<PAGE>
PROSPECTUS
- --------------------------------------------------------------------------------
[LOGO] 2,500,000 Shares
NAL FINANCIAL GROUP INC.
Common Stock
- --------------------------------------------------------------------------------
All 2,500,000 shares of common stock, $0.15 par value per share (the 'Common
Stock') offered hereby (the 'Offering') are being sold by NAL Financial Group
Inc. (the 'Company').
The Company's Common Stock is included in the Nasdaq Stock Market's National
Market (the 'Nasdaq National Market') under the symbol 'NALF.' On December 23,
1996, the last reported sales price for the Common Stock on the Nasdaq National
Market was $8.50 per share. See 'Price Range of Common Stock.'
SEE 'RISK FACTORS' ON PAGES 8 TO 15 FOR A DISCUSSION OF CERTAIN MATERIAL FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK
OFFERED HEREBY.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions (1) Company (2)
<S> <C> <C> <C>
Per Share.... $7.50 $0.47 $7.03
Total (3).... $18,750,000 $1,175,000 $17,575,000
</TABLE>
(1) The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See 'Underwriting.'
(2) Before deducting expenses payable by the Company estimated to be $700,000.
(3) The Company has granted the several Underwriters a 30-day over-allotment
option to purchase up to 375,000 additional shares of Common Stock on the
same terms and conditions as set forth above. If all such additional shares
are purchased by the Underwriters, the total Price to Public will be
$21,562,500, the total Underwriting Discounts and Commissions will be
$1,351,250 and the total Proceeds to Company will be $20,211,250. See
'Underwriting.'
- --------------------------------------------------------------------------------
The shares of Common Stock are offered by the several Underwriters subject to
delivery by the Company and acceptance by the Underwriters, to prior sale and to
withdrawal, cancellation or modification of the offer without notice. Delivery
of the shares to the Underwriters is expected to be made at the office of
Prudential Securities Incorporated, One New York Plaza, New York, New York on or
about December 30, 1996.
PRUDENTIAL SECURITIES INCORPORATED
PIPER JAFFRAY INC.
SANDS BROTHERS & CO., LTD.
December 23, 1996
<PAGE>
[MAP of Headquarters and States of Operation]
States of Operation
Currently Currently Licensed
State Operating but not Operating
-------------- --------- -----------------
Arizona X
California X
Colorado X
Connecticut X
Delaware X
Florida X
Georgia X
Illinois X
Indiana X
Kansas X
Kentucky X
Louisiana X
Maryland X
Michigan X
Mississippi X
Missouri X
Nevada X
New Hampshire X
New Jersey X
New Mexico X
New York X
North Carolina X
Ohio X
Oklahoma X
Oregon X
Pennsylvania X
Rhode Island X
South Carolina X
Tennessee X
Texas X
Vermont X
Utah X
Virginia X
Washington X
West Virginia X
As of December 23, 1996
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) OR THEIR RESPECTIVE AFFILIATES MAY HAVE ENGAGED IN PASSIVE
MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN
ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE
'UNDERWRITING.'
------------------------
AVAILABLE INFORMATION
The Company is subject to the information reporting requirements of the
Securities Exchange Act of 1934, as amended (the 'Exchange Act') and in
accordance therewith files reports and other information with the Securities and
Exchange Commission (the 'Commission'). Copies of these reports may be inspected
and copied at the Public Reference Facilities maintained by the Commission at
Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's regional offices at 7 World Trade Center, Suite 1300, New York, New
York 10048, and at Northwest Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such materials can be obtained upon written
request addressed to the Commission's Public Reference Section, 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. In addition, the
Commission maintains a Web site at http://www.sec.gov containing reports, proxy
and information statements and other information regarding registrants that file
electronically with the Commission, including the Company.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the detailed
information and financial statements (including the notes thereto) appearing
elsewhere in this Prospectus. Unless otherwise indicated, all information in
this Prospectus assumes that the Underwriters' over-allotment option will not be
exercised. Investors should carefully consider the information set forth under
the caption 'Risk Factors.' Unless the context otherwise requires, the 'Company'
or 'NAL' refers to NAL Financial Group Inc. and its wholly-owned subsidiaries.
THE COMPANY
NAL is a specialized automobile finance company engaged in the purchase and
servicing of loan and lease contracts (the 'Contracts') originated by franchised
and select independent dealers ('Dealers') in connection with sales or leases of
used and new automobiles to consumers with non-prime credit. Consumers with
non-prime credit are perceived to be relatively high credit risks due to various
factors, including the manner in which they have handled previous credit, the
absence or limited extent of their prior credit history and their limited
financial resources. The Company purchases Contracts relating principally to the
'C' credit segment of the automobile finance market. In addition to purchasing
Contracts directly from Dealers, the Company has established diverse programs
that enable it to increase the volume of Contracts purchased from a variety of
Dealers with whom the Company does not maintain a direct relationship. As of
September 30, 1996, the Company serviced 1,594 Dealers in 23 states and more
than 90% of all Contracts acquired by the Company during the nine months ended
September 30, 1996 were originated by franchised Dealers. The Company generated
net income of approximately $394,000 and $2.8 million in 1994 and 1995,
respectively. For the nine months ended September 30, 1995 and September 30,
1996, the Company generated net income of approximately $1.1 million and $6.1
million, respectively.
The Company has experienced significant growth in its portfolio of
purchased and serviced Contracts since June 1994, when the acquisition of
Contracts became the principal focus of its business. Total Contracts purchased,
which includes both loan contracts ('Loan Contracts') and lease contracts
('Lease Contracts'), increased from approximately $28.1 million through December
31, 1994 and $165.7 million through December 31, 1995, to approximately $205.8
million through September 30, 1996. As a result, the Company's servicing
portfolio increased from approximately $44.4 million at December 31, 1994 and
$153.8 million at December 31, 1995, to approximately $283.9 million at
September 30, 1996. The Company's overall growth during this period was
attributable to an increase in its Dealer relationships from 196 Dealers at
December 31, 1994 to 1,594 Dealers at September 30, 1996, and an expansion of
the sources and amounts of financing available to purchase Contracts. Loan
Contracts purchased during the nine months ended September 30, 1996 had an
average principal balance of $12,300, a weighted average annual percentage rate
('APR') of 19.48%, a weighted average purchase discount of 5.73% and a weighted
average initial contract term of 54.7 months. Lease Contracts purchased during
the nine months ended September 30, 1996 had an average principal balance of
$15,800, a weighted average yield of 18.10%,which is based on the residual value
assigned by the Company at the inception of the Lease Contract, and a weighted
average initial contract term of 45.4 months.
The Company has historically funded the purchase of its Contracts with
borrowings from banks and other lenders. Currently, the Company's primary
financing sources include a $100 million warehouse facility, $45 million of
revolving credit facilities, including a $25 million facility with General
Electric Capital Corporation ('GECC') and a specialized borrowing facility.
Beginning in December 1995, the Company began securitizing the majority of its
portfolio of Loan Contracts to increase the Company's liquidity, provide for the
redeployment of capital, reduce risks associated with interest rate fluctuations
and provide the Company with access to a cost-effective, diversified source of
financing. During the last four fiscal quarters, the Company completed
securitization transactions aggregating approximately $200 million. During this
period, gains on sale from the securitization transactions have constituted the
principal source of the Company's revenues. The Company plans to
3
<PAGE>
continue to employ its securitization program as an integral component of its
funding strategy and anticipates that it will generally complete securitization
transactions on a quarterly basis. The Company also generates revenues from
interest income and fees earned on Contracts held in portfolio, as well as
servicing fees from Loan Contracts sold in securitization transactions. In
addition, the Company receives revenues from the sale of insurance and related
products through its insurance subsidiary, NAL Insurance Services, Inc. ('NIS').
The Company purchases Contracts directly from Dealers through its Dealer
Program and through select third party entities that participate in the
Company's Captive Program, Affinity Program, Correspondent Program, Recourse
Program and Wholesale Program (collectively, the 'Origination Programs').
Participants in these Origination Programs offer Contracts to the Company under
a variety of arrangements and allow the Company to increase its access to
Dealers. The Company's main sources of Contracts are its Dealer Program and its
Captive Program. The Captive Program includes the Company's arrangements with
Special Finance, Inc. ('SFI'), which recently became a wholly-owned subsidiary
of the Company. Under its Affinity Program, the Company has an agreement with
General Electric Capital Auto Lease, Inc. ('GECAL') to purchase non-prime Lease
Contracts through GECAL's network of Dealers in the Southeast region of the
United States. As of September 30, 1996, the Company's servicing portfolio
consisted of Contracts purchased through its Dealer Program (32%), Captive
Program (46%), Affinity Program (5%), Correspondent Program (2%), Recourse
Program (9%) and Wholesale Program (6%). Each of these programs, other than the
Recourse Program, is designed to purchase Contracts relating primarily to the
'C' credit segment of the market. The Recourse Program is designed to purchase
Contracts relating to the 'D' credit segment.
The Company's principal objectives are to sustain controlled growth of its
business and to maximize its profit potential. To achieve these objectives, the
Company is currently implementing the following strategies:
Expanding and Strengthening Relationships with Origination
Sources. The Company plans to achieve a greater volume of business by
expanding its origination sources in existing markets, by entering into new
geographic markets and by strengthening its current relationships. The
Company develops strong relationships with its Dealers and other
origination sources by providing a high level of service specifically
tailored to meet their needs. The Company typically responds to credit
applications on the date received and in most cases within two to four
hours, and generally pays for Contracts purchased within twenty-four hours
of receipt of a complete funding package. In addition, the Company provides
training to Dealer personnel on the use of the Company's credit
underwriting guidelines.
Providing Diverse Products and Services to Dealers. In addition to
providing prompt, flexible service and a reliable source of financing, the
Company increases its volume of business from Dealers by offering a
'one-stop shop' service. This service includes purchasing both Loan and
Lease Contracts on used and new automobiles, addressing a broad range of
credit profiles and offering insurance and related products.
Employing Detailed Underwriting Guidelines. In order to evaluate and
measure effectively the risks associated with lending to non-prime
consumers, the Company's underwriting guidelines and approval procedures
focus on balancing the creditworthiness of the borrower with the adequacy
of the vehicle as collateral. The guidelines provide a high degree of
credit and pricing specificity to Dealers, which enable them to improve
service to their customers by increasing the efficiency of the credit
application and funding process.
Maintaining Effective Collection and Asset Disposition Systems. The
Company employs efficient and aggressive collection policies and
procedures. The Company contacts a borrower typically within 24 hours of a
payment delinquency and manages accounts based on geographic regions. The
Company also uses its subsidiary, Performance Cars of South Florida, Inc.
('PCSF'), with a J.D. Byrider car dealership franchise ('JDBR Franchise')
to maximize recovery on some of its repossessed and off-lease vehicles. As
geographic expansion requires, the
4
<PAGE>
Company intends to establish full service regional centers, which will
include servicing and collection operations.
Diversifying its Financing Sources. The Company plans to continue to
expand and diversify its financing sources. The Company intends to continue
to sell Loan Contracts through securitization transactions on a quarterly
basis. Securitization enables the Company to increase its liquidity,
redeploy capital, mitigate interest rate risk and reduce credit risk.
Continuing the Growth of Related Businesses. The Company's related
businesses, through NIS and PCSF, complement the purchasing and servicing
of Loan and Lease Contracts and enhance the Company's profitability. The
Company intends to continue to offer insurance and related products to
Dealers, which provide an additional source of revenue to the Company. As
the volume of Contracts purchased increases, the Company plans to open
additional PCSF sites with JDBR Franchises to maximize recovery from
remarketing activities.
Recruiting and Retaining Experienced Management. Members of the
Company's management team have an average of over 20 years of experience in
automobile finance, consumer finance or banking. Management believes that
hiring experienced management personnel is critical to the formulation and
implementation of its strategies and the maintenance of its growth and
profitability. The Company intends to continue to provide incentive
compensation arrangements, including stock option plans, to attract and
retain members of the management team.
According to CNW Marketing/Research, an independent automobile finance
market research firm, the automobile finance industry (which includes new and
used vehicle lending and leasing) is the second largest consumer finance
industry in the United States with over $410 billion in loan and lease
originations in 1995. Management believes that captive finance companies, such
as General Motors Acceptance Corporation, Ford Motor Credit Company and Chrysler
Credit Corporation, financed between 25% and 30% of automobile purchases and
leases nationwide in 1995, while the balance was provided by banks, credit
unions and independent finance companies. The industry is generally segmented
according to the type of car sold (new or used) and the credit characteristics
of the borrower (prime or non-prime). Management believes that the non-prime
segment of the automobile finance market is in the range of $80 billion to $100
billion in annual loan and lease originations.
The Company was founded in February 1991 as a specialized consumer finance
company. It became publicly held by virtue of a merger (the 'Merger') with a
previously inactive public company on November 30, 1994. Until June 1994, the
Company's principal activities involved the bulk purchase and servicing of
seasoned and non-performing portfolios of consumer and mortgage loan and
automobile loan and lease receivables. The principal focus of the Company's
business since June 1994 has shifted to the purchase and servicing of automobile
Loan and Lease Contracts.
The Company's principal executive office is located at 500 Cypress Creek
Road West, Suite 590, Fort Lauderdale, Florida 33309. Its telephone number is
(954) 938-8200.
RECENT DEVELOPMENTS
On December 18, 1996, the Company completed the sale of approximately $88
million of Loan Contracts in a privately-placed securitization transaction, the
terms of which are similar to the Company's four prior securitization
transactions. The securities issued in the securitization transaction were rated
'A' and 'BBB' by Duff & Phelps Credit Rating Co. and Fitch Investors Service,
L.P. and carry a weighted average coupon rate of 7.03%.
5
<PAGE>
THE OFFERING
Common Stock Offered Hereby.................. 2,500,000 shares
Common Stock to be Outstanding after the
Offering(1)(2)............................. 9,847,367 shares
Use of Proceeds.............................. The proceeds will be used to
support growth and for
general corporate purposes,
including working capital,
future acquisitions, the
repayment of certain advances
totaling $2,413,869 to the
Company's Chief Executive
Officer and the repay-
ment of short-term
indebtedness of $2,000,000.
Pending such use, the net
proceeds will be used to
repay indebtedness under the
Company's warehouse and other
credit facilities. See 'Use
of Proceeds.'
Nasdaq National Market Symbol................ NALF
- ------------------
(1) As of December 23, 1996.
(2) Excludes the potential conversion of $25.0 million principal amount of
outstanding debentures and the exercise of 2,913,625 outstanding related
warrants. Assuming the conversion of $25.0 million of outstanding debentures
into 3,355,330 shares of Common Stock (principal and interest) and the
issuance of 2,913,625 shares upon the exercise of outstanding warrants, the
Company would have 16,116,322 shares of Common Stock outstanding after the
Offering. Of the 6,268,955 shares of Common Stock issuable upon the
conversion of outstanding debentures and the exercise of outstanding related
warrants, substantially all of such shares are subject to the terms of a
lock-up agreement for a period of 180 days after the date of this
Prospectus. In addition, assuming the conversion of such debentures and the
exercise of such warrants, the Company would be released from its obligation
to repay approximately $28.4 million of principal and interest, and the
Company would secure additional working capital of approximately $29.3
million. See 'Risk Factors' and 'Description of Securities.'
Certain debentures and warrants are subject to price protection and
adjustment features. Based upon the current market price, the number of
shares issuable upon conversion of such debentures would likely be subject
to material increase. See 'Description of Securities -- Price Protection.'
6
<PAGE>
SUMMARY FINANCIAL INFORMATION
The financial data set forth below should be read in conjunction with the
Consolidated Financial Statements of the Company and related notes thereto and
'Management's Discussion and Analysis of Financial Condition and Results of
Operations' included elsewhere herein. In the opinion of management, the interim
financial information for the nine-month periods ended September 30, 1996 and
1995 includes all of the adjustments necessary to fairly present the results of
such interim periods and all such adjustments which are of a normal recurring
nature. The interim financial information includes the accounts of the Company
and its wholly-owned subsidiaries and should be read in conjunction with the
audited financial statements, and the footnotes thereto, for the year ended
December 31, 1995. Certain 1995 and 1994 amounts have been reclassified to
conform with the current year presentation. Operating results for the nine-month
period ended September 30, 1996 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1996.
<TABLE>
<CAPTION>
FOR THE NINE FOR THE
MONTHS ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
---------------------- ---------------------
1996 1995 1995 1994
-------- -------- -------- -------
(DOLLARS IN THOUSANDS EXCEPT FOR
PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net interest income............................... $ 8,936 $ 6,363 $ 8,319 $ 3,430
Gain on sale of Contracts......................... 13,427 128 4,600 2,292
Servicing fees and other income................... 4,670 1,241 2,651 454
-------- -------- -------- -------
Total revenue..................................... 27,033 7,732 15,570 6,176
Provision for credit losses....................... (2,801) (1,412) (2,762) (573)
Operating expenses................................ (13,844) (4,514) (7,805) (4,946)
Non-cash charge for escrow shares................. (301) (80) (280) --
-------- -------- -------- -------
Income before taxes............................... 10,087 1,726 4,723 657
Provision for income taxes........................ (3,945) (656) (1,926) (263)
-------- -------- -------- -------
Net income........................................ $ 6,142 $ 1,070 $ 2,797 $ 394
-------- -------- -------- -------
-------- -------- -------- -------
Primary EPS....................................... $ .81 $ .18 $ .45 $ .08
Fully diluted EPS................................. $ .75 $ .18 $ .45 $ .07
PRO FORMA EPS:(1)
Net income........................................ $ 6,750 $ 3,952
Primary EPS....................................... $ .68 $ .45
Fully diluted EPS................................. $ .66 $ .45
OPERATING DATA:
Loan Contracts purchased during the period........ $191,718 $ 92,368 $145,657 $23,382
Average Loan Contract purchased during the
period(2)....................................... $ 12.3 $ 11.8 $ 12.0 $ 9.1
Weighted average Loan Contract APR................ 19.48% 19.94% 19.72% 20.98%
Weighted average Loan Contract term (months)...... 54.7 50.7 48.73 43.75
Lease Contracts purchased during the period....... $ 14,071 $ 16,059 $ 20,048 $ 4,683
Average Lease Contract purchased during the period $ 15.9 $ 16.8 $ 17.7 $ 17.6
Weighted average Lease Contract yield............. 18.10% 17.74% 16.93% 16.95%
Weighted average Lease Contract term (months)..... 45.4 43.7 42.5 45.5
Principal balance of Contracts securitized during
the period...................................... $160,302 -- $ 40,136 --
Number of states served (at end of period)........ 23 4 8 1
Number of Dealers (at end of period)(3)........... 1,594 787 909 196
Operating expenses as a percentage of average
servicing portfolio during the period(4)........ 8.59% 7.76% 8.41% 14.39%
SELECTED PORTFOLIO DATA:
Servicing portfolio (at end of period)............ $283,887 $111,888 $153,764 $44,415
Delinquencies as a percentage of the servicing
portfolio (at end of period)(5)................. 11.69% 9.39% 13.97% 8.61%
Net charge-offs as a percentage of the average
servicing portfolio during the period(4)(5)..... 6.46% .79% 3.15% 0%
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and cash equivalents......................... $ 4,572 $ 1,336 $ 1,953 $ 1,726
Contracts receivable, net(6)...................... 87,739 99,278 101,214 29,984
Excess servicing receivable....................... 22,898 -- 4,999 --
Total assets...................................... 144,833 112,206 122,035 34,518
Debt(7)........................................... 96,716 86,977 91,794 22,502
Total liabilities................................. 107,575 91,177 98,175 23,663
Stockholders' equity.............................. 37,258 21,029 23,860 10,855
</TABLE>
- ------------------
(1) Pro forma net income and pro forma primary and fully diluted earnings per
share as adjusted to give effect to the sale by the Company of 2,500,000
shares of the Common Stock offered hereby, after deducting the underwriting
discounts and commissions and estimated offering expenses, and the
application of the net proceeds therefrom to the repayment of a portion of
the Company's debt as if such transaction had been consummated at the
beginning of the periods presented.
(2) Excludes Recourse Program Loans.
(3) Includes Dealers with whom SFI has relationships.
(4) The percentages for the nine months ended September 30, 1996 and 1995 have
been annualized.
(5) Excludes non-automobile bulk purchase contracts. Delinquency information
reflects Contract delinquency greater than 30 days.
(6) Net of reserve available for credit losses.
(7) Amounts include discount arising from the issuance of common stock purchase
warrants.
7
<PAGE>
RISK FACTORS
An investment in the shares of Common Stock involves a high degree of risk.
Prospective investors should carefully consider the following risk factors in
addition to the other information set forth in this Prospectus in connection
with the investment in the shares of Common Stock.
When used in this Prospectus, the words 'may,' 'will,' 'expect,'
'anticipate,' 'continue,' 'estimate,' 'project,' 'intend' and similar
expressions are intended to identify forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 regarding events, conditions and financial
trends that may affect the Company's future plans of operations, business
strategy, operating results and financial position. Prospective investors are
cautioned that any forward-looking statements are not guarantees of future
performance and are subject to risks and uncertainties and that actual results
may differ materially from those included within the forward-looking statements
as a result of various factors. Such factors are described under the headings
'Management's Discussion and Analysis of Financial Condition and Results of
Operations,' 'The Company' and in the risk factors set forth below.
DEPENDENCE UPON ADEQUATE SOURCES OF FINANCING. The Company is dependent
upon its warehouse facility, revolving credit facilities and other financing
arrangements to finance the purchase of its automobile Loan and Lease Contracts.
See 'Management's Discussion and Analysis of Financial Condition and Results of
Operations.' Accordingly, the Company's ability to maintain and expand its
portfolio of Loan and Lease Contracts, while dependent upon a number of factors,
relies predominantly upon the availability of adequate financing at rates and
upon terms acceptable to the Company. The Company also relies on the proceeds
from its securitization transactions to pay down its warehouse facility, thereby
permitting the purchase of additional Loan Contracts.
The Company employs its securitization program as an integral component of
its funding strategy. During the period from December 1995 through September
1996, the Company completed the sale of approximately $200 million of Loan
Contracts in four privately-placed securitization transactions. The Company has
historically applied the net proceeds from securitization transactions to repay
indebtedness under its warehouse facility, thereby increasing the amounts
available under such facility to fund future purchases of Loan Contracts. Any
failure by the Company to effect additional securitizations of Loan Contracts on
terms acceptable to the Company would restrict the Company's financing
capabilities, could require the Company to curtail the purchase of Loan
Contracts and could have a material adverse effect on the Company. Furthermore,
the timing of any securitization transaction is affected by a number of factors
beyond the Company's control, including, among others, conditions in the
asset-backed securities markets, interest rates and approvals from third
parties. Although the Company expects to complete future securitization
transactions on a quarterly basis, some or all of these factors may cause delays
in closing a securitization or may prevent such transactions entirely. Gains
from the sale of Loan Contracts in securitization transactions constituted a
significant portion of the net earnings of the Company during the nine months
ended September 30, 1996 and are likely to continue to represent a significant
portion of the Company's net earnings. If the Company were unable to securitize
Loan Contracts in a financial reporting period, the Company would incur a
significant decline in total revenues and net earnings for such period. In
addition, in order for the Company to continue to fund the purchase of Contracts
in accordance with its growth strategy, the Company will require financing in
excess of that provided by its cash flow from operations, the net proceeds from
the Offering and its credit facilities (or any successor facilities). No
assurance can be given that additional financing sources, including
securitization transactions, will be available on terms acceptable to the
Company.
The Company currently finances its Lease Contracts principally through its
agreements with GECC. There can be no assurances that such financing would be
available from another source upon similar terms and conditions. The inability
of the Company to arrange new credit facilities or to extend its existing credit
facilities would have a material adverse effect upon the Company's ability to
purchase Lease Contracts.
8
<PAGE>
The Company remains in compliance with the terms of its existing credit
facilities and other financing agreements. A default under any of these
agreements in the future could have a material adverse effect on the Company's
financial condition. The Company's ability to keep these financing sources in
place depends on its continued compliance with the terms thereof. There can be
no assurance that the Company's sources of financing will continue to remain
available on terms acceptable to the Company, or that the Company will be able
to secure increased sources of financing. See 'Management's Discussion and
Analysis of Financial Condition and Results of Operations.'
SUSPENSION OR LOSS OF EXCESS SERVICING CASH FLOWS AND SERVICING FEE. The
gain on sale of Contracts and the amount of the excess servicing receivable
recognized by the Company in each securitization reflects management's estimate
of future credit losses and prepayments for the Contracts included in that
securitization. If the actual rates of credit losses, prepayments, or both, on
such Contracts exceeded those estimated by management, the timing and the amount
of the excess servicing cash flows could be adversely affected and the value of
the excess servicing receivable impaired. On a quarterly basis, the Company
updates its credit loss and prepayment assumptions for the remaining life of
each securitization based on the past performance of the Loan Contracts within
the securitization and market conditions. If the Company concludes that its
ability to realize the excess servicing receivable has been impaired, the
Company reduces the amount of the excess servicing receivable by recording a
charge to earnings. To date, no such adjustment has been made. However, the
Company's results of operations and liquidity could be adversely affected if
credit losses or prepayment levels, or both, on Contracts substantially exceed
anticipated levels. See 'Management's Discussion and Analysis of Financial
Condition and Results of Operations.'
Under the terms of each securitization, the Company is required to maintain
a reserve account at specific levels during the life of the securitization. Upon
the occurrence of certain trigger events, which relate to delinquency,
repossession or credit loss rates exceeding certain levels, the terms of the
securitization transactions require the Company to maintain the reserve account
at higher levels by restricting the distribution of both contractual servicing
cash flows and excess servicing cash flows to the Company. Once the reserve
account is maintained at the higher level and the trigger events cease to occur
for a specified period, the Company would continue to receive its contractual
servicing fees and excess servicing cash flows. The occurrence of trigger events
could materially adversely affect the Company's liquidity and results of
operations. Two of the Company's securitization transactions have recently
experienced trigger events. As a result, the Company's rights to receive
contractual servicing fees and excess servicing cash flows have been suspended
from these two securitization transactions. Continued occurrence of the trigger
events could delay cash flows to the Company which may have a material adverse
impact. Although,based upon management's analysis, there has been no impairment
of the excess servicing receivable to date, there can be no assurance that the
excess servicing receivable will not be impaired in the future.
NEGATIVE OPERATING CASH FLOWS. The Company's business requires substantial
cash to support the funding of reserve accounts in connection with
securitizations, the purchase of Contracts and other cash requirements, in
addition to debt service. These cash requirements increase as the volume of
Contracts purchased increases. The Company has operated historically on a
negative operating cash flow basis and expects to continue to do so for so long
as the Company's volume of Contracts purchased continues to grow at a
significant rate. As a result of the Company's historical growth rate, the
Company has used increasingly larger amounts of cash than it has generated from
its operating activities. The Company has funded these negative operating cash
flows principally through borrowings from financial institutions and private
placements of debt and equity securities. The Company's ability to execute its
growth strategy depends upon its continued ability to obtain substantial
additional long-term debt and equity capital through access to the capital
markets or otherwise. There can be no assurance that the Company will have
access to the capital markets when needed or will be able to obtain financing
upon terms reasonably satisfactory to the Company. Factors that could affect the
Company's access to the capital markets, or the costs of such capital, include
changes in interest rates, general economic conditions, the perception in the
capital markets of the Company's business, results of operations, leverage,
financial condition and business prospects, and
9
<PAGE>
the performance of the Company's securitization trusts. In addition, covenants
with respect to the Company's credit facilities may restrict the Company's
ability to incur additional indebtedness.
DEFAULT AND PREPAYMENT RISK. The Company's results of operations,
financial condition and liquidity depend, to a material extent, on the
performance of the Contracts. The performance of Contracts depends upon such
factors as the underwriting criteria, the collection efforts employed to prevent
defaults, and the proceeds from the sale of repossessed vehicles. The Company
bears the risk of losses resulting from defaults on Contracts. In the event of a
default, the liquidation proceeds from repossessed vehicles may not be
sufficient to cover the outstanding Contract balance and costs of recovery. The
Company, therefore, maintains a reserve for credit losses on its Contracts. The
reserve reflects management's estimate of anticipated credit losses based upon
expectations and historical performance of Contracts.
Based on static pool analyses of the performance of Contracts, management
has, from time to time, modified its credit underwriting criteria. In view of
the performance of Contracts purchased during the six months ended December 31,
1995, the Company modified its underwriting criteria during the fourth quarter
of 1995. Notwithstanding management's approach for establishing a reserve for
credit losses, its estimates for anticipated credit losses may not be adequate
because the Company has a limited operating history and its Contract portfolio
is unseasoned. If the reserve is inadequate, the Company would recognize as an
expense the losses in excess of such reserve and results of operations would be
adversely affected. Additionally, such losses may impair the Company's ability
to secure credit facilities and/or securitize its Contracts. While the Company
believes that it maintains a reserve adequate to cover potential credit losses,
there can be no assurance to that effect.
The Company's servicing income can be adversely affected by defaults and
prepayments on Contracts. The Company's servicing income is based on the
outstanding balance of Contracts. If Contracts are prepaid or charged-off, the
Company's servicing income will decline to the extent of such prepaid and
charged-off Contracts. There can be no assurance as to what level of prepayment,
if any, will occur on the Contracts. Prepayments may be influenced by a variety
of economic, geographic, social and other factors, including borrowers' job
transfers, casualty, trade-ins and declines in interest rates.
IMPLEMENTATION OF BUSINESS STRATEGIES. The Company's ability to sustain
the growth of its business and maximize its profit potential is dependent upon
the implementation of its business strategies. The Company's strategies include:
(i) expanding and strengthening relationships with its origination sources in
order to increase the volume of Contracts purchased; (ii) providing diverse
products and services to Dealers; (iii) employing detailed underwriting
guidelines to ensure that the Company purchases and services Contracts within
acceptable levels of credit risk and loss; (iv) maintaining effective
collections and asset disposition systems; (v) diversifying financing sources;
(vi) continuing the growth of related businesses; and (vii) recruiting and
retaining experienced management. The Company's failure with respect to any or
all of these strategies could impair its ability to increase the volume of
Contracts purchased, which could have a material adverse effect on the Company's
results of operations and financial condition. See 'The Company -- Business
Strategy.'
RELATIONSHIPS WITH DEALERS AND OTHER ORIGINATION SOURCES. The Company's
business depends in large part upon its ability to establish and maintain
relationships with Dealers and other origination sources. While the Company
believes that it has been successful in developing and maintaining relationships
with Dealers and other origination sources, these relationships are not long-
standing, and there can be no assurance that the Company will be successful in
maintaining such relationships or increasing the number of Dealers and other
origination sources with which it does business, or that its existing Dealer
base, and other origination sources, will continue to generate a volume of
Contracts comparable to the volume of such Contracts historically generated by
such Dealers and other origination sources. See 'The Company -- Business
Strategy.'
RISKS ASSOCIATED WITH THE NON-PRIME MARKET. The principal focus of the
Company's business is the purchase of Contracts involving consumers with
non-prime credit. The non-prime market is
10
<PAGE>
comprised of consumers who are perceived to be relatively high credit risks.
Consequently, the Contracts acquired by the Company typically bear a higher rate
of interest than contracts made to consumers with prime credit and are purchased
at a discount. However, these Contracts involve a higher probability of default,
higher delinquency rates and greater servicing costs than contracts made to
consumers with prime credit. The Company's profitability depends on its ability
to evaluate properly the credit risks, to price its Contracts accordingly and to
service efficiently its Contracts. However, there can be no assurance that the
rates of future defaults and losses will be consistent with prior experience or
at levels that will maintain the Company's profitability, that the credit
performance of its customers will be maintained, that the Company's credit
analysis, servicing and collection systems and controls will continue to be
adequate, or that the current interest rates and discount levels can be
maintained in the face of competitive pressures.
SENSITIVITY TO INCREASES IN INTEREST RATES. The Company's profitability is
determined largely by the difference, or 'spread,' between the rate of interest
collected from customers on their Contracts and the rate of interest on the
funds obtained by the Company under its existing credit facilities and through
securitization transactions to finance its Contracts. Generally, interest rates
received by the Company on the Contracts it purchases are determined by many
factors beyond the Company's control, including competition, state usury
statutes and other consumer laws prohibiting or limiting the Company's ability
to impose various charges on its borrowers. Significant increases in the
interest rates at which the Company borrows under its revolving credit
facilities could reduce the Company's spread and thereby adversely affect the
Company's profitability with respect to the Contracts it purchases. In the case
of securitization transactions, the interest rate demanded by investors is a
function of prevailing market rates for comparable transactions and the general
interest rate environment. Because the Contracts purchased by the Company have
fixed interest rates, the Company bears the risk of interest rate increases
during the period from the date the Contracts are purchased until the closing of
its securitization for Contracts that are sold and for the entire term for
Contracts that are held by the Company and are not match-funded. Moreover, the
Company's warehouse facility gives the lender the right to make margin calls in
the event of a specified decrease in the market value in the Contracts held for
repurchase. The Company does not presently employ a hedging strategy. There can
be no assurances that the Company will not sustain losses as a result of its
policy relative to hedging. See 'Management's Discussion and Analysis of
Financial Condition and Results of Operations.'
RECOVERY OF RESIDUAL VALUE. As of September 30, 1996, Lease Contracts
represented approximately 10% of the Company's servicing portfolio. In
connection with these Lease Contracts, the Company faces risks arising from its
estimate at lease inception of the projected value of the vehicle at the end of
the scheduled lease term (the 'Residual Value'). Although the Company uses
industry guidelines to estimate the Residual Value and periodically reviews and
updates the Residual Values as considered necessary throughout the lease term,
there can be no assurance that the Residual Value will approximate the ultimate
proceeds received on the disposition of the vehicle. At the end of the scheduled
lease term, if the lessee does not purchase the vehicle, the Company generally
sells the vehicle through wholesale auctions or through the Company's
subsidiary, PCSF. To the extent that the Company realizes proceeds from such
disposition in an amount less than the Residual Value, whether due to changes in
the market for that vehicle, the used automobile market in general or otherwise,
the Company will realize a loss on the disposition of the vehicle. Significant
aggregate losses on the disposition of off-lease vehicles would have a material
adverse effect on the Company's financial condition and results of operations.
The Company's ability to realize a gain on the disposition of a vehicle will be
substantially determined by the accuracy of the Residual Value previously
estimated and by the Company's ability to remarket its off-lease vehicles in a
cost-efficient manner. Due to the continued growth in the volume of Lease
Contracts purchased and the trend towards shorter lease terms, the Company will
likely be required to remarket increasing numbers of vehicles in the future.
There can be no assurance that such increased remarketing volume will not have a
material adverse effect on the Company's financial condition and results of
operations. See 'The Company -- Lease Contracts.'
11
<PAGE>
COMPETITION. The Company is subject to a high level of competition in the
retail automobile finance industry. The market is highly fragmented and
historically has been serviced by a variety of financial entities, including the
captive finance affiliates of major automobile manufacturers, banks, savings
associations, independent finance companies, credit unions and leasing
companies. Many of these competitors have greater financial resources than the
Company and have significantly lower cost of funds. Many of these competitors
may also have long-standing relationships with automobile dealerships and may
offer dealerships or their customers other forms of financing or services not
provided by the Company. Furthermore, during the past two years, a number of
automobile finance companies have completed public offerings of securities, the
proceeds from which are to be used, at least in part, to fund expansion and
finance increased purchases of contracts. There can be no assurance that the
Company will be able to compete successfully with such competitors in the
future.
GEOGRAPHIC AND CONTRACT PURCHASE CONCENTRATIONS. As of September 30, 1996,
the Company purchased 54.0% of its outstanding Contracts from Florida, 14.4%
from Georgia, 7.2% from Louisiana and 6.8% from North Carolina. As a result, the
Company's profitability may be influenced by the general economic conditions
prevailing in any of these states, particularly Florida.
As of September 30, 1996, 9.0% of the Company's portfolio were Loan
Contracts purchased through its Recourse Program, which consists of Loans to
consumers with 'D' credit. While Loans to 'D' credit consumers involve higher
credit risks than those to 'C' credit consumers, management believes that it
mitigates the credit risk through large discounts on the purchase of such Loan
Contracts and full recourse to the originating entity to repurchase certain
delinquent accounts. To date, the Company has not experienced any losses arising
out of the failure of the originating entities to repurchase any such delinquent
Loan Contracts. There can be no assurances, however, that the originating
entities will continue to have sufficient resources to cover recourse
obligations under this program; nor can there be any assurances that the level
of discounts associated with Loan Contracts originated under this program would
be sufficient to cover potential losses should the originating entity be unable
to satisfy its recourse obligations thereunder. See 'The Company -- Recourse
Program.'
Prior to the acquisition by the Company of the business of SFI, it
historically represented a significant source of Contracts for the Company. As
of September 30, 1996, Loan Contracts purchased through SFI represented
approximately 45% of the Company's outstanding Contracts purchased. Since the
acquisition, SFI has continued to generate Loan Contract volume comparable to
historic levels. As a result of a management contract with the former principals
of SFI, and the retention by SFI of substantially all of the personnel necessary
to the operation of the business, management believes that SFI will continue to
generate Loan Contracts at a comparable volume to historic levels. However,
there can be no assurance to that effect. In light of the volume of Loan
Contracts purchased through SFI prior to the acquisition, a significant decline
in the volume of Loan Contracts purchased through SFI could have a material
adverse effect on the Company.
MANAGEMENT OF RAPID GROWTH. The Company has experienced rapid growth and
expansion of its business. The Company's ability to support, manage and control
continued growth is dependent upon, among other things, its ability to train,
supervise and manage increased personnel. The success of the Company's growth
strategy is also dependent upon the Company's ability to maintain credit quality
as its Contract portfolio grows, which requires, among other things, the
maintenance of efficient collection procedures and adequate collection staffing,
internal controls and automated systems. There can be no assurance that the
Company will be successful in maintaining credit quality as its Contract
portfolio grows or that the Company's personnel, procedures, staff, internal
controls or systems will be adequate to support such growth.
RELIANCE ON KEY PERSONNEL. The Company's future operating results depend
in significant part upon the continued service of its executive officers. Should
one or more of these individuals cease to be affiliated with the Company before
acceptable replacements are found, there could be a material adverse effect on
the Company's business and prospects. Mr. Robert R. Bartolini, the Company's
Chairman and Chief Executive Officer, is the only executive officer with whom
the Company has an employment agreement. Should any of the Company's executive
officers elect to terminate their
12
<PAGE>
employment, there can be no assurance that suitable replacements could be hired
without substantial additional costs. The Company does not presently maintain
key-man insurance on any of its executives. The Company's continued success also
depends on its ability to attract and retain a sufficient number of qualified
employees to support its growth strategy. There can be no assurance that the
Company will be able to recruit and retain such personnel. See 'Management.'
CONTROL BY DIRECTORS AND OFFICERS. After the Offering, the Company's
officers and directors will own approximately 26.27% of the Common Stock of the
Company. See 'Principal Stockholders.' By virtue of the concentration of a
substantial block of shares with the Company's directors and officers, these
stockholders are in a position to elect all of the Company's directors and
control the outcome of other corporate matters without the approval of the
Company's other stockholders. In addition, applicable statutory provisions and
the ability of the Board of Directors to issue one or more series of Preferred
Stock without stockholder approval could deter or delay unsolicited changes in
control of the Company by discouraging open market purchases of the Company's
stock or a non-negotiated tender or exchange offer for such stock, which may be
disadvantageous to a majority of the Company's stockholders who may otherwise
desire to participate in such a transaction and receive a premium for their
shares. See 'Description of Securities.'
REGULATION. The Company's business is subject to numerous federal and
state consumer protection laws and regulations, which, among other things,
require the Company to obtain and maintain certain licenses and qualifications,
to limit the interest rates, charges and other fees the
Company is allowed to charge, to provide specified disclosures, and to define
the Company's rights to repossess and sell collateral. A change in existing laws
or regulations, or in the interpretation thereof, or the promulgation of any
additional laws or regulations could have an adverse effect on the Company's
business. See 'The Company -- Government Regulation.'
Due to the consumer-oriented nature of the industry in which the Company
operates, industry participants frequently are named as defendants in litigation
involving alleged violations of federal and state consumer lending or other
similar laws and regulations. A significant judgment against the Company or
another industry participant in connection with any litigation could have a
material adverse effect on the Company's financial condition and results of
operations. See 'The Company -- Government Regulation.'
SUBSTANTIAL DILUTION FROM CONVERTIBLE SECURITIES. The Company is presently
authorized to issue 50,000,000 shares of Common Stock, of which 7,347,367 shares
are outstanding as of the date of this Prospectus. During the period from April
1995 through September 1996, the Company sold in the aggregate $38.8 million
principal amount of convertible debentures ('Debentures') in private placement
transactions. Primarily in connection with the sale of such Debentures, the
Company issued 2,873,625 common stock purchase warrants (the 'Warrants'). The
Company has granted 40,000 Warrants in connection with directors joining the
Board of Directors. The Company may be caused to issue 3,355,330 additional
shares upon the conversion of the principal and interest due under the
outstanding Debentures at their stated conversion prices and 2,913,625 shares
upon the exercise of the Warrants, thus increasing the number of shares
outstanding from 7,347,367 to 13,616,322. This number may be subject to material
increase by virtue of price protection and adjustment features contained in
certain Debentures and Warrants. If such Debentures were converted based upon a
market price of $7.50, the Company would be caused to issue up to an additional
1,135,176 shares of Common Stock. See 'Description of Securities -- Price
Protection.'
The holders of the Debentures may exercise their rights of conversion, and
the holders of the Warrants may choose to exercise the Warrants, at prices below
the trading price of the Company's Common Stock at the time of conversion or
exercise and at a time when the Company might be able to obtain additional
capital through a new offering of securities at prevailing market prices. The
terms on which the Company may obtain additional financing during this period
may be adversely affected by the existence of such below market conversion and
exercise prices.
Conversion of all of the outstanding Debentures would, however, have the
effect of releasing the Company from its obligation to repay approximately $28.4
million of principal and interest on the
13
<PAGE>
Debentures. In addition, the exercise of all of the Warrants would have the
effect of securing for the Company additional working capital of up to
approximately $29.3 million. The proceeds to the Company of the Warrants may
decrease by virtue of price protection and adjustment features contained in
certain Warrants. See 'Description of Securities -- Price Protection.'
As its rate of growth continues, the Company must secure increasing amounts
of financing to fund the acquisition of additional Contracts. This may entail
the sale of additional shares of Common Stock or Common Stock equivalents, which
would have the effect of further increasing the number of shares outstanding.
In connection with other business matters deemed appropriate by the
Company's management, there can be no assurance that the Company will not
undertake the issuance of more shares of Common Stock without notice to
stockholders. This may be done in order to facilitate a business combination,
acquire assets or stock of another business, compensate employees or consultants
or for other valid business reasons in the discretion of the Company's Board of
Directors. The Company has two stock option plans, which are presently
authorized to grant options for the issuance in the aggregate of up to 1,250,000
shares of Common Stock. As of December 23, 1996, the Company had 564,166 options
outstanding under such plans. See 'Management -- Executive Compensation.'
SHARES ELIGIBLE FOR FUTURE SALE. Upon completion of the Offering, the
Company will have a total of 9,847,367 shares of Common Stock outstanding
(10,222,367 shares if the Underwriters' over-allotment option is exercised in
full). Of these shares, a total of approximately 6,111,825 shares (6,486,825
shares if the Underwriters' over-allotment option is exercised in full) will be
freely tradeable without restriction or further registration under the
Securities Act of 1933 (the 'Securities Act'). The remaining 3,735,542 shares of
Common Stock outstanding are 'Restricted Securities' as that term is defined in
Rule 144 under the Securities Act, of which approximately 2,596,752 are held by
'affiliates' (as defined in the Securities Act) of the Company.
The Restricted Securities are subject to all of the limitations on resale
imposed by Rule 144. In general, under Rule 144 as currently in effect, any
affiliate of the Company or any person (or persons whose shares are aggregated
in accordance with the Rule) who has beneficially owned Restricted Securities
for at least two years would be entitled to sell, within any three-month period,
a number of shares that does not exceed the greater of 1.0% of the outstanding
shares of Common Stock (approximately 98,474 shares based upon the number of
shares outstanding after the Offering) and the reported average weekly trading
volume in the over-the-counter market for the four weeks preceding the sale.
Sales under Rule 144 are also subject to certain manner of sale restrictions and
notice requirements and to the availability of current public information
concerning the Company. Persons who have not been affiliates of the Company for
at least three months and who have held their shares for more than three years
are entitled to sell Restricted Securities without regard to the volume, manner
of sale, notice and public information requirements of Rule 144. Substantially
all of the Restricted Securities were issued in November 1994. Accordingly,
under Rule 144 (and subject to the conditions thereof), the Restricted
Securities are eligible for public resale. However, a majority of such shares
are held by executive officers and directors of the Company who have agreed to
certain restrictions upon the resale of such shares.
A substantial influx of shares into the market may have a significant
depressive effect upon the trading price of the Company's Common Stock. This may
occur upon the public resale of up to 3,355,330 shares issuable upon the
conversion of outstanding Debentures or 2,913,625 shares issuable upon the
exercise of outstanding Warrants. See 'Description of Securities.'
As a result of certain registration rights granted by the Company in
connection with the shares issuable upon the conversion of outstanding
Debentures or upon the exercise of outstanding Warrants, the Company may have an
obligation to register for public resale up to 5,802,565 shares of Common Stock.
The holders of substantially all of such shares have agreed to defer their
registration rights for a period of 120 or 180 days after the date of this
Prospectus. See 'Description of Securities -- Registration Rights.'
14
<PAGE>
The Company, its executive officers and directors, certain debenture
holders and certain warrant holders have each agreed that they will not,
directly or indirectly, offer, sell, offer to sell, contract to sell, pledge,
grant any option to purchase or otherwise sell or dispose of (or announce any
offer, sale, offer of sale, contract of sale, pledge, grant of any option to
purchase or other sale or disposition) any shares of Common Stock or other
capital stock or any securities convertible into, or exercisable or exchangeable
for, any shares of Common Stock or other capital stock of the Company, for a
period of 180 days after the date of this Prospectus, without the prior written
consent of Prudential Securities Incorporated, on behalf of the Underwriters,
except for bona fide gifts or private transfers effected by such stockholders
other than on any securities exchange or in the over-the-counter market to
donees or transferees that agree to be bound by similar agreements. See
'Underwriting.'
The Company is unable to predict the effect, if any, that future sales of
shares, or the availability of shares for future sale, will have on the market
price for the Common Stock prevailing from time to time. Sales of substantial
amounts of Common Stock, or the perception that such influx of shares into the
market could occur, could adversely affect the market price for the Common Stock
and could impair the Company's future ability to obtain capital through
offerings of equity securities.
VOLATILITY OF STOCK PRICE. The market price of the Common Stock could be
subject to significant fluctuations in response to influxes of shares into the
market upon the conversion or exercise of outstanding convertible securities,
variations in financial results or announcements of material events by the
Company or its competitors. Developments in the automobile finance industry or
changes in general conditions in the economy or the financial markets could also
adversely affect the market price of the Common Stock.
EFFECTS OF CERTAIN ANTI-TAKEOVER PROVISIONS. Certain provisions of the
Company's Certificate of Incorporation, Bylaws and Delaware law may delay, defer
or prevent a change in control of the Company and may adversely affect the
voting and other rights of the holders of Common Stock. In particular, the
existence of the Company's classified Board of Directors, the ability of the
Board of Directors to issue 'blank check' preferred stock without further
stockholder approval and the inability of stockholders to take action by written
consent may have the effect of delaying, deferring or preventing a change in
control of the Company. See 'Management -- Directors and Executive Officers' and
'Description of Securities.'
DIVIDENDS. No dividends have been declared or paid by NAL since the
Merger. The declaration or payment of dividends is not contemplated in the
foreseeable future. Earnings are expected to be retained to finance the
development of the Company's business. The declaration or payment of future
dividends will be directly dependent upon the earnings of the Company, its
financial needs and other similarly unpredictable factors.
USE OF PROCEEDS
The net proceeds to the Company from the sale of 2,500,000 shares of Common
Stock offered hereby, after deducting underwriting discounts and commissions and
estimated offering expenses, are estimated to be approximately $16,875,000
(approximately $19,511,250 if the Underwriters over-allotment option is
exercised in full). The net proceeds will be used to support the growth of the
Company's operations and for general corporate purposes, including working
capital, future acquisitions, the repayment of advances totaling $2,413,869 to
the Company's Chief Executive Officer and the repayment of short-term
indebtedness of $2,000,000. See 'Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources' and 'Certain Transactions -- Loans to the Company.' Pending such use,
the net proceeds to the Company from the Offering will be used to repay
indebtedness under the Company's warehouse and other credit facilities.
15
<PAGE>
PRICE RANGE OF COMMON STOCK
Commencing December 1994, the Company's Common Stock was quoted on the
Over-the-Counter Bulletin Board under the symbol 'NALF.' In May 1995, the
Company's Common Stock was included in the Nasdaq National Market under the same
symbol.
The following table sets forth the high and low market prices of the Common
Stock for the period from January 1995 through December 23, 1996.
<TABLE>
<CAPTION>
1995 HIGH LOW
- -------------------------------------------------- ------ ------
<S> <C> <C>
First Quarter..................................... $12.00 $ 9.50
Second Quarter.................................... $13.38 $10.25
Third Quarter..................................... $18.38 $11.25
Fourth Quarter.................................... $17.38 $ 9.75
<CAPTION>
1996
- --------------------------------------------------
<S> <C> <C>
First Quarter..................................... $14.75 $10.63
Second Quarter.................................... $16.13 $12.38
Third Quarter..................................... $14.88 $11.75
Fourth Quarter (through December 23, 1996)........ $14.50 $ 8.38
</TABLE>
On December 23, 1996, the last reported sales price of the Common Stock on
the Nasdaq National Market was $8.50 per share.
As of December 23, 1996, the Company had approximately 144 holders of
record of its Common Stock. Since a number of the shares of the Company are held
by financial institutions in 'street name,' it is likely that the Company has
more stockholders than indicated above.
DIVIDEND POLICY
No dividends have been declared or paid by NAL since the Merger. The
declaration or payment of dividends is not contemplated in the foreseeable
future. Earnings are expected to be retained to finance and develop the
Company's business. The declaration or payment of future dividends will be
directly dependent upon the earnings of the Company, its financial needs and
other similarly unpredictable factors.
16
<PAGE>
CAPITALIZATION
The following table sets forth, as of September 30, 1996, the actual
capitalization of the Company and the capitalization of the Company as adjusted
to give effect to the issuance and sale of 2,500,000 shares of Common Stock by
the Company in the Offering and the application of the estimated net proceeds
therefrom as described in 'Use of Proceeds.'
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
---------------------------
ACTUAL AS ADJUSTED (1)
-------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Debt:
Warehouse and other credit facilities........... $ 49,191 $ 32,316
Specialized borrowing facility.................. 21,682 21,682
Convertible subordinated debentures............. 25,843 25,843
-------- ---------------
Total debt................................... 96,716 79,841
-------- ---------------
Stockholders' Equity:.............................
Preferred Stock, $1,000 par value, 10,000,000
shares authorized;
none issued and outstanding.................. -- --
Common Stock, $0.15 par value, 50,000,000 shares
authorized;
7,252,935 issued and outstanding;
9,752,935 shares issued and outstanding as
adjusted..................................... 1,088 1,463
Paid in capital................................... 25,698 42,198
Retained earnings................................. 10,472 10,472
-------- ---------------
Total stockholders' equity........................ 37,258 54,133
Total capitalization.............................. $133,974 $ 133,974
-------- ---------------
-------- ---------------
</TABLE>
- ------------------
(1) Reflects the capitalization of the Company on a pro forma basis as adjusted
to give effect to the partial repayment of the Company's warehouse and other
credit facilities and the sale of 2,500,000 shares of Common Stock offered
by the Company hereby, after deducting the underwriting discounts and
commissions and estimated offering expenses, and the receipt of the
estimated net proceeds therefrom.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following information should be read in conjunction with the
Consolidated Financial Statements (including the notes thereto) and other
financial data included elsewhere in this Prospectus.
The Company is a specialized automobile finance company engaged in the
purchase and servicing of Contracts originated by franchised and select
independent Dealers in connection with sales or leases of used and new
automobiles to consumers with non-prime credit. Consumers with non-prime credit
are perceived to be relatively high credit risks due to various factors,
including the manner in which they have handled previous credit, the absence or
limited extent of their prior credit history and their limited financial
resources. The Company purchases Contracts relating principally to the 'C'
credit segment of the automobile finance market. More than 90% of all Contracts
acquired by the Company during the nine months ended September 30, 1996 were
originated by franchised Dealers. The Company is also engaged in offering
insurance and related products to its Dealers and customers through its
insurance subsidiary, NIS. The Company has a remarketing subsidiary, PCSF with a
JDBR Franchise, which provides a cost-effective means of disposing of some of
the Company's repossessed and off-lease vehicles.
Contract Acquisition
The Company acquires Contracts from diverse sources through its Origination
Programs. In order to adjust for credit risk and achieve an acceptable rate of
return, the Company typically purchases Loan Contracts from Dealers at a
discount from the principal amounts of such Contracts. This discount is
non-refundable to the Dealer. Currently, the discount is being allocated to the
reserve for credit losses. See 'Acquisition Discounts.' During the period from
July 1, 1994 through September 30, 1996, the Company purchased $360.8 million in
Loan Contracts and $38.8 million in Lease Contracts through its Origination
Programs. The following table provides certain material information relative to
the Contracts acquired by the Company and its servicing portfolio during each of
the last nine quarters.
<TABLE>
<CAPTION>
FOR THE QUARTERS ENDED
------------------------------------------------------------------------------------------------
SEP. 30, JUN. 30, MAR. 31, DEC. 31, SEP. 30, JUN. 30, MAR. 31, DEC. 31, SEP. 30,
OPERATING DATA: 1996 1996 1996 1995 1995 1995 1995 1994 1994
-------- -------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Contracts purchased during the
period:
Loan Contracts:
Dealer Program.............. $ 23,001 $ 15,019 $ 12,143 $ 26,522 $ 16,540 $ 5,267 $ 4,805 $ 1,809 $ 395
Other Origination
Programs(1)(2)............ 46,555 35,952 36,183 20,071 15,084 16,097 13,980 10,279 --
Recourse Program............ 7,091 10,568 5,206 6,696 8,203 6,554 5,838 5,415 5,484
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total Loan Contracts...... 76,647 61,539 53,532 53,289 39,827 27,918 24,623 17,503 5,879
Lease Contracts............... 6,776 3,609 3,686 3,989 4,085 5,241 6,733 3,446 1,237
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total Contracts........... $ 83,423 $ 65,148 $ 57,218 $ 57,278 $ 43,912 $33,159 $31,356 $20,949 $ 7,116
Number of Dealers (at end of
period)(3).................. 1,594 1,381 1,271 909 787 406 296 196 83
Servicing portfolio (at end of
period):
Owned....................... $108,208 $111,928 $117,210 $113,830 $111,888 $87,938 $65,824 $44,415 $33,028
Serviced for securitization
trusts.................... 175,679 118,818 73,741 39,934 -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total servicing
portfolio............... $283,887 $230,746 $190,951 $153,764 $111,888 $87,938 $65,824 $44,415 $33,028
-------- -------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- -------- --------
</TABLE>
- ------------------
(1) Includes Contracts purchased during the period through the Company's
Captive, Affinity, Correspondent and Wholesale Programs.
(2) Includes Contracts purchased through the Company's Captive Program with SFI.
(3) Includes Dealers for the Company's Captive Program with SFI.
The Company has experienced significant growth in the volume of Contracts
purchased. Contract volume has increased to $83.4 million for the quarter ended
September 30, 1996 from $7.1 million for the quarter ended September 30, 1994,
representing an average quarterly growth rate of 36%. The growth in Contract
volume is attributable primarily to the increase in the number of Dealers
participating in the Company's Dealer and Captive Programs, as well as an
expansion of the sources and amounts of financing available to purchase
Contracts. The Dealers participating in these two
18
<PAGE>
programs increased to 1,594 Dealers at September 30, 1996 from 83 Dealers at
September 30, 1994, representing an average quarterly growth rate of 45%. The
growth in Contract volume has resulted in an increase in the Company's servicing
portfolio, which at September 30, 1996 was $283.9 million compared to $33.0
million at September 30, 1994, representing an average quarterly growth rate of
31%.
The Company experienced a significant increase in the volume of Loan
Contracts purchased under its Dealer Program during the six months ended
December 31, 1995, partly as a result of the relaxation of certain underwriting
criteria. As a result of its analysis of the performance of the Loan Contracts
originated under the Dealer Program during this period, the Company decided to
strengthen its underwriting criteria during the fourth quarter of 1995 and, upon
phasing-in these standards, the Company experienced a significant decline in the
volume of Loan Contracts purchased under its Dealer Program during the first
quarter of 1996. The volume of Loan Contracts purchased through its Dealer
Program increased during the second and third quarters of 1996, however, not to
the level achieved during the fourth quarter of 1995. Management expects that
the volume of Loan Contracts in this program will continue to increase and may
achieve, during the fourth quarter of 1996, the levels realized during the
fourth quarter of 1995. The Company experienced an increase in the volume of
Loan Contracts purchased through its Recourse Program for the quarters ended
June 30 and September 30, 1996, when compared to the quarter ended March 31,
1996, due primarily to the addition of a participant to the program during this
period.
Revenues
The increase in Contract volume and the servicing portfolio has led to an
increase in revenues as demonstrated in the following table:
<TABLE>
<CAPTION>
FOR THE QUARTERS ENDED
--------------------------------------------------------------------------------------------------------
SEP. 30, JUN. 30, MAR. 31, DEC. 31, SEP. 30, JUN. 30, MAR. 31, DEC. 31, SEP. 30,
REVENUE DATA: 1996 1996 1996 1995 1995 1995 1995 1994 1994
-------- -------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Loan Contracts......... $ 4,072 $ 4,054 $3,326 $ 3,573 $2,978 $1,847 $ 978 $ 192 $ 5
Lease Contracts........ 1,284 1,206 1,101 1,020 919 796 587 335 118
Recourse Programs...... 763 650 644 662 660 603 492 482 277
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total interest
income............. 6,119 5,910 5,071 5,255 4,557 3,246 2,057 1,009 400
Non-automobile interest
income................. 92 133 114 222 319 346 476 541 831
Gain on sale of Loan
Contracts.............. 7,147 3,283 2,997 4,123 478 -- -- 155 697
Servicing fees, net...... -- 302 557 104 -- -- -- -- --
Insurance fees........... 460 407 236 280 155 43 102 17 7
Other fees............... 760 1,225 722 580 372 167 53 214 94
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total revenues....... $14,578 $11,260 $9,697 $10,564 $5,881 $3,802 $2,688 $1,936 $2,029
-------- -------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- -------- --------
</TABLE>
The Company generates revenues primarily through the purchase, sale and
ongoing servicing of Contracts. The Company earns interest income and fees on
Contracts purchased and held in portfolio, including those awaiting
securitization. Upon the sale of Loan Contracts through the Company's
securitization program, the Company recognizes a gain on sale on the Loan
Contracts. The Company continues to service these Loan Contracts and earns a
servicing fee currently equal to three percent per year of the outstanding
principal balance of the Loan Contracts sold. The Company also receives revenues
from the sale of insurance and related products, and other miscellaneous fees.
During the quarter ended March 31, 1996, interest income declined slightly
from that reported during the quarter ended December 31, 1995, due primarily to
a decrease in the average balance of the Contracts held in the portfolio. This
decrease was associated with the Company's first sale of Loan Contracts under a
securitization transaction in December 1995.
19
<PAGE>
Interest income on the non-automobile portfolio consists of interest earned
on mortgage loans, marine loans and other consumer loans acquired by the Company
through bulk purchases prior to June 30, 1994. The decline in interest income is
due to the run-off of this portfolio.
Gain on sale of Loan Contracts decreased during the quarters ended March
31, and June 30, 1996 when compared to that for the quarter ended December 31,
1995. The decrease was due primarily to a decline in the net spread on the March
and June 1996 securitization transactions when compared to that for the December
1995 securitization transaction. See 'Gain on Sale of Loans.' The decline is
also attributable to an increase in the required level of reserve account
necessary to credit enhance the March and June 1996 securitization transactions
when compared to the reserve account for the December 1995 transaction. The
reserve account is funded upon the closing of a securitization transaction,
whereby a portion of the proceeds from the sale is set aside in the reserve
account to protect the purchasers of the asset-backed securities from potential
losses. Gain on sale subsequently increased during the quarter ended September
30, 1996, reflecting a larger securitization with a higher net spread than the
previous two securitizations. See 'Liquidity and Capital Resources --
Securitization.'
The Company experienced a decline in servicing fee income since the quarter
ended March 31, 1996 despite the completion of two additional securitization
transactions. During the quarters ended June 30 and September 30, 1996, the
Company did not receive its distribution of servicing cash flows associated with
two of its securitization trusts due to an increase in the rates of delinquency,
repossession and losses beyond those allowable by the structure of the
securitization transaction. Consequently, the reduced level of servicing fee
income was entirely offset by amortization of the Excess Servicing Receivable.
The Company will receive these servicing cash flows, which are currently
accumulating in the relevant reserve accounts, if the delinquency, repossession
and loss rates fall below the allowable levels for a specified period.
Management believes that these factors do not currently result in an impairment
to the Excess Servicing Receivable relating to these securitization
transactions. See 'Risk Factors.'
Net Interest Income
Net interest income ('Net Interest Income') is the difference between the
interest earned on Contracts held in portfolio, including those awaiting
securitization and the interest costs associated with the Company's borrowings
to finance such Contracts. Net Interest Income will fluctuate and be impacted by
the spread between the portfolio yield and the cost of the Company's borrowings,
changes in overall Contract acquisition volume and the timing of securitization
transactions. The following table illustrates the weighted average net interest
rate spread (expressed as a percentage) earned on Contracts acquired:
<TABLE>
<CAPTION>
FOR THE QUARTERS ENDED
--------------------------------------------------------------------------------------------------------
SEP. 30, JUN. 30, MAR. 31, DEC. 31, SEP. 30, JUN. 30, MAR. 31, DEC. 31, SEP. 30,
NET INTEREST SPREAD: 1996 1996 1996 1995 1995 1995 1995 1994 1994
-------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:(1)
Loan Contracts......... 20.65% 20.09% 18.71% 21.76% 22.01% 23.02% 26.62% 21.63% 21.48%
Lease Contracts........ 18.02 18.85 18.22 18.78 19.89 20.58 19.13 21.07 19.64
Recourse Program....... 18.75 17.31 18.60 19.96 20.43 20.11 19.69 22.93 17.83
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total automobile
Contracts.......... 19.80 19.48 18.58 20.88 21.31 21.80 22.26 21.22 17.98
Non-automobile
Contracts.............. 13.27 17.41 13.18 22.21 29.22 27.51 27.10 23.93 35.36
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total.................. 19.65 19.43 18.42 20.93 21.70 22.24 23.03 22.64 26.90
Interest expense(2)...... 10.32 10.80 10.12 11.07 10.93 11.04 11.54 10.50 13.59
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net interest spread...... 9.33% 8.63% 8.30% 9.86% 10.77% 11.20% 11.49% 12.14% 13.31%
-------- -------- -------- -------- -------- -------- -------- -------- --------
</TABLE>
- ------------------
(1) Represents interest income plus discount accretion (if any) and fees less
amortization of capitalized costs, expressed as a percentage of average
receivables outstanding.
(2) Represents interest expense as a percentage of average total debt
outstanding.
During the period from September 30, 1994 to March 31, 1996, the Company
has generally experienced a decline in the net interest spread. This reflected
the shift in the composition of the Company's portfolio from bulk purchase
non-automobile contracts purchased prior to 1995 at large
20
<PAGE>
discounts, which yielded higher rates, to a gradually greater concentration in
automobile Contracts, which yielded lower rates. The net interest spread
subsequently increased during the quarter ended June 30, 1996 as the Company
began to benefit from the expansion into additional states with higher allowable
rates of interest when compared to the allowable rate of interest in Florida,
where the Company has a large concentration. See 'The Company -- Origination
Sources.' This increase was partially offset by an increase in the cost incurred
on borrowings in connection with the additional placement of convertible
subordinated debentures during the quarter ended June 30, 1996.
Gain on Sale of Loans
The Company has sold Loan Contracts through its securitization program in
each of the last four quarters. The Company recognizes a gain on sale of Loan
Contracts in an amount equal to: (i) the excess servicing receivable ('Excess
Servicing Receivable') from the trust during the life of the securitization,
plus (ii) the net proceeds received from the securitization less the aggregate
book value of the Loan Contracts transferred to the trust. The Excess Servicing
Receivable represents the estimated present value of excess servicing cash flows
('Excess Servicing Cash Flows') based on the Company's estimates for loss and
prepayments during the life of the securitization transaction. Quarterly, the
Company reviews the assumptions made in determining the Excess Servicing
Receivable. If the present value of future aggregate Excess Servicing Cash Flows
is less than the aggregate capitalized amount, a valuation adjustment would be
recorded. Excess Servicing Cash Flows represent the difference between the cash
flows on Loan Contracts in a securitization trust and the sum of (i) payments of
principal and interest required to be made to investors in the securitized pool,
(ii) the contractual servicing fee, currently at the rate of three percent per
year, and (iii) other on-going expenses of such trust. See 'Liquidity and
Capital Resources -- Securitization.'
The gain on sale of Loan Contracts is affected by, among other things, the
amount of Loan Contracts sold in the securitization transaction, the net spread
on the transaction, the up-front costs of the transaction and estimated losses
and prepayments on the Loan Contracts. Net spread is the major component of the
total gain on sale. The following table illustrates the net spread for each of
the Company's securitization transactions:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE INTEREST RATE
ORIGINAL CONTRACT PAID TO GROSS NET
SECURITIZATION: BALANCE RATE INVESTORS(1) SPREAD(2) SPREAD(3)
-------- -------- ------------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
1996-3 Securitization Trust... $ 70,052 19.37% 7.42% 11.95% 8.95%
1996-2 Securitization Trust... 49,500 19.20% 7.58% 11.62% 8.62%
1996-1 Securitization Trust... 40,750 19.26% 7.47% 11.79% 8.79%
1995-1 Securitization Trust... 40,136 19.58% 7.10% 12.48% 9.48%
--------
Total....................... $200,438
--------
--------
</TABLE>
- ------------------
(1) Weighted average interest rate paid to investors in the securitization
transaction.
(2) Difference between weighted average Contract rate and weighted average
interest rate paid to investors.
(3) Difference between gross spread less contractual servicing fees.
The increase in the net spread for the 1996-3 Securitization Trust,
compared to the prior two securitization transactions, was attributable to a
higher weighted average coupon rate due primarily to the Company's expansion
outside the State of Florida. A corresponding decrease in the interest rate paid
to investors, due primarily to a decrease in market rates, also contributed to a
higher net spread.
The decrease in the net spread from the 1995-1 Securitization Trust to the
1996-1 Securitization Trust, and the further decline in the net spread on the
1996-2 Securitization Trust, was primarily due to an increase in the interest
rate paid to investors, due primarily to an increase in market interest rates.
Servicing Fee Income
Throughout the life of the Loan Contract, the Company earns a contractual
servicing fee from the securitization trust, currently equal to three percent
per year of the principal balance outstanding of the Loan Contracts sold to the
trust. Servicing fee income increased from $104,000 for the quarter ended
December 31, 1995, representing one month's servicing income from the December
securitization transaction, to $557,000 for the quarter ended March 31, 1996,
and then decreased to $302,000 for the
21
<PAGE>
quarter ended June 30, 1996. During the quarters ended June 30 and September 30,
1996, the Company did not receive its distribution of servicing cash flows
associated with two of its securitization trusts due to an increase in the rates
of delinquency, repossession and losses beyond those allowable by the structure
of the securitization transaction. Consequently, the reduced level of servicing
fee income was entirely offset by amortization of the Excess Servicing
Receivable. The Company will receive these servicing cash flows, which are
currently accumulating in the relevant reserve accounts, if the delinquency,
repossession and loss rates fall below the allowable levels for a specified
period. Management believes that these factors do not currently result in an
impairment to the Excess Servicing Receivable relating to these securitization
transactions. See 'Risk Factors.'
Servicing fee income and the Excess Servicing Receivable may be impacted by
changes in the amount of losses and levels of prepayments from those assumed by
the Company at the time of the securitization. To the extent the assumptions
used are materially different from actual results, the amount of Excess
Servicing Cash Flows received by the Company over the remaining life of the
securitization could be significantly affected. See 'Risk Factors.'
Other Income
The Company generates revenues from the sale of a variety of insurance and
related products to Dealers and its customers, acting as agent for third party
insurance companies. The Company recognizes as revenue the commissions or fees
received upon the sale of these products to customers. Other fees consist
primarily of late fees earned on the Company's servicing portfolio. Insurance
and other fees have continued to increase due primarily to the increase in the
volume of Contracts purchased and the growth in the servicing portfolio.
RESULTS OF OPERATIONS
The following table provides the principal components of the Company's net
income for the periods presented:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED FOR THE YEARS ENDED
------------------------------ ----------------------------
SEP. 30, SEP. 30, DEC. 31, DEC. 31,
RESULTS OF OPERATIONS: 1996 1995 1995 1994
------------- ------------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Net interest income.......................... $ 8,936 $ 6,363 $ 8,319 $3,430
Gain on sale of Loan Contracts............... 13,427 128 4,600 2,292
Servicing fees and other income.............. 4,670 1,241 2,651 454
------------- ------ ------------ ------
Total revenue.............................. 27,033 7,732 15,570 6,176
Provision for credit losses.................. (2,801) (1,412) (2,762) (573)
Operating expenses........................... (13,844) (4,514) (7,805) (4,946)
Non-cash charge for escrow shares............ (301) (80) (280) --
------------- ------ ------------ ------
Income before taxes.......................... 10,087 1,726 4,723 657
Provision for income taxes................... (3,945) (656) (1,926) (263)
------------- ------ ------------ ------
Net income................................. $ 6,142 $ 1,070 $ 2,797 $ 394
------------- ------ ------------ ------
------------- ------ ------------ ------
</TABLE>
Nine Months Ended September 30, 1996 and 1995.
Net Interest Income. Net Interest Income for the nine months ended
September 30, 1996 was $8.9 million compared to $6.4 million for the nine months
ended September 30, 1995, representing a 40% increase. This increase was
primarily a result of the growth in average Contracts held in portfolio and
those awaiting securitization from $77.5 million for the nine months ended
September 30, 1995 to $112.8 million for the nine months ended September 30,
1996.
Gain on Sale of Loans. Gain on Sale of Loans for the nine months ended
September 30, 1996 was $13.4 million compared to $128,000 for the nine months
ended September 30, 1995 because no securitization transactions were completed
during the nine months ended September 30, 1995.
Servicing Fees and Other Income. During the period from December 1995
through September 1996, the Company completed four securitization transactions
aggregating approximately $200.4 million. As a result, the Company received
servicing fee income of $859,000 for the nine months ended September 30, 1996.
Prior to this period, the Company did not complete a securitization transaction.
Other income, consisting primarily of insurance and other fees, increased from
$892,000 to
22
<PAGE>
$3.8 million for the nine months ended September 30, 1995 and 1996,
respectively. These increases were primarily due to an increase in the volume of
Contracts purchased and the growth in the servicing portfolio to $283.9 million
at September 30, 1996 from $111.9 million at September 30, 1995. In addition,
the Company recorded approximately $517,000 to other income relating to the
settlement of outstanding litigation during June 1996.
Provision for Credit Losses. The Company's provision for credit losses for
the nine months ended September 30, 1996 was $2.8 million compared to $1.4
million for the nine months ended September 30, 1995. This increase related
primarily to provisions recorded for an estimate of possible losses that may be
incurred in connection with the acquisition of new Contracts during 1996 and the
performance of previously purchased Contracts.
Operating Expenses. Operating expenses increased to $13.8 million for the
nine months ended September 30, 1996 compared to $4.5 million for the nine
months ended September 30, 1995. This increase was attributable to the hiring of
additional personnel in almost all areas of the Company's operations to support
its growth. The increase is also due to the absorption of the operating expenses
of SFI, which was acquired in June 1996. As a percentage of average total
servicing portfolio, operating expenses were approximately 9% and 8% for the
nine months ended September 30, 1996 and 1995, respectively, on an annualized
basis.
Non-Cash Charge For Escrow Shares. The Company recorded a non-cash charge
to earnings of $301,000 for the nine months ended September 30, 1996 compared to
$80,000 for the nine months ended September 30, 1995 for shares released from
the escrow arrangement that was established in connection with the Merger. See
'Principal Stockholders.'
Net Income. The Company reported net income of $6.1 million or $0.75 per
fully diluted share for the nine months ended September 30, 1996 compared to net
income of $1.1 million or $0.18 per fully diluted share for the nine months
ended September 30, 1995. Net income, excluding the non-cash charge for
releasing escrow shares, was $6.4 million or $.78 per share for the nine months
ended September 30, 1996, in comparison to $1.2 million or $0.19 per fully
diluted share for the nine months ended September 30, 1995.
Years Ended December 31, 1995 and 1994.
Net Interest Income. Net interest income for the year ended December 31,
1995 was $8.3 million compared to $3.4 million for the year ended December 31,
1994, representing a 143% increase. This increase was primarily a result of the
growth in average Contracts held in portfolio and those awaiting securitization
from $15.5 million for the year ended December 31, 1994 to $84.8 million for the
year ended December 31, 1995.
Gain on Sale of Loans. The Company completed a $40 million securitization
during the fourth quarter of 1995 resulting in a $4.0 million gain. Total gain
on sale for the year ended December 31, 1995 was $4.6 million compared to $2.3
million for the year ended December 31, 1994. Although no securitization
transactions were completed during 1994, the Company recognized gains from
selling loan portfolios through bulk sale arrangements.
Servicing Fees and Other Income. During the period from December 31, 1994
to December 31, 1995, the Company completed a securitization transaction
aggregating $40 million. As a result, servicing fee income was $104,000 for the
year ended December 31, 1995 compared to $0 for the preceding year. Other
income, consisting of insurance and other fees, increased from $332,000 for the
year ended December 31, 1994 to $1.7 million for the year ended December 31,
1995. These increases were primarily due to an increase in the volume of
Contracts purchased and the growth in the servicing portfolio to $153.8 million
for the year ended December 31, 1995 from $44.4 million for the year ended
December 31, 1994.
Provision for Credit Losses. The Company's provision for credit losses for
the year ended December 31, 1995 was $2.8 million compared to $573,000 for the
year ended December 31, 1994. This increase related primarily to provisions
recorded for an estimate of possible losses that may be incurred in connection
with the acquisition of new Contracts during 1995 and the performance of
previously purchased Contracts.
23
<PAGE>
Operating Expenses. Operating expenses increased to $7.8 million for the
year ended December 31, 1995 compared to $4.9 million for the year ended
December 31, 1994, a 59% increase. This increase was attributable to the hiring
of additional personnel in almost every area of the Company's operations to
support its growth. As a percentage of average total servicing portfolio,
operating expenses decreased to 8.41% in 1995 from 14.39% in 1994.
Non-Cash Charge For Escrow Shares. The Company recorded a charge to
earnings of $280,000 for the year ended December 31, 1995 for shares released
from the escrow arrangement that was established in connection with the Merger.
Net Income. The Company reported net income of $2.8 million or $0.45 per
fully diluted share for the year ended December 31, 1995 compared to net income
of $394,000 or $0.07 per fully diluted share for the year ended December 31,
1994. Net income, excluding the non-cash charge for releasing escrow shares, was
$3.0 million, or $0.50 per share for the year ended December 31, 1995.
DELINQUENCY AND CREDIT LOSS EXPERIENCE
The Company's profitability depends largely upon its ability to effectively
manage delinquency and credit losses. The Company maintains a reserve available
to absorb future credit losses on Contracts that are held in portfolio and on
Loan Contracts while they are awaiting securitization. The Company evaluates
historical charge-off experience against the reserve and performs analyses of
portfolio performance and delinquency trends to determine if the reserve is
adequate to absorb estimated future losses.
Collection and Charge-off Procedures. Typically within 24 hours of an
account becoming delinquent, a collector establishes contact with the customer.
If the delinquency is not promptly resolved, the collector pursues a resolution
through additional telephone contacts with the customer followed by demand
letters as appropriate. In the event that a delinquency cannot be resolved, the
account is turned over for repossession of the vehicle by an outside agency,
typically within 45 days. When a vehicle is repossessed and not redeemed by the
customer within a period prescribed by statute, the vehicle is assigned for
disposal. At the time of repossession, the vehicle is reviewed by management and
its carrying value is written down, if necessary, to its net realizable value.
Write-downs of carrying value, which include costs of disposition, are charged
against the Company's reserve available for credit losses. Vehicles typically
are disposed of at wholesale auctions, or remarketed through PCSF or through the
JDBR Franchise. The Company may establish a dialogue with a delinquent borrower
and formulate a short-term payment arrangement that would allow the borrower to
retain the automobile beyond a delinquency of 45 days. Accounts that reach 90
days of delinquency are placed on non-accrual status and any previously accrued
interest income is reversed. In the event that the Company is unable to locate
the customer or the vehicle by the time an account reaches 150 days of
delinquent status, the account is fully charged off against reserves available
for credit losses. If the customer declares bankruptcy, the account is charged
off to the lesser of any court-ordered settlement or the wholesale value of the
vehicle. The Company's collection staff continues to pursue customers, to locate
and repossess vehicles and to collect losses incurred. Any amount received after
a Contract has been charged-off is recorded as a recovery and an increase in the
reserves available for credit losses.
Acquisition Discounts. The Company purchases Contracts from Dealers at
discounts from their stated principal amount to provide for credit risk. The
discounts typically range from 3% to 10%. The amount of the discount varies
primarily based on the credit risk and the terms of the Contract and the quality
of the collateral. See 'The Company -- Underwriting.' Any discount that
management considers necessary to absorb future credit losses is allocated to
the reserves available for credit losses. The remaining portion of the discount,
if any, is recognized as income using the level-yield method of accretion.
Currently, the Company allocates the entire discount to the reserve available
for credit losses and expects to do so for the foreseeable future. However, the
Company will continue to evaluate the ability to collect on its Contracts in
conjunction with the allocation of discounts.
Reserve Available for Credit Losses. In the event of a payment default,
proceeds from the liquidation of the vehicle may not cover the outstanding
Contract balance and costs of recovery. The Company maintains a reserve
available for credit losses in an amount that management believes is
24
<PAGE>
adequate to absorb future credit losses on Contracts. The reserve available for
credit losses is comprised of the acquisition discounts, an allowance for credit
losses and, in limited cases, dealer reserves. On a monthly basis, the Company
evaluates the adequacy of the reserve available for credit losses by analyzing
the Contract portfolios in their entirety using a 'static pool analysis' method
in which the historical charge-offs are stratified according to the Contract
origination date. These Contracts are grouped together by calendar month of
origination, and the related historical charge-off experience on such Contracts
is analyzed to evaluate the reasonableness and adequacy of the reserve available
for credit losses. This analysis takes into consideration historical loss
experience, current economic conditions, levels of repossessed assets,
delinquency experience, seasoning of Contracts, and other relevant factors.
Should management deem the level of acquisition discounts and dealer reserves,
in limited cases, to be inadequate, an additional provision for credit losses
will be recorded to increase the allowance for credit losses and, therefore,
increase the overall level of the reserve available for credit losses.
The Company has prepared analyses of its Contracts, based on its credit
experience and available industry data, to identify the delinquency and default
rates at the various stages of a Contract's repayment term. The results of the
analyses suggest that the probability of a Contract becoming delinquent or going
into default is highest during the 'seasoning period,' which begins 3 to 4
months, and ends 12 to 14 months, after the origination date. If the volume of
Contracts purchased by the Company continues to grow, an increasingly greater
portion of the Company's portfolio is expected to fall into the 'seasoning
period' described above, causing a rise in the overall portfolio delinquency and
default rates. Assuming no changes in any other factors that may affect
delinquency and default rates, the Company's management believes that this trend
should stabilize or reverse when the volume of mature Contracts (with lower
delinquency and default rates) is sufficient to offset the delinquency and
default rates on newer Contracts.
The following table sets forth information regarding credit loss experience
of the total servicing portfolio for the periods presented:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED FOR THE YEAR ENDED
-------------------------------- ------------------
SEP. 30, SEP. 30, DEC. 31,
CREDIT LOSSES:(1)(4) 1996 1995 1995
------------- ------------- ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Loan Contracts serviced:.......................... $ 220,108 $ 68,543 $107,926
Gross charge-off percentage(2).................. 10.65% 1.07% 3.68%
Net charge-off percentage(3).................... 7.69% 1.07% 3.68%
Lease Contracts serviced:......................... $ 29,893 $ 19,699 $ 22,518
Gross charge-off percentage(2).................. 6.09% 0.91% 4.19%
Net charge-off percentage(3).................... 4.09% 0.91% 4.19%
Total Loan and Lease Contracts serviced:.......... $ 250,001 $ 88,242 $130,444
Gross charge-off percentage(2).................. 10.02% 1.02% 3.78%
Net charge-off percentage(3).................... 7.20% 1.02% 3.78%
Recourse Contracts serviced:...................... $ 24,412 $ 16,322 $ 18,129
Gross charge-off percentage(2).................. -- -- --
Net charge-off percentage(3).................... -- -- --
Total servicing portfolio:........................ $ 274,413 $ 104,564 $148,573
Gross charge-off percentage(2).................. 9.00% 0.79% 3.15%
Net charge-off percentage(3).................... 6.46% 0.79% 3.15%
</TABLE>
- ------------------
(1) This table excludes non-automobile bulk purchase contracts.
(2) Gross charge-offs are computed as principal balance less liquidation
proceeds received expressed as a percentage of average balance outstanding
during the period.
(3) Net charge-offs are computed as gross charge-offs less any recoveries
expressed as a percentage of average balance outstanding during the period.
(4) Percentages for the nine months ended September 30, 1996 and 1995 have been
annualized.
The increase in the level of credit losses is due primarily to the
seasoning of the Company's servicing portfolio when comparing the net charge-off
percentage for the nine months ended
25
<PAGE>
September 30, 1996 to that for the nine months ended September 30, 1995 and the
year ended December 31, 1995.
Delinquency Experience. The following table reflects the Company's
delinquency experience for the periods presented:
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, AS OF DECEMBER 31,
-------------------- --------------------
DELINQUENCY:(1) 1996 1995 1995 1994
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Loan Contracts serviced...................... $219,787 $ 67,484 $107,191 $ 8,175
Delinquencies:
31-60 days................................. 7.36% 6.42% 8.83% 2.17%
61-90 days................................. 2.62% 2.24% 2.99% 0.18%
Greater than 90 days....................... 2.14% 1.53% 2.18% 0.13%
-------- -------- -------- --------
Total.................................... 12.12% 10.19% 14.00% 2.48%
Lease Contracts serviced..................... $ 29,098 $ 18,324 $ 21,361 $ 5,918
Delinquencies:
31-60 days................................. 4.69% 5.12% 7.51% 6.88%
61-90 days................................. 1.39% 1.19% 1.90% 1.21%
Greater than 90 days....................... 2.65% 1.46% 1.83% 1.28%
-------- -------- -------- --------
Total.................................... 8.73% 7.77% 11.24% 9.37%
Total Loan and Lease Contracts serviced...... $248,885 $ 85,808 $128,552 $ 14,093
Delinquencies:
31-60 days................................. 7.04% 6.14% 8.61% 4.15%
61-90 days................................. 2.47% 2.01% 2.81% 0.61%
Greater than 90 days....................... 2.20% 1.52% 2.12% 0.61%
-------- -------- -------- --------
Total.................................... 11.71% 9.67% 13.54% 5.37%
Recourse Contracts serviced.................. $ 24,412 $ 16,322 $ 18,129 $ 14,521
Delinquencies:
31-60 days................................. 11.52% 7.89% 16.99% 11.75%
61-90 days(2).............................. N/A N/A N/A N/A
Greater than 90 days(2).................... N/A N/A N/A N/A
-------- -------- -------- --------
Total.................................... 11.52% 7.89% 16.99% 11.75%
Total Contracts serviced..................... $273,297 $102,130 $146,681 $ 28,614
Delinquencies:
31-60 days................................. 7.44% 6.42% 9.65% 8.01%
61-90 days................................. 2.25% 1.69% 2.46% 0.30%
Greater than 90 days....................... 2.00% 1.28% 1.86% 0.30%
-------- -------- -------- --------
Total.................................... 11.69% 9.39% 13.97% 8.61%
-------- -------- -------- --------
</TABLE>
- ------------------
(1) This table excludes non-automobile bulk purchase contracts. In addition,
this table excludes two automobile bulk purchase portfolios which were
non-performing at the time of purchase in 1994 and are accounted for on a
cost recovery basis, whereby income is recognized only to the extent that
the Company's investment in these portfolios has been fully recouped. As of
September 30, 1996, the combined investment in these portfolios totaled
$1,115,000.
(2) Contracts delinquent 61 days or more are repurchased by the originator of
the Contracts under the Recourse Program.
Management believes that the increase in the overall delinquency from
December 31, 1994 to December 31, 1995 is primarily the result of an increase in
the percentage of Contracts falling in the 'seasoning period.'
LIQUIDITY AND CAPITAL RESOURCES
The Company's business requires substantial cash to support the growth in
Contracts purchased. In general, the Company finances the purchase of Contracts
through various credit facilities. The Company funds through these facilities
between 80% and 90% of the principal balance of the Contracts. The Company funds
the remainder of the purchase price through its capital. As the Company
continues to increase the volume of Contracts purchased, it must secure
additional capital to support its growth. The Company's growth has been
facilitated by its ability to complete private placements of debt and equity
securities and through securitization transactions.
Through September 30, 1996, the Company had secured its principal sources
of financing through senior indebtedness comprised of its warehouse facility,
revolving credit facilities and its specialized
26
<PAGE>
borrowing facility, as well as subordinated indebtedness consisting of unsecured
subordinated debentures. In addition, the Company secures liquidity through the
securitization of its Loan Contracts. During the last four quarters, the Company
has completed an aggregate of approximately $200 million of securitization
transactions.
<TABLE>
<CAPTION>
AS OF AS OF
SEPTEMBER 30, DECEMBER 31,
------------------ ------------------
SOURCES OF FINANCING: 1996 1995 1995 1994
------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Warehouse Facility:
Available line............................. $50,000 $50,000 $50,000 $ --
Outstanding balance........................ 21,457 10,000 11,585 --
Revolving Credit Facilities:
Available line............................. 45,000 45,000 45,000 30,000
Outstanding balance........................ 27,231 21,733 21,844 11,998
Revolving Line of Credit Facility:
Available line............................. 3,500 -- -- --
Outstanding balance........................ 503 -- -- --
Specialized Borrowing Facility:
Outstanding balance........................ 21,682 47,144 42,381 10,212
Subordinated Debentures:
Issued -- cumulative....................... 38,825 15,400 21,325 --
Converted to Common Stock -- cumulative.... (12,825) (7,200) (8,260) --
------- ------- ------- -------
Outstanding balance........................ 26,000 8,200 13,065 --
Unsecured notes.............................. -- 35 -- 230
Note due to stockholder...................... -- 854 2,919 62
------- ------- ------- -------
Total outstanding borrowings................. $96,873 $87,966 $91,794 $22,502
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
Warehouse Facility. During September 1995, the Company entered into a $50
million warehouse facility (the 'Warehouse Facility') with Greenwich Capital
Financial Products, Inc. ('Greenwich'). In November 1996, the Warehouse Facility
was increased to $100 million. This facility is structured as a reverse
repurchase agreement, which is characterized as a borrowing for financial
reporting purposes. Under the terms of this facility, the Company receives an
advance of approximately 90% of the outstanding principal balance of the Loan
Contract at an interest rate of 2.25% over 30-day LIBOR. If, at any time during
the financing period, 90% of the market value of the Contract is less than the
amount advanced, Greenwich may require the Company to transfer funds or
additional Contracts to Greenwich until the deficiency ('margin') amount is
satisfied. Market value of Loan Contracts may be affected by such factors as
changes in interest rates, delinquency rates and credit losses. Although
management believes that this is unlikely to occur to any significant degree, a
margin call could require an allocation of certain of the Company's liquidity
and capital resources. The Warehouse Facility expires in September 1997 and is
renewable for an additional year subject to certain conditions. At September 30,
1996, the Company had $21.5 million outstanding under this facility.
The Warehouse Facility includes certain financial and operational
covenants, including the maintenance of a minimum net worth of $30 million, the
prohibition of a debt to equity ratio in excess of 8 to 1, and maintenance of
certain loan portfolio performance criteria. For the purpose of the Warehouse
Facility, net worth has been defined as total stockholders' equity plus
subordinated indebtedness not due within 90 days. At September 30, 1996, the
Company was in compliance with all relevant financial and operational covenants.
Management continues to monitor closely the performance of its Loan portfolios
in order to ensure compliance with all financial and operational covenants.
An event of default is also deemed to occur under the Warehouse Facility in
the event of the death of two of the Company's executive officers (or if both of
these individuals cease serving as officers) or if the Company is unable to
securitize at least $250 million of loans over a two-year period, with at least
$100 million securitized in any 365-day period.
27
<PAGE>
The Company uses the Warehouse Facility to purchase Loan Contracts with the
objective of selling such Contracts through securitization transactions. Since
the fourth quarter of 1995, the Company has completed in the aggregate the sale
of approximately $200 million of Loan Contracts through privately-placed
securitization transactions. The proceeds from the securitization transactions
have been used to pay down the Warehouse Facility, thereby making the Warehouse
Facility available to fund purchases of additional Contracts.
Revolving Credit Facilities. In March 1993, the Company entered into a $20
million three- year revolving credit facility (the 'Congress Facility') with
Congress Financial Corporation ('Congress'), which has been extended until March
1997. The Congress Facility bears interest at a floating rate of 2% over the
prime rate of CoreStates Bank, N.A., with interest payable monthly, and the
facility is secured by Loan and Lease Contracts. The facility can be utilized
for the financing of additional Contract purchases that meet certain credit
guidelines established by Congress, in its sole discretion. As of September 30,
1996, the Company had $3.5 million outstanding under this facility.
During February 1994, the Company entered into a $5 million one-year
revolving credit facility with GECC (the 'GECC Facility'). In September 1994 and
March 1995, the GECC Facility was increased to $10 million and $25 million,
respectively. The GECC Facility bears interest payable monthly at rates fixed at
the time of financing and is secured by certain Lease Contracts. Principal is
repaid monthly according to an agreed-upon schedule. At September 30, 1996, the
Company had drawn down approximately $23.7 million under the facility. The GECC
Facility is automatically renewed annually unless GECC provides the Company with
notice of termination 90 days prior to such renewal date.
The Congress Facility and the GECC Facility (collectively, the 'Revolving
Credit Facilities') are also subject to certain financial and operational
covenants that are similar to those imposed under the Warehouse Facility.
Revolving Line of Credit Facility. During September 1996, the Company
entered into a one-year $3.5 million revolving line of credit (the 'LOC
Facility') with a private third party. The LOC Facility bears interest at a
fixed rate of 13% with interest payable monthly. The LOC Facility is secured by
certain Loan Contracts. As of September 30, 1996, the Company had drawn down
approximately $503,000 under this facility. The LOC Facility is renewable at the
lender's discretion for an additional one-year period, provided that the Company
meets certain conditions.
Specialized Borrowing Facility. The Company historically has secured a
significant amount of its financing through borrowings classified as debt
participation agreements, in which the Company has sold an undivided interest,
typically 80% to 90%, in portfolios of receivables to financial institutions and
individual lenders on a full recourse basis. As of September 30, 1996, the
Company had an existing series of borrowings under a specialized borrowing
facility (the 'Specialized Borrowing Facility') with Fairfax Savings, a Federal
Savings Bank ('Fairfax') in the approximate amount of $21.7 million.
Approximately $21 million of the Fairfax financing has been used to acquire
Contracts. Borrowings under this facility are subject to interest at prime plus
2.5% fixed at the time of financing. Approximately $700,000 of the remaining
advances under the Specialized Borrowing Facility were used to acquire bulk
purchase portfolios prior to 1995. These amounts are subject to interest at
fixed rates from 10% to 13.5%, respectively.
In general, under the terms of the participation agreements, the lender's
principal advance is repaid in proportion to the principal received from the
underlying collateral. Interest on the outstanding principal balance of the
advance is due monthly. Collections received in excess of the principal and
interest due Fairfax are allocated to a restricted cash reserve account on
deposit with Fairfax until certain specified balances are maintained, generally
calculated as a percentage of the outstanding balance of the advance. Any
remaining collections are paid to the Company.
Short-term Financing. During the fourth quarter of 1996, Mr. Robert R.
Bartolini, Chairman and Chief Executive Officer, made advances to the Company in
an aggregate amount of $2,413,869, repayable on the earlier of February 18, 1997
and the completion of the Offering. These advances bear interest at a fixed rate
of 11%. During December 1996, the Company entered into a $2.0 million secured
short-term note with a private third party, repayable on the earlier of December
31, 1996 and
28
<PAGE>
the completion of the Offering. This note bears interest at a fixed rate of 10%
and is secured by certain Loan Contracts. See 'Use of Proceeds.'
Private Placement of Convertible Subordinated Debentures, Warrants and
Common Stock. The Company has secured a significant component of its capital
through the private placement of equity and debt securities. During the period
from April 1995 through September 1996, the Company issued: (i) 176,500 shares
of its Common Stock, which yielded net proceeds of approximately $2.1 million;
(ii) $38.8 million principal amount of convertible subordinated debentures (the
'Debentures'); and (iii) 2,913,625 common stock purchase warrants (the
'Warrants'). The Warrants were issued to Debenture holders in connection with
the sale of the Debentures, to certain consultants and advisors in consideration
for financial advisory services and to certain members of the Board of Directors
in connection with joining the Board.
In April and September 1996, the Company concluded institutional placements
of $10 million principal amount of 9% Debentures with 675,000 Warrants, and $5
million principal amount of 10% Debentures with 62,500 Warrants, respectively.
Through December 23, 1996, an aggregate of approximately $13.8 million
principal amount of the Debentures was converted into 1,452,849 shares of Common
Stock. The principal amount and accrued interest due under the remainder of the
Debentures is convertible into shares of Common Stock (at the option of the
holders thereof) at conversion prices ranging from $7.50 to $11.00. The
conversion price of certain Debentures is subject to decrease by virtue of price
protection and adjustment features contained in such Debentures. See
'Description of Securities -- Price Protection.'
The following table provides a summary of the Company's outstanding
Debentures.(1)
<TABLE>
<CAPTION>
PRINCIPAL MATURITY INTEREST CONVERSION SHARES
AMOUNT ISSUE DATE DATE RATE PRICE(2) ISSUABLE(3)
- ----------- ---------- ---------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C>
$ 200,000 Dec. 1995 Dec. 1996 9% 11.00 19,814
2,000,000 Dec. 1995 May 1997 9% 11.00 206,364
2,300,000 Dec. 1995 Jun. 1997 9% 11.00 237,266
10,000,000 Apr. 1996 Oct. 1997 9% 7.50 1,513,333
2,000,000 Jul. 1995 Jul. 1998 9% 9.00 282,167
1,000,000 Aug. 1995 Aug. 1998 9% 9.00 141,083
5,000,000 Sep. 1996 Sep. 1998 (4) 10%(4) 7.50 666,667
2,500,000 Jan. 1996 Jan. 1999 9% 11.00 288,636
- ----------- -----------
$25,000,000 3,355,330
- ----------- -----------
- ----------- -----------
</TABLE>
- ------------------
(1) Reflects information as of December 23, 1996.
(2) These Debentures are convertible into shares of the Company's Common Stock
at the lesser of the amount indicated and a discount to the market price of
the Company's Common Stock, which ranges from 75% to 85% pursuant to the
terms of the Debentures.
(3) Represents shares of Common Stock issuable upon conversion of the Debentures
(principal and interest at maturity) at their stated conversion price. If
such Debentures were converted based upon a market price of $7.50, the
Company would be caused to issue up to an additional 1,135,176 shares of
Common Stock.
(4) These Debentures bear interest at a rate of 10% for 2 years and at a rate of
9% thereafter. Maturity is subject to extension by the holder.
As of December 23, 1996 the Company had $25.0 million principal amount of
Debentures outstanding with maturity dates as follows: (i) $0.20 million in
December 1996; (ii) $2.0 million in May 1997; (iii) $2.3 million in June 1997;
(iv) $10.0 million in October 1997; (v) $3.0 million in July/August 1998; (vi)
$5.0 million in September 1998 (subject to extension by holder); and (vii) $2.5
million in January 1999. See 'Description of Securities -- Debentures.'
If the Company's Common Stock achieves certain trading prices ranging from
$18 to $25, the Company has the right to serve notice of redemption on the
holders of approximately $15 million of the Debentures for the principal amount
thereof (together with accrued interest). A notice to redeem would likely yield
conversion of the Debentures (since the average trading price of the stock
necessary to redeem would yield a greater profit to the Debenture holders upon
conversion rather than redemption). Notwithstanding rights of redemption,
management believes that a substantial number of the remaining Debentures will
be subject to conversion prior to their maturity, however, a possibility
29
<PAGE>
exists that the Company could be required to allocate liquidity and capital
resources to the retirement of these Debentures.
The Company may also secure certain amounts of capital in the future from
the exercise of existing Warrants. The Company has issued 2,913,625 Warrants at
exercise prices between $7.50 and $15.00. To date, none of the Warrants have
been exercised. If exercised, the Company would receive aggregate gross proceeds
of approximately $29.3 million. The exercise price of certain Warrants and the
proceeds thereof are subject to decrease by virtue of price protection and
adjustment features contained in such Warrants. See 'Description of Securities
- -- Price Protection.'
The following table provides a summary of outstanding Warrants.(1)
<TABLE>
<CAPTION>
SHARES PROCEEDS TO
ISSUE DATE EXPIRATION DATE EXERCISE PRICE ISSUABLE(2) THE COMPANY(3)
- ------------------- ------------------- --------------- ----------- --------------
<S> <C> <C> <C> <C>
Apr.-Aug. 1995 Apr.-Aug. 1998 $ 9.00 1,360,000 $ 12,240,000
Nov. 1995-Dec. 1995 Nov. 1998-Dec. 1998 13.50 175,000 2,362,500
Dec. 1995-Feb. 1996 Dec. 1998-Feb. 1999 14.00 to 14.38 195,000 2,737,500
Jul.-Aug. 1995 Jul.-Aug. 1998 12.00 to 12.30 62,500 765,000
Jul.-Dec. 1995 Jul.-Dec. 1998 15.00 363,625 5,454,375
Mar. 1996 Mar. 1999 11.50 20,000 230,000
Apr. 1996 Apr. 1999 7.50 615,000 4,612,500
Apr. 1996 Apr. 2001 7.50 60,000 450,000
Sep. 1996 Sep. 2001 7.50 62,500 468,750
----------- --------------
2,913,625(4) $ 29,320,625(5)
----------- --------------
----------- --------------
</TABLE>
- ------------------
(1) Reflects information as of December 23, 1996.
(2) Represents shares of Common Stock issuable upon exercise of the Warrants.
(3) Represents proceeds to the Company upon the exercise of the Warrants.
(4) Includes 40,000 Warrants in the aggregate issued to Mr. DeVoe and Mr. Jones
in connection with joining the Board of Directors.
(5) Includes proceeds of $517,500 from Warrants issued to Mr. DeVoe and Mr.
Jones. See Footnote 4.
Exercise of the Warrants is largely a function of the spread between the
trading price of the Company's Common Stock and the exercise price of the
Warrants. Thus, there can be no assurances that the future trading prices of the
Company's Common Stock will be sufficient to encourage the exercise of a
material number of the Warrants in the near term, if at all.
Exercise of the Warrants is also a function of other factors such as the
term of the Warrant and any associated rights of redemption. Substantially all
of the outstanding Warrants remain outstanding until 1998 and 1999, and some
remain outstanding until 2001. In addition, certain of the Warrants contain
features that permit redemption (at $.001 per Warrant) based upon average
trading prices of the Company's Common Stock between $15 and $25. Any call for
redemption will have the likely effect of causing the exercise of these
Warrants.
The Company's liquidity and capital resources may continue to be affected
by the trading price of the Company's Common Stock. Trading prices at levels
consistently higher than the conversion prices of the Debentures will likely
facilitate conversion of the Debentures in the near term. A conversion of the
Debentures would positively affect the Company's liquidity by eliminating the
need to repay the principal amount (and in certain instances, interest) due
thereunder. Trading prices at levels consistently lower than the conversion
prices of the Debentures, however, will make conversion of the Debentures less
likely, thus requiring the Company to allocate certain of its capital resources
towards the retirement of the Debentures at maturity. If all of such Debentures
were converted, the Company would not be required to repay approximately $28.4
million of principal and interest as of December 23, 1996. In addition, an
exercise of all of the Warrants would have the effect of securing approximately
$29.3 million of additional working capital. However, there can be no assurances
that the issuance of such shares would not have a depressive effect upon the
market for the Company's Common Stock. See 'Risk Factors.'
Securitization. Securitization of Loan Contracts is an integral part of
the Company's continuing financing strategy. Securitization: (i) provides a
lower cost of financing; (ii) allows the Company to increase its liquidity;
(iii) provides for redeployment of capital; (iv) reduces risks associated with
30
<PAGE>
interest rate fluctuations; (v) reduces credit risk; and (vi) properly matches
the duration of the financing to the assets financed. The Company uses the net
proceeds from a securitization to repay the advances outstanding under its
Warehouse Facility, thereby creating availability to purchase additional Loan
Contracts. Through September 30, 1996, the Company completed four securitization
transactions totaling approximately $200 million. See 'Recent Developments.' The
following is a summary of the basic structure of the Company's securitization
transactions through September 30, 1996. There can be no assurances, however,
that the Company will continue to use this structure for future securitization
transactions.
The Company transfers a pool of Loan Contracts to a trust (the 'Trust'),
which simultaneously issues one or more classes of securities (the 'Securities')
backed by the assets of the Trust. The assets of the Trust include the Loan
Contracts and a reserve account. Initially, the Company makes a deposit into the
reserve account; and thereafter, it maintains the reserve account at certain
levels (the 'Maintenance Level') during the life of the securitization by
depositing certain cash flows from the Trust that the Company would otherwise
have received. The Company continues to service the Loan Contracts and earns a
contractual servicing fee, currently equal to 3.0% per year (the 'Contractual
Servicing Fee').
The Securities were rated 'A', 'BBB' and 'BB' in the first three
securitization transactions and 'A' and 'BBB' in the last securitization by Duff
& Phelps Credit Rating Co. and Fitch Investors Service, L.P., and are sold to
investors in a private offering. These Securities carry fixed interest rate
coupons, payable quarterly. Generally, all collections of interest and principal
from Loan Contracts are used to pay interest due on the Securities and to reduce
the principal balance of the Securities. Collections of interest in excess of
that required to pay for (i) the interest due on the Securities, (ii) ongoing
fees and expenses of the Trust, and (iii) the Contractual Servicing Fees (the
'Excess Servicing Cash Flows') are deposited into the reserve account only to
the extent necessary to maintain it at the required Maintenance Level. The
remaining Excess Servicing Cash Flows, if any, are paid to the Company. In the
event that the collections of interest and principal from the Loan Contracts are
not sufficient to cover the required distributions of interest and principal on
the Securities, the trustee may withdraw funds from the reserve account to make
up for the shortfall.
The Company recognizes a gain on sale of the Loan Contracts from the
securitization in an amount equal to (i) the Excess Servicing Receivable from
the Trust during the life of the securitization, plus (ii) the net proceeds
received from the securitization less the aggregate book value of the Loan
Contracts transferred to the Trust. The Excess Servicing Receivable represents
the present value of the Excess Servicing Cash Flows after taking into account
the Company's estimates for the net credit loss and prepayment on the Loan
Contracts in the Trust.
The gain on sale through securitization has been a significant component of
the Company's revenues in each of the quarters in which the securitization
transactions have been completed. Management believes that such gain on sale
will continue to represent a significant source of the Company's revenues in all
financial reporting periods in which the Company completes a securitization. If,
for any reason whatsoever, the Company is unable to complete a securitization
during a quarter, the Company's revenues for such period would decline. Also,
failure to complete a securitization of the Loan Contracts or delays in
completing such securitization could further subject the Company to interest
rate risk since the Company finances the Loan Contracts through a floating
interest rate Warehouse Facility.
The Company continues to explore alternative structures for the
securitization of its Loan Contracts in order to achieve a lower cost of
financing and to maximize the net proceeds from the securitization. Management
believes that it would lower the cost of financing by structuring the
securitization in a manner that results in the issuance of triple-A rated
Securities backed by the assets of the Trust, and then by selling such
Securities in a public offering. However, there can be no assurance that the
Company will be able to achieve this in the near future.
31
<PAGE>
OTHER USES OF CAPITAL
In June 1996, the Company purchased certain assets constituting the
business of SFI pursuant to the exercise of an option agreement entered into on
August 1, 1995 for the purchase price of $1,000,000, plus 125,000 shares of the
Company's Common Stock and options to purchase 65,000 shares of Common Stock at
$6.00 per share. The option price of $250,000 paid on August 1, 1995 was
credited against the purchase price. This acquisition was recorded utilizing the
purchase method of accounting and the Company recognized goodwill in the amount
of $3.8 million. In conjunction with the acquisition, the Company entered into a
management agreement with the former principals of SFI and retained
substantially all of its operating personnel. Since the acquisition, SFI has
continued to generate Loan Contract volume comparable to historic levels. While
management believes that such levels of Contract volume will continue, there can
be no assurances to that effect. See 'Risk Factors.'
During June 1996, the Company repaid an outstanding stockholder loan in the
amount of approximately $3.0 million. See 'Certain Transactions -- Loan to the
Company.'
EFFECTS OF INFLATION
Inflationary pressures may have an effect on the Company's internal
operations and on its overall business. The Company's operating costs are
subject to general economic and inflationary pressures. Operating costs have
increased during the past years due primarily to the expansion of the Company's
operations. The Company's business is subject to risk of inflation. Significant
increases in interest rates that are normally associated with strong periods of
inflation may have an impact upon the number of individuals that are likely or
able to finance the purchase or lease of an automobile.
RECENT DEVELOPMENTS
On December 18, 1996, the Company completed the sale of approximately $88
million of Loan Contracts in a privately-placed securitization transaction, the
terms of which are similar to the Company's four prior securitization
transactions. The Securities issued in the securitization transaction were rated
'A' and 'BBB' by Duff & Phelps Credit Rating Co. and Fitch Investors Service,
L.P. and carry a weighted average coupon rate of 7.03%.
RECENT ACCOUNTING PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board ('FASB') issued
Statement of Financial Accounting Standards No. 123 ('SFAS No. 123'),
'Accounting for Stock-Based Compensation.' SFAS No. 123 establishes financial
accounting and reporting standards for stock-based employee compensation plans.
The statement defines a 'fair value based method' of accounting for employee
stock options or similar equity instruments and encourages all entities to adopt
that method of accounting for all of their employee stock compensation plans.
However, SFAS No. 123 also allows an entity to continue to measure compensation
costs for those plans using the 'intrinsic value based method' of accounting,
which the Company currently uses. The accounting requirements of SFAS No. 123
are effective for transactions entered into during fiscal years beginning after
December 15, 1995. The disclosure requirements are effective for financial
statements for fiscal years beginning after December 15, 1995, or for an earlier
fiscal year for which SFAS No. 123 is initially adopted for recognizing
compensation cost. Management has determined that the Company will continue to
measure compensation costs using the 'intrinsic value based method' and will
disclose the effect on net income and earnings per share using the 'fair value
based method' in the footnotes to the Company's financial statements upon the
adoption of SFAS No. 123.
In June 1996, the FASB issued Statement of Financial Accounting Standards
No. 125 ('SFAS No. 125'), 'Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities.' SFAS No. 125 provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishment of liabilities based on a financial-components approach that
focuses on control. SFAS No. 125 is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after December 31,
1996 and is to be prospectively applied. However, a proposal has recently been
developed to defer, for one year, certain provisions of SFAS No. 125. Management
is currently assessing the impact of the adoption of SFAS No. 125 on the
Company's financial position and results of operations.
32
<PAGE>
THE COMPANY
GENERAL
NAL is a specialized automobile finance company engaged in the purchase and
servicing of Contracts originated by franchised and select independent Dealers
in connection with sales or leases of used and new automobiles to consumers with
non-prime credit. Consumers with non-prime credit are perceived to be relatively
high credit risks due to various factors, including the manner in which they
have handled previous credit, the absence or limited extent of their prior
credit history and their limited financial resources. The Company purchases
Contracts relating principally to the 'C' credit segment of the automobile
finance market. The Company is also engaged in providing insurance and related
products to its Dealers and customers through its insurance subsidiary, NIS. The
Company has a remarketing subsidiary, PCSF, with a JDBR Franchise, which
provides a cost-effective means of disposing of some of the Company's
repossessed and off-lease vehicles.
The Company purchases Contracts directly from Dealers through its Dealer
Program and through select third party entities that participate in the
Company's Captive Program, Affinity Program, Correspondent Program, Recourse
Program and Wholesale Program. Participants in these Origination Programs offer
Contracts to the Company under a variety of arrangements and allow it to
increase the volume of Contracts purchased from Dealers with whom the Company
does not maintain a direct relationship. The Company's main sources of Contracts
are its Dealer Program and its Captive Program. The Captive Program includes the
Company's arrangements with SFI, which recently became a wholly-owned subsidiary
of the Company. Under its Affinity Program, the Company has an agreement with
GECAL to purchase non-prime Lease Contracts through GECAL's network of Dealers
in the Southeast region of the United States. As of September 30, 1996, the
Company's servicing portfolio consisted of Contracts purchased through its
Dealer Program (32%), Captive Program (46%), Affinity Program (5%),
Correspondent Program (2%), Recourse Program (9%) and Wholesale Program (6%).
Each of these programs, other than the Recourse Program, is designed to purchase
Contracts relating primarily to the 'C' credit segment of the market. The
Recourse Program is designed to purchase Contracts relating to the 'D' credit
segment.
The Company has experienced significant growth in its portfolio of
purchased and serviced Contracts since June 1994, when the acquisition of
Contracts became the principal focus of its business. Total Contracts purchased,
which includes both Loan Contracts and Lease Contracts, increased from
approximately $28.1 million through December 31, 1994 and $165.7 million through
December 31, 1995, to approximately $205.8 million through September 30, 1996.
As a result, the Company's servicing portfolio increased from approximately
$44.4 million at December 31, 1994 and $153.8 million at December 31, 1995, to
approximately $283.9 million at September 30, 1996. The Company's overall growth
during this period was attributable to an increase in the Company's Dealer
relationships from 196 Dealers at December 31, 1994 to 1,594 Dealers at
September 30, 1996, and an expansion of the sources and amounts of financing
available to purchase Contracts. The Company currently purchases Contracts from
Dealers in 23 states, with a major concentration in Florida. More than 90% of
all Contracts acquired by the Company during the nine months ended September 30,
1996 were originated by franchised Dealers.
The Company has historically funded the purchase of its Contracts with
borrowings from banks and other lenders. Currently, the Company's primary
financing sources include a $100 million Warehouse Facility, $45 million of
Revolving Credit Facilities, including the $25 million GECC Facility, and a
Specialized Borrowing Facility. Beginning in December 1995, the Company began
securitizing the majority of its portfolio of Loan Contracts to increase the
Company's liquidity, provide for the redeployment of capital, reduce risks
associated with interest rate fluctuations and provide the Company with access
to a cost-effective, diversified source of financing. During the last four
fiscal quarters, the Company completed securitization transactions aggregating
approximately $200 million. During this period, gains on sale from the
securitization transactions have constituted the principal source of the
Company's revenues. The Company plans to continue to employ its securitization
program as an integral component of its funding strategy and anticipates that it
will generally complete
33
<PAGE>
securitization transactions on a quarterly basis. The Company also generates
revenues from interest income and fees earned on Contracts held in portfolio, as
well as servicing fees from Loan Contracts sold in securitization transactions.
In addition, the Company receives revenues from the sale of insurance and
related products through its insurance subsidiary, NIS.
BACKGROUND
NAL was founded in February 1991 as a specialized consumer finance company.
It became publicly held by virtue of the Merger on November 30, 1994 with a
previously inactive public company, which was incorporated in Delaware on
November 14, 1986. Effective upon completion of the Merger, the Company assumed
the historic operations of NAL and changed its name to 'NAL Financial Group
Inc.'
Because of the opportunities presented by the insolvency and reorganization
of many financial institutions at the time, the Company's principal activities
until the second quarter of 1994 involved the bulk purchase and servicing of
seasoned and non-performing portfolios of consumer and mortgage loans and
automobile lease receivables that had been administered by the Resolution Trust
Corporation or the Federal Deposit Insurance Corporation. The principal focus of
the Company's business since June 1994 has shifted to the purchase and servicing
of automobile Loan and Lease Contracts originated by Dealers in connection with
the sale or lease of automobiles to consumers with non-prime credit.
INDUSTRY AND COMPETITION
According to CNW Marketing/Research, an independent automobile finance
market research firm, the automobile finance industry is the second largest
consumer finance industry in the United States with over $410 billion in loan
and lease originations in 1995. Management believes that captive finance
companies, such as General Motors Acceptance Corporation, Ford Motor Credit
Company and Chrysler Credit Corp., financed between 25% and 30% of automobile
purchases and leases nationwide in 1995, while the balance of automobile
financing was provided by banks, credit unions and other independent finance
companies. The industry is generally segmented according to the type of car sold
(new or used) and the credit characteristics of the borrower (prime or
non-prime).
Sales information for new and used vehicles indicates that the market for
used cars increased at approximately three times the rate for new cars for the
period from 1990 to 1995. According to industry analysts, sales of used
automobiles, excluding private sales, increased from 24.9 million vehicles in
1990 to 29.8 million vehicles in 1995, an increase of 19.7%. In contrast, sales
of new automobiles, excluding private sales, increased from 13.9 million
vehicles in 1990 to 14.8 million vehicles in 1995, an increase of 6.5%. Industry
analysts have concluded that the market for retail sales of used automobiles
will expand further due to a combination of increases in the average useful life
of automobiles, the number of late-model used automobiles in service and the
number of late-model used automobiles available for sale (including off-lease
and former rental cars).
In the leasing market, according to CNW Marketing/Research, used-car
leasing has followed the lead of new-car leasing and shown growth. According to
their findings, this growth is likely to amount to more than one million used
vehicles being leased by the year 2000. The reason for this growth is the same
as for the growth in new car leasing, which is that customers can receive a
higher quality vehicle for their budgeted amount, lower monthly payments and the
ability to have a better secondary vehicle in the household. The vast majority
of used cars being leased prior to 1994 were luxury models. However, there has
recently been a growing number of non-luxury automobiles being leased.
The Company primarily focuses on the 'C' credit segment of the automobile
finance market and to a limited extent, on the 'D' credit segment through its
Recourse Program. Management believes that the non-prime segment of the
automobile finance market is in the range of $80 billion to $100 billion in
annual loan and lease originations.
Competition in the field of retail automobile finance is intense. The
market is highly fragmented and historically has been serviced by a variety of
financial entities, including the captive finance
34
<PAGE>
affiliates of major automobile manufacturers, banks, savings associations,
independent finance companies, credit unions and leasing companies. Many of
these competitors have greater financial resources than the Company and may have
significantly lower cost of funds. Many of these competitors also have
long-standing relationships with automobile dealerships and may offer
dealerships or their customers other forms of financing or services not provided
by the Company. Furthermore, during the past two years, a number of automobile
finance companies have completed public offerings of common stock, the proceeds
from which are to be used, at least in part, to fund expansion.
The Company's ability to compete successfully depends largely upon its
relationships with its origination sources, particularly Dealers, and the
ability and willingness of such origination sources to offer Contracts that meet
the Company's underwriting criteria for purchase. Management believes that by
diversifying its origination sources through its Affinity Program, Correspondent
Program, Recourse Program and Wholesale Program, the Company increases the
number of Contracts purchased without significantly increasing its marketing
costs. Management believes that its multi-tier underwriting quidelines which
balances the creditworthiness of the borrower with the value of the collateral,
enables it to evaluate effectively and measure the risks associated with lending
to consumers with non-prime credit. The Company also believes that its servicing
and collection procedures, specialized servicing functions and asset disposition
enable it to manage its portfolio of Contracts profitably and in a cost-
effective manner. However, there can be no assurance that the Company will be
able to continue to compete successfully in the markets that it serves.
BUSINESS STRATEGY
The Company's business is to purchase and service non-prime Loan and Lease
Contracts through its Origination Programs. The Company's principal objectives
are to sustain controlled growth of its business and to maximize its profit
potential. To achieve these objectives, the Company is currently employing the
following key strategies:
Expanding and Strengthening Relationships with Origination
Sources. The Company plans to achieve a greater volume of business by
expanding its origination sources in existing markets, entering into new
geographic markets and strengthening current relationships. The Company
plans to expand its origination sources through strategic arrangements with
independent entities and relationships with individual Dealers and networks
of Dealers. The Company develops strong relationships with its Dealers and
other origination sources by providing a high level of service specifically
tailored to meet their needs. The Company typically responds to credit
applications on the date received, and in most cases, within two to four
hours, and generally pays the Dealer for Contracts purchased within
twenty-four hours of receipt of a complete funding package. In addition,
the Company provides training to Dealer personnel on the use of the
Company's credit underwriting and pricing guidelines.
Among its origination sources, Dealers, including those with whom SFI
has relationships, represent a principal source of business for the
Company. To service the Dealers, the Company employs a value-added
approach. Specifically, the Company's local representatives provide
training on the Company's products and services to their respective
Dealers. The Company's offices are open six days a week, and sales and
marketing personnel attend dealer-sponsored promotional sales events to
provide 'on-site' financing approval. The Company's regional sales
representatives and senior management maintain an ongoing dialogue with
Dealers to enhance such relationships. In addition, the Company has sales
and marketing resources dedicated to expanding its origination sources.
Providing Diverse Products and Services to Dealers. In addition to
providing prompt, flexible service and a reliable source of financing, the
Company increases its volume of business from Dealers by offering a
'one-stop shop' service. This service includes purchasing both Loan and
Lease Contracts on used and new automobiles from a broad range of credit
profiles and offering insurance and related products.
35
<PAGE>
Employing Detailed Underwriting Guidelines. In order to evaluate and
measure the risks associated with lending to consumers with non-prime
credit, the Company uses multi-tiered credit underwriting and pricing
guidelines for purchasing both Loan and Lease Contracts. These guidelines
balance, among other factors, the creditworthiness of the borrower with the
adequacy of the vehicle as collateral. These guidelines are designed to
enable Dealers to: (i) assess a borrower's credit risk category; (ii)
determine the maximum term of the loan or lease for used and new
automobiles; (iii) calculate the maximum payment affordable by the
borrower; and (iv) estimate their profit from selling the Contracts to the
Company.
By providing a high degree of credit and pricing specificity to the
Dealer, the Company's underwriting guidelines aid in the assessment of
credit risk and the development of financing terms for a borrower. These
guidelines not only enhance the rapid execution of the transaction for the
Dealer, but enable the Dealer to provide improved service to its customers.
Maintaining Effective Collection and Asset Disposition Systems. To
minimize delinquencies and losses, the Company employs aggressive
collection policies and procedures, which typically include contacting a
borrower within 24 hours of a payment delinquency and managing accounts
based on geographic regions. The Company also uses collection specialists
to address certain servicing functions, such as insurance claims,
deficiency collection, bankruptcy, skip tracing and asset management. In
addition, the Company uses its subsidiary, PCSF and its JDBR Franchise, to
maximize its recovery on some of its repossessed and off-lease vehicles by
providing an alternate means of disposition.
The Company currently has a servicing operation that utilizes both
local area and wide area network systems for servicing its portfolio. In
order to accommodate future growth, the Company plans to enhance its
current systems, which will facilitate the decentralization of collection
activities to regions based upon the concentration of business in those
areas. As geographic expansion requires, the Company intends to establish
full service regional centers. The Company expects to open regional centers
in Orlando, Florida and Atlanta, Georgia.
Diversifying its Financing Sources. The Company plans to continue to
expand and diversify its financing sources, and to increase the amount of
financing available. The Company intends to continue to securitize its Loan
Contracts on a quarterly basis. Current financing sources include a $100
million Warehouse Facility, $45 million of Revolving Credit Facilities,
including the $25 million GECC Facility, a securitization program and a
Specialized Borrowing Facility.
During each of the last four quarters, the Company has sold a
significant portion of its Loan Contracts in securitization transactions to
increase the Company's liquidity, to provide for redeployment of capital
and to mitigate interest-rate risk. The Company has completed four private
placement securitization transactions totaling approximately $200 million.
When the quarterly volume of Loan Contracts reaches over $100 million, the
Company intends to complete securitization transactions through the public
market, which management believes will reduce its financing cost. The
Company plans to complete securitization transactions of its Lease
Contracts when the volume of Lease Contracts reaches a level that is
cost-effective for securitization.
Continuing the Growth of Related Businesses. The Company's related
businesses complement the purchasing and servicing of Loan and Lease
Contracts and enhance the Company's profitability. The Company's insurance
subsidiary, NIS, offers insurance and related products. In 1995, NIS
generated revenues of $548,000. For the nine months ended September 30,
1996, NIS generated revenues of $1.1 million. The Company plans to continue
to market its insurance and related products to its Dealers and customers.
The Company uses its subsidiary, PCSF (including its JDBR Franchise),
as an efficient means of disposing of some of its repossessed and off-lease
vehicles. For the nine months ended September 30, 1996, PCSF generated
revenues of $971,000. As the volume of Contracts purchased increases, the
Company plans to open additional PCSF sites with JDBR Franchises in
36
<PAGE>
Florida and other markets. Currently, the Company expects to open a PCSF
site with a JDBR Franchise in Orlando, Florida.
Recruiting and Retaining Experienced Management. Members of the
Company's management team have an average of over 20 years of experience in
automobile finance, consumer finance or banking. Management believes that
hiring experienced management personnel is critical to the formulation and
implementation of its strategies, and the maintenance of its growth and
profitability. The Company intends to continue to provide incentive
compensation arrangements, including stock option plans, to retain members
of the management team.
BUSINESS
The Company's lines of business include the purchase and servicing of Loan
and Lease Contracts on used and new automobiles relating to consumers with
non-prime credit from Dealers and other origination sources, and the sale of
insurance and related products to its customers directly and through Dealers.
Loan Contracts
The following table provides certain material information relative to the
Loan Contracts acquired by the Company during each of the last nine quarters.
<TABLE>
<CAPTION>
FOR THE QUARTERS ENDED
-----------------------------------------------------------------------------------------------
SEP. JUN. MAR. DEC. SEP. JUN. MAR. DEC. SEP.
30, 30, 31, 31, 30, 30, 31, 31, 30,
LOANS:(1) 1996 1996 1996 1995 1995 1995 1995 1994 1994
------- ------- ------- ------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Contracts purchased...... $69,556 $50,971 $48,326 $46,593 $31,624 $21,364 $18,785 $12,088 $ 395
Weighted average
Contract amount........ $ 12.3 $ 12.3 $ 12.1 $ 12.5 $ 12.0 $ 11.2 $ 12.2 $ 10.5 $ 7.3
Weighted average initial
term (months).......... 54.4 53.6 56.1 53.0 51.1 48.0 42.8 43.0 44.5
Weighted average
APR.................... 19.50 % 19.33 % 19.60 % 19.35 % 19.90 % 20.56 % 19.05 % 20.73 % 28.51 %
Weighted average
discount............... 8.24 % 4.21 % 4.73 % 5.53 % 5.93 % 5.26 % 4.82 % 2.04 % 4.30 %
Percentage of
Contracts secured
by new vehicles........ 19.61 % 29.72 % 38.39 % 34.62 % 31.05 % 21.30 % 18.43 % 8.17 % 7.46 %
Percentage of
Contracts secured
by used vehicles....... 80.39 % 70.28 % 61.61 % 65.38 % 68.95 % 78.70 % 81.57 % 91.83 % 92.6 %
</TABLE>
- ------------------
(1) Excludes Loan Contracts purchased under the Company's Recourse Program.
The Company purchases Loan Contracts, which are secured by used and new
automobiles, from diverse sources through its Origination Programs. Loan
Contracts relate to borrowers which, according to the Company's underwriting
guidelines, fall within the 'C' credit segment of the automobile finance market,
except in the case of its Recourse Program, which is designed for 'D' credit
borrowers. Contracts generally have terms of 36 to 60 months and carry interest
rates ranging from 16% to 30% per year. A majority of the loans are based on the
Rule of 78's method; however, a small portion are simple interest loans and
actuarial loans.
The Company purchases Loan Contracts at discounts to the face amount of the
Loans. The discounts are nonrefundable and vary depending upon the credit
category of the borrower, as determined by the Company's underwriting
guidelines, and any special arrangements between the Company and the origination
source. In addition to the discount, the Company generally charges an
administration fee. The purchase price of the Loan Contracts is, therefore,
reduced from its face amount by both the discount and the administration fee.
The purchase price of the Loan Contracts
37
<PAGE>
generally ranges from 110% to 120% of the collateral value of the underlying
vehicle, except in the case of the Recourse Program where it ranges from 60% to
75% of the principal amount of the Loan Contract, which approximates the value
of the vehicle.
The Company purchases Loan Contracts in 23 states with a concentration in
Florida (50.0% of the Company's Loan portfolio as of September 30, 1996). The
average size of the Loan Contract acquired for the nine months ended September
30, 1996 was $12,300. The Company finances Loan Contracts on both a floating and
fixed rate basis through its credit facilities. The Company has sold, for the
last four quarters, a substantial majority of its Loan Contracts through
securitization transactions and services all Loan Contracts including those sold
through securitization transactions.
In the event of a default by a borrower, the Company repossesses the
vehicle and remarkets the vehicle through one of the following four channels:
(i) wholesale auctions; (ii) on a wholesale basis through the Company's
subsidiary, PCSF; (iii) on a retail basis through the Company's subsidiary,
PCSF; or (iv) on a retail basis through the JDBR Franchise, depending on, among
other factors, the age and condition of the vehicle. To the extent that the net
proceeds from remarketing a vehicle exceed the Company's book value of the Loan
Contract, the Company recognizes a gain, and to the extent such net proceeds are
less, the Company recognizes a loss. As a result, employing an efficient
remarketing channel for repossessed vehicles is an important aspect of the
Company's operations.
Lease Contracts
The following table provides certain material information relative to the
Lease Contracts acquired by the Company during each of the last nine quarters.
<TABLE>
<CAPTION>
FOR THE QUARTERS ENDED
-----------------------------------------------------------------------------------------
SEP. JUN. MAR. DEC. SEP. JUN. MAR. DEC. SEP.
30, 30, 31, 31, 30, 30, 31, 31, 30,
LEASES: 1996 1996 1996 1995 1995 1995 1995 1994 1994
------- ------ ------- ------ ------ ------ ------- ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Contracts purchased...... $6,776 $3,609 $3,686 $3,989 $4,085 $5,241 $6,733 $3,446 $1,237
Weighted average
Contract amount........ $ 15.9 $15.9 $ 15.8 $16.8 $16.5 $17.2 $ 20.2 $17.9 $16.9
Weighted average initial
term (months).......... 45.8 44.9 45.3 43.1 45.2 42.8 39.0 45.4 45.7
Weighted average yield... 17.93 % 18.03 % 18.36 % 17.5 % 18.09 % 17.62 % 14.49 % 16.82 % 15.87 %
Percentage of
Contracts secured
by new vehicles........ 40.47 % 43.61 % 41.63 % 54.43 % 64.92 % 67.11 % 64.67 % 64.58 % 76.71 %
Percentage of
Contracts secured
by used vehicles....... 59.53 % 56.39 % 58.37 % 45.57 % 35.08 % 32.89 % 35.33 % 35.42 % 23.29 %
</TABLE>
The Company purchases substantially all of its Lease Contracts from its
Dealer Program and Affinity Program. Generally, Lease Contracts involve
customers with better credit than customers relating to Loan Contracts. Lease
Contracts relate to many makes and models of both used and new vehicles. As of
September 30, 1996, the Company's lease portfolio consisted of 55.5% new
automobiles and 44.5% used automobiles. The Leases are closed-end leases and
generally have terms of 24, 36 and 48 months, with 48 months as the most common
term. A vast majority of the Lease Contracts are amortized according to the Rule
of 78's method. The Lease Contracts also require that the lessee pay all fees
and expenses relating to the use and maintenance of the vehicle.
The Company purchases Lease Contracts from its origination sources at the
implied principal amount of the Lease less an administration fee. The
administration fee is nonrefundable and varies depending upon the credit
category of the borrower, as determined by the Company's underwriting
guidelines, and any special arrangements between the Company and the origination
source. The purchase price of the Lease Contract ranges from 110% to 120% of the
collateral value of the underlying vehicle.
38
<PAGE>
The Company purchases Lease Contracts in 23 states with a concentration in
Florida (78.3% of the Company's Lease portfolio as of September 30, 1996). The
average size of Lease Contracts is $18,000 for new automobiles and $15,100 for
used automobiles. The Company uses its GECC Facility to finance all of its Lease
Contracts. Under this facility, GECC provides fixed-rate financing for the full
term of the Lease Contract and generally advances 100% of the Company's
investment in the Lease Contract. The Company currently holds all Lease
Contracts on its books and services them for their full term.
The Company purchases both direct finance leases and operating leases, with
the vast majority of the Lease Contracts being direct finance leases. Generally,
Lease Contracts having a term in excess of 48 months are classified as direct
finance leases, and Lease Contracts having a term of less than 48 months are
classified as operating leases. The Company's sources of revenues from Lease
Contracts include: (i) an administration fee; (ii) interest income in the case
of direct finance leases and rental revenue in the case of operating leases; and
(iii) proceeds from the sale of the vehicle in excess of the Residual Value at
the end of the lease term.
In establishing the amount of the lease payments, the Company makes an
estimate of the Residual Value of the vehicle at the end of the lease term. The
Company's ability to realize proceeds approximating the Residual Value will be
substantially determined by the accuracy of the Residual Value previously
estimated and the Company's ability to effectively remarket its off-lease
vehicles. The Company uses Automobile Leasing Guide guidelines in estimating the
Residual Value, which are based on, among other things, the lease term, the
vehicle's make and model, the vehicle's remarketing and mechanical history, new
automobile price increases for the model and how the vehicle is equipped.
Furthermore, the Company periodically reviews and updates the Residual Values as
necessary throughout the lease term.
The Company remarkets the vehicle at the end of the lease term by
attempting to sell the vehicle to the lessee. In the event that the lessee does
not purchase the vehicle, the Company remarkets the vehicle through the same
channels it uses for the disposition of its repossessed vehicles under its loan
program, which include wholesale auctions and the Company's subsidiary PCSF and
its JDBR Franchise. To the extent the proceeds from remarketing a vehicle exceed
the Residual Value of the vehicle, the Company recognizes a gain, and to the
extent such proceeds are less than the Residual Value, the Company recognizes a
loss. As a result, the estimation of the Residual Value at lease inception is an
important aspect of the Company's operations. As of September 30, 1996, the
Company had a Residual Value exposure of approximately $16.8 million,
representing an average of 34% of the original aggregate gross Lease Contracts
receivable. Management believes that it adequately reserves against exposure to
risks associated with realizing the underlying Residual Value. See 'Risk
Factors.'
In the event of an early termination of the Lease or default by the lessee,
the lessee is generally obligated to pay the remaining payments due under the
Lease, plus the Residual Value, less any unearned lease income calculated using
the Rule of 78's method, and less the proceeds received from the disposition of
the vehicle.
Sales and Marketing
The Company focuses its sales and marketing efforts on developing strong
relationships with Dealers and expanding and diversifying its other origination
sources. Since Dealers represent the Company's primary source of Contracts
through the Company's Dealer Program and through SFI, the Company's sales and
marketing team focuses on increasing the number of Contracts purchased from
existing Dealers and developing relationships with new Dealers. Management
believes that it increases its Contract volume from Dealers by providing both
Loan and Lease financing alternatives and insurance and related products. The
Company develops strong relationships with its Dealers by providing a high level
of service specifically tailored to meet their needs. The Company offers its
Dealers fast turnaround of Contract approval and funding, consistent and
detailed credit underwriting and pricing guidelines and feedback on the
performance of their portfolios. The Company's offices are open six days a week
and sales and marketing personnel attend dealer-sponsored promotional sales
39
<PAGE>
events to provide 'on-site' financing approval. In an effort to attract
additional non-prime borrowers, the Company provides advertising subsidies to
key Dealers. The Company's regional sales representatives and senior management
maintain an ongoing dialogue with Dealers to enhance relationships. With respect
to its other origination sources, the Company's special program manager, who has
30 years of experience in the automobile finance industry, focuses his sales and
marketing efforts on developing and expanding the Captive Program, Affinity
Program, Correspondent Program, Recourse Program and Wholesale Program.
The Company solicits business from Dealers through its sales and marketing
team, which principally consists of regional managers, area sales managers and
dealer service representatives. As of September 30, 1996, the sales and
marketing team had 70 members. Each regional sales manager manages approximately
6 area sales managers. The regional sales managers, in conjunction with area
sales managers, are responsible for maintaining and expanding existing Dealer
relationships and developing new Dealer relationships, including educating
Dealer personnel in the area of non-prime automobile finance.
The area sales managers are each assigned to a territory of approximately
75 to 100 franchised new car Dealers. The area sales managers are responsible
for making initial contact with Dealers in their territory with the goal of
establishing a minimum origination volume of 45 Contracts per month from a group
of 5 to 8 Dealers. Once this volume goal is achieved, the primary responsibility
for maintaining day-to-day contact with the newly-established Dealer group
shifts from the area sales manager to a dealer service representative who is
responsible for visiting the Dealers, coordinating the submission of the funding
packages and assisting the Dealers in Contract closing. The sales and marketing
team receives a daily list indicating the credit application approvals for the
prior day designated by the submitting Dealer. In order to increase the
likelihood that an approved application results in a completed Contract, a
member of the team responsible for servicing the submitting Dealer visits that
Dealer to request submission of the Contract to the Company and to assist in
Contract closing.
Members of the Company's sales and marketing staff are trained by the
Company's training manager, who is also responsible for training the finance
personnel of Dealers. The training manager periodically conducts formal two-day
training sessions for Dealer personnel focusing on the Company's underwriting
policies, procedures and documentation.
The sales and marketing team of the Company's wholly-owned subsidiary, SFI,
operates substantially as described above. As of September 30, 1996, the sales
and marketing staff of SFI consisted of 61 persons, including regional managers,
area sales managers and dealer service representatives. The sales and marketing
team of SFI coordinates with the Dealer Program its activities in maintaining
and expanding its network of Dealers in existing and new markets in order to
maximize Dealer relationships and the volume of Contracts generated.
Origination Sources
The Company purchases Contracts directly from Dealers through its Dealer
Program and through select third party entities that participate in its other
Origination Programs. Although the Dealer Program and the Captive Program are
the primary sources of Contracts, the other programs offer the Company the
opportunity to purchase Contracts with a minimal increase in sales and marketing
costs. Generally, under each program, the entity from which the Company
purchases Contracts makes certain representations and warranties to the Company
with respect to the Contracts purchased. Under the terms of the agreement
between the Company and a Dealer in the Dealer Program, the Dealer agrees to
repurchase any Contracts from the Company if certain conditions are not met.
Under this program, the Dealer also indemnifies the Company for certain breaches
of the dealer agreement.
Dealer Program. In its Dealer Program, the Company enters into a
non-exclusive agreement with a Dealer, under which the Company purchases Loan
and Lease Contracts originated by the Dealer in accordance with the Company's
underwriting guidelines and procedures. Under this program, a Dealer submits
loan and lease applications that it believes would satisfy the Company's
underwriting
40
<PAGE>
guidelines. The Company applies its underwriting guidelines and procedures to
determine whether to approve or decline the application. If the Company approves
the application, it will seek to purchase the Contract. The Company's sales and
marketing team establishes and maintains direct relationships with Dealers, and
when necessary, a member of the team works with the Dealer throughout every
stage of the application approval and the Contract purchase process.
As of September 30, 1996, the Company purchased Contracts through its
Dealer Program in 23 states with concentrations in Florida (54.0%), Georgia
(14.4%), Louisiana (7.2%) and North Carolina (6.8%). For the nine-month period
ended September 30, 1996, the Dealer Program generated a volume of 7,564
Contracts, which represented 29.5% of the Contracts purchased during the period.
Captive Program. In its Captive Program, the Company enters into an
exclusive agreement with an entity (the 'Captive') whereby the Captive
originates, through its Dealer relationships, Loan and Lease Contracts in
accordance with the Company's underwriting guidelines; and the Company has the
right of first refusal to purchase such Contracts. Under this program, the
Captive submits the Contracts and the Company verifies that each Contract meets
its underwriting guidelines prior to the purchase of such Contracts.
The Company currently has two Captive relationships, one with SFI and the
other with First Financial Acceptance, Inc. ('FFA'), a company which originates
Contracts exclusively from a network of Dealers who have ownership interests in
FFA.
SFI, a Florida-based finance business founded in 1987, is engaged in
originating and selling non-prime automobile Loan Contracts. From September 1994
to August 1995, the Company purchased Loan Contracts originated by SFI with an
aggregate volume of $41.7 million. In August 1995, the Company entered into an
exclusive agreement with SFI under its Captive Program whereby SFI originated,
through its Dealer relationships, Loan Contracts in accordance with the
Company's underwriting guidelines and the Company had the right of first refusal
to purchase such Contracts.
In June 1996, the Company acquired the business of SFI by exercising its
purchase option. SFI became a wholly-owned subsidiary of the Company without any
material change in the operations of SFI. The Company entered into a management
agreement with the former principals of SFI and retained substantially all of
the operating personnel of SFI. SFI has continued its operations consistent with
historic practice and the Company has continued to account for the origination
of Loan Contracts by SFI as part of the Captive Program. SFI has continued to
maintain its relationships with Dealers in coordination with the Company's own
Dealer relationships.
SFI has originated under the Captive Program increasing volume of Loan
Contracts. During the period from October 1, 1994 to September 30, 1996, the
Company purchased an aggregate volume of $165.9 million of Loan Contracts
through SFI, representing approximately 47.0% of the total volume of Loan
Contracts purchased by the Company during this period through all of its
Origination Programs. For the nine-month period ended September 30, 1996, the
Company's Captive Program generated a volume of 11,160 Contracts, which
represents 45.1% of the Contracts purchased during the period.
Affinity Program. In its Affinity Program, the Company enters into an
agreement with an independent entity (the 'Affinity'), which typically lends to
consumers with 'A' and 'B' credit. Under this program, the Affinity originates,
through its Dealer relationships, Loan and Lease Contracts that do not meet its
own underwriting guidelines but may satisfy the Company's underwriting
guidelines. The Company has the right of first refusal to purchase such
Contracts. The Affinity submits such Loan and Lease applications and the Company
applies its underwriting guidelines and procedures to determine whether to
approve or decline the application. Upon approval, the Company purchases the
Contract. The purpose of this program is primarily to develop strategic
relationships with third party financing sources that do not otherwise finance
consumers with non-prime credit.
The Company currently has three Affinity relationships. One of the
relationships is with GECAL, an affiliate of GECC. In July 1995, the Company
entered into a two-year agreement, automatically renewable for successive
one-year periods thereafter, under which the Company is given the
41
<PAGE>
opportunity to evaluate all applications that do not meet GECAL's underwriting
criteria. The Company, utilizing its underwriting guidelines, then approves or
declines the submissions. While not an exclusive arrangement, management
believes that the Company continues to be the only non-prime company operating
this program with GECAL in the Southeast. The program currently includes all of
GECAL's dealers in Florida and the Company is in the process of initiating the
program in North Carolina, South Carolina and Tennessee, with the long-term plan
of establishing the program in the entire Southeast region during fiscal 1997.
The Company anticipates that the relationship with GECAL will give it access to
GECAL's network of 1,500 dealerships in 11 Southeastern states with minimal
increases in sales and marketing costs.
For the nine-month period ended September 30, 1996, theAffinity Program
generated a volume of 903 Contracts, which represented 3.5% of the Contracts
purchased during the period.
Correspondent Program. In its Correspondent Program, the Company enters
into an agreement with an independent entity (the 'Correspondent') whereby the
Correspondent originates, through its Dealer relationships, Loan Contracts that
the Correspondent believes would satisfy the Company's underwriting guidelines;
but the Company does not have the right of first refusal to purchase such
Contracts. Under this program, the Correspondent submits loan and lease
applications which it believes would satisfy the Company's underwriting
guidelines. The Company applies its underwriting guidelines and procedures to
determine whether to approve or decline the application. Upon approval, the
Company purchases the Contract.
The Company currently has four Correspondent relationships. During the
nine-month period ended September 30, 1996, the Correspondent Program generated
a volume of 564 Contracts, which represented 2.2% of the Contracts purchased
during the period.
Recourse Program. In its Recourse Program, the Company enters into an
arrangement with an independent entity (the 'Originating Entity') that
originates, through its Dealer relationships, Loan Contracts that meet
pre-established credit criteria; and the Company purchases such Contracts with
full recourse to the Originating Entity. The Company accounts for the
arrangement as a financing to the Originating Entity. Under this program, the
Originating Entity submits the Contracts and the Company verifies that each
Contract meets the pre-established credit criteria prior to the purchase of such
Contract. The Company purchases the Contracts typically at 60% to 70% of the
principal amount of the Contracts. The pre-established credit criteria generally
relate to 'D' credit borrowers.
The Company currently has two Recourse relationships, which include a
finance company and a large used-car dealer. Management believes that the
Recourse Program offers the Company the opportunity to purchase Contracts
outside its 'C' credit target market and, at the same time, to mitigate the
credit risk through a large discount and full recourse. The advance rate is
determined based upon, among other factors, the credit of the Originating Entity
and the value of the underlying collateral. For the nine-month period ended
September 30, 1996, the Recourse Program generated a volume of 3,928 Contracts,
which represented 15.2% of the Contracts purchased during the period.
Wholesale Program. The Company engages in opportunistic purchases of
portfolios of Loan Contracts that meet the Company's underwriting guidelines and
Contract documentation requirements. The Company purchases such portfolios at a
discount and subject to verification that: (i) a sample of the Contracts,
typically 10% to 15% of the portfolio, complies with the Company's underwriting
guidelines; and (ii) each Loan Contract in the portfolio satisfies the
documentation requirements of the Company.
For the nine-month period ended September 30, 1996, the Company purchased
one $15 million portfolio of Contracts as part of its Wholesale Program.
Underwriting
The Company evaluates and purchases Loan and Lease Contracts in accordance
with its underwriting guidelines and procedures. The underwriting guidelines
focus on balancing the credit risk of the borrower or lessee with the adequacy
of the vehicle as collateral, as well as the purchase price of
42
<PAGE>
the Contract on a case by case basis. The underwriting procedure focuses upon
ensuring the compliance of the Contract with the underwriting guidelines, the
completeness of the documentation required for the Contract and the timely
response of the Company's decision to the entity submitting the Contract (the
'Originator').
Underwriting Guidelines. The Company's basic criteria for assessing credit
risk takes into account principally the following factors: (i) Stability: the
applicant's history with regard to his or her residency, occupation and
employment; (ii) Credit History: the applicant's history with regard to timely
payments on his or her past and present obligations, defaults, bankruptcies and
repossessions; (iii) Affordability: a monthly debt service-to-gross income ratio
test not to exceed 50%, and monthly payment not to exceed 20% of the monthly
gross income; (iv) Risk Exposure: the ratio of the principal amount of the
Contract net of the purchase discount and the administration fee to the market
value of the vehicle; and (v) Downpayment: the downpayment on the vehicle, which
is generally a minimum of 10% of the vehicle's sale price. The Company's
underwriting guidelines also incorporate certain criteria for the vehicle
underlying the Loan or Lease Contract, the maximum term of the Loan or Lease
Contract and the level of discount and administration fee required for the
purchase of such Contract.
Management believes that gradations exist with respect to the credit
profiles of non-prime consumers in the automobile finance market according to
the above generalized factors. The Company's underwriting guidelines provide for
four tiers of credit profiles: Tier I, Tier II, Tier III and Tier IV (the
'Multi-tier Underwriting Guidelines'). Management believes that its Tier I and
Tier II credits correspond to the 'B' credit segment and Tier III and Tier IV
correspond to the 'C' credit segment of the automobile finance market. Consumers
who do not meet the profile of a Tier IV credit are classified by the Company as
consumers with 'D' credit. While such gradations are by nature inexact, the
Company primarily focuses on the 'C' credit segment of the automobile finance
market. Furthermore, the Company believes that its Multi-tier Underwriting
Guidelines provide a greater degree of specificity to the Originator than its
competition in assessing the credit risk of, and developing the financing terms
for, the applicant, enhancing the rapid execution of the transaction for the
Originator and enabling the Originator to provide improved service to its
customers.
As of September 30, 1996, the Company's servicing portfolio of Loan
Contracts (excluding the Recourse Program) consisted of approximately 2% Tier I
and Tier II combined, 18% Tier III and 80% Tier IV, and Lease Contracts
consisted of approximately 6% Tier I and Tier II combined, 48% Tier III and 46%
Tier IV.
Underwriting Procedure. The Company has an underwriting department with an
underwriting staff, which is organized into teams based upon geographic regions.
Each team consists of a processor, credit analyst, funder and senior funder.
Management believes that this regional team approach promotes efficient
communication and expedites the underwriting process, giving the Company a
competitive edge while maintaining consistent underwriting performance. As
geographic expansion requires, the Company intends to establish full service
regional centers, which will include an underwriting department. The
underwriting procedure consists of three steps: Step I -- Application
Processing, Step II -- Credit Review and Step III -- Contract Funding, as
described below.
STEP I -- Application Processing: Upon receipt of an application from an
Originator, the processor enters the information into the Company's computer
system, which automatically provides for the tracking and processing of the
application. The application sets forth, among other things, the applicant's
income, liabilities, credit and employment history, proposed downpayment and a
description of the vehicle. Simultaneously with the processing of the
application, the processor obtains credit reports from Equifax and TRW through
its computer system, and immediately proceeds to: (i) verify the employment of
the applicant and his or her spouse/co-signer, if applicable, with their
respective employers; (ii) verify credit references, if applicable; (iii) verify
current residence and duration of current and past residence; (iv) verify and
evaluate the value of the vehicle as collateral through the use of the 'Black
Book' or NADA Book, as appropriate; and (v) review a budget screen automatically
produced by the computer system, which estimates funds the applicant will have
43
<PAGE>
available for paying his or her monthly payment. Once this process is completed,
the application is passed on-line to the team's credit analyst.
STEP II -- Credit Review: The credit analyst reviews the application and
evaluates the applicant's credit risk with respect to the Company's Multi-tier
Underwriting Guidelines. Regardless of the decision on the application, the
credit analyst will promptly respond to the Originator, typically within two to
four hours of receipt of the application, indicating that the application is
approved with or without stipulations, or declined. If the application is
declined, the credit analyst will give a detailed explanation as to what
circumstances dictated the rejection of the application and what, if any,
changes could be made in order to make a subsequent application more likely to
be approved. Typical items that the Company might require to be amended include
proving additional income, requiring a co-applicant, amending the length of the
proposed term, requiring additional downpayment, substantiating credit
information and requiring proof of the resolution of certain credit deficiencies
as noted on the customer's credit history. Approximately 44% of applications are
approved or conditionally approved, of which approximately 25% are ultimately
funded. Management believes that this direct contact between the credit analyst
and the Originator and the development of a relationship over time results in a
better understanding by the Originator of the underwriting guidelines and leads
to more accurate pre-screening by the Originator of applicants and higher
approval rates of Contracts.
STEP III -- Contract Funding: If the credit analyst approves the
application, the Originator provides a funding package to the Company, which
includes legal documentation and the credit information. Upon receipt by the
Company, the funding package is referred to the team's funder. At that time, all
information concerning the funding package, including both legal documentation
and credit are reverified by the funder. Any deficiencies are noted and the
Originator is advised. The funder works directly with the Originator to complete
the funding package. While the funding package is being processed, the team's
interviewer conducts a customer telephone interview with the applicant to verify
the information provided in the application and the funding package. The
telephone interview with the applicant typically concentrates on verifying the
downpayment, the monthly payment amount, the payment due date, the Dealer
add-ons, and the make, model and mileage of the vehicle. If there are any
discrepancies, the file is referred back to the credit analyst who then contacts
the Originator and/or the applicant to see if the discrepancy is capable of
being resolved. If the problem is not capable of being resolved, the application
is terminated.
Prior to final approval for funding the Contract, the computer system
automatically verifies the Contract information, such as the APR, verifies the
proceeds to be distributed to the Originator and alerts the funder to any
discrepancies between the calculations automatically performed by the computer
system and the information included in the funding package. Prior to issuance of
a check to the Originator, the team's senior funder reviews the entire funding
package including any discrepancies between the computer analysis and the
funding package, verifies the completeness of the legal and credit
documentation, confirms that the applicant has adequate insurance as verified by
NIS (see 'NAL Insurance Services, Inc.') and that the telephone interview was
successfully completed. After approval by the senior funder, the Contract is
referred to the accounting department and the funds are delivered to the
Originator by check or wire transfer. The Company typically funds within 24
hours of receipt of a properly completed funding package.
Underwriting for Origination Programs. The Company applies the Mutli-tier
Underwriting Guidelines to each of the Origination Programs, except in the case
of the Recourse Program. The underwriting and pricing guidelines for the
Recourse Program are pre-agreed upon between the Originator of the Contracts
under this program and the Company. The terms of the Contract are based upon,
among other factors, the credit history of the borrower or lessee and the value
of the underlying collateral. The Company also applies its underwriting
procedure to each of the Origination Programs as appropriate, except in the case
of the Wholesale Program. The underwriting procedure for the Wholesale Program
involves evaluating the overall quality of the portfolio for compliance with the
Company's underwriting guidelines based upon a sample review of generally 10% to
15% of the Contracts in the portfolio prior to purchase. In addition, the
Company conducts a documentation
44
<PAGE>
review of each Contract in the portfolio for accuracy and completeness prior to
purchasing the portfolio.
SFI, a Captive Program participant, applies the Company's underwriting
guidelines and procedures from application to the preparation of the funding
package through its independent staff of 22 processors, credit analysts, funders
and senior funders. Prior to purchase, the Company verifies that the Contract
meets its underwriting guidelines and conducts the customer telephone interview.
Quality Control
The Company's quality control group conducts a post-funding credit review
of its Contracts on a monthly basis. The staff reviews all of the Contract files
for completeness of documentation. The staff also conducts a credit review of
approximately 15% to 20% of the Contracts purchased each month to determine
whether the Contracts comply with the Company's underwriting guidelines and
procedures and records the nature and frequency of all exceptions that were
approved. In the event that a Contract contains unapproved exceptions to the
Company's underwriting guidelines, it is referred to management for resolution.
The quality control group also performs a monthly trend analysis to determine
whether any adjustments should be made to the Company's underwriting guidelines
based upon recurring approved exceptions and the performance of Contracts with
these exceptions.
Asset Servicing and Collections
The Company has a servicing and collections operation that utilizes
experienced staff and computer technology and software tailored to the Company's
specific needs. Servicing and collections functions are organized into
departments, which consist principally of Customer Service, Collections,
Repossession, Asset Management and Disposition, and Asset Recovery. To minimize
losses and delinquencies, the Company: (i) employs pro-active collection
policies and procedures based upon each collector managing the contract from
origination to settlement; (ii) manages the accounts based upon geographic
regions; (iii) employs experienced personnel with proven expertise whose
performance is continuously evaluated and rewarded based upon performance of the
Contracts serviced; and (iv) utilizes servicing and collection specialists to
provide technical expertise as required to address specific circumstances.
Customer Service. The Company's customer service department is responsible
for resolving customer problems, quoting customer pay-off amounts, arranging
substitutions of collateral, re-leasing vehicles at lease-end and processing
customer payments.
The Company also uses its customer service department to enhance the
efficiency of its account management by routing all incoming calls through the
collection department. Management believes that this procedure promotes
efficient account management through continuous updating of information prior to
the provision of other services to the customer. The Company facilitates
collections from customers by using Western Union 'Quick Collect,' which allows
a customer to make payments at numerous locations. The Company also accepts
walk-in payments. However, any delinquent customer making a walk-in payment must
be interviewed by a collector.
Collections. The collectors are organized into five regions consisting of
South Florida, North Florida, East Coast states, Central states and West Coast
states. Within each region, the collectors are organized into teams of four,
which include three collectors and a team leader. Management believes that this
regional team approach enables the Company to identify and efficiently tailor
its servicing and collection activities to each region, and permits accounts to
be monitored more closely by management, thereby enhancing collector performance
and minimizing delinquencies and losses. The collections staff has 54 persons,
including collectors and collection specialists, and management. As the volume
of Contracts increases, the Company continues to expand to maintain its
collection and servicing staff at a level that provides for approximately one
collector for every 500 Contracts serviced. As geographic expansion requires,
the Company intends to establish full service regional centers, which will
include asset servicing and collections departments. The Company is in the
process of opening regional centers in Orlando, Florida and Atlanta, Georgia.
See 'Facilities.'
45
<PAGE>
Collection Procedures. The collections staff uses its management
information systems to process and track the accounts in order to ensure that
data is immediately available for continuous evaluation and collection of
accounts. See 'Management Information Systems.' Within 24 hours of a
delinquency, a collector will telephone the customer to resolve the delinquency.
If the collector fails to reach the customer, the collector attempts to contact
the customer by calling the customer's employers and credit references. If the
delinquency is not resolved, the collector will send demand letters as
appropriate. The Company's policy permits Contracts to be extended or revised
payment schedules to be made no more than once a year on a case-by-case basis,
as determined by its collection supervisors. In the event that the delinquency
cannot be resolved, the collector typically recommends repossession within 45
days. Authorization for repossession typically requires the approval of the
collector, the team leader and the team supervisor. Management believes that
this team approach prevents premature repossession and prevents the collector
from improving the delinquency experience of his or her accounts through
repossession by terminating his or her responsibility for the account. Accounts
that are approved for repossession are turned over to outside agencies for
repossession. Repossession is typically accomplished within 72 hours of
repossession approval and the vehicle is assigned to the Company's asset
management staff. See 'Asset Management and Disposition.'
Collector Training and Incentives. The Company's servicing and collection
program emphasizes continuous evaluation and training of its collection staff;
and a compensation system for collectors, supervisors and managers that rewards
efficient management of the accounts through salary and bonuses. Management
believes that this incentive compensation system motivates employees to
effectively manage accounts by increasing collections and minimizing
delinquencies and losses.
Collectors, supervisors and collection managers are continuously trained
and evaluated. Team leaders audit approximately 15 to 20 accounts of each
collector on his or her team per month. Supervisors are required to review an
additional 20 accounts of each collector resulting in each collector having
approximately 40 accounts per month audited by management. Each account is
audited for compliance with the Company's servicing and collection policies and
performance in order to ensure that the accounts are in compliance with the
Company's goals and objectives relating to delinquencies, repossessions and
losses. All team members are required to attend classes held at the Company and
outside seminars provided by credit bureaus and collection agencies. Each
collector also participates in the Company's cross-training program which
requires rotating through the Company's other departments to continually educate
the collector on the Company's operations. In addition, the Company utilizes the
experience of its collectors through a policy of promoting from within the
Company whereby collectors have the opportunity to be promoted from the
Collections Department to other areas of the Company's operations.
The performance of each collector's accounts is available on a daily basis.
The performance and compensation of the collector is evaluated on a monthly
basis. The evaluations and the bonus program are based upon a rating system that
encompasses individual delinquency rates, team delinquency rates, the
delinquency mix, the repossession rate and the volume of calls handled.
Management believes that the bonus program provides the collector with an
incentive to manage his or her accounts more efficiently.
Collection Specialists. The Company supports its collection teams by
providing collection specialists in the areas of bankruptcy, insurance claims,
skip-tracing and repossession. In the event that an account involves bankruptcy
issues, insurance issues, skip-tracing or repossession, the account remains the
responsibility of the collector, and a collection specialist in the relevant
area works with the collector providing technical expertise in order to use
efficiently the collectors' time, maximize collections and minimize delinquency
and loss. The collector does not relinquish care, control or custody of the
account until the account is terminated by payment in full, repossession or is
charged-off and assigned to the asset recovery department. Management believes
that the origination to settlement servicing approach provides continuity and
enhances accountability of the collector for the performance of the accounts
serviced, rather than a 'roll-up' approach that routes the account to different
collectors as the account ages.
46
<PAGE>
Repossession. The Company's repossession department is responsible for
making a final attempt to collect the delinquent account, skip tracing and
assigning the account to an approved repossession agent. The department is also
responsible for following up on delivery of the repossessed vehicle,
coordinating all customer redemptions of repossessed vehicles and maintaining
files on repossession agents, including proof of licenses, bonding and
insurance.
Asset Management and Disposition. When a vehicle is repossessed and not
redeemed by the customer in the prescribed time, or the vehicle is returned at
the end of a lease, the vehicle is assigned to the asset management department
for disposal. The vehicles are reviewed by management at the time of
repossession or return and at that time written down to their net realizable
value and a determination is made of the appropriate disposition channel. The
vehicle is typically: (i) disposed of at wholesale auctions; (ii) remarketed on
a wholesale basis through PCSF; (iii) remarketed on a retail basis through PCSF;
or (iv) remarketed on a retail basis through the JDBR Franchise. See 'Related
Businesses.' During 1996, the Company hired a staff of auction representatives
to monitor the disposal of vehicles at the used car auctions. These
representatives seek to maximize the amount realized on the vehicles through:
(i) inspecting the vehicles for reimbursable insurance damage; (ii) setting
auction price floors; and (iii) enforcing proper auction procedures. The
Company's auction representatives have significantly improved sales prices on
its vehicles.
Asset Recovery. The asset recovery department uses collection specialists
to collect on any loss the Company may incur on an account. Losses may occur in
several ways, including: (i) proceeds received upon liquidation of the asset are
less than the customer's balance on the account and liquidation costs; (ii) the
amount of insurance pay-off or settlement is less than the customer's balance on
the account, and (iii) delinquent accounts are charged-off upon 150-days
delinquency. These balances are collected by various means, including: (i)
lump-sum settlement with the customer; (ii) reduced payment plans; or (iii)
referral to a collection agency or an attorney for action, including wage
garnishment, judgment and asset searches. Any amount received after a contract
has been charged off is recorded as a recovery. For the nine months ended
September 30, 1996, the Company's recoveries resulted in an annualized net
charge-off percentage of 6.46% in comparison to an annualized gross charge-off
percentage of 9.00%.
Management Information Systems
The Company employs information systems, including computer software
programs and a Voice Information Management System, which enable it to manage
more effectively its business activities. The Company's software programs, which
have been specifically modified for the Company, operate on a local area and
wide area network. The Company's COIN system expedites elements of the contract
purchase process, including entry and verification of credit application data,
credit analysis, communication to Dealers of credit decisions, contract
purchases, and contract-related cash disbursements. The Company's LeaseTek
system facilitates elements of asset servicing and management, including
monitoring account activities and maintaining customer contact, expediting
collection and referring delinquent accounts for repossession. The Company's
Voice Information Management System, through continuous routing of incoming
calls, maximizes the efficiency of the Company's asset servicing and collections
department.
These systems also provide functions that increase productivity, such as
computer faxing of credit decisions, automatic credit bureau retrieval,
automatic retrieval of NADA and 'Black Book' values for financed vehicles,
on-line inquiry for all Contract information to aid in collections,
verification, processing, tracking and solicitation, as applicable, of insurance
and related products. These systems provide for the prompt collection and
retrieval of data concerning the composition of the receivables portfolio, the
characteristics and performance status of the underlying receivables and other
information necessary for management to increase Contract volume, maximize
Contract performance, evaluate and manage personnel and minimize delinquency and
losses.
Management believes that it has adequate information systems in place to
permit significant growth in the volume of Contracts processed without any
near-term material additional investments.
47
<PAGE>
To increase productivity through automation, the Company is currently evaluating
enhancements to its systems.
Related Businesses
The Company continues to develop its related businesses consisting of NIS,
which offers insurance services and products, and PCSF, which principally
remarkets repossessed and off-lease vehicles. Management believes that these
businesses increase the efficiency of purchasing Loan and Lease Contracts and
provide independent sources of revenue to the Company.
NAL Insurance Services, Inc.
The Company's wholly-owned subsidiary, NIS, is a full service insurance
agency selling a variety of insurance and related products to the Dealers as
well as to the Company's customers. The staff of NIS consists of 10 persons. The
staff uses specialized computer software to verify insurance in connection with
the Company's underwriting of Contracts, to track cancellation of existing
insurance policies and to solicit insurance and related products. See
'Management Information Systems.' Management believes that these insurance and
related products complement its core business, and enhance the Company's
relationship with its Dealers by enabling the Dealers to better service their
customers.
Management believes that these products, which are as described below,
enhance its ability to provide a 'one-stop shop' service to the Dealer and
thereby increase the efficiency of the Company's purchase of Loan and Lease
Contracts while establishing an additional revenue source. In 1995, NIS
generated revenues of $548,000 and for the nine-month period ended September 30,
1996, NIS generated revenues of $1.1 million.
GAP Plan. The Company offers its customers an opportunity to participate
in the Company's guaranteed auto protection ('GAP') plan, a non-insurance
product. In the event of an insurance loss, the GAP plan pays the Company the
difference between the actual cash value protection afforded by the insurer and
the customer balance due the Company. The Company's risk in these transactions
is eliminated through reinsurance. The Company pays a flat premium per contract
to unaffiliated major insurers to reinsure this risk. The Company also pays the
Dealer a commission for each plan sold.
Primary Auto Insurance. As part of the Company's underwriting procedures,
NIS verifies the existence of insurance prior to funding of the Contracts and
also assures that the customer maintains adequate primary auto insurance during
the term of the Contract. The Company solicits sales of primary auto insurance
policies through brochures distributed to Dealers, on-site training for Dealers
and through Dealer personnel. However, the majority of the Company's sales of
primary auto insurance policies result from the cancellation of a customer's
existing insurance policy, which the Company tracks through its computer system.
Collateral Protection Insurance. If a customer does not continue to carry
primary auto insurance, the Company is authorized under the Loan or Lease
Contract to provide Collateral Protection Insurance ('CPI') upon notice of
cancellation of the existing insurance of the customer. CPI provides coverage
for the actual cash value of the vehicle in the event of physical damages to the
vehicle up to a total loss, which typically averages 84% of the loan balance.
Payments are automatically included in the monthly car payment on the customer's
contract for which the Company receives a 15% commission on each policy.
Extended Warranty. NIS also offers an extended warranty policy to its
customers directly or through Dealers. The extended warranty covers the customer
for repairs on their used vehicle where the manufacturer's warranty has expired.
Typically, an extended warranty covers the vehicle for an additional 12 months
or 12,000 miles, or for 24 months or 24,000 miles. NIS receives a commission on
all extended warranty policies sold.
Company Insurance Services. NIS provides the Company with internal
insurance services, such as workers compensation, employee dental and health
insurance, contingent and excess liability
48
<PAGE>
insurance coverage required in connection with the Company's leasing operation,
key employee life insurance, and liability and casualty insurance. Management
believes that by purchasing these insurance products through NIS, the Company
meets its insurance needs and recoups commissions that would otherwise be paid
in connection with such products.
Performance Cars of South Florida, Inc.
The Company conducts a vehicle remarketing operation through PCSF, a
wholly-owned subsidiary, and its JDBR Franchise at a retail sales facility
located in Palm Beach County, Florida. The staff of PCSF and the JDBR Franchise
consists of 22 persons, including senior management with an average of over 40
years of experience in the retail automobile business. The Company commenced
this remarketing operation principally as a means of providing a more
cost-effective method of remarketing some of the Company's repossessed and
off-lease vehicles. PCSF operates the JDBR Franchise, pursuant to which the
Company licenses the J.D. Byrider name, trademarks and business system. This
franchise provides national brand name recognition, national advertising,
comprehensive operative systems, ongoing franchise support, as well as employee
and management training in the JDBR system.
Sales at the facility are conducted through either the JDBR Franchise or
directly through PCSF based upon the model, condition, age and mileage of the
vehicle. Some of the vehicles sold by the JDBR Franchise are financed through
its affiliate, Car Now Acceptance Corporation. Typically, less than 10% of the
vehicles sold by PCSF, independent of the JDBR Franchise, are financed through
the Company. Management believes that remarketing vehicles through PCSF offers
several advantages over wholesale auctions (which historically has been the
Company's principal method of disposing of vehicles), including the following:
(i) the vehicles receive an extended period of resale exposure, as the
remarketing operation is open 7 days a week, as opposed to the limited period
(typically 4 days) available at auctions; (ii) the vehicles are available for
visible inspections for staff assessment rather than condition reports available
from auctions; (iii) the vehicles may be resold at retail or wholesale instead
of at wholesale through auctions; (iv) the staff has an opportunity to perform
appearance and mechanical repairs at reduced prices; and (v) auction fees of
approximately $300 per vehicle are not incurred. Management believes that PCSF
provides a cost-effective alternative to wholesale disposition of vehicles at
auction. The Company currently disposes of an average of 32% of its repossessed
and off-lease vehicles through PCSF, including the JDBR Franchise. In addition
to increasing the efficiency of the Company's Asset Management and Disposition
Department, PCSF, and in particular the JDBR Franchise, has been an additional
source of revenue to the Company. For the period commencing January 1996 and
ending September 30, 1996, PCSF generated revenues of $971,000.
As the Company's Contract volume increases, it plans to open additional
PCSF sites with JDBR Franchises based on any resulting geographic concentration.
Currently, the Company's management anticipates opening a PCSF site with a JDBR
Franchise in Orlando, Florida. However, there can be no assurances to that
effect. Management believes that the used car market is an expanding market and
offers the Company an opportunity to further the growth of its JDBR Franchise,
increase the recovery on its vehicles and obtain additional sources of revenue
for the Company.
GOVERNMENT REGULATION
The Company and the origination sources are subject to regulation and
licensing under various federal, state and local statutes, regulations and
ordinances. Most states in which the Company operates: (i) require the Company
and/or the origination sources to obtain and maintain certain licenses and
qualifications; (ii) limit the interest rate and other charges that may be
imposed by, or prescribe certain other terms of, the Contracts that the Company
purchases; (iii) regulate the sale and type of insurance products offered by the
Company and the insurers for which it acts as agent; (iv) require the Company
and/or the origination sources to provide specified disclosures; and (v) define
the Company's rights to repossess and sell collateral. The Company's agreement
with its origination sources provides that the origination source must indemnify
the Company with respect to any loss or expense the
49
<PAGE>
Company incurs as a result of violations by the origination source of any
federal, state or local consumer credit and insurance laws, regulations or
ordinances.
The Company is subject to numerous federal laws, including the Truth in
Lending Act, the Equal Credit Opportunity Act and the Fair Credit Reporting Act
and the rules and regulations promulgated thereunder, and certain rules of the
Federal Trade Commission. These laws require the Company to provide certain
disclosures to applicants, prohibit misleading advertising and protect against
discriminatory financing or unfair credit practices. The Truth in Lending Act
and Regulation Z promulgated thereunder require disclosure of, among other
things, the terms of repayment, the final maturity, the amount financed, the
total finance charge and the annual percentage rate charged on each retail
installment contract. The Equal Credit Opportunity Act prohibits creditors from
discriminating against loan applicants (including retail installment contract
obligors) on the basis of race, color, sex, age or marital status. Under the
Equal Credit Opportunity Act, creditors are required to make certain disclosures
regarding consumer rights and advise consumers whose credit applications are not
approved of the reasons for the rejection. The Fair Credit Reporting Act
requires the Company to provide certain information to consumers whose credit
applications are not approved on the basis of a report obtained from a consumer
reporting agency. The rules of the Federal Trade Commission limit the types of
property a creditor may accept as collateral to secure a consumer loan and its
holder-in-due-course rules provide for the preservation of the consumer's claims
and defenses when a consumer obligation is assigned to a subject holder. With
respect to used vehicles specifically, the Federal Trade Commission's Rule on
Sale of Used Vehicles requires that all sellers of used vehicles prepare,
complete and display a Buyer's Guide that explains any applicable warranty
coverage for such vehicles. The Credit Practices Rule of the Federal Trade
Commission imposes additional restrictions on loan provisions and credit
practices.
Certain of the states in which the Company operates prohibit Dealers from
charging a finance charge in excess of statutory maximum rates. Finance charges
include interest and any cash sale differential. The Company's agreements and
other communications with Dealers stress the importance of the Dealers'
compliance with all applicable laws and specifically prohibit the Dealer from
agreeing to a cash sale differential. The Company's contractual agreements with
Dealers obligate Dealers to comply with all applicable laws, and provide that
each Dealer must indemnify the Company for any violation of law relating to a
contract originated by the Dealer. Every borrower (as part of the standard
financing documentation) currently is required to sign a written acknowledgment
that (a) the borrower is aware, and approves, of the Dealer's intended sale of
the contract at a discount to the Company, and (b) the borrower was not quoted a
lower price for a cash purchase. Further, it is the Company's policy to
terminate its relationship with any Dealer where the Company becomes aware of
such incidents perpetrated either with the knowledge or tacit assent of the
Dealer, or by more than one salesperson at a particular Dealer. Dealers are
advised of this policy during the initial contacts with the Company's
representatives before the first contract is purchased. As of September 30,
1996, no Dealer has been so terminated. To the knowledge of the Company, no
action has been brought or is currently threatened or contemplated alleging that
Dealers regularly charge cash sale differentials. Nevertheless, if it were
determined that a material number of the Contracts involved violations of
applicable lending laws by the Dealers, the Company's financial position could
be materially adversely affected and a widespread pattern of violation by
Dealers could have a material adverse effect on the Company's future prospects.
In the event of default by a borrower on a contract, the Company is
entitled to exercise the remedies of a secured party under the Uniform
Commercial Code ('UCC'). The UCC remedies of a secured party include the right
to repossession by self-help means, unless such means would constitute a breach
of peace. Unless the borrower voluntarily surrenders a vehicle, self-help
repossession by an independent repossession specialist engaged by the Company is
usually employed by the Company when a borrower defaults. None of the states in
which the Company presently does business has any law that would require the
Company, in the absence of a probable breach of peace, to obtain a court order
before it attempts to repossess a vehicle.
In most jurisdictions, the UCC and other state laws require the secured
party to provide the obligor with reasonable notice of the date, time and place
of any public sale or the date after which any
50
<PAGE>
private sale of collateral may be held. Unless the obligor waives his rights
after default, the obligor has the right to redeem the collateral prior to
actual sale by paying the secured party the unpaid installments (less any
required discount for prepayment) of the receivable plus reasonable expenses for
repossessing, holding, and preparing the collateral for disposition and
arranging for its sale, plus in some jurisdictions, reasonable attorney's fees,
or in some states, by payment of delinquent installments. Repossessed vehicles
are generally resold by the Company through wholesale auctions or remarketed
through PCSF or its JDBR Franchise.
Management believes that it is in compliance with all applicable laws and
regulations. The Company maintains an internal compliance staff to review and
inform management of changes in applicable law and to act as liaison between the
Company and the various attorneys it has retained in each of the states in which
it conducts business.
EMPLOYEES
The Company employs personnel experienced in all areas of loan origination,
documentation, collection, administration and securitization. As of September
30, 1996, the Company had 445 full-time employees.
FACILITIES
The Company's executive offices and operations occupy approximately 37,183
square feet of leased office space in The Uptown Office Park at 500 Cypress
Creek Road West, Suite 590, Fort Lauderdale, Florida, for which the Company pays
an aggregate of $72,200 of base rent and common area maintenance per month
pursuant to four leases, with annual increases of approximately 5%. The leases
expire in 2002.
The Company's lease agreements offer rights of first refusal on available
space adjacent to the original offices, which the Company has used to
accommodate the staff required for continued growth. There can be no assurance
that any additional space will be available on terms favorable to the Company.
Management believes that the Company's facilities are appropriate for its needs.
The Company leases approximately 8,825 square feet of office space in
Orlando, Florida, which the Company intends to use as a regional office. The
Company pays $5,661 per month pursuant to a fifteen-year lease that expires in
October 2011.
The Company leases approximately 800 square feet of office space in
Atlanta, Georgia, which the Company intends to use as a temporary regional
office. The Company pays $4,779 per month for a six-month lease that expires in
February 1997.
The Company through PCSF leases a used car lot in Palm Beach County,
Florida at a base rent of $11,600 per month. The lease expires on December 31,
2000. See 'Related Businesses -- Performance Cars of South Florida, Inc.'
LEGAL PROCEEDINGS
The Company is currently not a party to any material litigation, although
it is involved from time to time in routine litigation incident to its business.
51
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The present members of the Board of Directors and executive officers, their
respective ages and positions with the Company are set forth below:
<TABLE>
<CAPTION>
NAME AGE POSITIONS WITH THE COMPANY
- ------------------------- --- ------------------------------------------------
<S> <C> <C>
Robert R. Bartolini...... 52 Chairman of the Board, President and Chief
Executive Officer of NAL; Chairman and Chief
Executive Officer of NAC
John T. Schaeffer........ 50 Director and Executive Vice President of NAL;
Director, President and Chief Operating Officer
of NAC
Robert J. Carlson........ 41 Vice President and Principal Accounting Officer
of NAL and NAC
Dennis R. LaVigne........ 52 Vice President and Treasurer of NAL and NAC
Ngaire E. Cuneo(1)(2).... 45 Director
James F. DeVoe(1)(2)..... 52 Director
David R. Jones(1)(2)..... 47 Director
</TABLE>
- ------------------
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
The Company's Certificate of Incorporation provides for the division of the
Board of Directors into three classes, with each class to be as nearly equal in
number of directors as possible. At each annual meeting of the stockholders, the
successors to the class of directors whose term expires at the time are elected
to hold office for a term of three years, and until their respective successors
are elected and qualified, so that the term of one class of directors expires at
each such annual meeting. The terms of office expire as follows: Ms. Cuneo and
Mr. DeVoe, 1997; Mr. Jones and Mr. Schaeffer, 1998; and Mr. Bartolini, 1999. See
'Description Of Securities -- Certain Provisions of the Company's Certificate of
Incorporation and Bylaws.'
Officers are elected by, and serve at the discretion of, the Board of
Directors. There are no family relationships among the directors or executive
officers. In August 1995, the Company established an Audit Committee, and in May
1996, the Company established a Compensation Committee.
The following is a summary of the business experience of the Company's
directors and executive officers during the past five years and their
directorships, if any, with companies with a class of securities registered with
the Securities and Exchange Commission:
Robert R. Bartolini. Mr. Bartolini has been Chairman and Chief Executive
Officer of the Company since its inception in 1991 and became President in
conjunction with the Merger in November 1994. Prior to founding NAL Financial
Group Inc., he was President and Chief Operating Officer of Financial Federal
Savings & Loan Association ('FinFed' -- Miami, Florida), a $1.8 billion mutual
savings and loan. From 1984 to 1987, Mr. Bartolini was Executive Vice President
at CenTrust Savings Bank, an $11 billion institution based in Miami, Florida,
with 60 branches. Prior to 1984, Mr. Bartolini was with First Pennsylvania Bank,
NA (assets of $6 billion; 75 branches), where he served as Senior Vice
President. Mr. Bartolini serves as a member of the Board of Directors of J.D.
Byrider Systems, Inc., from which the Company operates the JDBR Franchise.
John T. Schaeffer. Mr. Schaeffer has been President and Chief Operating
Officer of NAC since its inception. He became a director of the Company in
conjunction with the Merger and became Executive Vice President in May 1996.
Prior to joining the Company, Mr. Schaeffer was President and
52
<PAGE>
Chief Operating Officer of FinancialFed Services, Inc., the automobile lease
origination and servicing unit of FinFed. From 1986 through 1989, Mr. Schaeffer
was Executive Vice President and Chief Operating Officer of CenTrust Leasing
Corporation, the leasing unit of CenTrust Savings Bank, where he was responsible
for the overall activities of the leasing subsidiary. Prior to 1986, he was with
First Pennsylvania Bank, N.A., where he served as Vice President for 16 years.
Robert J. Carlson. Mr. Carlson has been Vice President and Principal
Accounting Officer of the Company since April 1992. Prior to joining the Company
in 1992, Mr. Carlson served 4 years as Senior Vice President -- Controller of
FinFed. Prior to 1992, he served as Senior Vice President and Chief Financial
Officer of Miami Savings Bank, a $175 million asset savings institution in
Miami, Florida. Mr. Carlson also served 3 years at CenTrust as Vice President --
Accounting Operations and Reporting, and 6 years as an auditor at Deloitte
Haskins & Sells (now Deloitte & Touche LLP). He is a certified public accountant
and holds a Bachelor of Science Degree in business administration from the
University of Florida.
Dennis R. LaVigne. Mr. LaVigne has been Vice President and Treasurer of
the Company since August 1995. Mr. LaVigne has substantial experience in the
automobile finance industry, having served as Senior Vice-President of Union
Acceptance Corporation (an automobile finance company) from December 1993 to
September 1994; an independent consultant to the industry from October 1994 to
August 1995; and having previously served as Senior Vice President
Asset/Liability Manager of Union Federal Savings Bank of Indianapolis from 1989
to December 1993. Prior to joining Union Federal, Mr. LaVigne held positions
with Columbia Savings, a federal savings and loan association, from 1981 to
1989, including Senior Vice President, Chief Investment Officer, Treasurer and
Asset/Liability Committee Chairman. Mr. LaVigne holds a Ph.D. in economics from
the University of Illinois.
Ngaire E. Cuneo. Ms. Cuneo has been a director of the Company since April
1996. She has been Executive Vice President, Corporate Development of Conseco,
Inc., a financial services holding company, since 1992. From 1986 to 1992, Ms.
Cuneo was Senior Vice President and Corporate Officer of General Electric
Capital Corporation. Ms. Cuneo is also a director of Conseco, Inc., Bankers Life
Holding Corporation, American Life Holdings, Inc., American Life Holding Company
and Duke Realty Investments, Inc. See 'Material Stockholder Arrangements.'
James F. DeVoe. Mr. DeVoe has been a director of the Company since March
1996. He is the founder, Chief Executive Officer and Chairman of the Board of
Directors of J.D. Byrider Systems, Inc. ('J.D. Byrider'), a used
vehicle-operation franchisor since 1989 with 86 franchised and 4 company-owned
locations in 28 states. The Company operates the JDBR Franchise as a franchisee
of J.D. Byrider. Mr. DeVoe has been President and Chairman of the Board of DeVoe
Chevrolet Cadillac, Inc., an automobile dealership, since 1975. Mr. DeVoe holds
a Bachelor of Science Degree and a Masters Degree in business from Indiana
University.
David R. Jones. Mr. Jones has been a director of the Company since
February 1996. He has been President and Chief Executive Officer of DR Jones
Financial, Inc., a privately-held consulting firm since its formation in
September 1995. Prior to forming DR Jones Financial, Inc., Mr. Jones was Senior
Vice President -- Asset Backed Finance of Greenwich Capital Markets, Inc. from
1989 to 1995. Mr. Jones served as a Managing Director of The First Boston
Corporation, an investment banking firm, from 1982 to 1989 and as Manager --
Product Development of General Electric Credit Corp., an asset-based lender and
financial services company, from 1981 to 1982. Mr. Jones is a graduate of
Harvard College and has a Masters Degree in business administration from The
Amos Tuck School of Business Administration.
DIRECTORS' FEES
The employee-directors of the Company receive no fees or other compensation
in connection with their services as directors. Mr. Jones and Mr. DeVoe were
each granted Warrants to purchase 20,000 shares of the Company's Common Stock in
connection with joining the Board of Directors. See
53
<PAGE>
'Stock Option Plans.' The non-employee directors each receive $1,000 for each
meeting of the Board and any committee meeting attended in person and $500 for
each meeting attended telephonically.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
--------------------------------
ANNUAL COMPENSATION AWARDS
(1) ---------------- PAYOUTS
---------------------- SECURITIES ------------
SALARY BONUS UNDERLYING ALL OTHER
NAME AND POSITION YEAR ($) ($) OPTIONS/SARS (#) COMPENSATION
- ---------------------------------------- ---- -------- ---------- ---------------- ------------
<S> <C> <C> <C> <C> <C>
Robert R. Bartolini 1995 $300,000 $ 0 50,000(4) $ 30,900(6)
Chairman of the Board, President and 1994 $281,916 $ 298,985 75,000(2) $ 30,900(6)
Chief Executive Officer of NAL; 1993 $250,000 $1,248,100 0 $ 30,900(6)
Chairman and Chief Executive Officer
of NAC
John T. Schaeffer 1995 $160,000 $ 0 25,000(4) $ 10,300(6)
Director and Executive Vice President 1994 $160,000 $ 0 40,000(3) $ 10,300(6)
of NAL; President and Chief Operating 1993 $160,000 $ 161,302 0 $ 10,300(6)
Officer of NAC
Robert J. Carlson 1995 $ 80,000 $ 0 15,000(4) $ 0
Vice President and Principal 1994 $ 74,231 $ 86,015 15,000(3) $ 0
Accounting Officer of NAL and NAC 1993 $ 72,500 $ 18,124 0 $ 0
Dennis R. LaVigne 1995 $ 48,461 $ 0 25,000(5) $ 0
Vice President and Treasurer of NAL
and NAC
</TABLE>
- ------------------
(1) Based upon the fiscal years ended December 31, 1995, 1994, and 1993.
(2) Represents stock options granted as of December 15, 1994 pursuant to the
Company's Amended and Restated 1994 Stock Option Plan (the '1994 Plan'), of
which 66,666 options vest pro-rata over four years commencing January 1,
1996 and 8,334 options vest pro-rata over three years commencing January 1,
1996.
(3) Represents stock options granted as of December 15, 1994 pursuant to the
1994 Plan, which vest pro-rata over three years commencing January 1, 1996.
(4) Represents stock options granted as of December 6, 1995 pursuant to the 1994
Plan, which vest pro-rata over three years commencing January 1, 1997.
(5) Represents stock options granted as of December 6, 1995 pursuant to the 1994
Plan, which vest on December 6, 1998.
(6) Represents insurance premiums on whole life insurance policies paid by the
Registrant for the benefit of the named executive officer.
54
<PAGE>
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/SARS EXERCISE
UNDERLYING GRANTED TO OR
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION
NAME GRANTED (#) FISCAL YEAR(1) ($/SHARE) DATE
- ---------------------------------------- ------------ --------------- ---------- -----------------
<S> <C> <C> <C> <C>
Robert R. Bartolini 50,000(2)(6) 15.22% $ 16.50(7) Dec. 6, 2005
Chairman of the Board, President and
Chief Executive Officer of NAL;
Chairman and Chief Executive Officer
of NAC
John T. Schaeffer 25,000(3)(6) 7.61% $ 15.00(7) Dec. 6, 2005
Director and Executive Vice President
of NAL; President and Chief Operating
Officer of NAC
Robert J. Carlson 15,000(4)(6) 4.57% $ 15.00(7) Dec. 6, 2005
Vice President and Principal
Accounting Officer of NAL and NAC
Dennis R. LaVigne 25,000(5)(6) 7.61% $ 13.25(7) Dec. 6, 2005
Vice President and Treasurer of NAL
and NAC
</TABLE>
- ------------------
(1) Based upon the grant during the year ended December 31, 1995 of options to
purchase an aggregate of 328,500 shares of Common Stock pursuant to the 1994
Plan.
(2) Represents non-qualified stock options granted as of December 6, 1995
pursuant to the 1994 Plan, which vest and become exercisable pro-rata over
three years commencing January 1, 1997 and are subject, with respect to each
one-third installment, to meeting a performance goal based on the Company's
earnings.
(3) Represents 9,332 incentive stock options and 15,668 non-qualified stock
options granted as of December 6, 1995 pursuant to the 1994 Plan, which vest
and become exercisable pro-rata over three years commencing January 1, 1997
and are subject, with respect to each one-third installment, to meeting a
performance goal based on the Company's earnings.
(4) Represents 14,332 incentive stock options and 668 non-qualified stock
options granted as of December 6, 1995 pursuant to the 1994 Plan, which vest
and become exercisable pro-rata over three years commencing January 1, 1997
and are subject, with respect to each one-third installment, to meeting a
performance goal based on the Company's earnings.
(5) Represents 7,547 incentive stock options and 17,453 non-qualified stock
options granted as of December 6, 1995 pursuant to the 1994 Plan, which vest
and become exercisable on December 6, 1998.
(6) Each stock option includes tandem stock appreciation rights, which entitle
the holder of the option to receive upon exercise shares of the Company's
Common Stock with a fair market value on the date of exercise equal to the
excess of the fair market value of the shares issuable upon exercise of the
option as of the date of exercise over the exercise price. Exercise of a
stock appreciation right results in the cancellation of the related option
with respect to the same number of shares, and exercise of an option results
in the cancellation of the related stock appreciation right with respect to
the same number of shares.
(7) The closing price of the Company's Common Stock as of December 6, 1995 was
$13.25 per share as reported on the Nasdaq National Market.
55
<PAGE>
AGGREGATED OPTIONS/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR
VALUES
<TABLE>
<CAPTION>
SHARES NUMBER OF SECURITIES VALUE IF UNEXERCISED
ACQUIRED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS/SARS AT
ON VALUE OPTIONS/SARS AT FY-END (#) FY-END ($)
NAME EXERCISE (#) REALIZED EXERCISABLE/UNEXERCISABLE (1) EXERCISABLE/UNEXERCISABLE (1)
- ------------------------- ------------ -------- ------------------------------ --------------------------------
<S> <C> <C> <C> <C>
Robert R. Bartolini -0- -0- 19,445(E)/105,555(U) $138,365(E)/$393,885(U)
Chairman of the Board,
President and Chief
Executive Officer of
NAL; Chairman and Chief
Executive Officer of
NAC
John T. Schaeffer -0- -0- 13,333(E)/51,667(U) $101,731(E)/$203,469(U)
Director and Executive
Vice President of NAL;
President and Chief
Operating Officer of
NAC
Robert J. Carlson -0- -0- 5,000(E)/25,000(U) $38,150(E)/$76,300(U)
Vice President and
Principal Accounting
Officer of NAL and NAC
Dennis R. LaVigne -0- -0- 0(E)/25,000(U) $0(E)/$9,500(U)
Vice President and
Treasurer of NAL and
NAC
</TABLE>
- ------------------
(1) Based upon the closing price of the Company's Common Stock ($13.63 per
share) as of December 29, 1995 on the Nasdaq National Market.
EMPLOYMENT ARRANGEMENTS
Effective November 30, 1994, the Company entered into an employment
agreement with Mr. Robert R. Bartolini. Such agreement, as subsequently amended,
provides for a base salary of $300,000 per year together with discretionary
bonuses, if any, to be declared by the Board of Directors. The agreement also
provides for certain benefits, including vacation, life and disability
insurance, use of an automobile and certain related expenses, certain other
expenses and stock option plan participation, as well as a confidentiality
agreement and a two-year noncompetition agreement in favor of the Company. This
agreement provides for an initial term of 3 years and is annually renewable for
successive three-year periods unless either Mr. Bartolini or the Company
provides at least 60 days' notice of an intent not to renew. The agreement
provides that the Company may terminate Mr. Bartolini's employment at any time
with or without cause and that Mr. Bartolini may terminate the agreement upon
written notice on the earlier of one year from the date of such notice or 90
days after his replacement is hired by the Company. If Mr. Bartolini's
employment were to be terminated by the Company without cause, he generally
would receive his base salary and benefits for the remainder of the term of the
agreement. If he were to be terminated because substantially all of the assets
of the Company are sold or a controlling interest in the Company is sold, Mr.
Bartolini would receive an additional payment of 299% of his base salary unless
the agreement is assumed by the buyer or Mr. Bartolini is offered substantially
identical duties and compensation with the buyer for at least the remaining term
of the agreement. Mr. Bartolini may not cause the agreement to terminate prior
to three years from the date of the agreement.
STOCK OPTION PLANS
The Company's Amended and Restated 1994 Stock Option Plan (the '1994 Plan')
covers 1,000,000 shares of the Company's Common Stock. Under its terms,
officers, directors, key employees and consultants of the Company are eligible
to receive incentive stock options within the meaning of Section 422 of the
Internal Revenue Code, as well as non-qualified stock options and stock
56
<PAGE>
appreciation rights ('SARs'). The 1994 Plan is administered by the Board of
Directors or a committee consisting of no less than three members designated by
the Board of Directors. Incentive stock options granted under the 1994 Plan are
exercisable for a period of up to 10 years from the date of grant and at an
exercise price that is not less than the fair market value of the Common Stock
on the date of the grant, except that the term of an incentive stock option
granted under the 1994 Plan to a stockholder owning more than 10% of the
outstanding Common Stock may not exceed five years and the exercise price of an
incentive stock option granted to such stockholder may not be less than 110% of
the fair market value of the Common Stock on the date of the grant.
Non-qualified stock options may be granted on terms determined by the Board of
Directors or a committee designated by the Board of Directors. SARs, which give
the holder the privilege of surrendering such rights for the appreciation in the
Company's Common Stock between the time of grant and the surrender, may be
granted on any terms determined by the Board of Directors or committee
designated by the Board of Directors.
Incentive stock options granted under the 1994 Plan are non-transferable,
except upon death, by will or by operation of the laws of descent and
distribution, and may be exercised during the employee's lifetime only by the
optionee. There is no limit on the number of shares with respect to which
options may be granted under the 1994 Plan to any participating employee.
However, under the terms of the 1994 Plan, the aggregate fair market value
(determined as of the date of grant) of the shares of Common Stock with respect
to which incentive stock options are exercisable for the first time by an
employee during any calendar year (under all such plans of the Company and any
parent and subsidiary corporation of the Company) may not exceed $100,000.
Options granted under the 1994 Plan may be exercised within 12 months after
the date of an optionee's termination of employment by reason of his death or
disability, or within three months after the date of termination by reason of
retirement or voluntary termination approved by the Board of Directors, but only
to the extent the option was otherwise exercisable at the date of termination.
The 1994 Plan provides that, in general, the Board of Directors or the
Administrative Committee of the 1994 Plan, shall, consistent with the Plan,
determine the terms and conditions, including vesting provisions, of any option
granted under the 1994 Plan, and may accelerate the exercisability of any
option.
The 1994 Plan will expire on November 1, 2004, unless terminated earlier by
the Board of Directors. The 1994 Plan may be amended by the Board of Directors
without stockholder approval, except that, in general, no amendment that
increases the maximum aggregate number of shares that may be issued under the
1994 Plan, decreases the minimum exercise price of options provided under the
Plan, or changes the class of employees who are eligible to participate in the
1994 Plan, shall be made without the approval of a majority of the stockholders
of the Company.
As of December 23, 1996, the Company had granted 579,500 options under the
1994 Plan, of which 524,166 options are outstanding. The outstanding options
include 245,000 options granted to executive officers. See 'Options/SAR Grants
in Last Fiscal Year Table.' The outstanding options do not include 65,000
options granted by the Company in connection with the exercise of the SFI
purchase option. See 'Management's Discussion and Analysis of Financial
Condition and Results of Operations.'
The Company's Directors' 1996 Stock Option Plan (the 'Directors' Plan')
covers 250,000 shares of the Company's Common Stock and provides for the grant
of non-qualified stock options and related SARs to the Company's non-employee
directors. The Directors' Plan is administered by the Board of Directors or a
committee appointed by the Board of Directors consisting of at least three of
its members.
Options are granted at the discretion of and on such terms and conditions
as are determined by the Board of Directors at the time the option is granted.
Options granted under the Directors' Plan are exercisable at such prices, times
and in such amounts as the Board of Directors will determine but, in no case
will the exercise price be less than the fair market value of a share of Common
Stock on the
57
<PAGE>
date of grant. The Board of Directors may accelerate the date or dates on which
some or all of the options outstanding under the Directors' Plan may be
exercised.
Options granted under the Directors' 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 optionee's lifetime only by the optionee, or in the case
of the legal incapacity of the optionee, the optionee's legal representative.
In the event a person ceases to be a director of the Company by reason
other than death, incapacity or for cause, options granted under the Directors'
Plan are exercisable only if and to the extent that they were exercisable on the
date of such termination, only within the 30-day period following such
termination and, in no event, after the expiration of the exercise period of the
particular option. If a director is terminated for cause, as determined by the
Board of Directors in its sole discretion, options granted under the Directors'
Plan shall be forfeited. Upon the death or legal incapacity of a director,
options previously granted under the Directors' Plan and exercisable on the date
of death or incapacity, as applicable, may be exercised within twelve months
after the date of death or in capacity, as applicable.
The Directors' Plan was approved by the Board of Directors of the Company
on November 20, 1996 and expires on November 20, 2006. The Directors' Plan may
be altered, suspended or terminated by the Board of Directors at any time,
provided that no change which would have a material adverse effect upon any
option previously granted will be made unless the consent of the optionee is
obtained. As of December 23, 1996, the Company had granted 20,000 options to
each of Messrs. DeVoe and Jones under the Directors' Plan.
58
<PAGE>
CERTAIN TRANSACTIONS
LOANS TO THE COMPANY
Mr. Robert R. Bartolini, Chairman and Chief Executive Officer of the
Company, has on occasion provided advances at market interest rates to the
Company.
In order to provide it with additional working capital, Mr. Bartolini
advanced approximately $1.0 million to the Company on June 30, 1995 and later
increased this amount to approximately $2.9 million during December 1995. The
advance was repaid in full as of June 30, 1996. During November 1996, Mr.
Bartolini provided advances totaling $2,413,869 to the Company, repayable on the
earlier of February 18, 1997 and the completion of the Offering. These advances
bear interest at a fixed rate of 11%. See 'Use of Proceeds.'
SALE OF PORTFOLIO TO EXECUTIVE OFFICER
As of November 30, 1994, the Company sold a portfolio of 14 unsecured
installment loans with a total principal balance of $1,055,000 to Mr. Bartolini,
Chairman and Chief Executive Officer of the Company, in consideration for
$590,965. This portfolio was part of a larger portfolio purchased by the Company
in March 1994 from the Federal Deposit Insurance Corporation at a purchase price
equal to 22.5% of principal balance. The purchase price paid by Mr. Bartolini
was equal to 56% of principal balance which, in management's opinion, was the
approximate fair market value of the loans determined from a review of the
expected collectability of the loans. This price, which reduced a previously
established liability owed by the Company to Mr. Bartolini for bonuses and
dividends, was considered by the Company to be equal to the fair market value
and was based on the estimated cash flows anticipated for the portfolio. The
method used for estimating the cash flows was the same used by the Company in
evaluating the fair value of all of its portfolio acquisitions.
TRANSACTION WITH AFFILIATE OF FORMER DIRECTOR
Mr. Andrew Panzo was a member of the Company's Board of Directors from
August 1995 until his resignation in March 1996. Following the Merger, American
Maple Leaf Financial Corporation ('AMLF'), an affiliate of Mr. Panzo, rendered
certain investment banking advisory services to the Company for which AMLF
received 33,000 common stock purchase warrants. The Warrants permit the purchase
of additional shares at an exercise price of $9.00 per share through the later
of May 1996 or the registration of the underlying shares of Common Stock.
During April 1995, AMLF purchased $1,200,000 principal amount of 9%
Convertible Subordinated Debenture Units for an aggregate purchase price of
$1,200,000. $810,000 principal amount of these Debenture Units, as well as the
accrued interest due thereon, was converted into 95,692 shares of the Company's
Common Stock during January 1996. The remaining principal amount of these
Debenture Units ($390,000) was converted in April 1996.
SALE OF BOAT TO EXECUTIVE OFFICER
In October 1994, the Company sold a repossessed boat to Mr. John T.
Schaeffer, a director of NAL and President and Chief Operating Officer of NAC,
in consideration for a note in the amount of $89,000, which bore interest at 10%
per annum for a period of one year, and the offset by the Company of $21,000
payable to Mr. Schaeffer. The note was repaid prior to June 30, 1995. In
management's opinion, the sale was at the approximate fair market value of the
boat.
TRANSACTIONS WITH FORMER PRINCIPAL STOCKHOLDER
In 1991, the Company entered into an agreement with FTM Holdings, Inc.
('FTM'), a former principal stockholder, to provide the Company with consulting
and other business-related services. Under the agreement, the Company agreed to
pay FTM $50,000 per month through March 1995. The payments for consulting
services continued through May 1994, whereupon the Company made a lump
59
<PAGE>
sum settlement with FTM through a final payment of $475,000 under the agreement.
This amount reflects a $75,000 discount from the cumulative payments required
under the agreement. Including the lump sum settlement, payments of $675,000
were made to FTM in 1994. Payments of $600,000 were made to FTM in 1993.
During 1994, the Company paid FTM $428,000 as a commission on the sale of
certain loan portfolios.
The Company previously subleased a portion of the space occupied by its
headquarters at 500 Cypress Creek Road West, Fort Lauderdale, Florida from FTM.
However, in January 1995, the Company entered into a lease directly with the
landlord for such space. Thereafter, the Company entered into a sublease
agreement with FTM, under which FTM subleased from the Company certain space
that it previously leased directly from the landlord. The sub-lease was
terminated on October 31, 1996.
PURCHASE OF SHARES OF COMMON STOCK
In October 1993, Mr. Bartolini, Chairman and Chief Executive Officer of the
Company, purchased 2,143 shares of the Company's Common Stock, representing all
outstanding shares not previously owned by Mr. Bartolini or Mr. Schaeffer. Such
purchase resulted in Mr. Bartolini owning 95% of the Company's Common Stock as
of such date. Mr. Bartolini financed the entire purchase price of such shares
through a loan from the Company, represented by a note in the amount of
$2,034,638, which bore interest at 5% per annum and was reflected as a 'Note
Receivable from a Stockholder' and as a reduction of Stockholders' equity on the
Company's consolidated balance sheet as of December 31, 1993. In June 1994, the
Company redeemed the 2,143 shares from Mr. Bartolini in consideration for
canceling the note.
GRANT OF OPTIONS AND WARRANTS
In December 1994 and December 1995, the Company granted certain options to
purchase shares of the Company's Common Stock to executive officers under the
Company's 1994 Plan. See 'Summary Compensation Table.' In conjunction with the
appointment of Mr. Jones to the Board of Directors on February 5, 1996, the
Company granted to him 20,000 Common Stock purchase warrants with an exercise
price of $14.38 per share. In conjunction with the appointment of Mr. DeVoe to
the Board of Directors on March 11, 1996, the Company granted to him 20,000
Common Stock purchase warrants with an exercise price of $11.50 per share. The
options held by Messrs. DeVoe and Jones are covered by the Directors' Plan.
RELATIONSHIP WITH J.D. BYRIDER SYSTEMS, INC.
Mr. Bartolini, Chairman and Chief Executive Officer of the Company, serves
as a member of the Board of Directors of J.D. Byrider, from which the Company
operates the JDBR Franchise. Mr. James F. DeVoe, a director of the Company, is
the Chairman and Chief Executive Officer of J.D. Byrider.
TRAVEL SERVICES
IYS Travel, Inc. ('IYS'), a travel agency of which the spouse of Mr. Robert
Bartolini is a principal stockholder, provides business and personal travel
services to the Company and its employees at prevailing market prices. IYS
receives customary industry commissions from airlines, hotels, and cruise
agencies for services provided. During the years ended December 31, 1995 and
1994 and the nine months ended September 30, 1996, the Company paid IYS
approximately $105,000, $84,000 and $133,000, respectively, for airline tickets
booked by IYS for travel by the Company's employees at the prevailing prices
charged by the airlines.
During 1994, the Company advanced to IYS approximately $66,000 for payroll,
which IYS subsequently repaid.
60
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information known to the Company
with respect to the beneficial ownership of the Company's Common Stock as of
December 23, 1996 and as adjusted to reflect the sale of the 2,500,000 shares of
Common Stock being offered hereby by: (i) each person (or group of affiliated
persons) who is known by the Company to own beneficially 5% or more of any class
of the Company's Common Stock; (ii) each of the Company's directors; (iii) the
Company's Chief Executive Officer and each of the named executive officers; and
(iv) the Company's directors and executive officers as a group.
<TABLE>
<CAPTION>
SHARE BENEFICIALLY SHARE BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
OFFERING(1) OFFERING(1)
---------------------- ----------------------
NAME AND ADDRESS NUMBER PERCENT NUMBER PERCENT
- ------------------------------------------- --------- ------- --------- -------
<S> <C> <C> <C> <C>
Robert R. Bartolini 2,228,643(2) 30.25% 2,228,643 22.59%
500 Cypress Creek Road West, Suite 590
Fort Lauderdale, FL 33309
John T. Schaeffer 302,913(3) 4.12% 302,913 3.07%
500 Cypress Creek Road West, Suite 590
Fort Lauderdale, FL 33309
Robert J. Carlson 65,196(4) * 65,196 *
500 Cypress Creek Road West, Suite 590
Fort Lauderdale, FL 33309
Dennis R. LaVigne --(5) * --(5) *
500 Cypress Creek Road West, Suite 590
Fort Lauderdale, FL 33309
Ngaire E. Cuneo --(6) * --(6) *
745 Fifth Avenue, Suite 2700
New York, NY 10151
James F. DeVoe --(7) * --(7) *
5780 West 71st Street
Indianapolis, IN 46278
David R. Jones --(8) * --(8) *
2 Ocean Avenue
Scituate, MA 02066-1624
Conseco, Inc.(9)(13) 2,028,436 21.64% 2,028,436 17.08%
11815 N. Pennsylvania Street
P. O. Box 1911
Carmel, IN 46032
Florence Karp(10) 1,440,303(11) 16.39% 1,440,303 12.76%
3418 Sansom Street
Philadelphia, PA 19104
Merrill Lynch Asset Management(13) 729,167(12) 9.03% 729,167 6.89%
800 Scudders Mill Road
Plainsboro, NJ 08536
All Directors and Officers
as a group (7 persons) 2,596,752 35.16% 2,596,752 26.27%
</TABLE>
- ------------------
* Represents less than 1%
(1) Except as otherwise indicated, includes total number of shares outstanding
and the number of shares that each person has the right to acquire within
60 days through the exercise of options, warrants or debentures, pursuant
to Item 403 of Regulation S-B and Rule 13d-3(d)(1), promulgated under the
Exchange Act. Percentage of ownership is based on 7,347,367 shares of
Common Stock outstanding prior to the Offering and 9,847,367 shares of
Common Stock outstanding after the Offering.
61
<PAGE>
(2) Includes 1,640,000 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 vested Incentive
Stock Options to purchase 19,445 shares of Common Stock granted in December
1994. Does not include Incentive Stock Options to purchase 105,555 shares
of Common Stock granted in December 1994 and December 1995, which have not
vested. See 'Summary Compensation Table.'
(3) Includes 34,628 shares held by English McCaughan & O'Bryan, P.A. for the
benefit of Mr. Schaeffer pursuant to the terms of the Voting Trust
Agreement. See 'Material Voting Arrangements.' Includes 13,333 vested
Incentive Stock Options granted to Mr. Schaeffer in December 1994. Does not
include 51,667 vested Incentive Stock Options granted to Mr. Schaeffer in
December 1994 and December 1995, which remain subject to vesting. Includes
4,952 shares held by Mr. Schaeffer's spouse. See 'Summary Compensation
Table.'
(4) Includes 60,196 shares held by English, McCaughan & O'Bryan, P.A. for the
benefit of Mr. Carlson pursuant to the terms of the Voting Trust Agreement.
See 'Material Voting Arrangements.' Includes 5,000 vested Incentive Stock
Options granted to Mr. Carlson in December 1994. Does not include 25,000
Incentive Stock Options granted to Mr. Carlson in December 1994 and
December 1995, which remain subject to vesting. See 'Summary Compensation
Table.'
(5) Does not include 25,000 Incentive Stock Options granted to Mr. LaVigne in
December 1995, which remain subject to vesting. See 'Summary Compensation
Table.'
(6) Ms. Cuneo joined the Board of Directors effective April 23, 1996 in
conjunction with the sale by the Company of certain Debentures. See
'Material Stockholder Arrangements.'
(7) Does not include Warrants to purchase 20,000 shares of Common Stock at an
exercise price of $11.50 per share granted to Mr. DeVoe in connection with
his appointment as a director on March 11, 1996, which have not vested.
(8) Does not include Warrants to purchase 20,000 shares of Common Stock at an
exercise price of $14.38 per share granted to Mr. Jones in connection with
his appointment as a director on February 5, 1996, which have not vested.
(9) Represents 515,000 shares issuable upon the exercise of Warrants held by
Conseco, Inc. Also includes 756,667 shares of Common Stock (666,667 shares
representing principal and 90,000 shares representing interest at maturity)
issuable upon conversion, if at all, of $5 million principal amount of
Debentures held by Great American Reserve Insurance Company ('GARCO') and
756,666 shares of Common Stock (666,666 shares representing principal and
90,000 shares representing interest at maturity) issuable upon the
conversion, if at all, of $5 million principal amount of Debentures held by
Beneficial Standard Life Insurance Company ('BSLIC'). GARCO and BSLIC are
wholly-owned subsidiaries of Conseco, Inc. (the 'Conseco Subsidiaries').
This table has been prepared assuming a fixed $7.50 conversion price for
the Debentures. Additional shares may be issued to the holder upon
conversion based on a conversion price equal to the lesser of: (i) $7.50
per share; and (ii) 80% of the closing bid price of the Company's Common
Stock on the date of conversion.
(10) As custodian for Ms. Karp's minor grandchildren.
(11) Includes 103,333 shares of Common Stock. Also includes 625,000 shares of
Common Stock issuable upon the exercise, if at all, of Warrants. Includes
711,970 shares of Common Stock (560,606 shares representing principal and
151,364 shares representing interest at maturity) issuable upon the
conversion, if at all, of $5.5 million principal amount of Debentures. This
table has been prepared assuming a fixed $9.00 conversion price for $3.0
million principal amount of the Debentures. Additional shares may be issued
to the holder upon conversion based on a conversion price equal to the
lesser of: (i) $9.00 per share; and (ii) 75% of the closing bid price of
the Company's Common Stock on the date of conversion. If such Debentures
were converted on
62
<PAGE>
the basis of a market price of $7.50, the Company would issue up to 253,956
additional shares of Common Stock.
(12) Represents 366,667 shares of Common Stock issuable upon conversion, if at
all, of $2.75 million principal amount of Debentures and 34,375 shares of
Common Stock issuable upon the exercise of Warrants held by Convertible
Holdings, Inc. Also represents 300,000 shares of Common Stock issuable upon
conversion, if at all, of $2.25 million principal amount of Debentures and
28,125 shares of Common Stock issuable upon the exercise of Warrants held
by Merrill Lynch World Income Fund, Inc. Convertible Holdings, Inc. is
advised by Merrill Lynch Asset Management, an investment adviser registered
under the Investment Advisers Act of 1940 ('MLAM'). Merrill Lynch World
Income Fund, Inc. is advised by Fund Asset Management, Inc., an investment
adviser registered under the Investment Advisers Act of 1940 ('FAM'). FAM
and MLAM are affiliates and both disclaim beneficial ownership of the
Common Stock referred herein. This table has been prepared assuming a fixed
$7.50 conversion price for the Debentures. Additional shares may be issued
to the holder upon conversion based on a conversion price equal to the
lesser of: (i) $7.50 per share; and (ii) 80% of the closing bid price of
the Company's Common Stock on the date of conversion.
(13) In connection with the issuance of these Debentures and Warrants, the
Company granted price protection to the holder(s) such that in the event
the Company issues securities during the term of the Debentures and
Warrants at an issuance price of less than $7.50 per share (the 'Issuance
Price'), the conversion price of such Debentures and the exercise price of
such Warrants would be reduced to the Issuance Price. This provision may
result in the issuance of additional shares of Common Stock upon the
conversion of the Debentures and a decrease in the proceeds to the Company
upon the exercise of the Warrants. See 'Description of Securities -- Price
Protection.'
MATERIAL VOTING ARRANGEMENTS
Concurrent with the completion of the Merger in November 30, 1994, Messrs.
Bartolini, Schaeffer and Carlson entered into a Voting Trust Agreement (the
'Voting Trust Agreement') pursuant to which 400,000 shares were placed in a
voting trust. The Voting Trust Agreement provides that, on any matter requiring
stockholder vote, the trustee will vote such shares in the same percentage as
the other then issued and outstanding shares of Common Stock are voted. Such
shares may be released from the Voting Trust Agreement pursuant to an earn-out
formula under which for the years 1995, 1996 and 1997, 10,000 trust shares will
be released for each $150,000 of cumulative net income after taxes of the
Company up to $3,000,000 and 5,000 shares will be released for each $150,000 of
cumulative net income after taxes in excess of $3,000,000, less the number of
trust shares previously transferred to the stockholders under this formula. The
trust shares will be released pro rata in accordance with the number of trust
shares beneficially owned by each stockholder. As of September 30, 1996, all of
the shares had been earned. See 'Management's Discussion and Analysis of
Financial Condition and Results of Operations.' If the shares are not released
pursuant to the earn-out formula within three years, such shares will be
canceled. The trustee under the Voting Trust Agreement is English, McCaughan &
O'Bryan, P.A., counsel to the Company.
MATERIAL STOCKHOLDER ARRANGEMENTS
In connection with the purchase of $10 million principal amount of
Debentures in April 1996, the Conseco Subsidiaries are entitled to designate a
nominee to the Company's Board of Directors and the Audit Committee of the Board
of Directors pursuant to the terms of the agreements governing such Debentures.
Ms. Ngaire E. Cuneo, an executive officer and director of Conseco and the
Conseco Subsidiaries, is the designated nominee. Pursuant to these arrangements,
Messrs. Bartolini and Schaeffer entered into a Stockholders' Agreement as of
April 23, 1996 with the Company, pursuant to which they agreed to certain
limitations upon the resale of their shares of Common Stock until October 1997.
63
<PAGE>
DESCRIPTION OF SECURITIES
COMMON STOCK
The Company is authorized to issue 50,000,000 shares of Common Stock, $0.15
par value per share, of which 7,347,367 are outstanding as of the date of this
Prospectus.
Holders of Common Stock have equal rights to receive dividends when, as and
if declared by the Board of Directors, out of funds legally available therefor.
Holders of Common Stock have one vote for each share held of record and do not
have cumulative voting rights.
Holders of Common Stock are entitled upon liquidation of the Company to
share ratably in the net assets available for distribution, subject to the
rights, if any, of holders of any preferred stock then outstanding. Shares of
Common Stock are not redeemable and have no preemptive or similar rights. All
outstanding shares of Common Stock are fully paid and nonassessable.
PREFERRED STOCK
Within the limits and restrictions provided in the Certificate of
Incorporation, the Board of Directors has the authority, without further action
by the stockholders, to issue up to 10,000,000 shares of preferred stock (the
'Preferred Stock'), in one or more series, and to fix, as to any such series,
the dividend rate, redemption prices, preferences on liquidation or dissolution,
sinking fund terms, conversion rights, voting rights, and any other preference
or special rights and qualifications. There are presently no shares of Preferred
Stock outstanding.
Shares of Preferred Stock issued by the Board of Directors could be
utilized, under certain circumstances, to make an attempt to gain control of the
Company more difficult or time consuming. For example, shares of Preferred Stock
could be issued with certain rights that might have the effect of diluting the
percentage of Common Stock owned by a significant stockholder or issued to
purchasers who might side with management in opposing a takeover bid that the
Board of Directors determines is not in the best interest of the Company and its
stockholders. This provision may be viewed as having possible anti-takeover
effects. A takeover transaction frequently affords stockholders the opportunity
to sell their shares at a premium over current market prices. The Board of
Directors has not authorized the issuance of any series of Preferred Stock.
64
<PAGE>
CONVERTIBLE SECURITIES
Debentures
The following table provides a summary of the Company's outstanding
Debentures.(1)
<TABLE>
<CAPTION>
PRINCIPAL MATURITY INTEREST CONVERSION SHARES
AMOUNT ISSUE DATE DATE RATE PRICE(2) ISSUABLE(3)
- ----------- ---------- ---------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C>
$ 200,000 Dec. 1995 Dec. 1996 9% 11.00 19,814
2,000,000 Dec. 1995 May 1997 9% 11.00 206,364
2,300,000 Dec. 1995 Jun. 1997 9% 11.00 237,266
10,000,000 Apr. 1996 Oct. 1997 9% 7.50 1,513,333
2,000,000 Jul. 1995 Jul. 1998 9% 9.00 282,167
1,000,000 Aug. 1995 Aug. 1998 9% 9.00 141,083
5,000,000 Sep. 1996 Sep. 1998 (4) 10%(4) 7.50 666,667
2,500,000 Jan. 1996 Jan. 1999 9% 11.00 288,636
- ----------- -----------
$25,000,000 3,355,330
- ----------- -----------
- ----------- -----------
</TABLE>
- ------------------
(1) Reflects information as of December 23, 1996.
(2) These Debentures are convertible into shares of the Company's Common Stock
at the lesser of the amount indicated and a discount to the market price of
the Company's Common Stock, which ranges from 75% to 85% pursuant to the
terms of the Debentures.
(3) Represents shares of Common Stock issuable upon conversion of the Debentures
(principal and interest at maturity) at their stated conversion price. If
such Debentures were converted based upon a market price of $7.50, the
Company would be caused to issue up to an additional 1,135,176 shares of
Common Stock.
(4) These Debentures bear interest at a rate of 10% for 2 years and at a rate of
9% thereafter. Maturity is subject to extension by the holder.
The Company has issued and sold in private placement transactions to
accredited and institutional investors, an aggregate of $38,825,000 principal
amount of convertible subordinated debentures (the 'Debentures'). Interest is
payable monthly on $5.0 million principal amount, quarterly on $17.0 million
principal amount and semi-annually on $3.0 million principal amount of
Debentures. With the exception of the holder of $5.0 million principal amount of
Debentures which require monthly interest payments, all of the holders of the
outstanding Debentures have elected to accrue such interest payments. In
conjunction with the sale of the Debentures, the Company issued Warrants to
purchase 2,873,625 shares of the Company's Common Stock. The terms of the
Debentures and the Warrants are described below and in the table above.
The indebtedness evidenced by the Debentures is subordinated to the prior
payment when due of the principal and interest on senior indebtedness of the
Company. Therefore, upon any distribution of its assets in a liquidation or
dissolution of the Company, or in bankruptcy, reorganization, insolvency,
receivership or similar proceedings relating to the Company, the holders of the
Debentures will not be entitled to receive payment until the holders of the
Company's senior indebtedness are paid in full. Furthermore, upon the occurrence
of any event of default with respect to any senior indebtedness of the Company,
no payments may be made to the holders of the Debentures until the Company has
cured such event of default.
As of December 23, 1996, Debentures with principal balances in the
aggregate of $13,825,000 had been converted into 1,452,849 shares of the
Company's Common Stock with $25.0 million principal amount of Debentures
remaining outstanding.
Conversion Feature. At the option of the holders, the principal and
accrued interest due under the Debentures is convertible into shares of Common
Stock. Prior to such conversion, the holders thereof are not entitled to voting
rights or other rights provided by law to stockholders.
Of the outstanding Debentures: (i) $3.0 million principal amount are
convertible into shares of the Company's Common Stock at a conversion price
equal to the lesser of 75% of the average closing bid price of the Company's
Common Stock as reported by the Nasdaq National Market for the 10 consecutive
trading days immediately preceding the date of conversion; and $9.00 per share;
(ii) $2.5 million are convertible into shares of Common Stock at a conversion
price of $11.00 per share; (iii) $2.5 million are convertible into shares of
Common Stock at a conversion price equal to the lesser of 85% of the average
closing bid price of the Company's Common Stock as reported by the Nasdaq
National Market for the 10 consecutive trading days immediately preceding the
date of conversion and
65
<PAGE>
$11.00 per share; (iv) $2.0 million are convertible into shares of Common Stock
at a conversion price equal to the lesser of 80% of the average closing bid
price of the Company's Common Stock as reported by the Nasdaq National Market
for the 10 consecutive trading days immediately preceding the date of conversion
and $11.00; and (v) $15.0 million are convertible into shares of Common Stock at
a conversion price equal to the lesser of 80% of the closing bid price on the
conversion date as reported by the Nasdaq National Market and $7.50 per share.
Redemption Feature. Certain Debentures are subject to redemption by the
Company at the principal amount thereof, together with any accrued interest, on
30 days written notice upon the following conditions: (i) a registration
statement covering the resale of the shares issuable upon conversion of the
Debentures is effective as of that date; and (ii) the average of the closing bid
prices of the Company's Common Stock as reported by the Nasdaq National Market
exceeds a designated redemption price (the 'Debenture Redemption Price') for 10
consecutive trading days ending within 15 days of the notice of redemption.
Of the redeemable outstanding Debentures: (i) $3.0 million principal amount
bear a Debenture Redemption Price of $15.00, (ii) $2.5 million principal amount
bear a Debenture Redemption Price of $18.00 and (iii) $9.5 million principal
amount bear a Debenture Redemption Price of $25.00. Of the Debentures subject to
redemption, $3.0 million principal amount of the Debentures provide the holder
with the option to elect not to have the Debentures subject to redemption,
however, from the point of such election and thereafter, the Debentures become
non-interest bearing. $5.0 million principal amount of Debentures are redeemable
after two years and bear a Debenture Redemption Price of $25.00, provided that
the trading price of the Company's Common Stock as reported by the Nasdaq
National Market equals or exceeds $25.00 per share for 60 consecutive trading
days prior to redemption. Of the outstanding Debentures, $10.0 million principal
amount are not redeemable by the Company.
Warrants
The following table provides a summary of the Company's outstanding
Warrants.(1)
<TABLE>
<CAPTION>
SHARES PROCEEDS TO
ISSUE DATE EXPIRATION DATE EXERCISE PRICE ISSUABLE(2) THE COMPANY(3)
- ------------------- ------------------- --------------- ----------- --------------
<S> <C> <C> <C> <C>
Apr.-Aug. 1995 Apr.-Aug. 1998 $ 9.00 1,360,000 $ 12,240,000
Nov. 1995-Dec. 1995 Nov. 1998-Dec. 1998 13.50 175,000 2,362,500
Dec. 1995-Feb. 1996 Dec.1998-Feb. 1999 14.00 to 14.38 195,000 2,737,500
Jul.-Aug. 1995 Jul.-Aug. 1998 12.00 to 12.30 62,500 765,000
Jul.-Dec. 1995 Jul.-Dec. 1998 15.00 363,625 5,454,375
Mar. 1996 Mar. 1999 11.50 20,000 230,000
Apr. 1996 Apr. 1999 7.50 615,000 4,612,500
Apr. 1996 Apr. 2001 7.50 60,000 450,000
Sep. 1996 Sep. 2001 7.50 62,500 468,750
----------- --------------
2,913,625(4) $ 29,320,625(5)
----------- --------------
----------- --------------
</TABLE>
- ------------------
(1) Reflects information as of December 23, 1996.
(2) Represents shares of Common Stock issuable upon the exercise of the
Warrants.
(3) Represents proceeds to the Company upon the exercise of the Warrants.
(4) Includes 40,000 Warrants in the aggregate issued to Mr. DeVoe and Mr. Jones
in connection with joining the Board of Directors.
(5) Includes proceeds of $517,500 from Warrants issued to Mr. DeVoe and Mr.
Jones. See Footnote 4.
The Company has issued 2,913,625 common stock purchase warrants (the
'Warrants'). Of the Warrants issued: (i) 2,873,625 of the Warrants were granted
in connection with the sale of the Debentures, including 190,000 Warrants issued
to certain consultants and advisers in consideration for financial advisory
services and 160,000 Warrants issued as commission, and (ii) 40,000 Warrants
were issued by the Company to Board members in connection with joining the Board
of Directors. See 'Certain Transactions.' To date, none of the Warrants have
been exercised.
Exercise. Of the outstanding Warrants, 737,500 of the Warrants permit the
holder to purchase a share of the Company's Common Stock at a designated
exercise price for a period of 5 years from the date of grant, while the
remaining Warrants have a term of 3 years from the date of grant. Prior to
66
<PAGE>
exercise, holders of the Warrants are not entitled to voting rights or other
rights provided by law to stockholders of the Company. A complete exercise of
the Warrants, if at all, would yield to the Company proceeds of $29,320,625.
There can be no assurances that all or a substantial percentage of the Warrants
will be exercised.
Redemption. Of the outstanding Warrants issued, 1,547,000 of the Warrants
are subject to redemption by the Company commencing with the date of issuance
and 489,125 are subject to redemption by the Company commencing two (2) years
from the date of issuance, all at a price of $.001 per Warrant on 30-days
written notice upon the following conditions: (i) a registration statement
covering the resale of the shares issuable upon exercise of the Warrants is
effective as of that date; and (ii) the average of the closing bid prices of the
Company's Common Stock as reported by the Nasdaq National Market exceeds a
designated price (the 'Warrant Redemption Price') for 10 consecutive trading
days ending within 15 days of the notice of redemption. Of the outstanding
Warrants, 877,500 Warrants are not subject to redemption.
The present trading price of the Company's Common Stock (see 'Price Range
For Common Stock') would not be sufficient to effectuate a redemption of any of
the Warrants. There can be no assurances that the trading price of the Company's
Common Stock will attain a level sufficiently high to effectuate a redemption.
There also can be no assurances that even with a sufficiently high trading price
the Company will elect to cause a redemption of the Warrants. Any call for
redemption would have the likely effect of causing the exercise of these
Warrants.
PRICE PROTECTION
The Company has granted price protection and adjustment features to the
holders of certain Debentures and Warrants pursuant to which the Company has
agreed that in the event that the Company issues securities at an Issuance Price
of less than $7.50 per share, the conversion price of such Debentures and the
exercise price of such Warrants would be reduced to the Issuance Price. See
'Principal Stockholders -- Footnote 13 to the Principal Stockholders' Table.' In
addition, certain Debentures are convertible into shares of Common Stock at the
lesser of the stated conversion price and a discount to the market price of the
Company's Common Stock that ranges from 75% to 85% pursuant to the terms of the
Debentures. If such Debentures were converted based upon a market price of
$7.50, the Company would be caused to issue up to an additional 1,135,176 shares
of Common Stock upon such conversion.
REGISTRATION RIGHTS
The Company has granted certain registration rights to the holders of the
Debentures and the Warrants pursuant to which the Company has agreed to register
for resale the shares of Common Stock issued or issuable upon the conversion of
the Debentures and the exercise of the Warrants.
The Company has granted registration rights in connection with the resale
of up to 2,884,962 shares issuable or issued upon conversion of certain
Debentures (principal and interest) and upon exercise of certain Warrants.
Pursuant to such rights, the Company has agreed to use its best efforts to file
with the Commission a registration statement covering the resale of such shares
upon the earlier of January 31, 1997 and 120 days from completion of this
Offering. The holders of such Warrants have also agreed not to effect the public
sale of shares issuable or issued upon exercise of the Warrants for a period of
90 days from the effective date of a registration statement covering such
shares. Substantially all of the holders of these Debentures and Warrants have
agreed to defer their registration rights for a period of 120 days after the
date of this Prospectus.
The Company has also granted certain demand and piggyback registration
rights commencing January 1, 1997 in connection with the resale of up to
2,188,333 shares issuable upon conversion of certain Debentures (principal and
interest) and upon the exercise of certain Warrants issued during April 1996. In
the event that such shares are not otherwise included within a registration
statement, the Company has agreed to use its best efforts to file with the
Commission a registration statement(s) covering the resale of: (i) 2,028,333 of
such shares upon the request of the holder(s) of such securities commencing at
any time after October 23, 1997; and (ii) 160,000 of such shares upon request of
the holder(s) of such securities commencing at any time after December 23, 1997.
Substantially all of the
67
<PAGE>
holders of these Debentures and Warrants have agreed to defer their registration
rights for a period of 180 days after the date of this Prospectus.
The Company has also granted mandatory registration rights in connection
with the resale of up to 666,667 shares issuable upon conversion of certain
Debentures and upon the exercise of certain Warrants issued during September
1996. The Company has agreed to use its best efforts to file with the Commission
a registration statement(s) covering such shares upon the earlier of: (i) 120
days after completion of this Offering; (ii) March 31, 1997; and (iii) the date
upon which certain other institutional holders exercise their registration
rights. Substantially all of the holders of these Debentures and Warrants have
agreed to defer their registration rights for a period of 180 days after the
date of this Prospectus.
RESERVATION OF SHARES
The Company has reserved a sufficient number of shares of Common Stock for
issuance upon conversion of the Debentures and exercise of the Warrants. Such
shares when issued will be fully paid and nonassessable.
TRANSFER AGENT
The transfer agent for the Company's securities is StockTrans, Inc., 7 East
Lancaster Avenue, Ardmore, Pennsylvania 19003, (610) 649-7300.
DELAWARE ANTI-TAKEOVER LAW
The Company will be governed by the provisions of Section 203 of the
General Corporation Law of the State of Delaware (the 'GCL'), an anti-takeover
law. In general, the law prohibits a public Delaware corporation from engaging
in a 'business combination' with an 'interested stockholder' for a period of
three years after the date of the transaction in which the person became an
interested stockholder, unless the business combination is approved in a
prescribed manner. 'Business combination' includes mergers, asset sales and
other transactions resulting in a financial benefit to the stockholder. An
'interested stockholder' is a person who, together with its affiliates and
associates, owns (or within three years, did own) 15% or more of the
corporation's voting stock.
The provisions regarding certain business combinations under the GCL could
have the effect of delaying, deferring or preventing a change in control of the
Company or the removal of existing management. A takeover transaction frequently
affords stockholders the opportunity to sell their shares at a premium over
current market prices.
CERTAIN PROVISIONS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS
General
Certain provisions of the Company's Certificate of Incorporation and Bylaws
may make more difficult the acquisition of control of the Company by a tender
offer, open market purchases not approved by the Company's Board of Directors, a
proxy contest or otherwise. The provisions are designed to reduce the
vulnerability of the Company to an unsolicited proposal for a takeover that does
not contemplate the acquisition of all outstanding shares of the Company or
which is otherwise unfair to stockholders of the Company.
Set forth below is a description of such provisions of the Company's
Certificate of Incorporation and Bylaws. Such description is intended as a
summary only and is qualified in its entirety by reference to the Company's
Certificate of Incorporation and Bylaws.
Election of Directors; Amendment to Certificate of Incorporation
The Company's Certificate of Incorporation provides that the Board of
Directors is divided into three classes. One class of directors is elected at
each annual meeting of stockholders for three-year terms. In addition, the
Bylaws require advance notice to the Board of Directors of stockholder proposals
or stockholder nominees for director to be considered at the next annual meeting
of stockholders.
68
<PAGE>
The Bylaws provide that the number of directors shall be fixed by majority
approval of the Board of Directors or by a vote of a majority of the
stockholders of the Company. Currently, the number of directors is set at five.
In addition, the Bylaws provide that such provision establishing the number of
directors may only be amended by majority approval of the Board of Directors or
by a vote of a majority of the stockholders of the Company.
The Certificate of Incorporation also provides that a director can only be
removed during his or her term for cause and upon the vote of two-thirds of the
stockholders, and that amendments to the Certificate of Incorporation require
the vote of two-thirds of the stockholders unless approved by 80% of the Board
of Directors.
Special Stockholder Meetings
The Bylaws provide that special meetings of the stockholders, for any
purpose or purposes, unless required by law, shall be called by the Chairman and
Chief Executive Officer or President pursuant to a request in writing of the
Chairman and Chief Executive Officer or the President, or a majority of the
entire Board of Directors. A special meeting may not be held absent such a
written request. The request shall state the purpose or purposes of the proposed
meeting. The Bylaws also provide that stockholders may not take action by
written consent. Such limitation on the right of stockholders to call a special
meeting and to take action by written consent could make it more difficult for
stockholders to initiate or to take action that is opposed by the Board of
Directors.
Preferred Stock
The Certificate of Incorporation authorizes the Company's Board of
Directors to establish series of Preferred Stock and to determine, with respect
to any series of Preferred Stock, the rights, preferences, privileges and
restrictions thereof. Management believes that the Preferred Stock will provide
the Company with increased flexibility in structuring possible future financings
and acquisitions, and in meeting other corporate needs that might arise. Having
such authorized shares available for issuance will allow the Company to issue
shares of Preferred Stock without the expense and delay of a special
stockholders' meeting. The authorized shares of Preferred Stock, as well as
shares of the Company's Common Stock, will be available for issuance without
further action by stockholders, unless such action is required by applicable law
or the rules of any stock exchange on which the Company's securities may be
listed. The Company's Board of Directors could issue Preferred Stock having
terms that could discourage an acquisition attempt or other transaction that
some, or a majority, of the stockholders might believe to be in their best
interests or in which stockholders might receive a premium for their stock over
the then market price of such stock.
69
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have 9,847,367 shares of
Common Stock outstanding (10,222,367 shares if the Underwriters' over-allotment
option is exercised in full). Of these shares, approximately 6,111,825 shares
(6,486,825 shares if the Underwriters' over-allotment option is exercised in
full) will be freely tradeable without restriction or further registration under
the Securities Act. The remaining 3,735,542 shares of Common Stock outstanding
are 'Restricted Securities' as that term is defined in Rule 144 under the
Securities Act, of which approximately 2,596,752 are held by 'affiliates' (as
defined in the Securities Act) of the Company.
The Restricted Securities are subject to all of the limitations on resale
imposed by Rule 144. In general, under Rule 144 as currently in effect, any
affiliate of the Company or any person (or persons whose shares are aggregated
in accordance with the Rule) who has beneficially owned Restricted Securities
for at least two years would be entitled to sell within any three-month period a
number of shares that does not exceed the greater of 1.0% of the outstanding
shares of Common Stock (approximately 98,474 shares based upon the number of
shares outstanding after the Offering) and the reported average weekly trading
volume in the over-the-counter market for the four weeks preceding the sale.
Sales under Rule 144 are also subject to certain manner of sale restrictions and
notice requirements and to the availability of current public information
concerning the Company. Persons who have not been affiliates of the Company for
at least three months and who have held their shares for more than three years
are entitled to sell Restricted Securities without regard to the volume, manner
of sale, notice and public information requirements of Rule 144. Substantially
all of the Restricted Securities were issued in November 1994. Accordingly,
under Rule 144 (and subject to the conditions thereof), the Restricted
Securities are eligible for public resale. However, a majority of such shares
are held by executive officers and directors of the Company who have agreed to
certain restrictions upon the resale of such shares.
The Company, its executive officers and directors, certain debenture
holders and certain warrant holders have each agreed that they will not,
directly or indirectly, offer, sell, offer to sell, contract to sell, pledge,
grant any option to purchase or otherwise sell or dispose of (or announce any
offer, sale, offer of sale, contract of sale, pledge, grant of any option to
purchase or sale or disposition) any shares of Common Stock or other capital
stock or any securities convertible into, or exercisable or exchangeable for,
any shares of Common Stock or other capital stock of the Company, for a period
of 180 days after the date of this Prospectus, without the prior written consent
of Prudential Securities Incorporated, on behalf of the Underwriters, except for
bona fide gifts or private transfers effected by such stockholders other than on
any securities exchange or in the over-the-counter market to donees or
transferees that agree to be bound by similar agreements. See 'Underwriting.'
The Company currently has outstanding $25.0 million principal amount of
Debentures and 2,913,625 Warrants, which upon conversion or exercise as
applicable, the Company may be caused to issue up to 6,268,955 shares of Common
Stock, thus increasing the number of shares outstanding from 7,347,367 to
13,616,322. See 'Description of Securities -- Convertible Securities.' Pursuant
to certain registration rights granted by the Company in connection with the
shares issuable upon the conversion of outstanding Debentures or upon exercise
of such Warrants, the Company may have an obligation to register for resale up
to 5,802,565 shares of such Common Stock. Substantially all of the holders of
such shares have agreed to defer their registration rights for a period of 120
or 180 days after the date of this Prospectus. See 'Description of Securities --
Registration Rights.'
70
<PAGE>
UNDERWRITING
The Underwriters named below (the 'Underwriters'), for whom Prudential
Securities Incorporated, Piper Jaffray Inc. and Sands Brothers & Co., Ltd. are
acting as representatives (the 'Representatives'), have severally agreed,
subject to the terms and conditions contained in the Underwriting Agreement, to
purchase from the Company the number of shares of Common Stock set forth below
opposite their respective names:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- -----------
<C> <C>
Prudential Securities Incorporated..... 708,334
Piper Jaffray Inc...................... 708,333
Sands Brothers & Co., Ltd.............. 708,333
Bear, Stearns & Co. Inc................ 100,000
Oppenheimer & Co., Inc................. 100,000
The Chicago Corporation................ 50,000
McDonald & Company Securities, Inc..... 50,000
Raymond James & Associates, Inc........ 50,000
JW Charles Securities, Inc............. 25,000
---------
Total............................. 2,500,000
---------
---------
</TABLE>
The Company is obligated to sell, and the Underwriters are obligated to
purchase, all of the shares of Common Stock offered hereby if any are purchased.
The Underwriters, through their Representatives, have advised the Company
that they propose to offer the Common Stock initially at the public offering
price set forth on the cover page of this Prospectus; that the Underwriters may
allow to selected dealers a concession of $0.23 per share; and that such dealers
may reallow a concession of $0.10 per share to certain other dealers. After the
public offering, the offering price and the concession may be changed by the
Representatives.
The Company has granted the Underwriters an option, exercisable for 30 days
from the date of this Prospectus, to purchase up to 375,000 additional shares of
Common Stock at the public offering price, less underwriting discounts and
commissions, as set forth on the cover page of this Prospectus. The Underwriters
may exercise such option solely for the purpose of covering over-allotments
incurred in the sale of the shares of Common Stock offered hereby. To the extent
such option to purchase is exercised, each Underwriter will become obligated,
subject to certain conditions, to purchase approximately the same percentage of
such additional shares as the number set forth opposite each Underwriter's name
in the preceding table bears to 2,500,000.
Pursuant to an investment banking agreement entered into between the
Company and Sands Brothers & Co., Ltd. dated January 29, 1996, and as
subsequently amended on April 24, 1996 and November 15, 1996, the Company has
agreed to pay a facilitation fee ('Facilitation Fee') to Sands Brothers & Co.,
Ltd. in the amount of $300,000, less any underwriting fees and commissions,
limited to $150,000, derived from their participation as an underwriter in this
Offering. The Facilitation Fee is underwriting compensation in connection with
this Offering. In connection with the private placement of $10,000,000 principal
amount of Debentures by the Company in April 1996, Sands Brothers & Co., Ltd.
received 160,000 Warrants, which the National Association of Securities Dealers,
Inc. ('NASD') has deemed to be underwriting compensation in connection with this
Offering. Accordingly, Sands Brothers & Co., Ltd. has agreed that it will not,
for a period of one year following the effective date of the Offering, sell,
transfer, assign, pledge or hypothecate these Warrants, or any shares it
receives pursuant to the exercise thereof, except to bona fide officers or
partners of any NASD member participating in the Offering.
The Company, its executive officers and directors, certain debenture
holders and certain warrant holders have each agreed that they will not,
directly or indirectly, offer, sell, offer to sell, contract to sell, pledge,
grant any option to purchase or otherwise sell or dispose of (or announce any
offer, sale,
71
<PAGE>
offer of sale, contract of sale, pledge, grant of any option to purchase or
other sale or disposition) any shares of Common Stock or other capital stock or
any securities convertible into, or exercisable or exchangeable for, any shares
of Common Stock or other capital stock of the Company, for a period of 180 days
after the date of this Prospectus, without the prior written consent of
Prudential Securities Incorporated, on behalf of the Underwriters, except for
bona fide gifts or private transfers effected by such stockholders other than on
any securities exchange or in the over-the-counter market to donees or
transferees that agree to be bound by similar agreements.
The Company has agreed to indemnify the several Underwriters or contribute
to losses arising out of certain liabilities, including liabilities under the
Securities Act.
In connection with this Offering, certain Underwriters and selling group
members (if any) or their respective affiliates who are qualified market makers
on the Nasdaq National Market may have engaged in passive market making
transactions in the Common Stock on the Nasdaq National Market in accordance
with Rule 10b-6A under the Exchange Act during the two business day period
before the commencement of offers of sales of the Common Stock. Passive market
makers must comply with applicable volume and price limitations and must be
identified as such. In general, a passive market maker must display its bid at a
price not in excess of the highest independent bid for such security; if all
independent bids are lowered below the passive market maker's bid, however, such
bid must then be lowered when certain purchase limits are exceeded.
LEGAL MATTERS
The validity of the Common Stock offered hereby has been passed upon for
the Company by Buchanan Ingersoll Professional Corporation, Two Logan Square,
12th Floor, 18th & Arch Streets, Philadelphia, Pennsylvania 19103. Certain legal
matters in connection with this Offering will be passed upon for the
Underwriters by Cleary, Gottlieb, Steen & Hamilton, One Liberty Plaza, New York,
New York 10006.
STATEMENT OF INDEMNIFICATION
The Company has adopted the provisions of Section 102(b)(7) of the GCL,
which eliminate or limit the personal liability of a director to the Company or
its stockholders for monetary damages for breach of fiduciary duty under certain
circumstances. Furthermore, under Section 145 of the GCL, the Company may
indemnify each of its directors and officers against his expenses (including
reasonable costs, disbursements and counsel fees) in connection with any
proceeding involving such person by reason of his having been an officer or
director to the extent he acted in good faith and in a manner reasonably
believed to be in, or not opposed to, the best interest of the Company, and,
with respect to any criminal action or proceeding, had no reasonable cause to
believe that his conduct was unlawful. The determination of whether
indemnification is proper under the circumstances, unless made by a court, shall
be determined by the Board of Directors.
Insofar as indemnification for liabilities under the Securities Act may be
permitted to directors, officers and controlling persons of the Company pursuant
to the foregoing provisions or otherwise, the Company has been advised that in
the opinion of the Commission, such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Company of expenses incurred or paid by a director, officer or
controlling person of the Company in a successful defense of any action, suit or
proceeding) is asserted by a director, officer or controlling person in
connection with the securities being registered, the Company will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issuer.
72
<PAGE>
EXPERTS
The financial statements as of December 31, 1995 and for each of the two
years in the period ended December 31, 1995 included in this Prospectus have
been so included in reliance on the report of Price Waterhouse LLP, independent
certified public accountants, given on the authority of said firm as experts in
auditing and accounting.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
SB-2, including amendments thereto, with respect to the Common Stock being
registered hereby. This Prospectus does not contain all of the information
contained in such Registration Statement and the exhibits and schedules filed
therewith, as permitted by the Rules and Regulations of the Commission. The
Registration Statement, including exhibits and schedules thereto, may be
inspected without charge, and copies of all or any part thereof may be obtained
from the Commission's principal office in Washington, D.C. at Room 1024, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional
offices at 7 World Trade Center, Suite 1300, New York, New York 10048, and at
Northwest Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661. Copies of such materials can be obtained upon written request addressed
to the Commission, Public Reference Section, 450 Fifth Street, N.W., Washington,
D.C. 20549, at prescribed rates. In addition, the Commission maintains a Web
site at http://www.sec.gov containing reports, proxy and information statements
and other information regarding registrants that file electronically with the
Commission, including the Company. For further information with respect to the
Company, the Common Stock being registered hereby and the contents of any
contract or document referred to herein, reference is made to the Registration
Statement and the exhibits filed as a part thereof.
73
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
REFERENCE
---------
<S> <C>
Report of Independent Certified Public Accountants................ F-2
Consolidated Balance Sheet as of December 31, 1995................ F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1995 and 1994...................................... F-4
Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended December 31, 1995 and 1994.......................... F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995 and 1994...................................... F-6
Notes to Consolidated Financial Statements for the Years Ended
December 31, 1995 and 1994...................................... F-7
Consolidated Balance Sheets as of September 30, 1996 (Unaudited)
and December 31, 1995........................................... F-22
Consolidated Statements of Operations (Unaudited) for the Nine
Months Ended September 30, 1996 and 1995........................ F-23
Consolidated Statements of Cash Flows (Unaudited) for the Nine
Months Ended September 30, 1996 and 1995........................ F-24
Notes to Consolidated Financial Statements (Unaudited) for the
Nine Month Period Ended September 30, 1996...................... F-25
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of NAL Financial Group Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of changes in stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
NAL Financial Group Inc. and its subsidiaries at December 31, 1995, and the
results of their operations and their cash flows for each of the two years in
the period ended December 31, 1995 in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Fort Lauderdale, Florida
February 27, 1996, except as to Note 19,
which is as of March 22, 1996
F-2
<PAGE>
NAL FINANCIAL GROUP INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1995
<TABLE>
<CAPTION>
1995
------------
<S> <C>
ASSETS
Finance receivables
Automobile finance contracts, net...................... $ 99,790,636
Consumer finance contracts, net........................ 2,289,503
Mortgage finance contracts, net........................ 1,805,068
Less: reserves available for credit losses............. (2,671,001)
------------
Finance receivables, net............................... 101,214,206
------------
Cash........................................................ 920,981
Restricted cash............................................. 1,031,734
Accrued interest receivable................................. 1,459,600
Investment in operating lease contracts, net................ 4,054,613
Automobile inventory........................................ 1,886,451
Property and equipment, net................................. 1,802,889
Excess servicing receivable................................. 4,999,165
Other assets................................................ 4,665,287
------------
TOTAL ASSETS........................................... $122,034,926
------------
------------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Debt participation interests........................... $42,380,522
Credit and warehouse facilities........................ 33,428,946
Convertible subordinated debt, net..................... 12,924,379
Stockholder loans...................................... 2,919,000
Drafts payable......................................... 2,593,098
Deferred taxes......................................... 1,603,587
Accounts payable and accrued expenses.................. 1,046,884
Other liabilities...................................... 1,278,594
------------
TOTAL LIABILITIES...................................... 98,175,010
------------
Commitments and contingencies (Notes 8 and 17).............. --
------------
STOCKHOLDERS' EQUITY
Preferred stock -- $1,000 par value:
10,000,000 shares authorized, no shares issued......... --
Common stock -- $.15 par value:
50,000,000 shares authorized 6,699,987 shares issued
and outstanding...................................... 1,004,998
Paid in capital............................................. 18,524,706
Retained earnings........................................... 4,330,212
------------
TOTAL STOCKHOLDERS' EQUITY............................. 23,859,916
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............. $122,034,926
------------
------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
NAL FINANCIAL GROUP INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
----------- ----------
<S> <C> <C>
INTEREST INCOME
Finance charges and purchase discount
accretion................................. $15,680,198 $5,387,291
Interest expense............................. (7,361,527) (1,957,420)
----------- ----------
Net interest income before provision for
credit losses.......................... 8,318,671 3,429,871
Provision for credit losses.................. (2,762,273) (572,636)
----------- ----------
Net interest income after provision for
credit losses.......................... 5,556,398 2,857,235
----------- ----------
OTHER INCOME
Gain on sale of contracts.................... 4,600,721 2,292,249
Fees and other............................... 2,651,497 453,660
----------- ----------
Total other income........................ 7,252,218 2,745,909
----------- ----------
OPERATING AND OTHER EXPENSES
Salaries and employee benefits.................. 2,551,486 2,337,557
Depreciation and amortization................... 1,298,866 320,294
Occupancy expense............................... 448,625 200,377
Professional and consulting services............ 723,620 902,720
Other operating expense......................... 2,782,634 1,184,530
Non cash charge for the release of escrow
shares....................................... 280,000 --
----------- ----------
Total other expenses......................... 8,085,231 4,945,478
----------- ----------
Income before income taxes........................ 4,723,385 657,666
Provision for income taxes........................ 1,926,321 263,343
----------- ----------
NET INCOME........................................ $ 2,797,064 $ 394,323
----------- ----------
Primary net income per common and common
equivalent share................................ $ 0.45 $ 0.08
----------- ----------
Fully diluted net income per common and common
equivalent share................................ $ 0.45 $ 0.07
----------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
NAL FINANCIAL GROUP INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
PREFERRED STOCK LESS:
---------------- COMMON STOCK ----------- TOTAL
PAR ----------------------- PAID IN NOTE RETAINED STOCKHOLDERS'
SHARES VALUE SHARES PAR VALUE CAPITAL RECEIVABLE EARNINGS EQUITY
------ ------ --------- ---------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December
31, 1993.......... -- $ -- 4,286 $ 4,286 $ 3,195,325 $(2,034,638) $ 2,643,110 $ 3,808,083
Dividends........... -- -- -- -- -- -- (1,069,460) (1,069,460)
Redemption of
stock............. -- -- (2,143) (2,143) (1,597,670) 2,034,638 (434,825) --
Redemption of
predecessor stock
in connection with
the merger........ -- -- (2,143) (2,143) (1,597,655) -- -- (1,599,798)
Issuance of stock to
predecessor
stockholders in
connection with
the merger........ -- -- 3,160,000 474,000 1,125,798 -- -- 1,599,798
Issuance of stock to
stockholders of
merged entity..... -- -- 2,432,968 364,945 7,357,916 -- -- 7,722,861
Net income.......... -- -- -- -- -- -- 394,323 394,323
------ ------ --------- ---------- ----------- ----------- ----------- -------------
Balance, December
31, 1994.......... -- -- 5,592,968 838,945 8,483,714 -- 1,533,148 10,855,807
Issuance of stock... -- -- 176,500 26,475 2,074,475 -- -- 2,100,950
Issuance of
warrants.......... -- -- -- -- 397,167 -- -- 397,167
Conversion of
subordinated
debt.............. -- -- 930,519 139,578 7,289,350 -- -- 7,428,928
Release of escrow
shares............ -- -- -- -- 280,000 -- -- 280,000
Net income.......... -- -- -- -- -- -- 2,797,064 2,797,064
------ ------ --------- ---------- ----------- ----------- ----------- -------------
Balance, December
31, 1995.......... -- $ -- 6,699,987 $1,004,998 $18,524,706 $ -- $ 4,330,212 $23,859,916
------ ------ --------- ---------- ----------- ----------- ----------- -------------
------ ------ --------- ---------- ----------- ----------- ----------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
NAL FINANCIAL GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net income.................................... $ 2,797,064 $ 394,323
Adjustments to reconcile net income to net
cash used in operations......................
Accretion of discount....................... (654,124) (2,064,714)
Provision for loan losses................... 2,762,273 572,636
Depreciation and amortization............... 1,445,149 320,294
Gain on sale of loan pools.................. (4,600,721) (2,292,249)
Non-cash charge - voting trust.............. 280,000 --
Changes in assets and liabilities
Increase in excess servicing receivable..... (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 automobile finance
contracts.................................. 22,042,555 7,417,861
Purchase of automobile 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 loan
contracts.................................. 37,511,237 --
Proceeds from issuance of subordinate
debentures................................. 21,338,728 --
Proceeds from participations and credit
facilities................................. 135,178,400 33,911,781
Repayments of participations and credit
facilities................................. (81,870,973) (34,249,908)
Payment of debt issue costs................. (1,532,707) (24,352)
Note payable from stockholder............... 2,856,506 --
Dividends paid.............................. -- (1,069,459)
------------ -----------
Net cash provided by financing activities....... 115,582,141 6,290,923
------------ -----------
Net increase in cash............................ 256,133 568,839
Cash, beginning of year......................... 664,848 96,009
------------ -----------
Cash, end of year............................... $ 920,981 $ 664,848
------------ -----------
------------ -----------
Supplemental disclosures of cash flow information
Cash paid during the year for interest............ $ 6,443,859 $ 1,859,353
------------ -----------
------------ -----------
Cash paid during the year for taxes............... $ 491,558 $ 320,501
------------ -----------
------------ -----------
Supplemental schedule of non-cash investing and
financing activities
Conversion of subordinated debt................... $ 8,260,000 $ --
------------ -----------
------------ -----------
Net transfers to automobile inventory............. $ 11,742,181 $ --
------------ -----------
------------ -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
NAL FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
NOTE 1 -- ORGANIZATION AND NATURE OF OPERATIONS:
NAL Financial Group Inc. (the 'Company') commenced operations in June 1991
as a specialized finance company for the purpose of engaging in consumer finance
transactions involving the origination, purchase, remarketing and servicing of
consumer loan and lease receivables. Since June 1994, the Company's principal
business has been the acquisition and servicing of automobile finance contracts
originated by dealers ('Dealers') in connection with sales ('Loan Contracts') or
leases ('Lease Contracts') to individuals with sub-prime credit with the intent
to pool and sell these contracts (the '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 Loan 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 Loan 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 Loan Contracts through the Company's securitization
programs.
NOTE 2 -- ACCOUNTING POLICIES:
A summary of the significant accounting policies followed in the
preparation of the accompanying financial statements is presented below:
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany transactions
have been eliminated.
Revenue Recognition
Interest income consists of both contractual interest and purchase discount
accretion and is recognized over the contractual term of the Contracts using the
interest method.
Purchase discount represents the differential, if any, between the amount
financed on a Loan Contract and the price paid by the Company to acquire the
Loan Contract, net of any acquisition costs. Any discount on Loan Contracts
which management considers necessary to absorb future credit losses is allocated
to the reserves available for credit losses. The remaining portion of the
discount, if any, is recognized as interest income as described above.
F-7
<PAGE>
NAL FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 AND 1994
NOTE 2 -- ACCOUNTING POLICIES: -- (CONTINUED)
Revenue from operating Lease Contracts 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 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 Loan 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
Loan Contracts required to absorb future credit losses, based on management's
assessment, is allocated to the reserves available for credit losses.
As part of the Company's financing program with Dealers, agreements are
entered into whereby holdbacks are established to protect the Company from
potential losses. Pursuant to the agreements, when the Company acquires Loan
Contracts, it withholds a portion of the proceeds from the Dealers to absorb
credit losses. Holdback amounts are refunded to the Dealers if the Loan 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 automobile and consumer accounts no
later than 150 days of delinquency. Recovery of charged off balances begin with
the Company's collection specialists. If results are not obtained within a
reasonable time frame, the account is either turned over to a collection agency
or an attorney for action, including wage garnishment, judgment 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 Lease Contracts
Operating Lease Contracts to third parties are originated by Dealers and
acquired by the Company, which assumes ownership of the vehicle. Vehicles held
under operating lease agreements are recorded at cost and depreciated on a
straight-line basis over the lease term to the estimated residual value.
F-8
<PAGE>
NAL FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 AND 1994
NOTE 2 -- ACCOUNTING POLICIES: -- (CONTINUED)
Automobile Inventory
Vehicles acquired through repossession or termination of a Lease or Loan
Contract are valued at the lower of the unpaid principal balance or market value
at the date of repossession.
Debt Issue Costs
Debt issue costs are capitalized and amortized to operations on a
straight-line basis over the life of the related debt, which currently
approximates one to three years.
Property and Equipment
Property and equipment is stated at cost, less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the related assets.
Excess Servicing Receivable
Excess servicing receivable results from the sale of Loan Contracts on
which the Company retains servicing rights and a portion of the excess cash
flows. Excess servicing receivable is determined by computing the difference
between the weighted average yield of the Loan 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
Loan 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 automobile financing
activities to be the Southeast United States. The properties collateralizing the
other loan receivable portfolios are located primarily throughout the eastern
United States, Texas and California. Although the Company has a diversified loan
portfolio, a substantial portion of its debtors' abilities to honor their
obligations to the Company is dependant upon the economic stability of these
areas.
Interest Rate Risk
Contract acquisitions are funded primarily through participations, credit
and warehouse facilities. The participations and credit facilities bear interest
at fixed rates tied to the prime rate and the durations are determined by the
durations of the related Contracts since the proceeds of the obligor payments
are applied to the repayment of the participations. The warehouse facility bears
interest at a variable rate tied to LIBOR and the duration is determined by the
timing of the Company's securitization transactions. Contract acquisitions
financed by this facility are warehoused pending securitization. Upon completion
of a securitization, any remaining amounts due associated with the Loan
Contracts securitized are repaid along with unpaid interest.
F-9
<PAGE>
NAL FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 AND 1994
NOTE 2 -- ACCOUNTING POLICIES: -- (CONTINUED)
Earnings Per Share
Earnings per common share are computed based on the weighted average number
of common and common equivalent shares outstanding during the period. The
weighted average number of shares of common and common equivalent shares
outstanding used to compute primary and fully diluted earnings per share was
6,200,362 for the year ended December 31, 1995, and 5,192,968 and 5,592,968,
respectively, for the year ended December 31, 1994.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Estimates
that are particularly susceptible to significant change in the near term are the
adequacy of reserves available for credit losses, the present value of the
estimated future cash flows utilized to calculate excess servicing receivable,
the realization of estimated residual values on direct finance Lease Contracts
and the realization of automobile inventory.
Reclassification
Certain 1994 amounts have been reclassified to conform with current year
presentation.
NOTE 3 -- AUTOMOBILE FINANCE CONTRACTS:
Automobile finance contracts at December 31, 1995 consist of the following:
Contracts held in portfolio:
<TABLE>
<S> <C>
Direct finance Lease Contracts
payments.............................. $16,361,733
Estimated residual values............... 9,170,719
-----------
Total direct finance Lease
Contracts.......................... 25,532,452
Less: Unearned interest............... (7,069,448)
-----------
Total direct finance Lease Contracts,
net................................ 18,463,004
-----------
Loan Contracts.......................... 17,080,482
Loan Contracts with recourse............ 29,226,018
-----------
Total Loan Contracts.................. 46,306,500
-----------
Total Contracts held in portfolio....... 64,769,504
Less: Unearned fees................... (123,322)
-----------
Total Contracts held in portfolio,
net................................... 64,646,182
Contracts held for sale................. 21,685,000
Advances to Dealers..................... 13,459,454
-----------
Total automobile finance contracts,
net................................... $99,790,636
-----------
-----------
</TABLE>
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 Loan Contracts of approximately $48 million for
others.
Contracts are collateralized primarily by the related automobiles and the
related security deposits on Lease Contracts. These Contracts are pledged as
security under various debt agreements.
F-10
<PAGE>
NAL FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 AND 1994
NOTE 3 -- AUTOMOBILE FINANCE CONTRACTS: -- (CONTINUED)
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 Loan Contracts pending securitization and are stated at the lower
of cost or estimated fair value on an aggregate basis.
Advances to Dealers represent amounts funded by the Company to automobile
dealerships which are collateralized by Loan and Lease Contracts of the Dealers,
totalling approximately $18,106,000 at December 31, 1995. The Company services
Contracts amounting to $7,783,000 for two of the dealerships. These advances
bear interest at fixed rates, or at variable rates subject to certain minimum
percentages. The duration of these advances is determined by the duration of the
related collateralized Loan and Lease Contracts.
At December 31, 1995, contractual maturities of Contracts are as follows:
<TABLE>
<CAPTION>
1996 1997 1998 1999 2000 THEREAFTER TOTAL
----------- ----------- ----------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Direct finance Lease
Contracts............. $ 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 Lease Contracts.
NOTE 4 -- CONSUMER FINANCE CONTRACTS:
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------
<S> <C>
Mobile homes...................................... $ 221,434
Equipment leases (net of unearned interest of
$285,730)....................................... 853,637
Other............................................. 1,407,601
------------
Total........................................... 2,482,672
Less: Purchase discount........................... (193,169)
------------
Consumer loans receivable, net.................... $ 2,289,503
------------
------------
</TABLE>
Included in the total above are fully matured loans totaling $270,491 that
were purchased by the Company at a substantial discount and are considered
non-performing at December 31, 1995. The Company has a net investment of
approximately $77,322 in these loans at December 31, 1995.
At December 31, 1995, contractual maturities of consumer finance contracts
were:
<TABLE>
<S> <C>
Fully matured...... $ 270,491
1996............. 711,666
1997............. 474,683
1998............. 396,539
1999............. 255,868
2000............. 101,976
Thereafter....... 271,449
----------
$2,482,672
----------
----------
</TABLE>
F-11
<PAGE>
NAL FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 AND 1994
NOTE 4 -- CONSUMER FINANCE CONTRACTS: -- (CONTINUED)
It is the Company's experience that a portion of the portfolio is repaid
before the contractual maturity date. Accordingly, the above tabulation is not
to be regarded as a forecast of the timing of future cash collections.
NOTE 5 -- MORTGAGE FINANCE CONTRACTS:
<TABLE>
<CAPTION>
DECEMBER
31,
1995
----------
<S> <C>
Residential mortgages................... $2,064,043
Less: Purchase discount................. (258,975)
----------
Mortgage finance contracts, net......... $1,805,068
----------
----------
</TABLE>
Included in the total above are fully matured loans totaling $351,221 that
were purchased by the Company at a substantial discount and are considered
non-performing at December 31, 1995. The Company has a net investment of $92,246
in these loans at December 31, 1995.
At December 31, 1995, contractual maturities of mortgage finance contracts
were:
<TABLE>
<S> <C>
Fully matured...... $ 351,221
1996............. 441,815
1997............. 270,965
1998............. 190,060
1999............. 74,722
2000............. 131,197
Thereafter....... 604,063
----------
$2,064,043
----------
----------
</TABLE>
It is the Company's experience that generally a portion of the portfolio is
repaid before the contractual maturity dates. Accordingly, the above tabulation
is not to be regarded as a forecast of the timing of future cash collections.
These loans are pledged as security for the participations.
F-12
<PAGE>
NAL FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 AND 1994
NOTE 6 -- RESERVES AVAILABLE FOR CREDIT LOSSES:
Changes in reserves available for credit losses for the years ended
December 31, 1995 and 1994 consisted of the following:
<TABLE>
<CAPTION>
1995
---------------------------------------------------- 1994
NON- REFUNDABLE ----------
ALLOWANCE REFUNDABLE DEALER ALLOWANCE
FOR LOSSES DISCOUNT RESERVES TOTAL FOR LOSSES
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance at beginning of
period...................... $ 305,000 $ -- $ -- $ 305,000 $ 277,316
Additions:
Provision charged to
income................... 2,762,273 -- -- 2,762,273 572,636
Other additions............. -- 4,159,048 817,122 4,976,170 --
Reductions:
Charge-offs, net of
recoveries............... (2,414,275) (584,767) (162,864) (3,161,906) (544,952)
Release of reserves upon
securitization of Loan
Contracts................ -- (2,061,280) (127,000) (2,188,280) --
Refund of dealer reserve.... -- -- (22,256) (22,256) --
---------- ---------- ---------- ---------- ----------
Balance at end of period...... $ 652,998 $1,513,001 $ 505,002 $2,671,001 $ 305,000
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
The Company allocated approximately $4.2 million to the reserves available
for credit losses during 1995, which represents management's estimate of the
purchase discount on Loan 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
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.
NOTE 7 -- NET INVESTMENT IN OPERATING LEASE CONTRACTS:
<TABLE>
<CAPTION>
DECEMBER
31,
1995
----------
<S> <C>
Vehicles held under operating Lease
Contracts, at cost......................... $4,449,451
Less: Accumulated depreciation............... (394,838)
----------
$4,054,613
----------
----------
</TABLE>
At December 31, 1995, future minimum rental revenue on operating Lease
Contracts are as follows:
<TABLE>
<S> <C>
1996.... $1,078,762
1997.... 937,021
1998.... 430,164
1999.... 24,876
----------
$2,470,823
----------
----------
</TABLE>
F-13
<PAGE>
NAL FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 AND 1994
NOTE 8 -- PROPERTY AND EQUIPMENT:
Property and equipment at December 31, 1995 consists of the following:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIFE
-----------
<S> <C> <C>
Furniture, fixtures, and office
equipment............................. $2,158,928 5-7 years
Less: Accumulated depreciation.......... (356,039)
----------
$1,802,889
----------
----------
</TABLE>
The Company leases office space under agreements which expire December 31,
2002.
The future minimum non-cancelable lease payments are as follows:
<TABLE>
<S> <C>
1996......... $ 598,872
1997......... 617,570
1998......... 644,583
1999......... 672,408
2000......... 701,095
Thereafter... 1,019,322
----------
$4,253,850
----------
----------
</TABLE>
NOTE 9 -- EXCESS SERVICING RECEIVABLE:
The Company's excess servicing receivable at December 31, 1995 consists of
the following:
<TABLE>
<S> <C>
Servicing cash flows on Loan Contracts 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 receivable....................... $4,999,000
----------
----------
</TABLE>
NOTE 10 -- DEBT PARTICIPATION INTERESTS:
Debt participation interests at December 31, 1995 consists of the
following:
<TABLE>
<S> <C>
Participation with Fairfax Savings, a Federal Savings Bank
('Fairfax'), interest at fixed rates ranging from 10% to 13.5%;
principal and interest due monthly, secured by undivided
interest in automobile finance contracts, consumer finance
contracts, and mortgage finance contracts...................... $41,845,372
Participations with investors, secured by undivided interest in
automobile finance contracts, consumer finance contracts and
mortgage finance contracts; interest at a fixed rate of 18%.... 470,432
Participations with a stockholder, secured by undivided interest
in certain automobile finance contracts and mortgage finance
contracts; interest at fixed rates of 11.5%-18%................ 64,718
-----------
$42,380,522
-----------
-----------
</TABLE>
F-14
<PAGE>
NAL FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 AND 1994
NOTE 10 -- DEBT PARTICIPATION INTERESTS: -- (CONTINUED)
In general, under the terms of the participation agreements, principal
payments on the agreements are tied to the payments received from the Contracts
which secure the borrowings. Interest is due monthly. Proceeds received from
contracts financed by Fairfax are first paid to Fairfax to the extent of any
unpaid principal and interest due on participations. Thereafter, proceeds are
allocated to a reserve account until certain balances are achieved and the
remainder is paid to the Company.
Under the Company's participation agreements, collections received from
Contracts 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 Contracts collateralizing the
participation arrangements, including payment collection and posting, contact
with customers, and repossession and disposal of collateral on defaulted
Contracts.
Scheduled maturities of debt participation interests at December 31, 1995
are as follows:
<TABLE>
<S> <C>
1996......... $11,971,194
1997......... 10,532,585
1998......... 10,832,758
1999......... 6,699,261
2000......... 2,127,517
Thereafter... 217,207
-----------
$42,380,522
-----------
-----------
</TABLE>
NOTE 11 -- CREDIT AND WAREHOUSE FACILITIES:
Credit and warehouse facilities at December 31, 1995 consists of the
following:
<TABLE>
<S> <C>
Note payable under a $25 million automobile loan and lease
financing facility, interest due monthly at 5.5% over LIBOR
established and fixed at time of funding (weighted average rate
of 9.3% at December 31, 1995) with General Electric Capital
Corporation, secured by certain automobile finance contracts... $21,844,149
Note payable under a $50 million repurchase financing facility
with Greenwich Capital secured by automobile 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
automobile finance contracts, consumer finance contracts, and
mortgage finance
contracts...................................................... --
-----------
$33,428,946
-----------
-----------
</TABLE>
The repurchase facility is used to warehouse Loan Contracts pending
securitization. Under the terms of the repurchase facility, the Company has
agreed to engage the lender as investment underwriter on these securitization
transactions until such time that the Company has securitized a cumulative $250
million in Loan Contracts.
F-15
<PAGE>
NAL FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 AND 1994
NOTE 11 -- CREDIT AND WAREHOUSE FACILITIES: -- (CONTINUED)
Scheduled maturities of credit and warehouse facilities at December 31,
1995 are as follows:
<TABLE>
<S> <C>
Upon securitization.... $11,584,797
1996................... 5,071,529
1997................... 5,459,096
1998................... 6,081,862
1999................... 4,441,201
2000................... 765,133
Thereafter............. 25,328
-----------
$33,428,946
-----------
-----------
</TABLE>
Since the repayment of the above debt is directly related to the timing of
the future cash collections of the related 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 Loan Contracts
collateralizing the facility.
The Company must maintain certain net worth and liquidity ratios based on
covenants within its debt agreements.
NOTE 12 -- CONVERTIBLE SUBORDINATED DEBT:
Convertible subordinated debt at December 31, 1995 consists of the
following:
<TABLE>
<S> <C>
Principal outstanding....................................... $13,065,000
Value assigned to warrants on outstanding debt.............. (140,621)
-----------
Convertible subordinated debt, net.......................... $12,924,379
-----------
-----------
</TABLE>
During 1995, the Company completed the offering and sale in private
placement transactions of 9% Convertible Subordinated Debt (the 'Debentures')
along with detachable common stock purchase warrants. The principal amount and
accrued interest due under the Debentures is convertible into shares of common
stock at the option of the holders at conversion prices ranging from $9.00 to
$12.50. In addition, the Company may redeem the debt together with accrued
interest, at redemption prices ranges from $15 to $25, provided that the stock
price of the Company's common stock trades at the redemption price for twenty
consecutive trading days. Through December 31, 1995, an aggregate of $8,260,000
of Debentures was converted into 930,519 shares of common stock.
Scheduled maturities of convertible subordinated debt at December 31, 1995
are as follows:
<TABLE>
<S> <C>
1996.... $10,065,000
1997.... --
1998.... 3,000,000
-----------
$13,065,000
-----------
-----------
</TABLE>
NOTE 13 -- STOCKHOLDERS' EQUITY:
In October 1993, the president and chief executive officer of the Company,
who is also a stockholder, purchased all outstanding shares not previously owned
by him to give him 95% ownership in the Company. The president of NAC owned the
remaining 5%. In connection with this transaction,
F-16
<PAGE>
NAL FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 AND 1994
NOTE 13 -- STOCKHOLDERS' EQUITY: -- (CONTINUED)
the stockholder executed a note in favor of the Company; the note bore interest
at 5% and was due September 30, 1995. In June 1994, the Company redeemed 2,143
shares of its common stock from this stockholder by cancelling the note.
Merger
In accordance with the terms of the Merger, of the 3,160,000 shares of
common stock issued to the Company's stockholders, 400,000 shares issued to
certain directors and officers were placed in a Voting Trust under the terms of
a Voting Trust Agreement. The Voting Trust provides that, on any matter
requiring stockholder vote, the trustee will vote the shares in the same
percentage as the other then issued and outstanding shares of common stock are
voted. Such shares may be released from the Voting Trust pursuant to the
following formula. Based upon the Company's audited financial statements for the
years ending December 31, 1995, 1996, and 1997, 10,000 shares will be released
for each $150,000 of cumulative net income after taxes the Company earns up to
$3,000,000, and 5,000 shares will be released for each $150,000 of cumulative
net income after taxes in excess of $3,000,000, less the number of shares
previously released under this formula. Any shares not released within three
years will be cancelled. Originally, the Company intended to account for the
release of all shares held in the Voting Trust as compensation expense. In 1995,
the Company reassessed the accounting for shares after further consideration of
the relevant facts and circumstances and has determined that the release of
340,000 of the 400,000 shares placed into the Voting Trust will be considered
additional consideration of the Merger and not result in compensation expense.
The remaining 60,000 shares will still be considered compensatory in nature
resulting in a charge to earnings for the fair market value at the date of
release. As of December 31, 1995, 200,000 of the 400,000 shares have been earned
and are eligible for release of which $280,000 has been reflected as a non-cash
charge to operations for the portion of the 60,000 shares eligible for release.
Concurrent with the completion of the Merger, certain stockholders entered
into a Shareholders' Agreement whereby the stockholders agreed, among other
provisions, for the election of eight directors, two of which will be
independent directors. The Shareholders' Agreement also provides certain
limitations on transactions involving the stockholders' shares.
Stock Option Plan
The Company adopted a 1994 stock option plan (the '1994 Plan'), which
covers 600,000 shares of the Company's common stock. Under the terms of the 1994
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 1994 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
('SARs') may be granted on terms determined by the Company's Board of Directors.
SARs give the holder the privilege of surrendering such rights for the
appreciation in the Company's common stock between the time of grant and
surrender.
F-17
<PAGE>
NAL FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 AND 1994
NOTE 13 -- STOCKHOLDERS' EQUITY: -- (CONTINUED)
The following table presents activity for the 1994 Plan for the years ended
December 31, 1995 and 1994:
<TABLE>
<CAPTION>
NUMBE OF
SHARES PRICE PER SHARE
--------- ---------------
<S> <C> <C>
Options Outstanding, December 31, 1993... -- --
Options granted.......................... 215,000 $ 6.00 -- $ 6.60
Options exercised........................ -- --
Options cancelled........................ -- --
---------
Options Outstanding, December 31, 1994... 215,000 $ 6.00 -- $ 6.60
Options granted.......................... 328,500 $13.25 -- $16.50
Options exercised........................ -- --
Options cancelled........................ -- --
---------
Options Outstanding, December 31, 1995... 543,500 $ 6.00 -- $16.50
---------
---------
</TABLE>
Aggregate proceeds from the exercise of all options outstanding approximate
$6 million at December 31, 1995. No options were exercisable at December 31,
1995.
Purchase Option
During August 1995, the Company acquired an option to purchase (the
'Purchase Option') 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 Loan Contracts. The Purchase 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. A
Purchase Option price of $250,000 paid to SFI on August 1, 1995 is to be
credited against the purchase price.
In the event the Company decides to exercise the Purchase Option, the
Company has agreed to register the shares of Common Stock to be distributed in
the transaction, and pending such registration, the Company has agreed to lend
up to $900,000 to the sole stockholder of SFI at then prevailing market rates of
interest, with such loan being secured by a security interest in up to 120,000
shares until such time as the shares are registered.
Management is currently evaluating the economic benefits of exercising the
Purchase Option and to date, has made no determination on the likelihood of
whether or when such a purchase may occur, if at all. In the interim, the
Purchase Option provides the Company with a right of first refusal to purchase
all of the Loan Contracts acquired or originated by SFI.
Stock Purchase Warrants
The Company has issued detachable stock purchase warrants (the 'warrants')
in connection with the private placement of convertible subordinated debt. At
December 31, 1995, the Company had 1,961,125 in warrants outstanding at exercise
prices ranging from $9 to $15. The warrants contain features that permit
redemption at $.001 per warrant based on the average trading prices of the
Company's common stock.
F-18
<PAGE>
NAL FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 AND 1994
NOTE 14 -- INCOME TAXES:
The components of the provision for income taxes for the years ended
December 31, 1995 and 1994, consist of the following:
<TABLE>
<CAPTION>
1995 1994
---------- --------
<S> <C> <C>
Current tax expense:
Federal.......................... $ 360,243 $231,591
State............................ 72,951 43,981
---------- --------
433,194 275,572
---------- --------
Deferred tax expense (benefit):
Federal.......................... 1,349,092 (10,390)
State............................ 144,035 (1,839)
---------- --------
1,493,127 (12,229)
---------- --------
Total provision for income taxes... $1,926,321 $263,343
---------- --------
---------- --------
</TABLE>
The income tax provision differs from the amount determined by multiplying
pre-tax income by the statutory federal income tax rate. The reconciliation
between the expected tax provision and the actual tax provision for the years
ended December 31, 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
1995 1994
---------- --------
<S> <C> <C>
Income taxes at statutory rate..... $1,653,185 $223,606
State taxes........................ 141,721 27,814
Other.............................. 131,415 11,923
---------- --------
Provision for income taxes......... $1,926,321 $263,343
---------- --------
---------- --------
</TABLE>
The net deferred income tax liability as of December 31, 1995 is comprised
of the following temporary differences:
<TABLE>
<S> <C>
Deductible Temporary Differences
Depreciation................................. $ 5,850,659
Bad debt reserves............................ 362,441
Other........................................ --
-----------
Deferred income tax asset.................... 6,213,100
-----------
Taxable Temporary Differences
Direct financing Lease Contracts............. (6,685,591)
Book over tax gain on sale of contracts...... (1,131,096)
Capitalized loan costs....................... --
-----------
Deferred income tax liability................ (7,816,687)
-----------
Net deferred income tax liability............ $(1,603,587)
-----------
-----------
</TABLE>
NOTE 15 -- RELATED PARTY TRANSACTIONS:
In October 1994, the Company sold a repossessed boat to an officer of the
Company in consideration for a note in the amount of $89,000 and the offset by
the Company of $21,000 payable to the officer. The note bore interest at an
annual rate of 10% and was repaid in 1995.
On November 30, 1994, the Company sold a portfolio of 14 loans with a total
principal balance of $1.1 million to the president and chief executive officer
of the Company for a price of $591,000. These loans were included in a portfolio
purchased during 1994 at a significant discount. The portion of the
F-19
<PAGE>
NAL FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 AND 1994
NOTE 15 -- RELATED PARTY TRANSACTIONS: -- (CONTINUED)
purchase price allocated to the loans sold approximated the sales price to the
officer; therefore, no gain or loss was recognized on the sale. The Company sold
these loans at a purchase price based on the estimated discounted cash flows
anticipated on the specific loans purchased. This is the same method the Company
uses to value its bulk portfolio acquisitions. The sales price of the loans
reduced a previously established liability owed by the Company to the officer
for bonuses and dividends. The Company continues to service the loans for the
officer.
An affiliate provided executive and financial services to the Company
during 1994. The Company reimbursed the affiliate $675,000 for these services
under a consulting agreement. The consulting agreement includes providing advice
on the purchase and sale of consumer loan and lease portfolios and financing
arrangements. Under the terms of the agreement, the Company pays the affiliate a
fee of $50,000 per month through March 1995. During 1994, the Company prepaid
the remaining amounts due under the contract at a $75,000 discount.
Upon completion of the Merger, the Company entered into an employment
agreement (the 'Agreement') with the president and chief executive officer of
the Company. The Agreement provides for a base salary of $275,000 per year plus
discretionary bonuses, as approved by the Board of Directors, in addition to
certain benefits. The Agreement is renewable annually for successive three year
periods; however, the president may terminate the Agreement upon written notice
the earlier of one year from the date of such notice or 90 days after his
replacement has been hired by the Company. The president may not terminate the
Agreement prior to three years from the date of the Agreement. During 1995, the
Board of Directors approved an increase in base salary to $300,000 per year.
At December 31, 1995, the Company had a stockholder loan payable in the
amount of $2,919,000, interest at 9%, which is due on March 31, 1996. However,
this loan may be extended at the discretion of the chief executive officer for
30 day periods.
NOTE 16 -- EMPLOYEE BENEFITS:
The Company sponsors a 401(k) savings plan covering most employees.
Contributions made by the Company to the 401(k) plan are based on a specified
percentage of employee contributions. Total Company contributions were $48,355
and $22,787 for the years ended December 31, 1995 and 1994, respectively.
NOTE 17 -- LITIGATION:
The Company is involved in various litigation matters arising in the normal
course of business. Legal counsel's and management's assessment are that none of
these matters are anticipated to have a material adverse impact on the financial
position or results of operations of the Company.
NOTE 18 -- FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument for which it is practicable to estimate
that value. Fair value estimates are made at a specific point in time using
estimates of rates of return that the Company believes would be required by
independent third party investors. Accordingly, these estimates may not be
indicative of rates that would be required if actual sales had taken place.
F-20
<PAGE>
NAL FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 AND 1994
NOTE 18 -- FAIR VALUE OF FINANCIAL INSTRUMENTS: -- (CONTINUED)
Finance Receivables
The fair value of finance receivables is computed by using estimated market
rates of return desired by bulk purchasers.
Excess Servicing Receivable
Excess servicing cash flows over the estimated remaining life of the Loan
Contracts have been calculated using estimates for prepayments, losses and
weighted average discount rates, which the Company expects market participants
would use for similar instruments. Accordingly, the carrying amount approximates
the fair value.
Debt Participation Interests; Credit and Warehouse Facilities
The fair value of existing debt is computed based on rates currently
available to the Company for debt with similar terms and maturities.
Other Financial Liabilities
The fair value of other financial liabilities closely approximates carrying
amount.
The estimated fair values of the Company's financial instruments at
December 31, 1995 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------------------
CARRYING FAIR
AMOUNT VALUE
------------ ------------
<S> <C> <C>
Financial Assets:
Cash......................................... $ 920,981 $ 920,981
Restricted cash.............................. 1,031,734 1,031,734
Finance receivables:
Automobile 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 receivable.................. 4,999,165 4,999,165
------------ ------------
Total................................... $108,166,086 $108,639,904
------------ ------------
------------ ------------
Financial Liabilities:
Debt participation interests................. $ 42,380,522 $ 42,305,963
Credit and warehouse facilities.............. 33,428,946 33,017,076
Convertible subordinated debt................ 12,924,379 12,924,379
Stockholder loans............................ 2,919,000 2,919,000
------------ ------------
Total................................... $ 91,652,847 $ 91,166,418
------------ ------------
------------ ------------
</TABLE>
NOTE 19 -- SUBSEQUENT EVENTS:
In January 1996, the Company completed the sale of $2.5 million of
additional subordinated debentures with terms similar to previously issued
convertible subordinated debt.
On March 22, 1996, the Company completed a securitization of Loan Contracts
of approximately $40.8 million.
F-21
<PAGE>
NAL FINANCIAL GROUP INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- -------------
<S> <C> <C>
ASSETS:
Cash and cash equivalents....................... $ 3,090 $ 921
Restricted cash................................. 1,482 1,032
Finance receivables, net........................ 87,739 101,214
Investment in operating Lease Contracts......... 8,905 4,055
Automobile inventory............................ 2,384 1,886
Excess servicing receivable..................... 22,898 4,999
Premises and equipment, net..................... 2,685 1,803
Accrued interest receivable..................... 2,875 1,460
Debt issue costs................................ 2,336 857
Goodwill........................................ 3,671 --
Other assets.................................... 6,768 3,808
------------- -------------
TOTAL ASSETS $ 144,833 $ 122,035
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Credit and warehouse facilities................. $ 49,191 $ 33,429
Debt participation interests.................... 21,682 42,380
Convertible subordinated debt................... 25,843 12,924
Accounts payable and accrued expenses........... 2,233 1,047
Income taxes payable............................ 4,713 1,604
Stockholder loan................................ -- 2,919
Other liabilities............................... 3,913 3,872
------------- -------------
TOTAL LIABILITIES 107,575 98,175
------------- -------------
STOCKHOLDERS' EQUITY:
Preferred Stock - $1,000 par value:
10,000,000 shares authorized, no shares
issued
Common Stock - $.15 par value:
50,000,000 shares authorized, 7,252,935
shares outstanding at September 30, 1996
and 6,699,987 shares outstanding at
December 31, 1995.......................... 1,088 1,005
Paid in capital................................. 25,698 18,525
Retained earnings............................... 10,472 4,330
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 37,258 23,860
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 144,833 $ 122,035
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-22
<PAGE>
NAL FINANCIAL GROUP INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS
ENDED SEPTEMBER
30,
------------------
1996 1995
------- -------
<S> <C> <C>
INTEREST INCOME:
Finance charges and discount accretion............... $17,154 $10,999
Interest expense..................................... (8,218) (4,636)
------- -------
Net interest income............................... 8,936 6,363
Provision for credit losses.......................... (2,801) (1,412)
------- -------
Net interest income after provision
for credit losses.............................. 6,135 4,951
------- -------
OTHER INCOME:
Gain on sale of contracts............................ 13,427 128
Fees and other....................................... 4,670 1,241
------- -------
Total other income............................. 18,097 1,369
------- -------
OTHER EXPENSES:
Salaries and employee benefits....................... 6,060 1,373
Depreciation and amortization........................ 1,250 691
Occupancy expense.................................... 773 289
Professional services................................ 1,401 488
Other operating expense.............................. 4,360 1,673
Non cash charge for the release of
escrow shares..................................... 301 80
------- -------
Total other expenses........................... 14,145 4,594
------- -------
Income before income taxes........................... 10,087 1,726
Provision for income taxes........................... (3,945) (656)
------- -------
NET INCOME............................................. $ 6,142 $ 1,070
------- -------
------- -------
Primary Earnings Per Share:
Net income available to common and common
equivalent shares.................................... $ 6,900 $ 1,070
Weighted average number of common and
common equivalent shares............................. 8,484 5,875
Net income per share................................... $ 0.81 $ 0.18
Fully Diluted Earnings Per Share:
Net income available to common and common
equivalent shares.................................... $ 7,827 $ 1,070
Weighted average number of common and
common equivalent shares............................. 10,369 6,013
Net income per share................................... $ 0.75 $ 0.18
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-23
<PAGE>
NAL FINANCIAL GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
--------------------
1996 1995
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net Income........................................... $ 6,142 $ 1,070
Adjustments to reconcile net income to net
cash provided by operations:
Accretion of discount.......................... -- (599)
Provision for credit losses.................... 2,801 1,412
Depreciation and amortization.................. 3,101 691
Gain on sale of loan pools..................... (13,427) (128)
Non-cash charge - escrow shares................ 301 80
Return of excess servicing cashflows........... 1,949 --
Changes in assets and liabilities:
Other, net..................................... (760) 362
-------- --------
Net cash provided by operating activities:............. 107 2,888
-------- --------
Cash flows from investing activities:
Purchase of receivables........................... (197,445) (108,876)
Payments received on receivables.................. 42,427 31,788
Purchase of property and equipment................ (1,066) (689)
Proceeds from sale of loan pools.................. -- 1,623
Purchase of Special Finance, Inc.................. (750) (250)
-------- --------
Net cash used in investing activities:................. (156,834) (76,404)
-------- --------
Cash flows from financing activities:
Net proceeds from financings...................... 196,152 111,094
Repayments of financings.......................... (201,088) (40,662)
(Repayments) proceeds of stockholder loan......... (2,919) 791
Net proceeds from securitization of Loan
Contracts....................................... 149,251 --
Proceeds from subordinated debentures............. 17,500 --
Issuance of common stock.......................... -- 2,101
-------- --------
Net cash provided by financing activities:............. 158,896 73,324
-------- --------
Net increase (decrease) in cash and cash equivalents... 2,169 (192)
Cash and cash equivalents, beginning of period......... 921 665
-------- --------
Cash and cash equivalents, end of period............... $ 3,090 $ 473
-------- --------
-------- --------
Supplemental disclosures of cash flows information:
Cash paid during the period for interest............... $ 4,724 $ 3,965
-------- --------
-------- --------
Cash paid during the period for taxes.................. $ 1,465 $ 346
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-24
<PAGE>
NAL FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- BASIS OF PRESENTATION:
The interim financial information of NAL Financial Group Inc. (the
'Company'), which is included herein, is unaudited and has been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB. In the opinion of
management, these interim financial statements include all the adjustments
necessary to fairly present the results of the interim periods and all such
adjustments which are of a normal recurring nature. The interim financial
statements presented herein include the accounts of the Company and its
wholly-owned subsidiaries and should be read in conjunction with the audited
financial statements, and the footnotes thereto, for the year ended December 31,
1995. Certain 1995 amounts have been reclassified to conform with the current
year presentation.
Operating results for the nine month period ended September 30, 1996 are
not necessarily indicative of the results which may be expected for the year
ending December 31, 1996.
NOTE 2 -- FINANCE RECEIVABLES:
Finance receivables as of September 30, 1996 and December 31, 1995 consist
of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 DECEMBER 31, 1995
------------------ -----------------
(IN THOUSANDS)
<S> <C> <C>
Automobile finance contracts
Gross contracts receivable...................... $ 97,454 $ 106,983
Less: Unearned interest...................... (8,154) (7,069)
Deferred acquisition fees............... (382) (123)
---------- -----------------
88,918 99,791
---------- -----------------
Consumer contracts receivable
Gross contracts receivable...................... 2,056 2,768
Less: Unearned interest...................... (160) (286)
Purchase discount....................... (102) (193)
---------- -----------------
1,794 2,289
---------- -----------------
Mortgage loans receivable
Gross loans receivable.......................... 1,559 2,064
Less: Purchase discount...................... (285) (259)
---------- -----------------
1,274 1,805
---------- -----------------
Total finance receivables......................... 91,986 103,885
Reserve available for credit losses............... (4,247) (2,671)
---------- -----------------
Total finance receivables, net.................... $ 87,739 $ 101,214
---------- -----------------
---------- -----------------
</TABLE>
The reserve available for credit losses consists of an allowance for losses
established through a provision from earnings, non-refundable purchase discount
on Loan Contracts purchased from Dealers, and refundable reserves such as dealer
holdback. Purchase discount represents the differential, if any, between the
amount financed on a Loan Contract and the price paid by the Company to acquire
the Loan Contract, net of any acquisition costs. Any discount on Loan Contracts
which management considers necessary to absorb future credit losses is allocated
to the reserve available for credit losses. The remaining portion of the
discount, if any, is recognized as interest income over the life of the Loan
Contracts.
F-25
<PAGE>
NAL FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3 -- EXCESS SERVICING RECEIVABLE:
Excess servicing receivable results from the sale of Loan Contracts on
which the Company retains servicing rights and a portion of the excess cash
flows. Excess servicing receivable is determined by computing the difference
between the weighted average yield of the Loan Contracts sold and the yield to
the purchaser of the asset-backed security, adjusted for the contractual
servicing fee based on the agreements between the Company and the purchaser. The
resulting differential is recorded as a gain in the year of the sale equal to
the present value of the estimated future cash flows, net of any portion of the
excess that may be due to the purchaser and adjusted for anticipated
prepayments, repossessions, liquidations and other losses. The excess servicing
cash flows over the estimated remaining life of the Loan Contracts have been
calculated using estimates for prepayments, losses (charge-offs) and weighted
average discount rates, which the Company expects market participants would use
for similar instruments. The Company updates its cash flows on a quarterly basis
using actual rates of prepayments and losses to assess the remaining value of
the excess servicing receivable in the aggregate.
NOTE 4 -- VOTING TRUST AGREEMENT:
On November 30, 1994, the Company became publicly held by virtue of the
Merger with an existing, yet inactive, public company. Of the 3,160,000 shares
of the Company's common stock received by certain stockholders in conjunction
with the Merger, 400,000 shares were placed into the Voting Trust Agreement by
which shares may be released on an annual basis pursuant to a formula tied to
net income earned by the Company. Any shares not released from the Voting Trust
Agreement at the end of three years will be canceled.
Management has evaluated the accounting treatment relating to the potential
release of the shares under the Voting Trust Agreement using recent accounting
guidance and the relevant facts and circumstances, and has determined that the
potential release of approximately 340,000 shares of the total amount of shares
held under the Voting Trust Agreement is not compensatory. The potential release
of the remaining approximately 60,000 shares is considered compensatory based on
the relevant facts and circumstances and, accordingly, an expense has been
reflected for financial reporting purposes as these shares became eligible for
release. This expense was a non-cash charge and did not affect working capital
or total stockholders' equity.
Compensation expense of $301,000 and $80,000 has been recorded for the nine
months ended September 30, 1996 and 1995, respectively, for the portion of the
60,000 shares that has become eligible for release under the Voting Trust
Agreement. As of September 30, 1996, all of the 400,000 shares under the Voting
Trust Agreement have become eligible for release.
NOTE 5 -- BUSINESS COMBINATION:
As of June 28, 1996, the Company purchased certain assets of SFI, a Florida
based automobile finance company pursuant to a Purchase Option for a purchase
price of $1 million, plus 125,000 shares of the Company's Common Stock and
options to purchase 65,000 shares of Common Stock at an exercise price of $6.00
per share. A Purchase Option price of $250,000 paid to SFI on August 1, 1995 was
credited against the purchase price. As a result of this purchase, the Company
recorded goodwill in the amount of $3.8 million.
NOTE 6 -- RECENT ACCOUNTING PRONOUNCEMENTS:
In October 1995, the Financial Accounting Standards Board ('FASB') issued
Statement of Financial Accounting Standards No. 123 ('SFAS No. 123'),
'Accounting for Stock-Based Compensation.' SFAS No. 123 establishes financial
accounting and reporting standards for stock-
F-26
<PAGE>
NAL FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6 -- RECENT ACCOUNTING PRONOUNCEMENTS: -- (CONTINUED)
based employee compensation plans. The statement defines a 'fair value based
method' of accounting for employee stock options or similar equity instruments
and encourages all entities to adopt that method of accounting for all of their
employee stock compensation plans. However, SFAS No. 123 also allows an entity
to continue to measure compensation costs for those plans using the 'intrinsic
value based method' of accounting, which the Company currently uses. The
accounting requirements of SFAS No. 123 are effective for transactions entered
into during fiscal years beginning after December 15, 1995. The disclosure
requirements are effective for financial statements for fiscal years beginning
after December 15, 1995, or for an earlier fiscal year for which SFAS No. 123 is
initially adopted for recognizing compensation cost. Management has determined
that the Company will continue to measure compensation costs using the
'intrinsic value based method' and will disclose the effect on net income and
earnings per share using the 'fair value based method' in the footnotes to the
Company's financial statements upon the adoption of SFAS No. 123.
In June 1996, the FASB issued Statement of Financial Accounting Standards
No. 125 ('SFAS No. 125'), 'Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities.' SFAS No. 125 provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishment of liabilities based on a financial-components approach that
focuses on control. SFAS No. 125 is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after December 31,
1996 and is to be prospectively applied. However, a proposal has recently been
developed to defer, for one year, certain provisions of SFAS No. 125. Management
is currently evaluating the impact of adoption of SFAS No. 125 on its financial
position and results of operations.
NOTE 7 -- SUBSEQUENT EVENTS:
On November 8, 1996, the Company filed a Registration Statement on Form
SB-2 (No. 333-15787), as amended on November 22, 1996 by Pre-Effective Amendment
No. 1 and on December 23, 1996 by Pre-Effective Amendment No. 2 to the
Registration Statement, with the Securities and Exchange Commission relating to
a proposed public offering of 2,500,000 shares of Common Stock. Net proceeds of
the offering will be used to support growth and for general corporate purposes,
including working capital, future acquisitions, the repayment of certain
advances totaling $2,413,869 to the Chief Executive Officer and the repayment of
short-term indebtedness of $2,000,000. Pending such use, the net proceeds will
be used to repay indebtedness under the Company's warehouse and other credit
facilities.
F-27
<PAGE>
[This page intentionally left blank]
<PAGE>
----------------------------------------------------------
----------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY ANY
SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS, NOR
DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY THE
SHARES OF COMMON STOCK BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Available Information....................................... 2
Prospectus Summary.......................................... 3
Summary Financial Information............................... 7
Risk Factors................................................ 8
Use of Proceeds............................................. 15
Price Range of Common Stock................................. 16
Dividend Policy............................................. 16
Capitalization.............................................. 17
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 18
The Company................................................. 33
Management.................................................. 52
Certain Transactions........................................ 59
Principal Stockholders...................................... 61
Description of Securities................................... 64
Shares Eligible for Future Sale............................. 70
Underwriting................................................ 71
Legal Matters............................................... 72
Statement of Indemnification................................ 72
Experts..................................................... 73
Additional Information...................................... 73
Index to Financial Statements............................... F-1
</TABLE>
----------------------------------------------------------
----------------------------------------------------------
----------------------------------------------------------
----------------------------------------------------------
2,500,000 Shares
NAL FINANCIAL GROUP INC.
Common Stock
------------------------
PROSPECTUS
------------------------
PRUDENTIAL SECURITIES INCORPORATED
PIPER JAFFRAY INC.
SANDS BROTHERS & CO., LTD.
December 23, 1996
----------------------------------------------------------
----------------------------------------------------------
