SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[ X ] Annual Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
for the fiscal year ended December 31, 1995
[ ] Transition Report Under Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transition period from ________________ __, ____
to ___________________ __, ____
Commission File Number: 0-25476
NAL FINANCIAL GROUP INC.
----------------------------------------------
(Name of small business issuer in its charter)
Delaware 23-24552194
- - --------------- ------------------------------------
(State or other (I.R.S. Employer Identification No.)
jurisdiction of
incorporation
or organization)
500 Cypress Creek Road West
Suite 590
Fort Lauderdale, FL 33309
- - ---------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
Issuer's telephone number: (305) 938-8200
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock $.15 par value
---------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-B is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by
<PAGE>
reference in Part III of this Form 10-KSB or any amendment to this
Form 10-KSB. [ ]
Registrant's revenues for the year ended December 31, 1995:
$22,932,000.
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, as of March 26, 1996, was approximately $54,800,787, based upon
the closing sale price of the Registrant's Common Stock upon The NASDAQ National
MarketSM of $12.50 per share of Common Stock on such date. See Footnote (1)
below.
APPLICABLE ONLY TO CORPORATE REGISTRANTS
The number of shares outstanding of the Registrant's sole class of Common
Stock as of March 26, 1996 was 6,700,041 shares.
DOCUMENTS INCORPORATED BY REFERENCE:
None.
- - ------------------
(1) The information provided shall in no way be construed as an admission that
any person whose holdings are excluded from the figure is not an affiliate
or that any person whose holdings are included is an affiliate and any
such admission is hereby disclaimed. The information provided is included
solely for recordkeeping purposes of the Securities and Exchange
Commission.
2
<PAGE>
PART I
------
ITEM 1. DESCRIPTION OF BUSINESS.
Background
NAL Financial Group Inc. (the "Company") commenced operations during 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 and mortgage loans and auto lease receivables.
Because of the opportunities presented by the insolvency and
reorganization of many financial institutions at the time, from inception
through the second quarter of 1994 the principal activities of the Company
involved the bulk purchase and servicing of seasoned portfolios of consumer and
mortgage loans and lease receivables acquired principally from the Federal
Deposit Insurance Corporation ("FDIC") and the Resolution Trust Corporation
("RTC"). Most of these portfolios were purchased at substantial discounts.
In response to the decreasing availability of seasoned portfolios, since
the second quarter of 1994 the Company's principal focus has shifted to other
segments of the consumer finance industry, particularly auto finance. Although
opportunistic purchases of seasoned auto related portfolios may still be
considered by management, the Company's primary business since June 1994 has
been the acquisition and servicing of automotive leases and loans originated by
dealers in connection with sales or leases to persons with sub-prime credit.
The Company became publicly held by virtue of a merger (the "Merger")
effective November 30, 1994 with and into Corporate Financial Ventures, Inc.
("COFVI"), an inactive public company.
Pursuant to the Merger, the historic stockholders of NAL received
3,160,000 newly-issued restricted securities of COFVI, which at the time
constituted approximately 56% of its issued and outstanding common stock.
Effective upon completion of the Merger, COFVI assumed the historic operations
of NAL and changed its name to "NAL Financial Group Inc."
The Company operates its business through five wholly-owned subsidiaries:
NAL Acceptance Corporation ("NAC"), NAL Mortgage Corporation ("NMC"), NAL
Insurance Services, Inc. ("NIS"), Performance Cars of South Florida, Inc.
("PCSF") and AUTORICS, Inc. ("Autorics"). Unless otherwise specified, references
to the Company shall include NAC, NMC, NIS, Autorics and/or PCSF.
3
<PAGE>
Current Plan of Operations
The Company's auto finance business primarily consists of the evaluation,
acceptance and purchase of finance contracts which are either originated by
participating dealers in connection with the sale or lease of new and used
vehicles to sub-prime consumers or purchased in bulk receivables portfolios.
After a finance contract is evaluated and accepted by the Company, the purchase
contract or lease is executed by the dealer and the customer. The vehicle is
then delivered to the customer and the title to the vehicle is transferred into
the name of the customer and held by the Company with a lien in its favor (in
the case of a purchased vehicle), or to the Company (in the case of a lease).
Under the standard master dealer agreement utilized by the Company, upon
delivery of the title to the Company, the Company receives an assignment of the
contract and pays the dealer a "dealer advance" which is calculated on the basis
of a pre-determined formula based upon the value of the vehicle (for a used
vehicle) or manufacturer's invoice (for a new vehicle).
The Company also occasionally enters into customized dealer agreements
which differ from the standard master dealer agreement utilized by the Company.
Under these agreements, the Company purchases finance contracts from dealers
from time to time at a stated percentage of the financed amount. Typically, a
portion of the purchase discount is placed in a reserve account which is used to
offset any credit losses experienced by the Company. Periodically, the amounts
in the reserve account in excess of an agreed upon minimum are paid over to the
dealer. Pursuant to these agreements, the dealer typically retains many of the
collection and servicing functions, including monthly billing, repossession
and/or disposal of the vehicle. These agreements are generally with recourse to
the dealer. At December 31, 1995, the Company as a percentage of principal had
in place approximately 15% of these types of agreements.
The Company's shifting focus to the auto finance segment can most readily
be reflected by analysis of the increases in its dealer base and the origination
of finance contracts from such dealers since September 1994.
4
<PAGE>
- - --------------------------------------------------------------------------------
12/94 3/95 6/95 9/95 12/95
----- ---- ---- ---- -----
- - --------------------------------------------------------------------------------
No. of
Participating
Dealers 196 296 406 787 909
(Cumulative)
- - --------------------------------------------------------------------------------
No. of
Contracts
Originated 1,490 1,731 1,998 2,002 3,965
(By Quarter)
- - --------------------------------------------------------------------------------
Contract Origination
Dealers
The Company's auto finance segment involves the purchase of auto loan and
lease finance contracts in connection with the purchase or lease of new and used
vehicles. Dealer relationships generally begin with the Company's dealer
development representative contacting a dealer to explain the Company's
financing program. The Company's representative presents the dealer with a sales
package, including promotional material containing current rates being offered
by the Company to dealerships, copies of the Company's master dealer agreement,
examples of monthly reports and samples of the Company's documentation
requirements. A dealer desiring to utilize the Company's financing program must
enter into a non-exclusive master dealer agreement with the Company. As a
condition to entering into such an agreement, a dealer must provide satisfactory
financial and other information. A dealer must also make representations and
warranties to the Company with respect to the contracts to be assigned. Upon
completion of this master agreement, the Company's representative provides the
dealership with necessary documentation for origination of contracts and trains
dealership personnel in the use of such documentation.
The master dealer agreement may be terminated by the Company or the dealer
(so long as there is no event of default) upon 10 days prior written notice.
Events of default typically may include (i) the dealer's failure to perform or
observe covenants in the master dealer agreement; (ii) the dealer's breach of
representations or warranties in the master dealer agreement; (iii) a
misrepresentation by the dealer relating to an installment contract submitted to
the Company or the related vehicle or purchaser; (iv) an assignment for the
benefit of creditors or the appointment of a receiver for, or filing for,
bankruptcy or insolvency of, the dealer; (v) the liquidation or dissolution of a
5
<PAGE>
dealer; (vi) the death of a principal stockholder of a dealer; and (vii) a
decrease in the shares of stock owned by the principal stockholder of a dealer.
Under the master dealer agreement, the dealer is also obligated to
repurchase any contracts identified by the Company in the event that dealer
representations and warranties prove to have been untrue at the time the Company
purchased the contract, or in the event that the purchase of the contract by the
Company from the dealer was on a recourse basis and a lessee or borrower
defaults under the contract. Examples of defaults which require a dealer to
repurchase a finance contract include (i) misrepresentations by a dealer to
install optional equipment otherwise included within the agreed upon purchase
price; (ii) improper identification of a customer; and (iii) dealer
misrepresentation that adequate insurance is in force at the time of delivery of
the vehicle. The majority of these occurrences are prevented when the contract
is sent to the Company for funding by virtue of the Company's credit procedures
which typically include telephoning each customer to confirm contract terms at
the time of funding. Occasionally, however, the dealer is required to repurchase
the contract upon discovery of the default by the Company. The dealer also
indemnifies the Company for any liabilities and costs (including attorney's
fees) arising from any act or omission by the dealer required to be performed
under the master dealer agreement or any contract.
Retail car buyers are customarily directed to a dealership's finance and
insurance department to finalize their purchase or lease agreement and to review
potential financing sources and rates available from the dealer. If the customer
elects to pursue financing at the dealership, an application is taken for
submission to the dealer's financing sources. Typically, a dealership will
submit the purchaser's application to more than one financing source for review.
Once the responses are received by the dealership, the dealer will decide which
source will finance the purchase or lease.
When presented with an application, the Company strives to notify the
dealer of its decision within two to four hours. The buyer's purchase generally
is not completed until the Company approves the contract. If approved, the buyer
enters into a contract with the dealer on a form prepared and provided to the
dealer by the Company, which is then assigned to the Company.
Dealer Program
One of the critical elements for the growth of the Company's auto finance
segment is to establish, maintain and expand its
6
<PAGE>
relationships with new and used automobile dealers. The Company has developed
programs for dealers that are designed to meet the dealers' needs for customer
financing. These programs offer four major advantages to the dealers:
Flexibility. Unlike most traditional lending institutions and
captive finance companies, the Company employs multi-tiered credit
underwriting criteria offering a financing source not generally
available for sub-prime auto loans and leases elsewhere to
dealerships' sub-prime borrowers. The Company believes this
flexibility facilitates access to prime borrowers as well and
solidifies the dealer relationship.
Responsiveness. The Company is responsive to the needs of auto
dealers by providing rapid and complete service. When presented with
an application, the Company attempts to notify the dealer within two
to four hours whether it will approve the purchase of the contract
from the dealer. Staff members are trained specialists in credit
analysis, documentation, collection and administration.
Service Orientation. In addition to offering a reliable source of
financing for qualified buyers, the Company identifies particular
service needs of dealers. Dealer development representatives
maintain frequent contact to determine whether needs are being met
and will recommend service enhancements when appropriate. Examples
of such enhancements may include courier delivery of documents or
loan processing on dealer premises during peak promotions.
Training. The Company provides training to dealers both at the
dealership and on the Company's premises. This training covers,
among other things, the Company's origination program, underwriting
guidelines and the processing of loan and lease applications. The
dealership receives a certificate evidencing completion of the
training program.
The Company's relationship with auto dealers has for the most part been
established on a dealer-by-dealer basis as a result of the efforts of the
Company's marketing personnel. One of the Company's sales and marketing goals is
to develop and/or expand relationships with dealers and finance agencies that
will provide the Company more efficient access to greater numbers of dealer
networks. See "Marketing." Towards that end, during September 1994, the Company
entered into a test marketing arrangement with General Electric Capital Auto
Lease, Inc. ("GECAL"), an affiliate
7
<PAGE>
of General Electric Credit Corporation ("GECC"). During the test period, the
Company evaluated applications which did not meet GECAL's prime underwriting
criteria for 74 of GECAL's 400+ dealers located in Florida. The Company, using
its own underwriting model, then approved or declined these submissions
resulting in over $7,000,000 of lease volume during the test phase. The results
of the program led to a permanent two-year agreement automatically renewable for
successive one-year periods thereafter, which was executed on July 1, 1995. The
program has been rolled-out to the balance of the GECAL's Florida dealers during
a recent campaign completed on September 21, 1995. Early results indicate the
volume of applications has significantly increased since the program has been
made available to all Florida dealers.
The Company and GECAL have also agreed to target North and South Carolina
and Tennessee for the next roll-out phase. Planning began in October 1995, with
the campaign to be completed by the second quarter of 1996. The long-term plan
is to roll out the program in the entire southeast by December 1996.
While not an exclusive arrangement, the Company believes it continues to
be the only sub-prime company operating this program with GECAL in the
southeast. There is no contractual agreement to this effect, however, and no
assurance may be made that the Company would continue to be the only such
arrangement with GECAL.
Historically, GECC has not been active in the sub-prime market. The
Company's arrangements with GECAL and GECC give GECAL the ability to offer
customers of its dealerships a financing source through the Company to sub-prime
borrowers which GECC does not generally offer directly. In addition, the
arrangements give GECC access to the sub-prime market without GECC incurring the
evaluation, credit and servicing risks generally associated with financing to
sub-prime borrowers. This relationship with GECAL gives the Company access to
GECAL's network of 1,500 dealerships in 11 southeastern states.
The GECAL dealers with whom the Company has financed automotive loans and
leases presently constitute approximately 8% of the Company's overall volume of
loan and lease receivables. With the exception of Special Finance, Inc. ("SFI"),
an auto finance broker that accounts for approximately 35% of the Company's loan
and lease receivables, no single dealer or brokerage source presently accounts
for more than 3% of the Company's aitomotive finance contracts.
On August 1, 1995, the Company entered into a five (5) year option to
purchase the assets of SFI (the "SFI Purchase Option"), during which term the
Company has secured a right of first refusal
8
<PAGE>
to purchase all of the finance contracts acquired or originated by SFI. The
option to purchase remains subject to management's evaluation of the
transaction. Management is currently evaluating the economic benefits of
exercising the SFI Purchase Option and to date has made no determination on the
likelihood of whether or when such a purchase may occur, if at all. An election
by the Company to purchase the business of SFI would require the Company to
complete payment of the purchase price provided for in the SFI Purchase Option.
See "ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS."
The Company also intends to pursue arrangements with other organizations
such as dealership networks and credit unions as a means of expanding its dealer
and consumer bases.
Securitization Program
Although certain of the Company's automotive finance contracts may be held
until maturity, the Company's business strategy is to periodically accomplish
the pooling and sale of portfolios of loans and leases through securitization
transactions.
In securitization transactions, the Company transfers automobile loans to
a newly formed securitization trust, which issues one or more classes of
asset-backed securities. The asset- backed securities are simultaneously sold to
investors. Periodically, collections of principal and interest on the loans are
paid to holders of the related asset-backed securities by the Trustee. The
Company continues to act as the servicer of the automobile loans held in the
trust in return for a monthly servicing fee.
A securitization transaction increases the Company's liquidity, provides
for the redeployment of capital and reduces the risks associated with interest
rate fluctuations. The Company applies the net proceeds from securitization
transactions to reduce its outstanding warehouse facility, thereby making the
warehouse facility available to fund the acquisition of additional automotive
finance contracts.
The Company currently plans to continue securitizing pools of loans,
generally on a quarterly basis.
Since December 1995, the Company has completed the sale of approximately
$81 million of automotive loans in two privately placed securitization
transactions. The transactions resulted in the issuance of asset-backed
securities which received a rating of "A", "BBB" and "BB" by Duff and Phelps
Audit Rating Company and Fitch Investors Services, L.P.
9
<PAGE>
Since December 1995, gains from the sale of loans in securitization
transactions have provided a significant portion of the net income of the
Company and are likely to continue to represent a significant portion of the
Company's net income. See "ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN
OF OPERATIONS."
Underwriting
The Company purchases each contract in accordance with its underwriting
standards and procedures. These underwriting procedures are intended to assess
the applicant's ability to repay the amounts due and the adequacy of the vehicle
as collateral. Each candidate for credit is required to complete and sign an
application which lists assets, liabilities, income, credit and employment
history, and other pertinent information. The Company has a staff of persons who
provide underwriting services and conduct credit evaluations. Upon receipt of
the credit application, the Company orders a credit bureau report on the
applicant to document his or her credit history. The credit report presents a
history of the applicant's credit performance and, if applicable, contains
information on such matters as past-due credit, previous repossessions, prior
loans charged off by other lenders, real estate liens or wage attachments, and
bankruptcy. The application and credit report are given to one of the Company's
underwriters for evaluation and tier placement.
Conventional credit ratings divide credit risk into four tiers: "A", "B",
"C" and "D". "A" credit represents the highest quality risk and "D" the lowest.
"A" credit risk is associated with certain essential elements: excellent job and
residence stability; an unblemished credit record with equivalent, seasoned high
credit experience; very low debt-to-income ratio (under 30%). "B" credit risk
lacks one or more of these essentials, but still reflects a good credit history
and a debt-to-income ratio under 40%. "C" credit lacks two or more essentials;
however, current credit may indicate non-serious past due payments and a
debt-to- income ratio under 50%. "D" credit lacks two or more essentials,
includes recent slow payments, may contain judgments, collection agency
activity, discharged bankruptcy or previous repossession, and debt-to-income
ratio at or above 50%.
While traditional auto financing sources limit their risk to "A"
borrowers, the Company believes that extending sub-prime credit based upon
strict underwriting standards is prudent, with proper precautions and careful
management. To mitigate risk, the Company:
o prices each category progressively higher.
10
<PAGE>
o requires progressively larger down-payments.
o requires considerably more client information for lower
grades, for purposes of skip-tracing, etc.
o initiates collection and repossession activity more
quickly for lower grades.
Upon completion of the credit analysis, the Company will decide whether to
approve the applicant as stated and at which tier, decline the applicant, or
conditionally approve the loan. A decision to decline an applicant may be based
upon one or more of the following: failure to meet the Company's underwriting
standards, debt-to-income ratios, payment-to-income ratios, loan-to-value ratios
or the financing specialist's subjective judgment. Conditioning approval of the
applicant involves amending the proposed terms of the contract in order to
qualify the applicant according to the Company's guidelines. Typical areas that
the Company might require to be amended include, but are not limited to, proving
additional income, requiring a co-applicant, amending the length of the proposed
term, requiring additional down-payment, substantiation of credit information
and requiring proof of resolution of certain credit deficiencies as noted on the
customer's credit history. Approved, declined or conditioned applicant decisions
are promptly communicated to the dealership by phone and facsimile.
Additionally, the applicant is informed of any credit denial or other adverse
action by mail, in compliance with statutory requirements.
The Company regularly reviews the quality of loans which it purchases and
conducts internal reviews on a monthly basis in an effort to ensure compliance
with its established policies and procedures. See "Asset Servicing and
Collections."
Asset Servicing and Collections
The Company has a staff engaged in contract servicing and performing
collection services. The Company has expanded its collection and servicing staff
to a level which provides for approximately 1 collector for every 500 contracts
serviced. Management believes that the ratio of its collectors to contracts
serviced compares favorably to industry averages.
The Company's management team has extensive experience in consumer
financing services and utilizes a state-of-the-art PC network-based computer
system. Whether part of the origination process or routine monthly servicing,
data is immediately available for evaluation and processing, providing speedy
turnaround as a
11
<PAGE>
valuable tool for marketing to the Company's dealership network and maximizing
the Company's cash flow from collections.
The Company's servicing and collection activities include (i) conducting
an initial telephone interview with customers; (ii) collection of payments;
(iii) accounting for payments received; (iv) customer relations and inquiries;
(v) perfection and maintenance of security interest in vehicles and other
collateral; (vi) monitoring and investigation of delinquencies; (vii) tax
reporting on accounts serviced; (viii) initiation and monitoring of repossession
of vehicle; and (ix) disposition of vehicles upon lease termination.
The Company's collections staff monitors all contracts and typically takes
action within 24 hours of delinquency if the first payment is missed and within
48 hours if the payment missed is the second payment or thereafter,
significantly earlier than is customary in the industry. The Company's policy
permits contracts to be extended or revised payment schedules to be made on a
case by case basis as determined by its experienced collections staff. Accounts
that have not complied with the initial or revised collection program are turned
over to outside agencies for repossession, generally after five to ten days of
non-compliance with the revised agreement. Repossessed vehicles may be re-
marketed through the participating dealer who originated the contract, or sold
by the Company through wholesale auctions or re- marketed through the Company's
used vehicle facility. See "Used Vehicle Operation." The Company's experience
indicates that historically many repossessions are redeemed and the majority of
these customers do not become delinquent again.
The Company charges off delinquent accounts no later than after 150 days
of delinquency, depending on the individual circumstances. Recovery of charge
off balances begins 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,
judgment and asset search.
When a vehicle is repossessed and not redeemed by the customer in the
prescribed time, the Company re-markets the vehicle. Vehicles in inventory are
reviewed by management at the time of repossession and at that time written down
to their fair market value, if necessary. The Company applies for insurance and
extended warranty rebates, which are applied to the customer balance. A net loss
is the difference between the net customer balance, adjusted for rebates, etc.,
and the net proceeds of the sale or re-lease of the vehicle. See "ITEM 6.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS."
12
<PAGE>
Used Vehicle Operation
Sales of the Company's repossessed vehicles are conducted through PCSF, a
wholly-owned subsidiary, at a retail sales facility located in Palm Beach
County, Florida. Vehicles that are in retail condition are sold at this
facility. All other vehicles are sold at auction or through automotive
wholesalers. Retail sales operations at this location are conducted through a
J.D. Byrider Systems, Inc. franchise pursuant to which the Company licenses the
J.D. Byrider name, trademarks and business system.
Management believes that the used car market is an expanding market and
offers the Company an opportunity to enhance its vehicle financing
opportunities, and to increase its recovery on vehicles.
Insurance Services
The Company's wholly-owned subsidiary, NIS, is a full service insurance
agency selling a variety of insurance products to the public as well as to the
Company's customers. The staff of NIS verifies insurance at the time leases and
loans are funded, assures that the customer maintains adequate insurance during
the term of the contract, solicits the sale of other insurance products, and
sells a package of insurance services to the Company's dealers. The Company has
the ability to add insurance and bill its customer at any time during the
contract. Insurance policies are issued through unaffiliated, major insurers
with whom the Company has established brokerage agreements. Insurance
commissions are earned as received from the insurer.
GAP Protection Plan
The Company offers the debtor of a finance contract an opportunity to
participate in the Company's guaranteed auto protection ("GAP") plan. In the
event of an insurance loss, GAP Protection pays the Company the difference
between the actual cash value protection afforded by the insurer and the
customer balance due the Company, if any. The Company's risk in these situations
is eliminated through reinsurance. The Company pays a flat premium per contract
to unaffiliated major insurers to reinsure this risk.
Industry Overview - The Sub-Prime Credit Market
The sub-prime credit market, upon which the Company's business currently
focuses, is comprised primarily of individuals who are deemed by certain
industry participants to be relatively high credit risks due to various factors,
including, among other things, the manner in which they have handled previous
credit, the absence
13
<PAGE>
or limited extent of their prior credit history, or their limited financial
resources.
The sub-prime credit market is highly fragmented and historically has been
serviced by a variety of financial entities, including captive finance arms of
major automotive manufacturers, banks, savings and loans, independent finance
companies, small loan companies, industrial thrifts and leasing companies. Many
of these financial organizations do not consistently solicit business in, or
have withdrawn from, this credit market. The Company believes that increased
regulatory oversight and capital requirements imposed by market conditions and
governmental agencies have limited the activities of many banks and savings and
loans in this credit market. In many cases those organizations electing to
remain in the auto finance business have migrated toward higher credit quality
customers to allow reductions in their overhead cost structures. The Company
believes that as a result, the sub-prime credit market is primarily serviced by
smaller finance organizations that solicit business when and as their capital
resources permit.
The Company's strategy is designed to capitalize on the market's lack of a
major, consistent financing source. See "Business Strategy." The Company's
business strategy capitalizes upon the overly broad classification of a great
number of individuals as "sub-prime" borrowers. Many of these individuals, in
the view of management, actually may be "prime" borrowers who by clerical
categorization have been given "sub-prime" designations. The Company's
management has substantial experience in the consumer finance field and, by
virtue of that experience, has been successful in selecting and assessing the
true credit categories of potential borrowers.
Business Strategy
The Company's growth relies on the following strategies:
o Emphasis on Dealer Service - Rapid Response Time. The Company
is committed to service as the cornerstone of its growth
strategy. Providing rapid response to credit application
submissions has historically proven to be a key element for
success in this industry. The Company also maintains and
enhances dealer relationships through high levels of on-site
training programs and continued sales assistance and dealer
support.
o Product Flexibility. The Company believes that its ability to
offer sub-prime leases as well as sub-
14
<PAGE>
prime loans differentiates it from the competition. The
Company also offers a total insurance package, including life,
accident and health, GAP, auto, boat and homeowners.
o Multi-tiered Credit. The Company believes its policy of
extending credit to sub-prime borrowers utilizing strict
underwriting guidelines for protection differentiates the
Company from other competitors in the industry and provides a
significant impetus for growth.
o Expansion of Dealership Base in Existing Markets. The Company
is aggressively pursuing additional dealer relationships
within existing markets with dealers that meet the Company's
criteria. Management believes existing markets can contribute
to growth objectives without compromising credit underwriting
standards.
o Geographic Expansion. The Company intends to increase volume
by hiring additional sales representatives in markets which
meet its economic and demographic criteria, primarily in the
southeastern United States, in the near term, with a view
towards a national market in the long term.
See "Marketing."
o Affinity Marketing. The Company plans to expand its financing
activities through development of special programs aimed at
credit unions, trade associations and affinity groups, such as
gasoline credit card companies and special interest
organizations.
o Operating Efficiency. The Company will continue to enhance its
systems and operations to further improve operating
efficiencies in contract processing, servicing and dealer
communications.
Marketing
Dealers
The Company's marketing efforts focus principally on dealer-related
programs, dealership network arrangements and affinity marketing programs. These
programs are directed at existing dealership networks, independent dealerships,
credit unions and
15
<PAGE>
trade associations, among others. See "Contract Origination - Dealer Program"
and "Business Strategy."
The Company's marketing efforts are undertaken by a staff which includes a
vice-president of sales, training manager, regional and area sales managers, and
a dealer service representatives. The sales staff operates in particular
geographic areas within Florida, Tennessee, North Carolina and South Carolina
for a combination of salary and commission. In addition, the Company augments
its in-house staff through exclusive agreements with companies operating in
Louisiana, Georgia and Texas which provide the Company with additional sales
representatives on an independent contractor basis. These representatives market
the Company's services primarily through personal contacts and participating
dealer referrals, which are augmented by the distribution of marketing materials
and advertising in trade journals and industry-related publications. Pursuant to
the Company's dealer arrangements, participating dealers engage in training
sessions designed to increase the dealer's familiarity with the Company's
evaluation and servicing procedures. See "Contract Origination - Dealer
Program." The Company continues to increase its marketing efforts in conjunction
with its focus on the indirect auto loan and lease market through the hiring of
additional sales representatives. As part of its expanded marketing program, the
Company has also entered into arrangements with companies which originate and
broker finance contracts with markets in Georgia and Texas, whereby the Company
has agreed to purchase loan receivables as originated by such companies which
meet Company credit and origination guidelines. Through such arrangements the
Company is able to increase its access to such markets without significantly
increasing its staff.
The Company's marketing program with GECAL offers yet another, indirect,
avenue for purchase of auto leases. Sub-prime contracts presented to GECAL from
its 1,500 southeastern dealers may be offered to the Company for purchase and,
if accepted by the Company's underwriting standards, will be funded by GECC.
This arrangement effectively allows GECAL to maintain its relationship with its
dealership network while giving the Company access to dealers outside the
Company's established territory. The Company intends to seek similar
relationships with other dealer networks and affinity groups such as credit
unions as a method of increasing its dealer and consumer bases.
Geographic Expansion of Auto Finance Segment
As of December 31, 1995, the Company had relationships with 909 dealers
which have yielded finance contracts in the southeastern United States. Florida
represents the Company's
16
<PAGE>
largest market for lease and loan receivables originated by participating
dealers. Management estimates that there are approximately 1,100 dealers in
Florida and approximately 5,600 dealers within the southeastern United States,
which represents the Company's target market in the near term.
Competition
Competition in the retail automobile financing industry is intense.
Competitors include well-established financial institutions, such as banks,
savings and loans institutions, small loan companies and credit unions,
industrial thrifts, leasing companies as well as the major automobile
manufacturers' captive finance companies such as Ford Motor Credit Corporation,
Chrysler Credit Corporation and General Motors Acceptance Corporation. Many of
these competitors have greater financial, technical and marketing resources than
the Company. Furthermore, many of these competitors offer other forms of
financing to dealers, including, but not limited to, vehicle floor plan
financing and leasing. All of these competitors offer some degree of service to
dealerships.
Many of the larger banks, financial institutions and captive finance arms
of automobile manufacturers have not consistently sought to do business in the
sub-prime market. These organizations have traditionally elected to limit their
activities to the higher credit quality customers. As a result, the sub-prime
credit market tends to be primarily serviced by smaller and independent finance
organizations.
The Company's business strategy is designed to capitalize on the absence
of consistent institutional sources of financing in the sub-prime market. The
competition in the sub-prime market would be significantly increased should the
large finance organizations seek to compete consistently in the sub-prime
market.
Employees
The Company employs personnel experienced in all areas of loan
origination, documentation, collection and administration. As of December 31,
1995, the Company had approximately 200 full-time employees.
Government Regulation
The Company's operations are subject to federal and state laws and
regulations, including the Federal Consumer Credit Protection Act, Fair Debt
Collection Practices Act, Fair Credit Reporting Act, FTC Preservation of
Consumer Claims and Defenses Rule, Truth in Lending Act, Truth in Leasing Act,
Equal Credit Opportunity Act,
17
<PAGE>
FTC Credit Practices Rule, state insurance laws and state vehicle disposal laws.
Consumer lending laws generally require licensing of the lender and adequate
disclosure of loan terms and impose limitations on the terms of consumer loans
and on collection policies and creditor remedies. Federal consumer credit
statutes primarily require disclosures of credit terms in consumer finance
transactions. In general, the Company's business is conducted under licenses
issued by individual states, and the Company is subject to periodic examination
by the individual states. State licenses are generally revocable for cause. The
Company believes that it is in compliance with all applicable laws and
regulations, and maintains an internal compliance staff to stay abreast 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 its
business.
ITEM 2. DESCRIPTION OF PROPERTIES.
The Company's executive offices and operations occupy approximately 29,000
square feet of leased office space in The Uptown Office Park at 500 Cypress
Creek Road West, Suite 590, Fort Lauderdale, Florida 33309 for which the Company
pays an aggregate of base rent and common area maintenance of $52,300 per month
pursuant to three leases, with annual increases of approximately 5%. The leases
expire in 2002.
The Company has entered into a lease for an additional 8,183 square feet
in the same building for occupancy on or about April 1, 1996. The base rent on
this space will be approximately $7,550 per month.
The Company subleases approximately 2,300 square feet of its space to FTM,
a former principal stockholder, for rent of $4,500 per month. See "ITEM 12.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
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 through PCSF leases a used car lot in Palm Beach
County, Florida at a base rent of $11,500 per month. The lease
expires December 31, 2000. See "Used Vehicle Operation."
ITEM 3. LEGAL PROCEEDINGS.
18
<PAGE>
The Company is the plaintiff in numerous collection matters, all of which
are considered to be in the ordinary course of business and none of which,
either individually or collectively, are likely to have a material adverse
effect on the Company or its results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
-------
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Prior to the Merger on November 30, 1994, virtually no trading of the
Company's Common Stock had occurred since 1990. During December 1994, the
Company's Common Stock began trading on the over-the-counter market through the
OTC Bulletin Board under the symbol "NALF." In May 1995, the Company's Common
Stock commenced trading on The NASDAQ National MarketSM under the same symbol.
The following table sets forth the high and low market prices of the
Common Stock for the period from December 1994 through December 1995.
1994 High Low
- - ---- ---- ---
Fourth Quarter $ 9.75 $ 7.50
December 1994
1995 High Low
- - ---- ---- ---
First Quarter $12.00 $10.30
Second Quarter $12.49 $10.50
Third Quarter $17.87 $11.97
Fourth Quarter $17.38 $ 9.75
The closing price on March 26, 1996 was $12.50.
Records of the Company's stock transfer agent indicate that as of March
26, 1996, the Company had 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 substantially more beneficial
owners of its stock than indicated above. To date, the Company has been unable
to accurately ascertain this information.
From inception through November 30, 1994, NAL as the predecessor to the
Company paid dividends of $1,069,460. No
19
<PAGE>
dividends had been paid by COFVI, nor have there been any dividends paid by NAL
following the Merger. The payment of dividends is not contemplated in the
foreseeable future. The payment of future dividends will be directly dependent
upon the earnings of the Company, its financial needs and other similarly
unpredictable factors. Earnings are expected to be retained to finance and
develop the Company's business.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATIONS.
The following information should be read in conjunction with the
Consolidated Financial Statements and Notes thereto of the Company included in
this Report.
Background
NAL commenced operations during 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 and mortgage loans
and auto lease receivables.
Because of the opportunities presented by the insolvency and
reorganization of many financial institutions at the time, from inception
through the second quarter of 1994 the Company's principal activities involved
the bulk purchase and servicing of seasoned portfolios of consumer and mortgage
loans and auto lease receivables that had been administered by the RTC or FDIC.
In response to the decreasing availability of seasoned portfolios, since
the second quarter of 1994 the Company's principal focus has shifted to other
segments of the consumer finance industry, particularly auto finance. Although
opportunistic purchases of seasoned portfolios may still be considered by
management, the Company's primary business since June 1994 has been the
acquisition and servicing of automotive leases and loans originated by dealers
in connection with sales or leases to persons with sub-prime credit. While
certain of the Company's loans and leases may be held until maturity, the
Company intends to periodically attempt the pooling and sale of portfolios of
loans and leases through securitization transactions. See "Liquidity and Capital
Resources - Securitization of Loans."
The Company became publicly held by virtue of the Merger with COFVI on
November 30, 1994. COFVI had been an inactive public company at the time of the
Merger. Since, as a result of the Merger, the historic stockholders of NAL
acquired a controlling interest in COFVI, the Merger has been accounted for as a
"reverse
20
<PAGE>
acquisition". Accordingly, for financial statement presentation purposes, NAL is
viewed as the continuing entity and the related business combination is viewed
as a recapitalization of NAL, rather than an acquisition by COFVI.
In conjunction with the Merger, COFVI changed its name to "NAL Financial
Group Inc."
Results of Operations
Year Ended December 31, 1995 compared to Year Ended December 31, 1994
The Company reported net income of $2,797,000 or $.45 per share for the
year ended December 31, 1995. This compares to net income of $394,000 or $.07
per share for the year ended December 31, 1994. Net income for 1995 included a
non-cash charge to income of $280,000 for the release of shares held in escrow
pursuant to the Merger in November 1994. Operating income, excluding this
charge, was $3,077,000 or $.50 per share.
The increase in net income was due to the Company's success in
significantly increasing its portfolio of automotive finance contracts during
1995. Contracts acquired during the year ended December 31, 1995 totalled
$165,697,000 compared to $31,319,000 for the year ended December 31, 1994. This
increase positively affected the Company's earnings and was reflective of the
Company's success in the establishment and continuous expansion of its network
of automobile dealerships participating in the Company's financing programs. As
a result, the Company's results of operations for the year ended December 31,
1995 principally reflected net interest income, rental income and fees earned on
its expanded portfolio of sub-prime automotive finance contracts. The results of
operations for the year ended December 31, 1994 principally reflected interest
income and purchase discount accretion earned on bulk purchased portfolios and
gains from the sale of these portfolios. Purchase discount accretion reflected
the increase in the value of the Company's portfolios of consumer and mortgage
loans as they approached maturity.
The following table presents the principal components of the Company's net
income for the years ended December 31, 1995 and 1994:
21
<PAGE>
================================================================================
YEAR ENDED DECEMBER 31
($000's)
- - --------------------------------------------------------------------------------
1995 1994 CHANGE
- - --------------------------------------------------------------------------------
Net Interest Income $ 8,318 $ 3,430 $ 4,888
Provisions for Credit Losses (2,762) (573) (2,189)
Gains on Sales of Contracts
and Other Income 7,252 2,745 4,507
Operating and Other Expenses (8,085) (4,945) (3,140)
- - --------------------------------------------------------------------------------
Income Before Income Taxes 4,723 657 4,066
Provision for Income Taxes (1,926) (263) (1,663)
- - --------------------------------------------------------------------------------
Net Income $ 2,797 $ 394 $ 2,403
================================================================================
Net Interest Income
During 1995, the Company's net interest spread rate, or the difference
between the effective rate earned on interest-earning assets and the effective
rate paid on interest-bearing borrowings, decreased 3.20%, from 12.80% to 9.60%,
when compared to the same period of the preceding year. This decrease was due
primarily to a 1.89% decrease in the effective rate earned on interest earning
assets, from 22.53% to 20.64%, accompanied by an increase in the Company's
effective cost rate from 9.73% to 11.04%, or 1.31%.
The decrease in the net interest spread rate in 1995 was primarily
attributable to, among other things, a decrease in purchase discount accretion
from $2,065,000 in 1994 to $654,000 in 1995 and an increase in the average
effective cost rate associated with the Company's outstanding indebtedness which
can be attributed to the increased cost of borrowing associated with the
subordinated debentures issued by the Company during 1995.
Although the net interest spread rate earned in the current period on
automotive finance contracts is less than the net interest spread rate earned in
prior periods on bulk purchased portfolios, the increase in volume of automotive
finance contracts originated during 1995 more than offsets the decrease in net
interest spread rate and resulted in a positive contribution to earnings when
comparing 1995 to 1994.
22
<PAGE>
The effects of these factors upon the Company's net interest income are
reflected within the following table:
<TABLE>
<CAPTION>
Effective Yield Earned/
Rate Paid Average Balance Interest Income/Interest Expense Change Due to
----------------------- --------------- -------------------------------- -------------
1995 1994 Change 1995 1994 Change 1995 1994 Change Rate Volume Total
---- ---- ------ ---- ---- ------ ---- ---- ------ ---- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Finance Contracts 20.64% 22.53% -1.89% $75,957 $23,917 $52,040 $15,680 $ 5,387 $10,293 ($1,436) $11,729 $10,293
Borrowing 11.04% 9.73% 1.31% 66,668 20,109 46,559 7,361 1,957 5,404 873 4,530 5,404
----- ---- ---- ------ ------ ------ ----- ----- ----- --- ----- -----
Net Interest Spread 9.60% 12.80% -3.20% $ 8,319 $ 3,430 $ 4,889 ($2,309) $ 7,198 $ 4,889
===== ===== ==== ======= ======= ======= ======= ======= =======
Net Interest Margin 10.95% 14.34% -3.39%
===== ===== ====
</TABLE>
Given existing market rates of interest, management expects that the
effective yields earned on automotive finance contracts will remain relatively
stable within the short-term. Net interest income in the future will be
dependent upon, among other things, the effective rate paid on the Company's
borrowings as well as the volume of originated finance contracts.
To a large extent, the Company's ability to support its growth in the rate
of the acquisition and origination of automotive finance contracts in the future
will depend upon, among other things: (i) continued expansion of the Company's
program with dealers and other sources of auto loans and leases (see "ITEM 1.
DESCRIPTION OF BUSINESS - Dealer Program"); (ii) maintaining and enforcing the
implementation of underwriting guidelines relative to credit decisions which are
intended to result in reduction in delinquency experience and credit losses; and
(iii) the availability of adequate sources of capital (on terms and at rates
that provide an acceptable interest spread) from which to finance the growth of
the Company's business.
Provision for Possible Credit Losses
The provision for possible credit losses which totalled $2,762,000 for the
year ended December 31, 1995, reflects an increase of $2,189,000 over the amount
of $573,000 reported for 1994. This increase related primarily to provisions
recorded for an estimate of possible losses which may be incurred in connection
with the acquisition of new automotive finance contracts during 1995. See "Net
Credit Loss Experience."
During the fourth quarter of 1995, management elected to discontinue the
accretion to earnings of the purchase discount considered necessary to absorb
future credit losses and instead allocate this amount to the Company's reserve
available for credit losses. Management believes that this decision, although
not totally eliminating the need for future provisions, will ultimately result
in lower provisions for credit losses on purchased contracts.
23
<PAGE>
Management periodically reviews the adequacy of the reserve for credit
losses and considers whether the level of reserve is sufficient to cover any
losses of the carrying value of 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 contracts and
portfolios.
Gains on Sales of Contracts and Other Income
Gains on sales of loans totalled $2,292,000 during the year ended December
31, 1994 compared to $4,601,000 for the year ended December 31, 1995. Sales
during 1994 consisted primarily of loan pools which had been purchased at
discounts and sold within a short period after purchase. During 1995, the
Company completed its first securitization transaction whereby the Company
pooled approximately $40 million of its portfolio of originated automobile loans
for sale in a privately-placed transaction. This sale resulted in a gain of
approximately $4.1 million during the fourth quarter.
The Company completed its second securitization transaction during the
first quarter of 1996 and expects that a significant portion of its net income
for that quarter will be attributable to that transaction. Gains from the sale
of loans in securitization transactions have provided a significant portion of
the net income of the Company during the fourth quarter of 1995 and the first
quarter of 1996, and are likely to continue to represent a significant portion
of the Company's net income during all periods in which securitization
transactions are undertaken.
Fee and other income increased $2,197,000 from $454,000 during the year
ended December 31, 1994 to $2,651,000 during the year ended December 31, 1995,
due primarily to the commissions earned by the Company's insurance brokerage
services from placing insurance policies and late fees charged on the portfolio
of automotive loans and leases. Other income also includes approximately
$400,000 of gross profit on the sale of vehicles through the Company's retail
sales facility for the year ended December 31, 1995.
Operating and Other Expenses
Operating and other expenses increased $3,140,000 to $8,085,000 during the
year ended December 31, 1995 from $4,945,000 during the year ended December 31,
1994, due primarily to increased overhead and costs associated with the
Company's automotive contract financing business. This increase was attributable
to, among other things, an increase in compensation and employee
24
<PAGE>
benefits paid due to an expansion of the Company's work force. Additional
personnel were hired to assist with underwriting, collecting and servicing of
the Company's expanding portfolio of automotive contracts. This increase was
also attributable to an increase in depreciation and amortization as the Company
continued to build its infrastructure in order to meet the needs of a growing
organization and asset base. As a percentage of average total portfolio being
serviced by the Company during the year, operating and other expenses decreased
to 8.16% in 1995 from 14.33% in 1994.
Management expects that operating expenses will continue to increase as
the size of its portfolio of automotive finance contracts increases. However,
management does not expect that the rate of growth of these expenses will be
proportionate with the rate of growth of the Company's revenues or the increase
in its automotive finance contracts.
Year Ended December 31, 1994 compared to Year Ended December 31, 1993
The Company reported net income of $394,000 or $.07 per share for the year
ended December 31, 1994. This compares to net income of $471,000 or $.08 per
share for the year ended December 31, 1993.
The results of operations for the year ended December 31, 1994 and
December 31, 1993 principally reflected interest income and purchase discount
accretion earned on bulk purchased portfolios and gains from the sales of these
portfolios.
The following table presents the principal components of the Company's net
income for the years ended December 31, 1994 and 1993:
================================================================================
Year Ended December 31
($000's)
- - --------------------------------------------------------------------------------
1994 1993 Change
- - --------------------------------------------------------------------------------
Net Interest Income $ 3,430 $ 4,365 (935)
Provisions for Credit Losses (573) -- (573)
Gains on Sales of Contracts
and Other Income 2,745 1,956 789
Operating and Other Expenses (4,945) (5,516) 571
- - --------------------------------------------------------------------------------
Income Before Income Taxes 657 805 (148)
Provisions for Income Taxes (263) (334) 71
- - --------------------------------------------------------------------------------
Net Income $ 394 $ 471 $ (77)
================================================================================
25
<PAGE>
Net Interest Income
During the year ended December 31, 1994, the Company's net interest spread
rate decreased 2.64%, from 15.44% to 12.80%, when compared to the preceding
year. This decrease was primarily due to a 4.53% decrease in the effective rate
earned on interest-earning assets from 27.06% to 22.53%. The decrease in the
earnings rate was offset by a decrease in the Company's effective cost rate from
11.62% to 9.73%, or 1.89%. The decrease in the effective earnings rate was
attributable to a decrease in interest income and purchase discount accretion.
Interest income from loans and direct finance leases decreased $1,049,000,
or approximately 24%, from $4,371,000 in 1993 to $3,322,000 in 1994. Although
total loans and leases outstanding at December 31, 1994 of $29,984,000 exceeded
that outstanding at December 31, 1993 of $24,038,000, the average balance
outstanding during 1994 was less than that for 1993. During 1994, the average
balance of total loans and leases decreased approximately 12%, from $27,093,000
in 1993 to $23,917,000 in 1994. Although the Company acquired $41,027,000 of new
leases and loans during 1994, these acquisitions occurred primarily in the last
two quarters of the year. During 1994, the Company received principal payments
on its portfolios totalling $23,640,000, and sold loans with a total book value
of $11,963,000.
The decrease in purchase discount accretion, from $2,959,000 in 1993 to
$2,065,000 in 1994, reflected the maturing during 1994 of discounted portfolios
previously purchased by the Company, which were replaced in 1994 with
acquisitions of bulk-purchase portfolios and loan and lease originations which
did not have as large an amount of purchase discount as realized in the past,
and with the purchase of the two under-performing portfolios which were
partially accounted for using the cost recovery method.
Interest expense decreased from $2,966,000 in 1993 to $1,957,000 in 1994.
This decrease corresponded to a decrease in the average balance of
participations and notes payable, from $25,522,000 in 1993 to $20,109,000 in
1994, consistent with the decrease in the average balance of loans and lease
receivables outstanding during the year. In addition, during 1994, the Company
realized a full year's benefit of the refinancing of its participations in 1993,
together with benefits of obtaining less expensive financing for new loan
purchases and originations.
The effects of these factors upon the Company's net interest income are
reflected within the following table:
26
<PAGE>
<TABLE>
<CAPTION>
Effective Yield Earned/
Rate Paid Average Balance Interest Income/Interest Expense Change Due to
----------------------- --------------- -------------------------------- -------------
1994 1993 Change 1994 1993 Change 1994 1993 Change Rate Volume Total
---- ---- ------ ---- ---- ------ ---- ---- ------ ---- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Finance Contracts 22.53% 27.06% -4.53% $23,917 $27,093 ($3,176) $5,387 $7,331 ($1,944) ($1,083) ($ 860) ($1,943)
Borrowing 9.73% 11.62% -1.89% 20,109 25,522 (5,413) 1,957 2,966 (1,009) (380) (628) (1,008)
---- ----- ---- ------ ------ ------ ----- ----- ------ ---- ---- ------
Net Interest Spread 12.80% 15.44% -2.64% $3,430 $4,365 ($ 35) ($ 703) ($ 232) ($ 935)
===== ===== ==== ====== ====== ====== ====== ====== =======
Net Interest Margin 14.34% 16.11% -1.77%
===== ===== ====
</TABLE>
27
<PAGE>
Provision for Possible Credit Losses
During 1994, the Company recorded a provision for loan losses of $573,000.
This provision was due primarily to two factors: the settlement during the year
of several delinquent loans previously purchased as part of performing loan
packages, and the determination during the year of the portion of the purchase
price of two underperforming portfolios acquired during 1994 deemed not
collectible.
Management periodically reviews the adequacy of the reserve for loan
losses and considers whether the level of the reserve is sufficient to cover any
losses of the carrying value of its existing portfolios. This review includes an
evaluation of the value of the collateral pledged for the loans and leases
receivable, an analysis of the equity invested in the collateral by borrowers,
delinquency data and historical loss experience, and any recourse arrangements
the Company has with the sellers of portfolios.
Prior to 1994, the Company's portfolio acquisitions consisted primarily of
performing loans and leases which were acquired at discounted prices. The
Company's experience with these portfolios was that, in general, it recovered
its discounted investment in the portfolios through diligent collection efforts.
Accordingly, based on management's review, no additional provision for losses
was considered necessary for 1993.
During the last quarter of 1994, management was able to fully evaluate the
collectibility of the two underperforming portfolios acquired during the earlier
part of 1994. This evaluation determined that the purchase cost of several of
the loans would not be fully collectible, and, under generally accepted
accounting principles, the portion deemed uncollectible was charged off.
However, management expects that the collections from each of the two portfolios
taken as a whole will exceed their respective total purchase costs. These
portfolios are being amortized on a cost-recovery basis.
Gains on Sales of Loans and Other Income
Gains on sales of loans increased from $1,925,000 in 1993 to $2,292,000 in
1994. During 1994, the Company sold loan portfolios with a book value of
$11,963,000, which compares to sales during 1993 of loans with a book value of
$6,527,000.
Gains on mortgage loan sales to correspondents decreased from $206,000 in
1993 to none in 1994, reflecting the decision by the
28
<PAGE>
Company to cease operations of its mortgage origination business in order to
concentrate on the automobile finance business.
Other income increased $410,000, due primarily to an increase in late fee
income of $177,000, due to fees collected primarily from the underperforming
portfolios, and commission income of $47,000 from the Company's insurance
brokerage activities.
Operating and Other Expenses
Operating and other expenses decreased $55,000 from $5,000,000 during the
year ended December 31, 1993 to $4,945,000 during the year ended December 31,
1994, due primarily to a decrease in servicing expense. Servicing expense
decreased from $320,000 in 1993 to $80,000 in 1994, resulting from the Company's
decision to transfer the data processing function for servicing its portfolios
from an outside service bureau to an in-house system. This transfer was made to
enhance the efficiency of the Company's operations and to reduce its operating
expenses. This transfer did not have a material effect on the liquidity and
capital resources of the Company, nor did it have a material effect on the
results of operations.
Other operating expense categories increased $297,000, due primarily to
increased overhead and sales costs incurred in establishing the Company in its
new business focus.
Delinquency Experience
The following table summarizes delinquency experience on total finance
contracts owned by the Company, as well as automotive finance contracts serviced
for others, at December 31, 1995 and 1994:
29
<PAGE>
<TABLE>
<CAPTION>
1995 1994
---- ----
Dollars Contracts Dollars Contracts
<S> <C> <C> <C> <C>
Total finance contracts serviced $145,936,162 13,337 $33,165,177 3,560
============ ====== =========== =====
Delinquencies:
60-89 days delinquent:
Automotive finance contracts 3,916,286 395 111,515 13
Other finance contracts 202,097 9 103,451 6
--------- --- ------- --
Total finance contracts serviced 4,118,383 404 214,966 19
========= === ======= ==
90 days or more delinquent:
Automotive finance contracts 2,789,773 272 106,377 13
Other finance contracts 948,031 25 316,881 14
--------- --- ------- --
Total finance contracts 3,737,804 297 423,258 27
========= === ======= ==
Total 60 days or more delinquent:
Automotive finance contracts 6,706,059 667 217,892 26
Other finance contracts 1,150,128 34 420,332 20
------------ --- ----------- --
Total finance contracts $ 7,856,187 701 $ 638,224 46
============ === =========== ==
</TABLE>
The following table summarizes delinquency experience on total finance
contracts as a percent of gross servicing portfolio outstanding at December 31,
1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
---- ----
Dollars Contracts Dollars Contracts
<S> <C> <C> <C> <C>
60-89 day delinquencies as a percent of:
Automotive finance contracts 2.68% 2.96% 0.34% 0.37%
Other finance contracts 0.14% 0.07% 0.31% 0.16%
---- ---- ---- ----
Total finance contracts 2.82% 3.03% 0.65% 0.53%
==== ==== ==== ====
90 Day or more delinquencies as a percent of:
Automotive finance contracts 1.91% 2.04% 0.32% 0.37%
Other finance contracts 0.65% 0.19% 0.96% 0.39%
---- ---- ---- ----
Total finance contracts 2.56% 2.23% 1.28% 0.76%
==== ==== ==== ====
Total delinquencies over 60 days as a percent of:
Automotive finance contracts 4.60% 5.00% 0.66% 0.73%
Other finance contracts 0.78% 0.26% 1.27% 0.56%
---- ---- ---- ----
Total finance contracts 5.38% 5.26% 1.93% 1.29%
==== ==== ==== ====
</TABLE>
Delinquency for 1995 excludes four under-performing, bulk- purchase
portfolios acquired during 1994 and accounted for using a cost recovery method
whereby income is recognized only for the excess of collections received over
the purchase price basis of the loans. At December 31, 1995, principal balance
and book balance of these portfolios amounted to $3,326,933 and $1,954,979,
respectively. Delinquency for 1994 excludes two under-performing, bulk purchase
portfolios acquired during the year with principal
30
<PAGE>
balance and book balance amounting to $2,270,556 and $897,150, respectively, at
December 31, 1994.
The historic delinquency experience of the Company identified in the chart
provided above through December 31, 1994 was accumulated during periods in which
the Company's business focused principally upon the bulk purchase and servicing
of portfolios of mortgage, lease and consumer receivables. In view of its recent
shift to the automotive finance business, the Company's past delinquency
experience may not be indicative of future results. At December 31, 1994, the
dollar amount of the Company's portfolios consisted of approximately 76% of new
contracts originated through its sub-prime credit program and 24% of previously
acquired bulk purchase portfolios. At December 31, 1995, the Company's
portfolios consisted of 95% of new contracts originated and 5% of previously
acquired bulk purchase portfolios. Management expects that future delinquency
rates for sub-prime automobile leases and loans will differ from that
experienced for bulk-purchase portfolios.
The Company has prepared analyses of its automotive finance contracts,
based on its own credit experience and available industry data, to identify the
relationship between contract delinquency and default rates at the various
stages of a contract's repayment term. The results of these 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. The Company believes that the increase in
the over 60 days delinquency percentage of number of contracts from 1.29% at
December 31, 1994 to 5.26% at December 31, 1995 is primarily the result of an
increase in the percentage of automotive finance contracts in the "seasoning
period," rather than any change in the underlying average credit characteristics
of the Company's portfolio.
If the rate of the Company's volume continues to escalate, 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, without regard to underwriting performance.
Assuming no changes in any other factors that may affect delinquency and default
rates, the Company believes this trend should stabilize or reverse when the
volume of mature contracts (with lower delinquency and default rates) is
sufficient to offset the total portfolio delinquency and default rates.
The Company's collections staff monitors the contracts and typically takes
action within 24 hours of delinquency if the first payment on a contract is
missed, and within 48 hours if the second
31
<PAGE>
or subsequent payment is missed, and generally repossesses the automobile within
20 days of any uncured delinquency. While average periods of delinquency may
decrease, actual results of operations will only be enhanced provided the
Company's net credit loss experience does not deteriorate. See "Net Credit Loss
Experience."
Net Credit Loss Experience
A reserve for credit losses has been maintained at a level that management
considers adequate to provide for potential 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 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 following table summarizes charge-off experience, net of recoveries
from carrying value, on total finance contracts owned by the Company, as well as
automotive finance contracts serviced for others by the Company, for the years
ended December 31, 1995 and 1994.
1995 1994
---- ----
Principal Outstanding $ 148,449,537 $ 35,435,733
Average principal outstanding 91,942,635 32,645,108
Net losses:
Automotive finance contracts $ 2,730,072 $ --
Other finance contracts 431,834 544,952
--------------- --------------
Total net losses $ 3,161,906 $ 544,952
=============== ==============
Net losses as a percent of ending
finance contracts serviced:
Automotive finance contracts 1.84% --
Other finance contracts 0.29% 1.54%
--------------- --------------
Total net losses 2.13% 1.54%
=============== ==============
Net losses as a percent of average
finance contracts serviced:
Automotive finance contracts 2.97% --
Other finance contracts 0.47% 1.67%
--------------- --------------
Total net losses 3.44% 1.67%
=============== ==============
Due to the limited historical experience reflecting results of the
Company's program of auto loan and lease acquisitions, management is
continuously assessing the level or extent of future credit losses. Credit
losses in the future will be dependent on
32
<PAGE>
the Company's credit criteria, advance rates in relation to the value of the
secured automobiles, and the value received from the disposition of any
repossessed automobiles in relation to the outstanding balance of the lease or
loan. However, management believes that its policy of underwriting contracts on
an individual basis, the effectiveness of its collection efforts, and its
knowledge of collateral values and of the industry will contribute positively to
the Company's charge-off experience. Management also anticipates that the
operation of the Company's sales lot will improve charge-off experience by
reducing the losses realized upon the disposition of repossessed automobiles.
Liquidity and Capital Resources
Current Operations
The Company's business requires substantial cash to support its growth in
the rate of acquisition and origination of automotive finance contracts. The
following chart presents the growth in both the number and dollar amount of
contracts acquired since June 1994.
<TABLE>
<CAPTION>
=============================================================================================
Quarter Ended
- - ---------------------------------------------------------------------------------------------
June September December March June September December
1994 1994 1994 1995 1995 1995 1995
- - ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Contracts Acquired $3.26 $7.12 $14.76 $29.66 $34.79 $43.97 $50.61
($ in millions)
- - ---------------------------------------------------------------------------------------------
Number 423 848 1,490 2,657 2,889 3,524 3,965
=============================================================================================
</TABLE>
As a general matter, the Company finances the acquisition of its
automotive finance contracts by drawing against its available lines of credit
and warehouse facilities. Under the terms of these facilities, funding is
provided between 80 to 90% of the acquisition price of the contracts.
Accordingly, the Company must secure the remainder of the acquisition price from
equity or other funding sources.
As the rate of growth of contract acquisition continues to increase, the
Company must secure additional equity or other sources to fund these
requirements. The Company's growth, therefore, is governed by its ability to
gain access to additional financing sources. The Company's growth during the
year ended December 31, 1995 has been facilitated by its ability to successfully
complete private placements of debt and equity securities and gain access to
increasing sources of financing.
During 1995, the Company had secured its principal sources of working
capital through senior indebtedness comprised of a series
33
<PAGE>
of debt participation interests, revolving lines of credit, and a repurchase
facility, as well as subordinated junior indebtedness consisting of unsecured
subordinated debentures and advances from an officer, and the proceeds from the
sale of shares of common stock in a private placement transaction.
As of December 31, 1995, the respective balances due under the Company's
outstanding indebtedness were as follows:
Senior Indebtedness:
Lines of Credit and Warehouse
Facility.................................................. $33,429,000
Debt Participation Interests.................................$42,381,000
Subordinated Indebtedness:
Private Placement of Convertible
Subordinated Debentures
Issued: $21,325,000
Less: Converted to Common Stock (8,260,000)............$13,065,000
Unsecured Advances............................................$2,919,000
Lines of Credit, Warehouse Facilities and Debt Participations
In March 1993, the Company entered into a $20,000,000 three-year revolving
credit facility with Congress Financial Corporation (the "Congress Credit
Facility") which has recently been extended until March 1997. The Congress
Credit Facility bears interest at 2% over the prime rate of CoreStates Bank,
N.A. (10.75% at December 31, 1995), payable monthly, and is secured by certain
lease contracts receivable and consumer and mortgage loans receivable. As of
December 31, 1995, the Company had no advances outstanding and had an available
borrowing base of $20,000,000 under the Congress Credit Facility for the
financing of additional loan and lease portfolio purchases which meet certain
credit guidelines established by Congress, in its sole discretion.
During February 1994, the Company entered into a $5,000,000 one-year
revolving credit facility with GECC (the "GECC Credit Facility"). In September
1994, the GECC Credit Facility was increased to $10,000,000. The GECC Credit
Facility bears interest payable monthly at rates fixed at the time of financing
and is secured by certain lease contracts receivable and consumer and mortgage
loans receivable. In March 1995, the GECC Credit Facility available line was
increased to $25,000,000 and at December 31, 1995, the Company had drawn down
approximately $21,844,000 under
34
<PAGE>
the facility. The GECC Credit Facility is automatically renewed annually unless
GECC provides the Company with notice of termination 90 days prior to such
renewal.
During September 1995, the Company entered into a $50 million repurchase
facility (the "Repurchase Facility") with an additional lending institution (the
"Lender"). Under the terms of the Repurchase Facility, the Lender purchases loan
and lease contracts receivable from the Company at approximately 90% of the
outstanding principal balance. These advances are accounted for as financing
transactions characterized as borrowings. The Company repurchases the
receivables from the Lender at approximately 90% of the outstanding principal
balance at the time of repurchase plus a premium for accrued interest at a rate
of 2.25% over 30 day LIBOR. The Repurchase Facility also provides that if the
market value of contracts sold to the Lender (market value being determined by
an independent third party) is less than the Lender's margin amount (market
value multiplied by the advance rate), the Lender may require the Company to
transfer money or additional contracts to the Lender until the margin amount is
satisfied. Market value may be affected by, among other things, sudden 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 term of the Repurchase Facility is for one year, automatically
renewable for an additional year. At December 31, 1995, the Company had
$11,585,000 outstanding under the Repurchase Facility.
The Company intends to use the Repurchase Facility to fund additional
growth in loan and lease receivables with the intent to eventually pool and
securitize these receivables. Towards that end, during the fourth quarter of
1995, the Company completed the sale of approximately $40 million of automotive
loans in a privately-placed securitization transaction. The proceeds from the
transaction were used to pay down the Repurchase Facility, thereby making the
Repurchase Facility available to fund acquisitions of additional automotive
contracts. See "Securitization of Loans."
The Repurchase Facility includes certain financial and operational
covenants including, among other things, the required maintenance of a minimum
net worth of $30 million dollars, prohibition upon debt to equity ratio in
excess of 8 to 1, and the maintenance of certain loan portfolio performance
criteria. For the purpose of the Repurchase Facility, net worth has been defined
as total stockholders' equity plus subordinated indebtedness not due within 90
days. At December 31, 1995, the Company was in compliance with all relevant
financial and operational covenants. Management continues to closely monitor the
performance of its loan
35
<PAGE>
portfolios in order to insure compliance with all financial and operational
covenants.
An event of default is also deemed to occur under the Repurchase 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.
The Congress Credit Facility and the GECC Credit Facility are also subject
to certain financial and operational covenants that are not inconsistent with
those imposed under the Repurchase Facility.
Since inception, the Company has secured a significant amount of its
working capital through debt participation interests. As of December 31, 1995,
the Company had an existing series of borrowings under participation
arrangements outstanding with Fairfax Savings, a Federal Savings Bank
("Fairfax") in the approximate amount of $41,845,000. Approximately $40.6
million of the Fairfax financing has been utilized to acquire automotive finance
contracts. These amounts are subject to interest at prime plus 2.5% fixed at the
time of the financing. The remaining approximately $1.2 million of the Fairfax
financing has been utilized to acquire bulk purchase portfolios prior to 1995.
These amounts are subject to interest at fixed rates from 10% to 13.5%.
In general, under the terms of the participation agreements, principal
payments on the agreements are tied to the payments received from the secured
contracts and loans receivable. 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 the 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.
Distributions under some participation agreements with Fairfax include
deposits of a portion of the collections into segregated, interest-bearing
reserve accounts held for the benefit of the Company at Fairfax. These reserve
accounts are returned to the Company once the principal balances under the
participation agreements are reduced to certain levels.
36
<PAGE>
The balances of the trust account pending settlement with participants and
the balance of the reserve accounts on deposit with Fairfax are reflected on the
Company's balance sheet as Restricted Cash.
Private Placement of Convertible Subordinated Debentures,
Warrants and Common Stock
The Company has secured a significant component of its working capital
through the private placement of debt and equity securities. During the fourth
quarter of 1994, the Company raised approximately $8,298,000 (net proceeds of
$7,723,000), in a private placement transaction of 1,549,667 shares of its
Common Stock in conjunction with the Merger. Also during the period from April
1995 through December 31, 1995, the Company completed the offering and sale in
private placement transactions of $21,325,000 of 9% Convertible Subordinated
Debentures (the "Debentures") and 1,961,125 Common Stock Purchase Warrants (the
"Warrants"), as well as 176,500 shares of its common stock which yielded net
proceeds of $2,100,950. During January 1996, the Company completed the sale of
$2.5 million of additional Debentures and 175,000 Warrants.
Through December 31, 1995, an aggregate of $8,260,000 principal amount of
the Debentures was converted into 930,519 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)
in accordance with the following table:
Principal Amount(1) Conversion Price
- - ------------------- ----------------
$4,140,000.................................... Lower of: (i) $9.00; or (ii)
75% of average closing bid
price upon conversion.
$8,425,000.................................... Lower of: (i) $11.00; or (ii)
85% of average closing bid
price upon conversion.
$3,000,000.................................... $12.50
- - ----------
$15,565,000
===========
- - ----------------
(1) As of March 29, 1996
- - ----------------
Once the stock achieves the trading prices identified in the table
provided below, the Company has the right to serve notice of the redemption 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
37
<PAGE>
of the stock necessary to redeem would yield a greater profit to the Debenture
holders upon a conversion rather than a redemption).
Principal Amount(1) Redemption Price
- - ------------------- ----------------
$4,140,000(2)................................. $15
$6,425,000.................................... $18
$5,000,000.................................... $25
- - ----------
$15,565,000
===========
- - -------------------------------
(1) As of March 29, 1996
(2) $3,750,000 of the Debentures are not subject to a call for
redemption, in which event, however, the Debentures become
non-interest bearing.
- - -------------------------------
The respective maturity dates of the Debentures are identified in the
following table:
Principal Amount(1) Maturity Date
- - ------------------- -------------
$1,140,000.................................... April 1996
$3,000,000.................................... September 1996
$2,500,000.................................... November 1996
$3,425,000.................................... December 1996
$3,000,000.................................... July/August 1998
$2,500,000.................................... January 1999
- - -----------
$15,565,000
===========
- - ----------------
(1) As of March 29, 1996
- - ----------------
Although management is optimistic that a substantial number of the
remaining Debentures will be subject to conversion prior to their maturity, a
possibility exists that the Company could be required to allocate liquidity and
capital resources to the retirement of these Debentures.
The Warrants entitle the holders thereof for a period of three (3) years
to purchase shares of Common Stock at exercise prices identified in the table
provided below.
38
<PAGE>
Warrants(1) Exercise Price
- - -------- --------------
Per Share/Aggregate
-------------------
1,360,000..................................... $9.00/$12,240,000
12,500........................................ 12.00/$150,000
50,000........................................ $12.30/$615,000
350,000....................................... $14.00/$4,900,000
363,625....................................... $15.00/$5,454,375
- - -------- ----------
2,136,125..................................... $23,359,375
========== ===========
- - ----------------
(1) As of March 29, 1996
- - ----------------
The Warrants also contain features that permit redemption (at $.001 per
Warrant) based upon average trading prices of the Company's Common Stock between
$15.00 and $25.00. Any call for redemption would have the likely effect of
causing the exercise of the Warrants.
There can be no assurances that a material number of the Warrants will be
exercised in the near term, if at all, or that the trading price of the
Company's Common Stock will, in the near term, be sufficient to permit a
redemption of the Warrants.
The Company has granted certain registration rights to the holders of the
Debentures and the Warrants. Pursuant to these rights, the Company has agreed to
include the resale of up to approximately 2.9 million shares, issuable, if at
all, upon the conversion of the Debentures and the exercise of the Warrants in a
registration statement to be filed with the Securities and Exchange Commission
on or before May 15, 1996.
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 obviating the need
to repay the principal amount (and in certain instances, interest) due
thereunder. Trading at reduced prices, however, will make less likely conversion
of the Debentures, thus requiring the Company to allocate certain of its capital
resources towards the retirement of the Debentures at maturity.
As of the date of this Report, the Company had outstanding 6,700,041
shares of Common Stock. By virtue of the registration rights, commencing May 15,
1996, the Company will be commencing the registration for resale purposes of up
to approximately 2.9 million shares issuable, if at all, upon the conversion of
the Debentures
39
<PAGE>
and exercise of the Warrants. This may have the effect of substantially
increasing the number of shares eligible for public trading. Although it is
impossible to predict market influences and prospective values for securities,
it is possible that, in and of itself, the increase in the number of shares
available for public trading could have a depressive effect upon the trading
value of the Company's Common Stock.
Securitization of Loans
During the fourth quarter of 1995, the Company completed the sale of
approximately $40 million of automotive loans in a privately-placed
securitization transaction. This was followed by a further sale of approximately
$41 million of automotive loans in a second securitization transaction that
occurred during March 1996. Both of these transactions resulted in the issuance
of asset-backed securities which received a rating of "A", "BBB" and "BB" by
Duff & Phelps Audit Rating Co. and Fitch Investors Services L.P. The proceeds
from these transactions were used to reduce the Company's outstanding warehouse
facility, thereby making the warehouse facility available to fund the
acquisition of additional automotive contracts. The Company expects to complete
future securitizations, generally, on a quarterly basis.
In securitization transactions, the Company transfers automobile loans to
a newly-formed securitization trust which issues one or more classes of
asset-backed securities. The asset-backed securities are simultaneously sold to
investors. Periodically, collections of principal and interest on the loans are
paid to holders of the related asset-backed securities by the trustee. The
Company continues to act as the servicer of the automobile loans held in the
trust in return for a monthly fee.
To further credit enhance the asset-backed securities and thereby to
improve the level of profitability from the sale of securitized loans, the
Company has set aside a portion of the proceeds from the sale in a reserve
account to be held in the trust. Withdrawals may be made from the reserve
account to the extent that collections from the loans held in the trust are not
sufficient to cover periodic distributions to holders of the trust's
asset-backed securities. At periodic dates, amounts on deposit in the reserve
account in excess of certain specified percentages of the principal balance of
the loans held in the trust are returned to the Company.
40
<PAGE>
Other Potential Uses of Working Capital
In the short term, the Company may be required to repay advances from its
chief executive officer, the balance of which was $2,919,000 as of December 31,
1995, which is due on March 31, 1996. Thereafter,the balance due thereunder
becomes due upon demand which may be made upon thirty days written notice to
Company.
The Company may potentially be caused to allocate certain capital
resources in the future towards the purchase of the business of SFI. SFI is a
Florida-based auto finance broker that at December 31, 1995 accounted for
approximately 35% of the Company's loan and lease receivables. Pursuant to an
option agreement entered into on August 1, 1995 (the "SFI Purchase Option"), the
Company has an option through August 1, 2000 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 SFI 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
SFI 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 SFI
Purchase Option provides the Company with a right of first refusal to purchase
all of the finance contracts acquired or originated by SFI.
Given the Company's dependence on its present sources of financing for
current cash flow and continued growth, loss of such sources would have a
material adverse impact on the Company's conduct of business and prospects.
Management is presently evaluating additional sources of financing through a
continuation and expansion of its existing practices; that is, through offering
debt participation interests to institutional investors, traditional lines of
credit, and through additional equity placements. In addition, the Company
intends to continue utilizing alternative financing sources and structures, such
as securitizations of loans, in order to maximize profitability and make
available sufficient funds to continue implementation of the Company's growth
strategy over the long term. See "Securitization
41
<PAGE>
of Loans." However, there can be no assurances that the Company will secure
additional sources of financing.
By virtue of the Company's status as a public company, management will
likely seek to gain access to equity or debt capital through a sale of
securities either through the public market or to institutional investors. Any
funding provided by the sale of securities, if at all, would be used directly to
acquire additional automotive finance contracts, or would enhance the Company's
borrowing base so as to facilitate increased lines of credit or participation
agreements.
Management believes that the Company's current cash flow from operations,
proceeds from private placement transactions, as well as advances on its credit
facilities and debt participation interests, are adequate to meet the Company's
liquidity requirements for its existing operations. Continued growth of the
Company's operations will remain subject to expansion of the Company's sources
of financing. The terms of the borrowings under the participation agreements and
the credit facilities provide for repayments of principal and interest to the
lenders in amounts which, in general, correspond with and are exceeded by the
scheduled repayment of the secured loans and leases receivable.
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. While operating costs
have increased during the past years, the Company does not believe that its
operations have been significantly affected by inflation. 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 afford the purchase of an
automobile through consumer finance or lease transactions. The Company believes,
however, that because of its customer profile, and the need of its customers for
basic transportation, such factors are not likely to have a material adverse
impact on the Company's business.
ITEM 7. FINANCIAL STATEMENTS.
Financial Statements of the Company for the years ended December 31, 1995
and 1994, and specific supplementary financial information are included within
Item 13(A) and 13(B) of this Report and may be found at pages F-1 through F-27.
42
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
There are no matters to be reported hereunder.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
Positions with
Name Age the Company
- - ---- --- -----------
Robert R. Bartolini 51 Chairman of the Board, President and
Chief Executive Officer of NAL;
Chairman and Chief Executive Officer
of NAC
John T. Schaeffer 49 Director of NAL;
Director, President and
Chief Operating Officer of NAC
Robert J. Carlson 40 Vice President-Finance
and Principal Accounting
Officer of NAL and NAC
Dennis R. LaVigne 51 Vice President and
Treasurer of NAL
James F. DeVoe 52 Director
David R. Jones 47 Director
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 has maintained those positions, with the
addition of the office of the President, following the Merger with COFVI on
November 30, 1994. Prior to founding NAL Financial Group Inc., he was President
and Chief Operating Officer of Financial Federal Savings & Loan Association
43
<PAGE>
("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
that, Mr. Bartolini was with First Pennsylvania Bank, NA (assets of $6 billion;
75 branches), where he served as Senior Vice President.
Robert J. Carlson
Mr. Carlson has been Vice President-Finance 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 that, he served as Senior Vice President and Chief Financial Officer at Miami
Savings Bank, a $175 million asset savings institution in Miami, Florida. Mr.
Carlson also served 3 years at CenTrust, where he held the position of Vice
President-Accounting Operations and Reporting. He is a certified public
accountant and holds a Bachelor of Science Degree in business administration
from the University of Florida.
James F. DeVoe
Mr. DeVoe has been a director of the Company since March 1996. He is the
founder and has been Chief Executive Officer and Chairman of the Board of
Directors of J.D. Byrider Systems, Inc., a used vehicle-operation franchisor
since 1989 with 75 open locations in 28 states. Mr. DeVoe has been President and
Chairman of the Board of DeVoe Chevrolet Cadillac, Inc., an auto 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 D.R. Jones Financial, Inc., a
privately held consulting firm since its formation in September 1995. Prior to
forming D. R. 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.
44
<PAGE>
Dennis R. LaVigne
Mr. LaVigne has been Vice President and Treasurer of the Company since
August 1995. Mr. LaVigne has substantial experience in the automotive finance
industry, having served as Senior Vice-President of Union Acceptance
Corporation (an automotive 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.
John T. Schaeffer
Mr. Schaeffer has been President and Chief Operating Officer of NAC since
its inception and has maintained those positions, with the addition of the
office of director of the Company following the Merger with COFVI. Prior to
joining the Company, Mr. Schaeffer was President and Chief Operating Officer of
FinancialFed Services, Inc. ("FFS"), 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.
Compliance with Section 16(a) Of the Securities Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires directors
and certain officers of the Company, as well as persons who own more than 10% of
a registered class of the Corporation's equity securities ("Reporting Persons"),
to file reports of ownership and changes in ownership on Forms 3, 4 and 5 with
the Securities and Exchange Commission. The Company believes that during the
year ended December 31, 1995 all Reporting Persons timely complied with all
filing requirements applicable to them.
ITEM 10. EXECUTIVE COMPENSATION.
The following table discloses, individual compensation information
relating to the Company's Chief Executive Officer and the other named executive
officers of the Company for the years ended December 31, 1993, 1994 and 1995.
45
<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
==========================================================================================================================
Long Term
Annual Compensation(1) Compensation
- - --------------------------------------------------------------------------------------------------------------------------
Securities
Salary Bonus Underlying
Name and Position Year ($) ($) Options/SARs (#)
- - --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Robert R. Bartolini 1995 $300,000 $ 0 50,000(4)
Chairman of the Board, President and Chief Executive 1994 $281,916 $ 298,985 75,000(2)
Officer of NAL; 1993 $250,000 $1,248,100 0
Chairman and Chief Executive Officer of NAC
- - --------------------------------------------------------------------------------------------------------------------------
John T. Schaeffer 1995 $160,000 $ 0 25,000(4)
Director of NAL; 1994 $160,000 $ 0 40,000(3)
President and Chief Operating Officer of NAC 1993 $160,000 $ 161,302 0
- - --------------------------------------------------------------------------------------------------------------------------
Robert J. Carlson 1995 $ 80,000 $ 0 15,000(4)
Vice President-Finance and Principal Accounting 1994 $ 74,231 $ 86,015 15,000(3)
Officer of NAL 1993 $ 72,500 $ 18,124 0
- - --------------------------------------------------------------------------------------------------------------------------
Dennis R. LaVigne 1995 $ 48,461 $ 0 25,000(5)
Vice President and Treasurer of NAL
==========================================================================================================================
(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 Stock Option 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
Company's Stock Option 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
Company's Stock Option 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 Company's Stock Option Plan, which vest upon December 6,
1998.
- - ----------------------------------
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
=============================================================================================================================
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
- - -----------------------------------------------------------------------------------------------------------------------------
INDIVIDUAL GRANTS
- - -----------------------------------------------------------------------------------------------------------------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/SARs EXERCISE EXPIRATION
UNDERLYING GRANTED TO OR DATE
OPTION/SARs EMPLOYEES IN BASE PRICE
NAME GRANTED(#) FISCAL YEAR(1) ($/Share)
- - -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Robert R. Bartolini 50,000(2) 15.22% $ 16.50 December 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(2) 7.61% $ 15.00 December 6, 2005
Director of NAL;
President and Chief Operating Officer of NAC
- - -----------------------------------------------------------------------------------------------------------------------------
Robert J. Carlson 15,000(2) 4.57% $ 15.00 December 6, 2005
Vice President-Finance and
Principal Accounting Officer of NAL
- - -----------------------------------------------------------------------------------------------------------------------------
Dennis R. LaVigne 25,000(3) 7.61% $ 13.25 December 6, 2005
Vice President and Treasurer of NAL
=============================================================================================================================
(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
Company's Stock Option Plan.
(2) Represents Stock Options granted as of December 6, 1995 pursuant to the
Company's Stock Option Plan, which vest pro-rata over three years
commencing January 1, 1997.
(3) Represents Stock Options granted as of December 6, 1995 pursuant to the Company's Stock
Option Plan, which vest upon December 6, 1998.
- - ---------------------------------------
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
AGGREGATED OPTIONS/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
====================================================================================================================================
Number of Securities Value
Underlying Unexercised of Unexercised
Shares Options/SARs at FY-End (#) In-the-Money Options/SARs
Name Acquired Value Exercisable/ at FY-End($)
on Exercise(#) Realized 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 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-Finance and
Principal Accounting Officer of
NAL
- - ------------------------------------------------------------------------------------------------------------------------------------
Dennis R. LaVigne -0- -0- 0(E)/25,000(U) $0(E)/$9,500(U)
Vice President and Treasurer of
NAL
====================================================================================================================================
(1) Based upon the closing price of the Company's Common Stock ($13.63 per
share) as of December 29, 1995 as traded on The NASDAQ National MarketSM.
- - ------------------------------
</TABLE>
48
<PAGE>
Employment Arrangements
Upon the closing of the Merger, the Company entered into an employment
agreement with Mr. Robert 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 insurance, certain
expenses and stock option plan participation, as well as a restrictive covenant
in favor of the Company. The agreement is annually renewable for successive
three-year periods; however, 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. Mr. Bartolini may not cause
the agreement to terminate prior to three years from the date of the agreement.
Director's Fees
The employee-directors of the Company receive no fees or other
compensation in connection with their services as directors. Each of Mr. Jones
and Mr. DeVoe were granted Warrants to purchase 20,000 shares of the Company's
Common Stock in conjunction with joining the Board of Directors and receive
$1,000 for each meeting of the Board and each meeting of any Sub-Committee
afforded in person and $500 for each meeting attended telephonically.
Stock Option Plan
The Company has adopted a stock option plan (the "Plan") covering 600,000
shares of the Company's Common Stock, pursuant to which 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 ("SARs"). The
Plan will be 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 Plan are exercisable for a period of up to 10 years
from the date of grant and at an exercise price which 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 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
49
<PAGE>
granted on any terms determined by the Board of Directors or committee
designated by the Board of Directors.
Incentive stock options granted under the 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 Plan to any participating employee. However,
under the terms of the 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 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 Plan will expire on November 1, 2004, unless terminated earlier by the
Board of Directors. The Plan may be amended by the Board of Directors without
stockholder approval, except that no amendment which increases the maximum
aggregate number of shares which may be issued under the Plan or changes the
class of employees who are eligible to participate in the Plan, shall be made
without the approval of a majority of the stockholders of the Company.
Effective as of December 15, 1994, 229,000 options were granted under the
Plan; 99,000 of which were granted to non-management employees and 130,000 of
which were granted to management. Effective as of December 6, 1995, 328,500
additional options were granted under the Plan; 213,500 of which were granted to
non-management employees and 115,000 of which were granted to management. See
"Options/SAR Grants in Last Fiscal Year Table."
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The following table sets forth, as of March 26, 1996, information with
respect to the securities holdings of all persons which the Company, pursuant to
filings with the Securities and Exchange Commission, has reason to believe may
be deemed the beneficial owners of more than 5% of the Company's outstanding
50
<PAGE>
Common Stock. Also set forth in the table is the beneficial ownership of all
shares of the Company's outstanding stock, as of such date, of all officers and
directors, individually and as a group.
================================================================================
Shares Owned Percentage of
Beneficially and of Outstanding
Name Record(1) Shares(1)
- - --------------------------------------------------------------------------------
Robert R. Bartolini 2,235,647(2) 33.18%
500 Cypress Creek Road West, Suite 590
Ft. Lauderdale, FL 33309
- - --------------------------------------------------------------------------------
John T. Schaeffer 302,913(3) 4.50%
500 Cypress Creek Road West, Suite 590
Ft. Lauderdale, FL 33309
- - --------------------------------------------------------------------------------
Robert J. Carlson 65,196(4) *
500 Cypress Creek Road West, Suite 590
Ft. Lauderdale, FL 33309
- - --------------------------------------------------------------------------------
Dennis R. LaVigne --(5) *
500 Cypress Creek Road West, Suite 590
Ft. Lauderdale, FL 33309
- - --------------------------------------------------------------------------------
James F. DeVoe --(6) *
5780 West 71st Street
Indianapolis, IN 46278
- - --------------------------------------------------------------------------------
David R. Jones --(6) *
2 Ocean Avenue
Scituate, MA 02066-1624
- - --------------------------------------------------------------------------------
Florence Karp(7) 1,427,803(8) 17.57%
3418 Sansom Street
Philadelphia, PA 19104
- - --------------------------------------------------------------------------------
Rozel International Holdings Limited 362,318(9) 5.13%
P.O. Box 3151
Road Town
Tortola, B.V.I.
- - --------------------------------------------------------------------------------
All Directors and Officers 2,603,756 38.6%
as a group (6 persons)
================================================================================
- - --------------------------------------------------
*Represents less than 1%
(1) Except as otherwise indicated, includes total number of shares outstanding
and the number of shares which 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 1934 Act. Also reflects 6,700,041 shares of the Company's Common
Stock outstanding as of March 26, 1996.
51
<PAGE>
(2) Includes 1,647,004 shares held by Robert R. Bartolini and Marcia G.
Bartolini, Co-Trustees of the Robert R. Bartolini Revocable Trust dated
July 27, 1992, 210,000 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 Incentive Stock
Options to purchase 19,445 shares of Common Stock granted December 1994
which vested as of January 1, 1996. 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 "ITEM 10. EXECUTIVE
COMPENSATION."
(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 Incentive
Stock Options granted to Mr. Schaeffer in December 1994 which vested as of
January 1, 1996. Does not include 51,667 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
"ITEM 10. EXECUTIVE COMPENSATION."
(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 Incentive
Stock Options granted to Mr. Carlson in December 1994 which vested as of
January 1, 1996. Does not include 25,000 Incentive Stock Options granted
to Mr. Carlson in December 1994 and December 1995 which remain subject to
vesting. See ITEM 10. EXECUTIVE COMPENSATION."
(5) Does not include 25,000 Incentive Stock Options granted to Mr. LaVigne in
December 1995 which remain subject to vesting. See "ITEM 10. EXECUTIVE
COMPENSATION."
(6) 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 conjunction
with appointment as a director on February 5, 1996, which have not vested.
Also does not
52
<PAGE>
include Warrants to purchase 20,000 shares of Common Stock at an exercise
price of $11.50 per share granted to Mr. DeVoe in conjunction with
appointment as a director on March 11, 1996, which have not vested. See
"ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
(7) As custodian for Ms. Karp's minor grandchildren.
(8) Includes 625,000 shares of Common Stock issuable upon the exercise, if at
all, of Warrants. Also includes 802,803 shares of Common Stock (643,939
shares representing principal and 158,864 shares representing interest at
maturity) issuable upon the conversion, if at all, of Debentures.
(9) Includes 128,818 shares issuable, if at all, upon conversion of
outstanding Debentures and 233,500 shares issuable, if at all, upon the
exercise of outstanding Warrants.
- - -------------------------------
Material Voting Arrangements
Concurrent with the completion of the Merger, as of 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 whereby for the years ended June 30, 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 shareholders under this
formula. The trust shares will be released pro rata in accordance with the
number of trust shares beneficially owned by each shareholder. If the shares are
not released pursuant to the earn-out formula within three years, such shares
will be cancelled. The trustee under the Voting Trust Agreement is English,
McCaughan & O'Bryan, P.A., counsel to the Company.
53
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Loan to the Company
Robert R. Bartolini advanced $1,098,165 to the Company on June 30, 1995 in
order to provide it with additional working capital. The Company's obligation to
repay this loan was evidenced by a promissory note dated August 31, 1995. In
December 1995, the principal balance of this loan was increased to $2,919,000 by
an additional advance from Mr. Bartolini of $1,820,835 under the same terms and
conditions. The indebtedness evidenced by the promissory note is subordinated to
the prior payment, when due, of the principal and interest on all senior
indebtedness of the Company. Under the terms of this promissory note, principal
and interest are due on March 31, 1996, with interest accruing at 9%.
Thereafter, the promissory note becomes due on demand upon thirty (30) days
written notice.
Transactions with Affiliate of Former Director
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 May 1996.
During October 1994, the Company sold 333,333 shares of Common Stock to
AMLF in a private placement transaction for consideration of $19,999.
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, were converted into 95,692 shares of the Company's
Common Stock during January 1996. The remaining principal amount of these
Debentures Units $390,000 is due on April 16, 1996.
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. Robert R.
Bartolini, Chairman and Chief Executive Officer of the Company, in consideration
for $590,965. The portfolio of which this portfolio was a part was purchased by
the Company in March 1994 from the FDIC at a purchase price equal to
54
<PAGE>
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 collectibility of the loans. This price was considered by the Company
to be equal to their 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.
Sale of Boat to Executive Officer
In October 1994, the Company sold a repossessed boat to 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 bears 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, 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 this agreement. This reflected 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.
On April 30, 1993, the Company redeemed 5,928 shares of Common Stock held
by FTM for $2,400,000. A portion of the proceeds was applied to the cancellation
of the receivable of $841,417 due from FTM to the Company.
In October 1993, Mr. Bartolini purchased the remaining shares of the
Company's stock held by FTM for a purchase price of $2,034,000. This purchase
was financed by the Company as described below. See "Purchase of Shares of
Common Stock." After the purchase, Mr. Bartolini's ownership percentage of
outstanding stock was increased to 95%. The financial statements at December 31,
55
<PAGE>
1993 reflect the receivable from Mr. Bartolini as a reduction of stockholders'
equity.
The Company previously sub-leased 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 with
FTM by which FTM subleases from the Company certain space which it previously
leased directly from the landlord.
Purchase of Shares of Common Stock
In April 1993, the Company issued 214 shares to Mr. John Schaeffer,
President of NAC, in exchange for his 10% ownership of the common stock of NAC.
After the issuance, the Company owned 100% of the outstanding shares of NAC, and
Mr. Schaeffer owned 5% of the Company's Common Stock.
In October 1993, Mr. Bartolini, Chairman, Chief Executive Officer and
principal stockholder of the Company, purchased 2,143 shares representing all
outstanding shares not previously owned by Mr. Bartolini or Mr. Schaeffer to
provide him with 95% ownership of the Company 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" 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 cancelling the note.
Employment Arrangement
The Company has entered into an employment agreement with Robert R.
Bartolini, its Chairman, Chief Executive Officer and principal stockholder. See
"ITEM 10. Employment Arrangements."
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 "ITEM 10. Summary Compensation Table" and
"Stock Option Plan." In conjunction with his appointment to the Board of
Directors on February 5, 1996, the Company granted to Mr. Jones 20,000 common
stock purchase warrants with an exercise price of $14.38 per share.
In conjunction with his appointment to the Board of Directors on March 11, 1996,
the Company granted to Mr. DeVoe 20,000 common
56
<PAGE>
stock purchase warrants with an exercise price of $11.50 per share. See
"ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT."
Travel Services
IYS Travel, Inc. ("IYS"), a travel agency of which 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 commission for services provided. During the years ended December 31,
1995 and 1994, the Company paid IYS approximately $105,000 and $84,000,
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.
Mr. Bartolini receives only indirect benefits as a principal stockholder
of IYS through profits of IYS, if any.
57
<PAGE>
PART IV
-------
ITEM 13. FINANCIAL STATEMENTS AND EXHIBITS AND REPORT ON FORM 8-K.
(a) The following documents are filed as part of this Report:
1. Financial Statements filed as part of this Report: Page
----
Report of Independent Certified Public Accountants.............F-1
Consolidated Balance Sheets
as of December 31, 1995 and December 31, 1994 .................F-2
Consolidated Statements of Operations
for the Years Ended December 31, 1995 and 1994.................F-3
Consolidated Statement of Changes in
Stockholders' Equity for the Years Ended
December 31, 1995 and 1994.....................................F-4
Consolidated Statements of Cash Flows
for the Years Ended December 31, 1995 and 1994.................F-5
Notes to Consolidated Financial Statements.....................F-7
<PAGE>
NAL Financial Group Inc.
Consolidated Financial Statements
December 31, 1995 and 1994
<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 sheets 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 1994, and
the results of their operations and their cash flows for the years then ended 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-1
<PAGE>
NAL Financial Group Inc.
Consolidated Balance Sheets
December 31, 1995 and 1994
- - ---------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
ASSETS
Finance receivables
Automotive finance contracts, net $ 99,790,636 $ 23,974,929
Consumer finance contracts, net 2,289,503 1,491,694
Mortgage finance contracts, net 1,805,068 4,822,667
Less: reserves available for credit losses (2,671,001) (305,000)
---------------- -----------------
Finance receivables, net 101,214,206 29,984,290
---------------- -----------------
Cash 920,981 664,848
Restricted cash 1,031,734 1,061,041
Accrued interest receivable 1,459,600 167,692
Investment in operating leases, net 4,054,613 1,230,647
Automobile inventory 1,886,451 150,779
Property and equipment, net 1,802,889 510,885
Excess servicing receivables 4,999,165 -
Other assets 4,665,287 748,171
---------------- -----------------
TOTAL ASSETS $ 122,034,926 $ 34,518,353
================ =================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Debt participation interests $ 42,380,522 $ 10,273,645
Credit and warehouse facilities 33,428,946 12,228,396
Convertible subordinated debt, net 12,924,379 -
Stockholder loans 2,919,000 62,494
Drafts payable 2,593,098 -
Deferred taxes 1,603,587 110,460
Accounts payable and accrued expenses 1,046,884 400,057
Other liabilities 1,278,594 587,494
---------------- -----------------
TOTAL LIABILITIES 98,175,010 23,662,546
---------------- -----------------
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
1995 - 6,699,987 shares issued and outstanding
1994 - 5,592,968 shares issued and outstanding 1,004,998 838,945
Paid in capital 18,524,706 8,483,714
Retained earnings 4,330,212 1,533,148
---------------- -----------------
TOTAL STOCKHOLDERS' EQUITY 23,859,916 10,855,807
---------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 122,034,926 $ 34,518,353
================ =================
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-2
<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-3
<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 Common Stock
----------------- --------------------- Less:
Par Par Paid in Note
Shares Value Shares Value Capital Receivable
------ ----- ------ ----- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 -- $-- 4,286 $ 4,286 $ 3,195,325 $ (2,034,638)
Dividends -- -- -- -- -- --
Redemption of stock -- -- (2,143) (2,143) (1,597,670) 2,034,638
Redemption of predecessor stock
in connection with the merger -- -- (2,143) (2,143) (1,597,655) --
Issuance of stock to predecessor
stockholders in connection
with the merger -- -- 3,160,000 474,000 1,125,798 --
Issuance of stock to stockholders
of merged entity -- -- 2,432,968 364,945 7,357,916 --
Net income -- -- -- -- -- --
--- ---- --------- ---------- ------------ -----------
Balance, December 31, 1994 -- -- 5,592,968 838,945 8,483,714 --
Issuance of stock -- -- 176,500 26,475 2,074,475 --
Issuance of warrants -- -- -- -- 397,167 --
Conversion of subordinated
debt -- -- 930,519 139,578 7,289,350 --
Release of escrow shares -- -- -- -- 280,000 --
Net income -- -- -- -- -- --
--- ---- --------- ---------- ------------ ------------
Balance, December 31, 1995 -- $-- 6,699,987 $1,004,998 $ 18,524,706 $--
=== ==== ========= ========== ============ ============
<CAPTION>
Total
Retained Stockholders'
Earnings Equity
-------- -----------
Balance, December 31, 1993 $ 2,643,110 $ 3,808,083
Dividends (1,069,460) (1,069,460)
Redemption of stock (434,825) --
Redemption of predecessor stock
in connection with the merger -- (1,599,798)
Issuance of stock to predecessor
stockholders in connection
with the merger -- 1,599,798
Issuance of stock to stockholders
of merged entity -- 7,722,861
Net income 394,323 394,323
----------- ----------
Balance, December 31, 1994 1,533,148 10,855,807
Issuance of stock -- 2,100,950
Issuance of warrants -- 397,167
Conversion of subordinated
debt -- 7,428,928
Release of escrow shares -- 280,000
Net income 2,797,064 2,797,064
------------ ----------
Balance, December 31, 1995 $ 4,330,212 $ 23,859,916
============ ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
<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
============= =============
</TABLE>
(Continued)
The accompanying notes are an integral part of these consolidated
financial statements.
F-5
<PAGE>
NAL Financial Group Inc.
Consolidated Statements of Cash Flows Cont'd
For the Years Ended December 31, 1995 and 1994
- - -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
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
- - ------------------------------------------------------------------------------
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.
F-7
<PAGE>
NAL Financial Group Inc.
Notes to Consolidated Financial Statements
December 31, 1995 and 1994
- - -----------------------------------------------------------------------------
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.
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.
F-8
<PAGE>
NAL Financial Group Inc.
Notes to Consolidated Financial Statements
December 31, 1995 and 1994
- - ----------------------------------------------------------------------------
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
begins 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.
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.
F-9
<PAGE>
NAL Financial Group Inc.
Notes to Consolidated Financial Statements
December 31, 1995 and 1994
- - ----------------------------------------------------------------------------
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.
F-10
<PAGE>
NAL Financial Group Inc.
Notes to Consolidated Financial Statements
December 31, 1995 and 1994
- - -------------------------------------------------------------------------------
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.
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.
F-11
<PAGE>
NAL Financial Group Inc.
Notes to Consolidated Financial Statements
December 31, 1995 and 1994
- - ------------------------------------------------------------------------------
3. Automotive Finance Contracts
Automotive finance contracts at December 31, 1995 and 1994 consists of the
following:
<TABLE>
<CAPTION>
December 31,
1995 1994
<S> <C> <C>
Contracts held in portfolio:
Direct finance lease payments $ 16,361,733 $ 4,936,889
Estimated residual values 9,170,719 2,985,254
---------------- -----------------
Total direct finance lease 25,532,452 7,922,143
Less: Unearned interest (7,069,448) (2,004,435)
---------------- -----------------
Total direct finance leases, net 18,463,004 5,917,708
---------------- -----------------
Loan contracts 17,080,482 8,175,202
Loan contracts with recourse 29,226,018 -
---------------- -----------------
Total loan contracts 46,306,500 8,175,202
---------------- -----------------
Total contracts held in portfolio 64,769,504 14,092,910
Less: Unearned fees (123,322) (815,768)
---------------- -----------------
Total contracts held in portfolio, net 64,646,182 13,277,142
Contracts held for sale 21,685,000 -
Advances to dealers 13,459,454 10,697,787
---------------- -----------------
Total automobile finance contracts, net $ 99,790,636 $ 23,974,929
================ =================
</TABLE>
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.
F-12
<PAGE>
NAL Financial Group Inc.
Notes to Consolidated Financial Statements
December 31, 1995 and 1994
- - ------------------------------------------------------------------------------
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 and $15,463,000, at December
31, 1995 and 1994, respectively. 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.
4. Consumer Finance Contracts
<TABLE>
<CAPTION>
December 31,
1995 1994
<S> <C> <C>
Mobile homes $ 221,434 $ 524,274
Equipment leases (net of unearned interest of
$285,730) 853,637 -
Other 1,407,601 1,808,742
---------------- -----------------
Total 2,482,672 2,333,016
Less: Purchase discount (193,169) (841,322)
---------------- -----------------
Consumer loans receivable, net $ 2,289,503 $ 1,491,694
================ =================
</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-13
<PAGE>
NAL Financial Group Inc.
Notes to Consolidated Financial Statements
December 31, 1995 and 1994
- - -------------------------------------------------------------------------------
At December 31, 1995, contractual maturities of consumer finance contracts
were:
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
-----------------
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.
5. Mortgage Finance Contracts
<TABLE>
<CAPTION>
December 31,
1995 1994
<S> <C> <C>
Residential mortgages $ 2,064,043 $ 6,041,464
Less: Purchase discount (258,975) (1,218,797)
---------------- -----------------
Mortgage finance contracts, net $ 1,805,068 $ 4,822,667
================ =================
</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.
F-14
<PAGE>
NAL Financial Group Inc.
Notes to Consolidated Financial Statements
December 31, 1995 and 1994
- - -------------------------------------------------------------------------------
At December 31, 1995, contractual maturities of mortgage finance contracts
were:
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
=================
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.
6. Reserves Available for Credit Losses
Changes in reserves available for credit losses for the year 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>
F-15
<PAGE>
NAL Financial Group Inc.
Notes to Consolidated Financial Statements
December 31, 1995 and 1994
- - -------------------------------------------------------------------------
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.
7. Net Investment in Operating Leases
<TABLE>
<CAPTION>
December 31,
1995 1994
<S> <C> <C>
Vehicles held under operating leases, at cost $ 4,449,451 $ 1,283,300
Less: Accumulated depreciation (394,838) (52,653)
-------------- -----------------
$ 4,054,613 $ 1,230,647
============== =================
</TABLE>
At December 31, 1995, future minimum rental revenue on operating leases
are as follows:
1996 $ 1,078,762
1997 937,021
1998 430,164
1999 24,876
-----------------
$ 2,470,823
=================
8. Property and Equipment
Property and equipment at December 31, 1995 and 1994 consists of the
following:
<TABLE>
<CAPTION>
Amount
------------------------ Estimated
1995 1994 useful life
---- ---- -----------
<S> <C> <C> <C>
Furniture, fixtures, and office
equipment $ 2,158,928 $ 646,899 5-7 years
Less: Accumulated depreciation (356,039) (136,014)
----------------- ----------------
$ 1,802,889 $ 510,885
================= ================
</TABLE>
The Company leases office space under agreements which expire December 31,
2002.
F-16
<PAGE>
NAL Financial Group Inc.
Notes to Consolidated Financial Statements
December 31, 1995 and 1994
- - ------------------------------------------------------------------------------
The future minimum non-cancelable lease payments are as follows:
1996 $ 598,872
1997 617,570
1998 644,583
1999 672,408
2000 701,095
Thereafter 1,019,322
----------------
$ 4,253,850
================
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>
F-17
<PAGE>
NAL Financial Group Inc.
Notes to Consolidated Financial Statements
December 31, 1995 and 1994
- - -----------------------------------------------------------------------
10. Debt Participation Interests
Debt participation interests at December 31, 1995 and 1994 consists of the
following:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <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 $ 9,321,395
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%. 470,432 911,311
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 40,939
--------------- -----------------
$ 42,380,522 $ 10,273,645
=============== =================
</TABLE>
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.
F-18
<PAGE>
NAL Financial Group Inc.
Notes to Consolidated Financial Statements
December 31, 1995 and 1994
- - ------------------------------------------------------------------------------
Scheduled maturities of debt participation interests at December 31, 1995
are as follows:
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
================
11. Credit and Warehouse Facilities
Credit and warehouse facilities at December 31, 1995 and 1994 consists of
the following:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Note payable under a $25 million ($10 million at December 31, 1994)
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 $ 11,019,914
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. -- 977,123
Unsecured notes. -- 231,359
---------------- -----------------
$ 33,428,946 $ 12,228,396
================ =================
</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-19
<PAGE>
NAL Financial Group Inc.
Notes to Consolidated Financial Statements
December 31, 1995 and 1994
- - -----------------------------------------------------------------------------
Scheduled maturities of credit and warehouse facilities at December 31,
1995 are as follows:
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
=================
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.
12. Convertible Subordinated Debt
Convertible subordinated debt at December 31, 1995 and 1994 consists of
the following:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <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.
F-20
<PAGE>
NAL Financial Group Inc.
Notes to Consolidated Financial Statements
December 31, 1995 and 1994
- - ----------------------------------------------------------------------------
Scheduled maturities of convertible subordinated debt at December 31, 1995
are as follows:
1996 $ 10,065,000
1997 --
1998 3,000,000
-----------------
$ 13,065,000
=================
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, 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.
F-21
<PAGE>
NAL Financial Group Inc.
Notes to Consolidated Financial Statements
December 31, 1995 and 1994
- - -----------------------------------------------------------------------------
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.
The following table presents activity for the Plan for the years ended
December 31, 1995 and 1994:
<TABLE>
<CAPTION>
Number of Price per
Shares 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.
F-22
<PAGE>
NAL Financial Group Inc.
Notes to Consolidated Financial Statements
December 31, 1995 and 1994
- - ----------------------------------------------------------------------------
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.
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>
F-23
<PAGE>
NAL Financial Group Inc.
Notes to Consolidated Financial Statements
December 31, 1995 and 1994
- - ------------------------------------------------------------------------------
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 is as follows:
<TABLE>
<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 and 1994, is
comprised of the following temporary differences:
1995 1994
Deductible Temporary Differences
Deferred gain on sale of loan portfolio $ -- $ 89,392
Depreciation 5,850,659 2,400,978
Bad debt reserves 362,441 114,772
Other -- 7,189
----------- -----------
Deferred income tax asset 6,213,100 2,612,331
----------- -----------
Taxable Temporary Differences
Direct financing leases (6,685,591) (2,709,132)
Book over tax gain on sale of contracts (1,131,096) --
Capitalized loan costs -- (13,659)
----------- -----------
Deferred income tax liability (7,816,687) (2,722,791)
----------- -----------
Net deferred income tax liability $(1,603,587) $ (110,460)
=========== ===========
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 a $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 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
F-24
<PAGE>
NAL Financial Group Inc.
Notes to Consolidated Financial Statements
December 31, 1995 and 1994
- - ------------------------------------------------------------------------------
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. The unamortized portion of the payment in
the amount of $131,000 is included in other assets at December 31, 1994.
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.
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.
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.
F-25
<PAGE>
NAL Financial Group Inc.
Notes to Consolidated Financial Statements
December 31, 1995 and 1994
- - -------------------------------------------------------------------------------
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.
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.
F-26
<PAGE>
NAL Financial Group Inc.
Notes to Consolidated Financial Statements
December 31, 1995 and 1994
- - -------------------------------------------------------------------------------
The estimated fair values of the Company's financial instruments at
December 31, 1995 were as follows:
December 31, 1995
--------------------------
Carrying Fair
Amount Value
-------- -------
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
============= =============
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-27
<PAGE>
(b) The following Exhibits are filed as part of this Report:
================================================================================
Exhibit No. Description Method of Filing
- - --------------------------------------------------------------------------------
2.1 Merger Agreement Incorporated by
between the reference to Exhibit
shareholders of NAL 2.1 to the Registrant's
Financial Group Inc., Form 8-K filed under
NAL Financial Group the Securities Exchange
Inc., and the Act of 1934 on December
Registrant dated 8, 1994 (the "Form 8-
October 4, 1994 and as K")
amended, November 30,
1994
58
<PAGE>
- - --------------------------------------------------------------------------------
3.1 Certificate of Incorporated by
Incorporation of reference to Exhibit
Registrant, as amended 3.1 to the Registrant's
December 1, 1994 Registration Statement
on Form SB-2 filed
under the Securities
Act of 1933 on January
31, 1995, Registration
No. 33-88966 (the
"January 1995
Registration
Statement")
- - --------------------------------------------------------------------------------
3.2 By-laws of the Incorporated by
Registrant as amended reference to Exhibit
as of November 30, 1994 3.2 to the January 1995
Registration Statement
- - --------------------------------------------------------------------------------
4.1 Copy of Specimen Common Incorporated by
Stock Certificate reference to Exhibit
4.1 to the January 1995
Registration Statement
- - --------------------------------------------------------------------------------
4.2 Form of 9% Subordinated Incorporated by
Convertible Debenture reference to 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
Purchase Warrant reference to Exhibit
4.3 to the October 1995
Registration Statement.
- - --------------------------------------------------------------------------------
4.4 Form of Registration Incorporated by
Rights Agreement reference to Exhibit
4.4 of the October 1995
Registration Statement.
59
<PAGE>
- - --------------------------------------------------------------------------------
9.1 Voting Trust Agreement Incorporated by
by and among English, reference to Exhibit
McCaughan & O'Bryan, 2.2 to the Form 8-K
P.A., John T.
Schaeffer, Robert J.
Carlson and The Robert
R. Bartolini Trust,
dated November 30, 1994
- - --------------------------------------------------------------------------------
10.2 Loan and Security Incorporated by
Agreement between reference to Exhibit
Congress Financial 10.2 to the January
Corporation and the 1995 Registration
Registrant dated March Statement
16, 1993
- - --------------------------------------------------------------------------------
10.3 Program Agreement Incorporated by
between NAL Acceptance reference to Exhibit
Corporation and General 10.3 to the October
Electric Capital Auto 1995 Registration
Lease, Inc. dated July Statement
1, 1995
- - --------------------------------------------------------------------------------
10.4 Amended and Restated Incorporated by
Loan and Security reference to Exhibit
Agreement between 10.4 to the January
General Electric 1995 Registration
Capital Corporation and Statement
NAL Acceptance
Corporation dated
September 28, 1994
- - --------------------------------------------------------------------------------
10.5 Loan Purchase Agreement Incorporated by
between Fairfax Savings reference to Exhibit
Bank and the Registrant 10.5 to the January
dated October 6, 1994 1995 Registration
Statement
- - --------------------------------------------------------------------------------
10.6 Participation Agreement Incorporated by
between Fairfax reference to Exhibit
Savings, FSB and NAL 10.6 to the January
Acceptance Corporation 1995 Registration
dated December 14, 1993 Statement
- - --------------------------------------------------------------------------------
10.7 Employment Agreement by Incorporated by
and between the reference to Exhibit
Registrant and Robert 10.7 to the October
R. Bartolini dated 1995 Registration
November 30, 1994 Statement
- - --------------------------------------------------------------------------------
60
<PAGE>
- - --------------------------------------------------------------------------------
10.8 Lease Agreement by and Incorporated by
between NAL Acceptance reference to Exhibit
Corporation and The 10.8 to the October
Northwestern Mutual 1995 Registration
Life Insurance Company Statement
dated October 2, 1991,
as modified by Lease
Modification Agreement
#1 dated February 18,
1994 and Lease
Modification Agreement
#2 dated January 20,
1995
- - --------------------------------------------------------------------------------
10.9 Lease Agreement by and Incorporated by
between NAL Acceptance reference to Exhibit
Corporation and The 10.9 to the October
Northwestern Mutual 1995 Registration
Life Insurance Company Statement
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
- - --------------------------------------------------------------------------------
10.10 Modification Agreement Incorporated by
# 4 dated July 1, 1995 reference to Exhibit
to Lease Agreement by 10.10 to the October
and between NAL 1995 Registration
Acceptance Corporation Statement
and the Northwestern
Mutual Life Insurance
Company dated June 7, 1994.
- - --------------------------------------------------------------------------------
10.11 Sublease Agreement by Incorporated by
and between NAL reference to Exhibit
Acceptance Corporation 10.11 to the October
and FTM Holdings, Inc. 1995 Registration
dated March 30, 1994 Statement
- - --------------------------------------------------------------------------------
61
<PAGE>
- - --------------------------------------------------------------------------------
10.12 Sublease Agreement by Incorporated by
and between the reference to Exhibit
Registrant and FTM 10.12 to the October
Holdings, Inc. dated 1995 Registration
February 1, 1995 Statement
- - --------------------------------------------------------------------------------
10.13 Master Repurchase Incorporated by
Agreement between reference to Exhibit
Greenwich Capital 10.13 to the October
Financial Products, 1995 Registration
Inc. and Autorics, Inc. Statement
dated September 5, 1995
- - --------------------------------------------------------------------------------
10.14 Option to Purchase Incorporated by
Assets of Special reference to Exhibit
Finance, Inc. dated 10.14 to the October
August 1, 1995 1995 Registration
Statement
- - --------------------------------------------------------------------------------
10.15 Receivables Purchase Incorporated by
Agreement among NAL reference to Exhibit
Acceptance Corporation, 10.15 to Post-Effective
Autorics II, Inc. and Amendment No. 1 to the
Autorics, Inc. dated October 1995
December 1, 1995 Registration Statement
- - --------------------------------------------------------------------------------
10.16 Sale and Servicing Incorporated by
Agreement among NAL reference to Exhibit
Auto Trust 1995-1 and 10.16 to Post-Effective
Autorics II, Inc., NAL Amendment No. 1 to the
Acceptance Corporation October 1995
and Bankers Trust Registration Statement
Company dated December
1, 1995
- - --------------------------------------------------------------------------------
10.17 Indenture between NAL Incorporated by
Auto Trust 1995-1 and reference to Exhibit
Bankers Trust Company 10.17 to Post-Effective
dated December 1, 1995 Amendment No. 1 to the
October 1995
Registration Statement
- - --------------------------------------------------------------------------------
10.18 Administration Incorporated by
Agreement among NAL reference to Exhibit
Auto Trust 1995-1, NAL 10.18 to Post-Effective
Acceptance Corporation, Amendment No. 1 to the
and Bankers Trust October 1995
Company dated December Registration Statement
1, 1995
- - --------------------------------------------------------------------------------
62
<PAGE>
- - --------------------------------------------------------------------------------
10.19 Trust Agreement between Incorporated by
Autorics II, Inc. and reference to Exhibit
Wilmington Trust dated 10.19 to Post-Effective
December 1, 1995 Amendment No. 1 to the
October 1995
Registration Statement
- - --------------------------------------------------------------------------------
10.20 Certificate Purchase Incorporated by
Agreement between reference to Exhibit
Autorics II, Inc. and 10.20 to Post-Effective
NAL Acceptance Amendment No. 1 to the
Corporation dated October 1995
December 20, 1995 Registration Statement
- - --------------------------------------------------------------------------------
10.21 Note Purchase Agreement Incorporated by
between Autorics II, reference to Exhibit
Inc. and NAL Acceptance 10.21 to Post-Effective
Corporation dated Amendment No. 1 to the
December 20, 1995 October 1995
Registration Statement
- - --------------------------------------------------------------------------------
21 Subsidiaries of the Incorporated by
Registrant reference to Exhibit 21
to Post-Effective
Amendment No. 1 to the
October 1995
Registration Statement
================================================================================
(c) Reports on Form 8-K.
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant certifies that it has reasonable grounds to believe that it meets all
the requirements of filing on Form 10-KSB, and has duly caused this Form 10-KSB
to be signed on its behalf by the undersigned, thereunto duly authorized on the
____ day of ______________, 1996.
NAL FINANCIAL GROUP INC.
BY: /s/Robert R. Bartolini
-----------------------------
Robert R. Bartolini
Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Form 10-KSB has been signed by the following persons in the capacity and on the
dates indicated.
Signature Title Date
--------- ----- ----
----------------------
Robert R. Bartolini Chairman of the _____________, 1996
Board, President
and Chief Executive
Officer (Principal
Executive Officer)
----------------------
Robert J. Carlson Vice President- _____________, 1996
Finance (Principal
Accounting Officer)
----------------------
John T. Schaeffer Director _____________, 1996
----------------------
James F. DeVoe Director _____________, 1996
----------------------
David R. Jones Director _____________, 1996
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 1,953
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 103,885
<ALLOWANCE> 2,671
<TOTAL-ASSETS> 122,035
<DEPOSITS> 0
<SHORT-TERM> 88,734
<LIABILITIES-OTHER> 9,441
<LONG-TERM> 0
0
0
<COMMON> 1,005
<OTHER-SE> 22,855
<TOTAL-LIABILITIES-AND-EQUITY> 122,035
<INTEREST-LOAN> 15,680
<INTEREST-INVEST> 0
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 15,680
<INTEREST-DEPOSIT> 0
<INTEREST-EXPENSE> 7,362
<INTEREST-INCOME-NET> 8,318
<LOAN-LOSSES> 2,762
<SECURITIES-GAINS> 4,601
<EXPENSE-OTHER> 8,085
<INCOME-PRETAX> 4,723
<INCOME-PRE-EXTRAORDINARY> 4,723
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,797
<EPS-PRIMARY> .45
<EPS-DILUTED> .45
<YIELD-ACTUAL> 9.60
<LOANS-NON> 2,800
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 305
<CHARGE-OFFS> 3,162
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 2,671
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
