SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From _________ To ____________
NAL FINANCIAL GROUP INC.
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 0-25476 23-2455294
- ------------------------ --------------------- -------------------
(State of Incorporation) (Commission File No.) (IRS Employer
Identification No.)
500 Cypress Creek Road West
Suite 590
Fort Lauderdale, Florida 33309
Registrant's telephone number, including area code: (954) 938-8200
Not Applicable
-------------------------------------------
(Former Name, if Changed Since Last Report)
Indicate by check whether the Registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
(1) Yes X No
--- ---
(2) Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of the Registrant's sole class of common
stock, as of November 14, 1997 is 50,000,000 shares.
<PAGE>
NAL FINANCIAL GROUP INC.
INDEX
PART I. FINANCIAL INFORMATION* PAGE
Item 1. Consolidated Balance Sheets as of September 30,
1997 (Unaudited) and December 31, 1996 1
Consolidated Statements of Operations for the
three months ended September 30, 1997 and 1996
(Unaudited) and for the nine months ended
September 30, 1997 and 1996 (Unaudited) 2
Consolidated Statements of Cash Flows for the
nine months ended September 30, 1997 and 1996
(Unaudited) 3
Notes to Consolidated Financial Statements 4-10
Item 2.
Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-32
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 32-33
Item 2. Changes in Securities 34
Item 3. Defaults Upon Senior Securities 34
Item 4. Submission of Matters to a Vote of Security Holders 34
Item 5. Other Information 35
Item 6. Exhibits and Reports on Form 8-K 36
*The accompanying financial information as of September 30, 1997 and
the three and nine months then ended is not covered by an Independent
Certified Public Accountant's Report.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
NAL FINANCIAL GROUP INC.
Consolidated Balance Sheets
(In thousands, except share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 678 $ 6,781
Restricted cash 1,445 1,237
Contract receivables, net 57,488 67,776
Investment in operating leases, net 13,983 14,823
Automobile inventory, net 3,449 2,141
Retained interest in securitizations, net 34,367 41,598
Property and equipment, net 3,344 2,514
Accrued interest receivable 57 620
Deferred tax asset, net 10,258 --
Debt issue costs, net 1,760 2,114
Goodwill, net 3,127 3,535
Other assets 5,945 6,646
-------- --------
TOTAL ASSETS $135,901 $149,785
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Credit and warehouse facilities $ 61,852 $ 52,023
Debt participation interests 407 3,145
Term note 10,000 --
Convertible subordinated debt, net 20,929 24,873
Accounts payable and accrued expenses 4,239 2,091
Deferred tax liability -- 5,799
Drafts payable 1,812 2,867
Other liabilities 2,023 2,609
-------- --------
TOTAL LIABILITIES 101,262 93,407
-------- --------
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,
13,185,695 shares outstanding at September 30, 1997 and
9,847,367 shares outstanding at December 31, 1996 1,978 1,477
Paid in capital 50,763 43,303
Unrealized loss on securities available for sale, net (685) --
(Accumulated deficit) retained earnings (17,417) 11,598
-------- --------
TOTAL STOCKHOLDERS' EQUITY 34,639 56,378
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $135,901 $149,785
======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
NAL FINANCIAL GROUP INC.
Consolidated Statements of Operations
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
----------------------- -----------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Finance charges $ 2,885 $ 6,211 $ 13,780 $ 17,154
Interest expense (2,393) (2,859) (7,795) (8,218)
-------- -------- -------- --------
Net interest income before provision
for credit losses 492 3,352 5,985 8,936
Provision for credit losses (7,575) (1,012) (12,992) (2,801)
-------- -------- -------- --------
Net interest income (expense) after
provision for credit losses (7,083) 2,340 (7,007) 6,135
-------- -------- -------- --------
OTHER INCOME:
Gain on sale of contracts -- 7,147 5,489 13,427
Fees and other 1,786 1,395 5,832 4,018
Net servicing income (loss) (20,952) (175) (24,597) 652
-------- -------- -------- --------
Total other income (19,166) 8,367 (13,276) 18,097
-------- -------- -------- --------
OTHER EXPENSES:
Salaries and employee benefits 3,631 3,149 12,795 6,060
Depreciation and amortization 348 575 1,032 1,250
Occupancy expense 433 310 1,339 773
Professional services 414 667 1,005 1,401
Telecommunications expense 459 314 1,373 618
Other operating expenses 2,230 2,020 6,814 3,742
Non-cash charge for release of escrow
shares -- 94 -- 301
-------- -------- -------- --------
Total other expenses 7,515 7,129 24,358 14,145
-------- -------- -------- --------
Income (loss) before provision
(benefit) for income taxes (33,764) 3,578 (44,641) 10,087
Provision (benefit) for income taxes (11,493) 1,396 (15,626) 3,945
-------- -------- -------- --------
NET INCOME (LOSS) ($22,271) $ 2,182 ($29,015) $ 6,142
======== ======== ======== ========
Primary Earnings (Loss) Per Share:
Net income (loss) available to common and
common equivalent shares ($22,271) $ 2,518 ($29,015) $ 6,900
Weighted average number of common and
common equivalent shares 12,840 9,046 11,356 8,484
Net income (loss) per share ($ 1.73) $ 0.28 ($ 2.56) $ 0.81
Fully Diluted Earnings (Loss) Per Share:
Net income (loss) available to common and
common equivalent shares ($22,271) $ 2,885 ($29,015) $ 7,827
Weighted average number of common and
common equivalent shares 12,840 11,221 11,356 10,369
Net income (loss) per share ($ 1.73) $ 0.26 ($ 2.56) $ 0.75
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
2
<PAGE>
NAL FINANCIAL GROUP INC.
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30,
---------------------------
1997 1996
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ($ 29,015) $ 6,142
Adjustments to reconcile net income (loss) to net
cash (used in) operating activities:
Provision for credit losses 12,992 2,801
Depreciation and amortization 30,792 3,101
Gain on sale of contracts (5,489) (13,427)
Non-cash charge for the release of escrow shares -- 301
Deferred taxes (16,483) 1,396
Purchase of automobile finance contracts (161,583) (191,069)
Proceeds from securitization of automobile finance contracts 140,885 149,251
Repayments of participations and credit facilities (232,091) (201,088)
Proceeds from participations and credit facilities 238,263 196,152
Changes in assets and liabilities:
Other, net (19,340) 654
--------- ---------
Net cash (used in) operating activities (41,069) (45,786)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of operating lease vehicles (3,780) (6,366)
Purchase of consumer finance contracts -- (10)
Payments received on contracts owned 15,044 28,147
Proceeds from sale of automobile inventory 12,269 13,419
Purchase of Special Finance, Inc. -- (750)
Purchase of property and equipment (595) (1,066)
--------- ---------
Net cash provided by investing activities 22,938 33,374
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds (repayments) from subordinated debentures (56) 17,500
Proceeds from issuance of term note 10,000 --
Proceeds from issuance of common stock 2,500 --
Payment of capital lease obligations (102) --
Net repayments to stockholder (24) (2,919)
Payment of debt issue costs (290) --
--------- ---------
Net cash provided by financing activities 12,028 14,581
--------- ---------
Net increase (decrease) in cash and cash equivalents (6,103) 2,169
Cash and cash equivalents, beginning of period 6,781 921
--------- ---------
Cash and cash equivalents, end of period $ 678 $ 3,090
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 4,663 $ 4,724
========= =========
Cash paid during the period for taxes $ 226 $ 1,465
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE>
NAL FINANCIAL GROUP INC.
Notes to Consolidated Financial Statements
(In thousands, except per share data)
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-Q. 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, 1996.
Certain 1996 amounts have been reclassified to conform with the current year
presentation.
Operating results for the nine month period ended September 30, 1997 are
not necessarily indicative of the results which may be expected for the year
ending December 31, 1997.
2. Contract Receivables
Contract receivables as of September 30, 1997 and December 31, 1996 consist
of the following:
September 30, 1997 December 31, 1996
------------------ -----------------
Automobile finance contracts $63,104 $70,847
Consumer contracts receivable 1,256 1,506
Mortgage loans receivable 1,096 1,088
------- -------
Total contract receivables 65,456 73,441
Reserves available for credit losses (7,968) (5,665)
------- -------
Total contract receivables, net $57,488 $67,776
======= =======
The reserves available for credit losses consist of an allowance for losses
established through a provision from earnings, non-refundable purchase discount
on automobile finance contracts purchased from dealers, and refundable reserves
such as dealer holdback. Purchase discount represents the differential, if any,
between the amount financed on a contract and the price paid by the Company to
acquire the contract, net of any acquisition costs. Any discount on automobile
finance contracts which management considers necessary to absorb future credit
losses is allocated to the reserves available for credit losses. The remaining
portion of the discount, if any, is recognized as interest income over the life
of the contracts.
4
<PAGE>
Currently, the entire amount of the discount is allocated to the reserves
available for credit losses. Credit losses experienced on automobile finance
contracts have exceeded purchase discounts. Accordingly, the Company has
recognized provisions for credit losses of $13.0 million and $2.8 million during
the nine months ended September 30, 1997 and 1996, respectively.
3. Retained Interest in Securitizations
Retained interest in securitizations consists of interest-only strips,
servicing receivables, and an investment in spread accounts. At September 30,
1997, the book value of the retained interest in securitizations consisted of
the following components:
Servicing receivables $ 7,700
Investment in spread accounts 21,727
Interest strips 4,940
-------
Retained interest in securitizations $34,367
=======
The Company adopted Statement of Financial Accounting Standards No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities," ("SFAS 125") effective January 1, 1997. In accordance with SFAS
125, all previously recognized excess servicing assets through December 31, 1996
have been reclassified to interest-only strips ("interest strips").
Additionally, the excess interest cash flows associated with the securitizations
completed during 1997 have been characterized as interest strips. The Company
has classified these interest strips as available for sale in accordance with
Statement of Financial Accounting Standards No. 115 "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS 115"), and, accordingly, any
differences between fair value and the carrying amount are recorded in
stockholders' equity, net of the related tax effects.
Interest strips result from the sale of contracts through securitization
whereby the Company retains an interest in the excess interest cash flows.
Interest strips are computed as the differential between the weighted average
interest rate earned on the contracts sold and the rate paid to the purchasers
of the contracts, adjusted for any contractual servicing fees to be paid to the
Company. The resulting differential represents an asset in the period in which
the contracts are sold equal to the present value of estimated future excess
interest cash flows adjusted for anticipated prepayments and losses. The
estimated future cash flows have been discounted using discount rates that the
Company would expect market participants to use for similar instruments.
Servicing receivables represent contractual servicing fees earned but not
yet paid to the Company relating to the servicing of securitized contracts.
The investment in spread accounts represents the funding of cash reserve
accounts, as credit enhancements, in order for a securitization to achieve a
specified rating from the credit rating agencies. The investment initially is
typically equal to a specified percentage of the
5
<PAGE>
aggregate principal balance of the contracts sold, which the Company deposits in
cash with a trustee, who in turn invests the cash in highly liquid securities.
During the quarter ended September 30, 1997, the Company recorded a charge
to earnings in the amount of $21.0 million due to (i) a decrease in the recorded
value in the Company's interest strips of $13.1 million, (ii) a decrease in the
recorded value in the investment in spread accounts by $3.4 million, and (iii) a
write-off of previously accrued interest and servicing fees on the collateral
included in the securitization pools by $4.5 million.
The value of the Company's retained interest in securitizations is
dependent on the available cash flows from the securitization pools.
Delinquency, loss and repossession rates related to the loan Contracts in the
securitization pools have exceeded the levels originally expected. Accordingly,
the Company has not been receiving cash flows from the securitization pools, and
expects future cash flows to be lower than originally expected. The expected
reductions in future cash flows from the securitization pools resulted in the
previously discussed charges during the quarter.
4. Term Note
In June 1997, the Company entered into a $5 million term note maturing on
December 31, 1997, subject to certain acceleration conditions with Conseco
Private Capital Group, Inc., a wholly owned subsidiary of Conseco, Inc.
("Conseco"). The term note bears interest at a floating rate of 4.25% over the
30 day LIBOR rate. The term note is secured by the common stock of Autorics II,
a special purpose entity established to facilitate securitization transactions,
and any incidental rights associated by their interests, including the Company's
retained interest in its securitizations. In connection with the term note, the
Company issued warrants to purchase 257,000 shares of common stock at an
exercise price of $0.15. In addition, the Company reduced to $0.15 the exercise
price of 515,000 warrants previously granted. The issuance of warrants and
reduction in the exercise price of previously granted warrants were recorded as
debt issue costs and amortized over the life of the term note. The term note
includes certain financial covenants with which the Company was in compliance as
of the date of this filing. The term note was increased to $10 million during
September 1997, and its maturity was extended during October 1997 to April 1,
1998.
5. Stock Option Plans
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," and related interpretations in
accounting for its employee and non-employee director stock options
(collectively, the "Plans").
Pro forma information regarding net income (loss) and earnings (loss) per
share had compensation expense been recorded at the grant date for awards under
the Plans consistent with Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," ("SFAS 123") has been determined as
if the Company had accounted for the
6
<PAGE>
grants under the Plans in the periods ended September 30, 1997 and 1996 under
the fair value method of SFAS 123.
Nine Months Ended
September 30,
------------------------
1997 1996
--------- ------
Pro forma net income (loss) ($22,445) $5,983
Pro forma fully diluted earnings (loss) per share ($1.98) $0.74
6. Supplemental Schedule of Non-Cash Investing and Financing Activities
Non-cash investing and financing activities for the nine months ended
September 30, 1997 and 1996 are as follows:
September 30, 1997 September 30, 1996
------------------ ------------------
Conversion of subordinated debt $ 5,461 $ 4,565
======= =======
Net transfers to automobile inventory $22,143 $24,373
======= =======
7. Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards No. 128 ("SFAS 128"),
"Earnings per Share." SFAS 128 establishes standards for computing and
presenting earnings per share and applies to entities with publicly held common
stock or potential common stock. SFAS 128 is effective for financial statements
issued for periods ending after December 15, 1997. Management currently plans to
adopt SFAS 128 in its annual report on Form 10-K for the year ending December
31, 1997. Basic and diluted earnings per share, as defined in SFAS 128, would
not have been materially different from primary and fully diluted earnings per
share for the three and nine months ended September 30, 1997.
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 129 ("SFAS 129"), "Disclosure of Information about Capital
Structure." SFAS 129 establishes standards for disclosing information about an
entity's capital structure. SFAS 129 is effective for financial statements
ending after December 15, 1997. Management currently plans to adopt SFAS 129 in
its annual report on Form 10-K for the year ending December 31, 1997.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130 ("SFAS 130"), "Reporting Comprehensive Income." This statement
establishes standards for reporting and display of comprehensive income and its
components in a full set of general purpose financial statements. SFAS 130 is
effective for fiscal years beginning after December 15, 1997.
7
<PAGE>
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and Related
Information." This statement establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that these enterprises report selected
information about operating segments in interim financial reports to
shareholders. SFAS 131 is effective for financial statements for periods
beginning after December 15, 1997.
8. Commitments and Contingencies
During the period of April 1997 through June 1997, nine class action suits
were filed in the United States District Court for the Southern District of
Florida on behalf of the named plaintiffs and others who purchased the Common
Stock of the Company during the period of April 1996 through April 1997. The
complaints are generally similar and charge the Company and several of its
officers with violations of the anti-fraud provisions of the federal securities
laws. The plaintiffs and their respective counsel have negotiated the identity
of the lead plaintiff and lead counsel and have submitted an order to the court
on the matter for its consideration. The court is also expected to rule shortly
on all parties' request for consolidation of the cases into one action. The
Company is not expected to officially respond to the allegations until after
consolidation is completed. The Company has reviewed the allegations in the
various complaints with its counsel, and believes the allegations to be without
foundation. The Company strongly believes that it has complied at all times with
its disclosure obligations and plans to vigorously defend the claims made
against it.
The Company and its subsidiaries are involved in various pending or
threatened legal proceedings arising from the conduct of their businesses. These
proceedings in some instances include claims for punitive damages and similar
types of relief in unspecified or substantial amounts, in addition to amounts
for alleged contractual liability or claims for equitable relief. In
management's opinion, after consultation with counsel and review of available
facts, these proceedings will ultimately be resolved without materially
affecting the Company's financial condition or results of operations.
9. Subsequent Events
On October 1, 1997, Conseco, through a subsidiary, acquired a controlling
interest in the outstanding common stock of the Company. The acquisition was
consummated through the purchase of approximately $11.3 million of convertible
debentures from a Conseco affiliate and approximately $12.2 million of
convertible debentures from private third party investors. The Company issued
36,814,305 shares of its common stock to Conseco in exchange for approximately
$11.8 million of the convertible debentures held by Conseco. As a result,
Conseco holds approximately 73.6% of the Company's 50,000,000 issued and
outstanding shares of common stock.
The balance of the convertible debentures owned by Conseco, approximately
$11.7 million including accrued interest, will be converted into additional
shares of the Company's
8
<PAGE>
common stock upon the increase in the Company's level of authorized common
stock. Upon conversion of the debentures, Conseco and/or its designees will own
approximately 85% of the Company's then outstanding common stock.
As a result of Conseco's acquisition of a controlling interest in the
Company, the Company will adopt a new basis of accounting under the "push down"
method. Under this method, the assets and liabilities of the Company related to
Conseco's ownership interest will be revalued to reflect Conseco's cost basis,
which will be based on the estimated fair values of such assets and liabilities
on the date Conseco's controlling ownership interest was acquired (October 1,
1997). As a result, the assets and liabilities will represent the following
combination of values: (i) the portion of the Company's net assets acquired by
Conseco will be valued as of October 1, 1997 and (ii) the portion of the
Company's net assets related to other ownership interests will be valued based
on historical cost.
The pro forma balance sheet data which follows is presented as if Conseco's
acquisition of a controlling interest in the Company had occurred on September
30, 1997.
Assets:
Contract receivables, net $ 57,488
Investment in operating leases, net 13,983
Retained interest in securitizations, net 34,367
Deferred tax asset 10,258
Other 11,573
--------
Total Assets $127,669
========
Liabilities:
Credit and warehouse facilities $ 71,852
Convertible subordinated debt, net 10,518
Goodwill 17,233
Other 7,272
--------
Total Liabilities 106,875
Total Stockholder's Equity 20,794
--------
Total Liabilities and Stockholders Equity $127,669
========
Conseco's cost to purchase its controlling interest in the Company
reflected in the pro forma balance sheet data summarized above, is based on a
preliminary determination of the fair values of the assets and liabilities
acquired. Such allocation may be adjusted when the final determination of such
values is made.
9
<PAGE>
The pro forma statement of operations is presented as if Conseco's
acquisition of a controlling interest in the Company had occurred on January 1,
1996:
September 30, September 30,
1997 1996
------------- -------------
Net interest income (expense) after provision ($ 4,140) $ 7,662
Other income (expense) (10,419) 20,709
Operating expenses 23,349 13,643
-------- -------
Net income (loss) ($24,747) $ 9,019
======== =======
Fully diluted earnings (loss) per share ($ 2.18) $ 1.03
======== =======
On October 2, 1997, Conseco purchased 5,000,000 shares of the Company's
Series A 9% Cumulative Convertible Preferred Stock for an aggregate purchase
price of $5 million.
Item 2. 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 and Notes thereto of the Company included in
this Report.
The Company is a specialized automobile finance company engaged in the
purchase, securitization and servicing of automobile finance contracts
("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 primarily to the "C" credit segment of the
automobile finance market. The Company is also engaged in offering insurance and
related products to its Dealers and customers through its insurance agency
subsidiary, NAL Insurance Services, Inc. The Company has a remarketing
subsidiary, Performance Cars of South Florida, Inc. with a J.D. Byrider car
dealership 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. 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 reserves available for credit losses. See
"Acquisition Discounts." The following table sets forth the Contracts acquired
and the portfolio serviced by the Company during each of the last five quarters.
10
<PAGE>
<TABLE>
<CAPTION>
For the Quarters Ended
----------------------------------------------------------------------
Revenue Data: September 30, June 30, March 31, December 31, September 30,
(dollars in thousands) 1997 1997 1997 1996 1996
------------- -------- --------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Contracts purchased during the period:
Loan Contracts $ 34,952 $ 45,625 $ 94,024 $ 87,674 $ 76,647
Lease Contracts 52 1,997 5,675 10,154 6,776
-------- -------- -------- -------- --------
Total Contracts purchased $ 35,004 $ 47,622 $ 99,699 $ 97,828 $ 83,423
======== ======== ======== ======== ========
Number of Dealers (at end of period): 2,907 2,817 2,613 2,122 1,594
======== ======== ======== ======== ========
Servicing portfolio (at end of period):
Owned $104,993 $58,140 $94,144 $91,934 $108,208
Serviced for Securitization Trusts 267,344 323,131 297,504 243,932 175,679
-------- -------- -------- -------- --------
Total servicing portfolio $372,337 $381,271 $391,648 $335,866 $283,887
======== ======== ======== ======== ========
</TABLE>
Contract volume decreased to $35.0 million for the quarter ended September
30, 1997 from $83.4 million for the quarter ended September 30, 1996,
representing a decrease of 58%. The decline in Contract volume during the
quarter ended September 30, 1997 was a result of the Company's deliberate
slowing of Contract acquisitions due to the material liquidity issues that were
facing the Company during the quarter. See "Liquidity and Capital Resources."
<TABLE>
<CAPTION>
For the Quarters Ended
----------------------------------------------------------------------
Revenue Data: September 30, June 30, March 31, December 31, September 30,
(dollars in thousands) 1997 1997 1997 1996 1996
------------- -------- --------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Interest income:
Loan Contracts $ 1,669 $3,271 $ 4,154 $ 4,260 $ 4,835
Lease Contracts 1,186 1,619 1,724 1,652 1,284
-------- ------ ------- ------- -------
Total interest income 2,855 4,890 5,878 5,912 6,119
Non-automobile interest income 30 65 62 76 92
Gain on sale of Contracts -- 614 4,875 6,445 7,147
Net servicing income (loss) (20,952) (4,366) 722 1,048 (175)
Other income 1,786 1,796 2,249 2,395 1,395
-------- ------ ------- ------- -------
Total revenues (loss) ($16,281) $2,999 $13,786 $15,876 $14,578
======== ====== ======= ======= =======
</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 of loan Contracts.
The Company continues to service these loan Contracts and earns a servicing fee
currently equal to three percent per annum of the outstanding principal balance
of the Contracts sold. Currently, the Company is not receiving any distribution
of cash related to this servicing fee as it is being used to further credit
enhance the Company's securitizations. See "Liquidity and Capital Resources -
Securitizations." The Company also receives revenues from the sale of insurance
and related products and other miscellaneous fees.
11
<PAGE>
Revenues decreased from $14.6 million for the quarter ended September 30,
1996 to ($16.3) million for the quarter ended September 30, 1997, due primarily
to (i) a decrease in net interest income, (ii) no gain on sale recorded in the
quarter ended September 30, 1997 due to the Company's continued exploration of
alternative financing arrangements, (see "Gain on Sale of Contracts"), and (iii)
a net servicing loss of $21.0 million included in other income resulting
primarily from the charge to the retained interest in securitizations, (see "Net
Servicing Fee 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
securitizations. The Company's net interest income decreased due primarily to
(i) the Company's deliberate slowing of Contract acquisition, due to the
material liquidity issues, resulting in a decline in the average Contracts held
in portfolio and those awaiting securitization and (ii) an increase in the cost
of funds relating primarily to the issuance of a $10 million term note to
Conseco Inc. ("Conseco") as well as amortization of the debt issue costs
associated with the issuance of warrants to Conseco to purchase 257,000 shares
of the Company's common stock and the reduction in the exercise price of 515,000
warrants previously granted. See "Liquidity and Capital Resources- Term Note."
The following table illustrates the weighted average net interest rate spread
(expressed as a percentage) earned on Contracts outstanding:
<PAGE>
<TABLE>
<CAPTION>
For the Quarters Ended
September 30, June 30, March 31, December 31, September 30,
Net Interest Spread: 1997 1997 1997 1996 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Interest Income (1):
Loan Contracts 20.00% 20.66% 20.77% 20.94% 23.25%
Lease Contracts 17.12 17.94 19.05 19.53 18.02
----- ----- ----- ----- -----
Total automobile
Contracts 18.52 19.69 20.23 20.53 21.91
Non-automobile Contracts 8.09 10.18 9.15 11.05 13.27
----- ----- ----- ----- -----
Total 18.14 19.45 19.98 20.30 21.70
Interest expense (2) 12.34 10.61 10.03 10.21 10.32
----- ----- ----- ----- -----
Net interest spread 5.80% 8.84% 9.95% 10.09% 11.38%
----- ----- ----- ----- -----
</TABLE>
- ----------
(1) Represents interest income expressed as a percentage of average receivables
outstanding.
(2) Represents interest expense as a percentage of average total
debt outstanding.
12
<PAGE>
Gain on Sale of Contracts. The Company sells its loan Contracts through its
securitization program. The Company recognizes a gain on sale of loan Contracts
equal to the net proceeds received on the transaction, including the cash used
to fund the reserve account, less the allocated carrying value of the loan
Contracts sold. The gain is recorded in accordance with SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities," ("SFAS 125") whereby a portion of the carrying amount of the
loan Contracts sold is allocated to any assets retained, typically an
interest-only strip, based on a measurement using relative fair values. Any
newly created interest in the securitization, typically the funding of a spread
account, is recorded at estimated fair value.
An interest-only strip receivable ("interest strip") results from the
Company's right to receive any excess interest cash flows collected on the loan
Contracts sold. Excess interest cash flows are computed as the difference
between the weighted average interest rate earned on the loan Contracts sold and
the interest rate paid to investors in the securitization transaction, adjusted
for any contractual servicing fees to be paid to the Company. In determining the
estimated fair value of an interest strip, the Company computes the present
value of the excess interest cash flows using estimates for net credit losses
and prepayments. The discount rate used is one that the Company would expect
market participants would use for similar financial instruments. Currently, the
Company is not receiving any distribution of contractual servicing or excess
interest cash flows associated with its securitization trusts as these cash
flows, if any, are being used as credit enhancements based on the terms of the
securitization agreements. See "Net Servicing Fee Income" and "Liquidity and
Capital Resources - Securitizations".
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, upfront costs of the transaction and estimated net 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 as initially
calculated for each of the Company's securitizations:
<TABLE>
<CAPTION>
Weighted Interest
Securitized Average Rate Paid to Gross Net
Securitization Balance Contract Rate Investors (1) Spread (2) Spread (3)
-------------- ------- ------------- ------------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
1997-2 Auto Trust(4)..... $135,007 19.58% 7.89% 11.69% 8.69%
1996-4 Auto Trust........ 88,044 19.50% 7.02% 12.48% 9.48%
1996-3 Auto Trust........ 70,052 19.37% 7.42% 11.95% 8.95%
1996-2 Auto Trust........ 49,500 19.20% 7.58% 11.62% 8.62%
1996-1 Auto Trust........ 40,750 19.26% 7.47% 11.79% 8.79%
1995-1 Auto Trust Trust.. 40,136 19.58% 7.10% 12.48% 9.48%
--------
Total.................. $423,489
========
</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 of 3%.
(4) Amount includes $72.4 million in loan Contracts securitized in the 1997-1
transaction which had a weighted average contract rate, gross and net
spread of 19.54%, 11.22% and 8.22%, respectively.
13
<PAGE>
During the quarter ended September 30, 1997, the Company elected not to
complete a securitization transaction through which the Company had historically
recognized a gain on sale. As such, the Company's revenues were negatively
impacted and resulted in lower income for the quarter. The Company continues to
explore alternative financing 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 sale of its loan Contracts. However, there can be no
assurances that the Company will be able to achieve this in the near future.
Should the Company continue to delay its securitization program, the Company is
exposed to interest rate risk as the loan Contracts are financed through a
floating interest rate warehouse facility.
Net Servicing Fee Income. Throughout the life of the loan Contract sold to
the trusts, the Company earns a contractual servicing fee from the
securitization trust, currently equal to three percent per year of the principal
balance outstanding. Servicing fees are reported as income when earned, net of
any amortization of interest strips and investment in spread accounts. Net
servicing fees may be reduced from those that are contractually due if the
Company believes that estimated future cash flows would be insufficient to
recover the carrying value of the retained interest in securitizations.
Servicing costs are charged to expense as incurred.
Net servicing fee income and the retained interest in securitizations 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 interest cash flows received by the Company over the remaining life of
the securitization could be significantly affected.
During the quarter ended September 30, 1997, the Company recorded a charge
to earnings in the amount of $21.0 million due to (i) a decrease in the recorded
value in the Company's interest strips of $13.1 million, (ii) a decrease in the
recorded value in the investment in spread accounts by $3.4 million, and (iii) a
write-off of previously accrued interest and servicing fees on the collateral
included in the securitization pools by $4.5 million.
The decrease in the value of the interest strips was due primarily to an
increase in the level of credit losses experienced and a decrease in the
recovery rates realized on charged-off assets. Management increased the credit
loss assumptions used to project the anticipated future cash flows associated
with the retained interest as a result of higher than expected credit losses
experienced during the quarter ended September 30, 1997. The Company believes
the increase in the level of credit losses was due to, among other things, the
material liquidity issues facing the Company. The Company believes its lack of
liquidity resulted in its resources being focused on the preservation of the
Company. The Company also involuntarily terminated a portion of its collections
staff and was prevented from reimbursing third parties for repossession and
disposition services provided resulting in the deterioration of such functions.
During the third quarter ended September 30, 1997, the Company completed a
servicing system conversion which management believes further distracted the
Company's collection efforts.
14
<PAGE>
The higher level of credit losses experienced during the third quarter
resulted in the Company not receiving expected cash flows from the
securitization pools for (i) its investment in its spread accounts, (ii) accrued
servicing fees, and (iii) its accrued interest recorded on the Contracts prior
to securitization.
Other Income. The Company generates revenues from the sale of a variety of
insurance and related products to Dealers and its customers. The Company, acting
as agent for third party insurance companies, offers insurance products. The
Company recognizes as revenue the commissions and 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 growth in the servicing portfolio.
Results of Operations
The following table presents the principal components of the Company's net
income (loss) for the periods presented:
<TABLE>
<CAPTION>
For Quarters Ended For Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net interest income, net of interest
expense $492 $3,352 $5,985 $8,936
Gain on sale of loan Contracts -- 7,147 5,489 13,427
Net servicing income (loss) (20,952) (175) (24,597) 652
Other income 1,786 1,395 5,832 4,018
-------- ------- --------- --------
Total revenue (loss) (18,674) 11,719 (7,291) 27,033
Provision for credit losses (7,575) (1,012) (12,992) (2,801)
Operating expenses (7,515) (7,035) (24,358) (13,844)
Non-cash charge for escrow shares -- (94) -- (301)
-------- ------- --------- --------
Income (loss) before taxes (33,764) 3,578 (44,641) 10,087
Provision (benefit) for income taxes (11,493) 1,396 (15,626) 3,945
-------- ------- --------- --------
Net income (loss) ($22,271) $2,182 ($29,015) $ 6,142
======== ======= ========= ========
</TABLE>
15
<PAGE>
Quarters Ended September 30, 1997 and 1996.
Net Interest Income. Net interest income decreased to $0.5 million for the
quarter ended September 30, 1997 from $3.4 million for the quarter ended
September 30, 1996. The Company's net interest income decreased due primarily to
(i) the Company's deliberate slowing of Contract acquisition, due to material
liquidity issues, resulting in a decline in the average Contracts held in
portfolio and those awaiting securitization and (ii) an increase in the cost of
funds relating primarily to the issuance of a $10 million term note to Conseco
as well as amortization of the debt issue costs associated with the issuance of
warrants to Conseco to purchase 257,000 shares of the Company's common stock and
the reduction in the exercise price of 515,000 warrants previously granted. See
"Liquidity and Capital Resources - Term Note."
Gain on Sale of Contracts. The Company elected not to engage in a
securitization transaction in the quarter ended September 30, 1997 compared to a
$70 million securitization during the quarter ended September 30, 1996. This
resulted in no gain on sale being recorded in the quarter ended September 30,
1997 compared to a gain on sale of $7.1 million in the quarter ended September
30, 1996. As such, the Company's revenues were negatively impacted on a
comparable basis.
Net Servicing Fee Income (Loss) and Other Income. The Company reported net
servicing loss of $21.0 million for the quarter ended September 30, 1997
compared to a net servicing loss of $0.2 million for the quarter ended September
30, 1996.
During the quarter ended September 30, 1997, the Company recorded a charge
to earnings in the amount of $21.0 million due to (i) a decrease in the recorded
value in the Company's interest strips of $13.1 million, (ii) a decrease in the
recorded value in the investment in spread accounts by $3.4 million, and (iii) a
write-off of previously accrued interest and servicing fees on the collateral
included in the securitization pools by $4.5 million. See "Net Servicing Fee
Income."
16
<PAGE>
Other income, consisting of insurance income and other fees increased to
$1.8 million from $1.4 million for the quarter ended September 30, 1997 and
1996, respectively. This increase is due to the growth of the servicing
portfolio to $357.9 million at September 30, 1997 from $283.9 million at
September 30, 1996.
Provision For Credit Losses. During the quarter ended September 30, 1997,
the Company recorded a provision for credit losses totaling $7.6 million
compared to $1.0 million for the same quarter of the preceding year. This
increase related to provisions recorded for an estimate of possible losses that
may be incurred in connection with the acquisition of Contracts during the
quarter ended September 30, 1997, and with the performance of previously
purchased Contracts.
Operating Expenses. Operating expenses increased to $7.5 million for the
quarter ended September 30, 1997 from $7.1 million for the quarter ended
September 30, 1996. Expressed as a percentage of average total servicing
portfolio, operating expenses were approximately 8.0% and 8.6% for the quarters
ended September 30, 1997 and 1996, respectively, on an annualized basis. The
decrease in operating expenses on a percentage of servicing portfolio is due to
the Company's evaluation of its operations which resulted in reductions of
personnel from a peak of approximately 472 in June to approximately 333 in
September based on current and anticipated origination and servicing levels.
Non-Cash Charge for Escrow Shares. On November 30, 1994, the Company became
publicly held by virtue of a merger with an existing, yet inactive public shell.
In connection with the merger, certain shares of the Company's common stock were
placed in escrow to be released to certain selling stockholders based on a
formula tied to earnings. For financial reporting purposes, the release of a
portion of these shares is considered compensatory and a non-cash charge to
earnings is reflected in the financial statements. This charge does not affect
working capital or total stockholders' equity. During the quarter ended
September 30, 1997, the Company was not required to take a charge.
Net Income (Loss). Net loss for the quarter ended September 30, 1997 was
$22.3 million or a loss of $1.73 per fully diluted share. This compares to net
income of $2.2 million or $0.26 per fully diluted share for the quarter ended
September 30, 1996.
17
<PAGE>
Nine Months Ended September 30, 1997 and 1996.
Net Interest Income. Net interest income decreased to $6.0 million for the
nine months ended September 30, 1997 from $9.0 million for the nine months ended
September 30, 1996. The Company's net interest income decreased due primarily to
(i) the Company's deliberate slowing of Contract acquisition due to material
liquidity issues, resulting in a decline in the average Contracts held in
portfolio and those awaiting securitization and (ii) an increase in the cost of
funds relating primarily to the issuance of a $10 million term note with Conseco
as well as amortization of the debt issue costs associated with the issuance of
warrants to Conseco to purchase 257,000 shares of the Company's common stock and
the reduction in the exercise price of 515,000 warrants previously granted. See
"Liquidity and Capital Resources - Term Note."
Gain on Sale of Contracts. The Company completed securitizations totaling
$135.0 million and $160.3 million during the nine months ended September 30,
1997 and 1996, respectively, resulting in gains on sale of $5.5 million and
$13.4 million, respectively. The decrease in the gain on sale is due to (i) a
decline in the amount of loan Contracts securitized as the Company elected not
to engage in a securitization transaction in the quarter ended September 30,
1997 and (ii) an increase in the level of credit enhancements required for the
securitization of the loan Contracts.
Net Servicing Income (Loss) and Other Income. Net servicing income
decreased from $0.7 million for the nine months ended September 30, 1996 to a
net servicing loss of $24.6 million for the nine months ended September 30,
1997, due to the charge to the retained interest in securitizations. See "Net
Servicing Fee Income."
Other income, consisting of insurance income and other fees, increased to
$5.8 million from $4.0 million for the nine months ended September 30, 1997 and
1996, respectively. This increase is due to the growth of the servicing
portfolio to $357.9 million at September 30, 1997 from $283.9 million at
September 30, 1996.
Provision For Credit Losses. During the nine months ended September 30,
1997, the Company recorded a provision for credit losses totaling $13.0 million
compared to $2.8 million for the same period of the preceding year. This
increase related to provisions recorded for an estimate of possible losses that
may be incurred in connection with the acquisition of Contracts during the nine
months ended September 30, 1997, and with the performance of previously
purchased Contracts.
Operating Expenses. Operating expenses increased to $24.4 million for the
nine months ended September 30, 1997 from $14.1 million for the nine months
ended September 30, 1996. Expressed as a percentage of average total servicing
portfolio, operating expenses were approximately 8.8% for both the nine months
ended September 30, 1997 and 1996, on an annualized basis.
18
<PAGE>
Non-Cash Charge for Escrow Shares. On November 30, 1994, the Company became
publicly held by virtue of a merger with an existing, yet inactive public shell.
In connection with the merger, certain shares of the Company's common stock were
placed in escrow to be released to certain selling stockholders based on a
formula tied to earnings. For financial reporting purposes, the release of a
portion of these shares is considered compensatory and a non-cash charge to
earnings is reflected in the financial statements. This charge does not affect
working capital or total stockholders' equity. During the nine months ended
September 30, 1997, the Company was not required to take a charge.
Net Income (Loss). Net loss for the nine months ended September 30, 1997
was $29.0 million or a loss of $2.56 per fully diluted share. This compares to
net income of $6.1 million or $0.75 per fully diluted share for the nine months
ended September 30, 1996.
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 which are held in portfolio and on
loan Contracts while they are awaiting securitization. The Company evaluates
historical charge-off experience against the reserve as well as other analyses,
including portfolio performance analyses and delinquency trends, to establish
reserves it believes are adequate to absorb estimated future 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 2% to 10%. The amount of the discount varies
based upon the credit risk, the terms of the transaction and the quality of the
collateral. Any discount which management believes is 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, management is allocating the entire
amount of discount to the reserves available for credit losses and expects to
continue to do so in the foreseeable future.
19
<PAGE>
Reserves Available for Credit Losses. In the event of a payment default,
the liquidation proceeds of the financed vehicle may not cover the outstanding
Contract balance and costs of recovery. The Company maintains reserves available
for credit losses at amounts which the Company believes are adequate to absorb
future credit losses on Contracts subject to non-recourse arrangements which are
held in portfolios and during the warehousing period. The reserves available for
credit losses are comprised of the acquisition discounts, dealer reserves, and
an allowance for credit losses. On a quarterly basis, the Company evaluates the
adequacy of the reserves 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 reserves available for credit
losses. This analysis takes into consideration historical loss experience,
levels of repossessed assets, delinquency experience, seasoning of Contracts,
and other relevant factors. When management believes the level of acquisition
discounts and dealer reserves are inadequate, an additional provision for credit
losses will be recorded to increase the allowance for credit losses or to offset
credit losses incurred during the period.
20
<PAGE>
The following table sets forth information regarding credit loss experience
of the total servicing portfolio for the periods presented:
<TABLE>
<CAPTION>
For the Quarters Ended For the Year Ended
Credit Losses:(1)(4) September 30, June 30, March 31, December 31,
(dollars in thousands) 1997 1997 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Loan Contracts Serviced(5):
Gross charge-off percentage (2) 24.01% 17.90% 17.06% 10.35%
Net charge-off percentage (3) 20.42% 15.02% 15.04% 9.12%
Lease Contracts Serviced(5):
Gross charge-off percentage (2) 12.95% 12.78% 11.77% 7.82%
Net charge-off percentage (3) 10.74% 11.57% 10.35% 6.35%
Total Loan and Lease Contracts
Serviced(5):
Gross charge-off percentage (2) 23.11% 17.39% 16.47% 10.03%
Net charge-off percentage (3) 19.63% 14.67% 14.52% 8.78%
Special Recourse Contracts Serviced(5):
Gross charge-off percentage (2) -- -- -- --
Net charge-off percentage (3) -- -- -- --
Total Serviced Portfolio(5):
Gross charge-off percentage(2) 22.06% 16.99% 15.83% 9.23%
Net charge-off percentage(3) 18.73% 14.34% 13.96% 8.07%
</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) Computed as gross charge-offs less any recoveries expressed as a percentage
of average balance outstanding during the period.
(4) Percentages for the quarters presented have been annualized.
(5) Contracts serviced are computed as the average principal balance
outstanding during the period plus inventory on hand.
See "Net Servicing Fee Income" above for an explanation of the increase in
the level of credit losses incurred during the quarter ended September 30, 1997.
21
<PAGE>
Delinquency Experience. The Company attempts to minimize credit losses by
monitoring the level of delinquencies through follow up and collection of
delinquent accounts. The following table reflects the Company's delinquency
experience for the periods presented:
<TABLE>
<CAPTION>
As of As of As of As of
September 30, 1997 June 30, 1997 March 31, 1997 December 31, 1996
------------------ ------------- -------------- -----------------
<S> <C> <C> <C> <C>
Delinquency(1) (2)
Loan Contracts Serviced
Delinquencies:
31-60 Days 9.31% 8.47% 9.82% 10.30%
61-90 Days 3.56% 3.46% 3.16% 3.38%
Greater than 90 Days 1.88% 2.17% 1.70% 1.52%
----- ----- ----- -----
Total 14.75% 14.10% 14.68% 15.20%
===== ===== ===== =====
Lease Contracts Serviced
Delinquencies:
31-60 Days 6.97% 7.24% 9.07% 6.47%
61-90 Days 3.12% 2.32% 2.82% 2.00%
Greater than 90 Days 1.95% 1.63% 1.90% 2.54%
----- ----- ----- -----
Total 12.04% 11.19% 13.79% 11.01%
===== ===== ===== =====
Recourse Contracts Serviced
Delinquencies(3):
31-60 Days 2.65% 8.18% 10.48% 9.69%
61-90 Days -- -- -- --
Greater than 90 Days -- -- -- --
----- ----- ----- -----
Total 2.65% 8.18% 10.48% 9.69%
===== ===== ===== =====
Total Contracts
Delinquencies:
31-60 Days 9.10% 8.35% 9.77% 9.85%
61-90 Days 3.52% 3.32% 3.01% 2.99%
Greater than 90 Days 1.89% 2.10% 1.66% 1.57%
----- ----- ----- -----
Total 14.51% 13.77% 14.44% 14.41%
===== ===== ===== =====
</TABLE>
- ---------------
(1) Table excludes non-automobile contracts.
(2) Table excludes certain portfolios which are accounted for on a cost
recovery basis.
(3) Contracts delinquent 61 days or more are repurchased by the originator of
the Contracts under the Recourse Program. During the quarter ended
September 30,1997, the Company completed the sale of the majority of its
loan Contracts under the Recourse Program.
The Company has prepared analyses of its automobile finance Contracts,
based on its own credit experience and available industry data, to identify the
relationship between Contract delinquency and default rates at the various
stages of a Contract's repayment term. The results of the analyses suggest that
the probability of a Contract becoming delinquent or going into default is
highest during the "seasoning period" which typically begins 3 to 4 months, and
typically ends 12 to 14 months, after the origination date. The Company believes
that its servicing portfolio is currently within this "seasoning period"
described above.
22
<PAGE>
Liquidity and Capital Resources
The Company's business requires substantial cash to support its growth in
the rate of acquisition of new Contracts and to fund its expenses. The Company
has been required to use increasingly larger amounts of cash than it generated
from its operating activities. The Company has funded these negative cash flows
by drawing against its available warehouse and credit facilities. These
facilities provide for between 75% and 90% of the principal balance of the
Contracts. The Company funded the remainder of the purchase price through its
capital.
In connection with the securitization of loan Contracts, the Company is
required to fund reserve accounts as a means of providing credit enhancement to
each transaction. The Company funds these reserve accounts through a combination
of an initial cash deposit from the proceeds of the transaction, and the capture
of contractual servicing fees and excess interest cash flows until such reserve
accounts reach predetermined levels. These levels may be increased if the
average delinquency, and/or annualized loss and repossession rates of the trusts
exceed certain rates.
The Company has completed seven securitization transactions, which included
the combination of the sixth and seventh transactions. Currently, the required
reserves of the first five of the securitizations have been increased due to
delinquency, loss or repossession rates exceeding the specified levels. The
structure of the combined sixth/seventh securitization transaction, concluded in
June 1997, requires that the initial reserve be increased for the first six
months by the capture of contractual servicing fees and excess servicing cash
flows. After the first six months, the Company will receive its contractual
servicing fee without regard to delinquency or loss experience. As a result of
requirements to build the reserves for all of the trusts, as described, the
Company currently is not receiving any distributions of cash flows from any of
the trusts.
As a result of the above, the Company experienced a significant liquidity
issue during the quarter ended September 30, 1997. In response to this issue,
the Company evaluated its financial alternatives which included the ultimate
recapitalization of the Company during the quarter. The recapitalization was
facilitated by Conseco, through a subsidiary, acquiring a controlling
interest in the outstanding common stock of the Company. In connection with the
acquisition of its controlling interest, Conseco agreed to lend an additional $5
million on an existing term note facility and another $5 million was invested by
Conseco in the form of preferred stock.
Sources of Liquidity and Capital Resources:
Through September 30, 1997, the Company had secured its principal sources
of financing through senior indebtedness comprised of its warehouse facility,
revolving credit facilities and its specialized 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.
23
<PAGE>
The following table illustrates the Company's sources of financing as of
September 30, 1997 and 1996.
<TABLE>
<CAPTION>
(dollars in thousands)
September 30, 1997 September 30, 1996
------------------ ------------------
<S> <C> <C>
Sources of Financing:
Warehouse Facility:
Available Line $100,000 $50,000
Outstanding Balance 40,219 21,457
Revolving Credit Facilities:
Available Line 45,000 45,000
Outstanding Borrowings 21,633 27,231
Revolving Line of Credit Facility:
Available Line -- 3,500
Outstanding Borrowings -- 503
Specialized Borrowing Facility 407 21,682
Term Note 10,000 --
Subordinated Debentures:
Issued - Cumulative 38,825 38,825
Converted to Common Stock - Cumulative (17,755) (12,825)
Principal repaid - Cumulative (56) --
-------- --------
Outstanding Borrowings 21,014 26,000
Total Outstanding Borrowings $93,273 $96,873
======== ========
</TABLE>
Warehouse Facility. During September 1995, the Company entered into a $50
million warehouse facility (the "Greenwich Facility") with Greenwich Capital
Financial Products, Inc. ("Greenwich"). In November 1996, the Greenwich Facility
was increased to $100 million. This facility is structured as a reverse
repurchase agreement which is characterized as borrowings for financial
reporting purposes. Interest on the facility accrued at a rate of 3% over LIBOR
through September 30, 1997, and accrues at a rate of 2.25% over LIBOR
thereafter. The Company's advance rate on the outstanding principal of loan
Contracts financed under the facility was reduced from 88% to 86%, effective
June 3, 1997, and from 86% to 85% effective October 9, 1997, and from 85% to
75%, effective October 24, 1997. Theses changes in the advance rates were
applied prospectively for Contracts financed after the dates of change. If at
any time during the financing period the advance rate on the Contracts
multiplied by the market value of the Contract is less than the amount advanced,
Greenwich may require the Company to transfer money or additional Contracts to
Greenwich until the margin amount is satisfied. Market value may be affected by,
among other things, sudden changes in interest rates, delinquency rates and
credit losses. A margin call could require an allocation of certain of the
Company's liquidity and capital resources. The term of the Greenwich Facility is
for one year, automatically renewable for an additional year, unless Greenwich
provides the Company with notice of its intent to terminate within 60 days of
such renewal. The facility was renewed for another year on September 30, 1997,
at which time the Company had $40.2 million outstanding under the Greenwich
Facility.
24
<PAGE>
The Greenwich Facility includes certain financial and operational covenants
including, among other things, the required maintenance of a minimum net worth
of the greater of $20 million and 85% of the sum of (i) the Company's
stockholders' equity and subordinated debt as of December 31, 1997, and (ii) any
increase in the Company's net worth resulting from any capital contribution or
subordinated debt offering in excess of 8 to 1, and the maintenance of certain
loan portfolio performance criteria. At September 30, 1997, the Company was in
compliance with all relevant financial and operational covenants. Management
continues to closely monitor the performance of its loan portfolios in order to
insure compliance with all financial and operational covenants.
The Company uses the Greenwich Facility to purchase loan Contracts with the
objective of selling such Contracts through securitization transactions. Towards
that end, since the fourth quarter of 1995, the Company has completed the sale
of in the aggregate of approximately $423.5 million of automobile loans in
privately-placed securitization transactions. The proceeds from the Company's
securitization transactions have historically been used to pay down its
warehouse facility, thereby making the warehouse facility available to fund
acquisitions 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
1998. The Congress Facility bears interest at a floating rate of 2% over the
prime rate of CoreStates Bank, N.A., with interest payable monthly. The facility
is secured by certain loan and lease Contracts and has been used historically to
finance bulk purchase Contracts. The Congress Facility can be utilized for the
financing of additional Contract purchases which meet certain credit guidelines
established by Congress, in its sole discretion. As of September 30, 1997, the
Company had $0.2 million outstanding under this credit facility.
During February 1994, the Company entered into a $5 million one-year
revolving credit facility (the "GECC Facility") with GE Capital Credit Corp.
("GECC"). In September 1994, the GECC Facility was increased to $10 million. The
GECC Facility bears interest payable monthly at rates fixed at the time of
financing and is secured by certain lease and loan Contracts. Principal is
repaid monthly according to an agreed upon schedule. In March 1995, the GECC
Facility line was increased to $25 million. At September 30, 1997, the Company
had $21.4 million outstanding under this facility. GECC has elected not to renew
the GECC Facility which expired in September 1997, after which time the Company
may not draw down advances for the financing of new lease contracts. However,
the borrowing then existing will remain outstanding and will be repaid over the
term of the related pledged lease Contracts. In anticipation of expiration, the
Company has entered into an agreement with GECC whereby GECC now maintains
custody of the cash collection accounts.
The Congress Facility and the GECC Facility are also subject to certain
financial and operational covenants that are similar to those imposed under the
Greenwich Facility.
25
<PAGE>
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 bore interest at 13%
with interest payable monthly. The LOC Facility was secured by certain loan and
lease Contracts. In September 1997, the remaining borrowings under the portion
of the facility were fully repaid.
In December 1996, the LOC Facility was amended to provide for financing for
up to an additional $6.0 million on certain of the Company's advances to dealers
under its recourse program. Advances under this portion of the facility were for
renewable ninety day periods and bore interest at 14%. In June 1997, the
remaining borrowings under this portion of the facility were fully repaid.
Specialized Borrowing Facility. The Company has secured a portion of its
financing through borrowings classified as debt participation interests, in
which the Company has sold an undivided interest, typically 80% to 90%, in
portfolios of receivables on a full recourse basis to financial institutions and
individual lenders. As of September 30, 1997, the Company had an existing series
of borrowings under a specialized borrowing facility with Fairfax Savings, a
Federal Savings Bank ("Fairfax") in the approximate amount of $407,000 which has
been utilized to acquire bulk purchase portfolios prior to 1995. These amounts
are subject to interest at fixed rates from 10% to 13.5%, 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.
Under the Company's participation agreements, collections received from
receivables securing the participations are deposited into restricted trust bank
accounts pending distributions to participation holders. Distributions generally
are disbursed to participants once each month for the previous month's
collections.
Distributions under some participation agreements with Fairfax include
deposits of a portion of the collections into segregated, interest-bearing
reserve accounts held for the benefit of the Company at Fairfax. These reserve
accounts are returned to the Company once the principal balances under the
participation agreements are reduced to certain levels.
The balances of the trust accounts pending settlement with participants and
the balance of the reserve accounts on deposit with Fairfax are reflected on the
Company's balance sheet as "Restricted Cash".
26
<PAGE>
Term Note. In June 1997, the Company entered into a $5 million term note
maturing on December 31, 1997, subject to certain acceleration conditions with
Conseco. The term note bears interest at a floating rate of 4.25% over the 30
day LIBOR rate. The term note is secured by the common stock of Autorics II, a
special purpose entity established to facilitate securitization transactions,
and any incidental rights associated by their interests, including the Company's
retained interest in its securitizations. In connection with the term note, the
Company issued warrants to purchase 257,000 shares of common stock at an
exercise price of $0.15. In addition, the Company reduced to $0.15 the exercise
price of 515,000 warrants previously granted. The issuance of warrants and
reduction in the exercise price of previously granted warrants were recorded as
debt issue costs and amortized over the life of the term note. The term note
includes certain financial covenants with which the Company was in compliance as
of the date of this filing. The term note was increased to $10 million during
September 1997, and its maturity was extended during October 1997 to April 1,
1998.
Private Placement of Convertible Subordinated Debentures, Warrants and
Equity Securities. The Company has secured a significant component of its
working capital through the private placement of debt and equity securities.
During the period from April 1995 through September 1996, the Company completed
the offering and sale in private placement transactions of $38.8 million of
convertible subordinated debentures (the "Debentures") as well as 176,500 shares
of its common stock which yielded net proceeds of $2.1 million. Through November
14, 1997, an aggregate of $28.2 million principal amount of the Debentures were
converted into 41,230,482 shares of Common Stock.
On October 1, 1997, Conseco through a subsidiary, acquired a controlling
interest in the outstanding common stock of the Company. The acquisition was
consummated through the approximately $11.3 million of convertible debentures
previously owned and the purchase of convertible debentures of $12.2 million
purchased from private third party investors. The Company issued 36,814,305
shares of its common stock to Conseco in exchange for approximately $11.8
million of the convertible debentures held by Conseco. As a result, Conseco
holds approximately 73.6% of the Company's 50,000,000 issued and outstanding
common stock.
The balance of the convertible debentures owned by Conseco, approximately
$11.7 million including accrued interest, will be converted into additional
shares of the Company's common stock upon the increase in the Company's
authorized common stock to 100,000,000 shares. Upon conversion of the remaining
debentures, Conseco and/or the designees will own approximately 85% of the
Company's then outstanding common stock.
27
<PAGE>
On October 2, 1997, Conseco purchased 5,000,000 shares of the Company's
Series A 9% Convertible Preferred Stock for an aggregate purchase price of $5
million.
The Company has issued 2,449,625 warrants at exercise prices between $7.50
and $15.00 and 772,000 warrants at an exercise price of $0.15. To date, none of
the warrants have been exercised. The exercise price of certain warrants and the
proceeds thereof decreased by virtue of price protection and adjustment features
contained in such warrants.
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 or any associated rights of redemption. Principally all of
the outstanding warrants shall remain outstanding until 1998 and 1999, although
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.
Securitizations. The Company securitizes loan Contracts as a part of a
financing strategy which attempts to provide for a lower cost of financing and
reduces risks associated with interest rate fluctuations. In addition, the
Company uses the net proceeds from a securitization to pay down the loans
outstanding under its warehouse facilities, thereby creating availability to
purchase additional loan Contracts.
The Company has completed seven securitizations totaling approximately
$423.5 million. During the quarter ended September 30, 1997, the Company did not
receive any distribution of servicing cash flows associated with the first five
securitization trusts due to the delinquency, repossession, and credit losses
exceeding those allowable by the structure of the securitization trusts. The
Company is not receiving any distribution of cash flows from the combined
sixth/seventh securitization transaction which requires the capture of
contractual servicing fees, in addition to the capture of excess interest,
during the first six months. The following is a summary of the basic structure
of the Company's securitizations. There can be no assurances, however, that the
Company will continue to use this structure for future securitizations.
28
<PAGE>
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 which the Company would otherwise
have received. The Company continues to service the loan Contracts and earns a
contractual servicing fee of three percent per annum (the "Contractual Servicing
Fee"). This contractual servicing fee may, however, be captured by the Trust as
a means of building the reserve accounts to certain levels.
The Securities are rated by Duff and Phelps Credit Rating Co. and/or Fitch
Investors Services L.P., and are sold to investors in a private offering. These
Securities carry fixed interest rate coupons, payable quarterly. Generally, all
collections of interest and principal from loan Contracts are utilized 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 are deposited into the reserve account
only to the extent necessary to maintain it at the required Maintenance Level.
The remaining excess interest 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 sells its loan Contracts through its securitization program.
The Company recognizes a gain on sale of Contracts equal to the net proceeds
received on the transaction, including the cash used to fund the reserve
account, less the allocated carrying value of the loan Contracts sold. The gain
is recorded in accordance with SFAS 125 whereby a portion of the carrying amount
in the loan Contracts sold is allocated to any assets retained, typically an
interest-only strip, based on a measurement using relative estimated fair
values. Any newly created interest in the securitization, typically the funding
of a spread account, is recorded at estimated fair value.
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. If for any reason whatsoever, the Company is
unable to complete a securitization during a quarter, then the Company's
revenues for such period would decline and would result in lower income for that
quarter. 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.
29
<PAGE>
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. However,
there can be no assurances that the Company will be able to achieve this in the
near future.
Public Offering Of Common Stock. In December 1996, the Company completed an
underwritten, secondary public offering of 2,500,000 shares of Common Stock at
$7.50 per share, which yielded net proceeds of approximately $16.9 million. In
January 1997, the Company's underwriters exercised their over allotment option
to purchase an additional 375,000 shares of Common Stock at $7.50 per share. The
net proceeds to the Company from this sale were approximately $2.5 million.
Uses of Liquidity and Capital Resources
Purchase and Financing of Contracts. Purchasing of Contracts represents the
most significant cash requirement. The Company funds the purchase price of loan
Contracts primarily through its warehouse and credit facilities. However,
because advance rates under these facilities generally provide for approximately
75% to 90% of the principal of loan Contracts, the Company is required to fund
the remainder of the purchase price with other available cash resources.
The Company has historically funded the purchase of lease Contracts through
the $25 million GECC Facility, which, at September 30, 1997, had an outstanding
balance of approximately $21.4 million, and through funding on a temporary basis
under the Greenwich facility. The Company is currently exploring other financing
sources and alternatives relative to the acquisition of new lease Contracts, as
well as the refinancing of contracts which are either temporarily financed or
financed through equity capital. This has resulted in a slowdown in the purchase
of lease Contracts pending the establishment of relationship with a new
financing source.
30
<PAGE>
Securitization of Loan Contracts. In connection with the Company's
securitization of loan Contracts, the Company is required to fund cash reserve
accounts as credit enhancements to the transactions. The Company funds the
reserve accounts through a combination of an initial cash deposit upon the close
of each transaction, and through the capture of contractual servicing fees and
excess interest cash flows until these reserve accounts reach determined levels.
These levels may be increased if the average delinquency, and/or annualized loss
and repossession rates of the trusts exceed certain rates. The amount of time
required to fully fund each reserve account is dependent on numerous factors,
including, but not limited to (i) the size of the initial deposit, (ii) the net
interest rate spread, (iii) delinquencies and defaults, and (iv) liquidation of
repossessed inventory. Currently, the reserve levels for the first five of the
Company's six outstanding securitization transactions have been increased due to
delinquency, loss and/or repossession rates exceeding levels specified by the
transactions. The structure of the combined sixth/seventh transaction requires
the capture of contractual servicing fees, in addition to the capture of excess
interest, during the first six months. After six months, the Company will
receive contractual servicing fees, regardless of the delinquency or loss
experience of the trust. Until the required levels are achieved, however, the
Company is prohibited from receiving its distribution of excess interest cash
flows. The trusts had $19.7 million in restricted cash held in such reserve
accounts at September 30, 1997.
Effects of Inflation
The Company's business is subject to risk of inflation. Significant
increases in interest rates that are normally associated with strong periods of
inflation may have an impact upon the number of individuals that are likely or
able to finance the purchase or lease of an automobile or repay their
indebtedness. Inflationary pressures may also have an impact on the Company's
cost of funds. The Company is exposed to interest rate risk as the loan
Contracts are financed through a floating interest rate warehouse facility. The
Company's operating costs are also subject to general economic and inflationary
pressures.
Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards No. 128 ("SFAS 128"),
"Earnings Per Share." SFAS 128 establishes standards for computing and
presenting earnings per share and applies to entities with publicly held common
stock or potential common stock. SFAS 128 is effective for financial statements
issued for periods ending after December 15, 1997. Management currently plans to
adopt SFAS 128 in its annual report on Form 10-K for the year ending December
31, 1997. Basic and diluted earnings per share, as defined in SFAS 128, would
not have been materially different from primary and fully diluted earnings per
share for the nine months ended September 30, 1997.
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 129 ("SFAS 129"), "Disclosure of Information about Capital
Structure." SFAS 129 establishes standards for disclosing information about an
entity's capital structure. SFAS 129 is effective for financial statements
ending after December 15, 1997. Management currently
31
<PAGE>
plans to adopt SFAS 129 in its annual report on Form 10-K for the year ending
December 31, 1997.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130 ("SFAS 130"), "Reporting Comprehensive Income." This statement
establishes standards for reporting and display of comprehensive income and its
components in a full set of general purpose financial statements. SFAS 130 is
effective for fiscal years beginning after December 15, 1997.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and Related
Information." This statement establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that these enterprises report selected
information about operating segments in interim financial reports to
shareholders. SFAS 131 is effective for financial statements for periods
beginning after December 15, 1997.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
During the period of April 1997 through June 1997, nine class action suits
were filed in the United States District Court for the Southern District of
Florida on behalf of the named plaintiffs and others who purchased the Common
Stock of the Company during the period of April 1996 through April 1997. The
complaints are generally similar and charge the Company and several of its
officers with violations of the anti-fraud provisions of the federal securities
laws. The plaintiffs and their respective counsel have negotiated the identity
of the lead plaintiff and lead counsel and have submitted an order to the court
on the matter for its consideration. The court is also expected to rule shortly
on all parties' request for consolidation of the cases into one action. The
Company is not expected to officially respond to the allegations until after
consolidation is completed. The Company has reviewed the allegations in the
various Complaints with its counsel, and believes the allegations to be without
foundation. The Company strongly believes that it has complied at all times with
its disclosure obligations and plans to vigorously defend the claims made
against it.
The Company and its subsidiaries are involved in various pending or
threatened legal proceedings arising from the conduct of their businesses. These
proceedings in some instances include claims for punitive damages and similar
types of relief in unspecified or substantial amounts, in addition to amounts
for alleged contractual liability or claims for equitable relief. In
management's opinion, after consultation with counsel and review of available
32
<PAGE>
facts, these proceedings will ultimately be resolved without materially
affecting the Company's financial condition or results of operations.
The captions for each class action suit filed against the Company are:
Wilson vs. NAL Financial Group Inc., Robert R. Bartolini, John T. Schaeffer,
Robert J. Carlson, and Dennis R. LaVigne, United States District Court Case No.
97-6412- CIV- Hurley.
Briscoe vs. NAL Financial Group Inc., and Robert R. Bartolini, United States
District Court Case No. 97-6616-CIV-Furgeson.
Kaufman vs. NAL Financial Group Inc., Robert R. Bartolini, John T. Schaeffer,
Robert R. Carlson, and Dennis R. LaVigne, United States District Court Case No.
97-6655-CIV-Zloch.
Lowrance vs. NAL Financial Group Inc., Robert R. Bartolini, John T. Schaeffer,
Robert J. Carlson and Dennis R. LaVigne, United States District Court Case No.
97-6659-CIV-Ungaro-Benages.
Raleigh Financial Corp. vs. NAL Financial Group Inc., Robert R. Bartolini, John
T. Schaeffer, Robert J. Carlson and Dennis R. LaVigne, United States District
Court Case No. 97-6679-CIV-Zloch.
Gilfand vs. NAL Financial Group Inc., Robert R. Bartolini, John T. Schaeffer,
Robert J. Carlson and Dennis R. LaVigne, United States District Court Case No.
97-6693-CIV-Furgeson.
Titan Industries Money Purchase Profit Sharing Plan and Gary E. Williams vs. NAL
Financial Group Inc., and Robert R. Bartolini, United States District Court Case
No. 97-6689-CIV-Zloch.
Daoust vs. NAL Financial Group Inc., and Robert R. Bartolini, United States
District Court Case No 97-6707-CIV-Zloch.
Howard vs. NAL Financial Group Inc., Robert R. Bartolini, John T. Schaeffer,
Robert J. Carlson, and Dennis R. LaVigne, United States District Court Case No.
97-6717-CIV-Zloch.
33
<PAGE>
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
34
<PAGE>
Item 5. Other Information
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995.
When used in this Quarterly Report on Form 10-Q and in other public statements
by the Company and Company officers, the words "may," "will," "expect,"
"anticipate," "continue," "estimate," "project," "intend," and similar
expressions are intended to identify forward-looking statements regarding events
and financial trends which may affect the Company's future operating results and
financial position. Such statements are subject to risks and uncertainties that
could cause the Company's actual results and financial position to differ
materially. Such factors include, among others: (i) changes in the level of
future delinquencies, gross charge-offs and recoveries; (ii) the Company's
ability to implement its planned consolidation and reduction in operating
expenses; (iii) the Company's ability to retain existing or obtain additional
financing at rates and upon terms acceptable to the Company in order to maintain
and expand its portfolio of finance contracts and to continue the periodic
warehousing and sale of such contracts in securitization transactions; (iv) the
potential adverse effect a decrease in the trading price of the Company's common
stock would have upon the Company's ability to obtain financing through the
placement of debt and equity securities, and upon the likelihood of conversion
of outstanding debentures and the exercise of outstanding warrants; (v) the
potential depressive impact an influx of shares into the market may have upon
the trading price of the Company's common stock upon the resale of shares
issuable upon the conversion of outstanding debentures or upon the exercise of
outstanding warrants; (vi) the sensitivity of the Company's business to general
economic conditions associated with the non-prime market, including risks
associated with interest rate fluctuations, default and prepayment of contracts,
market concentrations and risks associated with recovery of residual value;
(vii) the reliance of the Company upon the continued service of its executive
officers; (viii) the Company's ability to remain in compliance with numerous
federal and state consumer protection laws and regulations; and (ix) other
economic, competitive and governmental factors affecting the Company's
operations, market, products and services. Additional factors are described in
the Company's other public reports and registration statements filed with the
Securities and Exchange Commission. Readers are cautioned not to place undue
reliance on forward-looking statements when made, which speak only as of the
date made. The Company undertakes no obligation to publicly release the results
of any revision of these forward-looking statements to reflect events or
circumstances after the date they are made or to reflect the occurrence of
unanticipated events.
35
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description Method of Filing
- ----------- ----------- ----------------
11 Statement re: computation of earnings per
share Filed herewith
27 Financial Data Schedule Filed herewith
(b) Reports on Form 8-K
None.
36
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this Form 10-Q to be signed on its behalf by the
undersigned thereunto duly authorized.
NAL FINANCIAL GROUP INC.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Robert R. Bartolini Chairman of the Board; November 19, 1997
- ------------------------ President and Chief Executive
Robert R. Bartolini Officer
/s/ David H. Sheir Senior Vice President of Accounting November 19, 1997
- ------------------------
David H. Sheir
</TABLE>
37
NAL FINANCIAL GROUP INC.
Statement Re: Computation of Per Share Earnings
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
For the Quarters Ended For the Nine Months Ended
Sept 97 Sept 96 Sept 97 Sept 96
------- ------- ------- -------
<S> <C> <C> <C> <C>
Primary:
Weighted average shares outstanding 12,840 7,044 11,356 6,857
Net effect of dilutive stock options
based on the modified treasury stock method -- 2,002 -- 1,627
-------- -------- -------- --------
Total weighted average shares outstanding 12,840 9,046 11,356 8,484
======== ======== ======== ========
Net income (loss) ($22,271) $ 2,182 ($29,015) $ 6,142
Income adjustment relating to reduction
of debt based on the modified treasury method -- 336 -- 758
-------- -------- -------- --------
Net income (loss) available to common
and common equivalent shares ($22,271) $ 2,518 ($29,015) $ 6,900
======== ======== ======== ========
Per share amount ($ 1.73) $ 0.28 ($ 2.56) $ 0.81
======== ======== ======== ========
Fully Diluted:
Weighted average shares outstanding 12,840 7,044 11,356 6,857
Net effect of dilutive stock options
based on the modified treasury stock method -- 2,002 -- 1,627
Net effect of dilutive subordinated
debentures based on the if converted method -- 2,175 -- 1,885
-------- -------- -------- --------
Total weighted average shares outstanding 12,840 11,221 11,356 10,369
======== ======== ======== ========
Net income (loss) ($22,271) $ 2,182 ($29,015) $ 6,142
Income adjustment relating to reduction
of debt based on the modified treasury method -- 319 -- 722
Income adjustment relating to reduction
of debt based on the if converted method -- 384 -- 963
-------- -------- -------- --------
Net income (loss) available to common
and common equivalent shares ($22,271) $ 2,885 ($29,015) $ 7,827
======== ======== ======== ========
Per share amount ($ 1.73) $ 0.26 ($ 2.56) $ 0.75
======== ======== ======== ========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<CURRENCY> U.S.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 2,123
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 65,456
<ALLOWANCE> 7,968
<TOTAL-ASSETS> 135,901
<DEPOSITS> 0
<SHORT-TERM> 0
<LIABILITIES-OTHER> 101,262
<LONG-TERM> 0
0
0
<COMMON> 1,978
<OTHER-SE> 32,661
<TOTAL-LIABILITIES-AND-EQUITY> 135,901
<INTEREST-LOAN> 13,780
<INTEREST-INVEST> 0
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 0
<INTEREST-DEPOSIT> 0
<INTEREST-EXPENSE> 7,795
<INTEREST-INCOME-NET> 5,985
<LOAN-LOSSES> 12,992
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<EXPENSE-OTHER> 24,358
<INCOME-PRETAX> (44,641)
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (29,015)
<EPS-PRIMARY> (2.56)
<EPS-DILUTED> (2.56)
<YIELD-ACTUAL> 18.14
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
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<ALLOWANCE-OPEN> 4,953
<CHARGE-OFFS> 5,403
<RECOVERIES> 8,464
<ALLOWANCE-CLOSE> 8,014
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
