaws. Such description is intended as a
summary only and is qualified in its entirety by reference to the Company's
Certificate of Incorporation and Bylaws.
Election of Directors; Amendment to Certificate of Incorporation
The Company's Certificate of Incorporation provides that the Board of
Directors is divided into three classes. One class of directors is elected at
each annual meeting of stockholders for three-year terms. In addition, the
Bylaws require advance notice to the Board of Directors of stockholder proposals
or stockholder nominees for director to be considered at the next annual meeting
of stockholders.
The Bylaws provide that the number of directors shall be fixed by majority
approval of the Board of Directors or by a vote of a majority of the
stockholders of the Company. Currently, the number of directors is set at five.
In addition, the Bylaws provide that such provision establishing the number of
directors may only be amended by majority approval of the Board of Directors or
by a vote of a majority of the stockholders of the Company.
The Certificate of Incorporation also provides that a director can only be
removed during his or her term for cause and upon the vote of two-thirds of the
stockholders, and that amendments to the Certificate of Incorporation require
the vote of two-thirds of the stockholders unless approved by 80% of the Board
of Directors.
Special Stockholder Meetings
The Bylaws provide that special meetings of the stockholders, for any
purpose or purposes, unless required by law, shall be called by the Chairman and
Chief Executive Officer or President pursuant to a request in writing of the
Chairman and Chief Executive Officer or the President, or a majority of the
entire Board of Directors. A special meeting may not be held absent such a
written request. The request shall state the purpose or purposes of the proposed
meeting. The Bylaws also provide that stockholders may not take action by
written consent. Such limitation on the right of stockholders to call a special
meeting and to take action by written consent could make it more difficult for
stockholders to initiate or to take action that is opposed by the Board of
Directors.
Preferred Stock
The Certificate of Incorporation authorizes the Company's Board to
establish series of Preferred Stock and to determine, with respect to any series
of Preferred Stock, the rights, preferences, privileges and restrictions
thereof. Management believes that the Preferred Stock will provide the Company
with increased flexibility in structuring possible future financings and
acquisitions, and in meeting other corporate needs that might arise. Having such
authorized shares available for issuance will allow the Company to issue shares
of Preferred Stock without the expense and delay of a special stockholders'
meeting. The authorized shares of Preferred Stock, as well as shares of the
Company's Common Stock, will be available for issuance without further action by
stockholders, unless such action is required by applicable law or the rules of
any stock exchange on which the Company's securities may be listed. The
Company's Board of Directors could issue Preferred Stock having terms that could
discourage an acquisition attempt or other transaction that some, or a majority,
of the stockholders might believe to be in their best interests or in which
stockholders might receive a premium for their stock over the then market price
of such stock.
69
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have 9,629,222 shares of
Common Stock outstanding (10,004,222 shares if the Underwriters' over-allotment
option is exercised in full). Of these shares, approximately 6,111,825 shares
(6,486,825 shares if the Underwriters' over-allotment option is exercised in
full) will be freely tradeable without restriction or further registration under
the Securities Act. The remaining 3,517,397 shares of Common Stock outstanding
are 'Restricted Securities' as that term is defined in Rule 144 under the
Securities Act, of which approximately 2,624,000 are held by 'affiliates' (as
defined in the Securities Act) of the Company.
The Restricted Securities are subject to all of the limitations on resale
imposed by Rule 144. In general, under Rule 144 as currently in effect, any
affiliate of the Company or any person (or persons whose shares are aggregated
in accordance with the Rule) who has beneficially owned Restricted Securities
for at least two years would be entitled to sell within any three-month period a
number of shares that does not exceed the greater of 1.0% of the outstanding
shares of Common Stock (approximately 96,474 shares based upon the number of
shares outstanding after the Offering) and the reported average weekly trading
volume in the over-the-counter market for the four weeks preceding the sale.
Sales under Rule 144 are also subject to certain manner of sale restrictions and
notice requirements and to the availability of current public information
concerning the Company. Persons who have not been affiliates of the Company for
at least three months and who have held their shares for more than three years
are entitled to sell Restricted Securities without regard to the volume, manner
of sale, notice and public information requirements of Rule 144. Substantially
all of the Restricted Securities were issued in November 1994. Accordingly,
under Rule 144 (and subject to the conditions thereof), the Restricted
Securities are eligible for public resale. However, a majority of such shares
are held by executive officers and directors of the Company and Selling
Stockholders who have agreed to certain restrictions upon the resale of such
shares.
The Company, its executive officers and directors, the Selling
Stockholders, certain debenture holders and certain warrant holders have each
agreed that they will not, directly or indirectly, offer, sell, offer to sell,
contract to sell, pledge, grant any option to purchase or otherwise sell or
dispose of (or announce any offer, sale, offer of sale, contract of sale,
pledge, grant of any option to purchase or sale or disposition) any shares of
Common Stock or other capital stock or any securities convertible into, or
exercisable or exchangeable for, any shares of Common Stock or other capital
stock of the Company, for a period of 180 days after the date of this
Prospectus, without the prior written consent of Prudential Securities
Incorporated, on behalf of the Underwriters, except for bona fide gifts or
private transfers effected by such stockholders other than on any securities
exchange or in the over-the-counter market to donees or transferees that agree
to be bound by similar agreements. See 'The Company -- Underwriting.'
The Company currently has outstanding $25.0 million principal amount of
Debentures and 2,913,625 Warrants, which upon conversion or exercise as
applicable, the Company may be caused to issue up to 5,439,220 shares of Common
Stock, thus increasing the number of shares outstanding from 7,347,367 to
12,786,587. See 'Debentures' and 'Warrants.' Pursuant to certain registration
rights granted by the Company in connection with the shares issuable upon the
conversion of outstanding Debentures or upon exercise of such Warrants, the
Company may have an obligation to register for resale up to 4,970,820 shares of
such Common Stock. Substantially all of the holders of such shares have agreed
to defer their registration rights for a period of 120 or 180 days after the
date of this Prospectus. See 'Description of Securities -- Registration Rights.'
70
<PAGE>
UNDERWRITING
The Underwriters named below (the 'Underwriters'), for whom Prudential
Securities Incorporated, Piper Jaffray Inc. and Sands Brothers & Co., Ltd. are
acting as representatives (the 'Representatives'), have severally agreed,
subject to the terms and conditions contained in the Underwriting Agreement, to
purchase from the Company and the Selling Stockholders the number of shares of
Common Stock set forth below opposite their respective names:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
- --------------------------------------- -----------
<S> <C>
Prudential Securities Incorporated.....
Piper Jaffray Inc......................
Sands Brothers & Co., Ltd..............
Total............................. 2,500,000
-----------
-----------
</TABLE>
The Company and the Selling Stockholders are obligated to sell, and the
Underwriters are obligated to purchase, all of the shares of Common Stock
offered hereby if any are purchased.
The Underwriters, through their Representatives, have advised the Company
and the Selling Stockholders that they propose to offer the Common Stock
initially at the public offering price set forth on the cover page of this
Prospectus; that the Underwriters may allow to selected dealers a concession of
$ per share; and that such dealers may reallow a concession of
$ per share to certain other dealers. After the public offering, the
offering price and the concession may be changed by the Representatives.
The Company has granted the Underwriters an option, exercisable for 30 days
from the date of this Prospectus, to purchase up to 375,000 additional shares of
Common Stock at the public offering price, less underwriting discounts and
commissions, as set forth on the cover page of this Prospectus. The Underwriters
may exercise such option solely for the purpose of covering over-allotments
incurred in the sale of the shares of Common Stock offered hereby. To the extent
such option to purchase is exercised, each Underwriter will become obligated,
subject to certain conditions, to purchase approximately the same percentage of
such additional shares as the number set forth opposite each Underwriter's name
in the preceding table bears to .
Pursuant to an investment banking agreement entered into between the
Company and Sands Brothers & Co., Ltd. dated January 29, 1996, and as
subsequently amended on April 24, 1996 and November 15, 1996, the Company has
agreed to pay a facilitation fee ('Facilitation Fee') to Sands Brothers & Co.,
Ltd. in the amount of $300,000, less any underwriting fees and commissions,
limited to $150,000, derived from their participation as an underwriter in this
Offering. The Facilitation Fee may be viewed as additional underwriting
compensation.
The Company, its executive officers and directors, the Selling
Stockholders, certain debenture holders and certain warrant holders have each
agreed that they will not, directly or indirectly, offer, sell, offer to sell,
contract to sell, pledge, grant any option to purchase or otherwise sell or
dispose of (or announce any offer, sale, offer of sale, contract of sale,
pledge, grant of any option to purchase or other sale or disposition) any shares
of Common Stock or other capital stock or any securities convertible into, or
exercisable or exchangeable for, any shares of Common Stock or other capital
stock of the Company, for a period of 180 days after the date of this
Prospectus, without the prior written consent of Prudential Securities
Incorporated, on behalf of the Underwriters, except for bona fide gifts or
private transfers effected by such stockholders other than on any securities
exchange or in the over-the-counter market to donees or transferees that agree
to be bound by similar agreements.
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<PAGE>
The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters or contribute to losses arising out of certain liabilities,
including liabilities under the Securities Act.
In connection with this Offering, certain Underwriters and selling group
members (if any) or their respective affiliates who are qualified market makers
on the Nasdaq National Market may engage in passive market making transactions
in the Common Stock on the Nasdaq National Market in accordance with Rule 10b-6A
under the Exchange Act during the two business day period before the
commencement of offers of sales of the Common Stock. Passive market makers must
comply with applicable volume and price limitations and must be identified as
such. In general, a passive market maker must display its bid at a price not in
excess of the highest independent bid for such security; if all independent bids
are lowered below the passive market maker's bid, however, such bid must then be
lowered when certain purchase limits are exceeded.
LEGAL MATTERS
The validity of the Common Stock offered hereby has been passed upon for
the Company by Buchanan Ingersoll Professional Corporation, Two Logan Square,
12th Floor, 18th & Arch Streets, Philadelphia, Pennsylvania, 19103. Certain
legal matters in connection with this Offering will be passed upon for the
Underwriters by Cleary, Gottlieb, Steen & Hamilton, One Liberty Plaza, New York,
New York 10006.
STATEMENT OF INDEMNIFICATION
The Company has adopted the provisions of Section 102(b)(7) of the GCL
which eliminate or limit the personal liability of a director to the Company or
its stockholders for monetary damages for breach of fiduciary duty under certain
circumstances. Furthermore, under Section 145 of the GCL, the Company may
indemnify each of its directors and officers against his expenses (including
reasonable costs, disbursements and counsel fees) in connection with any
proceeding involving such person by reason of his having been an officer or
director to the extent he acted in good faith and in a manner reasonably
believed to be in, or not opposed to, the best interest of the Company, and,
with respect to any criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful. The determination of whether indemnification
is proper under the circumstances, unless made by a court, shall be determined
by the Board of Directors.
Insofar as indemnification for liabilities under the Securities Act may be
permitted to directors, officers and controlling persons of the Company pursuant
to the foregoing provisions or otherwise, the Company has been advised that in
the opinion of the Commission, such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Company of expenses incurred or paid by a director, officer or
controlling person of the Company in a successful defense of any action, suit or
proceeding) is asserted by a director, officer or controlling person in
connection with the securities being registered, the Company will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issuer.
EXPERTS
The financial statements as of December 31, 1995 and for each of the two
years in the period ended December 31, 1995 included in this Prospectus have
been so included in reliance on the report of Price Waterhouse LLP, independent
certified public accountants, given on the authority of said firm as experts in
auditing and accounting.
72
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
SB-2, including amendments thereto, with respect to the Common Stock being
registered hereby. This Prospectus does not contain all of the information
contained in such Registration Statement and the exhibits and schedules filed
therewith, as permitted by the Rules and Regulations of the Commission. The
Registration Statement, including exhibits and schedules thereto, may be
inspected without charge, and copies of all or any part thereof may be obtained
from the Commission's principal office in Washington, D.C. at Room 1024, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional
offices at 7 World Trade Center, Suite 1300, New York, New York 10048, and at
Northwest Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661. Copies of such materials can be obtained upon written request addressed
to the Commission, Public Reference Section, 450 Fifth Street, N.W., Washington,
D.C. 20549, at prescribed rates. In addition, the Commission maintains a Web
site at http://www.sec.gov containing reports, proxy and information statements
and other information regarding registrants that file electronically with the
Commission, including the Company. For further information with respect to the
Company, the Common Stock being registered hereby and the contents of any
contract or document referred to herein, reference is made to the Registration
Statement and the exhibits filed as a part thereof.
73
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
REFERENCE
---------
<S> <C>
Report of Independent Certified Public Accountants................ F-2
Consolidated Balance Sheet as of December 31, 1995................ F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1995 and 1994...................................... F-4
Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended December 31, 1995 and 1994.......................... F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995 and 1994...................................... F-6
Notes to Consolidated Financial Statements for the Years Ended
December 31, 1995 and 1994...................................... F-7
Consolidated Balance Sheets as of September 30, 1996 (Unaudited)
and December 31, 1995........................................... F-22
Consolidated Statements of Operations (Unaudited) for the Nine
Months Ended September 30, 1996 and 1995........................ F-23
Consolidated Statements of Cash Flows (Unaudited) for the Nine
Months Ended September 30, 1996 and 1995........................ F-24
Notes to Consolidated Financial Statements (Unaudited) for the
Nine Month Period Ended September 30, 1996...................... F-25
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of NAL Financial Group Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of changes in stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
NAL Financial Group Inc. and its subsidiaries at December 31, 1995, and the
results of their operations and their cash flows for each of the two years in
the period ended December 31, 1995 in conformity with generally accepted
accounting principles. 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 of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Fort Lauderdale, Florida
February 27, 1996, except as to Note 19,
which is as of March 22, 1996
F-2
<PAGE>
NAL FINANCIAL GROUP INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1995
<TABLE>
<CAPTION>
1995
------------
<S> <C>
ASSETS
Finance receivables
Automotive finance contracts, net...................... $ 99,790,636
Consumer finance contracts, net........................ 2,289,503
Mortgage finance contracts, net........................ 1,805,068
Less: reserves available for credit losses............. (2,671,001)
------------
Finance receivables, net............................... 101,214,206
------------
Cash........................................................ 920,981
Restricted cash............................................. 1,031,734
Accrued interest receivable................................. 1,459,600
Investment in operating leases, net......................... 4,054,613
Automobile inventory........................................ 1,886,451
Property and equipment, net................................. 1,802,889
Excess servicing receivables................................ 4,999,165
Other assets................................................ 4,665,287
------------
TOTAL ASSETS........................................... $122,034,926
------------
------------
LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES
Debt participation interests........................... $42,380,522
Credit and warehouse facilities........................ 33,428,946
Convertible subordinated debt, net..................... 12,924,379
Stockholder loans...................................... 2,919,000
Drafts payable......................................... 2,593,098
Deferred taxes......................................... 1,603,587
Accounts payable and accrued expenses.................. 1,046,884
Other liabilities...................................... 1,278,594
------------
TOTAL LIABILITIES...................................... 98,175,010
------------
Commitments and contingencies (Notes 8 and 17).............. --
------------
STOCKHOLDERS' EQUITY
Preferred stock -- $1,000 par value:
10,000,000 shares authorized, no shares issued......... --
Common stock -- $.15 par value:
50,000,000 shares authorized 6,699,987 shares issued
and outstanding...................................... 1,004,998
Paid in capital............................................. 18,524,706
Retained earnings........................................... 4,330,212
------------
TOTAL STOCKHOLDERS' EQUITY............................. 23,859,916
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............. $122,034,926
------------
------------
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
F-3
<PAGE>
NAL FINANCIAL GROUP INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
----------- ----------
<S> <C> <C>
INTEREST INCOME
Finance charges and purchase discount
accretion................................. $15,680,198 $5,387,291
Interest expense............................. (7,361,527) (1,957,420)
----------- ----------
Net interest income before provision for
credit losses.......................... 8,318,671 3,429,871
Provision for credit losses.................. (2,762,273) (572,636)
----------- ----------
Net interest income after provision for
credit losses.......................... 5,556,398 2,857,235
----------- ----------
OTHER INCOME
Gain on sale of contracts.................... 4,600,721 2,292,249
Fees and other............................... 2,651,497 453,660
----------- ----------
Total other income........................ 7,252,218 2,745,909
----------- ----------
OPERATING AND OTHER EXPENSES
Salaries and employee benefits.................. 2,551,486 2,337,557
Depreciation and amortization................... 1,298,866 320,294
Occupancy expense............................... 448,625 200,377
Professional and consulting services............ 723,620 902,720
Other operating expense......................... 2,782,634 1,184,530
Non cash charge for the release of escrow
shares....................................... 280,000 --
----------- ----------
Total other expenses......................... 8,085,231 4,945,478
----------- ----------
Income before income taxes........................ 4,723,385 657,666
Provision for income taxes........................ 1,926,321 263,343
----------- ----------
NET INCOME........................................ $ 2,797,064 $ 394,323
----------- ----------
Primary net income per common and common
equivalent share................................ $ 0.45 $ 0.08
----------- ----------
Fully diluted net income per common and common
equivalent share................................ $ 0.45 $ 0.07
----------- ----------
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
F-4
<PAGE>
NAL FINANCIAL GROUP INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
PREFERRED STOCK LESS:
---------------- COMMON STOCK ----------- TOTAL
PAR ----------------------- PAID IN NOTE RETAINED STOCKHOLDERS'
SHARES VALUE SHARES PAR VALUE CAPITAL RECEIVABLE EARNINGS EQUITY
------ ------ --------- ---------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December
31, 1993.......... -- $ -- 4,286 $ 4,286 $ 3,195,325 $(2,034,638) $ 2,643,110 $ 3,808,083
Dividends........... -- -- -- -- -- -- (1,069,460) (1,069,460)
Redemption of
stock............. -- -- (2,143) (2,143) (1,597,670) 2,034,638 (434,825) --
Redemption of
predecessor stock
in connection with
the merger........ -- -- (2,143) (2,143) (1,597,655) -- -- (1,599,798)
Issuance of stock to
predecessor
stockholders in
connection with
the merger........ -- -- 3,160,000 474,000 1,125,798 -- -- 1,599,798
Issuance of stock to
stockholders of
merged entity..... -- -- 2,432,968 364,945 7,357,916 -- -- 7,722,861
Net income.......... -- -- -- -- -- -- 394,323 394,323
------ ------ --------- ---------- ----------- ----------- ----------- -------------
Balance, December
31, 1994.......... -- -- 5,592,968 838,945 8,483,714 -- 1,533,148 10,855,807
Issuance of stock... -- -- 176,500 26,475 2,074,475 -- -- 2,100,950
Issuance of
warrants.......... -- -- -- -- 397,167 -- -- 397,167
Conversion of
subordinated
debt.............. -- -- 930,519 139,578 7,289,350 -- -- 7,428,928
Release of escrow
shares............ -- -- -- -- 280,000 -- -- 280,000
Net income.......... -- -- -- -- -- -- 2,797,064 2,797,064
------ ------ --------- ---------- ----------- ----------- ----------- -------------
Balance, December
31, 1995.......... -- $ -- 6,699,987 $1,004,998 $18,524,706 $ -- $ 4,330,212 $23,859,916
------ ------ --------- ---------- ----------- ----------- ----------- -------------
------ ------ --------- ---------- ----------- ----------- ----------- -------------
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
F-5
<PAGE>
NAL FINANCIAL GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net income.................................... $ 2,797,064 $ 394,323
Adjustments to reconcile net income to net
cash used in operations......................
Accretion of discount....................... (654,124) (2,064,714)
Provision for loan losses................... 2,762,273 572,636
Depreciation and amortization............... 1,445,149 320,294
Gain on sale of loan pools.................. (4,600,721) (2,292,249)
Non-cash charge - voting trust.............. 280,000 --
Changes in assets and liabilities
Increase in excess servicing receivables.... (4,999,165) --
Decrease in restricted cash................. 29,307 921,492
Increase in other assets.................... (3,514,607) (75,428)
Decease in due from affiliates.............. -- 43,667
Increase in accrued interest receivable..... (1,291,908) --
Increase in drafts payable.................. 2,593,098 --
Increase in accounts payable and accrued
expenses................................... 825,631 --
Increase in other liabilities............... 627,505 190,030
Increase (decrease) in accrued income
taxes...................................... 1,493,127 (33,590)
------------ -----------
Net cash used in operating activities......... (2,207,371) (2,023,539)
------------ -----------
Cash flows from investing activities:
Purchase of SFI option...................... (250,000) --
Proceeds from sale of loan pools............ 12,514,061 14,614,031
Purchase of operating lease vehicles........ (3,400,690) (1,283,300)
Payments received on automotive finance
contracts.................................. 22,042,555 7,417,861
Purchase of automotive finance contracts.... (154,866,844) (22,681,679)
Payments received on consumer finance
contracts.................................. 1,996,335 8,421,534
Purchase of consumer finance contracts...... (1,050,549) (14,795,381)
Payments received on mortgage finance
contracts.................................. 2,587,063 5,083,106
Purchase of mortgage finance contracts...... -- (221,713)
Proceeds from sale of automobile
inventory.................................. 8,845,103 --
Purchase of property and equipment.......... (1,535,671) (253,004)
------------ -----------
Net cash used by investing activities......... (113,118,637) (3,698,545)
------------ -----------
Cash flows from financing activities:
Proceeds from issuance of common stock...... 2,100,950 7,722,861
Proceeds from securitization of finance
contracts.................................. 37,511,237 --
Proceeds from issuance of subordinate
debentures................................. 21,338,728 --
Proceeds from participations and credit
facilities................................. 135,178,400 33,911,781
Repayments of participations and credit
facilities................................. (81,870,973) (34,249,908)
Payment of debt issue costs................. (1,532,707) (24,352)
Note payable from stockholder............... 2,856,506 --
Dividends paid.............................. -- (1,069,459)
------------ -----------
Net cash provided by financing activities....... 115,582,141 6,290,923
------------ -----------
Net increase in cash............................ 256,133 568,839
Cash, beginning of year......................... 664,848 96,009
------------ -----------
Cash, end of year............................... $ 920,981 $ 664,848
------------ -----------
------------ -----------
Supplemental disclosures of cash flow information
Cash paid during the year for interest............ $ 6,443,859 $ 1,859,353
------------ -----------
------------ -----------
Cash paid during the year for taxes............... $ 491,558 $ 320,501
------------ -----------
------------ -----------
Supplemental schedule of non-cash investing and
financing activities
Conversion of subordinated debt................... $ 8,260,000 $ --
------------ -----------
------------ -----------
Net transfers to automobile inventory............. $ 11,742,181 $ --
------------ -----------
------------ -----------
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
F-6
<PAGE>
NAL FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
NOTE 1 -- ORGANIZATION AND NATURE OF OPERATIONS:
NAL Financial Group Inc. (the 'Company') commenced operations in June 1991
as a specialized finance company for the purpose of engaging in consumer finance
transactions involving the origination, purchase, remarketing and servicing of
consumer loan and lease receivables. Since June 1994, the Company's principal
business has been the acquisition and servicing of automotive finance contracts
originated by dealers in connection with sales or leases to individuals with
sub-prime credit with the intent to pool and sell these contracts through the
Company's securitization programs.
The Company completed its initial securitization during December 1995. In a
securitization, the Company creates securities backed by automotive finance
contracts and sells these securities in privately placed transactions.
Purchasers of the securities receive a pass-through rate of interest set at the
time of sale and the Company receives a base servicing fee for its servicing
efforts. In addition, the Company is entitled to certain excess servicing fees
which represent collections on the contracts in excess of those required to pay
investor principal and interest and the base servicing fee.
On November 30, 1994, the Company merged with Corporate Financial Ventures,
Inc. ('CFVI'), a public company (the 'Merger'). Under the terms of the Merger,
the Company's stockholders received 3,160,000 shares of CFVI in exchange for all
outstanding shares of stock of the Company. Stockholders of the Company received
approximately 56% of the outstanding common stock of CFVI. Additionally, the
Company raised net proceeds of approximately $7,700,000 in a private placement
of 1,549,667 shares of its common stock in connection with the Merger. The
Merger has been accounted for as a reverse acquisition by the Company. Upon
completion of the Merger, CFVI assumed the historic operations of the Company
and changed its name to NAL Financial Group Inc. As the Merger is not considered
a business combination as defined in Accounting Principles Board Opinion No. 16,
'Business Combinations', pro forma information is not presented. The operations
of CFVI prior to the Merger were not significant.
The Company operates its business through six wholly-owned subsidiaries.
The principal operations of the Company are conducted through NAL Acceptance
Corporation ('NAC'). NAL Insurance Services, Inc. provides automobile and other
forms of insurance services. NAL Mortgage Corporation presently is inactive.
Performance Cars of South Florida, Inc. was incorporated in January 1995 to
conduct the Company's used vehicle operations. Autorics, Inc. and Autorics II,
Inc. were established during 1995 for the limited purpose of purchasing and the
re-selling of the Company's automotive finance contracts through the
Company's securitization programs.
NOTE 2 -- ACCOUNTING POLICIES:
A summary of the significant accounting policies followed in the
preparation of the accompanying financial statements is presented below:
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany transactions
have been eliminated.
Revenue Recognition
Interest income consists of both contractual interest and purchase discount
accretion and is recognized over the contractual term of the finance contracts
using the interest method.
Purchase discount represents the differential, if any, between the amount
financed on a contract and the price paid by the Company to acquire the
contract, net of any acquisition costs. Any discount on automotive finance
contracts which management considers necessary to absorb future credit losses is
allocated to the reserves available for credit losses. The remaining portion of
the discount, if any, is recognized as interest income as described above.
F-7
<PAGE>
NAL FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 AND 1994
NOTE 2 -- ACCOUNTING POLICIES: -- (CONTINUED)
Revenue from operating leases is recognized as rental revenue on a
straight-line basis over the lease term.
Accrual of interest income ceases the sooner of when a contract becomes
delinquent by 90 days or the underlying collateral is repossessed. At December
31, 1995 and 1994, the Company had approximately $2,800,000 and $236,000,
respectively, in non-accrual finance contracts. Had these contracts been on full
accrual, $236,000 and $26,000 would have been recognized to earnings for the
years ended December 31, 1995 and 1994, respectively.
Late charges and other miscellaneous fees are credited to income as earned.
Fees from the resale of guaranteed asset protection ('GAP') insurance policies
are non-rebatable and recognized as earnings in the current period.
Reserves Available for Credit Losses
The Company purchases contracts from dealers at discounts pursuant to a
financing program that bases the level of discount on, among other things, the
credit risk of the borrower. As discussed above, the portion of the discount on
automotive finance contracts required to absorb future credit losses, based on
management's assessment, is allocated to the reserves available for credit
losses.
As part of the Company's financing program with dealers, agreements are
entered into whereby holdbacks are established to protect the Company from
potential losses. Pursuant to the agreements, when the Company acquires
contracts, it withholds a portion of the proceeds from the dealers to absorb
credit losses. Holdback amounts are refunded to the dealers if the contract
performs throughout its term.
In cases where the purchase discount and/or dealer holdbacks are not
adequate to cover potential losses, the Company establishes an allowance for
losses by charging a provision against earnings.
The combined allowance, discount and dealer holdbacks available for credit
losses are maintained at an amount considered by management to be adequate to
absorb potential credit losses based upon an evaluation of known and inherent
risks in the portfolios. Management's periodic evaluation is based upon an
analysis of the portfolios, historical loss experience, current economic
conditions, collateral value and other relevant factors. Future adjustments to
the reserve may be necessary if economic conditions differ substantially from
the assumptions used in making the evaluation.
The Company charges off delinquent automotive and consumer accounts no
later than 150 days of delinquency. Recovery of charged off balances begin with
the Company's collection specialists. If results are not obtained within a
reasonable time frame, the account is either turned over to a collection agency
or an attorney for action, including wage garnishment, judgement and asset
search.
Restricted Cash
Restricted cash represents deposit accounts established pursuant to
servicing agreements between the Company and various participants which
represents collections from customers. The collection accounts are settled
monthly by the Company with the participants.
Net Investment in Operating Leases
Operating automotive leases to third parties are originated by dealers and
acquired by the Company, which assumes ownership of the vehicle. Vehicles held
under operating lease agreements are recorded at cost and depreciated on a
straight-line basis over the lease term to the estimated residual value.
F-8
<PAGE>
NAL FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 AND 1994
NOTE 2 -- ACCOUNTING POLICIES: -- (CONTINUED)
Automobile Inventory
Vehicles acquired through repossession or termination of a lease or loan
are valued at the lower of the unpaid principal balance or market value at the
date of repossession.
Debt Issue Costs
Debt issue costs are capitalized and amortized to operations on a
straight-line basis over the life of the related debt, which currently
approximates one to three years.
Property and Equipment
Property and equipment is stated at cost, less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the related assets.
Excess Servicing Receivables
Excess servicing receivables ('ESR') result from the sale of contracts on
which the Company retains servicing rights and a portion of the excess cash
flows. ESRs are determined by computing the difference between the weighted
average yield of the contracts sold and the yield to the purchaser, adjusted for
the normal servicing fee based on the agreements between the Company and the
purchaser. The resulting differential is recorded as a gain in the year of the
sale equal to the present value of the estimated cash flows, net of any portion
of the excess that may be due to the purchaser and adjusted for anticipated
prepayments, repossessions, liquidations and other losses. The excess servicing
cash flows over the estimated remaining life of the contracts have been
calculated using estimates for prepayments, losses (charge-offs) and weighted
average discount rates, which the Company expects market participants would use
for similar instruments.
Income Taxes
The Company and its subsidiaries file a consolidated federal income tax
return.
The Company utilizes an asset and liability approach to account for income
taxes on a current and deferred basis using current income tax rates. Deferred
income tax assets are recognized for temporary differences that will result in
deductible amounts in future years. Deferred income tax liabilities are
recognized for temporary differences that will result in taxable amounts in
future years.
Concentration of Credit Risk
The Company considers its primary market area for automotive financing
activities to be the Southeast United States. The properties collateralizing the
other loan receivable portfolios are located primarily throughout the eastern
United States, Texas and California. Although the Company has a diversified loan
portfolio, a substantial portion of its debtors' abilities to honor their
obligations to the Company is dependant upon the economic stability of these
areas.
Interest Rate Risk
Contract acquisitions are funded primarily through participations, credit
and warehouse facilities. The participations and credit facilities bear interest
at fixed rates tied to the prime rate and the durations are determined by the
durations of the related contracts since the proceeds of the obligor payments
are applied to the repayment of the participations. The warehouse facility bears
interest at a variable rate tied to LIBOR and the duration is determined by the
timing of the Company's securitization transactions. Contract acquisitions
financed by this facility are warehoused pending securitization. Upon completion
of a securitization, any remaining amounts due associated with the contracts
securitized are repaid along with unpaid interest.
F-9
<PAGE>
NAL FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 AND 1994
NOTE 2 -- ACCOUNTING POLICIES: -- (CONTINUED)
Earnings Per Share
Earnings per common share are computed based on the weighted average number
of common and common equivalent shares outstanding during the period. The
weighted average number of shares of common and common equivalent shares
outstanding used to compute primary and fully diluted earnings per share was
6,200,362 for the year ended December 31, 1995, and 5,192,968 and 5,592,968,
respectively, for the year ended December 31, 1994.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Estimates
that are particularly susceptible to significant change in the near term are the
adequacy of reserves available for credit losses, the present value of the
estimated future cash flows utilized to calculate excess servicing receivables,
the realization of estimated residual values on direct finance leases and the
realization of automotive inventory.
Reclassification
Certain 1994 amounts have been reclassified to conform with current year
presentation.
NOTE 3 -- AUTOMOTIVE FINANCE CONTRACTS:
Automotive finance contracts at December 31, 1995 consist of the following:
Contracts held in portfolio:
<TABLE>
<S> <C>
Direct finance lease payments........... $16,361,733
Estimated residual values............... 9,170,719
-----------
Total direct finance lease............ 25,532,452
Less: Unearned interest............... (7,069,448)
-----------
Total direct finance leases, net...... 18,463,004
-----------
Loan contracts.......................... 17,080,482
Loan contracts with recourse............ 29,226,018
-----------
Total loan contracts.................. 46,306,500
-----------
Total contracts held in portfolio....... 64,769,504
Less: Unearned fees................... (123,322)
-----------
Total contracts held in portfolio, net.. 64,646,182
Contracts held for sale................. 21,685,000
Advances to dealers..................... 13,459,454
-----------
Total automobile finance contracts, net. $99,790,636
-----------
-----------
</TABLE>
F-10
<PAGE>
NAL FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 AND 1994
NOTE 3 -- AUTOMOTIVE FINANCE CONTRACTS: -- (CONTINUED)
The Company has entered into arrangements with certain of its dealers and
other origination sources by which the Company may require the reimbursement for
credit losses sustained on contracts purchased from these sources.
The Company services automotive finance contracts of approximately $48
million for others.
Automotive finance contracts are collateralized primarily by the related
automobiles and the related security deposits on leases. These contracts are
pledged as security under various debt agreements.
Contracts held in portfolio are stated at cost as the Company has the
ability and presently intends to hold the portfolio to maturity. Contracts held
for sale are contracts pending securitization and are stated at the lower of
cost or estimated fair value on an aggregate basis.
Advances to dealers represent amounts funded by the Company to automobile
dealerships which are collateralized by loan and lease receivables of the
dealers, totalling approximately $18,106,000 at December 31, 1995. The Company
services contracts amounting to $7,783,000 for two of the dealerships. These
advances bear interest at fixed rates, or at variable rates subject to certain
minimum percentages. The duration of these advances is determined by the
duration of the related collateralized loan and lease receivables.
At December 31, 1995, contractual maturities of automotive finance
contracts are as follows:
<TABLE>
<CAPTION>
1996 1997 1998 1999 2000 THEREAFTER TOTAL
----------- ----------- ----------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Direct finance leases... $ 2,292,832 $ 7,172,485 $ 8,426,841 $ 6,305,136 $1,329,848 $ 5,310 $25,532,452
Loan contracts.......... 10,207,017 11,795,493 12,254,748 8,805,294 3,185,518 58,430 46,306,500
Advances to dealers..... 4,867,676 3,446,671 3,423,349 1,428,079 286,612 7,067 13,459,454
----------- ----------- ----------- ----------- ---------- ---------- -----------
$17,367,525 $22,414,649 $24,104,938 $16,538,509 $4,801,978 $ 70,807 $85,298,406
----------- ----------- ----------- ----------- ---------- ---------- -----------
----------- ----------- ----------- ----------- ---------- ---------- -----------
</TABLE>
It is the Company's experience that generally a portion of the portfolios
are repaid before the contractual maturity dates. Accordingly, the above
tabulation is not to be regarded as a forecast of the timing of future cash
collections. Additionally, this tabulation assumes liquidation of the residual
values upon expiration of the leases.
NOTE 4 -- CONSUMER FINANCE CONTRACTS:
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------
<S> <C>
Mobile homes...................................... $ 221,434
Equipment leases (net of unearned interest
of $285,730).................................... 853,637
Other............................................. 1,407,601
------------
Total........................................... 2,482,672
Less: Purchase discount........................... (193,169)
------------
Consumer loans receivable, net.................... $ 2,289,503
------------
------------
</TABLE>
Included in the total above are fully matured loans totaling $270,491 that
were purchased by the Company at a substantial discount and are considered
non-performing at December 31, 1995. The Company has a net investment of
approximately $77,322 in these loans at December 31, 1995.
F-11
<PAGE>
NAL FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 AND 1994
NOTE 4 -- CONSUMER FINANCE CONTRACTS: -- (CONTINUED)
At December 31, 1995, contractual maturities of consumer finance contracts
were:
<TABLE>
<S> <C>
Fully matured...... $ 270,491
1996............. 711,666
1997............. 474,683
1998............. 396,539
1999............. 255,868
2000............. 101,976
Thereafter....... 271,449
----------
$2,482,672
----------
----------
</TABLE>
It is the Company's experience that a portion of the portfolio is repaid
before the contractual maturity date. Accordingly, the above tabulation is not
to be regarded as a forecast of the timing of future cash collections.
NOTE 5 -- MORTGAGE FINANCE CONTRACTS:
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------
<S> <C>
Residential mortgages................... $2,064,043
Less: Purchase discount................. (258,975)
----------
Mortgage finance contracts, net......... $1,805,068
----------
----------
</TABLE>
Included in the total above are fully matured loans totaling $351,221 that
were purchased by the Company at a substantial discount and are considered
non-performing at December 31, 1995. The Company has a net investment of $92,246
in these loans at December 31, 1995.
At December 31, 1995, contractual maturities of mortgage finance contracts
were:
<TABLE>
<S> <C>
Fully matured...... $ 351,221
1996............. 441,815
1997............. 270,965
1998............. 190,060
1999............. 74,722
2000............. 131,197
Thereafter....... 604,063
----------
$2,064,043
----------
----------
</TABLE>
It is the Company's experience that generally a portion of the portfolio is
repaid before the contractual maturity dates. Accordingly, the above tabulation
is not to be regarded as a forecast of the timing of future cash collections.
These loans are pledged as security for the participations.
F-12
<PAGE>
NAL FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 AND 1994
NOTE 6 -- RESERVES AVAILABLE FOR CREDIT LOSSES:
Changes in reserves available for credit losses for the years ended
December 31, 1995 and 1994 consisted of the following:
<TABLE>
<CAPTION>
1995
---------------------------------------------------- 1994
NON- REFUNDABLE ----------
ALLOWANCE REFUNDABLE DEALER ALLOWANCE
FOR LOSSES DISCOUNT RESERVES TOTAL FOR LOSSES
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance at beginning of
period...................... $ 305,000 $ -- $ -- $ 305,000 $ 277,316
Additions:
Provision charged to
income................... 2,762,273 -- -- 2,762,273 572,636
Other additions............. -- 4,159,048 817,122 4,976,170 --
Reductions:
Charge-offs, net of
recoveries............... (2,414,275) (584,767) (162,864) (3,161,906) (544,952)
Release of reserves upon
securitization of
automotive contracts..... -- (2,061,280) (127,000) (2,188,280) --
Refund of dealer reserve.... -- -- (22,256) (22,256) --
---------- ---------- ---------- ---------- ----------
Balance at end of period...... $ 652,998 $1,513,001 $ 505,002 $2,671,001 $ 305,000
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
The Company allocated approximately $4.2 million to the reserves available
for credit losses during 1995, which represents management's estimate of the
purchase discount on automotive finance contracts necessary to absorb future
credit losses.
Management periodically reviews the adequacy of the reserves available for
credit losses and considers whether the level of reserve is sufficient to cover
any losses of the carrying value based on the collateral pledged for the finance
contracts, an analysis of the equity invested in the collateral by the
borrowers, delinquency data and historical loss experience, and any recourse
arrangements the Company has with dealers or other sellers of finance contracts.
NOTE 7 -- NET INVESTMENT IN OPERATING LEASES:
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------
<S> <C>
Vehicles held under operating leases,
at cost.................................... $4,449,451
Less: Accumulated depreciation............... (394,838)
----------
$4,054,613
----------
----------
</TABLE>
At December 31, 1995, future minimum rental revenue on operating leases are
as follows:
<TABLE>
<S> <C>
1996.... $1,078,762
1997.... 937,021
1998.... 430,164
1999.... 24,876
----------
$2,470,823
----------
----------
</TABLE>
F-13
<PAGE>
NAL FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 AND 1994
NOTE 8 -- PROPERTY AND EQUIPMENT:
Property and equipment at December 31, 1995 consists of the following:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIFE
-----------
<S> <C> <C>
Furniture, fixtures, and office
equipment............................. $2,158,928 5-7 years
Less: Accumulated depreciation.......... (356,039)
----------
$1,802,889
----------
----------
</TABLE>
The Company leases office space under agreements which expire December 31,
2002.
The future minimum non-cancelable lease payments are as follows:
<TABLE>
<S> <C>
1996......... $ 598,872
1997......... 617,570
1998......... 644,583
1999......... 672,408
2000......... 701,095
Thereafter... 1,019,322
----------
$4,253,850
----------
----------
</TABLE>
NOTE 9 -- EXCESS SERVICING RECEIVABLES:
The Company's excess servicing receivables at December 31, 1995 consists of
the following:
<TABLE>
<S> <C>
Servicing cash flows on loans sold, net of
estimated prepayments........................... $9,607,000
Less:
Discount to present value.................... (834,000)
Reserve for loan losses...................... (1,705,000)
Deferred servicing income.................... (2,069,000)
----------
Excess servicing receivables...................... $4,999,000
----------
----------
</TABLE>
NOTE 10 -- DEBT PARTICIPATION INTERESTS:
Debt participation interests at December 31, 1995 consists of the
following:
<TABLE>
<S> <C>
Participation with Fairfax Savings, a Federal Savings Bank
('Fairfax'), interest at fixed rates ranging from 10% to 13.5%;
principal and interest due monthly, secured by undivided
interest in automotive finance contracts, consumer finance
contracts, and mortgage finance contracts...................... $41,845,372
Participations with investors, secured by undivided interest in
automotive finance contracts, consumer finance contracts and
mortgage finance contracts; interest at a fixed rate of 18%.... 470,432
Participations with a stockholder, secured by undivided interest
in certain automotive finance contracts and mortgage finance
contracts; interest at fixed rates of 11.5%-18%................ 64,718
-----------
$42,380,522
-----------
-----------
</TABLE>
F-14
<PAGE>
NAL FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 AND 1994
NOTE 10 -- DEBT PARTICIPATION INTERESTS: -- (CONTINUED)
In general, under the terms of the participation agreements, principal
payments on the agreements are tied to the payments received from the contracts
which secure the borrowings. Interest is due monthly. Proceeds received from
contracts financed by Fairfax are first paid to Fairfax to the extent of any
unpaid principal and interest due on participations. Thereafter, proceeds are
allocated to a reserve account until certain balances are achieved and the
remainder is paid to the Company.
Under the Company's participation agreements, collections received from
loans securing the participations are deposited into restricted, trust bank
accounts pending distributions to participation holders. Distributions generally
are disbursed to participants once each month for the previous month's
collections.
The Company services the loan and lease receivables collateralizing the
participation arrangements, including payment collection and posting, contact
with customers, and repossession and disposal of collateral on defaulted
contracts.
Scheduled maturities of debt participation interests at December 31, 1995
are as follows:
<TABLE>
<S> <C>
1996......... $11,971,194
1997......... 10,532,585
1998......... 10,832,758
1999......... 6,699,261
2000......... 2,127,517
Thereafter... 217,207
-----------
$42,380,522
-----------
-----------
</TABLE>
NOTE 11 -- CREDIT AND WAREHOUSE FACILITIES:
Credit and warehouse facilities at December 31, 1995 consists of the
following:
<TABLE>
<S> <C>
Note payable under a $25 million automobile loan and lease
financing facility, interest due monthly at 5.5% over LIBOR
established and fixed at time of funding (weighted average rate
of 9.3% at December 31, 1995) with General Electric Capital
Corporation, secured by certain automotive finance contracts... $21,844,149
Note payable under a $50 million repurchase financing facility
with Greenwich Capital secured by automotive finance contracts.
Interest due monthly at 2.25% over LIBOR (weighted average rate
of 8.1% at December 31, 1995).................................. 11,584,797
Note payable under a $20 million restricted financing facility
with Congress Financial Corporation, interest due monthly at 2%
over prime rate (10.75% at December 31, 1995), secured by
automotive finance contracts, consumer finance contracts, and
mortgage finance
contracts...................................................... --
-----------
$33,428,946
-----------
-----------
</TABLE>
The repurchase facility is used to warehouse automotive finance contracts
pending securitization. Under the terms of the repurchase facility, the Company
has agreed to engage the lender as investment underwriter on these
securitizations until such time that the Company has securitized a cumulative
$250 million in automotive finance contracts.
F-15
<PAGE>
NAL FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 AND 1994
NOTE 11 -- CREDIT AND WAREHOUSE FACILITIES: -- (CONTINUED)
Scheduled maturities of credit and warehouse facilities at December 31,
1995 are as follows:
<TABLE>
<S> <C>
Upon securitization.... $11,584,797
1996................... 5,071,529
1997................... 5,459,096
1998................... 6,081,862
1999................... 4,441,201
2000................... 765,133
Thereafter............. 25,328
-----------
$33,428,946
-----------
-----------
</TABLE>
Since the repayment of the above debt is directly related to the timing of
the future cash collections of the related finance contracts, the above schedule
of maturities may not be representative of the actual repayments. The above
schedule of maturities excludes the balances held in the reserve accounts.
Scheduled maturities under the repurchase financing facility are structured
to coincide with the securitization of the underlying automotive finance
contracts collateralizing the facility.
The Company must maintain certain net worth and liquidity ratios based on
covenants within its debt agreements.
NOTE 12 -- CONVERTIBLE SUBORDINATED DEBT:
Convertible subordinated debt at December 31, 1995 consists of the
following:
<TABLE>
<S> <C>
Principal outstanding....................................... $13,065,000
Value assigned to warrants on outstanding debt.............. (140,621)
-----------
Convertible subordinated debt, net.......................... $12,924,379
-----------
-----------
</TABLE>
During 1995, the Company completed the offering and sale in private
placement transactions of 9% Convertible Subordinated Debt (the 'Debentures')
along with detachable common stock purchase warrants. The principal amount and
accrued interest due under the Debentures is convertible into shares of common
stock at the option of the holders at conversion prices ranging from $9.00 to
$12.50. In addition, the Company may redeem the debt together with accrued
interest, at redemption prices ranges from $15 to $25, provided that the stock
price of the Company's common stock trades at the redemption price for twenty
consecutive trading days. Through December 31, 1995, an aggregate of $8,260,000
of Debentures was converted into 930,519 shares of common stock.
Scheduled maturities of convertible subordinated debt at December 31, 1995
are as follows:
<TABLE>
<S> <C>
1996.... $10,065,000
1997.... --
1998.... 3,000,000
-----------
$13,065,000
-----------
-----------
</TABLE>
NOTE 13 -- STOCKHOLDERS' EQUITY:
In October 1993, the president and chief executive officer of the Company,
who is also a stockholder, purchased all outstanding shares not previously owned
by him to give him 95% ownership in the Company. The president of NAC owned the
remaining 5%. In connection with this transaction,
F-16
<PAGE>
NAL FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 AND 1994
NOTE 13 -- STOCKHOLDERS' EQUITY: -- (CONTINUED)
the stockholder executed a note in favor of the Company; the note bore interest
at 5% and was due September 30, 1995. In June 1994, the Company redeemed 2,143
shares of its common stock from this
stockholder by cancelling the note.
Merger
In accordance with the terms of the Merger, of the 3,160,000 shares of
common stock issued to the Company's stockholders, 400,000 shares issued to
certain directors and officers were placed in a Voting Trust under the terms of
a Voting Trust Agreement. The Voting Trust provides that, on any matter
requiring stockholder vote, the trustee will vote the shares in the same
percentage as the other then issued and outstanding shares of common stock are
voted. Such shares may be released from the Voting Trust pursuant to the
following formula. Based upon the Company's audited financial statements for the
years ending December 31, 1995, 1996, and 1997, 10,000 shares will be released
for each $150,000 of cumulative net income after taxes the Company earns up to
$3,000,000, and 5,000 shares will be released for each $150,000 of cumulative
net income after taxes in excess of $3,000,000, less the number of shares
previously released under this formula. Any shares not released within three
years will be cancelled. Originally, the Company intended to account for the
release of all shares held in the Voting Trust as compensation expense. In 1995,
the Company reassessed the accounting for shares after further consideration of
the relevant facts and circumstances and has determined that the release of
340,000 of the 400,000 shares placed into the Voting Trust will be considered
additional consideration of the Merger and not result in compensation expense.
The remaining 60,000 shares will still be considered compensatory in nature
resulting in a charge to earnings for the fair market value at the date of
release. As of December 31, 1995, 200,000 of the 400,000 shares have been earned
and are eligible for release of which $280,000 has been reflected as a non-cash
charge to operations for the portion of the 60,000 shares eligible for release.
Concurrent with the completion of the Merger, certain stockholders entered
into a Shareholders' Agreement whereby the stockholders agreed, among other
provisions, for the election of eight directors, two of which will be
independent directors. The Shareholders' Agreement also provides certain
limitations on transactions involving the stockholders' shares.
Stock Option Plan
The Company has adopted a stock option plan (the 'Plan') which covers
600,000 shares of the Company's common stock. Under the terms of the Plan,
officers, directors, key employees and consultants of the Company are eligible
to receive incentive as well as non-qualified stock options and stock
appreciation rights. Incentive stock options granted under the Plan are
exercisable for a period of up to 10 years from the date of grant at an exercise
price which is not less than the fair market value of the Company's common stock
on the date of the grant. For any stockholder owning more than 10% of the
outstanding common stock, incentive stock options are exercisable for a period
of up to five years from the date of grant at an exercise price which is not
less than 110% of the fair market value of the Company's common stock on the
date of the grant. Non-qualified stock options and stock appreciation rights may
be granted on terms determined by the Company's Board of Directors. Stock
appreciation rights give the holder the privilege of surrendering such rights
for the appreciation in the Company's common stock between the time of grant and
surrender.
F-17
<PAGE>
NAL FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 AND 1994
NOTE 13 -- STOCKHOLDERS' EQUITY: -- (CONTINUED)
The following table presents activity for the Plan for the years ended
December 31, 1995 and 1994:
<TABLE>
<CAPTION>
NUMBE OF
SHARES PRICE PER SHARE
--------- ---------------
<S> <C> <C>
Options Outstanding, December 31, 1993... -- --
Options granted.......................... 215,000 $6.00 - $ 6.60
Options exercised........................ -- --
Options cancelled........................ -- --
---------
Options Outstanding, December 31, 1994... 215,000 $6.00 - $ 6.60
Options granted.......................... 328,500 $13.25 - $16.50
Options exercised........................ -- --
Options cancelled........................ -- --
---------
Options Outstanding, December 31, 1995... 543,500 $6.00 - $16.50
---------
---------
</TABLE>
Aggregate proceeds from the exercise of all options outstanding approximate
$6 million at December 31, 1995. No options were exercisable at December 31,
1995.
Purchase Option
During August 1995, the Company acquired an option to purchase the assets
of Special Finance, Inc. ('SFI'). SFI is a Florida based auto finance broker
that at December 31, 1995 provided approximately 35% of the Company's acquired
automotive finance contracts. The option expires August 1, 2000 and gives the
Company the right to purchase the business of SFI for the purchase price of
$1,000,000, plus 125,000 shares of the Company's Common Stock and options to
purchase 65,000 shares of Common Stock at $6.00 per share. An option price of
$250,000 paid to SFI on August 1, 1995 is to be credited against the purchase
price.
In the event the Company decides to exercise the Purchase Option, the
Company has agreed to register the shares of Common Stock to be distributed in
the transaction, and pending such registration, the Company has agreed to lend
up to $900,000 to the sole stockholder of SFI at then prevailing market rates of
interest, with such loan being secured by a security interest in up to 120,000
shares until such time as the shares are registered.
Management is currently evaluating the economic benefits of exercising the
Purchase Option and to date, has made no determination on the likelihood of
whether or when such a purchase may occur, if at all. In the interim, the
Purchase Option provides the Company with a right of first refusal to purchase
all of the finance contracts acquired or originated by SFI.
Stock Purchase Warrants
The Company has issued detachable stock purchase warrants (the 'warrants')
in connection with the private placement of convertible subordinated debt. At
December 31, 1995, the Company had 1,961,125 in warrants outstanding at exercise
prices ranging from $9 to $15. The warrants contain features that permit
redemption at $.001 per warrant based on the average trading prices of the
Company's common stock.
F-18
<PAGE>
NAL FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 AND 1994
NOTE 14 -- INCOME TAXES:
The components of the provision for income taxes for the years ended
December 31, 1995 and 1994, consist of the following:
<TABLE>
<CAPTION>
1995 1994
---------- --------
<S> <C> <C>
Current tax expense:
Federal.......................... $ 360,243 $231,591
State............................ 72,951 43,981
---------- --------
433,194 275,572
---------- --------
Deferred tax expense (benefit):
Federal.......................... 1,349,092 (10,390)
State............................ 144,035 (1,839)
---------- --------
1,493,127 (12,229)
---------- --------
Total provision for income taxes... $1,926,321 $263,343
---------- --------
---------- --------
</TABLE>
The income tax provision differs from the amount determined by multiplying
pre-tax income by the statutory federal income tax rate. The reconciliation
between the expected tax provision and the actual tax provision for the years
ended December 31, 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
1995 1994
---------- --------
<S> <C> <C>
Income taxes at statutory rate..... $1,653,185 $223,606
State taxes........................ 141,721 27,814
Other.............................. 131,415 11,923
---------- --------
Provision for income taxes......... $1,926,321 $263,343
---------- --------
---------- --------
</TABLE>
The net deferred income tax liability as of December 31, 1995 is comprised
of the following temporary differences:
<TABLE>
<S> <C>
Deductible Temporary Differences
Depreciation................................. $ 5,850,659
Bad debt reserves............................ 362,441
Other........................................ --
-----------
Deferred income tax asset.................... 6,213,100
-----------
Taxable Temporary Differences
Direct financing leases...................... (6,685,591)
Book over tax gain on sale of contracts...... (1,131,096)
Capitalized loan costs....................... --
-----------
Deferred income tax liability................ (7,816,687)
-----------
Net deferred income tax liability............ $(1,603,587)
-----------
-----------
</TABLE>
NOTE 15 -- RELATED PARTY TRANSACTIONS:
In October 1994, the Company sold a repossessed boat to an officer of the
Company in consideration for a note in the amount of $89,000 and the offset by
the Company of $21,000 payable to the officer. The note bore interest at an
annual rate of 10% and was repaid in 1995.
On November 30, 1994, the Company sold a portfolio of 14 loans with a total
principal balance of $1.1 million to the president and chief executive officer
of the Company for a price of $591,000. These loans were included in a portfolio
purchased during 1994 at a significant discount. The portion of the
F-19
<PAGE>
NAL FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 AND 1994
NOTE 15 -- RELATED PARTY TRANSACTIONS: -- (CONTINUED)
purchase price allocated to the loans sold approximated the sales price to the
officer; therefore, no gain or loss was recognized on the sale. The Company sold
these loans at a purchase price based on the estimated discounted cash flows
anticipated on the specific loans purchased. This is the same method the Company
uses to value its bulk portfolio acquisitions. The sales price of the loans
reduced a previously established liability owed by the Company to the officer
for bonuses and dividends. The Company continues to service the loans for the
officer.
An affiliate provided executive and financial services to the Company
during 1994. The Company reimbursed the affiliate $675,000 for these services
under a consulting agreement. The consulting agreement includes providing advice
on the purchase and sale of consumer loan and lease portfolios and financing
arrangements. Under the terms of the agreement, the Company pays the affiliate a
fee of $50,000 per month through March 1995. During 1994, the Company prepaid
the remaining amounts due under the contract at a $75,000 discount.
Upon completion of the Merger, the Company entered into an employment
agreement (the 'Agreement') with the president and chief executive officer of
the Company. The Agreement provides for a base salary of $275,000 per year plus
discretionary bonuses, as approved by the Board of Directors, in addition to
certain benefits. The Agreement is renewable annually for successive three year
periods; however, the president may terminate the Agreement upon written notice
the earlier of one year from the date of such notice or 90 days after his
replacement has been hired by the Company. The president may not terminate the
Agreement prior to three years from the date of the Agreement. During 1995, the
Board of Directors approved an increase in base salary to $300,000 per year.
At December 31, 1995, the Company had a stockholder loan payable in the
amount of $2,919,000, interest at 9%, which is due on March 31, 1996. However,
this loan may be extended at the discretion of the chief executive officer for
30 day periods.
NOTE 16 -- EMPLOYEE BENEFITS:
The Company sponsors a 401(k) savings plan covering most employees.
Contributions made by the Company to the 401(k) plan are based on a specified
percentage of employee contributions. Total Company contributions were $48,355
and $22,787 for the years ended December 31, 1995 and 1994, respectively.
NOTE 17 -- LITIGATION:
The Company is involved in various litigation matters arising in the normal
course of business. Legal counsel's and management's assessment are that none of
these matters are anticipated to have a material adverse impact on the financial
position or results of operations of the Company.
NOTE 18 -- FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument for which it is practicable to estimate
that value. Fair value estimates are made at a specific point in time using
estimates of rates of return that the Company believes would be required by
independent third party investors. Accordingly, these estimates may not be
indicative of rates that would be required if actual sales had taken place.
F-20
<PAGE>
NAL FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 AND 1994
NOTE 18 -- FAIR VALUE OF FINANCIAL INSTRUMENTS: -- (CONTINUED)
Finance Receivables
The fair value of finance receivables is computed by using estimated market
rates of return desired by bulk purchasers.
Excess Servicing Receivables
Excess servicing cash flows over the estimated remaining life of the
contracts have been calculated using estimates for prepayments, losses and
weighted average discount rates, which the Company expects market participants
would use for similar instruments. Accordingly, the carrying amount approximates
the fair value.
Debt Participation Interests; Credit and Warehouse Facilities
The fair value of existing debt is computed based on rates currently
available to the Company for debt with similar terms and maturities.
Other Financial Liabilities
The fair value of other financial liabilities closely approximates carrying
amount.
The estimated fair values of the Company's financial instruments at
December 31, 1995 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------------------
CARRYING FAIR
AMOUNT VALUE
------------ ------------
<S> <C> <C>
Financial Assets:
Cash......................................... $ 920,981 $ 920,981
Restricted cash.............................. 1,031,734 1,031,734
Finance receivables:
Automotive finance contracts............... 97,119,635 97,323,178
Consumer finance contracts................. 2,289,503 2,383,365
Mortgage finance contracts................. 1,805,068 1,981,481
Excess servicing receivables................. 4,999,165 4,999,165
------------ ------------
Total................................... $108,166,086 $108,639,904
------------ ------------
------------ ------------
Financial Liabilities:
Debt participation interests................. $ 42,380,522 $ 42,305,963
Credit and warehouse facilities.............. 33,428,946 33,017,076
Convertible subordinated debt................ 12,924,379 12,924,379
Stockholder loans............................ 2,919,000 2,919,000
------------ ------------
Total................................... $ 91,652,847 $ 91,166,418
------------ ------------
------------ ------------
</TABLE>
NOTE 19 -- SUBSEQUENT EVENTS:
In January 1996, the Company completed the sale of $2.5 million of
additional subordinated debentures with terms similar to previously issued
convertible subordinated debt.
On March 22, 1996, the Company completed a securitization of automotive
finance contracts of approximately $40.8 million.
F-21
<PAGE>
NAL FINANCIAL GROUP INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- -------------
<S> <C> <C>
ASSETS:
Cash and cash equivalents....................... $ 3,090 $ 921
Restricted cash................................. 1,482 1,032
Finance receivables, net........................ 87,739 101,214
Investment in operating leases.................. 8,905 4,055
Automobile inventory............................ 2,384 1,886
Excess servicing receivables.................... 22,898 4,999
Premises and equipment, net..................... 2,685 1,803
Accrued interest receivable..................... 2,875 1,460
Debt issue costs................................ 2,336 857
Goodwill........................................ 3,671 --
Other assets.................................... 6,768 3,808
------------- -------------
TOTAL ASSETS $ 144,833 $ 122,035
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Credit and warehouse facilities................. $ 49,191 $ 33,429
Debt participation interests.................... 21,682 42,380
Convertible subordinated debt................... 25,843 12,924
Accounts payable and accrued expenses........... 2,233 1,047
Income taxes payable............................ 4,713 1,604
Stockholder loan................................ -- 2,919
Other liabilities............................... 3,913 3,872
------------- -------------
TOTAL LIABILITIES 107,575 98,175
------------- -------------
STOCKHOLDERS' EQUITY:
Preferred Stock - $1,000 par value:
10,000,000 shares authorized, no shares
issued
Common Stock - $.15 par value:
50,000,000 shares authorized, 7,252,935
shares outstanding at September 30, 1996
and 6,699,987 shares outstanding at
December 31, 1995.......................... 1,088 1,005
Paid in capital................................. 25,698 18,525
Retained earnings............................... 10,472 4,330
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 37,258 23,860
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 144,833 $ 122,035
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
F-22
<PAGE>
NAL FINANCIAL GROUP INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS
ENDED SEPTEMBER
30,
------------------
1996 1995
------- -------
<S> <C> <C>
INTEREST INCOME:
Finance charges and discount accretion............... $17,154 $10,999
Interest expense..................................... (8,218) (4,636)
------- -------
Net interest income............................... 8,936 6,363
Provision for credit losses.......................... (2,801) (1,412)
------- -------
Net interest income after provision
for credit losses.............................. 6,135 4,951
------- -------
OTHER INCOME:
Gain on sale of contracts............................ 13,427 128
Fees and other....................................... 4,670 1,241
------- -------
Total other income............................. 18,097 1,369
------- -------
OTHER EXPENSES:
Salaries and employee benefits....................... 6,060 1,373
Depreciation and amortization........................ 1,250 691
Occupancy expense.................................... 773 289
Professional services................................ 1,401 488
Other operating expense.............................. 4,360 1,673
Non cash charge for the release of
escrow shares..................................... 301 80
------- -------
Total other expenses........................... 14,145 4,594
------- -------
Income before income taxes........................... 10,087 1,726
Provision for income taxes........................... (3,945) (656)
------- -------
NET INCOME............................................. $ 6,142 $ 1,070
------- -------
------- -------
Primary Earnings Per Share:
Net income available to common and common
equivalent shares.................................... $ 6,900 $ 1,070
Weighted average number of common and
common equivalent shares............................. 8,484 5,875
Net income per share................................... $ 0.81 $ 0.18
Fully Diluted Earnings Per Share:
Net income available to common and common
equivalent shares.................................... $ 7,827 $ 1,070
Weighted average number of common and
common equivalent shares............................. 10,369 6,013
Net income per share................................... $ 0.75 $ 0.18
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
F-23
<PAGE>
NAL FINANCIAL GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
--------------------
1996 1995
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net Income........................................... $ 6,142 $ 1,070
Adjustments to reconcile net income to net
cash provided by operations:
Accretion of discount.......................... -- (599)
Provision for credit losses.................... 2,801 1,412
Depreciation and amortization.................. 3,101 691
Gain on sale of loan pools..................... (13,427) (128)
Non-cash charge - escrow shares................ 301 80
Return of excess servicing cashflows........... 1,949 --
Changes in assets and liabilities:
Other, net..................................... (760) 362
-------- --------
Net cash provided by operating activities:............. 107 2,888
-------- --------
Cash flows from investing activities:
Purchase of receivables........................... (197,445) (108,876)
Payments received on receivables.................. 42,427 31,788
Purchase of property and equipment................ (1,066) (689)
Proceeds from sale of loan pools.................. -- 1,623
Purchase of Special Finance, Inc.................. (750) (250)
-------- --------
Net cash used in investing activities:................. (156,834) (76,404)
-------- --------
Cash flows from financing activities:
Net proceeds from financings...................... 196,152 111,094
Repayments of financings.......................... (201,088) (40,662)
(Repayments) proceeds of stockholder loan......... (2,919) 791
Net proceeds from securitization of finance
contracts....................................... 149,251 --
Proceeds from subordinated debentures............. 17,500 --
Issuance of common stock.......................... -- 2,101
-------- --------
Net cash provided by financing activities:............. 158,896 73,324
-------- --------
Net increase (decrease) in cash and cash equivalents... 2,169 (192)
Cash and cash equivalents, beginning of period 921 665
-------- --------
Cash and cash equivalents, end of period............... $ 3,090 $ 473
-------- --------
-------- --------
Supplemental disclosures of cash flows information:
Cash paid during the period for interest............... $ 4,724 $ 3,965
-------- --------
-------- --------
Cash paid during the period for taxes.................. $ 1,465 $ 346
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
F-24
<PAGE>
NAL FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- BASIS OF PRESENTATION:
The interim financial information of NAL Financial Group Inc. (the
'Company'), which is included herein, is unaudited and has been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB. In the opinion of
management, these interim financial statements include all the adjustments
necessary to fairly present the results of the interim periods and all such
adjustments which are of a normal recurring nature. The interim financial
statements presented herein include the accounts of the Company and its
wholly-owned subsidiaries and should be read in conjunction with the audited
financial statements, and the footnotes thereto, for the year ended December 31,
1995. Certain 1995 amounts have been reclassified to conform with the current
year presentation.
Operating results for the nine month period ended September 30, 1996 are
not necessarily indicative of the results which may be expected for the year
ending December 31, 1996.
NOTE 2 -- FINANCE RECEIVABLES:
Finance receivables as of September 30, 1996 and December 31, 1995 consist
of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 DECEMBER 31, 1995
------------------ -----------------
(IN THOUSANDS)
<S> <C> <C>
Automobile finance contracts
Gross contracts receivable...................... $ 97,454 $ 106,983
Less: Unearned interest...................... (8,154) (7,069)
Deferred acquisition fees............... (382) (123)
---------- -----------------
88,918 99,791
---------- -----------------
Consumer contracts receivable
Gross contracts receivable...................... 2,056 2,768
Less: Unearned interest...................... (160) (286)
Purchase discount....................... (102) (193)
---------- -----------------
1,794 2,289
---------- -----------------
Mortgage loans receivable
Gross loans receivable.......................... 1,559 2,064
Less: Purchase discount...................... (285) (259)
---------- -----------------
1,274 1,805
---------- -----------------
Total finance receivables......................... 91,986 103,885
Reserve available for credit losses............... (4,247) (2,671)
---------- -----------------
Total finance receivables, net.................... $ 87,739 $ 101,214
---------- -----------------
---------- -----------------
</TABLE>
The reserve available for credit losses consists of an allowance for losses
established through a provision from earnings, non-refundable purchase discount
on automobile finance contracts purchased from dealers, and refundable reserves
such as dealer holdback. Purchase discount represents the differential, if any,
between the amount financed on a contract and the price paid by the Company to
acquire the contract, net of any acquisition costs. Any discount on automobile
finance contracts which management considers necessary to absorb future credit
losses is allocated to the reserve available for credit losses. The remaining
portion of the discount, if any, is recognized as interest income over the life
of the contracts.
F-25
<PAGE>
NAL FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3 -- EXCESS SERVICING RECEIVABLES:
Excess servicing receivables result from the sale of contracts on which the
Company retains servicing rights and a portion of the excess cash flows. Excess
servicing receivables are determined by computing the difference between the
weighted average yield of the contracts sold and the yield to the purchaser of
the asset-backed security, adjusted for the contractual servicing fee based on
the agreements between the Company and the purchaser. The resulting differential
is recorded as a gain in the year of the sale equal to the present value of the
estimated future cash flows, net of any portion of the excess that may be due to
the purchaser and adjusted for anticipated prepayments, repossessions,
liquidations and other losses. The excess servicing cash flows over the
estimated remaining life of the contracts have been calculated using estimates
for prepayments, losses (charge-offs) and weighted average discount rates, which
the Company expects market participants would use for similar instruments. The
Company updates its cash flows on a quarterly basis using actual rates of
prepayments and losses to assess the remaining value of the excess servicing
receivables in the aggregate.
NOTE 4 -- VOTING TRUST AGREEMENT:
On November 30, 1994, the Company became publicly held by virtue of a
merger with an existing, yet inactive, public company. Of the 3,160,000 shares
of the Company's common stock received by certain stockholders in conjunction
with the merger, 400,000 shares were placed into a voting trust agreement (the
'Agreement') by which shares may be released on an annual basis pursuant to a
formula tied to net income earned by the Company. Any shares not released from
the Agreement at the end of three years will be canceled.
Management has evaluated the accounting treatment relating to the potential
release of the shares under the Agreement using recent accounting guidance and
the relevant facts and circumstances, and has determined that the potential
release of approximately 340,000 shares of the total amount of shares held under
the Agreement is not compensatory. The potential release of the remaining
approximately 60,000 shares is considered compensatory based on the relevant
facts and circumstances and, accordingly, an expense has been reflected for
financial reporting purposes as these shares became eligible for release. This
expense was a non-cash charge and did not affect working capital or total
stockholders' equity.
Compensation expense of $301,000 and $80,000 has been recorded for the nine
months ended September 30, 1996 and 1995, respectively, for the portion of the
60,000 shares that has become eligible for release under the Agreement. As of
September 30, 1996, all of the 400,000 shares under the Agreement have become
eligible for release.
NOTE 5 -- BUSINESS COMBINATION:
As of June 28, 1996, the Company purchased certain assets of Special
Finance, Inc., a Florida based automobile finance company ('SFI') pursuant to an
option agreement for a purchase price of $1 million, plus 125,000 shares of the
Company's Common Stock and options to purchase 65,000 shares of Common Stock at
an exercise price of $6.00 per share. An option price of $250,000 paid to SFI on
August 1, 1995 was credited against the purchase price. As a result of this
purchase, the Company recorded goodwill in the amount of $3.8 million.
NOTE 6 -- RECENT ACCOUNTING PRONOUNCEMENTS:
In October 1995, the Financial Accounting Standards Board ('FASB') issued
Statement of Financial Accounting Standards No. 123 ('SFAS No. 123'),
'Accounting for Stock-Based Compensation.' SFAS No. 123 establishes financial
accounting and reporting standards for stock-
F-26
<PAGE>
NAL FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6 -- RECENT ACCOUNTING PRONOUNCEMENTS: -- (CONTINUED)
based employee compensation plans. The statement defines a 'fair value based
method' of accounting for employee stock options or similar equity instruments
and encourages all entities to adopt that method of accounting for all of their
employee stock compensation plans. However, SFAS No. 123 also allows an entity
to continue to measure compensation costs for those plans using the 'intrinsic
value based method' of accounting, which the Company currently uses. The
accounting requirements of SFAS No. 123 are effective for transactions entered
into during fiscal years beginning after December 15, 1995. The disclosure
requirements are effective for financial statements for fiscal years beginning
after December 15, 1995, or for an earlier fiscal year for which SFAS No. 123 is
initially adopted for recognizing compensation cost. Management has determined
that the Company will continue to measure compensation costs using the
'intrinsic value based method' and will disclose the effect on net income and
earnings per share using the 'fair value based method' in the footnotes to the
Company's financial statements upon the adoption of SFAS No. 123.
In June 1996, the FASB issued Statement of Financial Accounting Standards
No. 125 ('SFAS No. 125'), 'Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities.' SFAS No. 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. SFAS No. 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. However, a proposal has recently been
developed to defer, for one year, certain provisions of SFAS No. 125. Management
is currently evaluating the impact of adoption of SFAS No. 125 on its financial
position and results of operations.
NOTE 7 -- SUBSEQUENT EVENTS:
On November 8, 1996, the Company filed a Registration Statement on Form
SB-2 (No. 333-15787) with the Securities and Exchange Commission relating to a
proposed public offering of 2,500,000 shares of Common Stock of which the
Company intends to issue and sell 2,000,000 shares and certain selling
stockholders intend to sell up to 500,000 shares. Net proceeds of the offering
will be used to support growth and for general corporate purposes, including
working capital and future acquisitions.
F-27
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY, ANY OF THE SELLING STOCKHOLDERS OR ANY OF THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF ANY OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON
STOCK OFFERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF ANY OFFER TO BUY THE SHARES OF COMMON STOCK BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH
THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO
ANY PERSON TO WHOM 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 TIME SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Available Information....................................... 2
Prospectus Summary.......................................... 3
Summary Financial Information............................... 7
Risk Factors................................................ 8
Use of Proceeds............................................. 15
Price Range of Common Stock................................. 16
Dividend Policy............................................. 16
Capitalization.............................................. 17
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 18
The Company................................................. 33
Management.................................................. 52
Certain Transactions........................................ 58
Principal Stockholders...................................... 60
Selling Stockholders........................................ 63
Description of Securities................................... 64
Shares Eligible for Future Sale............................. 70
Underwriting................................................ 71
Legal Matters............................................... 72
Statement of Indemnification................................ 72
Experts..................................................... 72
Additional Information...................................... 73
Index to Financial Statements............................... F-1
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2,500,000 Shares
[LOGO]
NAL FINANCIAL GROUP INC.
Common Stock
------------------------
PROSPECTUS
------------------------
PRUDENTIAL SECURITIES INCORPORATED
PIPER JAFFRAY INC.
SANDS BROTHERS & CO., LTD.
December , 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
The Company has adopted the provisions of Section 102(b)(7) of the
Delaware General Corporation Law (the "Delaware Act") which eliminate or limit
the personal liability of a director to the Company or its stockholders for
monetary damages for breach of fiduciary duty under certain circumstances.
Furthermore, under Section 145 of the Delaware Act, the Company may indemnify
each of its directors and officers against his expenses (including reasonable
costs, disbursements and counsel fees) in connection with any proceeding
involving such person by reason of his having been an officer or director to
the extent he acted in good faith and in a manner reasonably believed to be in,
or not opposed to, the best interest of the Company, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful. The determination of whether indemnification is proper under the
circumstances, unless made by a court, shall be determined by the Board of
Directors.
Reference is made to Item 28 for the undertakings of the Registrant
with respect to indemnification of liabilities arising under the Securities Act
of 1933, as amended (the "Securities Act").
Item 25. Other Expenses of Issuance and Distribution
The following is a list of the estimated expenses to be incurred by the
Registrant in connection with the preparation and filing of this Registration
Statement.
SEC Registration Fee................................ $ 11,217
Printing and Engraving.............................. 125,000
Accountants' Fees and Expenses...................... 100,000
Blue Sky Filing Fees and Expenses................... 20,000
NASD Filing Fee..................................... 4,202
Listing Fees........................................ 17,500
Legal Fees and Expenses............................. 272,081
Other Offering Expenses............................. 200,000
--------
TOTAL................. $750,000
========
Item 26. Recent Sales of Unregistered Securities
1. In December 1993, the Company sold 143,333 post-split shares of
Common Stock to Discretionary Investment Trust dated July 7, 1993 in
consideration for the purchase price of $100,000 plus certain valuable services
rendered. This sale was made in reliance on the exemption from registration
requirements provided by Section 4(2) of the Securities Act.
II-1
<PAGE>
2. During October 1994, the Company sold 714,999 shares of Common
Stock, $.15 par value, in private placement transactions exempt from
registration requirements under Section 4(2) of the Securities Act.
Number of Shares
Name of Common Stock Consideration
---- ---------------- -------------
Audley International 300,000 $48,600
Investments Limited
American Maple 333,333 $19,999
Leaf Financial
Corporation
Ernest and Kathy 19,166 $ 3,105
Bartlett
Kenneth A. Rosen 43,334 $ 7,020
SPH Investments
P/S Plan f/b/o 19,166 $ 3,105
Stephen P. Harrington
3. During November and December 1994, the Company sold 1,549,667 shares
of Common Stock, $.15 par value, to accredited and sophisticated investors in a
private placement transaction exempt from registration pursuant to Rule 506 of
Regulation D. In connection with this transaction, brokerage commissions of
$539,370 (6.5%) were paid. The following individuals purchased shares at $6.00:
Number of Shares
Name of Common Stock
Allen, Alvin 10,000
Alperin, David 3,375
Alperin, Judith 2,500
Alu, James M 9,000
Angiuli, Nick 154,696
Apothaker, Jonathan 875
Beckerman, Sam 3,500
Bellino, Michael/Supnick, Richard 2,500
Steven R. Blecker TTEE for Athanacia Bell Trust 4,000
Steven R. Blecker TTEE for Elizabeth Bell Trust 4,000
Block, Charles 2,500
Borenstein, Howard 2,500
Brennan, Quinn 3,375
The Bridge Fund 8,500
Brown Valet, Inc. 5,250
Button, Richard 7,000
Buck, Paul 5,000
Cantor, Michael 30,000
Chaiken, Carl 875
Cohen, Bernard 6,000
Cohen, Susan 2,500
Colon, Jose F 13,000
Costa, Neil and Ahrens, Lynne JTWROS 14,500
Cox, J. Douglas 3,500
Cox, Kathryn Retirement Trust 3,500
Diamond Import Group 3,500
II-2
<PAGE>
Diversified Securities Fund I, L.P. 3,500
Eugene M. Eisner MD PA Pension Trust 5,000
Fabrikant, Martin 2,500
Feldman, Joel & Shirley, JTWROS 1,750
Flam, Robert M 5,000
Foreman, Michael 3,000
Frankel, Richard 10,000
Garnick, Michael 100,000
Garnick, Richard 1,250
Gates, Andrew and Gloria 1,750
Genack, Menachem 875
GiroCredit Bank (Switzerland) A.G 17,500
Goldberg, Paul 3,500
Goldberg, Robert Theodore 3,500
Goldberg, Sheldon E. & Toni A 2,500
GOP Partners 17,000
Henderson, Marilyn 7,000
Hess, Julie 5,000
Hollander, Bernard 3,500
Interbanc Mortgage Services, Inc. 33,000
Jackenthal, Herb 875
Jeddi Limited 25,000
Joseph, Gerson 5,000
Josephart, Herbert Employee Defined 5,000
Benefit Pension Plan dtd 1/1/91
Herbert and Marcia Josephart TTEES
JRJ, Inc. 13,000
Kaplan, Charles 875
Kaplan, Susan 2,500
Karp, Florence c/f Penelope Karp and Athena Karp 12,500
Kaufman, Richard and Adrienne JTWROS 1,500
Lambert, Terrence 2,500
Lilly, Richard M 2,000
Linsker, Rita 3,500
Love, Douglas 5,000
Lucas, Russell 2,500
Luongo, Michael 875
Manheimer, Marvin 2,500
Marks, Mitchell 12,500
Masucci, Robert N., II 875
McCabe, William Dennis III 2,500
Miller, Alan I 50,000
Miller, Marc 5,000
Moorman, Jeffrey 3,500
Moriuchi, Takashi B 875
Morgenstern, Richard 4,000
Mousaieff, Yoram 7,000
MRS Investments 37,500
Najmy, Joseph 3,500
Nedwick, Robert & Barbara JTWROS 6,000
Pacht, Harvey & Joan 3,500
Prevor Marketing International Inc. 4,000
Rabin, Jeffrey 50,000
Rachenbach, Jack L 3,500
Rauseo, Mark 2,500
Rehcam Investments, LP 4,500
Rehcam Investments, NV 4,500
Reiff, Geraldine ttee, Carol Reiff Gottlieb 5,000
Co-ttee f/b/o Geraldine Reiff UAD 1/2/91
Rice, Howard T. Revocable Trust 3/10/76 3,500
Howard T. Rice TTEE
II-3
<PAGE>
Rice, Irving & Elaine, JTWROS 3,500
Rogoff, Ellen 1,750
Rogoff, Les 7,000
Rosen, Joseph 3,334
Rosen, Kenneth A 16,666
Rosen, Kenneth A. Pension Plan 20,000
Rosner, Anita 2,500
Sato, Ken 4,500
Schoenbaum, Jeff 10,000
Schnell, David 5,000
Schraub, Howard 10,658
Scinicariello, M 3,500
Serota, Marvin & Marsha 3,500
SGA Trading Corp. 4,000
Shapiro, Allan 10,000
Shotz, Steven & Barbara 3,500
Shrem, Bella 7,000
Sibco Partners 3,500
Silverman, Eugene 7,000
Slovin, Gilbert 438
Slovin, Joel 875
Smolen, Eric 6,000
Sorrentino, Andrew 5,250
Staller, Jerome 15,000
Stanley, Michael 5,000
Strassberg, David 5,000
Tupper, Ronald W 25,000
Van Brunt, Dwight S 5,000
Ward, Dean 4,250
Wray, Paul & Herron, Diane JTWROS 16,000
Yanni, Louis 2,500
The following individuals purchased shares at $4.00:
Jeffrey I. Binder
& Rosalie Binder 250,000
George A. Levin
& Gayla Sue Levin 250,000
II-4
<PAGE>
4. As of November 30, 1994, the Company issued a total of 3,160,000
shares of Common Stock, $.15 par value, to the stockholders set forth in the
table below in consideration for the exchange of 100% of the stock of NAL
Financial Group Inc., a Florida corporation.
Shares of
Name Common Stock
- ---- ------------
Edward M. Bartolini 50,000
Marcia G. Bartolini and Robert R.
Bartolini as co-trustees of the Marcia G.
Bartolini Revocable Trust dated July 27, 264,022
1992
Robert R. Bartolini and Marcia G.
Bartolini as co-trustees of the Robert R.
Bartolini Revocable Trust dated July 27, 1992 2,212,180
Robert J. Carlson 60,196
George Schnabel as trustee of the Robert
R. Bartolini and Marcia G. Bartolini
Irrevocable Trust dated July 27, 1992 264,022
John T. Schaeffer 309,580
The issuance of such shares was made in reliance on the exemption from
registration requirements provided by Section 4(2) of the Securities Act.
5. During the period from April 1995 through January 1996, the Company
sold $23,825,000 of 9% Convertible Subordinated Debenture Units in a private
placement transaction exempt from the registration requirements under Section
506 of Regulation D and Section 4(2) of the Securities Act, as set forth below.
Each Unit consists of a 9% Convertible Subordinated Debenture and common stock
purchase warrants as set forth below. In connection with this transaction,
brokerage commissions of $1,229,000 were paid.
Amount of Number of
Name Debenture Warrants
---- --------- ---------
American Maple Leaf $1,200,000 120,000
Financial Corporation
Gerald Appel $25,000 1,250
Myles Bass $925,000 64,750
$575,000 40,250
S. Beckerman $100,000 4,500
R. Button $100,000 4,500
Capital Growth Investment $50,000 5,000
Trust
Centaur Financial Corp. $100,000 10,000
Doug Cox $125,000 5,625
K. Cox $100,000 4,500
Discretionary Investment $900,000 90,000
Trust dated
July 7, 1993
Diversified Securities Fund I, L.P. $100,000 5,000
Equity Associates Corp. $50,000 5,000
FAC Enterprises $750,000 75,000
Bruce Ginsburg $250,000 25,000
II-5
<PAGE>
GRA Investments, Corp. $1,550,000 155,000
Michael Garnick $300,000 12,000
Norton Herrick $1,250,000 87,500
HMA Investments, Inc. $600,000 60,000
Profit Sharing f/b/o
Howard Appel
Interbanc Mortgage $200,000 9,000
Florence Karp as c/f $750,000 75,000
Penelope Karp,
Athena Karp,
Justine Karp, and
Ulysses Karp
Florence Karp $5,500,000 550,000
as c/f Penelope and Athena
Karp
Provence Holdings $625,000 56,250
Steven B. Rosner $250,000 25,000
Steven B. Rosner $150,000 15,000
Money Purchase Pension Plan
Rozel International $1,750,000 175,000
Holdings Limited $1,300,000 58,500
Martin Solomon $2,000,000 80,000
TGP Associates Limited Partnership $1,000,000 40,000
Westminster Capital, Inc. $1,250,000 87,500
6. During May 1995 and September 1995, the Company issued 190,000
common stock purchase warrants in connection with certain financial advisory
services provided, as follows:
Number of
Name Warrants Date of Grant
- ---- --------- -------------
American Maple Leaf Financial Corporation 33,000 May 4, 1995
Ernest & Kathy Bartlett 15,000 May 4, 1995
Centaur Financial Corporation 33,000 May 4, 1995
FAC Enterprises, Inc. 50,000 August 28, 1995
25,000 September 14, 1995
34,000 May 4, 1995
7. During August 1995, the Company sold 176,500 shares of Common Stock
in an offshore offering at a purchase price of $12.30 per share, for an
aggregate purchase price of $2,160,000, as set forth below. In connection with
this transaction, brokerage commissions of $70,000 were paid.
Name Shares of Common Stock
---- ----------------------
Everest Capital Investment, Ltd. 78,295
Everest Capital International, Ltd. 98,205
The issuance of such shares was exempt from registration pursuant to Regulation
S promulgated under the Act.
8. Effective as of April 23, 1996, the Company sold to Great American
Reserve Insurance Company and Beneficial Standard Life Insurance Company, as
wholly-owned subsidiaries of Conseco, Inc., $10,000,000 principal amount of 9%
Convertible Subordinated
II-6
<PAGE>
Debentures and issued 515,000 common stock purchase
warrants in a private placement transaction exempt from registration
requirements under Section 506 of Regulation D and Section 4(2) of the
Securities Act. In connection with this transaction, brokerage commissions and
investment banking fees of $550,000 and 160,000 common stock purchase warrants
were paid.
9. Effective as of September 12, 1996, the Company sold to Convertible
Holdings, Inc. and Merrill Lynch World Income Fund, Inc. $5,000,000 principal
amount of 10% Convertible Subordinated Debentures and issued 62,500 common
stock purchase warrants in a private placement transaction exempt from
registration requirements under Section 506 of Regulation D and Section 4(2) of
the Securities Act. In connection with this transaction, brokerage commissions
of $300,000 were paid.
Item 27. Exhibits
The following Exhibits are filed as part of this Report:
<TABLE>
<CAPTION>
Exhibit No. Description Method of Filing
- ----------- ----------- ----------------
<S> <C> <C>
1.1 Form of Underwriting Agreement Filed herewith
between the Registrant and
Prudential Securities
Incorporated, Piper Jaffray
Inc. and Sands Brothers & Co.,
Ltd.
2.1 Merger Agreement between the Incorporated by reference to
shareholders of NAL Financial Exhibit 2.1 to the
Group Inc., NAL Financial Registrant's Form 8-K filed
Group Inc., and the Registrant under the Exchange Act on
dated October 4, 1994 and as December 8, 1994 (the "Form
amended, November 30, 1994 8-K")
3.1 Certificate of Incorporation Incorporated by reference to
of the Registrant, as amended Exhibit 3.1 to the
December 1, 1994 Registrant's Registration
Statement on Form SB-2 filed
under the Securities Act on
January 31, 1995, Registration
No. 33-88966 (the "January
1995 Registration Statement")
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description Method of Filing
- ----------- ----------- ----------------
<S> <C> <C>
3.2 Certificate of Amendment to Incorporated by reference to
Certificate of Incorporation Exhibit 3.3 to the
of the Registrant dated May Registrant's Quarterly Report
31, 1996 on Form 10-QSB for the period
ended June 30, 1996 ("June
1996 10-QSB")
3.3 Amended and Restated Bylaws of Incorporated by reference to
the Registrant dated May 31, Exhibit 3.4 to the June 1996
1996 10-QSB
4.1 Copy of Specimen Common Stock Incorporated by reference to
Certificate Exhibit 4.1 to the January
1995 Registration Statement
4.2 Form of 9% Subordinated Incorporated by reference to
Convertible Debenture Exhibit 4.2 to the
Registration Statement on Form
SB-2, Registration No.
33-97948, filed on October 25,
1995 (the "October 1995
Registration Statement")
4.3 Form of Common Stock Incorporated by reference to
Purchase Warrant Exhibit 4.3 to the October
1995 Registration Statement
4.4 Form of Common Stock Purchase Incorporated by reference to
Warrant Exhibit 4.4 of the October
1995 Registration Statement
4.5 Securities Purchase Agreement Incorporated by reference to
between NAL Financial Group Exhibit 4.5 to the
Inc., Beneficial Standard Life Registrant's Quarterly Report
Insurance Company and Great on Form 10-QSB for the period
American Reserve Insurance ended March 31, 1996 ("March
Company dated as of April 23, 1996 10-QSB")
1996
4.6 9% Subordinated Convertible Incorporated by reference to
Debenture in the principal Exhibit 4.12 to the March 1996
amount of $5,000,000 payable 10-QSB
to Great American Reserve
Insurance Company
</TABLE>
II-8
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description Method of Filing
- ----------- ----------- ----------------
<S> <C> <C>
4.7 9% Subordinated Convertible Incorporated by reference to
Debenture in the principal Exhibit 4.7 to the March 1996
amount of $5,000,000 payable 10-QSB
to Beneficial Standard Life
Insurance Company
4.8 Common Stock Purchase Warrant Incorporated by reference to
granted to Conseco, Inc. Exhibit 4.8 to the March 1996
($12.625) 10-QSB
4.9 Common Stock Purchase Warrant Incorporated by reference to
granted to Conseco, Inc. Exhibit 4.9 to the March 1996
($14.52) 10-QSB
4.10 Stockholders' Agreement Incorporated by reference to
entered into as of April 23, Exhibit 4.10 to the March 1996
1996 among NAL Financial Group 10-QSB
Inc., Beneficial Standard Life
Insurance Company and Great
American Reserve Insurance
Company
4.11 Registration Rights Agreement Incorporated by reference to
between NAL Financial Group Exhibit 4.11 to the March 1996
Inc. and Conseco, Inc. 10-QSB
4.12 Registration Rights Agreement Incorporated by reference to
between NAL Financial Group Exhibit 4.12 to the March 1996
Inc., Beneficial Standard Life 10-QSB
Insurance Company and Great
American Reserve Life
Insurance Company
4.13 Form of Amended and Restated Incorporated by reference to
Registration Rights Agreement Exhibit 4.13 to the June 1996
10-QSB
4.14 Securities Purchase Agreement Incorporated by reference to
between NAL Financial Group Exhibit 4.14 to the
Inc. and Merrill Lynch World Registrant's Quarterly Report
Income Fund, Inc. and on Form 10-QSB for the period
Convertible Holdings, Inc. ended September 30, 1996
dated September 12, 1996 ("September 1996 10-QSB")
4.15 10% Subordinated Convertible Incorporated by reference to
Debenture in the principal Exhibit 4.15 to the September
amount of $2,250,000 payable 1996 10-QSB
to Bridge Rope & Co.
</TABLE>
II-9
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description Method of Filing
- ----------- ----------- ----------------
<S> <C> <C>
4.16 10% Subordinated Convertible Incorporated by reference to
Debenture in the principal Exhibit 4.16 to the September
amount of $2,750,000 payable 1996 10-QSB
to Kane & Co.
4.17 Common Stock Purchase Warrant Incorporated by reference to
granted to Bridge Rope & Co. Exhibit 4.17 to the September
($13.92) 1996 10-QSB
4.18 Common Stock Purchase Warrant Incorporated by reference to
granted to Kane & Co. ($13.92) Exhibit 4.18 to the September
1996 10-QSB
4.19 Registration Rights Agreement Incorporated by reference to
between NAL Financial Group Exhibit 4.19 to the September
Inc. and Merrill Lynch World 1996 10-QSB
Income Fund, Inc. and
Convertible Holdings, Inc.
dated September 12, 1996
5.1 Opinion of Buchanan Ingersoll Filed herewith
Professional Corporation
9.1 Voting Trust Agreement by and Incorporated by reference to
among English, McCaughan & Exhibit 2.2 to the Form 8-K
O'Bryan, P.A., John T.
Schaeffer, Robert J. Carlson
and The Robert R. Bartolini
Trust, dated November 30, 1994
10.1 Loan and Security Agreement Incorporated by reference to
between Congress Financial Exhibit 10.2 to the January
Corporation and the Registrant 1995 Registration Statement
dated March 16, 1993
10.2 Program Agreement between NAL Incorporated by reference to
Acceptance Corporation and Exhibit 10.3 to the October
General Electric Capital Auto 1995 Registration Statement
Lease, Inc. dated July 1, 1995
</TABLE>
II-10
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description Method of Filing
- ----------- ----------- ----------------
<S> <C> <C>
10.3 Amended and Restated Loan and Incorporated by reference to
Security Agreement between Exhibit 10.4 to the January
General Electric Capital 1995 Registration Statement
Corporation and NAL Acceptance
Corporation dated September
28, 1994
10.4 Loan Purchase Agreement Incorporated by reference to
between Fairfax Savings Bank Exhibit 10.5 to the January
and the Registrant dated 1995 Registration Statement
October 6, 1994
10.5 Participation Agreement Incorporated by reference to
between Fairfax Savings, FSB Exhibit 10.6 to the January
and NAL Acceptance Corporation 1995 Registration Statement
dated December 14, 1993
10.6 Employment Agreement by and Incorporated by reference to
between the Registrant and Exhibit 10.7 to the October
Robert R. Bartolini dated 1995 Registration Statement
November 30, 1994
10.7 Lease Agreement by and between Incorporated by reference to
NAL Acceptance Corporation and Exhibit 10.8 to the October
The Northwestern Mutual Life 1995 Registration Statement
Insurance Company dated
October 2, 1991, as modified
by Lease Modification
Agreement #1 dated February
18, 1994 and Lease
Modification Agreement #2
dated January 20, 1995
10.8 Lease Agreement by and between Incorporated by reference to
NAL Acceptance Corporation and Exhibit 10.9 to the October
The Northwestern Mutual Life 1995 Registration Statement
Insurance Company dated June
7, 1994 as modified by Lease
Modification Agreement #1
dated June 28, 1994, Lease
Modification Agreement #2
dated December 1, 1994 and
Lease Modification Agreement
#3 dated January 20, 1995
</TABLE>
II-11
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description Method of Filing
- ----------- ----------- ----------------
<S> <C> <C>
10.9 Modification Agreement # 4 Incorporated by reference to
dated July 1, 1995 to Lease Exhibit 10.10 to the October
Agreement by and between NAL 1995 Registration Statement
Acceptance Corporation and the
Northwestern Mutual Life
Insurance Company dated June
7, 1994
10.10 Master Repurchase Agreement Incorporated by reference to
between Greenwich Capital Exhibit 10.13 to the October
Financial Products, Inc. and 1995 Registration Statement
Autorics, Inc. dated September
5, 1995
10.11 Option to Purchase Assets of Incorporated by reference to
Special Finance, Inc. dated Exhibit 10.14 to the October
August 1, 1995 1995 Registration Statement
10.12 Receivables Purchase Agreement Incorporated by reference to
among NAL Acceptance Exhibit 10.15 to
Corporation, Autorics II, Inc. Post-Effective Amendment No. 1
and Autorics, Inc. dated to the October 1995
December 1, 1995 Registration Statement
10.13 Sale and Servicing Agreement Incorporated by reference to
among NAL Auto Trust 1995-1 Exhibit 10.16 to
and Autorics II, Inc., NAL Post-Effective Amendment No. 1
Acceptance Corporation and to the October 1995
Bankers Trust Company dated Registration Statement
December 1, 1995
10.14 Indenture between NAL Auto Incorporated by reference to
Trust 1995-1 and Bankers Trust Exhibit 10.17 to
Company dated December 1, 1995 Post-Effective Amendment No. 1
to the October 1995
Registration Statement
</TABLE>
II-12
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description Method of Filing
- ----------- ----------- ----------------
<S> <C> <C>
10.15 Administration Agreement among Incorporated by reference to
NAL Auto Trust 1995-1, NAL Exhibit 10.18 to
Acceptance Corporation, and Post-Effective Amendment No. 1
Bankers Trust Company dated to the October 1995
December 1, 1995 Registration Statement
10.16 Trust Agreement between Incorporated by reference to
Autorics II, Inc. and Exhibit 10.19 to
Wilmington Trust dated Post-Effective Amendment No. 1
December 1, 1995 to the October 1995
Registration Statement
10.17 Certificate Purchase Agreement Incorporated by reference to
between Autorics II, Inc. and Exhibit 10.20 to
NAL Acceptance Corporation Post-Effective Amendment No. 1
dated December 20, 1995 to the October 1995
Registration Statement
10.18 Note Purchase Agreement Incorporated by reference to
between Autorics II, Inc. and Exhibit 10.21 to
NAL Acceptance Corporation Post-Effective Amendment No. 1
dated December 20, 1995 to the October 1995
Registration Statement
10.19 Receivables Purchase Agreement Incorporated by reference to
among NAL Acceptance Exhibit 10.25 to the March
Corporation, Autorics, Inc. 1996 10-QSB
and Autorics II, Inc. dated as
of March 8, 1996
10.20 Sales and Servicing Agreement Incorporated by reference to
among NAL Auto Trust 1996-1, Exhibit 10.26 to the March
Autorics II, Inc., NAL 1996 10-QSB
Acceptance Corporation and
Bankers Trust Company dated as
of March 8, 1996
10.21 Indenture between NAL Auto Incorporated by reference to
Trust 1996-1 and Bankers Trust Exhibit 10.27 to the March
Company dated as of March 8, 1996 10-QSB
1996
10.22 Trust Agreement between Incorporated by reference to
Autorics II, Inc. and Exhibit 10.28 to the March
Wilmington Trust Company dated 1996 10-QSB
as of March 8, 1996
</TABLE>
II-13
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description Method of Filing
- ----------- ----------- ----------------
<S> <C> <C>
10.23 Administration Agreement among Incorporated by reference to
NAL Auto Trust 1996-2, NAL Exhibit 10.29 to the June 1996
Acceptance Corporation, and 10-QSB
Bankers Trust Company dated
June 17, 1996
10.24 Receivables Purchase Agreement Incorporated by reference to
among NAL Acceptance Exhibit 10.30 to the June 1996
Corporation, Autorics, Inc. 10-QSB
and Autorics II, Inc. dated as
of June 17, 1996
10.25 Sales and Servicing Agreement Incorporated by reference to
among NAL Auto Trust 1996-2, Exhibit 10.31 to the June 1996
Autorics II, Inc., NAL 10-QSB
Acceptance Corporation and
Bankers Trust Company dated as
of June 17, 1996
10.26 Indenture between NAL Auto Incorporated by reference to
Trust 1996-2 and Bankers Trust Exhibit 10.32 to the June 1996
Company dated as of June 17, 10-QSB
1996
10.27 Trust Agreement between Incorporated by reference to
Autorics II, Inc. and Exhibit 10.33 to the June 1996
Wilmington Trust Company dated 10-QSB
as of June 17, 1996
10.28 Amended and Restated 1994 Incorporated by reference to
Stock Option Plan of the Exhibit 3 to the Registrant's
Registrant Proxy Statement filed under
the Exchange Act on May 2,
1996
10.29 Administration Agreement among Incorporated by reference to
NAL Auto Trust 1996-3, NAL Exhibit 10.32 to the September
Acceptance Corporation and 1996 10-QSB
Bankers Trust Company dated as
of September 11, 1996
10.30 Receivables Purchase Agreement Incorporated by reference to
among NAL Acceptance Exhibit 10.33 to the September
Corporation, Autorics, Inc. 1996 10-QSB
and Autorics II, Inc. dated as
of September 11, 1996
</TABLE>
II-14
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description Method of Filing
- ----------- ----------- ----------------
<S> <C> <C>
10.31 Sale and Servicing Agreement Incorporated by reference to
among NAL Auto Trust 1996-3, Exhibit 10.34 to the September
Autorics II, Inc., NAL 1996 10-QSB
Acceptance Corporation and
Bankers Trust Company dated as
of September 11, 1996
10.32 Indenture between NAL Auto Incorporated by reference to
Trust 1996-3 and Bankers Trust Exhibit 10.35 to the September
Company dated as of September 1996 10-QSB
11, 1996
10.33 Trust Agreement between Incorporated by reference to
Autorics II, Inc. and Exhibit 10.36 to the September
Wilmington Trust Company dated 1996 10-QSB
as of September 11, 1996
10.34 Form of Custody Agreement and Filed herewith
Power of Attorney between each
Selling Stockholder, Robert R.
Bartolini as Attorney-in-Fact
and Stock Trans, Inc. as
Custodian
10.35 Form of Lock-Up Agreement Filed herewith
between certain Debenture
holders and certain Warrant
holders and Prudential
Securitied Incorporated, Piper
Jaffray Inc. and Sands
Brothers & Co., Ltd.
11 Statement re: computation of Incorporated by reference to
per share earnings Exhibit 11 to the September
1996 10-QSB
21 Subsidiaries of the Registrant Incorporated by reference to
Exhibit 21 to the November
1996 Registration Statement
23.1 Consent of Buchanan Ingersoll Included within Exhibit 5.1
Professional Corporation hereto
23.2 Consent of Price Waterhouse Filed herewith
LLP
</TABLE>
Item 28. Undertakings
The undersigned Registrant hereby undertakes:
1. To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement to: (i) include any
prospectus required by Section 10(a)(3) of the Securities Act; (ii) reflect in
the prospectus any facts or events which, individually or together, represent a
fundamental change in the information in the registration statement; and (iii)
include any additional or changed material information on the plan of
distribution.
2. For the purpose of determining liability under the Securities Act,
each post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
II-15
<PAGE>
3. To file a post-effective amendment to remove from registration any
of the securities being registered that remain unsold at the termination of the
offering.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in a successful defense of any action, suit or
proceeding) is asserted by a director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
II-16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securitites Act of 1933, the
Company certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and has duly caused this
Pre-effective Amendment No. 1 to the Registrant's Registration Statement of
Form SB-2 to be signed on its behalf by the undersigned, thereunto authorized
on November 20, 1996.
NAL FINANCIAL GROUP INC.
By: /s/ Robert R. Bartolini
--------------------------------
Robert R. Bartolini
Chairman of the Board, President
and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below under the heading "Signatures" constitutes and appoints ROBERT R.
BARTOLINI his true and lawful attorney-in-fact and agent with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities to sign any or all amendments to this Registration
Statement, and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorney-in-fact and agent full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about
the premises, as fully for all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and
agent or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Pre-effective Amendment No. 1 to the Registrant's Registration Statement on
Form SB-2 was signed by the following persons in the capacities and on the
dates stated.
Signature Title Date
- --------- ----- ----
/s/ Robert R. Bartolini Chairman of the Board November 20, 1996
- ------------------------- President and Chief
Robert R. Bartolini Executive Officer
(Principal Executive
Officer)
/s/ Robert J. Carlson Vice President (Principal November 20, 1996
- ------------------------- Accounting Officer)
Robert J. Carlson
/s/ John T. Schaeffer Director November 20, 1996
- -------------------------
John T. Schaeffer
/s/ Ngaire E. Cunco Director November 20, 1996
- -------------------------
Ngaire E. Cunco
/s/ James F. DeVoe Director November 20, 1996
- -------------------------
James F. DeVoe
/s/ David R. Jones Director November 20, 1996
- -------------------------
David R. Jones
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description Page
- ----------- ----------- ----
<S> <C> <C>
1.1 Underwriting Agreement
5.1 Opinion of Buchanan Ingersoll
Professional Corporation
10.34 Form of Custody Agreement and
Power of Attorney between each
Selling Stockholder, Robert R.
Bartolini Attorney-in-Fact and
Stock Trans, Inc. as Custodian
10.35 Form of Lock-Up Agreement
between certain Debenture
holders and certain Warrant
holders and Prudential
Securitied Incorporated, Piper
Jaffray Inc. and Sands
Brothers & Co., Ltd.
23.2 Consent of Price Waterhouse LLP
</TABLE>
<PAGE>
NAL FINANCIAL GROUP INC.
2,500,000 Shares*
Common Stock
UNDERWRITING AGREEMENT
_____________, 1996
PRUDENTIAL SECURITIES INCORPORATED
PIPER JAFFRAY INC.
SANDS BROTHERS & CO., LTD.
As Representatives of the several Underwriters
c/o Prudential Securities Incorporated
One New York Plaza
New York, New York 10292
Dear Sirs:
NAL Financial Group Inc., a Delaware corporation (the
"Company"), and the stockholders of the Company named in Schedule 2 hereto (the
"Selling Stockholders") hereby confirm their respective agreements with the
several underwriters named in Schedule 1 hereto (the "Underwriters"), for whom
you have been duly authorized to act as representatives (in such capacities, the
"Representatives"), as set forth below. If you are the only Underwriters, all
references herein to the Representatives shall be deemed to be to the
Underwriters.
1. Securities. Subject to the terms and conditions herein
contained, the Company proposes to issue and sell to the several Underwriters an
aggregate of 2,218,855 shares (the "Company's Firm Securities") of the Company's
Common Stock, par value $0.15 per share ("Common Stock") and the Selling
Stockholders severally (and not jointly) propose to sell to the several
Underwriters an aggregate of 218,145 shares of Common Stock (the "Selling
Stockholders' Firm Securities") as indicated on Schedule 2 hereto. Collectively,
the Company's Firm Securities and the Selling Stockholders' Firm Securities are
hereinafter referred to as the "Firm Securities." The Company also proposes to
issue and sell to the several Underwriters not more than 375,000 additional
shares of Common Stock in the aggregate if requested by the Representatives as
provided in Section 3 of this Agreement. Any and all shares of Common Stock to
be purchased by the Underwriters pursuant to such option are referred to herein
as the "Option Securities", and the Firm Securities and any Option Securities
are collectively referred to herein as the "Securities".
- ---------------
* Plus an option to purchase fom NAL Financial Group Inc. up to an aggregate
of 375,000 additional shares to cover over-allotments.
<PAGE>
2. Representations and Warranties.
(a) The Company represents and warrants to, and agrees with,
each of the several Underwriters as set forth below in this Section 2:
(i) The Company meets the requirements for use of
Form SB-2 under the Securities Act of 1933, as amended (the "Act"). A
registration statement on such Form (File No. ) with respect to the
Securities, including a prospectus subject to completion, has been
filed by the Company with the Securities and Exchange Commission (the
"Commission") under the Act, and one or more amendments to such
registration statement may have been so filed. After the execution of
this Agreement, the Company will file with the Commission either (A) if
such registration statement, as it may have been amended, has been
declared by the Commission to be effective under the Act, either (i) if
the Company relies on Rule 434 under the Act, a Term Sheet (as
hereinafter defined) relating to the Securities, that shall identify
the Preliminary Prospectus (as hereinafter defined) that it
supplements, containing such information as is required or permitted by
Rule 434, 430A and 424(b) under the Act or (ii) if the Company does not
rely on Rule 434 under the Act, a prospectus in the form most recently
included in an amendment to such registration statement (or, if no such
amendment shall have been filed, in such registration statement), with
such changes or insertions as are required by Rule 430A under the Act
or permitted by Rule 424(b) under the Act, and in the case of clause
(A)(i) or (A)(ii) of this sentence as have been provided to and
approved by the Representatives prior to the execution of this
Agreement, or (B) if such registration statement, as it may have been
amended, has not been declared by the Commission to be effective under
the Act, an amendment to such registration statement, including a form
of prospectus, a copy of which amendment has been furnished to and
approved by the Representatives prior to the execution of this
Agreement. The Company may also file a related registration statement
with the Commission pursuant to Rule 462(b) under the Act for the
purpose of registering certain additional Securities, which
registration shall be effective upon filing with the Commission. As
used in this Agreement, the term "Original Registration Statement"
means the registration statement initially filed relating to the
Securities, as amended at the time when it was or is declared
effective, including (A) all financial schedules and exhibits thereto,
(B) all documents (or portions thereof) incorporated by reference
therein filed under the Securities Exchange Act of 1934, as amended
(the "Exchange Act") and (C) any information omitted therefrom pursuant
to Rule 430A under the Act and included in the Prospectus (as
hereinafter defined); the term "Rule 462(b) Registration Statement"
means any registration statement filed with the Commission pursuant to
Rule 462(b) under the Act (including the Registration Statement and any
Preliminary Prospectus or Prospectus incorporated therein at the time
such Registration Statement becomes effective); the term "Registration
Statement" includes both the Original Registration Statement and any
Rule 462(b) Registration Statement; the term "Preliminary Prospectus"
means each prospectus subject to completion filed with such
registration statement or any amendment thereto (including the
prospectus subject to completion, if any, included in the Registration
Statement or any amendment thereto at the time it was or is declared
effective), including all documents (or portions thereof) incorporated
by reference therein filed under the Exchange Act; the term
"Prospectus" means: (1) if the Company relies on Rule 434 under the
2
<PAGE>
Act, the Term Sheet relating to the Securities that is first
filed pursuant to Rule 424(b)(7) under the Act, together with
the preliminary Prospectus identified therein that such Term
Sheet supplements; (2) if the Company does not rely on Rule 434
under the Act, the prospectus first filed with the Commission
pursuant to Rule 424(b) under the Act; or (3) if the Company
does not rely on Rule 434 under the Act and if no prospectus is
required to be filed pursuant to Rule 424(b) under the Act, the
prospectus included in the Registration Statement, including,
in the case of clauses (1), (2) or (3) of this sentence, all
documents (or portions thereof) incorporated by reference
therein filed under the Exchange Act; and the term "Term Sheet"
means any term sheet that satisfies the requirements of Rule
434 under the Act. Any reference in this Agreement to an
"amendment or supplement" to any Preliminary Prospectus or the
Prospectus or an "amendment" to any registration statement
(including the Registration Statement) shall be deemed to
include any document incorporated by reference therein that is
filed with the Commission under the Exchange Act after the date
of such Preliminary Prospectus, Prospectus or registration
statement, as the case may be. Any reference herein to the
"date" of a Prospectus that includes a Term Sheet shall mean
the date of such Term Sheet. For purposes of the preceding
sentence, any reference to the "effective date" of an amendment
to a registration statement shall, if such amendment is
effected by means of the filing with the Commission under the
Exchange Act of a document incorporated by reference in such
registration statement, be deemed to refer to the date on which
such document was so filed with the Commission.
(ii) The Commission has not issued any order
preventing or suspending the use of any Preliminary Prospectus. When
any Preliminary Prospectus was filed with the Commission it
(A) contained all statements required to be stated therein in
accordance with, and complied in all material respects with the
requirements of, the Act, the Exchange Act and the respective rules and
regulations of the Commission thereunder and (B) did not include any
untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. When the
Registration Statement or any amendment thereto was or is declared
effective, it (A) contained or will contain all statements required to
be stated therein in accordance with, and complied or will comply in
all material respects with the requirements of, the Act, the Exchange
Act and the respective rules and regulations of the Commission
thereunder and (B) did not or will not include any untrue statement of
a material fact or omit to state any material fact necessary to make
the statements therein not misleading. When the Prospectus or any Term
Sheet that is a part thereof or any amendment or supplement to the
Prospectus is filed with the Commission pursuant to Rule 424(b) (or, if
the Prospectus or part thereof or such amendment or supplement is not
required to be so filed, when the Registration Statement or the
amendment thereto containing such amendment or supplement to the
Prospectus was or is declared effective), on the date when the
Prospectus is otherwise amended or supplemented and on the Firm Closing
Date and any Option Closing Date (both as hereinafter defined), the
Prospectus, as amended or supplemented at any such time, (A) contained
or will contain all statements required to be stated therein in
accordance with, and
3
<PAGE>
complied or will comply in all material respects with the requirements
of, the Act, the Exchange Act and the respective rules and regulations
of the Commission thereunder and (B) did not or will not include any
untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. The foregoing
provisions of this paragraph (ii) do not apply to statements or
omissions made in any Preliminary Prospectus, the Registration
Statement or any amendment thereto or the Prospectus or any amendment
or supplement thereto in reliance upon and in conformity with written
information furnished to the Company by any Underwriter through the
Representatives specifically for use therein.
(iii) If the Company has elected to rely on Rule
462(b) and the Rule 462(b) Registration has not been declared effective
(A) the Company has filed a Rule 462(b) Registration Statement in
compliance with and that is effective upon filing pursuant to Rule
462(b) and has received confirmation of its receipt and (B) the Company
has given irrevocable instructions for transmission of the applicable
filing fee in connection with the filing of the Rule 462(b)
Registration Statement, in compliance with Rule 111 promulgated under
the Act or the Commission has received payment of such filing fee.
(iv) The Company and each of its subsidiaries have
been duly organized and are validly existing as corporations in good
standing under the laws of their respective jurisdictions of
incorporation and are duly qualified to transact business as foreign
corporations and are in good standing under the laws of all other
jurisdictions where the ownership or leasing of their respective
properties or the conduct of their respective businesses requires such
qualification, except where the failure to be so qualified does not
amount to a material liability or disability to the Company and its
subsidiaries, taken as a whole.
(v) The Company and each of its subsidiaries have
full power (corporate and other) to own or lease their respective
properties and conduct their respective businesses as described in the
Registration Statement and the Prospectus (or, if the Prospectus is not
in existence, the most recent Preliminary Prospectus); and the Company
has full power (corporate and other) to enter into this Agreement and
to carry out all the terms and provisions hereof to be carried out by
it.
(vi) The issued shares of capital stock of each of
the Company's subsidiaries have been duly authorized and validly
issued, are fully paid and nonassessable and, except for directors'
qualifying shares and as otherwise set forth in the Prospectus (or, if
the Prospectus is not in existence, the most recent Preliminary
Prospectus), are owned beneficially by the Company free and clear of
any security interests, liens, encumbrances, equities or claims.
(vii) The Company has an authorized, issued and
outstanding capitalization as set forth in the Prospectus or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus.
All of the issued shares of capital stock of the Company have been duly
authorized and validly issued and are fully paid and nonassessable. The
4
<PAGE>
Firm Securities and the Option Securities have been duly authorized and
at the Firm Closing Date or the related Option Closing Date (as the
case may be), after payment therefor in accordance herewith, will be
validly issued, fully paid and nonassessable. No holders of outstanding
shares of capital stock of the Company are entitled as such to any
preemptive or other rights to subscribe for any of the Securities, and
no holder of securities of the Company has any right which has not been
fully exercised or waived to require the Company to register the offer
or sale of any securities owned by such holder under the Act in the
public offering contemplated by this Agreement.
(viii) No options or rights by the Company to
acquire Common Stock have been exercised since ________________.
(ix) The capital stock of the Company conforms to
the description thereof contained in the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary
Prospectus).
(x) Except as disclosed in the Prospectus (or, if
the Prospectus is not in existence, the most recent Preliminary
Prospectus), there are no outstanding (A) securities or obligations of
the Company or any of its subsidiaries convertible into or exchangeable
for any capital stock of the Company or any such subsidiary,
(B) warrants, rights or options to subscribe for or purchase from the
Company or any such subsidiary any such capital stock or any such
convertible or exchangeable securities or obligations, or
(C) obligations of the Company or any such subsidiary to issue any
shareS of capital stock, any such convertible or exchangeable
securities or obligations, or any such warrants, rights or options.
(xi) The consolidated financial statements and
schedules of the Company and its consolidated subsidiaries included in
the Registration Statement and the Prospectus (or, if the Prospectus is
not in existence, the most recent Preliminary Prospectus) fairly
present the financial position of the Company and its consolidated
subsidiaries and the results of operations and changes in financial
condition as of the dates and periods therein specified. Such financial
statements and schedules have been prepared in accordance with
generally accepted accounting principles consistently applied
throughout the periods involved (except as otherwise noted therein).
The selected financial data set forth under the caption "Selected
Financial Information" in the Prospectus (or, if the Prospectus is not
in existence, the most recent Preliminary Prospectus) fairly present,
on the basis stated in the Prospectus (or such Preliminary Prospectus),
the information included therein.
(xii) Price Waterhouse LLP, who have certified
certain financial statements of the Company and its consolidated
subsidiaries and delivered their report with respect to the audited
consolidated financial statements and schedules included in the
Registration Statement and the Prospectus (or, if the Prospectus is not
in existence, the most recent Preliminary Prospectus), are independent
public accountants as required by the Act, the Exchange Act and the
applicable rules and regulations thereunder.
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(xiii) The execution and delivery of this Agreement
have been duly authorized by the Company and this Agreement has been
duly executed and delivered by the Company, and is the valid and
binding agreement of the Company, enforceable against the Company in
accordance with its terms.
(xiv) No legal or governmental proceedings are
pending to which the Company or any of its subsidiaries is a party or
to which the property of the Company or any of its subsidiaries is
subject that are required to be described in the Registration Statement
or the Prospectus and are not described therein (or, if the Prospectus
is not in existence, the most recent Preliminary Prospectus), and no
such proceedings have been threatened against the Company or any of its
subsidiaries or with respect to any of their respective properties; and
no contract or other document is required to be described in the
Registration Statement or the Prospectus or to be filed as an exhibit
to the Registration Statement that is not described therein (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus)
or filed as required.
(xv) The issuance, offering and sale of the
Securities to the Underwriters by the Company pursuant to this
Agreement, the compliance by the Company with the other provisions of
this Agreement and the consummation of the other transactions herein
contemplated do not (A) require the consent, approval, authorization,
registration or qualification of or with any governmental authority,
except such as have been obtained, such as may be required under state
securities or blue sky laws and, if the registration statement filed
with respect to the Securities (as amended) is not effective under the
Act as of the time of execution hereof, such as may be required (and
shall be obtained as provided in this Agreement) under the Act, or
(B) conflict with or result in a breach or violation of any of the
terms and provisions of, or constitute a default under, any indenture,
mortgage, deed of trust, lease or other agreement or instrument to
which the Company or any of its subsidiaries is a party or by which the
Company or any of its subsidiaries or any of their respective
properties are bound, or the charter documents or by-laws of the
Company or any of its subsidiaries, or any statute or any judgment,
decree, order, rule or regulation of any court or other governmental
authority or any arbitrator applicable to the Company or any of its
subsidiaries.
(xvi) Subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus
(or, if the Prospectus is not in existence, the most recent Preliminary
Prospectus), neither the Company nor any of its subsidiaries has
sustained any material loss or interference with their respective
businesses or properties from fire, flood, hurricane, accident or other
calamity, whether or not covered by insurance, or from any labor
dispute or any legal or governmental proceeding and there has not been
any material adverse change, or any development involving a prospective
material adverse change, in the condition (financial or otherwise),
management, business prospects, net worth, or results of operations of
the Company or any of its subsidiaries, except in each case as
described in or contemplated by the Prospectus or, if the Prospectus is
not in existence, the most recent Preliminary Prospectus.
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(xvii) The Company has not, directly or indirectly,
(A) taken any action designed to cause or to result in, or that has
constituted or which might reasonably be expected to constitute, the
stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Securities or (B) since
the filing of the Registration Statement (1) sold, bid for, purchased,
or paid anyone any compensation for soliciting purchases of, the
Securities or (2) paid or agreed to pay to any person any compensation
for soliciting another to purchase any other securities of the Company
(except for the sale of Securities by the Selling Stockholders under
this Agreement).
(xviii) The Company has not distributed and, prior
to the later of (A) the Closing Date and (B) the completion of the
distribution of the Securities, will not distribute any offering
material in connection with the offering and sale of the Securities
other than the Registration Statement or any amendment thereto, any
Preliminary Prospectus or the Prospectus or any amendment or supplement
thereto, or other materials, if any, permitted by the Act.
(xix) The Company and each of its subsidiaries have
good and marketable title in fee simple to all items of real property
and marketable title to all personal property owned by each of them, in
each case free and clear of any security interests, liens,
encumbrances, equities, claims and other defects, except such as do not
materially and adversely affect the value of such property and do not
interfere with the use made or proposed to be made of such property by
the Company or such subsidiary, and any real property and buildings
held under lease by the Company or any such subsidiary are held under
valid, subsisting and enforceable leases, with such exceptions as are
not material and do not interfere with the use made or proposed to be
made of such property and buildings by the Company or such subsidiary,
in each case except as described in or contemplated by the Prospectus
(or, if the Prospectus is not in existence, the most recent Preliminary
Prospectus).
(xx) No labor dispute with the employees of the
Company or any of its subsidiaries exists or, to the best of the
Company's knowledge, is threatened or imminent that could result in a
material adverse change in the condition (financial or otherwise),
business prospects, net worth or results of operations of the Company
and its subsidiaries, except as described in or contemplated by the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus).
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<PAGE>
(xxi) The Company and its subsidiaries own, possess
or have the right to use, or can acquire on reasonable terms, all
material patents, patent applications, trademarks, service marks, trade
names, licenses, copyrights and proprietary or other confidential
information currently employed by them in connection with their
respective businesses, and neither the Company nor any such subsidiary
has received any notice of infringement of or conflict with asserted
rights of any third party with respect to any of the foregoing which,
singly or in the aggregate, if the subject of an unfavorable decision,
ruling or finding, could result in a material adverse change in the
condition (financial or otherwise), business prospects, net worth or
results of operations of the Company and its subsidiaries, except as
described in or contemplated by the Prospectus (or, if the Prospectus
is not in existence, the most recent Preliminary Prospectus).
(xxii) The Company and each of its subsidiaries are
insured by insurers of recognized financial responsibility against such
losses and risks and in such amounts as are prudent and customary in
the businesses in which they are engaged; neither the Company nor any
such subsidiary has been refused any insurance coverage sought or
applied for; and neither the Company nor any such subsidiary has any
reason to believe that it will not be able to renew its existing
insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue
its business at a cost that would not materially and adversely affect
the condition (financial or otherwise), business prospects, net worth
or results of operations of the Company and its subsidiaries, except as
described in or contemplated by the Prospectus (or, if the Prospectus
is not in existence, the most recent Preliminary Prospectus).
(xxiii) No subsidiary of the Company is currently
prohibited, directly or indirectly, from paying any dividends to the
Company, from making any other distribution on such subsidiary's
capital stock, from repaying to the Company any loans or advances to
such subsidiary from the Company or from transferring any of such
subsidiary's property or assets to the Company or any other subsidiary
of the Company, except as described in or contemplated by the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus).
(xxiv) The Company and its subsidiaries possess all
certificates, authorizations, licenses and permits issued by the
appropriate federal, state or foreign regulatory authorities necessary
to conduct their respective businesses, and neither the Company nor any
such subsidiary has received any notice of proceedings relating to the
revocation or modification of any such certificate, authorization,
license or permit which, singly or in the aggregate, if the subject of
an unfavorable decision, ruling or finding, would result in a material
adverse change in the condition (financial or otherwise), business
prospects, net worth or results of operations of the Company and its
subsidiaries, except as described in or contemplated by the Prospectus
(or, if the Prospectus is not in existence, the most recent Preliminary
Prospectus).
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<PAGE>
(xxv) The Company will conduct its operations in a
manner that will not subject it to registration as an investment
company under the Investment Company Act of 1940, as amended, and the
transactions contemplated hereby will not cause the Company to become
an investment company subject to registration under such Act.
(xxvi) The Company has filed all foreign, federal,
state and local tax returns that are required to be filed or has
requested extensions thereof (except in any case in which the failure
so to file would not have a material adverse effect on the Company and
its subsidiaries, taken as a whole) and has paid all taxes required to
be paid by it and any other assessment, fine or penalty levied against
it, to the extent that any of the foregoing is due and payable, except
for any such assessment, fine or penalty that is currently being
contested in good faith or as described in or contemplated by the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus).
(xxvii) Each certificate signed by any officer of
the Company and delivered to the Representatives or counsel for the
Underwriters shall be deemed to be a representation and warranty by the
Company to each Underwriter as to the matters covered thereby.
(xxviii) Except for the shares of capital stock of
each of the subsidiaries owned by the Company and such subsidiaries,
neither the Company nor any such subsidiary owns any shares of stock or
any other equity securities of any corporation or has any equity
interest in any firm, partnership, association or other entity, except
as described in or contemplated by the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary
Prospectus).
(xxix) The Company and each of its subsidiaries
maintain a system of internal accounting controls sufficient to provide
reasonable assurance that (A) transactions are executed in accordance
with management's general or specific authorizations; (B) transactions
are recorded as necessary to permit preparation of financial statements
in conformity with generally accepted accounting principles and to
maintain asset accountability; (C) access to assets is permitted only
in accordance with management's general or specific authorization; and
(D) the recorded accountability for assets is compared with the
existing assets at reasonable intervals and appropriate action is taken
with respect to any differences.
(xxx) No default exists, and no event has occurred
which, with notice or lapse of time or both, would constitute a default
in the due performance and observance of any term, covenant or
condition of any indenture, mortgage, deed of trust, lease or other
agreement or instrument to which the Company or any of its subsidiaries
is a party or by which the Company or any of its subsidiaries or any of
their respective properties is bound or may be affected in any material
adverse respect with regard to the property, business or operations of
the Company and its subsidiaries, taken as a whole.
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<PAGE>
(xxxi) Neither the Company nor any of its
subsidiaries is in violation of its articles of incorporation or
by-laws. Neither the Company nor any of its subsidiaries is in
violation in any respect of any statute, law, governmental rule,
regulation, order or decree of any court or governmental agency or body
to which it or its property is subject or by which it or its property
may be affected in any material adverse respect with regard to the
property, business or operations of the Company and its subsidiaries,
taken as a whole.
10
<PAGE>
(b) Each Selling Stockholder severally represents and warrants
to, and agrees with, the Company and each of the several Underwriters that:
(i) Such Selling Stockholder has full power to enter
into this Agreement and to sell, assign, transfer and deliver to the
Underwriters the Securities to be sold by such Selling Stockholder
hereunder in accordance with the terms of this Agreement; this
Agreement has been duly executed and delivered by such Selling
Stockholder, and is the valid and binding agreement of such Selling
Stockholder, subject to applicable bankruptcy, insolvency and similar
laws affecting creditors' rights generally, and subject, as to
enforceability, to general principles of equity (regardless of whether
enforcement is sought in a proceeding in equity or at law).
(ii) Such Selling Stockholder has duly executed and
delivered a power of attorney and custody agreement (with respect to
such Selling Stockholder, the "Power of Attorney" and the "Custody
Agreement", respectively), each in the form heretofore delivered to the
Representatives, appointing __________________________, as such Selling
Stockholder's attorney-in-fact (the "Attorney-in-Fact") with authority
to execute, deliver and perform this Agreement on behalf of such
Selling Stockholder and appointing ________________ as custodian
thereunder (the "Custodian"). Certificates in negotiable form, endorsed
in blank or accompanied by blank stock powers duly executed, with
signatures appropriately guaranteed, representing the Securities to be
sold by such Selling Stockholder hereunder have been deposited with the
Custodian pursuant to the Custody Agreement for the purpose of delivery
pursuant to this Agreement. Such Selling Stockholder has full power to
enter into the Custody Agreement and the Power of Attorney and to
perform its obligations under the Custody Agreement. The Custody
Agreement and the Power of Attorney have been duly executed and
delivered by such Selling Stockholder and, assuming due authorization,
execution and delivery by the Custodian, are the legal, valid, binding
and enforceable instruments of such Selling Stockholder, subject to
applicable bankruptcy, insolvency and similar laws affecting creditors'
rights generally, and subject, as to enforceability, to general
principles of equity (regardless of whether enforcement is sought in a
proceeding in equity or at law). Such Selling Stockholder agrees that
each of the Securities represented by the certificates deposited by
such Selling Stockholder with the Custodian is subject to the interests
of the Underwriters hereunder, that the arrangements made by such
Selling Stockholder for such custody, the appointment by such Selling
Stockholder of each Attorney-in-Fact and the right, power and authority
of each Attorney-in-Fact to execute and deliver this Agreement on
behalf of such Selling Stockholder, to agree on the price at which the
Securities (including such Selling Stockholder's Securities) are to be
sold to the Underwriters, and to carry out the terms of this Agreement,
are to that extent irrevocable and that the obligations of such Selling
Stockholder hereunder shall not be terminated, except as provided in
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<PAGE>
this Agreement or the Custody Agreement, by any act of such Selling
Stockholder, by operation of law or otherwise, whether in the case of
any individual Selling Stockholder by the death or incapacity of such
Selling Stockholder, in the case of a trust or estate by the death of
the trustee or trustees or the executor or executors or the termination
of such trust or estate, or in the case of a corporate or partnership
Selling Stockholder by its liquidation or dissolution or by the
occurrence of any other event. If any individual Selling Stockholder,
trustee or executor should die or become incapacitated or any such
trust should be terminated, or if any corporate or partnership Selling
Stockholder shall liquidate or dissolve, or if any other event should
occur, before the delivery of such Securities hereunder, the
certificates for such Securities deposited with the Custodian shall be
delivered by the Custodian in accordance with the respective terms and
conditions of this Agreement as if such death, incapacity, termination,
liquidation, dissolution or other event had not occurred, regardless of
whether or not the Custodian or the Attorneys-in-Fact shall have
received notice thereof.
(iii) Such Selling Stockholder is the lawful owner
of the Securities to be sold by such Selling Stockholder hereunder and
upon sale and delivery of, and payment for, such Securities, as
provided herein, such Selling Stockholder will convey good and
marketable title to such Securities, free and clear of any security
interests, liens, encumbrances, equities, claims or other defects.
(iv) Such Selling Stockholder has not, directly or
indirectly, (A) taken any action designed to cause or result in, or
that has constituted or which might reasonably be expected to
constitute, the stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of the
Securities or (B) since the filing of the Registration Statement
(1) sold, bid for, purchased or paid anyone any compensation for
soliciting purchases of, the Securities or (2) paid or agreed to pay to
any person any compensation for soliciting another to purchase any
other securities of the Company (except for the sale of Securities
under this Agreement).
(v) Such Selling Stockholder has reviewed the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus) and the Registration Statement, and the
information regarding such Selling Stockholder set forth therein under
the captions "Selling Stockholders" and "Principal Stockholders" is
complete and accurate.
(vi) The sale by such Selling Stockholder of
Securities pursuant hereto is not prompted by any adverse information
concerning the Company that is not set forth in the Registration
Statement or the Prospectus (or, if the Prospectus is not in existence,
the most recent Preliminary Prospectus).
(vii) The sale of the Securities to the Underwriters
by such Selling Stockholder pursuant to this Agreement, the compliance
by such Selling Stockholder with the other provisions of this
Agreement, the Custody Agreement and the consummation of the other
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<PAGE>
transactions herein contemplated do not (A) require the consent,
approval, authorization, registration or qualification of or with any
governmental authority, except such as have been obtained, such as may
be required under state securities or blue sky laws and, if the
registration statement filed with respect to the Securities (as
amended) is not effective under the Act as of the time of execution
hereof, such as may be required (and shall be obtained as provided in
this Agreement) under the Act and the Exchange Act, or (B) conflict
with or result in a breach or violation of any of the terms and
provisions of, or constitute a default under any indenture, mortgage,
deed of trust, lease or other agreement or instrument to which such
Selling Stockholder is a party, or by which such Selling Stockholder,
or any of such Selling Stockholder's properties, are bound, or any
statute or any judgment, decree, order, rule or regulation of any court
or other governmental authority or any arbitrator applicable to such
Selling Stockholder.
(viii) Such Selling Stockholder has not distributed
and, prior to the later of (A) the last Option Closing Date or, if no
Option Securities are purchased, the Firm Closing Date and (B) the
completion of the distribution of the Securities, will not distribute
any offering material in connection with the offering and sale of the
Securities other than the Registration Statement or any amendment
thereto, any Preliminary Prospectus or the Prospectus or any amendment
or supplement thereto, or other materials, if any, permitted by the
Act.
(ix) Such Selling Stockholder does not have any
right or has irrevocably waived any such right to have any securities
registered under the Registration Statement in excess of the number of
securities of such Selling Stockholder actually so registered.
3. Purchase, Sale and Delivery of the Securities.
(a) On the basis of the representations, warranties,
agreements and covenants herein contained and subject to the terms and
conditions herein set forth, (A) the Company agrees to issue and sell to each of
the Underwriters, and each of the Underwriters, severally (and not jointly),
agrees to purchase from the Company, at a purchase price of $_______ per share
(the "Purchase Price"), the number of Firm Securities set forth opposite the
name of such Underwriter in column (a) of Schedule 1 hereto and (B) each of the
Selling Stockholders severally (and not jointly), agrees to sell to the
Underwriters, the number of Firm Securities set forth opposite the name of such
Selling Stockholder in Schedule 2 hereto, and each of the Underwriters,
severally (and not jointly), agrees to purchase from such Selling Stockholders,
at the Purchase Price per share, the number of Firm Securities set forth
opposite the name of such Underwriter in column (b) of Schedule 1 hereto. One or
more certificates in definitive form for the Firm Securities that the several
Underwriters have agreed to purchase hereunder, and in such denomination or
denominations and registered in such name or names as the Representatives
request upon notice to the Company and such Selling Stockholders at least 48
hours prior to the Firm Closing Date, shall be delivered by or on behalf of the
Company and such Selling Stockholders to the Representatives for the respective
accounts of the Underwriters, against payment by or on behalf of the
Underwriters of the purchase price therefor by wire transfer in same-day funds
(the "Wired Funds") to the order of the Company and such Selling Stockholders.
Such delivery of and payment for the Firm Securities shall be made at the
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offices of Cleary, Gottlieb, Steen & Hamilton, One Liberty Plaza, New York, New
York at 9:30 A.M., New York time, on ____________________, 1996, or at such
other place, time or date as the Representatives and the Company may agree
upon or as the Representatives may determine pursuant to Section 9 hereof,
such time and date of delivery against payment being herein referred to as the
"Firm Closing Date." The Company and such Selling Stockholders will make such
certificate or certificates for the Firm Securities available for checking and
packaging by the Representatives at the offices in New York, New York of the
Company's transfer agent or registrar or of Prudential Securities Incorporated
at least 24 hours prior to the Firm Closing Date.
(b) For the purpose of covering any over-allotments in
connection with the distribution and sale of the Firm Securities as contemplated
by the Prospectus, the Company hereby grants to the several Underwriters an
option to purchase, severally and not jointly, the Option Securities. The
purchase price to be paid for any Option Securities shall be the same price per
share as the price per share for the Firm Securities set forth above in
paragraph (a) of this Section 3, plus, if the purchase and sale of any Option
Securities takes place after the Firm Closing Date and after the Firm Securities
are trading "ex-dividend", an amount equal to the dividends payable on such
Option Securities. The option granted hereby may be exercised as to all or any
part of the Option Securities from time to time within [thirty] days after the
date of the Prospectus (or, if such [30th] day shall be a Saturday or Sunday or
a holiday, on the next business day thereafter when the Nasdaq Stock Market's
National Market (the "Nasdaq National Market") is open for trading). The
Underwriters shall not be under any obligation to purchase any of the Option
Securities prior to the exercise of such option. The Representatives may from
time to time exercise the option granted hereby by giving notice in writing or
by telephone (confirmed in writing) to the Company setting forth the aggregate
number of Option Securities as to which the several Underwriters are then
exercising the option and the date and time for delivery of and payment for such
Option Securities. Any such date of delivery shall be determined by the
Representatives but shall not be earlier than two business days or later than
seven business days after such exercise of the option and, in any event, shall
not be earlier than the Firm Closing Date. The time and date set forth in such
notice, or such other time on such other date as the Representatives and the
Company may agree upon or as the Representatives may determine pursuant to
Section 9 hereof, is herein called the "Option Closing Date" with respect to
such Option Securities. Upon exercise of the option as provided herein, the
Company shall become obligated to sell to each of the several Underwriters, and,
subject to the terms and conditions herein set forth, each of the Underwriters
(severally and not jointly) shall become obligated to purchase from the Company,
the same percentage of the total number of the Option Securities as to which the
several Underwriters are then exercising the option as such Underwriter is
obligated to purchase of the aggregate number of Firm Securities, as adjusted by
the Representatives in such manner as they deem advisable to avoid fractional
shares. If the option is exercised as to all or any portion of the Option
Securities, one or more certificates in definitive form for such Option
Securities, and payment therefor, shall be delivered on the related Option
Closing Date in the manner, and upon the terms and conditions, set forth in
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<PAGE>
paragraph (a) of this Section 3, except that reference therein to the Firm
Securities and the Firm Closing Date shall be deemed, for purposes of this
paragraph (b), to refer to such Option Securities and Option Closing Date,
respectively.
(c) The Company hereby acknowledges that the wire transfer by
or on behalf of the Underwriters of the purchase price for any Shares does not
constitute closing of a purchase and sale of the Shares. Only execution and
delivery of a receipt for Shares by the Underwriters indicates completion of the
closing of a purchase of the Shares from the Company. Furthermore, in the event
that the Underwriters wire funds to the Company prior to the completion of the
closing of a purchase of Shares, the Company hereby acknowledges that until the
Underwriters execute and deliver a receipt for the Shares, by facsimile or
otherwise, the Company will not be entitled to the wired funds and shall return
the wired funds to the Underwriters as soon as practicable (by wire transfer of
same-day funds) upon demand. In the event that the closing of a purchase of
Shares is not completed and the wire funds are not returned by the Company to
the Underwriters on the same day the wired funds were received by the Company,
the Company agrees to pay to the Underwriters in respect of each day the wire
funds are not returned by it, in same-day funds, interest on the amount of such
wire funds in an amount representing the Underwriters' cost of financing as
reasonably determined by Prudential Securities Incorporated.
(d) It is understood that any of you, individually and not as
one of the Representatives, may (but shall not be obligated to) make payment on
behalf of any Underwriter or Underwriters for any of the Securities to be
purchased by such Underwriter or Underwriters. No such payment shall relieve
such Underwriter or Underwriters from any of its or their obligations hereunder.
4. Offering by the Underwriters. Upon your authorization of
the release of the Firm Securities, the several Underwriters propose to offer
the Firm Securities for sale to the public upon the terms set forth in the
Prospectus.
5. Covenants.
(a) The Company covenants and agrees with each of the
Underwriters that:
(i) The Company will use its best efforts to cause
the Registration Statement, if not effective at the time of execution
of this Agreement, and any amendments thereto to become effective as
promptly as possible. If required, the Company will file the Prospectus
or any Term Sheet that constitutes a part thereof and any amendment or
supplement thereto with the Commission in the manner and within the
time period required by Rules 434 and 424(b) under the Act. During any
time when a prospectus relating to the Securities is required to be
delivered under the Act, the Company (A) will comply with all
requirements imposed upon it by the Act and the Exchange Act and the
respective rules and regulations of the Commission thereunder to the
extent necessary to permit the continuance of sales of or dealings in
the Securities in accordance with the provisions hereof and of the
Prospectus, as then amended or supplemented, and (B) will not file with
the Commission the prospectus, Term Sheet or the amendment referred to
in the second sentence of Section 2(a) hereof, any amendment or
supplement to such prospectus, Term Sheet or any amendment to the
Registration Statement or any Rule 462(b) Registration Statement of
which the Representatives shall not previously have been advised and
furnished with a copy for a reasonable period of time prior to the
proposed filing and as to which filing the Representatives shall not
have given their consent. The Company will prepare and file with the
Commission, in accordance with the rules and regulations of the
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Commission, promptly upon request by the Representatives or counsel for
the Underwriters, any amendments to the Registration Statement or
amendments or supplements to the Prospectus that may be necessary or
advisable in connection with the distribution of the Securities by the
several Underwriters, and will use its best efforts to cause any such
amendment to the Registration Statement to be declared effective by the
Commission as promptly as possible. The Company will advise the
Representatives, promptly after receiving notice thereof, of the time
when the Registration Statement or any amendment thereto has been filed
or declared effective or the Prospectus or any amendment or supplement
thereto has been filed and will provide evidence satisfactory to the
Representatives of each such filing or effectiveness.
(ii) The Company will advise the Representatives,
promptly after receiving notice or obtaining knowledge thereof, of
(A) the issuance by the Commission of any stop order suspending the
effectiveness of the Original Registration Statement or any Rule 462(b)
Registration Statement or any amendment thereto or any order preventing
or suspending the use of any Preliminary Prospectus or the Prospectus
or any amendment or supplement thereto, (B) the suspension of the
qualification of the Securities for offering or sale in any
jurisdiction, (C) the institution, threatening or contemplation of any
proceeding for any such purpose or (D) any request made by the
Commission for amending the Original Registration Statement or any Rule
462(b) Registration Statement, for amending or supplementing the
Prospectus or for additional information. The Company will use its best
efforts to prevent the issuance of any such stop order and, if any such
stop order is issued, to obtain the withdrawal thereof as promptly as
possible.
(iii) The Company will arrange for the qualification
of the Securities for offering and sale under the securities or blue
sky laws of such jurisdictions as the Representatives may designate and
will continue such qualifications in effect for as long as may be
necessary to complete the distribution of the Securities, provided,
however, that in connection therewith the Company shall not be required
to qualify as a foreign corporation or to execute a general consent to
service of process in any jurisdiction.
(iv) If, at any time prior to the later of (A) the
final date when a prospectus relating to the Securities is required to
be delivered under the Act or (B) the Option Closing Date, any event
occurs as a result of which the Prospectus, as then amended or
supplemented, would include any untrue statement of a material fact or
omit to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made,
not misleading, or if for any other reason it is necessary at any time
16
<PAGE>
to amend or supplement the Prospectus to comply with the Act or the
rules or regulations of the Commission thereunder, the Company will
promptly notify the Representatives thereof and, subject to Section
5(a) hereof, will prepare and file with the Commission, at the
Company's expense, an amendment to the Registration Statement or an
amendment or supplement to the Prospectus that corrects such statement
or omission or effects such compliance.
(v) The Company will, without charge, provide (A) to
the Representatives and to counsel for the Underwriters a signed copy
of the registration statement originally filed with respect to the
Securities and each amendment thereto (in each case including exhibits
thereto), (B) to each other Underwriter, a conformed copy of such
registration statement or any Rule 462(b) Registration Statement and
each amendment thereto (in each case without exhibits thereto) and
(C) so long as a prospectus relating to the Securities is required to
be delivered under the Act, as many copies of each Preliminary
Prospectus or the Prospectus or any amendment or supplement thereto as
the Representatives may reasonably request; without limiting the
application of clause (C) of this sentence, the Company, not later than
(1) 6:00 P.M., New York City time, on the date of determination of the
public offering price, if such determination occurred at or prior to
10:00 A.M., New York City time on such date or (2) 6:00 P.M., New York
City time, on the business day following the date of determination of
the public offering price, if such determination occurred after 10:00
A.M., New York City time, on such date, will deliver to the
Underwriters, without charge, as many copies of the Prospectus and any
amendment or supplement thereto as the Representatives may reasonably
request for purposes of confirming orders that are expected to settle
on the Firm Closing Date.
(vi) The Company, as soon as practicable, will make
generally available to its securityholders and to the Representatives a
consolidated earnings statement of the Company and its subsidiaries
that satisfies the provisions of Section 11(a) of the Act and Rule 158
thereunder.
(vii) The Company will apply the net proceeds from
the sale of the Securities as set forth under "Use of Proceeds" in the
Prospectus.
(viii) The Company will not, directly or indirectly,
without the prior written consent of Prudential Securities
Incorporated, on behalf of the Underwriters, offer, sell, offer to
sell, contract to sell, pledge, grant any option to purchase or
otherwise sell or dispose (or announce any offer, sale, offer of sale,
contract of sale, pledge, grant of any option to purchase or other sale
or disposition) of any shares of Common Stock or any securities
convertible into, or exchangeable or exercisable for, shares of Common
Stock for a period of 180 days after the date hereof, except pursuant
to this Agreement.
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<PAGE>
(ix) The Company will not, directly or indirectly,
(A) take any action designed to cause or to result in, or that has
constituted or which might reasonably be expected to constitute, the
stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Securities or
(B)(1) sell, bid for, purchase, or pay anyone any compensation for
soliciting purchases of, the Securities or (2) pay or agree to pay to
any person any compensation for soliciting another to purchase any
other securities of the Company (except for the sale of Securities by
the Selling Securityholders under this Agreement).
(x) The Company will obtain the agreements described
in Section 7(f) hereof prior to the Firm Closing Date.
(xi) If at any time during the 25-day period after
the Registration Statement becomes effective or the period prior to the
Option Closing Date, any rumor, publication or event relating to or
affecting the Company shall occur as a result of which in your opinion
the market price of the Common Stock has been or is likely to be
materially affected (regardless of whether such rumor, publication or
event necessitates a supplement to or amendment of the Prospectus, the
Company will, after notice from you advising the Company to the effect
set forth above, forthwith prepare, consult with you concerning the
substance of, and disseminate a press release or other public
statement, reasonably satisfactory to you, responding to or commenting
on such rumor, publication or event.
(xii) If the Company elects to rely on Rule 462(b),
the Company shall both file a Rule 462(b) Registration Statement with
the Commission in compliance with Rule 462(b) and pay the applicable
fees in accordance with Rule 111 promulgated under the Act by the
earlier of (A) 10:00 P.M. Eastern time on the date of this Agreement
and (B) the time confirmations are sent or given, as specified by Rule
462(b)(2).
(xiii) The Company will cause the Securities to be
duly included for quotation on the Nasdaq National Market prior to the
Firm Closing Date. The Company will ensure that the Securities remain
included for quotation on the Nasdaq National Market following the Firm
Closing Date.
(b) Each of the Selling Stockholders, severally (and not
jointly) covenants and agrees with each of the Underwriters that:
(i) Such Selling Stockholder will not, directly or
indirectly, without the prior written consent of Prudential Securities
Incorporated, on behalf of the Underwriters, offer, sell, offer to
sell, contract to sell, pledge, grant any option to purchase or
otherwise sell or dispose (or announce any offer, sale, offer of sale,
contract of sale, pledge, grant of any option to purchase or other sale
or disposition) of any shares of Common Stock or other capital stock of
the Company substantially similar thereto or any securities convertible
into, or exchangeable or exercisable for, any shares of Common Stock or
other capital stock of the Company for a period of
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<PAGE>
180 days after the date hereof, except pursuant to this Agreement and
except for bona fide gifts and transfers by will or by the laws of
descent and distribution, provided that the donee, heir or legatee
agrees in writing to be bound by the terms of this Section 5(b)(i).
(ii) Such Selling Stockholder will not, directly or
indirectly, (A) take any action designed to cause or result in, or that
has constituted or which might reasonably be expected to constitute,
the stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Securities or
(B) (1) sell, bid for, purchase, or pay anyone any compensation for
soliciting purchases of, the Securities or (2) pay or agree to pay to
any person any compensation for soliciting another to purchase any
other securities of the Company (except for the sale of Securities
under this Agreement).
(iii) As soon as such Selling Stockholder is advised
thereof, such Selling Stockholder will advise the Representatives (and
immediately thereafter confirm such advice in writing) (A) of receipt
by such Selling Stockholder or by any representative or agent of such
Selling Stockholder of any communication from the Commission relating
to the Registration Statement, the Prospectus or any Preliminary
Prospectus, or any notice or order of the Commission relating to the
Company or the Selling Stockholders in connection with the transactions
contemplated by this Agreement and (B) of the happening of any event
which makes or may make any statement made in the Registration
Statement, the Prospectus or any Preliminary Prospectus untrue or that
requires the making of any change in the Registration Statement, the
Prospectus or Preliminary Prospectus, as the case may be, in order to
make such statement, in light of the circumstances in which it was
made, not misleading.
6. Expenses. The Company will pay all costs and expenses
incident to the performance of its obligations under this Agreement, whether or
not the transactions contemplated herein are consummated or this Agreement is
terminated pursuant to Section 11 hereof, including all costs and expenses
incident to (i) the printing or other production of documents with respect to
the transactions, including any costs of printing the registration statement
originally filed with respect to the Securities and any amendment thereto, any
Rule 462(b) Registration Statement, any Preliminary Prospectus and the
Prospectus and any amendment or supplement thereto, this Agreement and any blue
sky memoranda, (ii) all arrangements relating to the delivery to the
Underwriters of copies of the foregoing documents, (iii) the fees and
disbursements of the counsel, the accountants and any other experts or advisors
retained by the Company or the Selling Stockholders, (iv) preparation, issuance
and delivery to the Underwriters of any certificates evidencing the Securities,
including transfer agent's and registrar's fees, (v) the qualification of the
Securities under state securities and blue sky laws, including filing fees and
fees and disbursements of counsel for the Underwriters relating thereto,
(vi) the filing fees of the Commission and the National Association of
Securities Dealers, Inc. relating to the Securities, (vii) any quotation of the
Securities on the Nasdaq National Market and (viii) any meetings with
prospective investors in
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<PAGE>
the Securities (other than as shall have been specifically approved by the
Representatives to be paid for by the Underwriters). If the sale of the
Securities provided for herein is not consummated because any condition to the
obligations of the Underwriters set forth in Section 7 hereof is not satisfied,
because this Agreement is terminated pursuant to Section 11 hereof or because of
any failure, refusal or inability on the part of the Company or any Selling
Stockholder to perform all obligations and satisfy all conditions on its part to
be performed or satisfied hereunder by the Company or such Selling Stockholder
other than by reason of a default by any of the Underwriters, the Company will
reimburse the Underwriters severally upon demand for all out-of-pocket expenses
(including counsel fees and disbursements) that shall have been incurred by them
in connection with the proposed purchase and sale of the Securities. The Company
shall not in any event be liable to any of the Underwriters for the loss of
anticipated profits from the transactions covered by this Agreement.
7. Conditions of the Underwriters' Obligations. The
obligations of the several Underwriters to purchase and pay for the Firm
Securities shall be subject, in the Representatives' sole discretion, to the
accuracy of the representations and warranties of the Company and the Selling
Stockholders contained herein as of the date hereof and as of the Firm Closing
Date, as if made on and as of the Firm Closing Date, to the accuracy of the
statements of the Company's officers and the Selling Stockholders made pursuant
to the provisions hereof, to the performance by the Company and the Selling
Stockholders of their respective covenants and agreements hereunder and to the
following additional conditions:
(a) If the Original Registration Statement or any amendment
thereto filed prior to the Firm Closing Date has not been declared effective as
of the time of execution hereof, the Original Registration Statement or such
amendment and, if the Company has elected to rely upon 462(b), the Rule 462(b)
Registration Statement shall have been declared effective not later than the
earlier of (i) 11:00 A.M., New York time, on the date on which the amendment to
the registration statement originally filed with respect to the Securities or to
the Registration Statement, as the case may be, containing information regarding
the initial public offering price of the Securities has been filed with the
Commission and (ii) the time confirmations are sent or given as specified by
Rule 462(b)(2), or with respect to the Original Registration Statement, or such
later time and date as shall have been consented to by the Representatives; if
required, the Prospectus or any Term Sheet that constitutes a part thereof and
any amendment or supplement thereto shall have been filed with the Commission in
the manner and within the time period required by Rules 434 and 424(b) under the
Act; no stop order suspending the effectiveness of the Registration Statement or
any amendment thereto shall have been issued, and no proceedings for that
purpose shall have been instituted or threatened or, to the knowledge of the
Company or the Representatives, shall be contemplated by the Commission; and the
Company shall have complied with any request of the Commission for additional
information (to be included in the Registration Statement or the Prospectus or
otherwise).
(b) The Representatives shall have received an opinion, dated
the Firm Closing Date, of Buchanan Ingersoll Professional Corporation, counsel
for the Company, to the effect that:
20
<PAGE>
(i) the Company and each of its subsidiaries listed
in Exhibit 21 to the Registration Statement (the "Subsidiaries") have
been duly organized and are validly existing as corporations in good
standing under the laws of their respective jurisdictions of
incorporation and are duly qualified to transact business as foreign
corporations and are in good standing under the laws of all other
jurisdictions where the ownership or leasing of their respective
properties or the conduct of their respective businesses requires such
qualification, except where the failure to be so qualified does not
amount to a material liability or disability to the Company and the
Subsidiaries, taken as a whole;
(ii) the Company and each of the Subsidiaries have
corporate power to own or lease their respective properties and conduct
their respective businesses as described in the Registration Statement
and the Prospectus, and the Company has corporate power to enter into
this Agreement and to carry out all the terms and provisions hereof to
be carried out by it;
(iii) the issued shares of capital stock of each of
the Subsidiaries have been duly authorized and validly issued, are
fully paid and nonassessable and, except for directors' qualifying
shares and as otherwise set forth in the Prospectus, are owned
beneficially by the Company free and clear of any perfected security
interests or, to the best knowledge of such counsel, any other security
interests, liens, encumbrances, equities or claims;
(iv) the Company has an authorized, issued and
outstanding capitalization as set forth in the Prospectus; all of the
issued shares of capital stock of the Company (including the Option
Securities) have been duly authorized and validly issued and are fully
paid and nonassessable, have been issued in compliance with all
applicable federal and state securities laws and were not issued in
violation of or subject to any preemptive rights or other rights to
subscribe for or purchase securities; the Firm Securities have been
duly authorized by all necessary corporate action of the Company and,
when issued and delivered to and paid for by the Underwriters pursuant
to this Agreement, will be validly issued, fully paid and
nonassessable; the Securities have been duly included for trading on
the Nasdaq National Market; no holders of outstanding shares of capital
stock of the Company are entitled as such to any preemptive or other
rights to subscribe for any of the Securities; and no holders of
securities of the Company are entitled to have such securities
registered under the Registration Statement;
(v) the statements set forth under the heading
"Description of Securities" in the Prospectus, insofar as such
statements purport to summarize certain provisions of the capital stock
of the Company, provide a fair summary of such provisions; and the
statements set forth under the headings "Business of the Company--Legal
Proceedings," "Management; Certain Transactions" and "Certain
Transactions" in the Prospectus, insofar as such statements constitute
21
<PAGE>
a summary of the legal matters, documents or proceedings referred to
therein, provide a fair summary of such legal matters, documents and
proceedings;
(vi) the execution and delivery of this Agreement
have been duly authorized by all necessary corporate action of the
Company and this Agreement has been duly executed and delivered by the
Company;
(vii) (A) no legal or governmental proceedings are
pending to which the Company or any of the Subsidiaries is a party or
to which the property of the Company or any of the Subsidiaries is
subject that are required to be described in the Registration Statement
or the Prospectus and are not described therein, and, to the best
knowledge of such counsel, no such proceedings have been threatened
against the Company or any of the Subsidiaries or with respect to any
of their respective properties and (B) no contract or other document is
required to be described in the Registration Statement or the
Prospectus or to be filed as an exhibit to the Registration Statement
that is not described therein or filed as required;
(viii) the issuance, offering and sale of the
Securities to the Underwriters by the Company pursuant to this
Agreement, the compliance by the Company with the other provisions of
this Agreement and the consummation of the other transactions herein
contemplated do not (A) require the consent, approval, authorization,
registration or qualification of or with any governmental authority,
except such as have been obtained and such as may be required under
state securities or blue sky laws, or (B) conflict with or result in a
breach or violation of any of the terms and provisions of, or
constitute a default under, any indenture, mortgage, deed of trust,
lease or other agreement or instrument, known to such counsel, to which
the Company or any of the Subsidiaries is a party or by which the
Company or any of the Subsidiaries or any of their respective
properties are bound, or the charter documents or by-laws of the
Company or any of the Subsidiaries, or any statute or any judgment,
decree, order, rule or regulation of any court or other governmental
authority or any arbitrator known to such counsel and applicable to the
Company or any of the Subsidiaries;
(ix) the Registration Statement is effective under
the Act; any required filing of the Prospectus, or any Term Sheet that
constitutes a part thereof, pursuant to Rules 434 and 424(b) has been
made in the manner and within the time period required by Rules 434 and
424(b); and no stop order suspending the effectiveness of the
Registration Statement or any amendment thereto has been issued, and no
proceedings for that purpose have been instituted or threatened or, to
the best knowledge of such counsel, are contemplated by the Commission;
and
(x) the Registration Statement originally filed with
respect to the Securities and each amendment thereto, any Rule 462(b)
Registration Statement and the Prospectus (in each case, other than the
financial statements and other financial information contained therein,
as to which such counsel need express no opinion)
22
<PAGE>
comply as to form in all material respects with the applicable
requirements of the Act and the rules and regulations of the Commission
thereunder.
(xi) if the Company elects to rely on Rule 434, the
Prospectus is not "materially different", as such term is used in Rule
434, from the prospectus included in the Registration Statement at the
time of its effectiveness or an effective post-effective amendment
thereto (including such information that is permitted to be omitted
pursuant to Rule 430A).
Such counsel shall also state that they have no reason to
believe that the Registration Statement, as of its effective date, contained any
untrue statement of a material fact or omitted to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading or that the Prospectus, as of its date or the date of such opinion,
included or includes any untrue statement of a material fact or omitted or omits
to state a material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not misleading.
In rendering any such opinion, such counsel may rely, as to
matters of fact, to the extent such counsel deems proper, on certificates of
responsible officers of the Company and public officials and, as to matters
involving the application of laws of any jurisdiction other than the State of
Delaware or the United States, to the extent satisfactory in form and scope to
counsel for the Underwriters, upon the opinion of other counsel of good
standing. The foregoing opinion shall also state that the Underwriters are
justified in relying upon such opinion of such other counsel of good standing,
and copies of such opinion shall be delivered to the Representatives and counsel
for the Underwriters.
References to the Registration Statement and the Prospectus in
this paragraph (b) shall include any amendment or supplement thereto at the date
of such opinion.
23
<PAGE>
(c) The Representatives shall have received an opinion, dated
the Firm Closing Date, of Cleary, Gottlieb, Steen & Hamilton, counsel for the
Underwriters, with respect to the issuance and sale of the Firm Securities, the
Registration Statement and the Prospectus, and such other related matters as the
Representatives may reasonably require, and the Company shall have furnished to
such counsel such documents as they may reasonably request for the purpose of
enabling them to pass upon such matters.
(d) The Representatives shall have received from Price
Waterhouse LLP a letter or letters dated, respectively, the date hereof and the
Firm Closing Date, in form and substance satisfactory to the Representatives, to
the effect that:
24
<PAGE>
(i) they are independent accountants with respect to the
Company and its consolidated subsidiaries within the meaning of the Act
and the applicable rules and regulations thereunder;
(ii) in their opinion, the audited consolidated financial
statements and schedules examined by them and included in the
Registration Statement and the Prospectus comply in form in all
material respects with the applicable accounting requirements of the
Act and the related published rules and regulations;
(iii) on the basis of a reading of the latest available
interim unaudited consolidated condensed financial statements of the
Company and its consolidated subsidiaries carrying out certain
specified procedures (which do not constitute an examination made in
accordance with generally accepted auditing standards) that would not
necessarily reveal matters of significance with respect to the comments
set forth in this paragraph (iii), a reading of the minute books of the
shareholders, the board of directors and any committees thereof of the
Company and each of its consolidated subsidiaries, and inquiries of
certain officials of the Company and its consolidated subsidiaries who
have responsibility for financial and accounting matters of the Company
and its Subsidiaries as to transactions and events subsequent to
[ , 199_], nothing came to their attention that caused them to believe
that:
(A) the unaudited consolidated condensed financial
statements of the Company and its consolidated subsidiaries
included in the Registration Statement and the Prospectus do
not comply in form in all material respects with the
applicable accounting requirements of the Act and the related
published rules and regulations thereunder or are not in
conformity with generally accepted accounting principles
applied on a basis substantially consistent with that of the
audited consolidated financial statements included in the
Registration Statement and the Prospectus;
(B) the unaudited amounts for sales, net revenues and
total and per share amounts of net income and other items
included in the Registration Statement and the Prospectus do
not agree with the amounts set forth in any unaudited
consolidated financial statements for those same periods or
were not determined on a basis substantially consistent with
that of the corresponding amounts in the audited consolidated
financial statements included in the Registration Statement
and the Prospectus; and
(C) at a specific date not more than five business
days prior to the date of such letter, there were any changes
in the capital stock or long-term debt of the Company and its
consolidated subsidiaries or any decreases in net current
assets or stockholders' equity of the Company and its
consolidated subsidiaries, in each case compared with amounts
shown on the [insert date of the most recent consolidated
(condensed) balance sheet] consolidated condensed balance
sheet included in the Registration Statement and the
Prospectus, or for the
25
<PAGE>
period from [insert date one day after the date inserted
above] to such specified date there were any decreases, as
compared with [insert appropriate comparative period or, if no
appropriate period exists, insert dollar amounts for each
item], in sales, net revenues, net income before income taxes
or total or per share amounts of net income of the Company and
its consolidated subsidiaries [conform the above list of items
to line items in financial statements and add other line items
as appropriate], except in all instances for changes,
decreases or increases set forth in such letter;
(iv) they have carried out certain specified
procedures, not constituting an audit, with respect to certain amounts,
percentages and financial information that are derived from the general
accounting records of the Company and its consolidated subsidiaries and
are included in the Registration Statement and the Prospectus and in
Exhibit 11 to the Registration Statement, and have compared such
amounts, percentages and financial information with such records of the
Company and its consolidated subsidiaries and with information derived
from such records and have found them to be in agreement, excluding any
questions of legal interpretation; and
(v) on the basis of a reading of the unaudited pro
forma consolidated condensed financial statements included in the
Registration Statement and the Prospectus, carrying out certain
specified procedures that would not necessarily reveal matters of
significance with respect to the comments set forth in this paragraph
(v), inquiries of certain officials of the Company and its consolidated
who have responsibility for financial and accounting matters and
proving the arithmetic accuracy of the application of the pro forma
adjustments to the historical amounts in the unaudited pro forma
consolidated condensed financial statements, nothing came to their
attention that caused them to believe that the unaudited pro forma
consolidated condensed financial statements do not comply in form in
all material respects with the applicable accounting requirements of
Rule 11-02 of Regulation S-X or that the pro forma adjustments have not
been properly applied to the historical amounts in the compilation of
such statements.
In the event that the letters referred to above set forth any
such changes, decreases or increases, it shall be a further condition to the
obligations of the Underwriters that (A) such letters shall be accompanied by a
written explanation of the Company as to the significance thereof, unless the
Representatives deem such explanation unnecessary, and (B) such changes,
decreases or increases do not, in the sole judgment of the Representatives, make
it impractical or inadvisable to proceed with the purchase and delivery of the
Securities as contemplated by the Registration Statement, as amended as of the
date hereof.
References to the Registration Statement and the Prospectus in
this paragraph (d) with respect to either letter referred to above shall include
any amendment or supplement thereto at the date of such letter.
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<PAGE>
(e) The Representatives shall have received a certificate,
dated the Firm Closing Date, of Robert R. Bartolini, the President and Chief
Executive Officer of the Company and Robert J. Carlson, Vice President of
Finance and Chief Accounting Officer of the Company to the effect that:
(i) the representations and warranties of the
Company in this Agreement are true and correct as if made on and as of
the Firm Closing Date; the Registration Statement, as amended as of the
Firm Closing Date, does not include any untrue statement of a material
fact or omit to state any material fact necessary to make the
statements therein not misleading, and the Prospectus, as amended or
supplemented as of the Firm Closing Date, does not include any untrue
statement of a material fact or omit to state any material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; and the
Company has performed all covenants and agreements and satisfied all
conditions on its part to be performed or satisfied at or prior to the
Firm Closing Date;
(ii) no stop order suspending the effectiveness of
the Registration Statement or any amendment thereto has been issued,
and no proceedings for that purpose have been instituted or threatened
or, to the best of the Company's knowledge, are contemplated by the
Commission; and
(iii) subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus,
neither the Company nor any of its subsidiaries has sustained any
material loss or interference with their respective businesses or
properties from fire, flood, hurricane, accident or other calamity,
whether or not covered by insurance, or from any labor dispute or any
legal or governmental proceeding, and there has not been any material
adverse change, or any development involving a prospective material
adverse change, in the condition (financial or otherwise), management,
business prospects, net worth or results of operations of the Company
or any of its subsidiaries, except in each case as described in or
contemplated by the Prospectus (exclusive of any amendment or
supplement thereto).
(f) The Representatives shall have received from each person
who is a director or officer of the Company or who owns more than % of the
outstanding shares of Common Stock and from each of the holders of any of the
Company's outstanding convertible securities an agreement to the effect that
such person will not, directly or indirectly, without the prior written consent
of the Prudential Securities Incorporated, on behalf of the Underwriters, offer,
sell, offer to sell, contract to sell, pledge, grant any option to purchase or
otherwise sell or dispose (or announce any offer, sale, offer of sale, contract
of sale, pledge, segrant of an option to purchase or other sale or disposition)
of any shares of Common Stock or any securities convertible into, or
exchangeable or exercisable for, shares of Common Stock for a period of 180 days
after the date of this Agreement.
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<PAGE>
(g) On or before the Firm Closing Date, the Representatives
and counsel for the Underwriters shall have received such further certificates,
documents or other information as they may have reasonably requested from the
Company.
(h) Prior to the commencement of the offering of the
Securities, the Securities shall have been included for trading on the Nasdaq
National Market.
All opinions, certificates, letters and documents delivered
pursuant to this Agreement will comply with the provisions hereof only if they
are reasonably satisfactory in all material respects to the Representatives and
counsel for the Underwriters. The Company shall furnish to the Representatives
such conformed copies of such opinions, certificates, letters and documents in
such quantities as the Representatives and counsel for the Underwriters shall
reasonably request.
The respective obligations of the several Underwriters to
purchase and pay for any Option Securities shall be subject, in their
discretion, to each of the foregoing conditions to purchase the Firm Securities,
except that all references to the Firm Securities and the Firm Closing Date
shall be deemed to refer to such Option Securities and the related Option
Closing Date, respectively.
8. Indemnification and Contribution. (a) The Company agrees
to indemnify and hold harmless each Underwriter and each person, if any, who
controls any Underwriter within the meaning of Section 15 of the Act or Section
20 of the Securities Exchange Act of 1934 (the "Exchange Act"), against any
losses, claims, damages or liabilities, joint or several, to which such
Underwriter or such controlling person may become subject under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon:
(i) any untrue statement or alleged untrue statement
made by the Company in Section 2 of this Agreement,
(ii) any untrue statement or alleged untrue
statement of any material fact contained in (A) the Registration
Statement or any amendment thereto, any Preliminary Prospectus or the
Prospectus or any amendment or supplement thereto or (B) any
application or other document, or any amendment or supplement thereto,
executed by the Company or based upon written information furnished by
or on behalf of the Company filed in any jurisdiction in order to
qualify the Securities under the securities or blue sky laws thereof or
filed with the Commission or any securities association or securities
exchange (each an "Application"),
(iii) the omission or alleged omission to state in
the Registration Statement or any amendment thereto, any Preliminary
Prospectus or the Prospectus or any amendment or supplement thereto, or
any Application a material fact required to be stated therein or
necessary to make the statements therein not misleading or
28
<PAGE>
(iv) any untrue statement or alleged untrue
statement of any material fact contained in any audio or visual
materials used in connection with the marketing of the Securities,
including without limitation, slides, videos, films, tape recordings,
and will reimburse, as incurred, each Underwriter and each such controlling
person for any legal or other expenses reasonably incurred by such Underwriter
or such controlling person in connection with investigating, defending against
or appearing as a third-party witness in connection with any such loss, claim,
damage, liability or action; provided, however, that the Company will not be
liable in any such case to the extent that any such loss, claim, damage or
liability arises out of or is based upon any untrue statement or alleged untrue
statement or omission or alleged omission made in such registration statement or
any amendment thereto, any Preliminary Prospectus or the Prospectus or any
amendment or supplement thereto, or any Application in reliance upon and in
conformity with written information furnished to the Company by any Underwriter
through the Representatives specifically for use therein. This indemnity
agreement will be in addition to any liability which the Company may otherwise
have. The Company will not, without the prior written consent of the Underwriter
or Underwriters purchasing, in the aggregate, more than fifty percent (50%) of
the Securities, settle or compromise or consent to the entry of any judgment in
any pending or threatened claim, action, suit or proceeding in respect of which
indemnification may be sought hereunder (whether or not any such Underwriter or
any person who controls any such Underwriter within the meaning of Section 15 of
the Act or Section 20 of the Exchange Act is a party to such claim, action, suit
or proceeding), unless such settlement, compromise or consent includes an
unconditional release of all of the Underwriters and such controlling persons
from all liability arising out of such claim, action, suit or proceeding.
(b) Each Underwriter, severally and not jointly, will
indemnify and hold harmless the Company, each of its directors, each of its
officers who signed the Registration Statement and each person, if any, who
controls the Company within the meaning of Section 15 of the Act or Section 20
of the Exchange Act against any losses, claims, damages or liabilities to which
the Company or any such director, officer or controlling person may become
subject under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon
(i) any untrue statement or alleged untrue statement of any material fact
contained in the Registration Statement or any amendment thereto, any
Preliminary Prospectus or the Prospectus or any amendment or supplement thereto,
or any Application or (ii) the omission or the alleged omission to state therein
a material fact required to be stated in the Registration Statement or any
amendment thereto, any Preliminary Prospectus or the Prospectus or any amendment
or supplement thereto, or any Application or necessary to make the statements
therein not misleading, in each case to the extent, but only to the extent, that
such untrue statement or alleged untrue statement or omission or alleged
omission was made in reliance upon and in conformity with written information
furnished to the Company by such Underwriter through the Representatives
29
<PAGE>
specifically for use therein; and, subject to the limitation set forth
immediately preceding this clause, will reimburse, as incurred, any legal or
other expenses reasonably incurred by the Company or any such director, officer
or controlling person in connection with investigating or defending any such
loss, claim, damage, liability or any action in respect thereof. This indemnity
agreement will be in addition to any liability which such Underwriter may
otherwise have.
(c) Promptly after receipt by an indemnified party under this
Section 8 of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against the indemnifying party
under this Section 8, notify the indemnifying party of the commencement thereof;
but the omission so to notify the indemnifying party will not relieve it from
any liability which it may have to any indemnified party otherwise than under
this Section 8. In case any such action is brought against any indemnified
party, and it notifies the indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate therein and, to the extent
that it may wish, jointly with any other indemnifying party similarly notified,
to assume the defense thereof, with counsel satisfactory to such indemnified
party; provided, however, that if the defendants in any such action include both
the indemnified party and the indemnifying party and the indemnified party shall
have reasonably concluded that there may be one or more legal defenses available
to it and/or other indemnified parties which are different from or additional to
those available to the indemnifying party, the indemnifying party shall not have
the right to direct the defense of such action on behalf of such indemnified
party or parties and such indemnified party or parties shall have the right to
select separate counsel to defend such action on behalf of such indemnified
party or parties. After notice from the indemnifying party to such indemnified
party of its election so to assume the defense thereof and approval by such
indemnified party of counsel appointed to defend such action, the indemnifying
party will not be liable to such indemnified party under this Section 8 for any
legal or other expenses, other than reasonable costs of investigation,
subsequently incurred by such indemnified party in connection with the defense
thereof, unless (i) the indemnified party shall have employed separate counsel
in accordance with the proviso to the next preceding sentence (it being
understood, however, that in connection with such action the indemnifying party
shall not be liable for the expenses of more than one separate counsel (in
addition to local counsel) in any one action or separate but substantially
similar actions in the same jurisdiction arising out of the same general
allegations or circumstances, designated by the Representatives in the case of
paragraph (a) of this Section 8, representing the indemnified parties under such
paragraph (a) who are parties to such action or actions) or (ii) the
indemnifying party does not promptly retain counsel satisfactory to the
indemnified party or (iii) the indemnifying party has authorized the employment
of counsel for the indemnified party at the expense of the indemnifying party.
After such notice from the indemnifying party to such indemnified party, the
indemnifying party will not be liable for the costs and expenses of any
settlement of such action effected by such indemnified party without the consent
of the indemnifying party.
(d) In circumstances in which the indemnity agreement provided
for in the preceding paragraphs of this Section 8 is unavailable or
insufficient, for any reason, to hold harmless an indemnified party in respect
of any losses, claims, damages or liabilities
30
<PAGE>
(or actions in respect thereof), each indemnifying party, in order to provide
for just and equitable contribution, shall contribute to the amount paid or
payable by such indemnified party as a result of such losses, claims, damages or
liabilities (or actions in respect thereof) in such proportion as is appropriate
to reflect (i) the relative benefits received by the indemnifying party or
parties on the one hand and the indemnified party on the other from the offering
of the Securities or (ii) if the allocation provided by the foregoing clause (i)
is not permitted by applicable law, not only such relative benefits but also the
relative fault of the indemnifying party or parties on the one hand and the
indemnified party on the other in connection with the statements or omissions or
alleged statements or omissions that resulted in such losses, claims, damages or
liabilities (or actions in respect thereof), as well as any other relevant
equitable considerations. The relative benefits received by the Company on the
one hand and the Underwriters on the other shall be deemed to be in the same
proportion as the total proceeds from the offering (before deducting expenses)
received by the Company bear to the total underwriting discounts and commissions
received by the Underwriters. The relative fault of the parties shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company or the
Underwriters, the parties' relative intents, knowledge, access to information
and opportunity to correct or prevent such statement or omission, and any other
equitable considerations appropriate in the circumstances. The Company and the
Underwriters agree that it would not be equitable if the amount of such
contribution were determined by pro rata or per capita allocation (even if the
Underwriters were treated as one entity for such purpose) or by any other method
of allocation that does not take into account the equitable considerations
referred to above in this paragraph (d). Notwithstanding any other provision of
this paragraph (d), no Underwriter shall be obligated to make contributions
hereunder that in the aggregate exceed the total public offering price of the
Securities purchased by such Underwriter under this Agreement, less the
aggregate amount of any damages that such Underwriter has otherwise been
required to pay in respect of the same or any substantially similar claim, and
no person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Underwriters' obligations to
contribute hereunder are several in proportion to their respective underwriting
obligations and not joint, and contributions among Underwriters shall be
governed by the provisions of the Prudential Securities Incorporated Master
Agreement Among Underwriters. For purposes of this paragraph (d), each person,
if any, who controls an Underwriter within the meaning of Section 15 of the Act
or Section 20 of the Exchange Act shall have the same rights to contribution as
such Underwriter, and each director of the Company, each officer of the Company
who signed the Registration Statement and each person, if any, who controls the
Company within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act, shall have the same rights to contribution as the Company.
9. Default of Underwriters. If one or more Underwriters
default in their obligations to purchase Firm Securities or Option Securities
hereunder and the aggregate number of such Securities that such defaulting
Underwriter or Underwriters agreed but failed to purchase is ten percent or less
of the aggregate number of Firm Securities or Option Securities to be purchased
by all of the Underwriters at such time hereunder, the other
31
<PAGE>
Underwriters may make arrangements satisfactory to the Representatives for the
purchase of such Securities by other persons (who may include one or more of the
non-defaulting Underwriters, including the Representatives), but if no such
arrangements are made by the Firm Closing Date or the related Option Closing
Date, as the case may be, the other Underwriters shall be obligated severally in
proportion to their respective commitments hereunder to purchase the Firm
Securities or Option Securities that such defaulting Underwriter or Underwriters
agreed but failed to purchase. If one or more Underwriters so default with
respect to an aggregate number of Securities that is more than ten percent of
the aggregate number of Firm Securities or Option Securities, as the case may
be, to be purchased by all of the Underwriters at such time hereunder, and if
arrangements satisfactory to the Representatives are not made within 36 hours
after such default for the purchase by other persons (who may include one or
more of the non-defaulting Underwriters, including the Representatives) of the
Securities with respect to which such default occurs, this Agreement will
terminate without liability on the part of any non-defaulting Underwriter or the
Company other than as provided in Section 10 hereof. In the event of any default
by one or more Underwriters as described in this Section 9, the Representatives
shall have the right to postpone the Firm Closing Date or the Option Closing
Date, as the case may be, established as provided in Section 3 hereof for not
more than seven business days in order that any necessary changes may be made in
the arrangements or documents for the purchase and delivery of the Firm
Securities or Option Securities, as the case may be. As used in this Agreement,
the term "Underwriter" includes any person substituted for an Underwriter under
this Section 9. Nothing herein shall relieve any defaulting Underwriter from
liability for its default.
10. Survival. The respective representations, warranties,
agreements, covenants, indemnities and other statements of the Company, its
officers and the several Underwriters set forth in this Agreement or made by or
on behalf of them, respectively, pursuant to this Agreement shall remain in full
force and effect, regardless of (i) any investigation made by or on behalf of
the Company, any of its officers or directors, any Underwriter or any
controlling person referred to in Section 8 hereof and (ii) delivery of and
payment for the Securities. The respective agreements, covenants, indemnities
and other statements set forth in Sections 6 and 8 hereof shall remain in full
force and effect, regardless of any termination or cancellation of this
Agreement.
11. Termination. (a) This Agreement may be terminated with
respect to the Firm Securities or any Option Securities in the sole discretion
of the Representatives by notice to the Company given prior to the Firm Closing
Date or the related Option Closing Date, respectively, in the event that the
Company shall have failed, refused or been unable to perform all obligations and
satisfy all conditions on its part to be performed or satisfied hereunder at or
prior thereto or, if at or prior to the Firm Closing Date or such Option Closing
Date, respectively,
(i) the Company or any of its subsidiaries shall
have, in the sole judgment of the Representatives, sustained any
material loss or interference with their respective businesses or
properties from fire, flood, hurricane, accident or other calamity,
whether or not covered by insurance, or from any labor dispute or any
32
<PAGE>
legal or governmental proceeding or there shall have been any material
adverse change, or any development involving a prospective material
adverse change (including without limitation a change in management or
control of the Company), in the condition (financial or otherwise),
business prospects, net worth or results of operations of the Company
and its subsidiaries, except in each case as described in or
contemplated by the Prospectus (exclusive of any amendment or
supplement thereto);
(ii) trading in the Common Stock shall have been
suspended by the Commission or the Nasdaq National Market or trading in
securities generally on the New York Stock Exchange or Nasdaq National
Market shall have been suspended or minimum or maximum prices shall
have been established on any such exchange or market system;
(iii) a banking moratorium shall have been declared
by New York or United States authorities; or
(iv) there shall have been (A) an outbreak or
escalation of hostilities between the United States and any foreign
power, (B) an outbreak or escalation of any other insurrection or armed
conflict involving the United States or (C) any other calamity or
crisis or material adverse change in general economic, political or
financial conditions having an effect on the U.S. financial markets
that, in the sole judgment of the Representatives, makes it impractical
or inadvisable to proceed with the public offering or the delivery of
the Securities as contemplated by the Registration Statement, as
amended as of the date hereof.
(b) Termination of this Agreement pursuant to this Section 11
shall be without liability of any party to any other party except as provided in
Section 10 hereof.
12. Information Supplied by Underwriters. The statements set
forth in the last paragraph on the front cover page and under the heading
"Underwriting" in any Preliminary Prospectus or the Prospectus (to the extent
such statements relate to the Underwriters) constitute the only information
furnished by any Underwriter through the Representatives to the Company for the
purposes of Sections 2(a)(ii) and 8 hereof. The Underwriters confirm that such
statements (to such extent) are correct.
13. Notices. All communications hereunder shall be in writing
and, if sent to any of the Underwriters, shall be delivered or sent by mail,
telex or facsimile transmission and confirmed in writing to Prudential
Securities Incorporated, One New York Plaza, New York, New York 10292,
Attention: Equity Transactions Group; and if sent to the Company or the Selling
Stockholders, shall be delivered or sent by mail, telex or facsimile
transmission and confirmed in writing to the Company at 500 Cypress Creek Road
West, Suite 590, Fort Lauderdale, FL 33309, Attn: Robert R. Bartolini.
14. Successors. This Agreement shall inure to the benefit of
and shall be binding upon the several Underwriters, the Company and their
respective successors and legal representatives, and nothing expressed or
mentioned in this Agreement is intended or shall be
33
<PAGE>
construed to give any other person any legal or equitable right, remedy or claim
under or in respect of this Agreement, or any provisions herein contained, this
Agreement and all conditions and provisions hereof being intended to be and
being for the sole and exclusive benefit of such persons and for the benefit of
no other person except that (i) the indemnities of the Company contained in
Section 8 of this Agreement shall also be for the benefit of any person or
persons who control any Underwriter within the meaning of Section 15 of the Act
or Section 20 of the Exchange Act and (ii) the indemnities of the Underwriters
contained in Section 8 of this Agreement shall also be for the benefit of the
directors of the Company, the officers of the Company who have signed the
Registration Statement and any person or persons who control the Company within
the meaning of Section 15 of the Act or Section 20 of the Exchange Act. No
purchaser of Securities from any Underwriter shall be deemed a successor because
of such purchase.
15. Applicable Law. The validity and interpretation of this
Agreement, and the terms and conditions set forth herein, shall be governed by
and construed in accordance with the laws of the State of New York, without
giving effect to any provisions relating to conflicts of laws.
16. Consent to Jurisdiction and Service of Process. All
judicial proceedings arising out of or relating to this Agreement may be brought
in any state or federal court of competent jurisdiction in the State of New
York, and by execution and delivery of this Agreement, such Selling Shareholder
accepts for itself and in connection with its properties, generally and
unconditionally, the nonexclusive jurisdiction of the aforesaid courts and
waives any defense of forum non conveniens and irrevocably agrees to be bound by
any judgment rendered thereby in connection with this Agreement. Each Selling
Shareholder designates and appoints ___________________, and such other persons
as may hereafter by selected by such Selling Shareholder irrevocably agreeing in
writing to so serve, as its agent to receive on its behalf service of all
process in any such proceedings in any such court, such service being hereby
acknowledged by such Selling Shareholder to be effective and binding service in
every respect. A copy of any such process so served shall be mailed by
registered mail to such Selling Stockholder at the Company's address provided in
Section 13 hereof; provided, however, that, unless otherwise provided by
applicable law, any failure to mail such copy shall not affect the validity of
service of such process. If any agent appointed by such Selling Shareholder
refuses to accept service, such Selling Shareholder hereby agrees that service
of process sufficient for personal jurisdiction in any action against such
Selling Shareholder in the State of New York may be made by registered or
certified mail, return receipt requested, to such Selling Shareholder at the
Company's address provided in Section 13 hereof, and such Selling Shareholder
hereby acknowledges that such service shall be effective and binding in every
respect. Nothing herein shall affect the right to serve process in any other
manner permitted by law or shall limit the right of any Underwriter to bring
proceedings against such Selling Shareholder in the courts of any other
jurisdiction.
17. Counterparts. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
34
<PAGE>
If the foregoing correctly sets forth our understanding,
please indicate your acceptance thereof in the space provided below for that
purpose, whereupon this letter shall constitute an agreement binding the
Company, each of the Selling Stockholders and each of the several Underwriters.
Very truly yours,
NAL FINANCIAL GROUP INC.
By:
------------------------------------
Name: Robert R. Bartolini
Title: Chief Executive Officer
SELLING STOCKHOLDERS:
Arnold D. Flam, DDS and
Harvey Glicker, DDS Profit
Sharing Trust dated 5/1/76 APP Investments, Inc.
By: By:
- ------------------------------------ ------------------------------------
Name: Name:
Title: Title:
Centaur Financial Corp. Cranbourne Investments, Inc.
By: By:
- ------------------------------------ ------------------------------------
Name: Name:
Title: Title:
Diamond Import Group, Inc.
By: By:
- ------------------------------------ ------------------------------------
Name: Name: Bruce Ginsburg
Title: Title:
By: By:
- ------------------------------------ ------------------------------------
Name: Edward J. Hance Name: Anita Rosner
Title: Title:
35
<PAGE>
The foregoing Agreement is hereby
confirmed and accepted as of the date
first above written.
PRUDENTIAL SECURITIES INCORPORATED
PIPER JAFFRAY INC.
SANDS BROTHERS & CO., LTD.
By PRUDENTIAL SECURITIES INCORPORATED
By
-------------------------------------
Name: Jean-Claude Canfin
Title: Director
For itself and on behalf of the Representatives.
36
<PAGE>
SCHEDULE 1
UNDERWRITERS
<TABLE>
<CAPTION>
(b)
(a) Number of Firm
Number of Firm Securities to be
Securities to be Purchased from
Purchased from Selling
Underwriter Company Stockholders
----------- ------------------ ------------------
<S> <C> <C>
Prudential Securities Incorporated..............
Piper Jaffray Inc. .............................
Sands Brothers & Co., Ltd. .....................
Total: .........................................
----------- ------------
</TABLE>
37
<PAGE>
SCHEDULE 2
SELLING STOCKHOLDERS
Number of Firm Number of Option
Name Securties to be Sold Securities to be Sold
---- -------------------- ---------------------
Arnold D. Flam, DDS and Harvey
Glicker, DDS Profit Sharing
Trust dated 5/1/76............... 5,500
APP Investments, Inc. ............. 58,000
Centaur Financial Corp. ........... 58,000
Cranbourne Investments, Inc. ...... 20,000
Diamond Import Group, Inc.......... 5,500
Bruce Ginsburg..................... 1,645
Edward J. Hance.................... 64,000
Anita Rosner....................... 5,500
-------
Total: ............................ 218,145
=======
38
<PAGE>
Stephen M. Cohen
215-665-3873
[email protected]
November 20, 1996
NAL Financial Group Inc.
500 Cypress Creek Road West
Suite 590
Fort Lauderdale, FL 33309
Gentlemen:
In connection with the Registration Statement on Form SB-2, as amended
(Registration No. 333-15787) (the "Registration Statement"), filed by NAL
Financial Group Inc. (the "Company") under the Securities Act of 1933, as
amended, relating to the public offering of an aggregate of up to 2,875,000
shares of the Company's Common Stock, par value $.15 per share, of which (a)
2,281,855 shares will be purchased by the underwriters from the Company; (b)
218,145 shares will be purchased by the underwriters from the existing
securityholders of the Company (the "Selling Stockholders"); and (c) up to
375,000 shares may be purchased by the underwriters from the Company if the
underwriters exercise the option granted to them by the Company to cover
over-allotments (collectively, the "Shares"), we, as counsel for the Company,
have examined such corporate records, other documents, and questions of law as
we have considered necessary or appropriate for the purposes of this opinion.
Upon the basis of such examination, we advise you that in our opinion:
(i) the Shares to be issued and sold by the Company have been duly and
validly authorized and, when sold in the manner contemplated by the underwriting
agreement (the "Underwriting Agreement") filed as an exhibit to the Registration
Statement and upon receipt by the Company of payment therefor as provided in the
Underwriting Agreement, will be legally issued, fully paid and non-assessable;
and
(ii) the Shares to be sold by the Selling Stockholders were, when
issued, duly and validly authorized, legally issued, fully paid and
non-assessable.
<PAGE>
We consent to the filing of this opinion as an exhibit to the
Registration Statement and the reference to this firm under the caption "Legal
Matters" in the Prospectus contained therein.
Very truly yours,
BUCHANAN INGERSOLL PROFESSIONAL CORPORATION
By: /s/ Stephen M. Cohen
---------------------------------------
Stephen M. Cohen
SMC:ps
<PAGE>
-----------------------------
(Name of Selling Stockholder)
CUSTODY AGREEMENT AND POWER OF ATTORNEY
for Sale of Common Stock of
NAL FINANCIAL GROUP INC.
Attorney-in-Fact:
Robert R. Bartolini
c/o NAL Financial Group Inc.
500 Cypress Creek Road West, Suite 590
Ft. Lauderdale, FL 33309
Custodian:
Jonathan Miller
c/o StockTrans, Inc.
7 E. Lancaster Avenue
Ardmore, PA 19003
Dear Mr. Bartolini and Mr. Miller:
NAL Financial Group Inc., a Delaware corporation (the "Company") and the
undersigned (the "Selling Stockholder") propose to sell certain shares
of Common Stock, $.15 par value per share, of the Company (the "Common
Stock" ) to underwriters (the "Underwriters" ) for whom Prudential
Securities Incorporated, Piper Jaffray Inc. and Sands Brothers & Co.,
Ltd., will act as representatives (the "Representatives" ) for
distribution under a Registration Statement on Form SB-2 (the
"Registration Statement") to the public at a price and on terms to be
hereafter determined. It is understood that at this time there is no
commitment on the part of the Underwriters to purchase any shares of
Common Stock and no assurance that an offering of Common Stock will take
place. The shares of Common Stock that the undersigned proposes to sell
to the Underwriters pursuant to the Underwriting Agreement hereinafter
mentioned are referred to herein as the "Shares."
<PAGE>
1. Appointment and Powers of Attorney-in-Fact.
A. The undersigned hereby irrevocably constitutes and appoints Robert R.
Bartolini (the "Attorney-in-Fact"), as his agent and attorney-in-fact,
with full power of substitution, with respect to all matters arising in
connection with the public offering and sale of the Shares, including,
but not limited to, the power and authority on behalf of the undersigned
to do or cause to be done any of the following things:
(i) assist in the preparation of an Underwriting Agreement (the
"Underwriting Agreement"), substantially in the form of the draft dated
, 1996, delivered to the undersigned herewith, receipt of
which is acknowledged, but with such insertions, changes, additions or
deletions as the undersigned shall approve, such approval to be
conclusively evidenced by the delivery of the Underwriting Agreement by
the undersigned, including the making of all representations and
agreements provided in the Underwriting Agreement to be made by, and the
exercise of all authority thereunder vested in, the undersigned;
(ii) sell, assign, transfer and deliver the Shares to the Underwriters
pursuant to the Underwriting Agreement and deliver to the Underwriters
certificates for the Shares so sold (the price for such shares to be the
same as that paid by the Underwriters to the Company);
(iii) take any and all steps deemed necessary or desirable by the
Attorney-in-Fact in connection with the registration of the Shares under
the Securities Act of 1933, as amended (the "Securities Act" ), the
Securities Exchange Act of 1934, as amended, and under the securities or
"blue sky" laws of various states and jurisdictions, including, without
limitation, the giving or making of such undertakings, representations
and agreements and the taking of such other steps as the
Attorney-in-Fact may deem necessary or advisable;
(iv) instruct the Company and the Custodian, as hereinafter defined, on
all matters pertaining to the sale of the Shares and delivery of
certificates therefor;
(v) provide, in accordance with the Underwriting Agreement, for the
payment of expenses of the offering and sale of the Common Stock covered
by the Registration Statement; and
(vi) otherwise take all actions and do all things necessary or proper,
required, contemplated or deemed advisable or desirable by the
Attorney-in-Fact in his discretion, including the execution and delivery
of any documents, and generally act for and in the name of the
undersigned respect to the sale of the Shares to the Underwriters and
the reoffering of the Shares by the Underwriters as fully as could the
undersigned if then personally present and acting.
B. The Attorney-in-Fact may act alone in exercising the rights and
powers conferred on the Attorney-in-Fact by this Custody Agreement and
Power of Attorney ("this Agreement"). The Attorney-in-Fact is hereby
empowered to determine, in his sole and absolute discretion, the
2
<PAGE>
time or times when, the purposes for which, and the manner in which, any
power herein conferred upon the Attorney-in-Fact shall be exercised.
C. The Custodian (as defined below), the Representatives, the Company
and all other persons dealing with the Attorney-in-Fact as such may rely
and act upon any writing believed in good faith to be signed by the
Attorney-in-Fact.
D. The Attorney-in-Fact shall not receive any compensation for his
services rendered hereunder, except that he shall be entitled to cause
the Custodian to pay, from the proceeds payable to the undersigned, the
undersigned's proportionate share of any out-of-pocket expenses incurred
under this Agreement.
2. Appointment of Custodian: Deposit of Shares.
A. In connection with and to facilitate the sale of the Shares to the
Underwriters, the undersigned hereby appoints Jonathan Miller as custodian (the
"Custodian") and herewith deposits with the Custodian one or more certificates
for Common Stock that represent not less than the total number of Shares to be
sold by the undersigned to the Underwriters, which number is set forth on
Schedule I hereto. Each such certificate so deposited is in negotiable and
proper deliverable form endorsed in blank with the signature of the undersigned
thereon guaranteed by a commercial bank or trust company in the United States or
by a member firm of the New York Stock Exchange, or is accompanied by a duly
executed stock power or powers in blank, bearing the signature of the
undersigned so guaranteed. The Custodian is hereby authorized and directed,
subject to the instructions of the Attorney-in-Fact, (a) to hold in custody the
certificate or certificates deposited herewith, (b) to deliver or to authorize
the Company's Transfer Agent to deliver the certificate or certificates
deposited hereunder (or replacement certificate(s) for the Shares) to or at the
direction of the Attorney-in-Fact in accordance with the terms of the
Underwriting Agreement and (c) to return or cause the Company's Transfer Agent
to return to the undersigned new certificate(s) for the shares of Common Stock
represented by any certificate deposited hereunder which are not sold pursuant
to the Underwriting Agreement. The Custodian shall be entitled to customary
compensation for the services to be rendered hereunder as set forth in Schedule
II attached hereto. Such compensation shall be paid to the Custodian by the
Company.
B. Until the Shares have been delivered to the Underwriters against payment
therefor in accordance with the Underwriting Agreement, the undersigned shall
retain all rights of ownership with respect to the Shares deposited hereunder,
including the right to vote and to receive all dividends and payment thereon,
except the right to retain custody of or dispose of such Shares, which right is
subject to this Agreement and the Underwriting Agreement.
3. Sale of Shares: Remitting Net Proceeds.
A. The Attorney-in-Fact is hereby authorized and directed to deliver or cause
the Custodian or the Company's Transfer Agent to deliver certificates for the
Shares to the Representatives, as provided in the Underwriting Agreement,
against delivery to the Attorney-in-
3
<PAGE>
Fact for the accounts of the undersigned of the purchase price of the Shares, at
the time and in the funds specified in the Underwriting Agreement. The
Attorney-in-Fact is authorized, on behalf of the undersigned, to accept and
acknowledge receipt of the payment of the purchase price for the Shares and
shall promptly remit to the undersigned his proportionate share of the proceeds.
4. Representations. Warranties and Agreements. The undersigned represents and
warrants to, and agrees with, the Company, the Attorney-in-Fact, the Custodian
and the Underwriters as follows:
A. The undersigned has full legal right, power and authority to enter
into and perform this Agreement and the Underwriting Agreement.
B. The undersigned has reviewed the representations and warranties to be made by
the undersigned as a Selling Stockholder contained in the Underwriting
Agreement, and hereby represents, warrants and covenants that each of such
representations and warranties is true and correct as of the date hereof and,
except as the undersigned shall have notified the Attorney-in-Pact pursuant to
paragraph F of the attached instructions, will be true and correct at all times
from the date hereof through and including the time of the closing of the sale
of the Shares to the Underwriters. The undersigned will promptly notify the
Attorney-in-Fact of any development that would make any such representation and
warranty untrue.
C. The undersigned is not directly or indirectly an affiliate of or associated
with any member of the National Association of Securities Dealers, Inc.
D. Upon execution and delivery of the Underwriting Agreement by the undersigned,
the undersigned agrees to indemnify and hold harmless the Company, each of its
directors, each of its officers who signs the Registration Statement, each
Underwriter and each person who controls the Company or any Underwriter, and to
contribute to amounts paid as a result of losses, claims, damages, liabilities
and expenses, as provided in Section 8 of the Underwriting Agreement.
E. Upon execution and delivery of the Underwriting Agreement by the undersigned,
the undersigned agrees to be bound by and to perform each of the covenants and
agreements of the undersigned as a Selling Stockholder in the Underwriting
Agreement.
F. The undersigned agrees to deliver to the Attorney-in-Fact such documentation
as the Attorney-in-Fact, the Company or the Underwriters or any of their
respective counsel may reasonably request in order to effectuate any of the
provisions hereof or of the Underwriting Agreement, all of the foregoing to be
in form and substance satisfactory in all respects to the Attorney-in-Fact.
The foregoing representations, warranties and agreements are made for the
benefit of, and may be relied upon by, the Attorney-in-Fact, the Company, the
Custodian, the Underwriters and their respective representatives, agents and
counsel and are in addition to, and not in limitation of, the representations,
warranties and agreements of the Selling Stockholder in the Underwriting
Agreement.
4
<PAGE>
5. Irrevocability of Instruments: Termination of this Agreement.
A. This Agreement, the deposit of the Shares pursuant hereto and all authority
hereby conferred, is granted, made and conferred subject to and in consideration
of (i) the interests of the Attorney-in-Fact, the Underwriters and the Company
in and for the purpose of completing the transactions contemplated hereunder and
by the Underwriting Agreement and (ii) the completion of the registration of
Common Stock pursuant to the Registration Statement and the other acts of the
above-mentioned parties from the date hereof to and including the execution and
delivery of the Underwriting Agreement in anticipation of the sale of Common
Stock, including the Shares, to the Underwriters; and the Attorney-in-Fact is
hereby further vested with an estate, right, title and interest in and to the
Shares deposited herewith for the purpose of irrevocably empowering and securing
to him authority sufficient to consummate said transactions. Accordingly, this
Agreement shall be irrevocable prior to March 31, 1997, and shall remain in full
force and effect until that date. The undersigned further agrees that this
Agreement shall not be terminated by operation of law or upon the occurrence of
any event whatsoever, including the death, disability or incompetence of any of
the undersigned. If any event referred to in the preceding sentence shall occur,
whether with or without notice thereof to the Attorney-in-Fact, any of the
Underwriters or any other person, the Attorney-in-Fact shall nevertheless be
authorized and empowered to deliver and deal with the Shares deposited under the
Agreement by the undersigned in accordance with the terms and provisions of the
Underwriting Agreement and this Agreement as if such event had not occurred.
B. If the sale of the Shares contemplated by this Agreement is not completed by
March 31, 1997, this Agreement shall terminate (without affecting any lawful
action of the Attorney-in-Fact or the Custodian prior to such termination), and
the Attorney-in-Fact shall cause the Custodian to return to the undersigned all
certificates for the Shares deposited hereunder, but only after having received
payment of any expenses to be paid or borne by the Selling Stockholder. The
undersigned hereby covenants with the Attorney-in-Fact that if for any reason
the sale of the Shares contemplated hereby shall not be consummated, the
undersigned shall pay all expenses payable by the Selling Stockholder hereunder
or under the Underwriting Agreement.
6. Liability and Indemnification of the Attorney-in-Fact and Custodian. The
Attorney-in-Fact and the Custodian assume no responsibility or liability to the
undersigned or to any other person, other than to deal with the Shares, the
proceeds from the sale of the Shares and any other shares of Common Stock
deposited with the Custodian pursuant to the terms of this Agreement in
accordance with the provisions hereof The duties and obligations of the
Custodian shall be limited to and determined solely by the express provisions of
this Agreement, and no implied duties or obligations shall be read into this
Agreement against the Custodian. The undersigned hereby agrees to indemnify and
hold harmless the Attorney-in-Fact and the Custodian, and their respective
officers, agents, successors, assigns and personal representatives with respect
to any act or omission of or by any of them in good faith in connection with any
and all matters within the scope of this Agreement or the Underwriting
Agreement; provided, however, that the Attorney-in-Fact and the Custodian may be
liable for the undersigned for any such act or omission to the extent
attributable to gross negligence or fraud. The Custodian may consult with
counsel
5
<PAGE>
of its own choice and shall have full and complete authorization and protection
for any action taken or suffered by it hereunder in good faith and in accordance
with the opinion of such counsel.
7. Interpretation.
A. The representations, warranties and agreements of the undersigned contained
herein and in the Underwriting Agreement shall survive the sale and delivery of
the Shares and the termination of this Agreement.
B. The validity, enforceability, interpretation and construction of this
Agreement shall be determined in accordance with the laws of the State of New
York applicable to contracts made and to be performed within the State of New
York, and this Agreement shall inure to the benefit of, and be binding upon, the
undersigned and the undersigned's heirs, executors, administrators, successors
and assigns, as the case may be.
C. Wherever possible each provision of this Agreement shall be interpreted in
such manner as to be effective and valid under applicable law, but if any such
provision shall be prohibited by or invalid under applicable law, it shall be
ineffective only to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or the remaining provisions of this
Agreement.
D. The use of the masculine gender in this Agreement includes the feminine and
neuter, and the use of the singular includes the plural, wherever appropriate.
6
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this Custody Agreement
and Power of Attorney this day of , 1996.
Signature of Selling Stockholder (Please sign exactly as your
Guaranteed by Stockholder name appears on
your stock certificate(s).)
Name and address to which
notices and funds shall
be sent.
----------------------------
(NAME)
----------------------------
(STREET)
----------------------------
(CITY, STATE, ZIP CODE)
(NOTE: The signature of the Selling Stockholder must be guaranteed by a
commercial bank or trust company in the United States or by a member firm of the
New York Stock Exchange.)
ACCEPTED by the Attorney-in-Fact ACCEPTED by the Custodian
as of the date above set forth: as of the date above set forth:
- ------------------------------- ----------------------------
- ------------------------------- By:
----------------------------
SEE THE ATTACHED INSTRUCTIONS
7
<PAGE>
INSTRUCTIONS
(For completing the Custody Agreement and Power of Attorney)
A. You have been sent five copies of the Custody Agreement and Power of Attorney
(the "Agreement"). Please complete and return four copies of the Agreement and
stock certificate(s) as set forth in paragraph D below. A fully executed copy of
the Agreement will be returned to you; a fully executed copy of the Agreement
and your stock certificate(s) will be retained by the Custodian; and a fully
executed copy of the Agreement will be delivered to the Attorney-in-Fact and to
the Representatives.
B. Complete Schedule I attached hereto.
C. Each copy of this Agreement and each stock certificate or stock power
deposited hereunder must be executed by you with your signature on this
Agreement and the stock certificate(s) or the accompanying stock power
guaranteed by a commercial bank or trust company in the United States or any
broker that is a member firm of the New York Stock Exchange. Please sign the
stock certificate(s) or stock power and the Agreement exactly as your name
appears on your stock certificate(s).
D. Endorsed stock certificate(s) or stock certificate(s) with stock powers
attached along with all four executed copies of the completed Agreement should
be promptly returned by hand delivery or by certified mail appropriately insured
to:
Jonathan Miller
c/o StockTrans, Inc.
7 E. Lancaster Avenue
Ardmore, PA 19003
If sent through the mail, it is recommended that the certificate(s) not be
endorsed, but an executed stock power be sent under separate cover from the
certificate(s).
E. If any certificate that you submit represents a greater number of Shares than
the aggregate number of Shares that you agree to sell pursuant to the
Underwriting Agreement, the Custodian will cause to be delivered to you in due
course, but not earlier than ten days after the closing for the purchase of
Shares by the Underwriters, a certificate for the excess number of shares.
F. For purposes of discharging your obligations under the Underwriting
Agreement, please contact Alex C. Mammen of Prudential Securities
Incorporated if any information or representation included in the
foregoing Agreement or the Underwriting Agreement should change, or if
you become aware of any new information, at any time prior to
termination of the period referred to in the Underwriting Agreement.
8
<PAGE>
---------------------------------
(Name of Selling Stockholder)
SCHEDULE I
Certificate(s) for Shares of Common Stock of
NAL FINANCIAL GROUP INC.
deposited under
Custody Agreement and Power of Attorney
Number of Shares of Number of Shares of
Common Stock Common Stock from this
Certificate Number Represented by Certificate Certificate to Be Sold*
- ------------------ -------------------------- -----------------------
- ------------------ -------------------------- -----------------------
- ------------------ -------------------------- -----------------------
- ------------------ -------------------------- -----------------------
- ------------------ -------------------------- -----------------------
- ------------------ -------------------------- -----------------------
Total: -----------------------
*If fewer than all shares represented by a certificate are to be sold,
indicate below, if desired for income tax purposes, the date of purchase
or purchase price of the particular shares to be sold.
9
<PAGE>
SCHEDULE II
Fees of Custodian
Custodial Fees .........................................
Wire Transfer Fees.............................$ per wire transfer
10
<PAGE>
Lead Managing Underwriter
Prudential Securities Incorporated
Co-Managers
Piper Jaffray Inc.
Sands Brothers & Co., Ltd.
As Representative(s) of the several Underwriters
c/o Prudential Securities Incorporated
One New York Plaza
New York, New York 10292
Re: NAL Financial Group Inc.
Gentlemen:
The undersigned is the "beneficial owner" (as that term is defined within
the meaning of Rule 13d-3 under the Securities Exchange Act of 1934, as amended)
of shares of common stock (the "Common Stock") of NAL Financial Group Inc. (the
"Company"). The undersigned understands that the Company has filed a
Registration Statement on Form SB-2 (the "Registration Statement") with the
Securities and Exchange Commission (the "Commission") for the registration of
approximately 2,875,000 shares of Common Stock (including shares subject to an
over-allotment option) (the "Offering"). The undersigned further understands
that you are contemplating entering into an Underwriting Agreement with the
Company in connection with the Offering. All terms not otherwise defined herein
shall have the same meanings as in the Underwriting Agreement.
In order to induce the Company, you and the other Underwriters to enter
into the Underwriting Agreement and to proceed with the Offering, the
undersigned agrees, for the benefit of the Company, you and the other
Underwriters, that should the Offering be effected, the undersigned will not,
without the prior written consent of Prudential Securities Incorporated, on
behalf of the Underwriters, directly or indirectly:
(i) offer, sell, offer to sell, contract to sell, pledge, grant any option
to purchase or otherwise dispose or transfer (or announce any offer, sale offer
of sale, contract of sale or grant of any option to purchase or other
disposition or transfer) of (a) any shares of Common Stock or of securities
substantially similar thereto or (b) any other securities convertible into, or
exchangeable or exercisable for, shares of Common Stock or such other
similar securities, beneficially owned (within the meaning of Rule 13d-3
under the Securities Exchange Act of 1934, as amended) by the undersigned on the
date hereof or hereafter acquired for a period of 180 days subsequent to the
date of the final Prospectus filed with the Securities and Exchange Commission
pursuant to Rule 424(b) of the Securities Act of 1933, as amended (the "Act")
promulgated by the Commission or if no filing under Rule 424(b) is made, the
date of the final Prospectus included in the Registration Statement when
declared effective under the Act (such 180 day period hereafter referred to as
the "Lock-Up Period");
<PAGE>
(ii) offer, sell, offer to sell, contract to sell, pledge, grant any option
to purchase or otherwise dispose or transfer (or announce any offer, sale, offer
of sale, contract of sale, pledge, grant of any option to purchase or other
disposition or transfer) of (a) any shares of Common Stock or of Securities
substantially similar thereto or (b) any other securities convertible into, or
exchangeable or exercisable for, any shares of Common Stock or such similar
securities "beneficially owned" (within the meaning of Rule 13d-3 under the
Securities Exchange Act of 1934, as amended) by the undersigned on the date
hereof or hereafter acquired, at any time from the date hereof through the
effective date of the Registration Statement, without first requiring any such
offering or acquiring parties to execute and deliver to you an agreement of
substantially the tenor hereof; and
(iii) exercise any of the demand, mandatory or piggyback registration
rights previously granted by the Company to the undersigned, as such rights were
previously established in a Registration Rights Agreement and/or Amended and
Restated Registration Rights Agreement, at any time from the date hereof and
commencing through the expiration of the Lock-Up Period; however, so as to
facilitate the potential sale of Common Stock as shortly after the Lock-up
Period as is practicable, Prudential Securities Incorporated has granted the
Company permission to file a registration statement with the Commission 120 days
after commencement of the Lock-up Period.
The undersigned, whether or not participating in the Offering, confirms
that he, she or it understands that the Underwriters and the Company will rely
upon the representations set forth in this agreement in proceeding with the
Offering. This agreement shall be binding on the undersigned and his, her or its
respective successors, heirs, personal representatives and assigns.
Very truly yours,
By: ---------------------------- By: ----------------------------
[Print Stockholder's name] [Stockholder's signature]
The foregoing is accepted and agreed to
as of the date first above written:
PRUDENTIAL SECURITIES INCORPORATED
By: ----------------------------
Jean-Claude Canfin, Director
<PAGE>
Consent of Independent Certified Public Accountants
We hereby consent to the use in the Prospectus constituting part of this
Pre-Effective Amendment No. 1 to the Registration Statement on Form SB-2 of our
report dated February 27, 1996, except as to Note 19, which is as of March 22,
1996, relating to the financial statements of NAL Financial Group Inc., which
appears in such Prospectus. We also consent to the reference to us under the
heading "Experts" in such Prospectus.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Fort Lauderdale, Florida
November 20, 1996
